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Stocks or E-Series Mutual Funds? Looking long-term and for dividend income

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[OP]
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Apr 16, 2006
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Stocks or E-Series Mutual Funds? Looking long-term and for dividend income

Hey everyone,

Looking for some financial advice here.

I'm making some pretty decent income, have 0 debt, am contributing in full to my pension fund at work, and have a healthy "emergency fund" and an unsecured LOC should the worst happen. I've got some extra cash in my savings account to play with, and I'm trying to figure out what to do with it.

I've got an E-Series Mutual funds account, but with virtually nothing in it
I've got a TD Waterhouse account, but with virtually nothing in it

Before making any major investments, I wanted to get some input from all of you first. These are cash accounts; they are NOT TFSA nor RRSP.

What I'm interested in is making investments in funds/companies that will result in dividends being paid monthly. Eventually, I'd like to get to the point where the dividend income I receive will be substantial...possibly even to the point where I'm capable of living off of it. Obviously, this is very ambitious, but setting a goal gives me something to work towards :)

The way I see it, I've got two options
1) Buy E-Series Mutual Funds focused on dividend income (main one was a non-E-Fund, TD Dividend Income...2% MER)
2) Buy stocks in dividend-paying corporations (banks, telecommunications companies, etc)

My strategy is to buy and hold for the (very) long term. I have no interest in being a day trader.

The amount I've got to play with at this moment in time is $4,000...got to start somewhere.

Which would you do? Why? Anything I should be wary/concerned about in going down one path vs the other?

Thanks everyone.
15 replies
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Dec 26, 2010
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Calgary
What I'm interested in is making investments in funds/companies that will result in dividends being paid monthly.
They don't exist.
Eventually, I'd like to get to the point where the dividend income I receive will be substantial...possibly even to the point where I'm capable of living off of it.
You'll need a million plus invested in today's dollars for that and for a dividend tax benefit you have to be undiversified, all in CDN equity.

If you're truly after the *magic* dividend, than there's no point to e-series (index investing). Despite people selling the virtues of dividends, they're not special, they're not 'uber profit'. They're just dividends. The most benign way of returning money to investors (after corporation pays taxes on it). I'm all for deferring taxes for long as possible with dividendless products like HXT/HXS.
Indexer, non-yield chasing, low cost, broad based, as simple as possible investor.
Deal Addict
Mar 8, 2013
2812 posts
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I don't see why in your situation you would want monthly (or even quarterly) income. Presumably you will be reinvesting it anyway since you have other income. Why not do the opposite, look for something that will grow in the long term with minimal distributions. Then in the future, for monthly income, you can always switch to diviidend paying investments or just withdraw from any of your investments.
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Sep 23, 2009
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Some people view investing for capital gains akin to gambling.

The problem is that most good companies that pay a steady income have been bought up by people with margin account.

A company may indeed pay a good dividend but when it is trading at 3 times book value while companies can and do write the book value up(IFRS), you are overpaying for the basket of the company's assets.

I have a few companies that I love, but now the stock price has risen so much that I no longer want to hold it.

I purchased the shares to have an income and while they still do that, the price of the stock itself is at a premium compared to what they own and owe.

So, do you want to buy shares that give out a 4% dividend, but may see a 40% dip (back to adjusted book value - not historical book value) in prices if bad news ever comes out?

If yes, buy to your heart's content.

There are some decently priced stocks out there, but most are extremely over valued.

So my opinion is that there is no good opportunities for long-term stable income with low risk for someone with little interest in following the market. Largely in part because people are able to buy so much on margin.

For the record, I do utilize margin. I am just pointing out that margin has caused many stocks to become overvalued.
[OP]
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Apr 16, 2006
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akaManny wrote: I don't see why in your situation you would want monthly (or even quarterly) income. Presumably you will be reinvesting it anyway since you have other income. Why not do the opposite, look for something that will grow in the long term with minimal distributions. Then in the future, for monthly income, you can always switch to diviidend paying investments or just withdraw from any of your investments.
I intend on reinvesting all dividends for the foreseeable future. The goal is that at some point down the road, maybe 15-20 years from now, my portfolio is in such a state that if I wanted to have the dividends paid out from that point onwards as opposed to being reinvested, that those dividends themselves would be capable of sustaining...well...me...on very little (if any) other income.

I appreciate companies do not pay dividends monthly, although I do believe companies have different fiscal years resulting in different companies paying dividends at different times.
So my opinion is that there is no good opportunities for long-term stable income with low risk for someone with little interest in following the market. Largely in part because people are able to buy so much on margin.
So basically you're saying I should probably just stick with old fashioned e-fund mutual funds and focus on growth over dividends?
Member
Aug 26, 2008
476 posts
57 upvotes
Vancouver
wm009 wrote: They don't exist.
Um. AltaGas pays a monthly dividend as well as many REITs/mortgage investment corporations. Also BMO's ZDV pays monthly.
Buying: Your US Shares (directly held with transfer agent)
Deal Addict
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Oct 9, 2005
1105 posts
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Toronto
In a taxable account, consider these two 100% equity investment scenarios on the opposite (but not ultimate) end of the spectrum:

1) Swap-based ETFs that (expect to) pay no distributions. Annual return of 6% all in capital gains, less 0.1% for ETF fees.
2) Mix of Canadian eligible dividend stocks. Annual return of 6%, 3% dividends paid out at year-end and 3% capital gains.

I am assuming:

- starting with 4k
- 30 year horizon
- marginal tax rate on ordinary income is constant 35%, so on capital gains is 17.5% and on Canadian eligible dividends it is 14%.
- no changes in tax brackets or to other tax rules
- no other contributions or dispositions outside of the initial and end transactions
- perfect DRIPing for #2 (every after-tax dividend $ goes straight into more shares, even if fractional)
- no brokerage account/trading fees

After-tax on disposition, swap-based ETFs would end with ~20.7k after 30 years. The dividend equities give you ~14.4k. Even if they paid out 6% dividends, it's 20k.

My takeaway is with such a long time horizon, it's better to maximize the return, whether that's dividends or otherwise, then near retirement, if a dividend income strategy is still attract, stick with or convert to it then.
Intricated
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Nov 9, 2013
4950 posts
5702 upvotes
Edmonton, AB
Octavius wrote: Hey everyone,

Looking for some financial advice here.

I'm making some pretty decent income, have 0 debt, am contributing in full to my pension fund at work, and have a healthy "emergency fund" and an unsecured LOC should the worst happen. I've got some extra cash in my savings account to play with, and I'm trying to figure out what to do with it.

I've got an E-Series Mutual funds account, but with virtually nothing in it
I've got a TD Waterhouse account, but with virtually nothing in it

Before making any major investments, I wanted to get some input from all of you first. These are cash accounts; they are NOT TFSA nor RRSP.

What I'm interested in is making investments in funds/companies that will result in dividends being paid monthly. Eventually, I'd like to get to the point where the dividend income I receive will be substantial...possibly even to the point where I'm capable of living off of it. Obviously, this is very ambitious, but setting a goal gives me something to work towards :)

The way I see it, I've got two options
1) Buy E-Series Mutual Funds focused on dividend income (main one was a non-E-Fund, TD Dividend Income...2% MER)
2) Buy stocks in dividend-paying corporations (banks, telecommunications companies, etc)

My strategy is to buy and hold for the (very) long term. I have no interest in being a day trader.

The amount I've got to play with at this moment in time is $4,000...got to start somewhere.

Which would you do? Why? Anything I should be wary/concerned about in going down one path vs the other?

Thanks everyone.
Remember total return = dividends + capital appreciation. If you're young (sounds like you are) you should be more concerned with total return rather than just dividends. As another poster said, to live off divvys you'll need a portfolio of ~ 1,000,000 yielding 4% (40,000). You gotta get to that 1 mill first.

With $4000 to start at I would buy e series index funds for the following reasons - 1) No cost to buy / sell vs $10 to buy / sell stocks at TD DI 2) Instant diversification across sectors and countries with e series, when it would be impossible to do this with stocks at $4000 3) can hold fractional shares of E series (can't for stocks or ETFs at TD DI) so you can make the most of the DRIP.

When you have a portfolio of 1 mill then it would be a good idea to consider switching to dividend stocks to live off the income. Until then, indexing will do very well in growing your money. Is it sexy? No, but it's highly effective.
[OP]
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Apr 16, 2006
6226 posts
690 upvotes
treva84 wrote: Remember total return = dividends + capital appreciation. If you're young (sounds like you are) you should be more concerned with total return rather than just dividends. As another poster said, to live off divvys you'll need a portfolio of ~ 1,000,000 yielding 4% (40,000). You gotta get to that 1 mill first.

With $4000 to start at I would buy e series index funds for the following reasons - 1) No cost to buy / sell vs $10 to buy / sell stocks at TD DI 2) Instant diversification across sectors and countries with e series, when it would be impossible to do this with stocks at $4000 3) can hold fractional shares of E series (can't for stocks or ETFs at TD DI) so you can make the most of the DRIP.

When you have a portfolio of 1 mill then it would be a good idea to consider switching to dividend stocks to live off the income. Until then, indexing will do very well in growing your money. Is it sexy? No, but it's highly effective.
Intricated wrote: In a taxable account, consider these two 100% equity investment scenarios on the opposite (but not ultimate) end of the spectrum:

1) Swap-based ETFs that (expect to) pay no distributions. Annual return of 6% all in capital gains, less 0.1% for ETF fees.
2) Mix of Canadian eligible dividend stocks. Annual return of 6%, 3% dividends paid out at year-end and 3% capital gains.

I am assuming:

- starting with 4k
- 30 year horizon
- marginal tax rate on ordinary income is constant 35%, so on capital gains is 17.5% and on Canadian eligible dividends it is 14%.
- no changes in tax brackets or to other tax rules
- no other contributions or dispositions outside of the initial and end transactions
- perfect DRIPing for #2 (every after-tax dividend $ goes straight into more shares, even if fractional)
- no brokerage account/trading fees

After-tax on disposition, swap-based ETFs would end with ~20.7k after 30 years. The dividend equities give you ~14.4k. Even if they paid out 6% dividends, it's 20k.

My takeaway is with such a long time horizon, it's better to maximize the return, whether that's dividends or otherwise, then near retirement, if a dividend income strategy is still attract, stick with or convert to it then.
So basically, you're saying I should stick with Couch Potato E-Funds for now until my portfolio gets to be a decent size and then consider switching to dividend paying stocks if that's what I still want to do at the time?

Seems to make sense. I think I'm going to do that, and leave my TD Waterhouse Account the way it is for the time being.

Thanks everyone!
Deal Expert
Feb 29, 2008
29095 posts
4786 upvotes
Montreal
Why are you not using a TFSA for this?

Any dividend you harvest from the account and withdraw will be readded as contribution room.
[OP]
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Apr 16, 2006
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mr_raider wrote: Why are you not using a TFSA for this?

Any dividend you harvest from the account and withdraw will be readded as contribution room.
My rationale for keeping these investments outside of my TFSA is that I've got my emergency fund in a TFSA savings account. While the interest earned isn't much (2.25%), interest is taxed as full income, whereas capital gains and dividends are given much more favorable tax treatment.

You guys think I should do this in a TFSA? I've still got about 8k of contribution room for the year...
Deal Addict
Jul 23, 2007
4766 posts
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Our taxable portfolio was invested in individual Canadian dividend growth stocks many years before the TFSA was announced. Now with the TFSA out that becomes my first priority for investment. Next priority if we were still working (now retired) are the RRSP's. Aside from a partial emergency fund HISA, the TFSA's are all TD e-Series funds while the RRSP's contain a mix of broad based index ETF's and TD e-Series.

I have a preference for running a dividend growth taxable portfolio rather than following dividend yield only. Unlike many other investors, I don't spend a lot of time poring over financial statements and yet the portfolio seems to have done just fine. Up to you, but I've never bought stocks on margin, and that's going back to the early 80's. In a bad market crash you can get totally wiped out, and that certainly included 1987, whereas if you just invest the money you have, odds are you'll eventually see your portfolio recover. If you really want to start investing in individual dividend stocks, then you just do it like the rest of us did, long before TD e-Series and ETF's were available here in Canada. Brick by brick.
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Oct 9, 2005
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How large of an emergency fund are you keeping? Unless you have an extravagant lifestyle, 10-30k for emergency living expenses should do, before disability insurance, credit cards, LOCs, family, etc. Assuming you were 18 in 2009 and you haven't lost money in TFSA, you have at least 41k of room to work with, which will increase by 10k per year. You should now or at least very soon going forward have lots of TFSA room for non-emergencies.

Favourable tax treatment still means payable taxes. Focus on total return across your entire portfolio. Most equity or dividend income/growth strategies are looking to 4-8% returns. In a TFSA, that would be tax-free. Having an emergency fund even at 4% in non-registered accounts taxed at the highest 50% marginal rate is 2% (2.6% at a more middling 35% tax rate), much lower than the sheltered equity return. Your emergency fund would have to be returning 6%-8% pre-tax to start exceeding the lowest expected return of TFSA-sheltered stocks.
Intricated
Sr. Member
Dec 28, 2006
992 posts
354 upvotes
Octavius wrote: My rationale for keeping these investments outside of my TFSA is that I've got my emergency fund in a TFSA savings account. While the interest earned isn't much (2.25%), interest is taxed as full income, whereas capital gains and dividends are given much more favorable tax treatment.

You guys think I should do this in a TFSA? I've still got about 8k of contribution room for the year...
You're paying half tax on 6-10% growth instead of paying full tax on 2.25% growth.

...?
[OP]
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Apr 16, 2006
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Intricated wrote: How large of an emergency fund are you keeping? Unless you have an extravagant lifestyle, 10-30k for emergency living expenses should do, before disability insurance, credit cards, LOCs, family, etc. Assuming you were 18 in 2009 and you haven't lost money in TFSA, you have at least 41k of room to work with, which will increase by 10k per year. You should now or at least very soon going forward have lots of TFSA room for non-emergencies.

Favourable tax treatment still means payable taxes. Focus on total return across your entire portfolio. Most equity or dividend income/growth strategies are looking to 4-8% returns. In a TFSA, that would be tax-free. Having an emergency fund even at 4% in non-registered accounts taxed at the highest 50% marginal rate is 2% (2.6% at a more middling 35% tax rate), much lower than the sheltered equity return. Your emergency fund would have to be returning 6%-8% pre-tax to start exceeding the lowest expected return of TFSA-sheltered stocks.
My emergency fund is $15,000, which works out to over 6 months of living expenses , including rent. This is in addition to a $10,000 unsecured LOC I have with a balance of zero.

I think I'll couch potato it with e-series mutual funds in my TFSA for the foreseeable future. Thanks everyone.
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Sep 6, 2010
1978 posts
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Octavius wrote: Hey everyone,

Looking for some financial advice here.

I'm making some pretty decent income, have 0 debt, am contributing in full to my pension fund at work, and have a healthy "emergency fund" and an unsecured LOC should the worst happen. I've got some extra cash in my savings account to play with, and I'm trying to figure out what to do with it.

I've got an E-Series Mutual funds account, but with virtually nothing in it
I've got a TD Waterhouse account, but with virtually nothing in it

Before making any major investments, I wanted to get some input from all of you first. These are cash accounts; they are NOT TFSA nor RRSP.

What I'm interested in is making investments in funds/companies that will result in dividends being paid monthly. Eventually, I'd like to get to the point where the dividend income I receive will be substantial...possibly even to the point where I'm capable of living off of it. Obviously, this is very ambitious, but setting a goal gives me something to work towards :)

The way I see it, I've got two options
1) Buy E-Series Mutual Funds focused on dividend income (main one was a non-E-Fund, TD Dividend Income...2% MER)
2) Buy stocks in dividend-paying corporations (banks, telecommunications companies, etc)

My strategy is to buy and hold for the (very) long term. I have no interest in being a day trader.

The amount I've got to play with at this moment in time is $4,000...got to start somewhere.

Which would you do? Why? Anything I should be wary/concerned about in going down one path vs the other?

Thanks everyone.
I own stocks, preferred shares, ETF's and TD e-series mutual funds. Why limit yourself to one, there is nothing saying you cannot own all 3

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