Investing

Why Dividend Investing is not a great idea

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So far, not one person has mentioned that dividend investing requires great amount of effort and research. No one here has mentioned the time commitment required to maintain a large portfolio.

No one has mentioned that it takes someone with considerable skill and knowledge to buy good-quality dividend stocks, unlike brain-dead index funds. Not everyone is as knowledgeable as @rodbarc nor has the time commitment.

No one has mentioned that if you're timing the market by constantly buying/selling (which is the vast majority of the people), neither dividend-investing nor index investing will work.
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TuxedoBlack wrote: So far, not one person has mentioned that dividend investing requires great amount of effort and research. No one here has mentioned the time commitment required to maintain a large portfolio.

No one has mentioned that it takes someone with considerable skill and knowledge to buy good-quality dividend stocks, unlike brain-dead index funds. Not everyone is as knowledgeable as @rodbarc nor has the time commitment.

No one has mentioned that if you're timing the market by constantly buying/selling (which is the vast majority of the people), neither dividend-investing nor index investing will work.
A combo of brain dead dividend index funds of CDZ, CYH, ZDY and ZDI will provide a nice monthly cash flow with about as close to zero effort as is possible. And even a goodly sized batch of decent individual dividend stocks (we currently have 30) doesn't take that much effort to find given the amount of info easily available on the internet, and once they're in the portfolio there's no real need to mess with them again as you harvest the dividends. I honestly can't think of an easier way to have a passive income stream than these set it and forget it portfolios.
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Dec 26, 2019
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I essentially have two portfolios: growth (Can, US, international) and Canadian dividend growth. I’m still fairly young. When I retire, I plan to slowly harvest my growth portfolio and will never sell my dividend portfolio. Just live off of dividends.

Even at my age, the predictability of my dividend portfolio has helped me take more risks. For example, I used my HELOC to invest knowing that the dividends can pay off the interest due.

It really is a set-it and forget it portfolio for me. I’ll continue to pay interest on my HELOC with a part of the dividends and grow the portfolio with the rest. It takes me 2 minutes, once per month. I only hold Canadian companies that are very unlikely to cut dividends.
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Oct 12, 2009
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There have been some guys on here making huge dividend gains a month for many years. There was a thread on it recently.

People say its boring, slow or you need a lot of capital up front, but overtime you will reap the rewards.

My brother in law gets a tidy 2.5k a month dividend and he invested 16-17 years ago by using 2 DRIPS without any annual top up.

I can make more in a day by day trading, than i do in six months with my dividend play, but as long as the established companies don't cut their divvy, long term I will reap the rewards. I always think of it as some sort of compound interest
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TuxedoBlack wrote: So far, not one person has mentioned that dividend investing requires great amount of effort and research. No one here has mentioned the time commitment required to maintain a large portfolio.

No one has mentioned that it takes someone with considerable skill and knowledge to buy good-quality dividend stocks, unlike brain-dead index funds. Not everyone is as knowledgeable as @rodbarc nor has the time commitment.
If you google around, you’ll find that most “regular folk” seem to buy “couple banks, couple pipelines, couple telcos, couple utilities, maybe a railroad and a grocery chain” and call it a day :) And “safe utilities” are popular as GIC replacements recommendation (with no regard to diversification, investor’s knowledge or stock valuation):
A safe investment, please

Q - I had a $30,000 GIC mature in my TFSA account, for which I earned a princely $666 in interest! I looked at putting the money into another GIC, but the return would be even less. I don't need the money for at least 10 years.

Can you suggest somewhere safe to put it in the meantime? Most of my investments are in mutual funds and stocks, so I’d like to have a little cushion in something that won’t lose money. Thank you for your time. - Susan D.


A – An investment that won’t lose money over 10 years? If you take inflation risk into account, even GICs and high-interest savings accounts could lose purchasing power over that time. A 10-year Government of Canada bond is only yielding about 0.5 per cent, so you probably don’t want to go that route either.

With a 10-year time horizon, I suggest you consider taking on a small amount of risk with your money. If you don’t own them already, some good utility stocks or a fund that invests in them would be worth considering. These would include companies like Fortis Inc. (FTS-T), Canadian Utilities Ltd. (CU-T) and Emera Inc. (EMA-T). Because most of their income is regulated, the downside risk is minimal, and the dividends appear to be secure. - G.P.
Gordon Pape’s mailbag: Seeking ‘safe’ options
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FarmerHarv wrote: A combo of brain dead dividend index funds of CDZ, CYH, ZDY and ZDI will provide a nice monthly cash flow with about as close to zero effort as is possible. And even a goodly sized batch of decent individual dividend stocks (we currently have 30) doesn't take that much effort to find given the amount of info easily available on the internet, and once they're in the portfolio there's no real need to mess with them again as you harvest the dividends. I honestly can't think of an easier way to have a passive income stream than these set it and forget it portfolios.
The problem with those dividend index funds is that they don't fit into the standard couch potato approach as all of them have some sort of filter that selects stocks. Of course, many of the popular index funds are based on indexes that have a stock selection process as well but it's just not well known.
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freilona wrote: If you google around, you’ll find that most “regular folk” seem to buy “couple banks, couple pipelines, couple telcos, couple utilities, maybe a railroad and a grocery chain” and call it a day :) And “safe utilities” are popular as GIC replacements recommendation (with no regard to diversification, investor’s knowledge or stock valuation):
That's basically my Canadian portfolio :). For me it also includes some REITs and has a big focus on Brookfield. I've also been selling my pipelines over the last several years. There are some great companies in these areas and I've been very happy with the returns.

I balance this out with my US holdings which is mostly tech stocks and S&P 500 index funds.
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Chance7652 wrote: That's basically my Canadian portfolio :). For me it also includes some REITs and has a big focus on Brookfield.
And that’s what took me years to realize - one doesn’t have to get super-creative with what’s supposed to be “safe boring Income” portion of their portfolio! :) I recently bought REIT ETF and BIP.UN in my LRSP (in addition to individual bond) whose combined distributions should be more than enough to cover yearly withdrawals once I convert it to LIF. And my watchlist of dividend stocks for non-reg account is as boring as it gets - and none cut their dividends so far :)
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freilona wrote: And that’s what took me years to realize - one doesn’t have to get super-creative with what’s supposed to be “safe boring Income” portion of their portfolio! :) I recently bought REIT ETF and BIP.UN in my LRSP (in addition to individual bond) whose combined distributions should be more than enough to cover yearly withdrawals once I convert it to LIF. And my watchlist of dividend stocks for non-reg account is as boring as it gets - and none cut their dividends so far :)
No dividend cuts so far for me. For the Canadian portfolio 13 out of the 18 stocks have raised their dividend (I think it will be 15 out of 18 by the end of the year).
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rodbarc wrote: No. Capital is never harvested with dividend income. That’s perpetual, unlikely harvesting shares to meet income. The flaw on your example assumes that every profit is reflected correctly on the share price, at all times that income is needed, and there won’t be periods that shares get depleted for reasons unrelated to the business.

In reality (not theory), I can have that dividend income forever. No shares sold, so that lasts forever. That’s why you have the same companies paying dividends for centuries. Growing at steady pace, including in bear markets. The same cannot be said for share prices every single year. When you sell stocks to produce the income, you can only do this for so long, because eventually all shares get sold. Dividend payment and growth is a reliable form of income. If I am after capital appreciation, I buy growth stocks, not stocks meant to produce growing income. Different strategies for different goals, use the right tool for your needs.

Not to mention that you are not accounting for bear markets. In years like 2001, 2008, 2011, 2018 or even March recently, a lot more shares would have to be sold to produce the same income, depleting your portfolio quicker. Meanwhile, dividends, which are paid by number of shares that you own (not share price), are intact or growing.
1. If you refer again to the example I posted: Company 1 has paid out 10K in dividends, whereas Company 2 has paid out no dividends at all. Company 1 now has 10K less than Company 2 with which to use to generate cash flow - so yes, the dividends that you receive from your dividend-paying company have depleted your cash flow engine when compared to the company that did not pay dividends.

2. When I sell stocks to produce income, it is by no means certain that eventually all of my shares will get sold. It depends entirely on how many shares I sell. If the company is not paying dividends, it can use this money to make more money, and make my share more valuable, so I need to sell fewer of them to get the same amount of money. Moreover, it is by no means certain that you can have that dividend income forever because dividends are paid at the discretion of the board of directors and can be cut or eliminated.

The company you owns shares in is (you hope) a cash flow engine; getting cash by dividends or selling stock are just 2 ways that you get the cash; one is more regular than the other, but either way, once you get the cash, the value of the stock you are left with remains the same. And if we are talking about long term investing, you really don't know what you cash flow need will be far in the future. It is entirely possibly that a long term investor will need to sell their dividend paying stock because of some unexpected event.

3. I am not sure why you are bringing up companies which have been paying dividends for centuries. How long do you expect to live? Do you want to finance a family dynasty that will last for centuries? I expect that when most of us talk about long term investing, we mean being able to finance a comfortable retirement and make sure the financial needs of our spouse/children are taken care of when we are gone. Anything beyond that is really too far out to plan. And even if you manage to leave a sizable amount of money for your descendents, they would blow through all of it after 3 or 4 generations. Smiling Face With Open Mouth

That being said, I have an strictly intellectual curiosity about companies which have being paying dividends for centuries - can you provide any examples?
Last edited by CheapScotch on Aug 17th, 2020 4:47 pm, edited 1 time in total.
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Feb 29, 2020
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A specific use case I've not seen mentioned is holding dividend stocks so that cash dividends can be used to prepay the mortgage for the Smith Maneuver.

i.e. the dividends help speed up the conversion rate of the non-deductible debt to its readvanceable leg
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May 29, 2005
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I've been dividend investing for about 10 years and "investing" for 20 years. At first I started with growth in the tech boom because "I had a long time horizon" but then as the bubble burst I turned to more boring stocks and started dividend investing. At first, it didn't look like much but one day I realized I had $10k of dividends in one year and it finally clicked. Since then I've got enough dividends to get out of the rat race (believe me, I think about it all the time). Disclosure - I had a helping hand with some stock options.

Interestingly, now that I'm comfortable with my dividend stream I find that I am willing to take more risk and started investing in more growth like MSFT, V and CSU. Just recently, I started thinking of even more growth like NVDA.

To answer the threads question though - the biggest disadvantage of dividend investing is the tax drag in non-registered accounts. I minimize this by having my higher dividends in my registered accounts, but there's still a big tax hit.

The second is dividend cuts - though it's no different than your stock price going down. I've got a few this year due to my energy holdings, but it was manageable. I think my dividends dropped a max of 5%.

Now, on the flip side there is great simplicity in dividend investing upon retirement - I don't have to do anything, I just use whatever cash is in my account. In addition, I've told my wife that if something happens to me, then don't do anything. She can just spend what ever cash is in the account, the portfolio will fuel itself in the long run.

The other big advantage is that you know when you've passed the finish line - dividends + buffer > expenses. I'm right now working on the buffer because of lifestyle upgrades.

I'd also like to say that there is a whole range of dividend investing and sometimes people paint them all with the same brush. My aim has been for dividend growth with a goal of 5% dividend increase. This is very different than just brute force high dividend stocks which isn't a really good idea in general.
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Dec 14, 2010
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CheapScotch wrote: 1. If you refer again to the example I posted: Company 1 has paid out 10K in dividends, whereas Company 2 has paid out no dividends at all. Company 1 now has 10K less than Company 2 with which to use to generate cash flow - so yes, the dividends that you receive from your dividend-paying company have depleted your cash flow engine when compared to the company that did not pay dividends.

2. When I sell stocks to produce income, it is by no means certain that eventually all of my shares will get sold. It depends entirely on how many shares I sell. If the company is not paying dividends, it can use this money to make more money, and make my share more valuable, so I need to sell fewer of them to get the same amount of money. Moreover, it is by no means certain that you can have that dividend income forever because dividends are paid at the discretion of the board of directors and can be cut or eliminated.

The company you owns shares in is (you hope) a cash flow engine; getting cash by dividends or selling stock are just 2 ways that you get the cash; one is more regular than the other, but either way, once you get the cash, the value of the stock you are left with remains the same. And if we are talking about long term investing, you really don't know what you cash flow need will be far in the future. It is entirely possibly that a long term investor will need to sell their dividend paying stock because of some unexpected event.

3. I am not sure why you are bringing up companies which have been paying dividends for centuries. How long do you expect to live? Do you want to finance a family dynasty that will last for centuries? I expect that when most of us talk about long term investing, we mean being able to finance a comfortable retirement and make sure the financial needs of our spouse/children are taken care of when we are gone. Anything beyond that is really too far out to plan. And even if you manage to leave a sizable amount of money for your descendents, they would blow through all of it after 3 or 4 generations. Smiling Face With Open Mouth

That being said, I have an strictly intellectual curiosity about companies which have being paying dividends for centuries - can you provide any examples?
1. The fact that a company chooses to pay dividends to shareholders doesn’t impair their ability to grow cash flow further. Management can choose to give a part of company’s cash to shareholder or put back in the business. The difference, which you cannot comprehend, is that with dividends I get to choose what to do with that, and the amount of dividends is determined by the business. But with a company that reinvests the cash back to the business, one is at mercy of market price to sell their shares, which is not determined by the business. There’s a big difference in getting dividends in March or 2008 or any bear period vs selling a lot of more shares to meet the same income in March or 2008 (regardless if the business reinvested the cash back into the company, market price is what counts when selling), and that’s why most retirees don’t hold 100% indexing as their portfolio.

2. That doesn’t work in bear markets. Any bear period in history or crash period like March, December 2018, 2016 or 2011 shows that the market doesn’t price stocks according to their operating performance. Which company that didn’t pay dividends and reinvested the cash back into the business were more valuable in March? Or 2008? Or 2001? Dividends are paid based on the number of shares that one owns it, and a portfolio made of Dividend Aristocrat companies are the proof that they can continue to raise dividends every single year for decades despite of recessions or crisis. It’s not discretionary / random as a surprise box. It’s a set expectation that is sustainable because of the resiliency of the business.

3. I’m bringing up companies that have been paying dividends for centuries without interruption to show you that good quality business allow dividends as a reliable cash flow, regardless of what happens on the future. We don’t know how long the next bear market will last or when it will start. But I know that a diversified portfolio of dividend growing companies will continue to grow MY income regardless if the market crashes, producing perpetual growing income.

You can easily search which companies have been paying dividends for centuries.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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dreadsoap wrote: A specific use case I've not seen mentioned is holding dividend stocks so that cash dividends can be used to prepay the mortgage for the Smith Maneuver.

i.e. the dividends help speed up the conversion rate of the non-deductible debt to its readvanceable leg
Yep, converting bad debt (mortage) into good debt (borrowing to invest as it makes money for you), while accelerating your mortgage payment without extra cash flow from your pocket. And by the time your house is paid off, you have a nice nest egg producing more income.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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Jan 27, 2006
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freilona wrote: And that’s what took me years to realize - one doesn’t have to get super-creative with what’s supposed to be “safe boring Income” portion of their portfolio! :) I recently bought REIT ETF and BIP.UN in my LRSP (in addition to individual bond) whose combined distributions should be more than enough to cover yearly withdrawals once I convert it to LIF. And my watchlist of dividend stocks for non-reg account is as boring as it gets - and none cut their dividends so far :)
Obviously, you took years and many many hours of hard deep research as well as demonstrating skills and intelligence that the average person doesn't have to find those dividend stocks... :)
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Jul 1, 2007
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FarmerHarv wrote: Dividend Investing may not be the perfect choice for some people depending on their situation, but diviphobes should look outside their tunnel vision and be able to accept that it works very well for others.
I don't think there are really "diviphobes". There are people who invest based on company fundamentals and time-tested, research-backed investment strategies, and are pleased to receive dividends as a side-effect, and there are diviphiles who have tunnel vision and alway ask "what's the yield?" first when assessing any investment.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
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jamzbe wrote: I've been dividend investing for about 10 years and "investing" for 20 years. At first I started with growth in the tech boom because "I had a long time horizon" but then as the bubble burst I turned to more boring stocks and started dividend investing. At first, it didn't look like much but one day I realized I had $10k of dividends in one year and it finally clicked. Since then I've got enough dividends to get out of the rat race (believe me, I think about it all the time). Disclosure - I had a helping hand with some stock options.

Interestingly, now that I'm comfortable with my dividend stream I find that I am willing to take more risk and started investing in more growth like MSFT, V and CSU. Just recently, I started thinking of even more growth like NVDA.

To answer the threads question though - the biggest disadvantage of dividend investing is the tax drag in non-registered accounts. I minimize this by having my higher dividends in my registered accounts, but there's still a big tax hit.

The second is dividend cuts - though it's no different than your stock price going down. I've got a few this year due to my energy holdings, but it was manageable. I think my dividends dropped a max of 5%.

Now, on the flip side there is great simplicity in dividend investing upon retirement - I don't have to do anything, I just use whatever cash is in my account. In addition, I've told my wife that if something happens to me, then don't do anything. She can just spend what ever cash is in the account, the portfolio will fuel itself in the long run.

The other big advantage is that you know when you've passed the finish line - dividends + buffer > expenses. I'm right now working on the buffer because of lifestyle upgrades.

I'd also like to say that there is a whole range of dividend investing and sometimes people paint them all with the same brush. My aim has been for dividend growth with a goal of 5% dividend increase. This is very different than just brute force high dividend stocks which isn't a really good idea in general.
This is a great post. Please consider posting more on this forum.
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Feb 4, 2015
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Canada, Eh!!
craftsman wrote: There's been a few interesting articles as well as one thread on RFD on taxes and dividend tax credits. Of particular interest is how one can earn tens of thousands (different amounts depending on the province you live in) completely tax-free due to the dividend tax credit as long as you have no other taxable income. But even with some taxable income, as you have shown, dividends, due to the tax credit, punches above it's weight class as far as being a tax-efficient income.

Here's a Financial Post article from 2017 that spells out the idea - https://financialpost.com/personal-fina ... have-a-job. Here's a nice little tax calculator where you can put in some basic information and get some idea of what taxes you would pay for what type of income in whatever province you live in.

For example, in BC for the 2020 tax year,
if we took the amount of $53,000 and said it was capital gains income, then the tax owing would be $2,491.
if we took the amount of $53,000 and said it was Canadian Eligible Dividends income, then the tax owing would be $0.
if we took the amount of $53,000 and said it was Canadian non-Eligible Dividends income, then the tax owing would be $4,180.
if we took the amount of $53,000 and said it was RRSP withdraw income, then the tax owing would be $8,636.
if we took the amount of $53,000 and said it was Other income (Interest, Foreign dividends...), then the tax owing would be $8,636.

Why did I pick $53,000? Well, that was basically the cut off between paying taxes for Canadian Eligible Dividends income and not paying any taxes. In other words, you can earn just over $53,000 in Canadian Eligible Dividends income tax-free as long as you don't have any other income. The next best income would be capital gains.
Nice example. Thank you.

Question or comment on the Other income scenario... We do have some of this [majority of it being foreign dividend] and so do get a foreign tax credit which has effect on tax. Other income would probably still be worst scenario however just something else to chew on... unless I have misunderstood tax implications??
2022/3: BOC raised 10 times and MCAP raised its prime next day.
2017,2018: BOC raised rates 5 times and MCAP raised its prime next day each time.
2020: BOC dropped rates 3 times and MCAP waited to drop its prime to include all 3 drops.
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Feb 4, 2015
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jamzbe wrote: I've been dividend investing for about 10 years and "investing" for 20 years. At first I started with growth in the tech boom because "I had a long time horizon" but then as the bubble burst I turned to more boring stocks and started dividend investing. At first, it didn't look like much but one day I realized I had $10k of dividends in one year and it finally clicked. Since then I've got enough dividends to get out of the rat race (believe me, I think about it all the time). Disclosure - I had a helping hand with some stock options.

Interestingly, now that I'm comfortable with my dividend stream I find that I am willing to take more risk and started investing in more growth like MSFT, V and CSU. Just recently, I started thinking of even more growth like NVDA.

To answer the threads question though - the biggest disadvantage of dividend investing is the tax drag in non-registered accounts. I minimize this by having my higher dividends in my registered accounts, but there's still a big tax hit.

The second is dividend cuts - though it's no different than your stock price going down. I've got a few this year due to my energy holdings, but it was manageable. I think my dividends dropped a max of 5%.

Now, on the flip side there is great simplicity in dividend investing upon retirement - I don't have to do anything, I just use whatever cash is in my account. In addition, I've told my wife that if something happens to me, then don't do anything. She can just spend what ever cash is in the account, the portfolio will fuel itself in the long run.

The other big advantage is that you know when you've passed the finish line - dividends + buffer > expenses. I'm right now working on the buffer because of lifestyle upgrades.

I'd also like to say that there is a whole range of dividend investing and sometimes people paint them all with the same brush. My aim has been for dividend growth with a goal of 5% dividend increase. This is very different than just brute force high dividend stocks which isn't a really good idea in general.
You need to post more. :)
2022/3: BOC raised 10 times and MCAP raised its prime next day.
2017,2018: BOC raised rates 5 times and MCAP raised its prime next day each time.
2020: BOC dropped rates 3 times and MCAP waited to drop its prime to include all 3 drops.

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