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The Dividend Guy Blog
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6 Lessons I've Learned through 4 Years of Dividend Investing

September 22, 2014

Four years ago, I made my first move towards dividend investing. I started investing back in 2003 but my first dividend stock was bought in 2010. Over the past four years, I’ve worked on building my own investing philosophy (you can read about it here). My investing model didn’t appear overnight and it was the result of a long process.

What I really like about investing is that you are never done learning. There is always a new situation that will generate new results in your portfolio. After four years of dividend investing, here are the most important investment lessons I’ve learned:

#1 I Love Receiving Money in my Account

I guess the biggest difference between dividend investing and all other strategies is the fact that each month; my cash account grows bigger. Receiving dividend payouts each month is a great feeling. Since I don’t lose any time tracking my dividend dates, I sometimes open my brokerage account and find $20, $50 and up to $171 once! Since 2010, my dividend payouts have never stopped growing:

dividend payout

In 2014, I expect to receive almost $1,500 in dividends on a $50,000 portfolio. This equals a 3% yield. It is a modest amount so far, but it will greatly increase over the years to come. It took me two years to make the full transition from my previous positions to a 100% dividend portfolio this is why the yield is still relatively low.

Besides the fact that it’s fun to receive money each month, I also appreciate this extra cash flow so I can buy more stocks. I usually build my dividend payouts up to $500 to buy an index fund and wait until I have about 10% of my portfolio available to buy another position. For example, I’m now waiting for my annual RRSP contribution of $5,000 in January to buy my next stock. I will definitely add all remaining cash in my account to this transaction.

#2 It’s Easier to Follow Dividend Stocks

I used to trade heavily on oil and other resources stocks. There is a lot of money to be made in these fields but it also requires several hours of work and daily check-ups. I still spend several hours before buying a dividend stock, but once it’s added to my portfolio, I don’t have to check my position every day… not even every week!

When you buy a dividend stock, you usually buy a sound & healthy companies. Therefore, following quarterly results is usually more than enough to make sure one stock doesn’t slip through the cracks and start rotting.

#3 Don’t Chase High Yield

I recently wrote a case against high dividend yield but I must admit I learned my lesson the hard way. I bought a covered call ETF back in 2011 (ZWB). ZWB is a covered call ETF that follows the six Canadian banks. Over about a year, I lost almost 9% on that trade. Mind you, when I bought ZWB, the dividend yield was… roughly 10%.

Today, the ETF is up 15% since its inception in 2011, while the worst bank during this period is CIBC (CM) at +23% and the best are TD (+54%) and NA (+50%). Plus, the ETF now pays *only* 4.61%.

The lesson to learn from this is that high yield investments always carry limited growth potential and/or higher risk.There is a reason why you get a higher yield and it’s not because Santa Claus exists!

#4 Dividend Growth is better than Trading Regularly

One of the reasons why I switched to dividend investing was to reduce the time required to manage my portfolio without affecting its performance. It turned out that I’ve improved my performance and reduced the time spent managing my stocks.

But I had to face my old demons; a part of me wanted to trade more and use capital gains to buy other companies. The best part about dividend investing is you don’t always need to sell your stocks to benefit from growth; the dividend payout increases too!

When I bought Telus (TSE:T) back in 2011, the dividend paid was $0.26 per quarter per share. Now the current dividend is $0.38 per quarter per share. That’s a 46% increase over just 3 years! I could have sold the stock and cashed out a healthy profit, but the truth is that Telus pays a 5.6% dividend yield based on my cost of purchase. In a few years, I’ll be able to add a new position to my portfolio only by cumulating the dividend payouts. This means I won’t have to dip into my pocket to grow my portfolio!

#5 Yield Doesn’t Matter if you Select the right pick

At first, I used to select only companies paying over 3% in yield. It was my way of identifying “good dividend stocks” amongst other factors. I used to ignore lower yielding companies because they were simply not good enough for me.

I quickly made my first exception and selected Coca-Cola (KO) at 2.75%. I knew KO’s dividend would reach over 3% in a heartbeat due to its dividend growth policy. It did and I was encouraged to dig further into similar yielding companies.

The truth is that I found several gems among low dividend yield stocks. Among them, I bought Disney (DIS) with a 1% dividend yield now showing a +40.18% in my portfolio. I also bought Apple (AAPL ) with a 2.25% yield (back then) now showing + 39.96%. More recently, I bought Gluskin & Sheff (TSE:GS) at 2.50%. The stock is already +11% before dividend payments this year. The dividend yield is not the most important metric when you select a dividend stock. Instead, I look for companies with the ability to increase its payout consecutively for the next 10 years and beyond.

#6 Patience is the Most Important Investor’s Asset

During these four years, I’ve bought several stocks that didn’t go into the green right away. In fact, both Chevron (CVX) and Johnson & Johnson (JNJ) stagnated a while before I realized any profits. I bought JNJ when there were quality control issues causing important expenses. Let’s just say there wasn’t any hype around the company at that time.

But since then, JNJ has soared boosted by great results in 2013 and 2014. Sometimes you get lucky and your stock keeps going up the minute you buy it. But most of the time, the result of your trade is not instantaneous. On the other hand, patient investors will receive their rewards sooner or later.

I’m excited to finish 2014 with my current portfolio as things are going very well for me right now. I also know that will learn a lot more in the upcoming years as it will be interesting to see how my portfolio will react to a bear market although I don’t think we will see it any time soon. I’m not stupid either; there’s always a drop in the market after such a boom.

Tell me, what have you learned from dividend investing in the current bullish market?


Rating: 4.6/5 (8 votes)

Voters:

Comments

OKwarrior
OKwarrior - 6 years ago    Report SPAM

I share your love of dividend growth investing, but I usually take a contrary approach to the conventional wisdom of screening for potential stocks to buy. Conventional wisdom says to look for companies not only w/ a history of growing dividends but low payout ratios. The rationale being there needs to be plenty of room to allow growth in future payouts.

One has to consider that corporations are not logical machines set up to enrich the investor, but rather manifestations of human management types that have mortgages to pay, kids to educate and spouses to please. If a CEO is taking home $1 million +/yr he likely realizes that he is beholden to his shareholders for job security. Most such managers are loathe to cut a dividend, as that will likely be one of his final acts in that employment. It follows that if his company is paying out 90% of available funds for dividends, he will likely do everything possible to cut costs, increase profit margins, slash payrolls or whatever else it takes to keep the dividend.

On the other hand the CEO of a company w/ a 25% payout ratio has the luxury of being able to keep the dividend stable (maybe even increase it a bit) despite a deteriorating business model. His shareholders are content and employees are happy w/ the (sometimes excessive) perks or compensation.

Which stock do you want to own?

Codinare
Codinare - 4 years ago    Report SPAM

The payout ratio is also important, if the payout ratio is 100%, then it will not grow however it can go less

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