Investing in dividend stock is a lot easier and more fun. You may have asked if it’s easy, why is it that not a lot of people are doing it? Well, if you are reading this, then you may have found the right article for you.
What are dividend stocks?
Dividend stocks by its simplest definition are companies or corporations that when you partner with or own a share of the company, it will pay you dividends. These are cash distributions you received to your brokerage account on a specific date or simply called dividend payment date. You can use this cash whatever you like. Withdraw this cash and spend to pay for goods and services or reinvest this cash back to your portfolio if you still don’t need the money.
Most commonly dividends are paid either quarterly, semi-annual, annually, and if you’re lucky to live and reside in countries like the US and Canada, a number of companies pay monthly dividends. (Why do I prefer monthly dividends?)
Why invest in dividend stocks?
Dividend stock investing is one of the purest forms of passive income. It is our favorite source of passive income. Essentially, you do the hard work at the beginning – creating your initial investment, building consistently (Pay yourself first), and reinvesting all dividends. BUY, HOLD, and FORGET (except when time to reinvest dividends so not exactly forgetting).
When you create a portfolio of solid dividend growth stocks, eventually you will be rewarded with growing and increasing dividends in the future. Dividend investing is a long term strategy and financial decision. You are building something that someday – those investments will look after for you (passively) in a form of dividend income. Furthermore, if dividend income is enough to cover your monthly expenses – you may have options to work part time, casual position or never work again.
Our ultimate goal as a dividend investor is to live off our passive income through dividends replacing our salary or active income without harvesting our capital. If done correctly and specially when one has started at a young age, one would never sell his or her investments at all.
How do I pick which dividend companies to choose from?
Again, we can make it simpler. Look around your households and see which products and services we commonly used. Then ask ourselves, will these products and services still be here 10 or 20 years and beyond? And, if the answer is YES, then it’s a good start to be thinking of partnering with these companies.
These are some of the products and services we commonly used in our households to name a few:
- Where do I get my groceries? We normally get our groceries with Loblaws Superstore and Walmart hence we are happy to partner and buy shares with Loblaws (L.TO) and Walmart (WMT)
- Which company provides heating or electricity at home? In BC, Fortis is a gas and electric utility provider. At home Fortis is our gas utility provider hence we owned shares of Fortis (FTS.TO)
- Which internet and telephone company do we have at home? Internet services are now considered a household essential and difficult to live without in this technology driven era. Our home internet and smartphone services are provided with Shaw hence happy to partner and owned shares with Shaw (SJR.B.TO)
- Do we pamper ourselves sometimes with coffee and burgers? Sure, At times we like to grab coffee at Tim Hortons and get fries and burgers at Burger King. Hence, we also partnered with Restaurant Brands International Inc. (QSR.TO) who owns Tim Hortons and Burger King.
- Where do we go with our day to day banking? We have accounts and services spread over these big banks: So NO surprise that we also partner and own shares of these big banks.
- Bank of Nova Scotia (BNS.TO) Tangerine is my main checking account which is a subsidiary of Scotia Bank.
- Toronto Dominion Bank (TD.TO) Our kids RESP used to be with TD.
- Bank of Montreal (BMO.TO) Our critical illness was provided through BMO
- Royal Bank of Canada (RY.TO) Our life insurance is with Royal Bank.
- Canadian Imperial Bank of Commerce (CIBC.TO) Our Line of Credit (LOC) is provided by CIBC.
There you go. As you can see, it is not difficult to pick which companies to partner and buy if you are just starting, right?
When you are new to investing – buy or invest in businesses that you can easily understand. More often these are household name companies or mega-corporations which are commonly known in investors language as blue chip companies. These are big companies that are considered safe and have a proven track record of profitability.
As you become more comfortable picking companies you eventually have a pool of companies in your portfolio (Total dividend stock portfolio). Similarly, once you have accumulated a number of household or blue chip companies, you should consider having exposure in every sector aiming for a well-diversified portfolio. (Example to sector allocation) Eventually, you will notice that you get paid or received dividends at different dates of the month depending on when companies declare their payout dates.
Pay for an investment advice vs. Self-directed or DIY Investing
While a few of us may already have started investing, the easiest route is going through a traditional bank or financial advisor seeking investment advice as to where best to invest our money. Most commonly, these investors have invested in mutual funds. However, by doing so and trusting your hard earned money to an advisor you will have to pay for their services.
On average, if you invest in mutual funds, these funds charge a fee called Management Expense Ratio (MER) which ranges from (1-3%). So let’s take 2% as an average. Let’s try to use basic math – if your investment is making 7% annually but commission is 2% in reality your investment has a return of only about 5%. Additionally, that commission always exists whether your investment is doing well or not. Imagine, what that 2% compounded over the lifetime of your investment? That’s a huge cut of your overall return in the long haul.
One other thing, a few years ago, it required a chunk of capital to start investing on your own. In the past, these online stock brokerages required a minimum balance to open an account (was $5,000 minimum when I started and big banks require even more) and charges a commission every time you trade (buy and/or sell a security) which is ranging $5-10 on average. Again, this commission adds up overtime if you frequently make a trade or even just reinvest your dividends.
Introduction to low fee or Zero commission brokerage
Luckily, with the advancement of technology and online brokers becoming more competitive, we can now choose online brokerages specially in Canada and US that charge very little or NO commission when we trade such as Wealthsimple Trade which was first introduced in Canada in 2019. Finally, gone are the days that new investors have to put up a sizable amount in order to start investing. In short, you can now start and invest as little as $100 or less.
If you sign up using this link and add money to a non-registered personal account, you will earn a cash equivalent of two random stocks and I will earn a cash equivalent of one stock. See more details with this link .
Here is the link to my live WS Trade non-registered dividend growth investing portfolio.
In other words, it empowers new and seasoned investors to invest on their own: self-directed or DIY investing with the opportunity to get into the market without paying exorbitant trading fees. Likewise, It’s also true (just like myself) that you will make mistakes as you go along. However, that is part of learning and going through those experiences will make you a better investor over time. Undoubtedly, I am continuously evolving myself, seeking knowledge, and learning everyday.
Additionally, I have also created my own general criteria of how to pick companies and important dates every dividend investor must know.
MY FINAL THOUGHTS
In brief, I am hoping that as a beginner investor, after reading this blog post that investing would no longer be daunting and scary. Additionally, I am optimistic that following this common sense approach, it is no longer difficult to pick which companies to buy and partner with as a newbie investor.
Unlike other investments such as mutual funds or Exchange Traded funds (ETF) that you get dividends or cash distribution once a month, or maybe a savings account – earned interest paid at the end of the month or even pension (Dangers of relying solely on pension) also paid once a month only. Building a dividend stocks portfolio gives you several options on when and how often you receive passive income.
All things considered, I have found that investing in common individual dividend stocks is, by far, exciting and more fun as you will receive dividends or get paid most commonly either quarterly or monthly.
When you built-up a well-diversified portfolio, you may find that you will receive dividends not only once or twice a month but most likely several times a month from different companies of pure passive income.
Finally, Imagine if you are fortunate to have a defined benefit pension at work and plus other government retirement income – these future incomes are surely the icing on the cake!