Convenience of stable and predictable income. (Photo: The Canadian Press)
Bob Lay, a 39-year-old product manager and blogger from Vancouver, owns an investment portfolio of 51 dividend-paying stocks and one exchange-traded fund (ETF).
Bob Lay started investing in his early twenties, when ETFs were not widely available or not popular. He started investing in mutual funds before moving into individual stocks, such as those of Intact Financial Corporation (formerly ING) and Manulife Financial, which paid dividends and continued to do so after the financial crisis.
“(My partner and I) thought it would be great to have that constant income from dividends. Living off those dividends would give us more flexibility instead of having to sell our capital. So that was the attraction.”
Dividends are generally paid on a quarterly basis and work like this: If a person owns 100 shares in the Royal Bank of Canada, for example, and receives $1.20 per share, each February, May, August, and November, you receive a $120 deposit. dollars in your account. Brokerage account, Bob Lay explains.
But while some investors rely on a dividend investing strategy, this approach doesn’t work for everyone, experts warn.
Dividend payers are typically established companies that have excess cash flow, so they start returning that cash flow to their shareholders, says Rob Engin, a paid financial planner at Boomer and Echo in Lethbridge, Alta.
Such companies are often called “excellent”, such as Royal Bank, Enbridge, Telus and BCE.
Rob believes that while there is nothing inherently wrong with investing in big, big companies, for most people, especially young people, the whole strategy shouldn’t characterize.
Instead, young Canadians should focus on growth, not income from their portfolios.
“We want to expand our investing world to other stocks that don’t just pay dividends.”
Loss of business value
Robb Engen points out that many people also don’t realize that dividend payments come from a company’s earnings and cash flow. So if we receive $1.20 in earnings per share, the value of this company goes down by that amount because it paid out that money.
Dividend shareholders can do just about anything with that money. They can spend it. They can invest it in another business. So the value of the company just went down.”
“I think many dividend investors think they see the dividend and think they’re getting that return as well as the capital appreciation, but the appreciation of capital is softened every time the company pays a dividend.”
For example, in terms of growth, Rob Engin says FP Canada’s forecast guidance shows that Canadian stocks as a whole have an expected return of 6.3% before fees, US and international stocks have an expected return of 6.6% before fees, and emerging market stocks have an expected return. Expected return of 7.7% before fees.
So in an investment in a company like Shopify, which doesn’t pay a dividend, the return is related to the growth in business value. Rob Engin explains that investing in a company is more valuable because the stock price has gone up.
With dividend-paying stocks, like Enbridge, for example, the company isn’t dependent on growth.
“They make money through their pipelines, they pay their expenses, and they return the rest of the profits to their shareholders as dividends. So, those who get 6% dividends shouldn’t expect the stock price to go up.”
He adds that a dividend-paying company does not invest much in its growth through acquisitions or other avenues. These are two different approaches to running a business.
“Nothing is free. You can’t get the 6% dividend that Enbridge promised, on top of the 6% growth you could get from a company that doesn’t pay a dividend.”
Convenience of stable and predictable income
However, it may be worth focusing on dividend-paying stocks if one feels comfortable receiving a quarterly dividend, and thus retaining the investment.
“If there is a behavioral reason that helps maintain focus and prevents panic and selling when the market is down, I think it might be a sound strategy. It would not be the most effective way to build wealth over time when you want to invest in the broader market rather than focusing on dividend payers,” also notes.
Instead, Rob Engin advises his clients to keep costs low and diversify broadly, rather than just focusing on one specific type of stock.
For the average Canadian, Bob Lai, like Robb Engen, prefers investing in the index with Vanguard ETFs or iShares, for example, and thinks it’s a good approach because you can just leave your investment and not have to think about it.
“But if, out of personal preference, you want that level of comfort in terms of some kind of fixed and predictable income, I think dividend investing is great because you see the numbers and the income coming in on a regular basis.” Bob Lay says.
In Bob Lay’s case, by 2025 he expects to receive about $50,000 to $60,000 in dividends each year, out of the $1.5 million he has invested. Given that he, his partner, and two children have lived on between $50,000 to $55,000 over the past seven to eight years, he estimates they can live on those earnings.
However, Bob Lay loves his job and has no intention of resigning. If he ever had to stop working full-time, he could potentially supplement his income with a part-time job.
“I am in no hurry to send a letter of resignation and relax on the beach every day. That is not the plan.”