Dividend Investing 101: What you need to look for and why when buying stocks
Disclaimer: I am not suggesting you all do this. I am not suggesting you buy ANY of the picks mentioned below. I am not a financial advisor, I do not have a crystal ball AND I am only posting this as my own personal strategy of what I do and why. You are under no obligation to take any of this entertainment-value information and risk your money investing in doing so.
Now that that’s out of the way….
What my investing strategy is:
Again — I DO NOT ADVOCATE YOU FOLLOW THIS AT ALL.
I am 50/50 index funds and dividend investing, meaning 50% of my portfolio aims to be in index funds, and the other 50% I put in specific dividend-paying stocks.
I decided I was bored with only index funds about 6 years ago, and started researching into a bunch of other ways I could make money, namely:
- Private lending
- Real Estate
Those are basically all the other ways you can make money. I also wanted to keep my money in index funds because they are already diversified and have nice low fees, so it’s a win-win.
I didn’t start private lending until last year because Lending Loop wasn’t available at the time (read about Lending Loop in Canada here and you can s )
I interviewed a few guys I knew who were into this, and their stories made me shudder. On top of that, I do not have any real standing at the banks (I know, ironic considering my net worth at my age), because I do not take a “real income” from my company as a salary, but in dividends instead for tax-efficiency and overall a hassle-free experience.
Plus. I hate people and don’t like managing fixed assets or paying anyone to do it if I can technically do it myself. I am also not 100% sure I will live here forever, you never know. I don’t enjoy being tied down.
So.. real estate was out, but I started looking into REITs instead.
…which brought me to this:
When I read more into dividend investing, I started to dabble into it because it seemed to make sense to me. I made a few mistakes along the way, so here are my insights into what NOT to do and what TO do as an investor.
My current dividend side income as of this post is: $14,661.97 / year
If you’re interested, I got into dividend investing for these reasons.
5 main rules I follow as a dividend investor
1. Do your own damn research
Everyone knows everyone who knows a stock that is a sure thing, don’t they?
Same goes in the dividend sphere. Everyone talks about certain stocks / the same stocks over and over again, and honestly, it can be easy to get caught up in the hype.
I definitely succumbed to some stupid buys because of this, one of them namely American Hotel REIT which I recently divested of. Looking back, I didn’t lose much money at all, I broke even in real dollars losing only $130-ish on my investment capital but that was made up for in the dividends I received during the time, but in lost investing opportunity cost, I lost money for sure.
My point is not to follow blindly. Do your own research. See a stock everyone likes? Read up on it. Ask why. Poke holes.
2. Refer to dividend mutual fund and ETF lists
Lots of them out there if you just Google it.
I googled another one, and you can see that basically any/all banks and financial institutions have their own Dividend ETFs or mutual funds you can use as starting research points:
Here’s how to sniff them out.
You see this list?
Look for anything that says EQUITY INCOME or DIVIDEND
Click on any one of those funds, and look for the word: PORTFOLIO or HOLDINGS
From there, scroll down and see what they’ve got:
Disclaimer: I own 7 of the 10 stocks on that list. I am now looking at the rest. 😛
You have literally hundreds if not thousands of lists out there like this that you can research, then compile into a nice spreadsheet and cross-check to see which stocks end up on most of the lists.
But again, EVEN THOUGH they are in this list, it doesn’t mean you take it all for granted and just buy whatever is in their top holdings. You need to do the research on each one. These are just starting points
3. Don’t chase high dividend yields
I was initially enamoured with 7% – 10% yields. I figured the faster I got the money/more of it, the better right?
High dividend yields above 5% should be suspect for a few reasons, namely:
- Why is their yield so high? Nobody gives out money from their company in cash for free
- Are they just enticing you to be an investor because of the yields?
- How can they grow (capital gains) if they give so much of their money away?
- Will they be able to sustain it?
High yields mean they get cut the minute things get rough on the high seas. American Hotel REIT did exactly that, as to be expected during the pandemic, but I was already thinking of cutting them long before the pandemic because their high yield made me uneasy.
Anyway, long story short, look for 3% – 5% as your maximum. The lower, the generally the more stable/better the dividends are.
4. Look at the capital gain potential first
Look at the stock itself first. Is the company viable? Will it be around for 10+ years?
If not, get out.
Read what they do, their services, think about how essential they would be if things got rough. Are they very dependent on a certain market? What is it?
For these reasons, I TEND to be overly invested in things like banks and utilities because… errrrybody needs electricity amirite?
But I always look at the company first. Do not assume just because they give out great dividends, they are going to be an amazing stock.
Here’s a great case in point. Recently, on Instagram, I was commenting on a post about bank stocks in Canada. Out of the 6 that are available (CIBC, TD, BMO, BNS, National Bank, Royal Bank), I only held (and still hold at the time of this post), Bank of Nova Scotia, TD Bank, BMO and Royal Bank.
The other two – CIBC and National Bank, I never purchased for whatever reasons at the time.
When I mentioned that I don’t own any CIBC stock, a few people were confused why I wouldn’t want to invest in a stock that was increasing its dividends year after year.
Well. I had no answer for that at the time, just that I never got around to looking into them or buying them so… but I put them on my list to research again (and figure out why I avoided them for so long).
When I finally got the time, I realized it was because the other banks were doing better than CIBC at the time.
Here’s a case in point, looking back 5 years ago with CIBC:
June 1st 2015, they were at $94.67
January 13th 2020 at the peak of the bull run they were at $108.77
Capital gain difference = $14.10
Dividend Yield = 6% (more or less)
Contrasting that with BMO for the same dates, you can see the following:
June 1st 2015, they were at $75.59
January 13th 2020 at the peak of the bull run they were at $103.80
Capital gain difference = $28.21
Dividend Yield = 6% (more or less)
BMO returned double the capital gain that CIBC did in the same period, paying out roughly the same dividends more or less.
Am I some magical stock picking guru? HARDLY.
I am just someone who saw a bunch of banks, went through each of them at the time, researched into them, and picked the ones I thought were likely to do the best.
CIBC didn’t make the cut and neither did National Bank.
Would I have lost money? Absolutely not, even if I had purchased CIBC, I would have still made money more or less during the time, but the potential for capital gains would have been better had I put that same amount of money into BMO instead.
You need to look at the company first, then the yields second.
If the company sucks, 50% yield of $0 is still $0.
That’s not to say I will keep these banks forever. I may divest of them for whatever reason in the future, but for now I will hold them until the pandemic calms down.
5. Limit your exposure
I am talking in individual stocks and industries.
Imagine if I had been all in with Hotel, Airline and other such stocks? During the pandemic it would have all plummeted.
Instead, by being diversified in a bunch of different stocks, and then changing the industries to not just be mostly banks, I am limiting my risk in any one area falling.
Of course, this is precisely what the other half of my portfolio aims to do because I am 50% in index mutual funds, and very diversified, but even the S&P 500 is mostly made up of a few big companies at the top as well.
I have a friend who has over $600K invested in Apple. One. Company. One. Stock.
Sure, he is getting a 1% dividend yield on that, and Apple doesn’t seem likely now to tank, but to be completely invested in ONE company is dangerous and far riskier to me than anything else I am doing.
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