Is Living Off Of Your Dividends A Mistake?

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Part of the reason I started this blog was to become a better investor. I’ve found that having to justify my investing decisions publicly has made me a better investor as it encourages me to think and justify my actions. It also provides a platform where I can hear and learn from readers.

I’m always curious to hear opposing views so that I can hopefully defend my strategy or make necessary adjustments. Part of my retirement strategy involves utilizing a growing stream of dividends to help pay for retirement. Naturally, when I read a National Post article by Jason Heath titled “Why living off your dividends in retirement may be a mistake“ it got me thinking about my retirement plan. One quote stuck with me particularly.

Retirement planning is a personal decision, but you might be making a big mistake if you go out of your way to ensure you can live off your dividends, since you will be leaving a great deal of money when you die. In the process, you may have worked too hard at the expense of family time or spent too little at the expense of treating yourself.

I thought the

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Financial Strength: A Key Element in High Quality Dividend Growth Stocks


“Financial strength is the key requirement of a high-quality stock. [...] Remember, you’re buying a piece of a business here, one that you want to live with for a long, long time.” (Miller, 2006)1

I recently read Lowell Miller’s The Single Best Investment: Creating Wealth with Dividend Growth. I would make this book required reading if I were teaching a course on dividend growth investing. What I like about this book is that it gives specific criteria to look for when trying to find a good dividend growth candidate. While the version I read was written in 2006, a lot still applies today.

The concept of the book is that high quality + high current dividends + high growth of the dividend = high total returns. A key element of a high quality company is financial strength. Today I’ll be sharing a few of the author’s different ways to identify financial strength.

Low debt

As a long term investor it is important to me that the company still exists in 10 years, 20 years, 30 years … well you get the idea. For a company to stand the test of time they have to be able

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What Is A Dividend Reinvestment Plan (DRIP/DRP)?

When Water Drops Collide

A dividend reinvestment plan (DRIP) is a plan for shareholders of a company that allows them to reinvest their dividends with the purchase of more shares. In most DRIPs, when the cash from the dividend is used to buy more shares there is no fee/commission charged. This is the main advantage of a DRIP, low or no fees. There are other advantages too, but I’ll go into those later on.

There are two types of DRIPs, a synthetic DRIP and a traditional DRIP.

Synthetic DRIP

A synthetic DRIP is a service offered by your broker. It depends on your broker, but most will not reinvest in fractional shares. This means that you’d need enough dividends from one payment to cover the cost of the share. To enrol in a synthetic DRIP, you have to contact your broker and ask to be enrolled. It doesn’t normally cost anything to enrol in a synthetic DRIP.

Traditional DRIP

A traditional or true DRIP is the plan that is offered by the company. The company uses a transfer agent to administer the plan. Through the transfer agent you can reinvest your dividends to buy fractional shares.

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An Introduction to the Great Canadian Banking Series (Part 1 of 10)

Canadian Sunset

Lone Primate / Foter / CC BY-NC-SA

In this series I’m going to take a look at the Canadian Banking Sector. If you talk to most Canadian dividend growth investors I think you will find that Canadian banks make up a significant portion of their portfolio. Canadian banks have reasonably high dividend yields, have performed well historically and they used to have very impressive dividend streaks with strong dividend growth until the global financial crisis hit.

When the crisis hit, the Canadian banks held their dividends steady while they navigated through the troubling times. Compared to other foreign banks, Canada stacked up very well, as a lot of other banks were cutting their dividends. Now that the financial crisis is over the Canadian banks have started increasing their dividends again and dividend investors are hoping that the banks get back to their old ways.

The Canadian banking industry is made up primarily of the “Big Six”:

  • Toronto-Dominion Bank
  • … Continue reading An Introduction to the Great Canadian Banking Series (Part 1 of 10)

  • Wide Moat Stocks In The US Dividend Champions List

    Bodiam (A Very Special) Castle!

    antonychammond / / CC BY-NC-SA

    I like to invest in undervalued dividend growth stocks that have a sustainable competitive advantage. Today I’m going to talk about the second part of this phrase as I’ve already written quite a bit about how I determine target prices and how to identify undervalued dividend growth stocks.

    Warren Buffett is famous for investing in companies with a sustainable competitive advantage and even coined the term “wide economic moat”. The phrase refers to the difficulty of invading a castle with a wide moat. The same theory applies to companies. If a company has a wide moat then it is difficult for its competitors to gain market share or take profit from the company the same way it is difficult to invade a castle with a wide moat.

    Characteristics of wide moat companies are having an established and well known brand, or having pricing power with a large portion of market demand. These help act as barriers against companies

    … Continue reading Wide Moat Stocks In The US Dividend Champions List

    Overcome Dividend Yield Valuation Flaws and Find Reasonable Target Prices Fast

    Oil Sands Plant - Suncor Energy

    Suncor Energy / / CC BY-NC-ND

    Last week I went over how you can compare the current dividend yield to historical averages to see if a stock is undervalued. The idea being that if the dividend is sustainable and the current yield is higher than the 3, 5, and 10 year high yield averages then the stock is likely undervalued.

    You can run into problems with this technique in a few situations however. Sometimes a company has a high yield because they are going through problems or because the market expects a dividend cut. If you look at the yield before a dividend cut, it will usually be higher than the historically high yield averages. No one likes to invest in a company right before a dividend cut, so it is important to see if the dividend is sustainable before using this valuation technique. AGF Management Ltd comes to mind when I look at the May 31, 2013 version of Canadian Dividend All-Star List. AGF Management Ltd’s current yield of 9.44% is 32.7% above its 10 year average highest yield, but by looking at the payout ratio I

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    Deciding Which Stocks To Buy: Dividend Growth Investing Criteria

    Deciding Which Door to Choose 2

    hang_in_there / / CC BY

    A question I often get asked is how do I decide what stocks to buy? The answer isn’t a simple one, but I’ll do my best to break it down. My process involves reviewing various companies and setting target prices. My dividend growth investing criteria is broken into two parts. First I complete a dividend stock analysis to determine if it is a company worth owning. What makes a company worth owning? Well I’m a long term investor so I’m looking for companies with a competitive advantage that have a history of increasing their dividends and earnings. I also want reasonable debt levels and a sustainable dividend among other things.

    If after I’ve completed a dividend stock analysis and I decide that I’d like to own the company I perform various valuation tests to come up with a reasonably cheap target price. Then I wait… and wait. My target prices are usually based on various measures that in the past would have resulted in opportunities to buy shares in 2 or

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    Can Past Dividend Growth Rates Be Relied Upon To Predict Future Rates?

    The Wizard

    seanmcgrath / People Photos / CC BY

    If you look at my retirement goals you’ll see that I want to have a growing stream of dividend income to support me in retirement. In order to meet my goals I’m looking for a dividend growth rate (DGR) of 8%. This is an ambitious rate in my opinion. Don’t get me wrong, I think it is entirely possible, but it is not an easy thing to achieve. My early retirement dreams are tied to dividend growth, so being able to predict future dividend growth is very important to me.

    I use a lot of historical averages in my analysis of dividend stocks, so I was excited to discover an article on Seeking Aplha: Dividend Growth Rates: Using The Past To Estimate The Future by Dividend Growth Machine that studied the correlation between past dividend growth rates and future rates.

    The study looked at the 10 year DGR of US companies from 1991-2001 and compared them to the 10 year DGR from 2001-2011.

    … Continue reading Can Past Dividend Growth Rates Be Relied Upon To Predict Future Rates?