Thursday, April 19, 2018

How Safe a Strategy Is Dividend Investing?



There have been a lot of articles lately in the business news about dividend stock investing. Questions mostly surrounding risk, suitability and the concept itself.

Those that have visited my blog before already know that I'm a big proponent of this strategy and the earlier you start dividend investing the more you will be able to see and realize it's benefits.

This is NOT a trading our way to riches strategy. That is best left to gamblers and not the money you need for your future or retirement.

I learned this a while ago and confirmed through reading 'The Investment Zoo' (out of print) by Stephen Jarislowsky.

It's not complicated and here are just a few points he advises to keep in mind;

  • have a plan and stick to it, make it early in your investing life
  • buy individual stocks and not ETFs
  • by buying just a few of the best stocks you can be properly diversified
  • don't buy cyclical stocks
  • you will be rewarded sticking with long term dividend growth stocks
  • look for companies that have a rising dividend
  • if it doesn't pay a dividend don't buy it
  • everyone under 60 should buy individual stocks under this criteria
That doesn't mean once you reach 60 you should dump your stocks. He wants you to start buying quality companies early so you can reap the rewards later in life.

I do have issue with the ETF part of his plan. I don't believe it should be an either or part of investing. I buy individual stocks and use ETFs to capture those parts of the US and Int'l markets that I don't understand. I think this works for us small people.

What Jarislowsky really means is Dividend ETFs. This point I agree with. This is just another form of sector investing which I also don't do. I don't know how anybody can trade in and out of different sectors using ETFs and make money. It's just not what I do. This is best left for professionals.

Dividend ETFs aren't necessarily composed of dividend growth stocks. Matter of fact they contain a lot of high yield energy and royalty plays. This is how they justify charging their high management fees. There is no growth in your dividend stream so why own it? 

Individual stocks are the place to be and if a company decides to split it's stock we also participate in that upside.

Rob Carrick recently wrote about Dividend ETFs in an article dated April 7/2018. You will see that they contain a lot of energy stocks. I don't buy any cyclical or commodity stocks either. Most of the constituents in Dividend ETFs are in my opinion not suitable for retirement portfolios, which is always my focus.

In a further article published yesterday there was an example highlighted of a woman who complained that her advisor had filled her portfolio what she called money losing dividend paying stocks. Really?

Her main complaints were;

  • they seem to go down in price every week
  • every year it seems to lose money
  • i want to safe proof my portfolio
  • I need my portfolio to last into my nineties
There is always risk no matter what your investment plan is. Carrick rightly points out that you have to ignore short term results with any strategy you use. Dividend stocks are NO safer than mutual funds or ETFs.

The thing is, dividend stocks are just best left alone and if like this retiree, you need income then you leave well enough alone and just hang in there.

We don't know exactly what stocks she owns and what her advisor bought but he should not have her in any energy or other cyclical stocks. For a ninety year old retirement portfolio it wouldn't be right.

The other misconception and where I disagree with Carrick is adding bonds to her portfolio now. They call this safety. Bonds don't grow. Yield doesn't grow. This is not a safe strategy to grow income and stay ahead of inflation.

I really hope she doesn't sell out and dump all her dividend paying stocks and go to cash. That would be a huge mistake and a sure fire way to run out of money.

What She Should Do

  • tell her advisor her concerns
  • know what she's invested in and why
  • stop looking at her portfolio every day
  • focus on yield and the growth of that yield
  • ignore any and all short term fluctuations


It is sad to hear she is not enjoying the income stream she should be enjoying from using dividend growth stocks with her retirement portfolio. It really is the best way for her to generate that return as she ages.

I know I will be doing exactly that.

What do you think she should do?

Related Post: Retirement Strategy-Invest for Income

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4 comments:

  1. As Tom says "There are dividend stocks and dividend growth stocks, which are not same!"

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  2. That's true and also it takes a lot o time before the magic happens. Most people don't give the strategy enough time. Dump the advisor.

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    1. That's why I always tell people to watch the Income, not the price. Even our grandkids feel good seeing they quarterly dividend gore from the previous qtr. Showing them the growth from $50/Qtr to the now $200/Qtr is impressive even at 15. They don't even ask the price or know what compounding is but they know their div will keep growing as it has for the past 10 yrs.

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    2. That's awesome. You are a great mentor to your grandkids and starting them that early is amazing. Good for yo and all the best.

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