Misguided Thinking About Dividend Investing

Misguided Thinking About Dividend Investing

I’ve received an uptick in emails and comments from investors about dividends and so I thought I’d address some common misconceptions around dividend investing.

One reader in particular wanted to know if he should take the commuted value of his pension ($750,000) and put it all in Enbridge stock because it was yielding around 6.5%. That reminds me of the reader who, several years ago, asked if he should borrow money at 4% to buy Canadian Oil Sands stock that was paying an 8% dividend yield.

Related: How did that leveraged investment work out?

I shouldn’t have to tell you why it’s not sensible to put your entire retirement savings into one stock – dividend payer or not. 

Most comments were much more sensible and reflected what I perceive to be some misguided thinking about dividend investing.

Dividends + Price Growth = Magic?

Some companies pay a dividend to shareholders. Some do not. Investors shouldn’t have a preference either way.

Amazon doesn’t pay a dividend, focusing instead on reinvesting their profits back into their business for more growth opportunities. 

Apple, on the other hand, is awash in cash thanks to the tremendous success of the iPhone and decided to start paying a dividend in 2012. It likely cannot reinvest or grow fast enough to keep up with its cash flow and so it returns some of that cash to shareholders.

Investors shouldn’t prefer Apple to Amazon just because of Apple’s dividend policy. 

But what happens when a dividend is paid? The value of the company decreases by the amount of the dividend. That must be true, since the dividend didn’t just appear out of thin air – it came from the company’s earnings.

Company A and Company B are worth $10 each. Company A pays out a $1 dividend, while Company B does not. 

Company A is now worth $9, and its shareholders received $1. Company B is still worth $10 and its shareholders received $0.

But some investors do seem to think the dividend comes from thin air and that it does not reduce the value of the dividend paying company.

Consider this example: Let’s say expected stock returns are 8% per year. The average dividend yield from all stocks (both non-dividend payers and dividend payers) is around 2%. That leaves 6% to come from the increase in share prices or capital gains.

Shopify doesn’t pay a dividend. You could consider its expected annual return to be 8% (ignoring the extreme dispersion of possible outcomes for a single stock), but all 8% would come from increases to its share price.

Enbridge has a dividend yield of 6.5%. Should we expect its price to also increase by 8%? Of course not. It would be more reasonable to expect price growth of 1.5% (again, ignoring the extreme dispersion of possible outcomes).

Here’s a more diversified example featuring Vanguard’s VCN (Canadian equities, represented by the yellow line) versus iShares’ CDZ (Canadian dividend aristocrats, in blue):


Teasing out the high dividend paying stocks (CDZ) did not lead to higher returns over the last five years. In fact, this portfolio lagged the overall Canadian equity market by a fairly wide margin.

High yield stocks payout most if not all of their earnings to shareholders, leaving little to no cash for growth and acquisitions. 

The bottom line: Dividends aren’t magic. Dividend investors don’t get to have their cake (high capital gains) and eat it too (high dividends).

Yield on Cost

Some dividend investors use a useless metric called yield on cost to track their growing dividends over time.

An example is that you buy a dividend stock for $10,000 and it yields 4%. Over time the company increases its dividend, which increases the yield on your original investment. Some dividend investors claim to be receiving double-digit yields on their original investment.

But this isn’t how investing works. The stock doesn’t care what price you paid for it in the past. All that matters today is the current yield. 

Replacement for Bonds

One concerning trend is the notion that dividends are somehow a safe replacement for bonds. I get it, we’re in a low interest rate environment where bond yields have fallen well below 2%. But the idea of replacing bonds with stocks, even stocks that pay dividends, is incredibly risky.

Bonds do still play an important role in your portfolio. They’re the ballast that reduces the volatility of stocks. They tend to hold value during periods of falling stock prices, which is essential for rebalancing. And, they do offer a source of return.

Now, we can argue about the merits of holding long-term bonds in this environment. Perhaps a blend of short-term government bonds and high yield corporate bonds could be appropriate for your fixed income needs

But all you need to do is look at the above chart and see how sharply CDZ fell during the March 2020 crash to understand why dividend stocks are not even close to being a suitable replacement for bonds in your portfolio.

Avoid Spending Capital

Many investors dream about having a portfolio so large they could simply live off the dividends and never touch the capital. But in reality we can see that this is impossible to do in an RRSP, and it’s impractical in other accounts. Here’s why:

You must convert your RRSP to a RRIF at the end of the year in which you turn 71. The RRIF minimum mandatory withdrawal schedule forces you to take out ever increasing amounts, starting at 5.40% in your age 72 year.

Good luck finding stocks that pay dividends (consistently) at that high of a rate – and, no, your yield on cost still doesn’t count.

Related: Investing for income in your accumulation years

It’s more realistic to just spend the dividends in your taxable account. But this poses two problems:

One, you’ll likely need to save a lot more money than you think in order to generate enough dividend income to meet your spending needs (i.e. a $200,000 portfolio would only reasonably yield $8,000 per year).

Two, unless you plan on leaving a sizeable inheritance there will eventually come a point when you need to dip into the capital. Meanwhile, you may have missed out on spending during your good, healthy retirement years.

Retirees who take a total return approach can create their own dividend simply by selling shares (or ETF units) to generate their desired income.

Dividend Tax Credit

This one might be the most misunderstood reason to invest in dividend stocks. The allure of dividend investing might come from the stories we’ve heard about investors living off extremely tax friendly Canadian dividends – even earning up to $50,000 in tax-free dividends.

But how realistic is it that you can enjoy a life of tax-free dividend income?

You can’t have any other sources of income, like from a job or a pension or from a rental property. And you’d need a large non-registered investment portfolio (think $1M or more) filled with Canadian dividend paying stocks.

In the article above, the example investor retired in his 40s and has been living off his non-registered dividends tax-free. A fun scenario to dream about, but extremely rare in reality.

Finally, most retirees start collecting other (taxable) income streams in their 60s, such as CPP and OAS, which start to erode the tax benefits of Canadian dividends.

Final Thoughts

I was a dividend investor for many years before switching to index investing. I understand all of the behavioural arguments in favour of dividend investing. But there is still a lot of misguided thinking around dividend investing.

I hope this article helped dispel some of these myths and also showed you that investors shouldn’t have a preference for dividend paying companies over non-dividend payers, and that dividends are no substitute for bonds.

Dividends aren’t magic – they’re part of a stock’s total return. If you’re attracted to a high dividend yield then consider what you might be giving up in capital appreciation.

And please don’t dump your life savings into one individual stock!

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  1. james Miller on June 23, 2021 at 4:34 pm

    Would you consider R.E.I.T’s .a good bond proxy

    • RobbieK on June 23, 2021 at 5:31 pm

      Thank you for taking the time to write this article! It’s likely I’ll be referring back to this now and again as a rational reminder.

      • Robb Engen on June 23, 2021 at 7:36 pm

        My pleasure, Robbie. Glad you enjoyed it!

    • Robb Engen on June 23, 2021 at 7:35 pm

      Hi James, no I wouldn’t. The only acceptable bond substitute would be GICs and even that has its trade-offs (liquidity being one). Here’s a good comparison of the two: https://www.canadianportfoliomanagerblog.com/gics-vs-bond-etfs-a-case-study-and-bold-adventure/

      As for REITs, Ben Felix does a deep dive into this ‘asset class’ that’s worth a read: https://www.pwlcapital.com/reconsidering-reits-in-your-investment-portfolio/

      • Fausto Alvarez on June 26, 2021 at 10:36 am

        Hi Robb

        Can you write one day about when to become more conservative with investments and the proper mix to have near to retirement?

        I am 61. Planning to retire at 65. Actually I am invested 80% in stock, 10% in GICs, 10 %in VAB ETF.

        Thinking about when is the time to change the mix to more conservative

        No pension, my RRSP may be is going to be 25% of the max.

        Love your articles

  2. David @ Filled With Money on June 23, 2021 at 5:59 pm

    The ones who think that a 2% dividend yield literally means a 2% rate of return don’t understand how dividend payouts work. The value of the company actually decreases by the amount of the dividend the day that they pay it out or the ex-dividend date, I can’t remember which date it was.

    Have to be careful and actually understand the intricacies when it comes to investing!

  3. Mario on June 23, 2021 at 6:13 pm

    Having to sell ETF shares as your only source of retirement income can be a slippery slope. As you know all investments, including ETFs, will go thru ups and down and you may end up having to sell at a loss to fund your retirement. I agree that dividend paying stocks will have lower total yield over time but the steady regular income stream from the dividends (some companies have not missed paying out for over 25 years) is a fair compromise. You will still have to sell shares ultimately but the qty required will be way less than if there were no dividends and if markets are down it will be less of a hit. In the accumulation stage of investing it is a different story of course where you are not selling units.

    • Robb Engen on June 23, 2021 at 7:44 pm

      Hi Mario, there’s no difference between selling ETF units and receiving cash dividends.

      I’m not suggesting it would be appropriate for a retiree to have his entire portfolio in equities (like VEQT). A lower risk portfolio may be more appropriate (VGRO or VBAL or VCNS), and those ETFs automatically rebalance so if stocks fall it will sell bonds and buy more stocks at lower prices – softening the blow.

      It would also make sense to hold some cash, maybe 1-3 years’ worth of spending, so you don’t need to sell stocks during a bad downturn.

      There are countless examples of supposed ‘safe’ dividend paying companies whose business deteriorates over time. General Electric was the ultimate widows and orphans stock and the most valuable company in the world. I doubt many retirees want to hold it now.

      • Mary on June 24, 2021 at 5:32 am

        Hi Robb. Great article. We discuss our dividend stocks frequently, especially our BIP and BEP, where we have substantial holdings within our RRIFs.

        You mention the Vanguard Index funds but I wonder why not a purpose built fund from a company such as Mawer? The fees are a bit higher but many of their balanced and index focused funds have a long history of reliable growth.

    • Diane on June 24, 2021 at 6:11 pm

      I am currently in the stage where I am withdrawing from my RRSP. To cover the possibility of a down market, I have already sold enough to cover my next 2 years of withdrawals while the market was up earlier in the year. I may have lost out on some upside potential, but I am protected against the downside. Those funds are now invested in fixed income, ready to be withdrawn from my RRSP when the time comes. I will do the same next year for 1 year of withdrawal and so on. This way I am selling somewhere within 1 to 2 years before I need the funds, at a time that I feel the markets are favorable. If we were to have another event like COVID hit the market, I can wait it out for at least 2 years.

  4. Mary M on June 23, 2021 at 6:28 pm

    Thanks for clarifying some of the dividend questions Robb. There is still the sticky business (and you may have addressed this previously) as to which accounts you want to keep any dividend stocks in – registered, non-registered, TFSA or RRSP, and whether they are US or CDN companies.

  5. Tawcan on June 23, 2021 at 8:22 pm

    Hey Robb,

    Great summary. You may know that we’re hybrid investors, we invest in dividend growth stocks and index ETFs. IMO index and dividend investing both have a lot of merits. For the average investors, it is probably easier to stick with index funds and track the market. For us, we are investing in dividend stocks as we plan to pass it down or even create a donation fund source.

    I recently interviewed fellow Canadians who are receiving $360k in dividend income a year. They retired in 2004 with around $1.8M and the portfolio has compounded to over $9M.


    Did they miss out on some potential gains by investing only in dividend stocks? Sure, but they were comfortable with their investment strategy.

    Index, dividends, or both, ultimately, it comes down to what each individual is comfortable with. It is called personal finance for a reason. 🙂

    • Robb Engen on June 24, 2021 at 2:27 pm

      Hi Bob, thanks for your comment. Stories like this are compelling (almost unbelievable!) but not realistic for the vast majority of investors. Yes, your goals are personal and everyone has their own unique situation.

      I’m not sure the takeaway from this story is about dividends, though. If I read correctly, the couple has pension income, RRIF withdrawals that force high taxation and OAS clawbacks, filled-up TFSAs, and million-dollar non-registered accounts. If that’s the case, the dividends from the non-registered account are not tax advantaged at all.

      The reader’s advice on avoiding RRSPs is absolute nonsense. Perhaps he should read my guide for the anti-RRSP crowd: https://boomerandecho.com/rrsps-not-scam-guide-anti-rrsp-crowd/

      Yes, it’s great that the reader has built a $9M portfolio. But I wouldn’t go so far as to extrapolate that success into investment advice for regular investors looking to build a retirement portfolio.

  6. Jeff pringle on June 23, 2021 at 9:39 pm

    Td bank 5 years up 57% plus a 4% plus dividend . Utilities , pipelines and Reits and other blue chips in the long run are hard to beat . Fortis stock dividend up 6% a year . It’s easy investing and can sleep at night . Don’t buy on yield but on long-term growth.

    • Robb Engen on June 24, 2021 at 2:33 pm

      Hi Jeff, naming dividend stocks that have performed well is not evidence that buying dividend stocks is suitable for most investors.

  7. Steve Oliver on June 24, 2021 at 5:04 am

    Well said Robb. I am realizing this more and more as I am trying to increase my income target just below the coming OAS clawback threshold ill face next year. By age 72, RRIF withdraw requirement will eat up most of my OAS. I’ll be paying high taxes on the withdraws too. So after the last 3-4 years of paying almost no taxes with the dividend tax credit, its going to be tax payback time it seems.

    For people in my position, i
    can a CFP do anything to help once RRIF withdrawls are imposed.

    I wonder wha the tax bill might be if we switched to US dividend stocks, REITs, and or just capital appreciation stocks in my non registered accounts. Have you done a comparative analysis at different thresholds of non registered and RRIF income to see if one has a final tax bill advantage over the other?

    Thank you for your post.

  8. Paul Walsh on June 24, 2021 at 7:44 am

    Hi Robb, interesting piece. Is that comparative chart of VCN vs CDZ a total returns chart? What would the comparison look like with dividends from both ETFs reinvested?
    It’s probably not a one size fits all, but I could see a young investor getting started early enough with a dividend-growth (and DRIPped) portfolio, perhaps in a TFSA, that could grow big enough over 40 years to make for a sufficiently large tax-free income stream in retirement, for example. Since dividends usually (I know! LOL) fall less than the stock market, these investors might tolerate stock market storms better than those forced to sell shares from a growth portfolio during a downturn. A portfolio biased towards dividend-growth might also tolerate a lower fixed-income component, allowing for greater equity investment. Which, in turn, would likely provide greater capital appreciation & dividend growth over time. Similary, older investors with a large traditional holding, or who inherit, might give consideration to dividend-growth stocks. During the accumulation phase, I imagine it’s less worrying what makes the portfolio grow, so long as it grows. But as I get ever closer to retirement, there is a siren song coming through the mist from those dividend-growth stocks! A song that will hopefully not see me crashing on the rocks! LOL

    • Robb Engen on June 24, 2021 at 2:50 pm

      Hi Paul, it’s just a price chart, not a total returns chart, but it was meant to show that the dividend stocks are not going to keep up with the overall market on price alone.

      CDZ’s total returns are:
      2016: 20.99%
      2017: 5.26%
      2018: (8.64%)
      2019: 25.96%
      2020: (2.94%)

      VCN’s total returns are:
      2016: 21.46%
      2017: 8.46%
      2018: (9.06%)
      2019: 22.06%
      2020: 4.84%

      I agree there are a ton of behavioural advantages to dividends, and if receiving that income keeps an investor in his or her seat during a crash then I’m all for it. Investors love dividends, and if that’s the commitment device that keeps you from steering your ship into the rocks, fantastic!

      Just don’t invest in dividend stocks for the wrong reasons (yield on cost, substitute for bonds, thinking dividend stocks outperform) and accept that you may have a less reliable, less diversified, and less tax advantaged portfolio than a globally diversified index investor.

  9. Jerri on June 24, 2021 at 7:57 am

    Hi Rob – Great article, but aren’t there studies showing that dividend paying stocks generally outperform the index? In a true “apples to apples” comparison it may be true that the dividends “cost” the stock value by whatever amount is paid out in dividends, but in the real world, is that really true? Sometimes the theory does not match the reality because all other factors are not held constant. I have read about dividend payers outperforming other stocks on average from various sources, but I am linking one here which seems to support that dividend payers do better than average, unless I misunderstand what they are saying?


    • Robb Engen on June 24, 2021 at 2:56 pm

      Hi Jerri, thanks for your comment. I wouldn’t exactly call that a study, but any research into dividend stock outperformance is largely explained by exposure to the value and profitability factors (of the Fama-French five factor model that explains investment returns).

      Here’s a good piece by advisor Jason Pereira that breaks this down: https://jasonpereira.ca/all-content-jason-pereira-toronto/dividend-integration

      • Jerri on June 24, 2021 at 3:27 pm

        Hi Robb –

        I read that article and it is excellent food for thought, and I never considered things that way before. JP says: “Here’s the bottom line: The investor thinks they are receiving a dollar when in actuality they are actually getting the 74 cents left over after corporate taxes. The real test is how much of a pre-tax dollar ends up in an investor’s hands after Ottawa (and your provincial capital) has chipped away at it from all sides.”

        Would that loss of value due to taxes not also apply to the value of the corporation (hence, stock price, though I do understand these are not perfectly correlated) as they have to pay taxes whether or not they are dividend paying corporations? Or am I missing something there?

  10. Ian Duncan MacDonald on June 24, 2021 at 2:04 pm

    I don’t think Robb is retired and living off his investments. His theory on dividend investing is far from my reality. I have been living off a generous dividend income for 16 years. During this time, I watched my 100% dividend portfolio more than triple. It is still growing. I had not really expected it to grow. How is this possible?

    If you invest in 20 diversified carefully chosen financially strong stocks like an Enbridge you get your steady dividend income, the dividend payouts increase almost every year, the share price increases almost every year. In a recession 95% of such companies continue to pay their regular dividends even though their share price may drop by half. If you live off your dividend income, share prices are almost irrelevant. The one stock in 20 that might not pay a dividend is irrelevant.

    Before you retire, if you reinvest those dividends, you should be able to double your portfolio in 5 years and triple it in 10 years. The 20 stocks reduce the possible influence of one weakening stock to only impacting 5% of your portfolio.

    For every stock traded you can see share prices and dividend payouts going back for more than 20 years. While share prices are set by the competing bids of speculators. The profits of companies are determined by the skills of the company’s management. Dividends are paid from profits. Putting faith in company management beats putting your faith in speculators.

    When you reach a point that you are now living solely off the dividend income from your main investment account your dividend payouts will still keep growing and your share prices will still keep growing. While living off the dividends in your main trading account, the dividends in your REIT accumulate during the year. At the end of the year, you withdraw a year’s full of REIT dividends, as you are required to do, pay your income tax, and spend what you wish of this windfall money or if you don’t need anything, invest it in your main trading account. Your total wealth keeps growing. You want for nothing. If you ever did need more cash in an emergency, you can always tap into your REIT.

    The big question then becomes how do you make finding financially strong companies paying high dividends easy? My background was developing commercial risk warning systems. Investing in the stock market is another form of commercial risk. For my own purposes I created stock scoring software.

    I have scored all stocks on the TSX paying a dividend of 3.5% and all those on the NYSE and NASDAQ paying a dividend of 6%. Out of these 1,000+ stocks all I am looking for are the 20 best. The only reason I remove a stock from my portfolio is if my IDM score drops below 50 while the dividend drops below 5%. I have held some stocks like Enbridge for close to 20 years. The following is a page from my scoring report on Enbridge:

    Date: 15 MAY 2021
    Company Name: Enbridge Inc
    Stock Symbol: ENB
    Today’s Stock Price $47.20 Score = 8
    Price 4 Years Ago $52.00 Score = 9
    Current to Historical Price Comparison Score = 5
    Stock’s Book Value $30.29 Score = 8
    Book Price to Book Value Comparison Score = 0 =
    Analysts Buy Ratings # 9 Score = 5
    Analyst Strong Buy Ratings # 1 Score = 3
    Dividend Yield % 7.08 Score = 8
    Stock’s Operating Margin % 21.34 Score = 5
    Daily Shares Traded # 16,508,203 Score = 10
    Price to Earnings Ratio 15.1x Score = 9 =
    Total Score = 70
    Month Day Year Dividend $ Stock Price $
    May 13 2021 $0.83 $49.86
    May 12 2016 $0.53 $52.09
    May 11 2011 $0.24 $31.36
    May 16 2001 $0.09 $10.30
    Notes: Enbridge Inc. is an energy infrastructure company with business platforms that include a network of crude oil, liquids and natural gas pipelines, regulated natural gas distribution utilities and renewable power generation. It operates through five segments: Liquids Pipelines, Gas Transmission and Midstream, Gas Distribution, Green Power and Transmission, and Energy Services. Liquids Pipelines consists of pipelines and related terminals that transport various grades of crude oil and other liquid hydrocarbons. Gas Transmission and Midstream consists of its investments in natural gas pipelines and gathering and processing facilities, including US Gas Transmission, and Canadian Gas Transmission and Midstream. Gas Distribution consists of its natural gas utility operations. Green Power and Transmission consists of investments in renewable energy assets and transmission facilities. The Energy Services businesses undertake physical commodity marketing activity and logistical services.


    I feel very safe and secure with my portfolio. Bonds are expensive to buy and to sell. They barely beat inflation. You are losing money by investing in them.

    • Jerri on June 24, 2021 at 3:34 pm

      Ian – Very elegantly stated Would you be willing to share more about your analysis technique at all?

    • Bob S on July 5, 2021 at 8:56 pm

      “if you reinvest those dividends, you should be able to double your portfolio in 5 years and triple it in 10 years.”

      The math seems WAY off to me.

      If you can double in 5years, that implies a total return of about 14% per year. Finding 20 dividend-paying stocks with similar performance seems far-fetched.

      Also, if you can double in 5years, shouldn’t you be able to quadruple in 10 years? (i.e double in the first 5 and then double again in the next 5)

      Your claims seem preposterous to me.

      P.S. I won’t be buying the book you are tryng to shill.

      • Ian Duncan MacDonald on January 7, 2023 at 7:25 pm

        Bob, I have just seen you comment about me being a shill for my books. Yes, i am very passionate about how I invest. I want to open up everyone’s eyes to what I have proven works and can work for them. It is my form of revenge against the investment advisor I was given by “professionals”.

        Send your address and I will mail you one of my books and after you have reviewed it I will answer any questions you might have and provide any proof you need to se how it works. My portfolio did increase by 500%. I do live off a 6 digit income. Let me know if you want a book for US or Canadian stocks.

  11. Gin on June 24, 2021 at 5:29 pm

    Thanks for this excellent post. It clarifies commonly misunderstood concepts about dividend investing. I agree with your sentiment that while dividend investing may have worked out well for some folks, it isn’t necessarily the best investment advice for everyone. Today’s winners can be tomorrow’s losers and diversity helps mitigate risk.

  12. Gary on June 25, 2021 at 8:48 am

    Great post Robb. I really enjoy your take on all subjects. We’ve been retired for 15 years and we’ve considered our OAS and CPP our bond/GIC portion of our portfolio. It has worked out fine so far but I’d love to read your thoughts.

    • Robb Engen on June 28, 2021 at 11:16 am

      Hi Gary, thanks for the kind words. I think it’s reasonable to view your government benefits (and workplace pension, for those who have one) as part of your fixed income allocation. These payments are guaranteed, paid for life, and indexed to inflation. If you feel that allows you to take more risk / hold more equities then I think that’s a fair argument.

      So much of retirement planning depends on your spending needs so it’s difficult to say what’s an ideal asset mix during this phase.

  13. Tom on June 27, 2021 at 8:56 am

    Great post Robb. Very interesting perspective and gives me some more confidence that my index investing approach is still the most reasonable and easiest to manage.

  14. Ron on June 27, 2021 at 4:03 pm

    Timely post Robb. As you know, I’m trying to quite an addiction to dividends from preferred shares, and my income is in that range where the dividend tax credit is a great advantage. The low liquidity of preferred shares, amongst other reasons, makes them extremely volatile and so they are a poor substitute for bonds as ballast or as a cash reserve for balancing. But they do deliver good dividend yield.

    In my quest for something else with better characteristics, we’ve talked about VRIF, which I still have my eye on. In addition, I’ve been researching a variety of dividend funds and also did a deeper dive into the very-high dividend payers like DF and the like. These relatively exotic split corp funds and the ones that generate income with covered calls are tempting (15 to 18%!), but the more I looked at them, the more they were all about maximizing income yield (at higher risk than I’m comfortable with) while ignoring price growth. Some of the older ones, with history of more than 10 years, show a clear trend of declining share prices even in this long bull market we’ve been in since 2009. So, I’m sticking with the Total Return principle to guide me.

    It turns out that there is no perfect income security. Looking for a combination of high yield, good price growth, optimum tax advantaged income, and modest volatility is a mug’s game and I’ve gotten nowhere (or is ZEB worth another look? here we go again…). Perhaps VRIF is a decent compromise, but so far I just cannot bring myself to just buy VBAL.

    • Robb Engen on June 28, 2021 at 11:26 am

      Hi Ron, one of the great psychological barriers in retirement is getting over the idea that it’s somehow sacrosanct to spend your capital. This barrier has retirees constantly searching for higher and higher yields to meet their income needs, which could more easily be met by taking a total return approach and selling shares or ETF units. Ironically, the search for higher yields usually means that part of your income is being paid back to you in the form of return of capital.

      VRIF is a decent compromise because of its extreme diversification. But even that doesn’t solve the dilemma of eventually having to spend your capital.

      ZEB is a Canadian bank ETF that holds 7 stocks and charges a MER of 0.60%. Banks sound safe, pay a nice dividend, but ultimately lack diversification and are not immune to price corrections or crashes (see March 2020).

  15. Rick on June 27, 2021 at 9:24 pm

    Hi Robb what are your thoughts on a “Participating Dividend-paying Whole Life Insurance” policy?
    This is also in conjunction with the Late R. Nelson Nash’s Infinite Banking Concept (IBC).

    • Robb Engen on June 28, 2021 at 11:28 am

      Hi Rick, in what context? At first blush it looks like an investing gimmick dreamed up by insurance companies. I have a hard time seeing how this type of strategy fits in with one’s investing goals.

      • Rick on June 28, 2021 at 11:58 am

        Hi Robb

        I was on a recent ‘Becoming Your Own Banker aka Infinite Banking Concept’ workshop with this group Ascendant Financial: https://www.youtube.com/watch?v=6CywVeVxbE4

        The tool they use to implement ‘Infinite Banking’ is a Participating Dividend-paying Whole Life Insurance policy.


  16. Howard on June 28, 2021 at 6:44 am

    Hi Rob,

    I strongly disagree with your statement that it is impossible to live off the dividends in registered accounts. I think the main point you are missing in your description of dividend stocks is dividend growth. My wife and I only own Canadian large cap Dividend stocks which have a 10 year average dividend growth record of > 5%. So the weighted average dividend growth for our portfolio is around 7%. When I do long term projections I find that with this growth we won’t need to sell stocks until we are too old to care (or dead).
    Once you are retired with a solid dividend income, stock price growth is a non issue. It’s all about the income and if you only own large cap stable companies with wide/narrow motes, you will sleep easy and just watch the money roll in. I do admit that raising enough money to eventually live off the dividends is not easy, but my wife and I both only have collage diplomas and never had huge salaries. We have three kids and did not live a frugal life. I must admit that my wife does have a decent pension, and I always thought that my dividend income would be enough to pay for the “toys”. Now that everything is in place I can see that with dividend growth our investment income will move ahead of my wife’s pension in our 60s and continue to grow. I hope that this post is helpful for anyone out there considering dividend investing. The book that sold me was “The Single Best Investment” buy Lowell Miller. I highly recommend it and wish I had read it years earlier.

    • Hybrid Approach on July 6, 2021 at 8:42 am

      Thanks for the comment Howard. I’m currently in my mid 20’s and considering a strategy like this due to a unique personal situation.

      Would you mind emailing me about this? Using an anonymous email since I don’t want people to know my personal financial situation.

      helpfulanon@protonmail.com, I would love to discuss this strategy and the book!

  17. Don G on June 28, 2021 at 4:56 pm

    I totally disagree with Robb and totally agree with Ian Mac and Howard. Investing is very personal and each to his own. I just don’t like it (and find it a tad arrogant) when someone like Robb says this is the right way and that is the wrong way.

    I’ve been retired for 8 years and my wife was stay at home so we had moderate total family income while I was working. We never deprived ourselves of anything and were able to help our 2 kids out with some of their university costs.

    At this point, our dividend income/growth portfolio with 22 TSX holdings generates more than 2.5x the income we need to cover all our expenses. Since retirement, both our income and our portfolio have increased significantly in size.

    We’re a perfect example that living off dividend income works incredibly well. It’s also relatively easy to do and totally stress free especially because we rarely, if ever, need to think about selling something. (mostly take-overs)

    Making a statement that it’s easy to just sell something for needed income is very untrue as it is in effect, timing the market. Also, selling something reduces future income. I think all in all, it would be very stressful. (but thank heavens we never need to worry about it 🙂

    • Robb Engen on June 28, 2021 at 9:45 pm

      Hi Don, thanks for your comment. I’m glad your approach has worked for you and I’m sorry this article came across as preachy.

      The post wasn’t meant to tell successful dividend investors that they’re wrong. It’s to clear up some potential misguided thinking about dividends.

      That includes the fact that dividend stocks don’t have higher expected returns than non-dividend payers, and that current yield (not yield on cost) is what matters. It points out that while living off the dividends sounds nice in theory, most investors will need to eventually spend their capital. Finally, the tax treatment of dividends is not that advantageous if you have other sources of income such as a pension, government benefits, and/or RRIF withdrawals.

      These are the stories that some dividend investors tell themselves.

      • Don G on June 29, 2021 at 9:55 am

        Hi Robb

        Thanks for the reply.

        I do think a number of bloggers are anti-dividend investing and quite a few do get a little “preachy”. I always say “each to his own, develop a plan, and try to stick to it, tweaking it as need be”.

        I agree that yield on cost is a totally useless number and agree that only current yield matters. Also, as a true dividend investor, I don’t really care about stock price. It’s all about having enough income to live off. The only thing price affects is the size of the inheritance we leave behind.

        We don’t have any company pension so just have dividends, my CPP, and both of our OAS so we’re still in a very favourable tax situation.

        I can’t imagine a scenario where we’d have to draw down capital. In fact, we have so much extra that we have been gifting some significant early inheritance to our kids and their families.

    • Hybrid Approach on July 6, 2021 at 8:44 am

      This is great and something I’m seriously considering for myself. I’m in my mid 20’s but have quite a bit saved for retirement.

      Can you email me to discuss this? Using an anonymous email so people don’t know my personal financial situation. helpfulanon@protonmail.com, would love to discuss this!

  18. Hybrid Approach on July 4, 2021 at 5:41 am

    What makes you say yield on cost is a useless metric? It is just a mathematical function of the investment you purchased vs. the growth in the dividend yield over time. This is the same way you measure the success of a non-dividend paying investment in terms of IRR or MOIC.

    Another thing I’m curious about is, you say that the price of the stock drops by the dividend paid out, but aren’t stocks valued on forward looking metrics? So if the dividend per share is growing the DDM model and growth rates would still make the company more valuable since it is still growing it’s ROIC above it’s WACC.

    A lot of your argument seems to stem from people “chasing yield”, most dividend investors I’ve met are “dividend growth” investors and use the strategy as a compromise between “pure” growth investing and investing only for income.

    There has been research from Vanguard that shows dividend growth equities outperform with lower volatility. I think this research is a lot more valid compared to you picking 1 ETF and comparing it to another ETF over an arbitrary 5 year period.

    I think dividend growth investing is a great strategy, but I would love to hear your responses to the points I raised, thanks for the article it has given me things to think about.

    • Robb Engen on July 4, 2021 at 7:38 am

      Thanks for your comment. It might be helpful to read that Vanguard study again because it reinforces a lot of what I’m saying here. Total returns are more important than dividends, and any outperformance shown by dividend growth strategies are time specific and can be explained by exposure to known risk factors like value and profitability:


      • Hybrid Approach on July 6, 2021 at 8:19 am

        That makes a lot of sense, I assume dividend growth stocks would have some exposure to the quality factor as well? For example something like TXN could probably be counted as both.

        I like dividend growth since I’m young with a relatively high amount saved for retirement at this age. I think in ~25-30 years in my 05’s this strategy will provide a reliable income stream. I see it as a hybrid between naively chasing high yield (horrible strategy) and pure growth through something like VTI (very good strategy).

        Your advice is very good and much more general, I guess mine is more of a unique situation. I appreciate you giving more general advice that more of your readers can actually use.

        I do go back and forth between whether investing in things like SCHD is really better for my personal situation than VTI, but I think both are good strategies that will produce good results.

        Thanks for being so polite about this discussion, often hard to do on the internet!

        • Robb Engen on July 6, 2021 at 11:00 am

          @Hybrid – I was also drawn to a dividend growth strategy at a young age, thinking about those dividends compounding into a passive income machine to fuel my retirement. But then I realized that I could more easily invest with a total return approach (using my one-ETF all equity solution) during my accumulation years. Then, in retirement, if I ever wanted to switch back to a dividend approach I could simply sell my one ETF and buy a bunch of dividend stocks or ETFs to generate those same dividends.

          That’s where the yield on cost versus current yield tends to trip up investors.

          • Hybrid Approach on July 6, 2021 at 1:26 pm

            This makes a lot of sense too. I’m glad I’m still young enough to have time to figure it out.

            It seems like your one ETF solution is mainly geared towards Canadian investors and I’m American, once dated a Canadian girl though haha.

            Thanks, I appreciate the advice and it has definitely given me a lot to think about.

          • Pete on January 10, 2023 at 10:44 am

            Very good article Robb, your thoughts on yield on cost are not my thoughts though. I look at good dividend growers as almost a bond with a growing payout, so yield on cost is big to me. For example a couple of years ago I bought ENB, CPX and CNQ when all 3 were yielding over 8%. I look at what I’m paying for a growing dividend payment down the road. CNQ was bought at $20.39, paying over 9% at the time. Today CNQ is trading for $73.46 and paying $3.40 a share. That’s paying me 16.66% on my initial investment. Now I could sell it, pay the tax and buy something that has a higher yield, but I’m only concerned about the income that I’m receiving from my investments, not the capital gains. We also got the special $1.50 dividend last year to boot. I don’t buy stocks that I think I’m going to have to sell, but sometimes things don’t work out and we do sell. That doesn’t happen very often though. And it’s not often you get to buy at those prices. Another point, when I’m focused on this strategy is that I don’t worry about what stock prices are doing. Only what they are paying and I get piece of mind and can sleep at night ☺️

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