My investment strategy is to buy dividend paying stocks when they are value priced and then hold them to collect growing dividends. The companies that I like to invest in typically raise their dividend annually, or they will average a high dividend growth rate over time.
While investing in dividend stocks is popular during a recession, dividend growth investors need to have the patience and discipline to stick with their strategy during economic boom times when other stocks are outperforming theirs. The reason that patience and discipline are such strong virtues of the dividend growth investor is because of yield on cost.
Related: Beat Inflation With Rising Dividends
Yield On Cost
Once you’ve purchased a dividend paying stock, you will be receiving the dividend yield as it was on the date of purchase. Each time that company raises their dividend, your yield on cost will increase, meaning more money in your pocket from dividend income.
After years of dividend growth your yield on cost could be in the double digits, beating the market each year with just dividends alone.
Related: 6 Reasons To Invest In Dividend Growth Stocks
Back in May 2009, I purchased the majority of my RRSP portfolio which consisted of about twelve stocks. Over the next eighteen month, six of these stocks have raised their dividend (some multiple times). Here is a look at the dividend growth percentages of those stocks, as well as my yield on cost:
| Company | Dividend Growth Rate | Yield On Cost |
| BCE | 18.8% | 7.46% |
| T | 10.5% | 6.62% |
| EMA | 28.7% | 5.23% |
| SJR.B | 4.7% | 4.32% |
| FTS | 7.7% | 3.83% |
| ENB | 14.9% | 3.43% |
Some of those dividend yields are starting to look really attractive and this is only after eighteen months. I will be really excited next year when the banks finally decide to increase their dividends. We haven’t even mentioned the increase in valuation of these stock prices.
EMA is up close to 30 percent, BCE is up 35 percent, and T is up close to 45 percent over the same eighteen months.
Again, this strategy preaches patience and disciplined investing. Many investors would take the profits from these stocks that are up 30 percent or more. Not me, I’m not selling.
Related: How To Use A Stock Screener To Find The Best Stocks
Not that there is anything wrong with taking profits, it just doesn’t fit with my investing strategy. The only way I would think of selling one of my stocks is if they slashed their dividend, or if the dividend wasn’t growing fast enough compared to others.
What do you think of yield on cost? Is this something you measure within your portfolio?
Mutual funds are a very popular investment. For many people they are the core investments in their portfolios. But, a lot of people are too complacent about their holdings – they don’t know exactly what they have and trust in their financial advisors too much so they end up in the “financial product of the month” that offers the advisor the best commission.
Mutual Fund Investing
Some people are happy when they see an increase, and switch to some other mutual fund company when they see a loss (or cash them in altogether and really take a loss).
Some people worry about high management fees and stick with lower cost index funds or switch to ETFs. There’s nothing wrong with these products as long as the reason you hold them is not entirely because you save money on fees. Some higher MER growth funds can outperform the index giving an overall higher return. ETFs don’t lend themselves to a regular purchase plan because of commissions when you buy them (like a stock).
In my opinion, mutual funds can be a very good investment for people in certain circumstances for these reasons:
- Easily available through banks and fund companies such as Investors Group. Generally no fee to set up an account and advisors to assist in building a portfolio.
- Low cost purchase plans – some as low as $25 – are a good way for younger and/or lower income people to start building up their investments and get them in the savings habit with fixed regular contributions that also have the benefit of dollar cost averaging.
- An easy way to diversify a smaller portfolio by holding different types of asset classes, management styles and geographic locations.
- A good way to take advantage of foreign investments that would be difficult to purchase otherwise.
- After purchasing the initial funds there is no direct involvement in the managing of the securities (done by a professional fund manager) for those who have no experience or interest in making these decisions.
Also, in my opinion, when a mutual fund portfolio exceeds around, say $50,000, it’s time to purchase a stock portfolio. After the initial purchase fees you will have no other management fees.
You can choose the top 10 stocks of an index or dividend ETF for a good start if you don’t know what to buy. A buy-and-hold strategy avoids having to make decisions of when to sell.
You benefit from both growth and income if you hold dividend stocks for the long term. Overall, I think you would end up making more money.
I like to read about different investment styles that other people choose. What is your investment strategy and why did you choose it? What are your thoughts on an ETF vs mutual fund?
I mentioned in my last post about the old adage regarding not spending more than 2-3 times gross salary on a house. This rule of thumb was not one that was set by the banks, but it was a belief held by many frugal home buyers who did not want to over-extend themselves. But is it realistic anymore in today’s environment? Let’s take a look at some numbers:
According to the MLS, the national average home price in Canada was just over $330,000 in September 2010. In order to purchase the average Canadian house, a family would need to earn $132,000 per year if they only wanted to spend 2.5 times their gross salary.
According to Statistics Canada in a June 2010 report, the average annual income for Canadian families is just over $70,000. If the average Canadian family only spent 2.5 times their gross salary on a house, they could only spend $175,000 on their home.
If the average Canadian family is earning $70,000 per year and the average Canadian house costs $330,000 that means Canadians are spending 4.7 times their gross salary on their houses. And it would take $66,000 to make a 20 percent down payment on the average Canadian house and avoid CMHC fees.
Are houses too expensive? Maybe in certain markets, but the average price across the country still seems reasonable if you look at the growth of real estate over time. Perhaps it’s wages that have stagnated and not kept up with inflation? I think there is a case to be made for this point. And what about the low interest rate environment that we currently live in? Larger mortgages seem more affordable when you’re only paying 2 percent interest.
Personally I don’t believe that spending only 2.5 times your gross salary on a house is even close to being realistic anymore. Even 2.5 times gross salary on your mortgage seems like a stretch. I would feel comfortable with a mortgage as high as 4 times our gross salary, provided that we didn’t have any other debt (including car payments). And I strongly believe in paying a minimum of 20 percent down payment on your house and amortizing over a maximum of 25 years.
Do you have any rules of thumb when it comes to your housing expenses? Is it time to change the way we think about mortgages?