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Though the math on this is easy enough to comprehend, I still have a hell of a hard time getting dividends out of my mind. How many of us were going crazy for Enbridge's 6.5% yield last month? I know I was...
I've had trouble with this too. My five pack portfolio pays lots of dividends and I have to keep fighting my tendency to think of the cash as newly generated or "extra" money. Several years ago, I bought ZUT (utilities ETF) thinking that it preserved capital and just emitted fresh money. There is just something about dividends that makes them feel like new money, hiding the fact that it directly comes out of equity. Even with everything I know today, I still look forward to and feel good when my five pack pays out dividends.

In reality, it makes no difference to me whether they pay out those dividends or just retain the cash and keep going on with their business. The share price declines the moment the dividend is paid out. But it doesn't feel like that, and the ex-dividend price drop happens weeks before the cash payment, which helps hide the effect. When the cash shows up in your account, it feels like you just got it for free.
 

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Discussion Starter · #62 · (Edited)
Great results! I'm around the same age as you, with similar parameters, and we seem to be heading the same way. I think there at least 3 or 4 of us in this forum all around the same age and place in our careers & savings.

I'm still amazed by how low your expenses are, much lower than mine. Any tips on how to reduce housing costs? Did you do something special to get this low?



DRIP'ing is essential, but another way to think of dividends is as a cash delivery mechanism, in that they are transferring some of your equity to you as cash. That is, the dividends do not generate new money (like bond interest does). Reinvesting the dividend preserves the equity value, as opposed to letting it bleed out (taking all the dividends out = bleeding out cash from the equity value).

So I think it's a misconception that reinvesting dividends grows or compounds the dividends. What's happening is that some $ is taken out of equity, you receive it as cash, then put the cash back into equity. Nothing has really changed through this process. This is why it doesn't make any sense to seek a high dividend yielding stock and then just DRIP the dividend. There is no compounding or extra growth accomplished.

As PWL Capital states in this video, "As much as the dividend may seem like free money, the reality is that the payment of the dividend decreases the value of your stock. If a company pays $20 million to its shareholders as a dividend, the remaining value of the company has to decrease by $20 million." -- see https://www.youtube.com/watch?v=9j6DInAMMaM

Why am I saying all this... I think we're fed misconceptions about dividends and given false promises by web sites and media personalities. It's important to not get the wrong idea about what dividends do for you when living off capital. When the time comes that you stop reinvesting the dividends, and start taking out the cash, you will be tapping into your equity and capital. If you have 1M capital and are living off dividends, this is equivalent to selling some shares each year and depleting (to a mild degree) your capital. Of course, if equities keep performing well, the new gains can offset the depletion. But I think it's still very important to be aware that dividends deplete or tap into capital.

This is also why it's critical to reinvest all dividends unless you actually need that cash, because it is equivalent to selling or withdrawing equity. Others around here will disagree with my view on this, but you can refer to the PWL Capital video or this Moneysense series on Dividend Myths which explains it all quite well. As the article says: "a company that pays a dividend to shareholders is depleting its own capital".
Yes, there are couple of us here within the same age range. However, my income is not as high as others. Therefore, I have been trying to reduce my costs. I have been living in the same house since Nov, 2008 and my rent is around $800. It's basement in a bi-level house. The basement is so bright and there is lot of fresh air in it. The upstairs is empty most of the time as landlord doesn't find suitable tenant. So, we have the full privacy like living in a whole house. I have a very good relationship with the landlord as I have been paying my rent on time for the last 10 years. I always try to buy stuff on sale. I don't pay full price other than for milk and banana. Don't spend much money on restaurants. Cook our own food.

I have been looking for a house for the last two months and planning to buy a house as soon as I find a suitable one. Also, planning to start MBA next year. Expenses will be very high next couple of years. I would rather complete MBA than saving $50k in my account.

I understand that dividend is not an extra money but with the DRIP, you get more dividends next time. Isn't it correct? If not then why do I get more dollars on every subsequent months? It's not significant amount. However, it has been increasing month by month. See below -

Settle Date Fund Amount Quantity Total Costs Avg. Costs
6/Mar/18 ZRE $180.29 8.0 $165.68 $20.71
5/Apr/18 ZRE $180.97 8.0 $167.36 $20.92
4/May/18 ZRE $181.65 8.0 $167.36 $20.92
6/Jun/18 ZRE $182.33 8.0 $173.28 $21.66
6/Jul/18 ZRE $183.01 8.0 $175.44 $21.93
 

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How is a bond coupon new money? It's exactly the same as a dividend distribution from the investor's perspective.
A bond price does not change after a coupon is paid, which is why I'm calling it new money. The company has to come up with that money (somehow) and pay it out. With a stock however, the dividend is paid out of the company's cash reserves or in other words, the cash is removed from their current equity value. The stock price drops when the dividend is paid out to reflect that the equity has declined by the amount of cash paid out.
 

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A bond price does not change after a coupon is paid, which is why I'm calling it new money. The company has to come up with that money (somehow) and pay it out. With a stock however, the dividend is paid out of the company's cash reserves or in other words, the cash is removed from their current equity value. The stock price drops when the dividend is paid out to reflect that the equity has declined by the amount of cash paid out.
Bond market prices may not change after the coupon is paid but the value does change. If you were to sell a bond immediately after the coupon payment you would receive less than if you sold it immediately before. Just like a dividend paying stock on it's ex-dividend date. The only difference is the bond market doesn't reflect the price plus accrued interest while the stock market does in the case of the dividend value.


This site provides a very good explanation. https://thismatter.com/money/bonds/bond-pricing.htm

My point is neither bonds nor dividend stocks produce new money. They accrue interest or dividend value until the ex-dividend date or the coupon payment date. When the coupon or dividend payment is made the bond or stock's value is reduced by the payment amount.
 

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That is, the dividends do not generate new money (like bond interest does). Reinvesting the dividend preserves the equity value, as opposed to letting it bleed out (taking all the dividends out = bleeding out cash from the equity value).
Except when the company increase their dividend year after year, while bond interest remains the same and loses value due to inflation!
There is no comparison between bonds & equities. One you are buying debt the other a share of the company.
 

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An idle mind is devil's workshop...I would really appreciate your comment/suggestion for the following NW analysis. Is it feasible to achieve around 7% ROI going forward while investing in broad based ETFs such as VCN, ZPR, VUN, XEF, XEC, ZRE and ZAG?

If I purchase a house in 2018 -

View attachment 18818

If I don't purchase a house in 2018 -

View attachment 18820
As I don't own any ETF's my opinion may not be the best, but I'd say No.
However, if one invested in a group of solid DG stocks, I'd say Yes, over time.
Here's examples:
Our TFSA: Started with a Bank, added Utility, then Pipeline and Comm stock
Mine maxed out $57,500, reinvested Dividends $18,250, Total Investment $75750, Mkt Val $91,400. Annual Div $4,625 or 6.10%(Yield on Investment)
Wife's $57,500, reinv div $19,365, Total $76,865, Mkt Val $98,600. Annual Div $4,943 or 6.43%
So as the companies increase the dividend our yield goes up and we'll probably hit the 7% within 2-3 yrs., not counting any Cap Gth.
You've done a great job saving, but looking back you might have done much better taking MyOwnAdvisor's advice and invested more in equities, rather than ETF's.
 

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Discussion Starter · #68 ·
As I don't own any ETF's my opinion may not be the best, but I'd say No.
However, if one invested in a group of solid DG stocks, I'd say Yes, over time.
Here's examples:
Our TFSA: Started with a Bank, added Utility, then Pipeline and Comm stock
Mine maxed out $57,500, reinvested Dividends $18,250, Total Investment $75750, Mkt Val $91,400. Annual Div $4,625 or 6.10%(Yield on Investment)
Wife's $57,500, reinv div $19,365, Total $76,865, Mkt Val $98,600. Annual Div $4,943 or 6.43%
So as the companies increase the dividend our yield goes up and we'll probably hit the 7% within 2-3 yrs., not counting any Cap Gth.
You've done a great job saving, but looking back you might have done much better taking MyOwnAdvisor's advice and invested more in equities, rather than ETF's.
I don't want to buy DG stock until I know how to analyze a suitable DG stock. The reason I started with broad based index ETF is that I can learn about investing/personal finance and my money can grow at the same time. I am planning to join with Canadian Money Saver Share Club in our area. Most of the investors in that group are DG investors. I hope I will learn about the DG investing from them.

Although I started to max out my TFSA since 2009, I left it on savings account and made around $500 until the end of Sep, 2013. Now the market value is $73.5k including DRIP of $9.7k. I have no plan to buy ZAG in future. I should have learnt about investing earlier. I cannot change my past but I can keep improving my future.
 

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I don't want to buy DG stock until I know how to analyze a suitable DG stock. The reason I started with broad based index ETF is that I can learn about investing/personal finance and my money can grow at the same time. I am planning to join with Canadian Money Saver Share Club in our area. Most of the investors in that group are DG investors. I hope I will learn about the DG investing from them.

Although I started to max out my TFSA since 2009, I left it on savings account and made around $500 until the end of Sep, 2013. Now the market value is $73.5k including DRIP of $9.7k. I have no plan to buy ZAG in future. I should have learnt about investing earlier. I cannot change my past but I can keep improving my future.
One can make evaluating DG complicated, but I use four basic rules in considering a stock:
1. Has the company paid a dividend for many years, min 10, 25 or more preferred
2. Has the company a consistent history of growing their dividend, at least 75% growth over 10 years
3. Ignore companies which have cut their dividend in the past 10 years
4. Ignore all cyclical stocks

There will only be about 30 Cdn stocks which might qualify and about the same US. I personally don't believe one needs more than 20 Cdn and 5 US (in RRSP or RRIF)
Then try to buy when prices drop, simple guide is to buy when the yield is close to or higher than its 10 yr average yield.
Re-invest the dividends, continue to add to the ones you've chosen and Hold for the rising Income. Only sell if one might cut their dividend (unlikely for at least 20 Cdn).
If you want information on DG from one who has recommended it for over 37 years, go to:
http://www.dividendgrowth.ca/dividendgrowth/
 

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One can make evaluating DG complicated, but I use four basic rules in considering a stock:
1. Has the company paid a dividend for many years, min 10, 25 or more preferred
2. Has the company a consistent history of growing their dividend, at least 75% growth over 10 years
3. Ignore companies which have cut their dividend in the past 10 years
4. Ignore all cyclical stocks
I fail to see how this is anything more than a very coarse way of identifying large cap stocks that have had relatively consistent profits, and some earnings growth (perhaps a lot, perhaps not) over the last 25 years. It indicates precisely nothing about the future prospects of the business, reasonableness or not of the current stock price, and may indeed say something negative about the business's cashflow if commitment to "dividend growth" comes before commitment to earnings growth and a healthy balance sheet.

It's not hard to find a large list of well known stocks that have had annual dividend increases of ~10% per year for the past 10+ years, and think "damn - in 10 more years just look at what my dividend income is going to be!"... Better double check that most of those companies have actually had impressive earnings growth though, and will likely in the future too, and that it hasn't just gone from 25% payout ratio to 75% ratio with stagnant earnings...
 

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Most of TSX 60's largest weights are "dividend growth" companies, so XIU is a DG portfolio. I think the danger of trying to pursue a DG strategy by stock picking is that it's hard to create a well diversified portfolio of stocks. If you are going down this route, I suggest you benchmark yourself against XIU and check in 5 and 10 years that you are actually doing better than the benchmark ETF.
 

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Most of TSX 60's largest weights are "dividend growth" companies, so XIU is a DG portfolio. I think the danger of trying to pursue a DG strategy by stock picking is that it's hard to create a well diversified portfolio of stocks. If you are going down this route, I suggest you benchmark yourself against XIU and check in 5 and 10 years that you are actually doing better than the benchmark ETF.
I took 20 min to apply the 4 basic rules to the XIU and eliminated 34 of them. There were many that not only cut their div, but cut them several times and 3 paid no div There would probably another 5 or so I'd not buy with further review, so No most of the TSX 60 are not "dividend growth" companies.
As for diversification, from the remaining one can choose:
Consumer Discretionary
Consumer Staples
Energy
Financials
Telecommunications, and
Utilities
 

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I fail to see how this is anything more than a very coarse way of identifying large cap stocks that have had relatively consistent profits, and some earnings growth (perhaps a lot, perhaps not) over the last 25 years. It indicates precisely nothing about the future prospects of the business, reasonableness or not of the current stock price, and may indeed say something negative about the business's cashflow if commitment to "dividend growth" comes before commitment to earnings growth and a healthy balance sheet.

It's not hard to find a large list of well known stocks that have had annual dividend increases of ~10% per year for the past 10+ years, and think "damn - in 10 more years just look at what my dividend income is going to be!"... Better double check that most of those companies have actually had impressive earnings growth though, and will likely in the future too, and that it hasn't just gone from 25% payout ratio to 75% ratio with stagnant earnings...
The key words are "considering a stock". Nothing will accurately forecast the future but these rules will allow one to quickly identify companies which should be considered as DG stocks. One can then apply what other tests they wish to determine which to buy. I've followed these basic guidelines for years to compile a select group of stocks to provide a growing income annually which now exceed $100k. I don't suggest it's the best strategy or that others might not have not done better, but it's proved to be a simple and effective one for us.
I've been told many times it's Total Return that really counts, not just dividends. I don't have a problem with that, but I don't know what the market value of our holdings are or really care. I'm just happy each month or Qtr when I received the expected dividend and even happier when the dividend has grown.
 

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I've been told many times it's Total Return that really counts, not just dividends. I don't have a problem with that, but I don't know what the market value of our holdings are or really care. I'm just happy each month or Qtr when I received the expected dividend and even happier when the dividend has grown.
But the dividend and market value are intimately linked. You may choose to ignore the market value, but each dividend takes $ out of the market value. A dividend based method cannot work long term unless the stock also performs well. One thing DG web sites aren't telling you is that, historically, dividends have declined during strong bear markets. Dividends can not be totally separated out from market prices.
 

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James, Canew really does care about DG stock price appreciation because one cannot have dividend growth longer term without stock price growth, as you have said. It is just that he professes not to pay attention to it, and that is fine if one decides to be in reactive mode when dividend growth stalls.

I prefer to anticipate stalls in DG growth by looking at appropriate metrics suggesting that could happen. EPS growth or lack thereof, ROE, etc.
 

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But the dividend and market value are intimately linked. You may choose to ignore the market value, but each dividend takes $ out of the market value. A dividend based method cannot work long term unless the stock also performs well. One thing DG web sites aren't telling you is that, historically, dividends have declined during strong bear markets. Dividends can not be totally separated out from market prices.
Of course they are linked, but more closely to earnings, in fact most of the stock prices have risen inline with the dividend increase over time. I don't care about market value because over the past 18yrs my income has risen through the entire period (at different rates, but never a decline). As mentioned our dividends are at the point where I doubt that any correction or even recession will affect their continued increase. Especially as we continue to reinvest about 60% of the dividends which generate more income and if prices drop we would just add more shares and more income.
 

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Investing in ETFs exclusively and you never benefit from stock splits. This also adds VALUE to the PF and gives the investor confirmation in plucking quality stocks out of a mindless universe of ETFs. As long as there continues to be dividend growth the price will go up as the dividend supports the price, growth and total return of your PF holdings. For me, it's about cash flow. The Yield Hog writes about this all the time as he still hangs on to losers because he gets raises through dividend increases. His total PF value grinds lower while his income/cash flow rises. Good reason to hold through any drops or a recession. Just don't listen to Derek Foster.
 

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Discussion Starter · #79 ·
Here is the Q3, 2018 net worth update. Around 3.6% or $17k savings/gain since June, 2018.

Net Worth -

2015 - $276k
2016 - $348k
2017 - $431k
Q1, 2018 - $440k
Q2, 2018 - $478k
Q3, 2018 - $495k

Expenses -

2015 - $20k
2016 - $22k
2017 - $47k
Q1, 2018 - $4.5k
Q2, 2018 - $9.2k
Q3, 2018 - $20k

So far, the average monthly expense is around $2,223 in 2018. The expenses include around $3.5k of donations. I am happy anything below $2k of expenses per month.

Passive Income (Dividend & Interest) -

2015 - $4.6k
2016 - $6.4k
2017 - $6.8k
Q1, 2018 - $1.9k
Q2, 2018 - $5.3k
Q3, 2018 - $7.3k

Asset Allocation -

Fixed Income - 35%
Equity - 53%
REIT - 12%

Since Inception Time-Weighted Rate of Returns -

Cash - 16.47% (VCN & ZPR)
TFSA - 36.45% (ZAG & ZRE)
RRSP - 73.16% (VUN, XEF & XEC)

I have some cash in my RRSP that has been waiting for further market correction.
 

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Discussion Starter · #80 ·
Here is the 2018 net worth update. Around 14.4% or $62k savings/gain since 2017.

Net Worth -

2015 - $276k
2016 - $348k
2017 - $431k
2018 - $493k

Expenses -

2015 - $20k
2016 - $22k
2017 - $47k
2018 - $27k

The average monthly expense was around $2,219 in 2018.

Passive Income (Dividend & Interest) -

2015 - $4.6k
2016 - $6.4k
2017 - $6.9k
2018 - $8.6k

Asset Allocation -

Fixed Income - 31%
Equity - 58%
REIT - 11%

Since Inception Time-Weighted Rate of Returns -

Cash – 3.18% (VCN & ZPR)
TFSA – 33.50% (ZAG & ZRE)
RRSP – 62.84% (VUN, XEF & XEC)

I have a little bit of cash in my RRSP that has been waiting for further market correction…
 
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