# Seven lessons I�ve learned as a dividend investor



## kcowan

*Seven lessons I’ve learned as a dividend investor*

Seven lessons I’ve learned as a dividend investor


> 1. Think like an owner, not a trader
> 
> 2. Remember the 10-year rule
> 
> 3. Watch dividends, not stock prices
> 
> 4. Consider ETFs
> 
> 5. Buy U.S. dividend stocks
> 
> 6. Reinvest dividends
> 
> 7. Be conservative


A good summary of some of the sound principles.


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## Toronto.gal

I have learned all of the above, except:

- I think like an owner and a trader because I'm both,
- I actually have a 20 year rule,
- I watch dividends and stock prices,
- Haven't yet warmed up to ETF's.


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## HaroldCrump

I agree with most of the above, except #3.
With all due respect to the author (never heard of him, btw) - #3 is actually dangerous, IMO.
Stock prices matter as much as the dividend yield, if not more.
Especially if you believe in #2 as well, then you believe that over the long-term stock price reflects earnings and growth of the company.
If so, surely a falling or stagnant stock price for years at a time is not a good sign, regardless of yield.

Following #3 would have led one into many high yield traps.


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## dogcom

I have to admit I have that trader itch as well T.Gal so I satisfy that in one account and buy and hold strong in another account with a mix of strong dividend stocks and bonds.


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## CanadianCapitalist

HaroldCrump said:


> Stock prices matter as much as the dividend yield, if not more.


I agree. It is dangerous to simply ignore stock prices; they reflect consensus opinion on the worth of a company. Granted that there may be nothing wrong with a company whose stock price falls in sympathy with the market but it will be wise to pay attention when a stock is trading a discount to peers or to the general market.


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## kcowan

HaroldCrump said:


> I agree with most of the above, except #3.
> With all due respect to the author (never heard of him, btw) - #3 is actually dangerous, IMO.
> Stock prices matter as much as the dividend yield, if not more.
> Especially if you believe in #2 as well, then you believe that over the long-term stock price reflects earnings and growth of the company.
> If so, surely a falling or stagnant stock price for years at a time is not a good sign, regardless of yield.
> 
> Following #3 would have led one into many high yield traps.


One example is YLO where watching the company is crucial. But I think ROTs are oversimplified. I think the idea of checking once a quarter is probably sane and then a judgement call about whether to sell of not.



CanadianCapitalist said:


> I agree. It is dangerous to simply ignore stock prices; they reflect consensus opinion on the worth of a company. Granted that there may be nothing wrong with a company whose stock price falls in sympathy with the market but it will be wise to pay attention when a stock is trading a discount to peers or to the general market.


Yes or if it drops beyond its benchmark for a couple of quarters. One of the problems with DIY is that autopilot will only work for short periods without attendance. In the author's own words:


> Watching that number (dividends) grow makes it a lot easier to stay calm on days when the market tanks.


So it is implied that he is watching the portfolio. I would just add total return to his spreadsheet.


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## praire_guy

I think the author meant by rule 3 is don't worry about the stock price and panic sell. 
By focusing on the growing dividend, and not the day to day stock price fluctuations you can stick to your plan. 

But, Harold, and CC, by watching the dividend are you not also inadvertently watching the stock price?

If a stock is yielding way above its peers, it's price will have dropped. An above average yield is something that warrants investigations . 

I disagree with dividend reinvesting. A great company can be a bad investment if the price is too high, so I like to keep my dividends as cash. If a company is too expensive to buy outright, why would I want to Drip?


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## Cal

I interpreted that the author was saying that if you bought into a good company, and it continued to raise dividends year over year, then the original purchase price would become increasingly less important over time.

Having said that....I don't really like to overpay for anything. So the lower the price I can get, the more shares I can pick up.

And as per above ^ you may want to drip if the company offered a drip discount and you felt it was enough to compensate for the potentially higher reinvestment price. (not trying to disagree, just throwing an option out there)


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## doctrine

Ignoring a stock price is folly; ignoring a dividend cut is suicidal.


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## Oldroe

In the case of YLO you should have never got to worrying about stock price. It was clear this technology was dying and this company wasn't making the changes 10 years ago. This is were technical analysis will fail you every time and good old fashion thinking will prevail.


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## cardhu

An eighth lesson might be to pay attention to taxes … too few do, and too many slow their wealth-accumulation by placing their dividend payers in the wrong type of account, and consequently paying more tax than they need to.


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## victag

I just learned this hard way as I have same US divident stock in TFSA and RRSP (ticker SSW) and just noticed that US gov is tax witholding on my TFSA but not on the RRSP dividends. Keep the US divi payers in RRSP if possible.


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## Cal

Some might argue that dividend investing is a tax advantageous way to invest.....vs having GIC's, high yield accounts, RE income.

As mentioned by cardhu...taxes are very much something to be aware of.....for any investor.


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## Financial Cents

In RRSP or LIRA, either one, you avoid withholding taxes on U.S. dividend paying stocks.


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## Sherlock

So why doesn't the TFSA get the same US treatment as RRSPs? Any plans to change this in the future?


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## Toronto.gal

Sherlock said:


> So why doesn't the TFSA get the same US treatment as RRSPs? Any plans to change this in the future?


Because those accounts are very different.

The Tax-Treaty between Canada and the USA, applies exclusively to pension/retirement accounts, not savings account, which is all a TFSA is; it is registered simply because there is a contribution limit.


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## Sherlock

I don't see the importance of the 10 year rule. If I think a stock is gonna do really well for the next 3 years then start to fizzle out, shouldn't I buy it now and sell it within 3 years?


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## avrex

I completely agree, Sherlock. 
I also don't see any relevance in a 10 year rule.
In 3 years an undervalued stock can become an overvalued stock. At that point in time, I would sell the overvalued stock an place my money in an undervalued stock. repeat.


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## PMREdmonton

I think the point Buffett is making with his "10 year rule" is that you should be comfortable that the business is going to be strong for many years into the future. That doesn't mean you shouldn't buy when it is low and then sell earlier than 10 years once you think it is fairly valued or overvalued. It just means that you should only invest in strong companies with predictable and strong earnings - I think he suggests a ROE > 15% without excess leverage.


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## doctrine

The problem with buying a stock that you think will fizzle out, is when will you get out. If you think it will fizzle, probably a lot of other people will to. I'm just not into timing but boring 7-8% yearly gains.


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## cardhu

Cal said:


> Some might argue that dividend investing is a tax advantageous way to invest....


Yeah, many do ... and that is exactly the sort of thing I was referring to upthread ... paying only partial attention to taxes is in some ways more harmful than not paying attention at all ... that very argument frequently leads to suboptimal choices that result in a slowing of wealth-accumulation ... for example, how often have we seen “advice” to the effect that Cdn dividend payers are best held in a non-reg account _“in order to claim the dividend tax credit” _? ... or that foreign dividend payers are best held in a non-reg account _“in order to claim the foreign tax credit”_? 



Sherlock said:


> So why doesn't the TFSA get the same US treatment as RRSPs?


T-gal is mistaken ... the Tax-Treaty between Canada and the USA applies to virtually all types of accounts that a resident of either country might have … if it didn’t, you’d face the full 30% withholding required under US tax law, instead of the reduced withholding of 15%, in your non-reg accounts, your TFSA, your RESP, etc. etc. 

There is a tiny little provision, deep in the bowels of the tax treaty that offers an exemption to taxation (in both directions) for arrangements operated exclusively to provide retirement benefits. RRSPs fit that bill, TFSAs do not. 



Sherlock said:


> Any plans to change this in the future?


Doubtful … there are two possible approaches that could accomplish such change … 


redefine the treaty exemption so that it includes other forms of savings, or 
redefine the TFSA so that it qualifies as a retirement account.
The former is extremely unlikely … why would either country be willing to subsidize the other, in relation to returns earned on vacation savings/new car savings/wedding savings/home downpayment savings/new big screen TV savings, etc? 

The latter could be done by Canada alone, without USA’s approval, but would require a wholesale restructuring of the rules surrounding TFSA … for example, they could limit contribution room only to those who have sufficient earned income … they could enforce a mandatory unwinding of the plans, during the period when most people are “retired”, say for example starting at age 71 … (you see where this is leading?) ... they could abolish the TFSA and expand RRSP contribution limits accordingly, but then it would no longer be a TFSA, and it wouldn’t serve the needs that the TFSA was originally intended to serve. Therefore, unlikely to happen.


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## shauni_g

> Originally Posted by *Cal*
> Some might argue that dividend investing is a tax advantageous way to invest....
> 
> Originally Posted by *cardhu*
> Yeah, many do ... and that is exactly the sort of thing I was referring to upthread ... paying only partial attention to taxes is in some ways more harmful than not paying attention at all ... that very argument frequently leads to suboptimal choices that result in a slowing of wealth-accumulation ... *for example, how often have we seen “advice” to the effect that Cdn dividend payers are best held in a non-reg account “in order to claim the dividend tax credit” ?* ... or that foreign dividend payers are best held in a non-reg account “in order to claim the foreign tax credit”?


Excuse my ignorance but where is the best place to hold Canadian dividend payers in that case and why? (I've not been living in this country for long and am still figuring out a lot of the finer details of the tax system!)

Shaun


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## Square Root

My basic stategy is using dividend paying stock to fund our retirement needs over and above my pension. Only invest in Canadian companies because of the advantageous treatment of dividends which are all in taxable accounts. In Alberta dividends are taxed at about 19% at the MMR. There are some great US dividend stocks but I am not willing to pay tax at the 39% MMR on these. Capital appreciation is less important to me as I may never sell the portfolio. Rebalance infrequently as I like the names I have. Retirement phase is quite different than the accumulation phase especially if you can live off the dividend yield, IMHO.


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## Cal

Campletely agree w you cardhu. I hold dividend payers in all accounts in varying degrees.

Shauni-your main concern is to only hold US dividend payers inside an RRSP. (as SR eluded to above)


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