The power of dividend investing
A dividend is simply money that companies will pay to their stockholders. It’s their way of saying “We’re offering you a piece of our profits in cash because you are a valued shareholder.” It’s one of the simplest ways for ordinary people to make some extra income. All investors have to do is wait for the steady dividends to roll in periodically; it’s as easy as earning interest.
The best way I’ve found to make money using dividend income is to buy and hold stocks that have dividend yields over 2%, and increase their dividends periodically.
For example in 2011 I purchased 25 shares of TD Bank at $75 each, for a total investment of $1,875. Well since then I have received $920 in dividends from my shares without investing any more money into this stock. That’s nearly 50% return on investment from just dividend income alone.
Since TD has a long history of raising dividends every year, over time I will have made all my initial investment back in dividend income. Dividends are paid using after-tax earnings of corporations. So a trend of rising dividends is a healthy indicator that a company is making more and more money, which of course should also lead to a higher stock price. The value of those TD shares I bought are now worth $3,650 which is up from $1,875 back in 2011.
This year my TD shares will generate $150 in dividends, an impressive 8% return on my initial investment amount. Where else can you find a safe, reliable, and steady return of 8%, plus have the potential for additional capital appreciation? And chances are the dividends will rise even higher in the future as TD has been steadily increasing dividend payments for over 50 years. The total return (stock price appreciation + dividend income) of my investment in TD Bank so far is about 11% annualized. Other dividend growers in my portfolio have performed similarly. It’s easy to see how the longer I stay invested in a dividend stock, the greater the rewards will become.
This powerful strategy of buying dividend growth stocks and holding them for the increasing dividend payments has been successfully used by investors for decades. It does require time and patience, but the payoff is immense.
My Dividend Investing Journey
When I got my first job I wanted to start investing early and take advantage of compounding. I started with dividend investing because it seemed to be the best way for investors to grow their wealth over time. The way I got started in 2009 was by opening up an account with a discount brokerage firm. One of my first stock purchases was Rogers Communications (RCI.B.) I bought 30 shares for $30 each. I was receiving $35/year in dividends for simply being a part owner in the business. 🙂 In 2020 not only has the share price of RCI.B doubled, but my dividend payments have also gone up to $60/year. You’ve probably noticed that phone and cable companies are charging more for their services every year. All that extra money they’re earning has to go somewhere right? Well a part of it goes to the shareholders. As corporate profits rise, so do dividend payments. 😉
From 2009 to 2011 I was heavily focused on buying dividend stocks with high yields like 5% or 6%. But starting from 2012 I changed my strategy and began to invest in dividend growth stocks instead, which are dividend paying companies that may not necessarily have very high dividend yields, but do have a long history of increasing their dividend payments, often every year. The best dividend growth stocks are sometimes called Dividend Aristocrats. I plan to keep buying these dividend growth stocks and hold them into my retirement. 🙂 I also use DRIP to buy additional shares at discounted prices.
Buying dividend stocks is easy to understand. But choosing the right companies to buy requires a little bit of research. You can browse through my articles in the stocks category for ideas, or view my portfolios to see which stocks I like to invest in, but be sure to do your own research too.
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Not sure if focusing just on dividend stocks when you are young, with a long time horizon to invest is the best idea. A company that pay dividends is a company that says they don’t need or want that money to invest in its own operations, so they’re returning that money to the shareholders instead. A company that doesn’t invest itself is a company that has limited growth potential. When you’re young, it’s probably better to invest in a company that is more likely to grow at 5% a year than return 5% a year in dividends. But again, diversification is key, so don’t ignore non dividend paying stocks.
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Very nice progress! I’m currently between your 2010 and 2011 😀
Cool to see the snowball rolling 🙂
are you able to over two additional metrics during that time period;
1 – how much your dividend stocks were worth on average, year over year. This would show us if the dividend stocks actual increase in value or if all of their increased value is just paid out in dividends so the share price never increases.
2. how much your total dividend portfolio was worth (in terms of share) price at the end of each year. This would show us the correlation on the amount of stock you hold vs. how much your dividends increased.
I have a question regarding re-investing dividends. (DRIP’S)
I invested in a REIT with about $5,500 to start. The share price is about $33.50/share. I get monthly dividends of $8-$19/month. I enrolled in the auto DRIP but my monthly dividend aren’t enough to buy a whole share so the money gets deposited into my account.
I want to reinvest dividends so I wait a few months until I have enough dividends to buy more shares but I thought about the brokerage fee for placing a trade for 1 share and it’s 4.95.
If I buy one share for $33.50 with dividends but then pay $4.95 for placing the trade makes my cost average quite a bit lower.
Does this eliminate any advantage of re-investing dividends? How do you do it?
Hi Jeff. You’re right. It’s inefficient to buy 1 unit and pay a transaction fee. In some cases you are allowed partial DRIPs, but usually you’ll need at least one whole unit worth of distributions to DRIP a REIT. What I do is make a large enough initial investment to DRIP at least one unit with an extra 20% margin of safety.
For example if a stock is trading at $10/share and pays a dividend of $0.05/share every month, then I would need to invest at least $2,000 to receive enough dividends for a whole share to DRIP.
Initial investment for DRIP = (share price)² ÷ distribution per share.
I use a 20% margin of safety which means I would actually invest $2,400 in this example. This is because if the stock price goes up after I buy it, the dividends would still be enough to DRIP. Very rarely does a stock go up more than 20% during the span of a distribution period. If that ever happens then maybe the stock is overvalued and using a DRIP at that point doesn’t make sense anymore.
If you really want to add more shares of this company at a cost efficient price than I suggest you might want to read more about share purchase plans through the transfer agent ( not all companies provide this.
Here is one link to get you started. There are also forums where people buy and sell one share to get started in a SPP. dripinvesting.org/first-share/
I believe you may find this way to start increasing your portfolio size is a good fit for what you want.
ps. Enjoy the blog Liquid. Like your thinking outside the box.
As your amount in a stock increases can you change into a DRIP purchase plan when it was not your initial investment instruction? I as well trade through TD.
Yes. You just have to call TD and ask them to DRIP your stock after you’ve accumulated enough to reinvest at least 1 share.
Hey Liquid, love the blog.
How would you decide whether to buy Dividend paying stocks vs stocks that could have higher long term growth?
Example: buy AT&T, McDonalds (Dividend Aristocrats) or Slack/Tesla.
For me, I have a set amount to invest each month after I pay all my bills. ~$10k Canadian. I’m 34. NW ~350k.
I’m trying to figure out where to put money each month…
30% (3k) into Dividend paying Stocks
50% (5k) into potentially higher growth long term companies
20% into ? bonds? no idea.
Happen to have a “this is where I put my money each month” post?
Hi J. I decide where to invest money based on which assets will have a higher risk adjusted return. This changes all the time so there isn’t any consistent breakdown of where I allocate savings on a regular basis. I suppose the only constant is my behavior, which is to continue saving and investing every quarter.
For example at the end of 2019 I thought Vancouver real estate was undervalued relative to other asset classes. So I wrote an article about buying a rental property.
Throughout 2020 the majority of my savings went towards dividend paying stocks because I like to be overweight in predictable, cash flow positive companies during a pandemic.
And recently I’ve been buying Bitcoin because that seems to be undervalued.
Generally speaking I buy growth stocks if I think there is still room for a lot of growth. And then I put a bit of money into more speculative investments like alternative assets or digital currencies. And finally I buy dividend stocks with my remaining savings.
While dividend investing is good, growth based investing also has it’s merit. A mixture of both these stocks can be there in a portfolio. Dividends are certainly attractive but they are also taxed and you have no control whatsoever to defer the payments or the taxes.
thank you nice article. Is technical analysis also important?
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