Should You Invest In Dividend Stocks or ETFs?

Written by Teacher Man™, at My University Money.

Free eBook on ETF InvestingHello citizens of Dividend Nation.  My pen name is Teacher Man™ and I am co-owner of the blog My University Money.  I also write for several other personal finance blogs, and have recently decided to try my hand at this whole eBook thing.  Before I get into trying to convince an audience full of dividend believers that I believe I have a better approach, I should probably get one thing straight.  As long as you are out of debt, saving, investing for the long-term, and determining what your best exposure to equities is (taking into account your time horizon and risk tolerance), then you will be absolutely fine with either method.  I have read the Dividend Ninja’s articles since I saw him in MoneySense magazine a few months ago, and I learn something new whenever I visit his site.  I think he has some great advice on dividend investing.  I just believe 100% that the average investor is much better off investing in ETFs than they are trying to pick stocks of any kind, be they dividend, growth, or otherwise.

I should also take the opportunity to give a big shout out to DN for his willingness to help me promote my new *FREE* eBook on ETF investing.  When I approached him with the idea of promoting our book on this site I qualified it with the statement that it probably wasn’t a good fit because of the focus on dividend investing.  He responded that he thought the book offered value to his readers, so I hope that I fulfill that promise!

ETFs or Stocks?

Dividend investors and ETF investors often share several things in common.  Both groups are strong advocates for buy-and-hold investing, they also believe in systemic additions to their positions over the long-term.  Both DN and myself agree that trying to pick stocks and trade them on a daily basis is a quick path to financial ruin.  From what I have seen, ETF investors (or “couch potato investors” as we are commonly known as) and dividend investors are both conscious of trying to minimize investing costs and use the power of compounding returns to build their investment portfolio.  What I’m trying to say is that if you are actually debating between ETF investing and dividend investing, then you are already far ahead of the vast majority of investors out there.  That being said, I honestly believe that the vast majority of investors would be better off investing with ETFs than trying to buy their own stocks, no matter what strategy they choose.  The reason for this is simply that humans are just inherently terrible at picking stocks and sticking with them!

If I were to convince myself that I was capable of picking stocks, I would almost certainly be a dividend-heavy investor.  I would try and pick stable stocks, and find advantageous entry points, much like DN or several of the authors that often comment on this site.  The problem is that I don’t believe that I am capable of picking stocks and more importantly, I’m quite content not trying.  Now you may ask, “If this guy doesn’t even know enough to evaluate specific stocks, why the heck should I listen to his investing advice?  There are tons of smart people on the Internet that tell me what stocks to pick all the time and give me compelling reasons to do so.”  Here is my rationale, several studies have proven that over the long-term the average investor will lose out to the market average.  Most notably an extensive Dalbar study from 1990-2010 showed that while the S&P 500 had an average return of 9.1%, the average American stock investor only achieved a 3.8% return.  The numbers on professional money managers that get paid big bucks to pick stocks for mutual funds show that they often fair just as bad as these “amateur” stock pickers.  I am fine with the relatively high average returns on equities as an asset class.  I’ve made my peace that I won’t ever “beat the street,” and that by admitting this I’m going to do better than roughly 98%+ of the investors in the market.

Capital Growth or Dividends?

Now, the Dividend Ninja and I have had a short email debate arguing the benefits of dividend investing versus those of ETF investing.  He (like many dividend investors) believes that the huge advantage dividend stocks have is that they generate a solid income, and this income can be compounded over time (ideally through ultra-efficient DRIP programs).  Many dividend investors believe that capital growth is irrelevant to their strategy as a whole.  I don’t follow this line of thinking. Unless you need income as an investor (ie. you are retired and depending on your investment returns as a source of income) I don’t understand why reinvesting dividend income is superior to capital growth?  My sole goal when I invest is to grow my nest egg as quickly as possible, regardless of if I am using compounding capital growth, or reinvesting dividends.

If you are like me and don’t care where your returns come from in your portfolio, as long as they are as large as possible, then I think there is a strong argument that dividend-only investors are actually missing out on the returns of an attractive part of the stock market.  Almost all dividend-payers are by nature mature companies. If they are channeling their profits back to shareholders in the form of dividends, then they are obviously investing a smaller percentage of their profits into growing the company.  Almost all stocks that dividend investors invest in are considered “large market capitalization stocks” which means they are big companies.

Over the long-term, it has been generally proven that small-cap stocks will outperform large-cap stocks, even after dividends are calculated in.  The only problem with that statistic is that individually, small-cap stocks are extremely volatile, and to try and pick specific winners carries a lot of risk.  This is where ETF investing comes to the rescue.  By choosing an ETF that tracks the Russell 2000 index, or a similar model, you can get the average growth rate of those “risky” small-cap stocks.  The best part is that it isn’t like you have to choose between dividends and capital growth when you choose ETFs.  Investing in ETFs doesn’t mean that your dividends simply disappear, they just get absorbed into the value of the fund and consequently increase your principle.

Conclusion

As I get older, and am looking to generate a little more income from my equities exposure, I might begin picking some of these nice-looking dividend stocks that DN, and other sites such as The Dividend Guy, and My Own Advisor espouse.  There has been plenty of people achieve success with the dividend model in the past, and I’m sure that the model will continue to reward its advocates; but the fact is that if you’re looking for the MOST stellar returns with the LEAST maintenance then you should see if ETF investing is right for you.  As a side note, there is no rule that the strategies cannot be combined for a “best of both worlds” approach, I know of a few really smart bloggers that use this approach, and have built up very enviable portfolios!

You may now return to your regularly scheduled income-oriented, DRIP-loving programming ;) Thanks for your time and attention!


TM writes about all things personal finance over at My University Money. He intends to continue his quest for lifelong learning and hopefully help others along the way

56 Responses to “Should You Invest In Dividend Stocks or ETFs?”

  1. Thanks for the Ebook,
    though I personally favor ETFs since I do not have enough market understanding to invest in stocks. I would go through your book may be that would change my thought process :)

    Reply to this comment
    • The Dividend Ninja

      Mar 28. 2012

      All the more reason you should invest in index funds and index ETFs. You don’t want to be picking stocks if you don’t understand them – in fact you should never invest in anything you don’t understand. ;) Get your feet wet with index funds and ETFs first, then in a few years perhaps, move into stocks when you are ready.

      Reply to this comment
      • My University Money

        Mar 28. 2012

        Ah, there is the inner Warren Buffet shining through DN. I love that the guy has made billions buying up ice cream, coke, railways, and insurance.

        Thanks for chiming in though Karunesh, my eBook is perfect for someone like yourself who is just beginning to understand investing. Take a look through some of DN’s posts about how to invest and the investing basics and then decide if you think you can do it all as well as he does. If you put your money in broad-based ETFs right now, you can always switch over to dividend stocks a latter time when economies of scale make more sense (this gets into calculating fees etc).

        Reply to this comment
  2. Poor Student

    Mar 28. 2012

    I hopefully am one of those smart bloggers utilizing both approaches. I started with dividend stocks and love the income but I am starting to diversify into ETFs for just that reason, diversity. And the ETFs I have still pay dividends, so I am not depriving myself. I feel like combining approaches might be best, the good returns of ETFs, plus the fun and dividends of picking your own stocks.

    Reply to this comment
    • The Dividend Ninja

      Mar 28. 2012

      Poor Student I think your a smart guy. :) Kidding aside I liked the blended approach and did this for two years. I still do with my Bond ETFs and Bond Funds. In fact Asset Allocation is more important to me than what dividend stock I invest in. :) I also think you will find diversification will pay off in the long run as well. Currently dividend stocks are doing very well, maybe the market will outperform dividends by far in the next 3 years. Who knows? So a balanced approach is a good one IMO.

      My Own Advisor, is another blogger who combines equity ETFs and Dividend Stocks (www.myownadvisor.ca). He’s been investing this way for years, and he is a smart guy too!

      Cheers

      Reply to this comment
  3. My University Money

    Mar 28. 2012

    There is no doubt that picking your own stocks is sexier and more fun (for nerds like us anyway), but just make sure you’re as good at it as DN is (VERY few of us are!).

    Reply to this comment
    • The Dividend Ninja

      Mar 28. 2012

      Well if you think Bank of Montreal, Fortis, Rogers Communications, Johnson and Johnson, Procter and Gamble, etc. are “sexy” I got news for you – they aren’t. All the more reason to invest in them ;) Sexy stocks are dangerous!

      Kidding aside, I don’t really consider myslef a great stock-picker. But I do look for companies I can have an understanding of what they do, have reasonable or low debt, a decent dividend payout ratio, etc.

      Buying stocks as core holding has to be a good investment. ;) But the rewards are worth it! – those be dividends and capital growth. Almost all my stocks, except a few high yield companies are set-it-and-forget-it. Let management do their thing, and let the power of compounding dividends do their thing. :)

      Cheers

      Reply to this comment
      • My University Money

        Mar 28. 2012

        See responses like this are why I have a hard time picking on you dividend types! That is an entirely rational way to look at investing in equities. Determine your asset allocation, and your risk tolerance, then set and forget it. I obviously just think that my “set and forget” strategy is a lot easier and will have a better ROI for about 90% of investors.

        Reply to this comment
  4. Six Figure Investor

    Mar 28. 2012

    This is a topic that can be debated for hours. There are a few points in your post that I think deserve debate so I will talk about them.

    You are bringing up some good points here. I think that everyone should be reflective and objective about their investing style when evidence suggests limitations.

    This is one I agree with you on – I think that many dividend stock pickers don’t beat the market. Dividend investors end up with portfolios of 20, 30 or more stocks. I think that at some point you will get a portfolio that mimics the market or perhaps the ETF SDY (the aristocrat index). So, you invest all that time to “find” these stocks only to actually get returns that may not be much different. There is a good point to be made here that your time might be wasted.

    A smart person needs to realize their own limits.

    For my part I have decided to have a concentrated portfolio of stocks based upon 3-4 investment ideas. I won’t be diversified by buying 40 companies.

    Am I missing out on anything? It’s a mistake to try to get returns from some other area that “you may be missing out on”. There are too many things to invest in and you can’t understand them all. I’ve found a few good ones that I know will make money and I’m sticking with those.

    The reason why dividend investors chose these stocks because it’s easier to find a quality company to invest in. It’s a mistake to conclude that dividend stocks aren’t growing companies or don’t expect large capital growth.

    When you look at the highest quality companies, you will find that their stock price closely matches their dividend growth which closely matches their earnings growth. I can give you many examples of companies that have dividend growth rates that are low (AT&T -T) or very high (W.W Grainger (GWW)).

    The high dividend growth companies are some of the biggest growth companies you will find. Check out the stocks charts for (GWW), Fastenal (FAST), or Sunoco Logistics Partners (SXL).

    Regards

    Reply to this comment
  5. My University Money

    Mar 28. 2012

    Hey Six Figure,

    Don’t you know that internet comments are supposed to be inflammatory and disrespectful – not well thought out and eloquently stated! ;)

    Great examples that back up your point, and I agree that it is a somewhat circular debate. The general idea behind dividend-paying companies not growing quite as fast is really quite simple. There will always be a few outliers, but the basic concept is that if a company is paying out a dividend, then it almost always has more cash flow than it believe it can soundly re-invest into growing the company. While this is certainly not a bad thing (it means the company obviously has a good business structure and is efficient) it does mean that on average, the majority of its growth has already taken place (see: Apple).

    Your strategy is very similar to what Warren Buffet recommends. “Buy what you know,” etc. The beauty is that I don’t need to know all 2000 companies in the Russell 2000 index, or have a clue as to how recent policy decisions in the BRIC or N-11 countries will affect their stock markets. Instead, I can just buy the ETF and ride out the long-term trends.

    It is interesting to note that almost all of the few professional money managers that do beat the market do so by investing in lesser-known companies (most of whom don’t pay dividends). This should give some indication as to what sort of companies generate the most growth on a consistent basis (small caps).

    Finally, I know that DRIP investing is extremely efficient in terms of fees etc, but with the “revolution” (over-dramatic word choice anyone?) in ETF investing where discount brokerages are now beginning to offer commission-free investing, it will get even more difficult for stock pickers to compete on a personal-scale basis.

    Reply to this comment
  6. The Dividend Ninja

    Mar 28. 2012

    My University Money I forgot to say thank you for writing this post, and sharing your eBook with my readers. It doesn’t matter what side of the fence you’re on here, this is a well written eBook. ;)

    Cheers

    Reply to this comment
  7. farcodev

    Mar 28. 2012

    As a beginner and tiny investor, since 2 months, I don’t have many assets and most of my portfolio is made of dividend stocks including recently HSE since today, thanks to the two consecutive days of low TSX.
    I’m not really interested by ETF and Funds, at least for now, since I tried one funds from RBC and it’s clearly not for me. But I see that after reading many sites like this one (kudos to DN and many people on this site for all their precious information) that the real power is the knowledge, so thanks for your book Teacher Man I’ll read it !

    Reply to this comment
    • My University Money

      Mar 28. 2012

      Hey Farcodev,

      If you bought funds from RBC I guarantee they had high MER fees (they don’t offer low cost ETFs). Almost assuredly they were house mutual funds. Check out my chapter on the mutual fund comparison.

      In terms of picking individual stocks for your dividend portfolio. I would almost recommend that until you have read these blogs for awhile, just copy what smart dudes like DN, and the other two sites I mentioned above do. You can’t go wrong buying Husky (in my opinion), but then again, people once said the same thing about Nortel, Bank of America, AIG etc. That’s why I don’t trust my own opinion.

      Reply to this comment
      • The Dividend Ninja

        Mar 28. 2012

        MUM RBC does indeed carry a line of index-funds. They are 2.5 times the MER of the TD e-series funds, but they still have them:

        http://canadiancouchpotato.com/recommended-index-funds/

        Reply to this comment
        • My University Money

          Mar 29. 2012

          Interesting, I’ve never even seen these before (tells you how much they have been marketed). What do you think the chances are they told the kid about these? Also, now that I think about it, what is the point of even having a index series if your direct competitor has a product that is so obviously superior.

          Reply to this comment
          • farcodev

            Mar 29. 2012

            Yes, MER are pretty high, unless you can put at least $10,000 in their special funds with about 1.04% MER, but for now I’m out of the race concerning these.

            Reply to this comment
          • The Dividend Ninja

            Mar 29. 2012

            MUM that is the problem. ;) The average person who walks into TD and says “help me invest my money”, won’t even be told about e-series funds. They will be shown the TD line of actively managed mutual funds, with the higher MERs.(Andrew Hallam had a couple of nice posts on this).

            The reason is simple, there isn’t any money to be made with the low MERs from the e-series funds. I assume RBC and every other bank in Canada is the same :)

            Cheers

            Reply to this comment
      • farcodev

        Mar 29. 2012

        “In terms of picking individual stocks for your dividend portfolio. I would almost recommend that until you have read these blogs for awhile, just copy what smart dudes like DN, and the other two sites I mentioned above do. You can’t go wrong buying Husky (in my opinion), but then again, people once said the same thing about Nortel, Bank of America, AIG etc. That’s why I don’t trust my own opinion.”

        Haha exactly, advices here have more value than any financial councellor.
        The fun with trading is that you need to be kept informed about the companies of your portfolio. Out of the money, it enlarge your economic knowledge, and in these harsh times it’s not an luxury.

        Reply to this comment
    • The Dividend Ninja

      Mar 28. 2012

      Farcodev I’m going to side with MUM on this one – and say that as a beginning investor, Index Funds and ETFs just make more sense. There are two reasons, one is you get enourmous diversification, and second you get expereince of how markets work before investing in them.

      Don’t confuse index funds and index ETFs with mutual funds – completely different animals :) MF’s are laden with high fees and underperformance, and index investments mirror the market with minimum fees.

      But kudos for you realizing this early and moving into dividend stocks already, and thanks so much for the compliments, really appreciate it! Now that you have the stocks they are likely worth holding, you’ll enjoy receiving the quarterly dividends. Good luck on your dividend journey! :)

      Cheers

      Reply to this comment
      • farcodev

        Mar 29. 2012

        “Farcodev I’m going to side with MUM on this one – and say that as a beginning investor, Index Funds and ETFs just make more sense. There are two reasons, one is you get enourmous diversification, and second you get expereince of how markets work before investing in them.”

        Oh ok, thanks for the clarification. I’ll take a look at it then.

        “Don’t confuse index funds and index ETFs with mutual funds – completely different animals :) MF’s are laden with high fees and underperformance, and index investments mirror the market with minimum fees.”

        Yeah I seen the “superb” performance of the RBC’s MF, and it was at… 2.78% MER. I understood my error in no much time ;(

        “But kudos for you realizing this early and moving into dividend stocks already, and thanks so much for the compliments, really appreciate it! Now that you have the stocks they are likely worth holding, you’ll enjoy receiving the quarterly dividends. Good luck on your dividend journey! :)
        Cheers”

        Thanks to you, it’s really cool to help people like that :)
        At least it’s more fun than to put the hard-earned money to a saving account at 1.2%.

        Reply to this comment
        • My University Money

          Mar 29. 2012

          Couldn’t agree more on the savings account comment. As long as you are saving 10% and investing for the long run, the rest is probably splitting hairs in a lot of ways. But hey, that’s why us personal finance bloggers get paid so well – to debate the finer points.

          Reply to this comment
  8. Good post but I don’t think Capital Growth and Dividends are exclusive as you make it look like. In fact, you want both and you get both (except with some stocks or income trusts). My portfolio definitely has growth well above my dividend yield. Only 6 of my investments have a 50B market cap.

    There is a 10/10 rule strategy as well that can be applied but generally speaking, you get plenty of growth with many dividend investments along with dividend earnings. However, my view is that the growth is icing on the cake but very much part of a portfolio growth.

    I don’t think a large market cap implies no growth but rather a more predefined growth compared with a small cap stock that can explode or implode …

    I don’t have anything against index investing and I am not trying to beat the market either. I am building a portfolio where I can have some understanding on the predictability of my portfolio. I also get 2 ways to profit: growth and income :)

    Looking forward to reading your eBook!

    Reply to this comment
    • The Dividend Ninja

      Mar 28. 2012

      “I don’t think a large market cap implies no growth but rather a more predefined growth compared with a small cap stock that can explode or implode …”

      Bingo :)

      Reply to this comment
  9. Kapitalk

    Mar 29. 2012

    Ninja, great work on the site, thanks for all the great info.

    Long story short, I recently moved from actively managed ~3% MER funds to self directed. I have a handful of dividend paying stocks and the rest of my balance in cash. My timeframe is 15-20 years

    I do love the idea of building up a portfolio of solid div paying companies but I don’t feel confident enough in my stock analysis and valuation abilities to bet my entire future on it.

    Because of this I feel that I should be building my core portfolio of broad based index’d ETF’s supplemented by some Div paying stocks. This way I get diversification and market returns while I also learn more about buying individual div growth stocks.

    How would you approach the asset allocation of a portfolio containing dividend paying stocks and indexes? Do you essentially split your total balance in 2 defined portions and build 2 portfolios? So say 30%of the total is div payers, then the other 70% is split into index funds (Bonds, Us, Canada, World, etc.) Or is it appropriate to consider Div paying stocks as Canadian and US equities and adjust the percentages accordingly.

    Here is what i was thinking…

    30% Bonds / GIC (XSB likely or CBO as I’m worried about buying into a bond fund like XBB now when interest rates will likely rise)

    70 % Equities
    15% XIC
    15% VTI
    10% VXUS
    20% Individual Div Paying stocks (US and Canada)
    10% REIT (ZRE)

    Seem sound? Any advice on how to approach a proper asset allocation with Individual div payers and indexes? Once I am happy with my allocations I can start examining the choices for ETFs in each area and start layering into positions.

    Thanks, keep up the great work!

    Reply to this comment
    • The Dividend Ninja

      Mar 29. 2012

      KapitalK WOW you are so far ahead of the curve here, I’m already congratulating you. :) Looks like you already have it all figured out here, and don’t need my help. Your approach is already sound and solid, and IMO is already a model portfolio.

      I could easily write a whole post on your question, and your portoflio holdings, and maybe I just might do that!

      30% bonds is reasonable, and I think if you are DRIPPing them then the capital losses in a rising rate environment may be offset somewhat.

      In Millionaire Teacher, Andrew Hallam suggests investors hold no more than 10% of their portfolio in dividend stocks, and the Couch Potato says as little as possible. It could be 10% 20% or 30% of your equities. However the real answer is you have to hold a percentage that makes you feel comfortable. I’m OK with 100% dividend stocks as my equity component – many people wouldn’t be. You’ve already got a great investment base here, and 20% dividend stocks looks fine to me. Your strategy is solid. Just don’t cash out the bonds – that’s your security blanket. :)

      Cheers man!

      Reply to this comment
      • Kapitalk

        Mar 30. 2012

        Thanks DN,

        Good to have the confirmation that I’m on the right track. I have been reading as much as i can and as a self directed investor its easy to get paralyzed by all the info out there.

        For example you read single best investment and he recommends 0 bonds where you read Millionaire Teacher (Or CCPs site) and they stress how bonds must be in a portfolio. Its easy to find point and counterpoint to everything out there.

        I know a few months ago you indexed part of your portfolio and i believe PIE still does so it could be a decent post to discus a “hybrid” portfolio and how you would build and maintain one.

        I think I’m close with my choices. Once i get this base in place If i decide to purchase more individual stocks with fresh money then it will increase my US and Can equities, which is fine as long as i keep the portfolio balance between bonds and equities. i don’t think its gonna matter too much if i grow to 10% World, 14% Can, 19% US for a while.

        Now comes the tricky part of when to buy in, sure hoping for a string of down days.

        Thanks again!
        K

        Reply to this comment
        • Dan

          Mar 30. 2012

          If you look back at the history of the S&P 500 dividends account for almost half of the total returns (4.1% of the 9.6%). According to the survey referenced the average American investor only returned 3.8%, less than the historical dividend returns. For me, their are two key reasons I like dividends.

          Firstly, I don’t have to time the markets we can remove some (not all) of the emotional swings.

          Secondly, I like the freedom to re-invest my dividends in stocks which meet all of my criteria. Just because a given stock met the criteria 6 months ago doesn’t mean it does now.

          I’m look forward to reading the guide on ETFs. I think you’re a wise man University Money – folks usually get sh-lacked by the markets because we have a tendency to believe we can pick stocks better then everyone else.

          Thanks for the e-book!

          Reply to this comment
          • My University Money

            Mar 30. 2012

            No problem Dan, thanks for reading it. Interesting that the exact reasons you like for picking dividend stocks are key ones I have for investing in ETFs. How much of the total S&P return that dividends account for is somewhat irrelevant to me as a long-term index investor, but it is very interesting I agree. We can throw statistics back and forth all day, I just find ETFs to be much less work, and much more of a guaranteed average return.

            Reply to this comment
      • My University Money

        Mar 30. 2012

        As usual, I agree with DN. As long as you keep this view for the long haul and keep investing a solid percentage of your income, I don’t think you can really lost (unless our whole financial system collapses – but as I like to say, we’ll all have bigger problems at that point anyway).

        Reply to this comment
    • @Kapitalk

      In looking at your equity allocations, you seem quite spread over a number of goals. The only suggestion I have is to evaluate if the percentage add up to a decent amount to invest. For example, if you have 50K$ to spread the way you have it, it’s not much per investment and DRIPing might not even be achievable with your dividend investments.

      Often time, we hear about the bond/stock allocation around an age but I also think that depending on how much you have to invest in stocks, you don’t want to spread yourself too thin across multiple investments and develop a strategy where you reach a target for a type of investment and then start adding up to another. For example, do you have 40 stocks at $1000 each or 8 at $5000 each. When starting to invest, I am not sure if massive diversification is required. Your bond allocation may indicate you are in your 30s …

      Personally, I am not a huge fan of investing in international (outside US and Canadian) because I just don’t understand all the political environment that could impact those markets. I prefer to pick a US conglomerate to get international exposure :)

      From what I can see, you are applying what the theory outlines and it’s a very good start. What Ninja mentions in his last paragraph is bang on in that you need to understand yourself and what you need and want. Many of us, who invest with dividends, are thinking of retirement income and preferential tax treatment. As you can see, we pick targets really far down the road and build a plan to get there.

      Also, I am not sure if REIT falls in full equity or fixed income? (probably up for a debate) They don’t tend to have the same growth as a stock.

      Good to see you moving out of mutual funds.

      Reply to this comment
      • Kapitalk

        Mar 30. 2012

        @PIE,

        Good thoughts, thanks. I just turned 40 so i see the bond / fixed income % as between 20-30 for my comfort. I also feel i have 15-20 years till i need my funds.

        Reading through CCP he talks about being invested for total return in your accumulation phase (indexes) as opposed to having income now (div stocks)

        I love the idea of dividends paying me every quarter and have seen it first hand in owning some shares in KO since 2007. But, i can concede that the growth opportunities will likely be better with an index fund.

        I also have some trepidation about putting large sums of money into a set of div paying companies in case my valuations or assumptions of growth are wrong and I’m stuck with no growth. As a newish DIY investor I am torn on the best course of action so I’m hedging my best by going core index funds and trying to keep it simple.

        I listed the international component as it is whats recommended but I am suspect as well. Buy something like VTI, XIC, and CBO, and shop for some div companies to complement the few div stocks i have now.

        I don’t think REITs are essential but it wouldn’t hurt to buy ZRE of a couple of REITS and thrown them in my TFSA.

        This would give me essentially something like this.. say

        30% Fixed income
        35% Can (Index & Div stocks, and a REIT or 2)
        35% US (Index & Div stocks)

        Thanks for post!

        PS. Enjoy your site and following your progress. Its because of your site, CCP, DN, MOA, etc. that i have made the move out of High MER funds.

        Reply to this comment
        • I like your plan. How you presented the last break down makes a lot of sense.

          What I was trying to highlight is that when starting (I don’t know your amount), no one needs to go super wide in terms of diversification. You don’t even need to start with dividend stocks and you could focus on the indexes and slowly add div stocks. U.S. div stocks probably need to go in your RRSP from a tax perspective … just something you might want to think about.

          Thanks for following us and interacting. Best of luck! … and yes, a hybrid strategy does work. It’s all about understanding the accounts, long term goals and also taxes :) I don’t have a choice with my defined contribution plan to buy mutual funds, so I pick indexes. I probably would switch a bunch to ETFs if I was to manage it myself, some bonds and then more stocks :)

          Reply to this comment
  10. My Own Advisor

    Mar 29. 2012

    Nice post.

    The thing is MUM, with many dividend paying stocks, especially companies that have been doing this for decades, or generations like many of the ones I own, and Dividend Ninja, Passive Income Earner does as well, you get paid AND you get capital growth. Take a look at the long-term histories of some of the biggest dividend payers, these guys are/have been growing…big time…because they are dividend payers!

    Regarding the income argument, you always need it. All investors want income, even indexers I’d suggest! It’s just tilted for dividend investors because they are getting more in their back into their pockets, faster. Indexers get long-term capital appreciation and little in the form of income. Dividend investors get almost real-time payments. I’d rather take my money now. Cash flow is king. That’s just me.

    I don’t consider myself a stock picker. That implies I’m making a definitive choice over a host of options. In Canada, there are only about 60 companies worth owning, ever. Most of them are listed in XIU, XDV and CDZ. Everything else really isn’t worth owning. If I hold 40 companies eventually, all churning out dividend income tax-free, in my TFSA, would you say that dividend investing remains inferior to indexing?

    I suggest dividend investing and indexing approaches are VERY similar. The keys to both are diversification, low costs, don’t trade and stay the course. :)

    Agree or disagree my friend?

    Cheers,
    Mark

    BTW – great stuff Ninja. Thanks for the mention!

    Reply to this comment
    • My University Money

      Mar 29. 2012

      Oh I definitely agree that there is more in common than different Mark. Here is my question, if you are going to own 40 companies that are similar are found in the XIU fund, then won’t it almost exactly mirror the index anyway? I guess you can try and find more advantageous entry points on each stock, but that can be a lot to keep track of.

      Who knows, in looking at starting my Smith Manoeuvre I hate the ROC that ETFs have (when it comes to book keeping for the HELOC), so I will probably end up choosing some dividend stocks, or having to check out Ed Rempel’s All-Star fund managers for that part of my portfolio anyway!

      Reply to this comment
      • The Dividend Ninja

        Mar 29. 2012

        MUM The dividend yield will be much lower holding XIU (about 2.6%) than holding theses dividend stocks directly. Most of the big dividend payers on the TSX60 have yields of 3.5% to 4.5%+. In Mark’s case where he has enough equity to virtually mirror the index anyway, he will get a higher yield by owning the companies directly.

        Any investment whether its mutual funds, ETFs, or stocks has the associated bookeeping – can’t get around that one.

        Cheers ;)

        Reply to this comment
        • Bernie

          Apr 11. 2012

          Not only would holding the individual stocks of dividend aristocrats give you a higher yield than a dividend ETF you also have the benefit of regular dividend growth. ETF’s are very poor dividend growers. These key points are why I prefer dividend growth stocks to ETF’s.

          Reply to this comment
  11. Hi Ninja,

    I have included this post at my site’s weekly roundup

    Reply to this comment
  12. Let's Learn Finance

    Jun 15. 2012

    “Capital Growth or Dividends?”

    Probably the most overlooked question by new or average investors. Sometimes we get carried away with getting some sort of payment on a regular basis, which makes us feel like we are doing something right and it’s working in our favour. This usually (obviously?) comes at the expense of more important factors in your investment portfolio like shear capital growth and other things.

    Quite a simple but thought-provoking read! I’m convinced that I have to go check out My University Money soon :P

    Reply to this comment
    • The Dividend Ninja

      Jun 15. 2012

      Hey thanks for the comment. ;)

      But I’m going to disagree with you on this point… I would much prefer to have a lower-beta, lower volatility portfolio that gives me consistent and reliable income. Sure I might be giving up some capital growth from smaller caps in the index, especially in a rising market. But as we are expereincing now, markets decline as well.

      I am still receiving monthly income for being a shareholder in great companies. Had I held index funds right now, I would have a lower dividend yield from the ETFs and I would have no “shear capital growth”, in fact I would have a “shear capital loss” with a lower yield.

      For younger investors capital growth makes sense, for me close to 50, I much prefer lower volatility and more portfolio stability…. ;)

      Cheers

      Reply to this comment
      • Let's Learn Finance

        Jun 15. 2012

        I absolutely agree. I think, personally, given I’m only 19 (this denotes two things; 1 – I have time ahead of me to let things accumulate and 2- I don’t have much start up capital.)

        So, I much rather invest my small capital in something that will grow over time than be interested in receiving a few cents a month!

        The idea is that over the span of say the next 40 years, I will have enough time to recover from the imminent market declines or even crashes. :P

        Reply to this comment
        • Why don’t you put both approaches to the test :) You’ll be able to write about it years down the road.

          From my investing experience, I am a lot more interested in more predictability than in theories (capital growth) and it turns out that the few cents a month are actually predictable and have the ability to provide compound growth. I just got my kids setup with shares that pay dividends and only 4 months later the payments are coming in slowly.

          The thing to realize is that you can find many companies that will provide dividend and growth. Dividend and growth are not exclusive.

          Reply to this comment
          • Let's Learn Finance

            Jun 17. 2012

            I’ve actually taken this advice on aboard! Prior to reading about the glorifications of ETFs and Indices here on DN – I was purely investing in blue-chip shares through a broker. I was actually unaware of the simplicity of ETFs and Index funds!

            I took the time in the last couple of days to understand what ETFs really are and how they work and I managed to get a basic understanding of it.

            I just opened up an all “intents and purpose” account with my bank that will allow me to trade shares and ETFs/Indices all from one place. It’ll take a couple of days to activate, but I’ll move all my shares to that account – it has cheaper fees too. I’m pretty excited!

            Keep the few blue-chip shares I have, get a couple of ETFs and Index funds on my portfolio and sign them all up to their respective DRIPs. :D

            Reply to this comment
        • Sridhar

          Aug 10. 2012

          This is a trade off where you have a choice between earning regular dividend/interest or opting for growth where your investment value in future goes up.
          Dividend is almost like receiving a slice of profits of the company, whereas growth is like reinvesting which boosts your stock price or value. Both approaches are mathematically similar, but dividends provide you the option of encashing your profits/earnings and diversify or reallocate it to some other use or for consumption. The future is always uncertain, so getting something back definitely provides a level of comfort.
          I agree and share the same points mentioned by Passive Income Earner – dividend is like getting a bird in hand. Both approaches – dividend and growth are find and you can choose to apply both strategies for different stocks.
          Secondly, its only in theory that dividend and growth are distinct, in practice dividend paying companies also provide steady growth and some growth companies may also offer good dividends. Dividend and growth are not mutually exclusive. Moreover, companies declaring regular dividends (barring few) are generally profitable and have good cash flows, otherwise they will not offer consistent dividends which grow every year.

          Remember that dividends grow year on year, so the cents that you receive can become dollars. However, you should also invest systematically and increase your portfolio size and then check your dividend yield.

          Getting back some returns helps in reallocating or re-balancing your portfolio. Moreover, we all earn or need income to enjoy or consume at some point or the other, so don’t ignore Dividends or interest pay outs altogether….it can atleast serve as a secondary source of income. Contrary to popular opinion some blue chips also provide good dividend growth as well as growth in profits which are stable (though not very high) .

          Reply to this comment
  13. Sridhar

    Aug 10. 2012

    Nice article and this was a question that I have been pondering for a long time. I have dabbled in stocks, investing/trading, ETFs, etc. in Indian market.
    However I switched to ETFs – equity ETF and gold ETF in late 2007. But in the past 2 years I have decided to picking my own stocks but still continue with Gold ETF.
    The stocks are a combination of mostly dividend and growth (both blue chip) and few mid/small cap ones, which I understand quite well.

    Now I’m looking at ETF as an option to get exposure to international markets (outside India). For example there is an ETF called “N100″ which tracks NASDAQ 100 companies. Since I dont have any significant exposure to technology/other tech companies, is it a good idea to buy this ETF to get international exposure ? Please advise.

    Reply to this comment
  14. My University Money

    Mar 28. 2012

    Hey DN,

    There is no denying that small cap stocks have much more volatility and a higher beta, but this is totally irrelevant for me as an index investor. As long as I have faith in the overall innovative strength of new companies, I’m fine. If I were arguing that I could get higher returns by trying to pick small cap winners, then I think your comparison might be more apt.

    Reply to this comment

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