7 Lessons for Any Dividend Investor
07/11/2012 11:31 am EST
An overriding principle: The more you can tune out the noise, the better off you’ll be, writes John Heinzl, reporter and columnist for Globe Investor.
Note: this article was written to a Canadian audience. There may be better dividend options in your home country.
I often hear from newbie investors who are overwhelmed by the prospect of managing their own money.
There are so many complex investing products, opinions and strategies flying around that they don’t know where to begin, so they end up hiring someone else to look after their cash.
The truth is that no individual could possibly keep up with—let alone understand—all the arcane financial products out there. But here’s the good news: You don’t have to. Nor do you have to know which way the market is heading (news flash: nobody does) to be a successful investor.
In fact, the more you can tune out the noise, the better off you’ll be. As a dividend investor, I’ve found that sticking to a few simple rules is all it takes. Here are seven that I consider to be among the most important.
1. Think Like an Owner, Not a Trader
Too many people see the stock market as a casino where the goal is to flip their shares for a quick buck. Good luck with that.
A better approach, both for your portfolio and your stomach, is to think of yourself as an owner who participates in the rising profits of the business. Instead of obsessing about short-term market gyrations, your main concern as an owner should be that the company’s earnings—and hence, dividends—are gradually growing. If they are, the stock price will eventually follow.
2. Remember the Ten-Year Rule
Here’s one of my favorite Warren Buffett quotes: "If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes."
Consider how many people would have avoided flame-outs such as Yellow Media (Toronto: YLO) or Research In Motion (RIMM) if they’d only heeded Buffett’s advice. If you can’t be highly confident that a company will be thriving a decade from now, the stock is too risky to buy today.
3. Watch Dividends, Not Stock Prices
One of the best things I did as an investor was set up a spreadsheet to track my dividends. Now, if a company raises its dividend or I buy more shares, I just enter the information into the spreadsheet and the little box that calculates my annual dividend income automatically updates. Watching that number grow makes it a lot easier to stay calm on days when the market tanks.
4. Consider ETFs
Don’t feel comfortable picking individual stocks? No problem. There are a growing number of exchange traded funds aimed at dividend investors. These ETFs offer diversification and lower costs than mutual funds, so your dividends won’t be eaten up by a lot of fees.
Examples include the BMO Canadian Dividend ETF (ZDV), the S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ) and the Dow Jones Canada Select Dividend Index Fund (XDV). Here’s an article comparing several these and a couple of others.
5. Buy US Dividend Stocks
Canada has lots of great banks, pipelines, and utilities, but if you want exposure to global consumer brands—companies such as McDonald’s (MCD), Coca-Cola (KO), Procter & Gamble (PG), and Wal-Mart (WMT)—you’ll need to do some cross-border shopping.
You’ll also find plenty of US dividend ETFs from companies such as Vanguard and Invesco PowerShares.
6. Reinvest Dividends
If you’re still in the wealth accumulation phase of your life, reinvesting dividends is a terrific way to build wealth. There are a few ways to accomplish this.
You could enroll in a company’s dividend reinvestment plan (DRIP), in which case all of your dividends will be reinvested in additional shares. You could sign up for your broker’s "synthetic" DRIP, which is similar except you won’t be able to purchase fractional shares. Or you could just let your dividends accumulate until you decide to buy something with the cash.
7. Be Conservative
Contrary to what many people think, investing doesn’t have to be risky. Pipelines, utilities, power producers, and real estate investment trusts, for example, generate fairly predictable profits. Sure, stocks fluctuate, but that volatility is the price you pay for the superior long-term returns of equities.
That’s not to say you should ignore bonds or guaranteed investment certificates. Even with rates as low as they are today, keeping a chunk of your portfolio in bonds or GICs will help you ride out the inevitable downturns.