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(Helioscribe/Getty Images/iStockphoto)

Strategy Lab

How a focus on dividends can transform your investing approach Add to ...

John Heinzl is the dividend investor for Globe Investor’s Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Yield Hog spends a lot of time talking to portfolio managers and analysts for their views on dividend stocks. The pros live and breathe this stuff, and you can learn a lot by listening to them.

But you can also learn a great deal by talking to regular folks who have become dividend investors.

So today, we’ll switch gears and chat with an average Joe – actually an average Rob.

Rob, whose last name we’ve left out to protect his privacy, is a 61-year-old government employee in Ottawa. For years he invested in high-fee mutual funds with lousy returns. Last year, he made the switch to managing his own dividend portfolio after hearing a local investing author on the radio recommend the strategy. He’s never looked back.

Rob’s story illustrates how, with some homework, discipline and a game plan for selecting stocks, a do-it-yourself investor can build a conservative portfolio of dividend-paying companies that will provide a long-term source of income. It also shows how putting the focus on dividends can fundamentally change one’s approach to investing.

Before he discovered dividends, Rob felt that the only way to make money in the market was to “buy low, ride the price up and then sell.” It was all about trying to generate a capital gain. Indeed, many retail investors see the market as a giant casino where fortunes are made, or lost, based on speculation.

But as he researched dividend investing, he began to see that it’s the antithesis of speculation.

“I realized you could hold an investment that would pay you a return on your money,” he says. “As a shareholder, I’m an owner of a company, and they’re paying me back a percentage of their profits.”

If the company’s profits are growing, so too should the dividend. Over time, assuming the company remains healthy, the share price should also rise, but this is the icing on the cake for the dividend investor – not the cake itself.

Armed with that insight, Rob began educating himself by reading books, newspapers and investing blogs. He then set out to build a dividend portfolio according to the following criteria:

  • The portfolio would consist of 20 stocks. Anything less would not provide adequate diversification, and anything more would require too much time to monitor.
  • Dividend yields would range from 3 per cent to 6 per cent. “I didn’t want anything below 3 per cent because it’s not much of a return, and if it was higher than 6 per cent I wasn’t sure how sustainable it would be and I also wondered how much cash was being put back into the business,” he says.
  • The portfolio would be diversified across the financial services, utilities, energy, real estate, pipelines and telecommunications sectors. “I limited it to Canadian companies, partly because of the dividend tax credit and also because, being a newbie, I decided to stick with companies I know and recognize.”
  • Each company would have a long track record of uninterrupted – and preferably rising – dividends.
  • Each company would offer a dividend reinvestment plan (DRIP).

After he had assembled the portfolio (see table below), Rob asked his discount broker to register the shares in his name.

This step, which cost him $50 per company, was required in order to enroll the shares in the DRIP operated by each company’s transfer agent.

He chose the “true” DRIP, as opposed to his broker’s “synthetic” DRIP, because the former allows reinvestment in fractional shares, so every penny of his dividends is reinvested.

Including the $10 brokerage commission to initially buy the shares, Rob paid $60 in fees per company – or $1,200 in total – to set up his DRIP portfolio, which is worth about $200,000.

The $1,200 in fees may sound high, but it’s a one-time expense. What’s more, 16 of the 20 companies offer a discount on shares purchased through the DRIP, and 14 of 20 offer an optional share purchase plan that allows him to buy additional shares with no brokerage fees.

If he needs the money in retirement, he’ll start taking the dividends in cash.

But right now he’s focused on reinvesting.

“The analogy I use when I try to explain it to people is it’s like planting fruit trees. When the trees bear fruit you plant the seeds and you get more trees. You don’t want to cut down your trees to burn them for firewood, which is what you’re doing if you’re selling for a capital gain,” he says.

Rob’s next project is building a spreadsheet to track his dividend reinvestments and the adjusted cost base of the shares (which he’ll need to know for tax purposes when he, or his estate, ultimately sells the shares).

Dividends are just one component of Rob’s retirement plan. He also stands to collect a government pension, in addition to the Canada Pension Plan and Old Age Security.

Now, instead of worrying about whether his investments are up or down, he sleeps well knowing that his dividends will be coming in for many years to come.

It’s a strategy that suits his personality, he says.

“I don’t like roller-coaster rides. I don’t like having to pay attention to the market to know if my stock has peaked and that I have to sell it. I’m cautious. I’m conservative. I expect my money to work for me.”

Rob’s Portfolio Picks:





Bank of Montreal


Bank of Nova Scotia


Sun Life Financial





Algonquin Power and Utilities




ARC Resources







Calloway REIT


Canadian REIT


Canadian Apt. Properties REIT


Dundee REIT











Pembina Pipeline Corp.


TransCanada Corp.














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