Stock Picking 4: Investment Income

Part 4: Earning Investment Income from Stocks

Objective: To buy and hold dividend-paying stocks in my retirement fund.


Over the last couple of months, I’ve held off making any long-term buys for my retirement portfolio as I wanted to wait until after the US election. Now that it’s over, I can see how the markets, sectors, and stocks from both Canada and the US reacted. For the last week, JP and I had been watching stocks and making decisions on what to hold for the long haul. If there’s one thing they all have in common, they all pay a dividend.

The Dividend Income Strategy

The big goal  with stocks is to be able to sell your shares at a higher price for a capital gain or profit. When stocks give their shareholders a dividend, then it makes it less desirable to sell your shares as they’re now a source of income!

If you’re buying stocks purely for dividend income, then the price you pay per share and what the sector and market are doing at the time have little significance. It’s intended as a long-term strategy and the idea is that over time, a dividend-paying stock of a good company should go up in value the longer it’s around and able to maintain dividend payments to its shareholders.

For me, these stocks are intended for my retirement fund. I’m still decades away from retiring, so I haven’t sold these stocks yet! With lesser ability to work and fewer job options, I want to have an investment source of income, and dividends are just that. In my opinion, this is the most simple form of stock investing and from a long-term perspective, the wisest.

If you have a blue chip company like a big bank or utility company you’d like to invest in for dividends, then you can accumulate shares over time, buying whenever it suits you. For me, when my stock goes down in price, I plan to buy more shares as it’s more affordable. I met a guy who buys shares of just one bank stock — his bank. He watches the stock price and whenever his stock takes a hit, he’s buying more shares. Over time, you can accumulate a lot of shares; the more shares you have, the more you make in dividend income.

So if you look up a stock on its company website, they’ll usually have its dividend payment schedule as well as what they pay their shareholders for each share they own. It’s usually on a quarterly basis, but sometimes dividends are paid monthly.

Here are some things to note:

  • Not all companies pay a dividend as they don’t HAVE to;
  • Companies don’t always pay the same amount in dividends each time – they can pay more or less each time;
  • Companies can suspend dividend payments for periods of time if it financially makes sense for them – doing this can often make the stock price go down;
  • If you’re receiving dividends from a Canadian company, you get a tax credit, so you can hold these stocks in non-registered accounts;
  • If the company or your brokerage doesn’t have the DRIP (dividend reinvestment plan) feature to automatically buy more shares, the dividend income just goes into your investment account and you can reinvest it at your discretion;
  • If you’re receiving dividends from US companies, then you should hold these stocks in your RRSP as we have an agreement with the US that investment income in retirement accounts won’t be subject to international withholding tax.

My dividend-paying stocks so far are in utilities, energy, finance, and consumer staples. My discount brokerage doesn’t offer the DRIP option, so the money just comes in regularly into my investment account and it’s nice to see my portfolio increase in value from both the capital appreciation of my stocks and from regular dividend payments.

If you’re off stock picking, you can also buy shares of a dividend income ETF. The dividends that are generated by the stocks in the fund are paid to you in the form of distributions (but also often called dividends). I, too, own a preferred share laddered ETF that pays me a substantial dividend every month!


 Generating a regular investment income from solid dividend-paying stocks of Canadian companies is a great strategy for the long term!

3 thoughts on “Stock Picking 4: Investment Income

  1. I’ve been a DIY investor since mid 2008 when I released my advisor and went all in with dividend growth investing. I’ve done extremely well in growing my dividend income which is my primary focus. What is really surprising is I’m also outperforming the TSX60 by 7%, the S&P500 by 1% and even BRK.B by 2% on an annual total return basis.
    If your readers are interested in dividend growth investing the best sources for finding suitable stocks are listed here:
    The Canadian Dividend All-Star List – http://www.dividendgrowthinvestingandretirement.com/canadian-dividend-all-star-list/
    The U.S. Dividend Champions, Contenders, and Challengers Lists – http://www.dripinvesting.org/Tools/Tools.asp
    These monthly updated lists comprise all dividend growth stocks which have increased their dividends for at least 5 consecutive years.

    Like

  2. Good for you, Bernie! That is all exciting stuff. Thanks for sharing these amazing resources. My hope is that more and more readers get excited by real life examples like yourself!

    Like

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