My Portfolio - Seeking advice, please help

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
Sensei
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Post by Sensei »

Hi,


DenisD wrote:
Personally, I would have a lot more foreign. But, different strokes ...
Good point. You have the choice of hedging to Canadian dollars, too. Not sure whether what you have does this or not.

If you stay with funds, then maybe you should have just one global fund. The best 10 - 15 year performance funds seem to be in the Trimark, MacCundhill, or Dynamic groups. OTOH, when I look at the MERs, they are high and we've also got DSC and FEs. They've all just been slaughtered by the high C$ too. Tough decision!!

Cheers
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Need help with Mutual funds

Post by SunnyDay »

Thanks for creating this financial weblog! I found the site over the past weekend and I love reading through all the valuable information that is offered here.

I have mutual funds that are losing money on a daily basis and I'm not sure if I should go to money market funds within the present mutual fund families or just close the mutuals and send the monies to my cash account.....or should I buy individual stocks. After reading your informative site it's obvious to me now that I have too many funds and I'd like to get rid of some of them, if not all.

The following are my mutual fund investments:

AGF Cdn Conserv Income
AGF Precious Metals fund
CI Sig Cdn Bal
CI Sig Devident CI
IA Clarington Cdn Bal
Mac Ivy Gwth & Inc Fd A
Mac Sentinel Income
Trimark Advantage Bond

Other - Cash and Equivalents

Multi Select Inc Trust Preff Secs
Multi Selct Income Trust Cap Unit



The total portfolio is around $100,000 and I believe I wouldn't incur any penalties if I decided to withdraw from the mutual funds since I've had them for seven plus years. I use these funds to cover monthly expenses by using a SWP and take out about $1200 monthly.

I also have about $29,000.00 in GICs and about $145,000 in cash.

I would appreciate any feedback you are willing to offer, and again, thanks for being there.

Sunny
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Post by queerasmoi »

Information that people are likely to ask of you on here in terms of what would be wise decisions...

- age? marital/family status?
- Are these held in your RRSP/RRIF or taxable account?
- Do you have in mind an ideal % allocation of asset classes? (CDN, US, Intl equities, bonds/cash, real estate, commodities...)
- Are these mutual funds through an advisor? If so, do you want to cut loose and self-manage? Keep in mind that if you want to buy low-fee index funds or ETFs, advisors might charge you an arm and a leg to compensate for trailers they're not getting, so it'd be prudent to transfer these assets to a discount brokerage ;)

My first advice to you would be to look up the MER (management expense ratio) on everything you own. Ask yourself if these are acceptable numbers. I won't look em all up myself but here are some examples:

AGF Precious Metals fund: 2.60%
IA Clarington Cdn Bal: 2.68%
Trimark Advantage Bond: 1.24%

The 1.24% for a bond fund may look low compared to what else you own but bond funds are very hard to squeeze extra performance from via active management.

In any case, I'd suggest you make a plan first before doing any drastic selling. And welcome to the forum :)
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Post by AltaRed »

I concur with queerasmoi that we need more information to provide more targeted opinions.

However, it is my observation that you are in withdrawal mode given your SWP of $1200/month from the $100k portion of your portfolio. It is also an observation that if what you stated is your entire portfolio, you are at least 65% FI given a considerable portion of your mutual funds contain bond components. That is a substantially conservative portfolio, but one that could be very appropriate if you are retired and counting on these assets to fund a major portion of your retirement. I do not know anything about many of these funds, but would observe there does not appear to be a rationale for the 'mixed bag' of funds you currently have.

The problem with cashing in your mutual funds now is you would be 'selling low', i.e. the worst possible time to be making an exit from the equity markets. You have held on through the past ~12 months of a bear market. Perhaps that bear market is going to turn around within the next 6 months. At the same time, MER expenses for many/most/all of these funds are high and are eating into fund performance.

In the absence of more information, what I might suggest you consider is to sell many of these funds and replace them immediately (to stay in the market) with a single index equity mutual fund (provided you can do this cost effectively with a discount broker) for the equity portion of your portfolio and buy additional GICs in a 5 year GIC ladder for the FI component. $145k is a lot of money to have in cash unless you have it in high interest savings accounts. Some of this could be deployed in a 5 year GIC ladder as well or 30 day cashable GICs to ensure ready access to some cash.

As initially mentioned, more information would be helpful.
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Post by SunnyDay »

Thanks for the welcome and your reply queerasmoi. I'm a widow almost 59 and I'm not working. Regarding the asset allocation...I'm not sure. I need a plan that will get me through this nasty bear market without losing my shirt. I've seen these mutual funds go down substantially over the last few months and I'm starting to worry. If I stay in mutuals funds I need some advice about which funds would be appropriate for a bear market. Would defensive funds be my best bet and if so which ones? I don't like my advisor and I'm looking for a new one but during the interim I need some guidance. Eventually I would like to manage these funds myself, once I gain the knowledge.


AltaRed thank you as well. I'm going to research your suggestions of a single index equity mutual fund and the 5 year GIC ladder. BTW what is "FI"?
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Post by WynnQuon »

FI is fixed income (e.g. bonds, GICs)

One of the basic questions that every investor has to answer for themselves is how much risk tolerance they can take.

Would you be ok if your mutual funds fall by 50% in value?

It's true that stock market investments perform well over the long run, but in the worse case scenario, stocks can take a long time to show their superiority. Are you okay if it takes a decade or more for them to recover their value?

If the answer is no, that tells you something about how much your risk tolerance is. You should reduce your stock market exposure until you can answer the question honestly with a 'yes'.
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Post by WynnQuon »

Oh, I would strongly recommend reading Shakespeare's (aka Keith Betty) guide for independent investors. It's a great primer and addresses all of the issues in clear prose. It was written with the help of some of the heavyweight financial talent on this forum, you can't go wrong.

http://www.telusplanet.net/public/kbetty/fhome.htm
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Post by queerasmoi »

Further to AltaRed's suggestion...

Suppose you take all your funds and look up what kind of assets are inside them. One might be 100% equities (stocks), another might be 60% equities and 40% bonds. Doing all the math you might arrive at, say, 79%/21% equities/bonds within all of your mutual funds. With that in mind, if you sell all the mutual funds and buy a low-fee equity index with 79% of that money (for example, TD Canadian Index-e, or iShares XIC/XIU exchange-traded fund), you will now have the same market exposure without the drag of high-fee funds. The remaining 21% can be pooled with all your other fixed-income and cash.

This does not guarantee that your equity portion will recover quickly, of course! But if the market goes up, you'll share in its gains. In the meantime, withdrawing from the fixed-income component makes the most sense. The trouble with "defensive funds" is that they might be hiding from the market at exactly the moment the market finally decides to shoot back up.

I agree with the bit about putting the cash you won't need immediately into a GIC ladder. In investment-land, we tend to use "cash" as a shorthand for high-interest savings accounts, short-term guaranteed investments, and so on... but if you've got that money literally in non-interest-bearing cash, then it's losing real value to inflation just sitting there.

Just a thought - back me up here or not, forum members - with that much cash, how about buying a nice real-return bond? Wouldn't a little inflation-protected investment be a good idea here?
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Post by AltaRed »

I would be careful about using ETFs as queerasmoi suggested because of the commissions associated with the sales needed to support the $1200/month SWP program, especially from a full service broker which is what the OP appears to be using at the current time. Index mutual funds (no load) for her equity component seem like a better choice AND if the OP plans to go on her own with DIY investing, then the TD efunds (or at least the Cdn index efund) may be her best bet for her equity component.

The suggestion to target her $1200/month SWP withdrawals from the FI component of her portfolio is probably a good idea until equities bounce back in the next few? several? months/years. RRBs might be worthwhile if also in long term nominal bonds to offset inflation risk, but I don't see the value in RRBs with a (short term) 5 year GIC ladder. Besides, it will cost real commissions to be selling part of a RRB every month (or quarter, or year) to meet the $1200/month SWP requirement.

Responses to the OP need to keep the context of the $1200/month SWP in mind when providing advice/opinions/recommendations. Those same responses need to take into context the OPs concerns about decreasing portfolio value.

IMHO, I would suggest the OP to 'hang tight' for a bit and not make rash decisions. 'Selling low' in a panic will drop her out of the market just when it might turn around with a bang this fall or winter. I simply don't have an answer for her, per quote:
I've seen these mutual funds go down substantially over the last few months and I'm starting to worry. If I stay in mutuals funds I need some advice about which funds would be appropriate for a bear market. Would defensive funds be my best bet and if so which ones? I don't like my advisor and I'm looking for a new one but during the interim I need some guidance.
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Post by queerasmoi »

Good points, AltaRed.

With respect to the withdrawal part, if ETFs are used for any part of the portfolio, the key would be to sell them in bigger lumps at a time, not monthly. This is probably what I'd do given the situation, but it does require a fair amount of planning (i.e. "On month X I will sell $20,000 of the ETF, park it in an eFund, then withdraw $1200 from the eFund monthly, then when it runs out I sell another chunk..."). For the sake of simplicity I could see how eFunds would be helpful.

Okay time for me to bow out of this thread because I have my own work to do, so that maybe one day I'll have enough invested to follow my own ideas ;)
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Post by SunnyDay »

Thanks for this link WynnQuon! I started reading Shakespeare's primer tonight. From what I've read so far It's an invaluable resource for me! This is a tremendous site for information!

AltaRed and queerasmoi I researched iShares and TD efund this afternoon Thank you so much for your guidance I've learned quite a lot in the short time I have been here. I will hang tight for a bit although I can barely wait to start managing my funds. I love learning and I find this site totally invigorating. I 'm sure I will have many more questions when I have digested the reading material. In the meantime, I'm focused and it feels great! :D
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Post by Bylo Selhi »

SunnyDay wrote:I will hang tight for a bit although I can barely wait to start managing my funds.
It's very hard to resist the temptation to start managing your funds, however, it's vital that you do so until you've formulated a financial plan and you're comfortable with it.

An important bit of reading to give you a view "from 30,000 feet up" is the Financial Planning sticky here on FWF.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
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Post by scomac »

My apologies for coming late to this thread. I'm just a little bit shocked that some else hasn't picked up on the fact that withdrawing $1200/month from an asset base of $100000 (mutual fund portfolio) is completely unsustainable. This is a withdrawl rate in excess of 14%/annum! At this rate of withdrawl and assuming a 5% annual rate of return to the conservative asset mix, the mutual fund account will be depleted in less than 9 years. Was this part of the plan when your advisor set this up? Are these funds being used to bridge you until age 65 when you begin collecting OAS/CPP? When you are withdrawing funds at this pace, the asset base is going to decline over time no matter what the markets are doing. It's no different than if you were spending more money than you were earning. You're bank account balance is going to drop. Under these circumstances, it is extremely difficult to know whether or not your mutual funds are performing poorly without doing some indepth analysis. There has to be a reason that your accounts were set-up in this fashion, otherwise it would appear, from my vantage point, that the advisor was completely incompetent.

There are some good suggestions upthread as to how you could make a few changes within your total portfolio, but I think that you are a ways away from the point where you would want to venture out on your own managing your funds. Resist the temptation to react prematurely on incomplete information and develop a sound plan before acting. This will take a fair bit of time, but it will be worthwhile. In the meantime, you could choose to fund your monthly withdrawls from your savings and suspend the SWP in order to preserve capital in the mutual funds account.
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Post by AltaRed »

Scomac, I observed the same thing regarding potential unsustainability. But we don't have the relevant information to make a judgement.

Is the $1200/month SWP strictly from the $100k portfolio? Or is it spread across the GICs and cash as well? Withdrawing $1200/month from the mutual fund portfolio exclusively does not make sense with $145k in cash sitting on the sidelines - particularly in a bad equity market..... unless it is part of a broader plan to purposely deplete the mutual fund portfolio first.

Taken in the broader context, $1200/month SWP on a total portfolio of $274k is a 5.2% withdrawal rate, not factoring in OAS or CPP. The OP may well have a withdrawal plan that is based on a reasonable 4-4.5%.
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Post by scomac »

AltaRed wrote:Scomac, I observed the same thing regarding potential unsustainability. But we don't have the relevant information to make a judgement.

Is the $1200/month SWP strictly from the $100k portfolio? Or is it spread across the GICs and cash as well? Withdrawing $1200/month from the mutual fund portfolio exclusively does not make sense with $145k in cash sitting on the sidelines - particularly in a bad equity market..... unless it is part of a broader plan to purposely deplete the mutual fund portfolio first.

Taken in the broader context, $1200/month SWP on a total portfolio of $274k is a 5.2% withdrawal rate, not factoring in OAS or CPP. The OP may well have a withdrawal plan that is based on a reasonable 4-4.5%.
All I could go on is what the OP said. It appeared as though the withdrawls were coming solely from the mutual funds account, hence why I asked if this was part of a plan that was being done deliberately. This is also why I pointed out that under those kinds of withdrawl pressures, it is impossible to draw any sort of conclusions about the performance of the mutual funds. Of course they're going to go down when you pull out that much capital on an annual basis. We'll have to wait for further clarification from the OP, if in fact, she even knows. It seemed to me that the chief concern of the OP was that her mutual funds account was going down. It was because of this that I took the approach I did and questioned why no-one else had mentioned the obvious reason behind the performance of the funds.

[Added] As far as the rational of withdrawing exclusively from the mutual funds account when there is a sizeable cash account just sitting there, we're are assuming that the advisor who set this plan up even knows about the existance of the other funds. It's quite possible that he/she doesn't as I believe that it is fairly commonplace for individuals to spread their investments around amongst several advisors (assuming the assets are of size). Typically, the advisor won't even know that there are other assets under the management of other advisors, hence each advisor ends up operating in a vacuum. This can lead to haphazard portfolios that aren't nearly as efficient as they might be otherwise. That can lead to poor performance which is ultimately blamed on the advisor when the client should shoulder some of the blame due to their desire to maintain secrecy.
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Post by SunnyDay »

Bylo thanks for pointing out that sticky I will definitely include it this weekend and I won't rush headlong into managing my funds...I am eager though lol.

AltaRed and scomac - The $1200 is being withdrawn strictly from the mutuals. The advisor was aware of 145K, but those funds were tied up when the the financial plan was drawn up, therefore they weren't included.
scomac I wouldn't hide funds from my advisor (and I have only one) because I know it's not in my best interest to do so.

The plan now is to amalgamate all the monies and create a feasible financial plan that will sustain a $1000-1200/monthly withdrawal. I know I have a lot to learn before I can create this plan, however, with the group's guidance and expertise I know I will accomplish this task.
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Post by Dividend Growth Investor »

Actually if you can manage to construct a portfolio that generates enough in dividend streams to offset your living expenses,you should be on a nice footing to start your retirement.
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Post by couponstrip »

Dividend Growth Investor wrote:Actually if you can manage to construct a portfolio that generates enough in dividend streams to offset your living expenses,you should be on a nice footing to start your retirement.
If this is your goal for retirement, and you achieve it at retirement, why not just stick with fixed income for most of your portfolio plus a healthy dose of real return bonds? If dividends are all you are concerned about, then why not take the most stable dividend there is rather than running the risks of loss of capital, dividend cuts, dividend suspensions, company bankruptcy?
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Post by WynnQuon »

The question that all stock market investors should ask themselves is: if the stock market were to lose 50% of its value, would i still be comfortable? And if this fall were to happen *and* I were to lose my job ....?

Too often, people overestimate their risk tolerance. After investing for almost thirty years, I still surprise myself in this regard. I've cut my stock exposure way down as of last year but of the few holdings i do have, their prices are down. And I look at them and I think "gee, I should have sold that when....."
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Post by Dividend Growth Investor »

couponstrip wrote:
Dividend Growth Investor wrote:Actually if you can manage to construct a portfolio that generates enough in dividend streams to offset your living expenses,you should be on a nice footing to start your retirement.
If this is your goal for retirement, and you achieve it at retirement, why not just stick with fixed income for most of your portfolio plus a healthy dose of real return bonds? If dividends are all you are concerned about, then why not take the most stable dividend there is rather than running the risks of loss of capital, dividend cuts, dividend suspensions, company bankruptcy?
CouponStrip,

Having an all bond portfolio plus real return bonds ( I suppose those are the inflation protected fixed income securities issued by governments) might make sense for some investors. In addition to that if you are in retirement then I believe that one should have at least a 25% allocation to fixed income.

However dividend growth stocks would provide you with a nice and growing dividend payment over time, which usually beats inflation by at least 1% over large periods of time. In addition to that you get a much higher chance of getting a capital gain with stocks as opposed to bonds.

And last but not least, dividend income has been more tax efficient that fixed income for some time now.

If we get a double digit inflationary period your bond investments will shrink in value and your payments will have a lower purchasing power. True, you will have inflation protected bonds but aren't these calculated based off CPI. And does that CPI basket truly reflect your spending for a given year?

As an extreme example suppose you are a car junkie and you just love driving your car 50 weeks every year in Canada and USA and that you gas expenses are 50% of your overall expenses. Would a CPI indexed bond be truly representative of your situation given the sharp run up in prices?
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Post by couponstrip »

DGI,

Thanks for your reply.
However dividend growth stocks would provide you with a nice and growing dividend payment over time, which usually beats inflation by at least 1% over large periods of time.
In theory, perhaps using historical dividend payers as a view into the future. Have the dividend payers that failed, or companies that suddenly cut their dividends been included in this figure? How has the overall "dividend" approach faired in terms of capital gain/loss plus your treasured dividends (including having to sell when the dividend is cancelled or the company goes bankrupt)?

Further, how do you know you are picking the ones that are going to grow their dividends, continue to be successful businesses with capital gain? Is it true that looking at one parameter, yield, and then seeing if it is growing over time gives you a leg up on the market? By promoting this, ISTM that you believe that you can beat all the other smart people that buy and sell in the market. Your strategy favours large to megacaps with limited growth potential relative to their size. Does favouring this segment of the market and ignoring small cap and growth stocks help you to beat the average market return?
In addition to that you get a much higher chance of getting a capital gain with stocks as opposed to bonds.
So you acknowledge, then, that capital upside is important to you too? Most dividend players only mention yield, yield, and more yield. If you are hoping for CG, are there other parameters you look at when buying a stock?
And last but not least, dividend income has been more tax efficient that fixed income for some time now.
Sure, but that could be remedied with preferred shares in your non-registered accounts.
If we get a double digit inflationary period your bond investments will shrink in value and your payments will have a lower purchasing power. True, you will have inflation protected bonds but aren't these calculated based off CPI. And does that CPI basket truly reflect your spending for a given year?
Ok, so stocks are good to own to hedge against inflation. However, the stocks you favour, good dividend payers, seem to me to be the type that would not fare well in this environment either. For example, our current inflationary environment is being lead by energy. How many oil and gas companies qualify for your dividend portfolio? Yet, owning energy stocks in the past two years has provided tremendous capital gains, and would help to offset the ravages of inflation in a largely fixed income retirement portfolio.

Have you considered the risk of concentrating your portfolio based on one parameter? A lot of folks are talking about buying only "dividend growers" for their portfolio. For example, I attended a Wood Gundy presentation recently where the advisor promoted a wrap account where she buys all dividend growth stocks for you for her 1% fee. Even the wrap account advisors are in on this gig. Try googling your handle and see how popular this strategy is. You might be paying a premium for these stocks due to the popularity of this approach, further risking your capital in the future. For historical examples, recall the nifty fifty, dogs of the dow, the January effect etc.

Also, you have narrowed your portfolio to a subsection of the market that will likely react to global market forces in a similar fashion. What if you are wrong, and growth stocks have a 30 year run right into your retirement? What if small caps excel and large caps lag for decades? This approach seems to be promoted as a safe bet for retirement, yet it seems far riskier to me than owning a 100% total stock market equity ETF. Hence my question (for argument's sake), if you are fortunate enough to accumulate a portfolio where steady dividends in your retirement will cover all of your expenses, why not just stick with something that is truly safe (relative to common stock) like fixed income? (ie bonds, real return bonds, TIPS, preferreds etc). That way when it comes time to tap your portfolio for an extraordinary expense in retirement (car, new roof, child getting married in Hawaii on your wallet), you know the capital will still be there.
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Post by queerasmoi »

Dividend Growth Investor wrote: And last but not least, dividend income has been more tax efficient that fixed income for some time now.
At least until retireat50 turns 65... and then it would be imperative to calculate how OAS clawback will come into play. But this is clearly a few decades away and who knows how income will be calculated by then.

I do agree that pref shares would be a decent way to balance out a dividend-based portfolio strategy.

Also if you're in your 30s now, and if TFSA continues in the way it's currently been planned, you'll build up a decent amount of contribution room. If you retire early and live off investment income, then you can slide the unused income into TFSA - further growth is then tax-sheltered. Shuttle as much of your non-taxable portfolio into TFSA as you can shortly before turning 65 and you'll have a nice nest egg you can draw on without triggering a clawback.

Disclaimer: This is just how I *think* it works ;)
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Post by BRIAN5000 »

Any income you receive in retirement wouldn't you want to spend it ?

If you could, I think you'd want any excess income to be inside your TFSA so it could compound tax free?
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Post by Dividend Growth Investor »

couponstrip wrote:DGI,

Thanks for your reply.

You are welcome.
In theory, perhaps using historical dividend payers as a view into the future. Have the dividend payers that failed, or companies that suddenly cut their dividends been included in this figure? How has the overall "dividend" approach faired in terms of capital gain/loss plus your treasured dividends (including having to sell when the dividend is cancelled or the company goes bankrupt)?
Well as a total return perspective, the dividend aristocrats have outperformed the S&P 500 since 1990. ( sorry to post a link to my own site)
http://www.dividendgrowthinvestor.com/2 ... crats.html

Most of the stocks that leave the index do so not because they are going bankrupt but because of some merger or acquisition. I however would not suggest selling a stock because it's freezing its dividend. I would most probably sell after a cut unless I think the company will make it - ED cut its dividend in 1970's only to increase it for 3 decades after that.

As for the 1% increase of dividends over inflation I used this pdf from Value line. It actually is 2% over the past 8 decades.

http://valueline.com/pdf/valueline_2006.pdf

As for your comments about the "overall "dividend" approach" check out these charts:

http://bp3.blogger.com/_9SoEE9d_aQo/SEt ... Policy.jpg

http://www.dividend.com/img/dividend-graph.jpg

In addition to that, most charts that I find about long term returns of fixed income are not as good as long term charts of common stocks.
There are times when fixed income does outperform common stocks so that's why one should have some allocation there. But in the long run your fixed income investment will most likely exceed inflation by a very slight margin..
Further, how do you know you are picking the ones that are going to grow their dividends, continue to be successful businesses with capital gain? Is it true that looking at one parameter, yield, and then seeing if it is growing over time gives you a leg up on the market? By promoting this, ISTM that you believe that you can beat all the other smart people that buy and sell in the market. Your strategy favours large to megacaps with limited growth potential relative to their size. Does favouring this segment of the market and ignoring small cap and growth stocks help you to beat the average market return?
Well there are many uncertainties in investing. I don't just look at dividends however - i look for companies that can afford to pay dividends. I never said that I will outperform the market. I like the overall stability of dividends as part of the total return. Dividends could get cut, but if you have a diversified portfolio of dividend stocks, your dividend income will increase over time. Compare this to a portfolio of fixed income where your income won't increase at all and your will lose purchasing power over time. Your only option is re-investing part of your proceeds in order to be bale to live off your coupon payments and increase your income to keep up with inflation. The "stability" of coupon payments is illusory because it doesn't take inflation into effect.

As for dividend stocks some researchers have found that re-invested dividends have contributed about 97% of the total return in S&P 500 since 1871.

In addition to that stock dividends contributed about 40% of the average annual total returns in S&P 500 since 1926.

And yes most of them are large caps. But not all of them are. The dividend aristocrats performed pretty well relative to the S&P 500 over the 2000-03 bear market.

So you acknowledge, then, that capital upside is important to you too? Most dividend players only mention yield, yield, and more yield. If you are hoping for CG, are there other parameters you look at when buying a stock?
Of course capital gains are important. And no I don't chase yields. I look for trends in revenues, EPS, roe, stock price, dividend payout ratios, dividend payments, dividend and eps growth, buybacks etc. I also would like to purchase a stock with dividend yields that are at least equal to S&P 500's yield.

Sure, but that could be remedied with preferred shares in your non-registered accounts.
I am not in Canada so my tax situation is slightly different i imagine. To me you bear the same level of risk with preferred stocks and ordinary stocks ( I know there are slight differences). But when the going gets tough, both preferreds and ordinary will likely be wiped out in the extreme scenarios ( FNM, FRE for example). Even if they aren't preferreds don't appreciate in value in good times when ordinary shares rise. I am sure that preferreds could be a part of one portfolio. Besides there are so many types of preferreds..
Ok, so stocks are good to own to hedge against inflation. However, the stocks you favour, good dividend payers, seem to me to be the type that would not fare well in this environment either. For example, our current inflationary environment is being lead by energy. How many oil and gas companies qualify for your dividend portfolio? Yet, owning energy stocks in the past two years has provided tremendous capital gains, and would help to offset the ravages of inflation in a largely fixed income retirement portfolio.
BP, CVX and XOM are three examples of oil related plays. XOM is the least rated for me because they have slow dividend growth and lowest yields.
I never know which stock/sector will perform well in the future. That's why I am diversified across several sectors. I am also trying to diverisyf with foreign dividend payers.
Have you considered the risk of concentrating your portfolio based on one parameter? A lot of folks are talking about buying only "dividend growers" for their portfolio. For example, I attended a Wood Gundy presentation recently where the advisor promoted a wrap account where she buys all dividend growth stocks for you for her 1% fee. Even the wrap account advisors are in on this gig. Try googling your handle and see how popular this strategy is. You might be paying a premium for these stocks due to the popularity of this approach, further risking your capital in the future. For historical examples, recall the nifty fifty, dogs of the dow, the January effect etc.
Most companies that pay dividends are solid performers with pretty decent shareholder friendly management. If dividends fall out of fashion, then so be it i will keep purchasing dividend stocks. That's what happened in the late 1990's, when everyone wanted a piece of the next MSFT, YHOO etc. With dividend stocks you will at least get something when your stock is going south or flat. I would much rather have bought GM with its erratic dividends in 1990 than PLA.

Actually my strategy is not as followed as yield chasing. In today's environment where people want instant gratification high current yields attract more attention than high dividend growth.
I have a somewhat strict criteria for purchasing dividend stocks based off p/e, yield, trends in roe, dpr and dividned growth and eps growth so I am not chasing performance. I really hope however that my dividend growth approach becomes so widely followed that my portfolio achieves above average total returns. That might help me in achieving my goals sooner.

Also, you have narrowed your portfolio to a subsection of the market that will likely react to global market forces in a similar fashion. What if you are wrong, and growth stocks have a 30 year run right into your retirement? What if small caps excel and large caps lag for decades? This approach seems to be promoted as a safe bet for retirement, yet it seems far riskier to me than owning a 100% total stock market equity ETF. Hence my question (for argument's sake), if you are fortunate enough to accumulate a portfolio where steady dividends in your retirement will cover all of your expenses, why not just stick with something that is truly safe (relative to common stock) like fixed income? (ie bonds, real return bonds, TIPS, preferreds etc). That way when it comes time to tap your portfolio for an extraordinary expense in retirement (car, new roof, child getting married in Hawaii on your wallet), you know the capital will still be there.
I don't like a 100% portfolio in bonds. I have lived in other countries where the local currency was totally devaluated and where most people who considered themselves lucky because they purchased government paper yielding 50%-100% per year, lost all their savings. The fixed income does give you just that -a fixed source of income. This income is not as flexble as dividend income. The fixed income will help you when we have a deflation. But in most cases inflation will eat your nest egg.

Dividends will continue to be an important part of stock returns. If there are nice small and mid cap stocks that have the capacity to increase their dividends, i will most likely purchase them. If you look at the dividend champions and dividend achievers lists you will find small and mid caps.
http://www.dividendgrowthinvestor.com/
couponstrip
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Post by couponstrip »

DGI,

Great post.

I am glad I asked some questions, since I now better understand your approach, and how much thought and diligence you have put into it. You have also given me something to read and learn more about. Perhaps I will see enough merit in dividend growth securities that it will rival my current investment philosophy which is to accept the average market return.

I hope you enjoy some great returns in the years to come.
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