Lai started investing in his early 20s when ETFs weren’t widely available or popular. He started investing in mutual funds before moving on to individual stocks, such as
“[My partner and I] just thought that having that stable dividend income would be good. Living off those dividends would give us more flexibility rather than having to sell our principle and live off that. So that’s the attraction.”
Dividends typically pay on a quarterly basis and work like this: if you own 100 shares in
While some investors rely on a dividend stock investment strategy, the approach isn’t for everyone, experts say.
Dividend payers are typically established companies that have excess cash flow so they start returning that cash flow to their shareholders, explained
These are often what are called blue chip companies, like RBC,
While there is nothing inherently wrong with investing in big blue chip companies, for most people, and especially young people, it shouldn’t be your whole strategy, Engen said.
Instead, younger Canadians should be focused on growth, and not the income they receive from their portfolio.
“You want to expand your investable universe into other stocks that don’t just pay dividends.”
Engen said that many people also don’t realize that a dividend payment is coming from a company’s earnings and cash flow. So, if you’re receiving
“Dividend shareholders could do anything with that cash. They could spend it. They could invest it in a different company. So the value of the company just went down,” he said.
“I think a lot of dividend investors think they see this dividend and they think they’re getting that return plus the capital appreciation, but the capital appreciation is being diluted every time the company pays a dividend.”
For example, when it comes to growth, Engen said that FP Canada’s projection assumption guidelines show that Canadian stocks,as a whole,have an expected return of 6.3 per cent before fees,
So, if you invest in a company like ShopifyInc. that doesn’t pay dividends, your return would be linked to the value of the company growing. Your investment in the company is worth more because the share price went up, Engen said.
With a dividend paying stock like
“They earn money from their pipelines, pay their expenses, and send the remaining profits back to their shareholders in the form of dividends. So, if you’re getting a six per cent dividend, you should not expect the share price to increase,” he said.
The company paying dividends is not investing as much in their growth via acquisitions or other avenues, he added. They have two different styles of company management.
“There is no free lunch. You don’t get the six per cent dividend that
Where a focus on dividend paying stocks might be beneficial is if you feel comfort from receiving a quarterly dividend, and that makes you hold onto the investment.
“If there’s a behavioural reason that keeps you grounded and keeps you from panicking and selling when the market goes down, then I think it can be a sensible strategy. It’s just not going to be the most efficient way to build wealth over time where you want to invest in the total market rather than concentrate on the dividend payers,” he said.
Instead, Engen recommends his clients keep their costs low and diversify broadly rather than focusing solely on one specific type of stock.
For the average Canadian, Lai, like Engen, is in favour of index investing with Vanguard or iShares ETFs, for example, and think it’s a good approach because you can just leave your investments and not have to think about them.
“But, if your personal preference is that you want that level of comfort in terms of having some sort of stable and predictable income, I think dividend investing is great because you see the numbers and the income coming in regularly,” Lai said.
In Lai’s case, by 2025 he expects to receive approximately
That said,Lai enjoyshis day job and has no clear plans to quit. If he were to one day stop working full-time, he would likely supplement his income with part-time work.
“I’m not in a rush to send in a resignation letter and chill on the beach every day. That’s not the plan.”
This report by
Companies in this story: (TSX:TKTK)
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