While I find it enjoyable to jump head-first into financial metrics; analyzing 52-week range lows and highs, price-to-earnings or price-to-FFO ratios, dividend yields and growth rates, payout ratios and earnings-per-share – this is not for everyone.
Some people don’t want to pick stocks; I hear people often say “I don’t know the first thing about investing. I’m afraid to lose money. I don’t trust the stock market“, and the list goes on. And for those people, picking stocks is likely not a good idea. This person may choose a quick pick, following the herd without performing their own due diligence, losing (hopefully only) some hundreds of dollars, and then swearing off the market for good. This is terrible because while you can lose money picking hot stocks, or even on good picks, the overall trend of the market is upwards over an extended period of time.
The best thing you can do as a young person (or even an old person) is to start investing as soon as you’re humanly able to. The power of compounding will be on your side and over time, you’ll have a fortune amassing itself as you sit back and live your daily life; all you have to do is put some money aside every month, or every three or four months – whenever you can! Obviously the more often, the better, both to add to your portfolio and to dollar cost average your purchases (so you buy more when markets are down and buy less when markets are up). If you don’t realize just how incredible compounding is, you can see this 20+ year plan to build a passive income machine.
For those who
- don’t have the time to dedicate to analyzing and picking stocks
- are afraid to lose all their money in the stock market
- want to start building a passive income machine of their own
- want to get paid every monthwithout lifting a finger
you can kick-start your investing careers by investing in a dividend growth ETF (exchange-traded fund).
An ETF is just a passively managed portfolio comprised of multiple stocks that usually follow a theme or objective. In this case the objective would be to invest in companies which regularly increase their dividends.
A popular option for Canadian investors is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF, which has the ticker CDZ.
They list their investment objectiveas:
“Seeks to replicate the S&P/TSX Canadian Dividend Aristocrats Index, less fees and expenses.
The S&P/TSX Canadian Dividend Aristocrats Index consists of companies that have increased dividends every year for at least five years.
Now if you were to purchase shares of this ETF through your brokerage, which you can set up with your bank, you wouldn’t have to do another thing! From then on you can just sit back, and purchase more shares when you’ve saved up enough money so that paying any brokerage commissions isn’t a big deal. For some who pay brokerage fees which can cost up to $10, investing a larger amount means commissions eat up a smaller percent of your investment. Still, never invest more than you could safely lose.
The CDZ fund consists of 94 different holdings (as of end of Feb 2022), meaning by purchasing one share of this fund you are essentially buying a stake in 94 different companies. This greatly reduces your risk of losing a large portion of your money. Even if one of these companies go bankrupt, you will not lose nearly all your money. This is one good reason why ETFs are far safer than individual stock picks.
And, by being invested in 94 different companies, you are well diversified. Below is the current sector diversification for CDZ:
So your stock picking is all handled, and your asset allocation is also taken care of.
This ETF also pays dividends every month, which is something that can be enticing about certain stocks. When you’re getting payments coming to you every month it enforces the good habit of investing, since the more you invest, the more you’ll see coming into your accounts every month, which will compound monthly. The benefits of monthly dividends is probably more about the psychology of investing than about total returns, though.
CDZ has an MER (management expense ratio) of 0.66%, which is a commission they keep for managing your portfolio. While this may upset you, the mutual funds the banks will sell to you will have MERs of 1% to 2% at least. So you’re getting a deal by purchasing ETFs instead of mutual funds. In fact, mutual funds are generally not-so-good investments and will cost you A LOT of money in the long run in comparison to ETFs, in terms of fees.
CDZ has a dividend yield of 3.35% as of today (this will fluctuate with the price of a share, as it’s relative), and has paid a yield of 3.09% in the past 12 months. That means that if you had been invested in CDZ over the last 12 months, you would have seen 3.09% of that money come right back to you, for each month over 12 months, without having lifted a finger. This definitely creams the measly 1% interest you’d get from your savings account with your bank.
One important thing to consider though, is that while an investment today will return 3.35% in dividends, 0.66% of that will be subtracted from the share price as the management fee is taken.
Now let’s image we’ve invested $5, 000 into CDZ just to put things into perspective. With the share price at $33.33, we would have purchased 150 shares… if we are operating through a no-commission brokerage. So now we’re proud owners of 150 shares of CDZ, a portfolio consisting of Canadian Dividend Aristocrats, who’ve raised their dividends for the past five years straight. These are companies that appreciate and reward shareholders.
On a yearly basis, going forward with the current 3.35% dividend yield, you’d be receiving $167.50. So every month, by having stored your $5,000 into this fund, you’d be receiving $13.96 a month. You might be saying “That’s not a lot”, but neither is $5,000 for a full retirement. If you consistently reinvest these dividends and put away a little something every month, you’ll see this money grow exponentially, compounded monthly.
You can enroll in a DRIP (dividend reinvestment plan) program, which basically means all of the dividends which you’d receive (in this case $13.96) will automatically be reinvested into purchasing more shares, and you don’t have to pay a commission for this. This can be a good option if you don’t plan on purchasing frequently and if you don’t plan on purchasing other stocks with these dividends. This way, every two months or so, you’d have another share of CDZ, and you’ll get another dividend payment.
While this wasn’t my traditional post for the more experienced dividend growth investors who know what they’re doing already and pick their own stocks, I hope this helps at least one person in understanding a little bit about starting their passive dividend income machine. The hard part is starting, once you own those first couple of shares, you’ll probably find a passion for investing and want to learn even more – and as they say, knowledge is power, and in investing – knowledge is also money.
