When I first started investing in dividend paying stocks, I kept coming across statements like the one below to show how powerful dividend reinvesting is.
If you invested $5000 in (Insert a stock symbol) in 1970 and compound dividend received since, you'd have $(insert insane large amount of money).
I would always ponder why I didn't start investing in dividend stocks earlier. Just imagine what my annual dividend income would be like today, if I had started when I was in my early twenties, roughly 10 years ago. This is one of the reasons why I always enjoy reading articles from "younger" bloggers about their dividend investment journeys, bloggers like Henry at Living at Home, Dividend Mongrel, No More Waffles, and Lenny & Bert at Dividend Diplomats.
Now to put the above example into a bit of perspective...
If you invested $5000 in MCD on Dec 31st, 1970 and compound dividend received since, you'd have $2,142,857.14 as of December 10th, 2014. An annual return of 14.78%.
If you invested $5000 in JNJ on Dec 31st, 1970 and compound dividend received since, you'd have $1,106,666.67 as of December 10th, 2014. An annual return of 13.07%.
Data from http://longrundata.com/
Pretty decent returns for leaving your money in the stock market for 44 years don't you think?. This is a perfect example of power of compound interest. It's amazing that a 1.71% annual return difference over 44 years means a difference of $1 million dollar! This is why if you're investing in ETF's or mutual fund, management fee ratio (MER) matters!
Before Baby T was born, Mrs. T and I spent quite a bit of time planning how we want to invest on his behalf. As any parent would know, post secondary education costs in North America can be significant, so it's a good idea to start an educational fund as early as possible. This is where Registered Education Savings Plans (RESP) comes in. Opening up an RESP for Baby T and contributing $2500 each year was a trivial decision. By investing $2500 per year, the Canadian government will automatically contribute $500 each year for a lifetime limit of $7,200 thanks to Canada Education Savings Grant (CESG). We'd be dummies to say no to a 20% guaranteed return! Although the RESP decision was a trivial one, I had some concerns for deploying dividend growth investment strategy using Baby T's RESP account.
Limited annual contribution room
With only $2500 annual contribution room, this limits the number of companies that we can buy enough shares to enroll in synthetic DRIP with discount brokers. To enroll in synthetic DRIP for a Canadian blue chip stock like Fortis (FTS.TO), we would need to invest about $5000 first. For the dividend growth investment strategy to work fully, we want to start DRIPing right away and take advantage of the power of compound interest.
Withdraw timeline & rules
Since RESP is a savings plan for post secondary education, when the RESP beneficiary (Baby T) is ready to go to a post secondary institution, he will start withdrawing money from the account. If Baby T doesn't go to a post secondary institution right away when he graduates from high school, the withdraw can be delayed until he is 35. We can also transfer his RESP to his sibling (meaning we'd need to have another kid! Get to work!?), or we can collapse his RESP and pay taxes. Unfortunately, all these scenarios require selling of the principal. Since the main strategy for dividend investing is to live off the dividend income and never touch the principal, the idea of selling the principal makes me slightly nauseous.
Due to these concerns we decided to deploy passive investment strategy and invest in index ETF's. However I was not satisfied...
"Knowledge become power only when we put it into use."
With all my knowledge about power of compound interest, it would be a shame if we don't put this powerful force to work. For Baby T, and our future kid(s), Mrs. T and I want to create a legacy. What's the best way to fulfil this dream? For us, it means creating a dividend portfolio for Baby T. The idea is simple, open a in-trust account (note: this is a regular account), allocate some money, buy a handful of dividend paying stocks, and DRIP away for many many years. To enroll in full DRIP, share certificates for the desired company needs to be purchased and a bunch of paperwork needs to be filled out. It is also very likely that we need to deal with multiple transfer agents and there will be no one central place to check the overall portfolio. Not an ideal set up.
ShareOwner offers dividend reinvestment of fractional shares (full DRIP). Best of all, it is the only investment broker in Canada that allows the purchase of a specific dollar amount of each stock or ETF. The one-time brokerage fee is $40 per order, so if you place an order of 10 stocks or more, the commission is already cheaper than Questrade's standard $4.99 stock commission.
Before going further, we took a quick look at ShareOwner's list of eligible stocks and ETF's to confirm that the dividend paying stocks we have in mind are listed on ShareOnwer's purchasing and DRIP plans. We were happy to see that all the stocks I had in mind are listed. The tough decision was determining the total number of stocks to own.
The idea of giving Baby T a dividend portfolio is to provide him with more opportunities in the future. We believe that by having a passive income, this will open a lot of opportunities for Baby T when he becomes an adult. There are already a lot of plans being put into place on teaching Baby T about money, personal finance, and investing once he's a bit older (he's only 1 right now!). We will get him involved with his portfolio once he's a bit older to start the money education. The goal is to teach him to appreciate the value of having a dividend portfolio and having money working hard for him.
We decided to select 15 dividend growth companies. Since the timeline of the portfolio is 35+ years, we targeted high dividend growth companies. Below are our selections and reasons behind each selection.
BlackRock Inc (BLK)
BlackRock Inc is the company behind iShares ETF's. A lot of people buy iShare ETF's in their portfolios and owning BLK is a great way to profit from the recent ETF craze. Paying dividend since 2003, BlackRock has also been growing dividend at very significant rate. It has a 10 year annualized dividend growth rate of 32.6%.
Walt Disney Co (DIS)
Every kid loves Disney because the theme parks and the entertaining movies. Disney has done quite well the last few years and has increased its dividend at a 10 year annualized growth rate of 15.3%. I would love to bring Baby T to Disney World one day and tell him that he owns part of the theme park.
There always needs a way to distribute energy across North America and this is where Enbridge comes in. I see Enbridge as a very stable business with a wide moat. Enbridge has a strong dividend growth history, paying dividend since 1990 with a 10 year annualized dividend growth rate of 12.22%. Enbridge demonstrated the strong dividend increase history by announcing a 33% dividend increase recently.
Fortis is one of the Canadian dividend aristocrats, having increased dividend for 40 years straight. This is a company that every Canadian dividend investor should hold in their portfolio.
General Mills (GIS)
I picked General Mills simply because of its wide selection of cereal and yogurt brands that Baby T will become very familiar with once he's older. GIS has been paying dividend for 116 years uninterrupted and without a reduction. That's a pretty impressive history to me. On top of the impressive dividend streak, GIS managed to grow its dividends the last 10 years at an annualized rate of 9.95%.
Johnson & Johnson (JNJ)
Johnson & Johnson is yet another company that every dividend investor should hold in their portfolio due to the long history of dividend increases. JNJ has increased its dividend for 51 consecutive years and this trend will most likely continue moving forward. JNJ's 25 year annualized dividend growth is an impressive 13.07%.
Procter & Gamble (PG)
Just like JNJ, Procter & Gamble is a company that every dividend investor should hold in their portfolio considering PG has increased dividend for 57 years consecutively. I'm sure Baby T will be very familiar with P&G products when he gets older.
Smartphones have become something that is heavily integrated into our daily lives. Qualcomm has benefited from the smartphone revolution. With Internet of Things picking up, Qualcomm will continue growing its revenues and continue its dividend growth. Qualcomm started paying in 2003 and has a 10 year annualized dividend growth rate of 26.9%.
Royal Bank (RY)
Royal Bank is one of the big five banks in Canada with low PE ratio and good growth potentials. RY has paid dividends since 1870 and has continued to grow its dividend. Royal Bank didn't increase its dividends during the great recession but unlike many American banks that cut or suspended dividends, Royal Bank did not cut or suspend dividends during that period. Royal Bank has been around for years and will be around for many more.
Shaw Communication (SJR.B)
Shaw provides internet and cable services in Canada. This is a very stable business with not a whole lot of surprises. SJR.B has a monthly dividend distribution which allows Baby T to compound his portfolio at an even faster rate.
Suncor Energy (SU)
I wanted to have a Canadian oil company in Baby T's portfolio and settled on Suncor. With a 10 year annualized dividend growth rate of 21.98%, Suncor has very strong dividend growth history and I believe the Suncor board will continue to reward their shareholders moving forward.
Out of all 3 Canadian wireless carriers, I believe Telus has the highest future growth potential. Telus has paid dividends since 1999 and has a 10 year annualized dividend growth rate of 13.67%.
We decided to select TD Bank for Baby T's dividend portfolio because we use TD for our banking services. TD has paid dividends since 1857. Similar to Royal Bank, it has a long dividend growth history. TD has a 10 year annualized dividend growth of 10.16%.
A well known brand worldwide, Visa has been making money left, right, and centre. Visa started paying dividend in 2008 and has a 5 year annualized dividend growth rate of 45.93%. For long term investor like Baby T, Visa will supercharge his dividend income in the very near future.
Verizon provides wireless voice and data services in the US. Verizon is one of the biggest cellphone providers in the US and has paid dividend since 1984 with a 5 year annualized dividend growth rate of 4.82%. The growth rate isn't very high because the initial dividend yield is already quite high at 4.7%. I believe Verizon will continue growing and expanding its empire in the future.
With some capital reallocation and some help from Grandma & Grandpa T, we managed to contribut $12,000 into Baby T's dividend portfolio. The current forward looking dividend income is $323 which is a yield on cost of 2.69%. The current yield on cost is lower than your typical dividend portfolio but Mrs. T and I have constructed this portfolio for dividend growth with 35+ years of timeline set in mind. We expect the yield on cost to significantly increase over the next decade and will continue increasing as Baby T gets older.
We plan to create similar dividend portfolio(s) for our future kid(s) too. 🙂
What do you think about Baby T's dividend portfolio? Do you think creating a legacy by building a dividend portfolio to your kid(s) is a good idea?