Dividend Growth Investor Q&A series – The Dividend Guy Blog

Although we can be financially independent if we choose to, we decided to postpone FI by building up our dividend portfolio so we can one day live off dividends. We randomly set an FI target of 2025 years ago but we aren’t too hung up on actually becoming FI by 2025.

The reality is that we are getting very close to becoming financially independent and living off dividends. Therefore, I have been doing more financial independence planning and talking to other like-minded people to learn from their financial independence journey. 

Today I asked Mike from The Dividend Guy Blog who is a dividend enthusiast to share his knowledge by answering questions related to dividend investing and financial independence. 

Q1: Welcome to the blog Mike. Please tell us a little bit about yourself.

A1: I’m the type of person that goes “all in” on everything I do.

At the age of 35, I rented my house and took a sabbatical year from my private banker job to go on a 1-year road trip all the way down to Costa Rica with my wife and kids. When I came back in 2017, I quit my job to work full-time on my online business. At that moment I came to realize that the only real currency is time and I wanted to live now instead of waiting for the time I retired.

Since then, I have used my work schedule flexibility to work anywhere as long as I have my laptop and an internet connection to allow me to book one big trip per year and to spend as much time as possible with my wife and children.

Q2: What sparked your interest in investing originally? What got you started on your financial independence journey? 

A2: I always loved playing around with numbers. I started my bachelor’s degree studies to become an accountant, but I quickly got bored with debit and credit items. I switched to marketing and eventually found a summer job in the financial market. I spent my summer clearing options and futures trades. This is where I discovered how fascinating the stock market was and that we can actually trade pork bellies!

After completing my bachelor’s degree, I secured a position at National Bank in a partnership department where we handled investment loans for Power Corp businesses (mostly Investors Group back then). After 2 weeks, I applied for a line of credit of $20,000 and borrowed the entire money to start investing. I didn’t know much about investing back then, but I got lucky to start in 2003 where a monkey could have been successful.

My parents declared bankruptcy when I was 14, and I swore to myself that I would never allow that to happen to me. Therefore, I worked 30-35 hours a week during my bachelor’s degree studies, and I started an online gig when I started working at the bank. I wanted to make a lot more than my expenses in order to have the ability to save and invest.

Q3: Why dividend investing over indexing? What are some key factors that made you like dividend investing over different investing strategies?

A3: As I mentioned earlier, I started investing with little knowledge and no strategy in 2003. As the years went by, I got busier. In 2010, I was a financial planner and I had just finished my MBA on top of having two kids already. I didn’t have time to do swing trades and fool around (even though it had worked incredibly well).

I grew an interest in a simpler, yet highly effective strategy called dividend growth investing. I was reading many investing blogs back then and one caught my attention: The Dividend Guy Blog.

My online sideline was about writing on a financial blog with one of my friends. We were making money selling advertising, mostly selling paid links to increase other sites ranking on Google.

Being in that business, we quickly realized that we could also buy blogs at a cheap valuation of around 18 to 24 times the monthly revenue.

We started building a personal finance blog portfolio and in 2010, we bought The Dividend Guy Blog which I have authored since then.

This strategy made a lot of sense to me as I wanted to remain in control of my investments. As opposed to investing in ETFs where you simply have to believe you follow the right index or the right strategy, I prefer to know exactly what I own and why I own it. Therefore, when one of my stocks is down, I know why and I can take action. By definition, a dividend grower is a company increasing its dividend yearly. Dividend growth is a direct consequence of a company with a strong business model and robust balance sheet generating predictable cash flow. In other words, by selecting companies showing constant dividend increases, I am picking from a basket of the most solid companies on the market.

Sure, I can make mistakes (more on that later!), but most of my holdings are thriving businesses. In general, those companies are better equipped to face economic crises and react with less volatility than an index ETF.

Don’t get me wrong as index investing works well and it is a great strategy. However, I’ve been able to invest with more conviction in companies I understand than trusting someone else to do the work. It gives me confidence and I don’t second guess my decisions, even when the market goes down. I stay invested as I strongly believe in my strategy. As a bonus, I’ve been able to generate higher returns than an ETF portfolio replicating my allocation of roughly 50% Canadian equities and 50% US equities.

Q4: How much dividend income does your dividend portfolio generate each year? Can you share with us your holdings?

A4: As of July 22^nd, my entire portfolio is worth $480K and generates $9.4K in annual dividend income. You can see that I focus on low-yield, high-dividend growth companies.

Here’s my top 12:

Tawcan: Very cool we have similar holdings in our dividend portfolio.

Q5: You recently started a Smith Manoeuvre investing portfolio. Walk me through your rationale for using the Smith Manoeuvre strategy, especially in a high interest rate environment.

A5: I stopped adding capital to my portfolio in 2016 to first travel, and then, I reinvested all my money into my membership website (we could say it’s my biggest investment now).

Starting a Smith Manoeuvre a few years ago was a way for me to invest new capital for the first time while I kept investing most of my money into Dividend Stocks Rock.

I see this portfolio as a fun experiment with a long-term horizon. I don’t believe interest rates will remain at 6-7% on my line of credit for the next 30 years. Therefore, it’s a play on buying high-quality companies now, paying a little bit more interest and watching them surge over decades.

It’s also a great way to automate the addition of capital to a portfolio.

Q6: If you were to summarize your philosophy of dividend investing, what would that be? 

A6: I like to combine a strong investment thesis (the story of why I like a company) with a robust dividend triangle where revenue, earnings per share, and dividends increase at a similar pace over the past 5 years.

For me, dividend growers give me more money in my pocket due to strong market performance with less stress (lower volatility).

Q7: You started Dividend Stocks Rock service many years ago. Congratulations on having huge success in this business. How are you and your team helping members to be better investors?

A7: Some people think investing services are all about investment returns and outperforming the market. I disagree.

At DSR, we focus on empowering investors so they can invest with conviction and enjoy their retirement. Our goal is to provide all the tools and the necessary education for investors to manage their portfolios with a high level of confidence. After all, when the market crashes, doubt and fear are your worst enemies. We are here to support our members and to help them focus on what matters to reach their financial objectives.

I particularly love hosting private monthly webinars where we have the opportunity to answer all my members’ questions. Our platform enables investors to build their portfolios and get a quarterly follow-up on all dividend payers’ quarterly earnings.

It makes it easy to buy and sell stocks while staying above the market noise.

Q8: Tell me about some of your investing mistakes. What have you learned from these mistakes?

A8: I’ve made plenty! Here are my two “favorite mistakes”:

#1 In 2006, I lost ~50% of a major investment I made that was meant to be part of my cash down payment for a house in a promising penny stock (a mining company). I got that “tip” from a friend whose father was friends with someone who worked there. As I mentioned earlier, I didn’t know much about investing when I started!

Lessons learned:

a) Don’t make short-term plays even if they look like “slam dunks”.

b) Don’t make gambles on what a “friend of a friend” tells you about a stock. Write down a robust investment thesis or don’t buy.

Ironically, I hesitated between two “promising penny stocks”. While the one I picked dropped by 50%, the other one jumped by more than 200%!

#2 I lost ~50% on Algonquin Power (AQN.TO) after the company failed to manage its variable debt and eventually slashed its dividend in 2023.

Lessons learned: while holding Algonquin, I had given too much importance to my investment thesis (the narrative around a company aggressively growing by acquisitions while greening its assets). I failed to sell on a weaker dividend triangle, thinking the narrative was strong enough to compensate for weaker financial metrics.

Tawcan: I learned some important lessons with Algonquin too!

Q9: Given the high inflation rate and ever rising interest rates, are you concerned that companies like Canadian banks, telecoms, and utility companies won’t be able to pay dividends? Why should someone invest in dividend paying stocks now when they can invest their money in safe 5% GICs?

A9: I think it’s important to have a long-term mindset and invest accordingly. I’m not a fan of sector rotation where investors would buy more of a specific sector and sell others to adjust their portfolio to the current state of the economy.

Interest rates will eventually go down (we got the first interest rate cuts earlier this year), but they could go back up in the future.

During higher interest rate periods, Canadian banks, telecoms, utilities, and also REITs will be affected in general. However, it’s better to review each company’s balance sheet and ability to pay their debt service costs.

While Algonquin had to cut its dividend and sell assets due to a large exposure to variable interest rates, Hydro One and Fortis kept on increasing their dividends.

Most Canadian Banks show a payout ratio of around 50%, so I’m not too worried.

In regard to investing in GIC’s or not, it’s a question about asset allocation and risk tolerance. If you move your money away from the market to get a “good deal” on the interest rate with the intent of, eventually going back to the stock market, you will likely leave a lot money on the table.

For example, many investors asked if it was better to sell their stocks toward the end of 2022 to move their money at 5%. While the GIC offered 5%, being invested in the stock market in 2023 and 2024 offered higher returns.

Therefore, the key is to determine your volatility tolerance. There is nothing wrong with seeking stability and going for bonds and GICs, but it must be part of a long-term strategy.  An “I go for the highest interest rate or yield” strategy is not an effective long-term strategy.

Tawcan: Good point on GICs, that’s definitely one of the reasons why we don’t invest in GICs.

Q10: Has your investing strategy evolved over the years? What are some of the challenges you have faced? Do you see your investing strategy evolving as you move forward? 

A10: I’ve been a dividend growth investor since 2010 and I don’t see what could make me change my strategy in the future. However, I’ve made a few iterations along the way.

Between 2010 and 2012, I’ve refined my dividend growth strategy. At first, I had a minimum requirement yield of 3%. This quickly disappeared as I realized that many companies I liked offered a lower yield.

I then came up with the dividend triangle (the study of 5 years history of revenue, EPS and dividend growth) as my main focus on financial metrics.

Following my losses on Algonquin and Sylogist, I’ve added more importance to matching my investment thesis (the reasons why I like a stock based on a qualitative analysis) with the financial metrics of the dividend triangle.

When a company’s investment thesis isn’t validated by a strong dividend triangle, I then sell and move on.

Since I keep a simple investing strategy with only a few rules, I haven’t faced big challenges. When I’m in doubt, I just get back to my rules and ignore the noise.

I wasn’t able to avoid all my mistakes (I made some pretty bad picks over the years), but the focus on my strategy enabled me to keep a great batting average and achieve my investment goals.

Tawcan: we as investors will always make mistakes. The keys are to learn from your mistakes and don’t keep making the same mistake.

Q11: You are a hockey fan. What’s your outlook for the Montreal Canadian for the 2024-2025 season? 

A11: The fan in me would like to see the Canadiens fight for the playoffs this year. But the manager in me would like to see the Habs keep all their promising defensemen (Hutson, Reinbacher, Mailloux) within the AHL in Laval and let the Canadiens sink for one more year.

They could then trade Savard and Matheson for a good return (especially Matheson), draft top 10 and get rid of some bad contracts. In 2025-2026, Demidov will join the team and the young defensemen will be ready to make the big move.

Q12: Tax planning is very important when you start living off dividends or start withdrawing from your investment portfolio. What’s your withdrawal strategy to minimize taxes? Do you have an early withdrawal RRSP strategy? 

A12: That’s a very interesting question as there are many good answers. Most of my portfolio is in an RRSP or a LIRA. Therefore, I will be stuck paying taxes on my withdrawals.

I don’t plan on withdrawing money early from my retirement accounts as I prefer to let that money compound tax-free. I also don’t plan to stop working… maybe ever. I will slow down, but I’m already living a “retirement life” where I do what I love (I wake up on Sunday mornings to jump on my computer) and I have all the time to do other things too like travelling. If I could maintain this lifestyle until I’m 70+, I’ll be super happy.

Since I have invested all my money in my business since 2017, I will be able to combine a part of my “online income” with my RRSP/LIRA to create my retirement income.

In the end, I know I’ll be paying taxes on my income but I’m okay with that. It’s good to be able to give back and pay our share as well. Some people need support.

Q13: Please provide one Canadian dividend stock and one US dividend stock that should be fundamental stocks in everyone’s portfolio. Please provide your rationale. 

A13: On the Canadian side, I’ll go with Alimentation Couche-Tard. The company counts on multiple organic growth vectors such as Fresh Food Fast, pricing & promotion, assortment, cost optimization, and network development. It’s also an acquisition machine. Management has proven its ability to pay the right price and generate synergies for each acquisition. ATD exhibits a solid combination of the dividend triangle: revenue, EPS, and strong dividend growth. ATD has faced many challenges in the past regarding regulations and economic environment changes. They will be able to handle the inevitable shift toward electric vehicles.

On the U.S side, I’ll go with Visa (it could be Mastercard too!). V’s key to success was building the widest and most secure network in the transfer of funds business. Visa partners with major financial institutions across the world, and customers pay a commission for each transaction. As there is a clear trend favoring electronic payments, Visa has already established its network, allowing it to benefit from this strong tailwind.

Visa is one of the few companies that remain insulated from inflationary and macroeconomic concerns thanks to its balanced exposure to payment categories. Visa is well positioned to thrive in a wide array of scenarios. Its business model is a toll booth that everybody uses and everybody pays into as well.

Q14: Related to the previous question, what are five dividend stocks you believe you can hold forever? And why? 

A14: The large majority of the stocks in my portfolio are held thinking I will hold them for decades. Unfortunately, I know I must monitor them quarterly to ensure that the business keeps on going in the right direction as shown by a strong dividend triangle.

My highest conviction stocks are as follows:

Apple: Apple can count on an impressive brand recognition built around an ecosystem of products. Once you get in, it’s “hard” to get out! With such cash flow generation abilities, Apple can afford to take its time to study the market, identify opportunities and enter them with high-quality products and be successful without being the first mover.

Alimentation Couche-Tard: for reasons mentioned already.

National Bank: I worked at NA for 13 years so maybe I’m biased, but the dividend triangle doesn’t lie. NA’s diversification (only 50% of its revenue comes from classic banking activities such as savings and loans) and it’s focus on growth (through capital markets, wealth management and now acquisitions!) will place them in a very solid position going forward.

Microsoft: Similar to Apple, Microsoft’s robust balance sheet and cash flow generation ability enables it to reinvent its business model and create new growth vectors by seizing opportunities. 7-8 years ago, it was Azure with the cloud business. Today it’s AI. Tomorrow it will be something else. MSFT’s strong bond with corporate America has helped create a very sticky business model.

Visa: for reasons mentioned already.

Tawcan: Solid picks, we own all of these except Microsoft. But we do own Microsoft through XAW and QQQ.

Q15: There are a lot of debates on which is superior, dividend investing vs. index investing and living off dividends vs. 4% withdrawals. What are your thoughts on this topic? 

A15: Ironically, we all debate with the same goal in mind: retire stress-free. Therefore, the best strategy is the one what helps you invest with conviction and live a happy retirement. Dividend growth investing works just as index investing works too! Plus, there is nothing wrong in doing a combo with a core portfolio with ETFs and add dividend growth stocks around it.

Since I prefer to be in control and know what I own, I went for building a stock portfolio. Selecting dividend growers means selecting thriving companies that can grow their business while sharing the wealth with their shareholders.

My portfolio’s yield is around 2%. I will go for a combination of selling shares and cashing my 2% dividends at retirement. To avoid selling shares at a bad time in the market, I will have a 3 years cash reserve invested in a 3-year GIC ladder. On a good year (e.g. my portfolio is up), I’ll sell shares and on a bad year (negative return on my portfolio), I will use the cash reserve.

My advice to anyone would be to find a strategy you understand and feel comfortable with. Then, you shut down the noise and stick to it.

Q16: Do you have any advice for someone who is just starting their dividend investing journey or someone like us who is planning to live off dividends one day? 

A16: Keep things simple but effective. You don’t need to track 53 financial metrics and use 3 excel spreadsheets to calculate a company’s value and entry point. What you need is a clear and simple strategy that works throughout time (that’s why I focus on dividend growers).

Then, the real secret of achieving your financial goals is to pour money into that strategy and stick to it. The younger you are and the more money you put to work early, the faster you benefit from compounding interest

I worked 2 jobs in my 20’s. I made sure I maximized my RRSP contribution on top of my pension plan. That enabled me to build a nest egg that is sufficient to ensure a decent retirement. I was then able to travel and put all the extra money into my business.

During my 20’s I made plenty of mistakes, but the power of compounding and sticking to my plan did the hard work and greatly compensated for those bad investments.

Q17: Any final comments you’d like to share with us to wrap up this Q&A? 

A17: If I may, I know a lot of your readers will raise an eyebrow (or two) when they read about me being a dividend growth investor with such a low yield. They would likely think it’s only good for people in the accumulation phase and that strategy doesn’t work at retirement.

I’d like to invite your readers to download my free guide “Dividend Income For Life” where I show how you can use this strategy at retirement and that’s actually a lot safer than focusing on 5%+ yields to fund their retirement.

Q18: Finally, which team will win the Stanley Cup this upcoming season? 

A18: I can’t believe the Panthers won this year! I think we will see the Oilers back in the finals against the Rangers in 2025.

I’ll put a $2 on the Oilers since their team hasn’t changed much during the offseason and they added a little bit more offense.

Tawcan: Go Canucks go!

Dividend Growth Investor Q&A series – Wrapping it up 

Thank you Mike for taking the time to answer all the questions. I have learned a few things via this interview. This is why I enjoy conducting the Q&A series, because regardless where you are at on your investing & FI journey, you can always learn from other people. 

Stay tuned for more Q&As with other dividend growth investors.