Last week I shared our story on how we got started with dividend investing. After thinking more about how we got started, I began to wonder what we would do if we were to start dividend investing today. We didn’t get serious with dividend growth investing until 2011 and it has taken us 4 years to build a portfolio consists of 50 companies. Although some people say that having a portfolio exists of 20-30 companies offers enough diversification, I think it depends on each individual’s situation. Looking at our dividend portfolio, we don’t even own names like Colgate-Palmolive, 3M, Royal Dutch Shell, or Canadian Utilities. Because of this, we most likely will add a few more Canadian, US, and international blue chip dividend paying stocks to our portfolio. What if we only have a little bit of money? How to start dividend investing? Below is what I’d do if we were to build our dividend portfolio starting fresh.
How to start dividend investing – Scenario #1 – $1,000
If we only have $1,000 to start dividend growth investing today, we wouldn’t jump in and use all the money to invest in one single company. Unlike how we got started years ago, we wouldn’t put all our eggs in one basket. Having all $1,000 invested in one single company is simply too risky, it doesn’t matter even if you are investing in solid companies like Johnson and Johnson, Procter and Gamble, Royal Bank, or Fortis. To truly diversify we would invest in a low fee indexed ETF that focuses on dividend paying stocks.
Which ETF would we pick? I went through some top Canadian dividend ETFs in this post. After my thorough analysis, here are some dividend focused ETF’s that you may want to consider with $1,000:
Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY.TO)
Dividend Schedule: Monthly
Holdings: 75 Canadian dividend paying stocks. Top 10 holdings are Royal Bank (RY.TO), TD Bank (TD.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO), Enbridge (ENB.TO), TransCanada (TRP.TO), CIBC (CM.TO), Potash (POT.TO), Sun Life Financial (SLF.TO), and Cenovus Energy (CVE.TO).
BMO Canadian Dividend ETF (ZDV.TO)
Dividend Schedule: Monthly
Holding: 51 Canadian dividend paying stocks. Top 10 holdings are Potash (POT.TO), Thomson Reuters (TRI.TO), Veresen (VSN.TO), Telus (T.TO), Capital Power (CPX.TO), Northland Power (NPI.TO), Crescent Point (CPG.TO), BCE (BCE.TO), Inter Pipeline (IPL.TO), ARC Resources (ARX.TO)
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ.TO)
Dividend Schedule: Monthly
Holdings: 76 Canadian dividend paying stocks. Top 10 holdings are Bonterra Energy (BNE.TO), Exchange Income Corp (EIF.TO), Norther Property REIT (NPR.UN), Bird Construction (BDT.TO), Teck Resources (TCK.B), H&R REIT (HR.UN), Mullen Group (MTL.TO), Pan American Silver Corp (PAA.TO), Cenovus Energy (CVE.TO), IGM Financial (IGM.TO)
Each ETF has its portfolio strategy so it’s not a surprise to see a wide range of top 10 holdings. ZDV’s yield is higher but the top 10 holdings are more focused on higher dividend payers like Crescent Point and Veresen. CDZ is the only ETF that holds REITs. VDY has over 50% weighting on financial stocks.
Personally I would go with VDY because this ETF not only has the lowest MER, its top holdings are focused on some of the best Canadian dividend paying companies available. Furthermore, after reading many books by John Bogle, I believe in his ideology on index investing.
When you only have $1,000 in cash to invest, you really need to consider the commission fee. Canadian discount brokers typically charge anywhere from $4.99 to $9.99 for buying an ETF. Although this fee is less than 1% when you have$1,000 in hand, wouldn’t it better to not having to pay commission at all when buying an ETF? This is why I love Questrade whom offers commission free ETF trading (for buying only, selling still costs money, but you wouldn’t and shouldn’t be selling that frequently.
If you don’t have a trading account yet, you could open one with Questrade by clicking on this referral link and enter the offer code 335712213387087. You can receive from $25 to $250 of cash reward depending on your account size.
How to start dividend investing – Scenario #2 – $5,000
If we only have $5,000 to start dividend investing today, we would buy $2,000 worth of VDY first. This will provide immediate diversification on 75 Canadian dividend paying stocks. With the remaining $3,000 we would split them into three and buy shares of Fortis, Royal Bank, and Telus at $1,000 each. We use products of these 3 companies on a daily basis so it makes sense to invest in these companies. Fortis is a Canadian dividend aristocrat and has paid dividend since 1972, it also has increased dividend for 41 straight years; Royal Bank has been paying dividend since 1870 and has increased dividend for 4 straight years (it held the dividend payments during the great recession and didn’t suspend or cut the dividend); Telus has paid dividend since 1999 and has raised dividend for 11 straight years. Buying these 3 companies will get us a foot in financial, energy, and telecommunication sectors.
Combined all four purchases will give us a dividend yield of roughly 3.5%. Pretty solid start in dividend investing. Considering VDY, Fortis, Royal Bank, and Telus all have raised dividend year after year, the yield on cost will certainly be above 3.5% after a few years.
How to start dividend investing – Scenario #3 – $10,000
If we have $10,000 to start dividend investing, things would get a bit more interesting. First we would buy $2,000 worth of VDY and $1,000 each for Fortis, Royal Bank, and Telus like what we did in scenario #2.
We will contribute the remaining $5,000 to our RRSP and use the money to buy five US stocks at $1,000 each. The five stocks we would pick are Johnson and Johnson, Procter and Gamble, Target, Coca Cola, and Exxon Mobil. All five companies have been paying dividend for many decades and have raised dividend for many decades as well. There’s no reason why the five companies won’t continue increasing their dividends year after year. (Note: This is a simplified scenario as we’re assuming US to CAN is a 1 to 1 conversion). In this scenario we would get 3.19% dividend yield and we effectively diversified our portfolio exposure to international companies as well added exposure in the consumer goods sector.
How to start dividend investing – Scenario #4 – More than $10,000
If we have more than $10,000 to invest we would focus even more in US and international stocks. Dividend stocks like Apple, Cisco, Chevron, BHP Billiton, Royal Dutch Shell, and Wal-Mart would be great to add to the dividend portfolio. We would also add an low MER index ETF with international exposure. VXC and VUN from Vanguard are two great ETF’s to own. We would also add some more Canadian dividend stocks like Bank of Nova Scotia, Potash, Enbridge, and BCE, just to name a few. At this time we would also look into getting some REITs to further diversify.
The ultimate goal is to have roughly 20% in financial sector, 20% in energy and utility sector, 20% in consumer goods sector, 15% in technology sector, 10% in telecommunications, and 15% in REITs. The dividend portfolio exposure would be roughly 35% Canadian and 65% international. Roughly half of the international exposure would come from the US. This would be our ideal diversified dividend portfolio.
Unfortunately, our current dividend portfolio does not have such portfolio breakdown and this is what we’re working towards. We hope that one day we will be able to achieve these type of portfolio breakdown.
What about you? How would you start dividend investing if you were to start today?