Although we’ve been involved in dividend growth investing for a number of years, we are still learning. Mrs. T and I are always looking for ways to gain more knowledge on investment and personal finance topics. There are many ways to learn. Books and blogs are a great way to gain investment and PF knowledge. Finding like-minded people to have deep discussions is another great way to gain and share knowledge. Over the last few months some readers have asked us some questions on dividend growth investing. Here’s our version of a quick overview & tips on dividend investing with a Canadian perspective.
1. Good Dividend Books
Here are some books that are great to get you started on the dividend investing journey.
The Lazy Investor by Derek Foster
The Intelligent Investor by Benjamin Graham
The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller
2. Dividend stock allocation
Maximize your tax sheltered accounts like RRSP and TFSA first. With the recent announcement of TFSA contribution limit increasing from $5,500 to $10,000, we believe TFSA is now THE tax-sheltered account to utilize for dividend stock investment.
Update: The $10k increase was a one time event. Regardless, I believe TFSA is a very powerful tax-sheltered account that everyone should utilize.
Hold Real Estate Income Trusts (REITs) and income trusts in TFSA. This is especially important if you’re enrolled in dividend reinvestment plans (DRIP) since calculating your cost basis with dividends from REITs and income trusts can be quite complicated. Although I’m a math nerd at heart, I like to keep my life as simple as possible when it comes to tax time.
Hold US dividend stocks in RRSP to avoid the 15% withholding tax. It is a good idea to use a broker that offers both Canadian and US RRSP, meaning your RRSP account will hold cash in both Canadian and US currencies. This way you will receive US dividend in US currency rather than having it converted back to Canadian currency. Having an RRSP account that allows you to hold dual currency will allow you to avoid having to constantly deal with currency conversion.
Hold Canadian dividend stocks from Canadian public corporations that pay eligible dividends in a regular (non-registered) account for the enhanced dividend tax credit. Eligible dividends get much more favourable treatment compared to active income. So when we get taxed on dividends, the actual tax amount will be relatively small.
3. Invest in Canadian brands that you know or use
This seems to be a common concept when it comes to investing in general but we think the concept is even more important when it comes to dividend investing. Invest in a brand that you know or use. For example we see Royal Bank and TD Bank branches everywhere and have experience banking with both of them. Their stocks both pay dividends, so it’s probably a good idea to spend some time to investigate whether it’s worthwhile to own these stocks or not.
Based on this logic, I have hand picked top 10 dividend paying stocks that I believe have great brand loyalty and have wide moats that allow to remain competitive for many years to come.
4. Enroll in dividend re-investment plan whenever possible
Become a good friend with Compound Interest. It’s one of the most powerful friend you can have in this world. When it comes to dividend investing, enroll in dividend reinvestment plan (DRIP) will allow you take advantage of the power of compound interest. There are two types of DRIPs – full/regular DRIP and synthetic DRIP. We are enrolled in regular DRIP for Baby T’s portfolio and synthetic DRIP for our dividend portfolio.
5. Use Online Tools for research
Here are some excellent websites that we use to for stock research purposes
http://dripinvesting.org/ – excellent website for DRIP investors. You can get an extended list of US and Canadian dividend champions/all stars.
http://longrundata.com/ – excellent website for doing research on dividend growth history. I also like using its Dividend Reinvestment Calculator to reenforce the idea that DRIP is very powerful in the long run.
http://www.morningstar.ca – a great website for getting stock evaluation information.
https://ca.finance.yahoo.com/ – I use Yahoo Finance to find information like PEG ratio, return on equity (ROE), and other key company stats.
Graham Number Calculator – This is a neat calculator for finding the Graham Number for US stocks.
Value Ratio TSX60 – A good tool to see which Canadian stocks offer great value.
6. Have fun and Enjoy the journey
Don’t take dividend investment too seriously. Have some fun and enjoy the journey. Have some beer and watch a hockey game. Enjoy the Canadian outdoor, whether it’s snowing or sunny outside. We live in one of the best countries in the world.
Do you have any tips or online tools that you’d like to share?