The Pros and Cons of Dividend Investing

My latest MoneySense Retired Money column has just been published, which you can retrieve by clicking on the highlighted headline: The Pros and Cons of Dividend Investing.

As with most of the Retired Money articles I write for the site, the piece looks at dividend investing from the perspective of someone in their 60s who is nearing retirement or semi-retired, as well as full retirees in their 70s.

It notes there are two major schools of thought on income investing.

In his book, You can retire sooner than you think, author and financial planner Wes Moss makes the case for retirees 60 or older having 100% of their portfolio in income-generating vehicles: whether interest, dividends, rental income from REITs or other securities: “Everything should be paying you an income from age 60 on.”

But there is a “total return” camp that argues total returns are what counts, whether generated by capital gains or cap gains combined with a growing stream of dividend income. In his series of “Stop doing” blogs, Toronto-based advisor Steve Lowrie argued investors should Stop chasing dividends.

One of the most romanticized ideas in personal finance?

Also in the total-return camp is PWL Capital portfolio manager Benjamin Felix, who tackled this in a Q&A column where a young Gen Y investor asked how he could create an all-dividend portfolio so he could retire early. Felix has said dividend investing is “one of the most romanticized ideas in personal finance”—citing a 2013 study by Dimensional Fund Advisors (DFA) that found 60% of U.S. stocks and 40% of international stocks don’t pay dividends, plus the fact that Warren Buffett declared dividends should not matter in making great investments. So, he concluded, an all-dividend approach would lead to “poor diversification.” Felix also dispelled the misconceptions that dividends are a guaranteed source of returns, offer protection in down markets, and that companies that grow their dividends necessarily beat the market.

Dividend Stocks or ETFs and Asset Allocation Funds?

For years, fee-only financial planner Robb Engen described in his Boomer & Echo blog (and sometimes here at the Hub) how he believed in investing exclusively in dividend stocks, preferably consistent dividend “aristocrats” with a long record of paying and raising their dividends. But four years ago, he reached a personal epiphany in favor of pure indexing. In a blog he related how he sold 24 individual dividend-paying stocks and replaced them with just two Vanguard index funds.

Today, he is keen on the new asset allocation ETFs pioneered by Vanguard, BMO and iShares. For retirees looking to generate income (dividend or otherwise), he is partial to the classic 60/40 stock/bonds mix of the Vanguard Balanced Portfolio ETF (VBAL/TSX). A major reason is  “it handles the rebalancing for you. No need for a retiree to be in 100% equities so VBAL is completely appropriate and gives some market exposure while smoothing out the volatility in case markets tank.”

For more insights on the pros and cons of dividend investing, click on the MoneySense link at the top of this blog.