Dividend Growth Investor Q&A Series – Dividend Earner

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 are getting pretty close to this goal so lately I have been doing more financial independence planning and talking to people ahead of us on the FI journey.

The FIRE community and the dividend-investing community are two very supportive communities. I have had opportunities to connect with like-minded people across the globe and met many of them in person. I enjoy meeting up with like-minded people and just able to talk and discuss FIRE and investing for hours.

Today I asked Dividend Earner, who is from the greater Vancouver area, to share his knowledge by answering various questions related to dividend investing and financial independence retire early. 

Q1: Welcome to the blog Dividend Earner. Can you tell us a little bit about yourself? 

A1: Long time software developer and financial aficionado. Money was always a topic of conversation at the table when I grew up as it pertains to investing, real estate, and entrepreneurship. All of this is due to my father having his own business.

It built two skill sets early on in the entrepreneurial and investing space which I have applied not long after I started a family.

Q2: You reached $1M in portfolio value in 2019 (congrats!). What’s the next milestone for you? 

A2: Well, I would like to say $2M but that just happened this past December. Dividend growth investing did its magic plus my saving rate.

The next milestone I set for myself earlier this year was doubling my portfolio. I think I was at $1.8M when I set the doubling goal over the next 5 years. Yes, I am setting a goal within a timeline which implies a solid rate of return.

Q3: What sparked your interest in dividend growth investing originally? And what got you started on your financial independence retire early journey? 

A3: My parents were retired and living from their portfolio with dividends. As such, I worked to emulate that. 

However, after a few years, I realized I was building the portfolio of a 70-year-old retiree instead of a younger adult with many years ahead of retirement so I switched from the simple dividend income idea to dividend growth investing.

I find it simpler to assess stocks that pay a dividend so I stick primarily to dividend paying stocks.

To be clear, I am not really trying to retire early but rather to live according to my rules and maintain the lifestyle I have.

Q4: What attracted you to dividend investing over other investment strategies like index investing and growth investing? 

A4: Index investing wasn’t very popular just yet. Primarily, the 8% return on the TSX is sad and not of interest to me. I have a lot of money invested in the US and I do beat the Canadian index. 

I might not be always beating the S&P 500 but I am not interested in switching to index investing.

Index investing is great over the long term due to overall averages but not in the short term and I don’t have that much time to rely on indexes to prop my portfolio and switch it to income.

My kids are all indexing. They have 30 years and they index with the S&P 500.

Q5: How much dividend income does your dividend portfolio generate each year? Can you share with us your holdings?

A5: It’s all public on my website. The dividend income plus the holdings. 

I generate just under $40K in dividend income right now and it will probably go down as I make adjustments to double my portfolio in the next 5 years. 

The stocks I need to double don’t pay much in dividends sadly, but that’s just the way it is.

Q6: You’re still working, is the goal to retire early once you hit your retirement number of $1,777,777? Or has that plan changed & evolved over time? 

A6: I thought reaching that number, which I have surpassed ahead of 50 years old, would mean I could stop but the reality now is that the “Bank of Dad” needs to see how it can set up the now adult kids with a place somehow as rent in big cities just eat up way too much of a young adult’s income. 

There is a massive imbalance. When I was their age, I paid 30% of my gross income towards rent for a 1 bedroom apartment in downtown Vancouver near Robson and Grandville. Today, they can barely get a room for that ratio in the suburbs.

I also don’t really have enough to keep me busy yet outside of work. I am instead taking more time off and in some cases unpaid time off. It’s a transition that will take time as I have decided to work for at least another 5 years.

Q7: If you were to summarize your philosophy of dividend investing, what would that be? 

A7: There is a big difference between building a growing portfolio and having an income portfolio. If you want income, you compromise on growth and if you want growth, you compromise on income. You cannot have both so you need to really understand your goals and be clear about how you will achieve them.

The consequences of how you approach it is how much money you need to save which means how many years you work for.

Q8: Are you using leveraging to build your dividend portfolio? What made you decide to create a leveraged portfolio?

A9: I just started a leveraged portfolio separate from the main portfolio back in September. I am putting the dormant money in my home to work. 

I pay 7% interest which freaks out anyone who thinks it needs to be covered by the dividend income which isn’t the case.

I have outlined it all under the leveraged portfolio section on the blog. The interest rate isn’t what people should be worried about, it’s their nerve and conviction. 

Tawcan: You can also check out Dividend Earner’s dividend portfolio here.

Q10: Over time, you have shifted your dividend portfolio to invest mostly in US dividend paying stocks. Why did you do this? 

A10: I switched nearly all my RRSP to US stocks when the Canadian dollar was at par and over time I did the same with the spousal RRSP. 

Since then, I started adding US dividend stocks in my TFSA. They are dividend growth US stocks with a 1% yield so the 15% withholding tax is negligible. 

Tawcan: Per my calculation, it does make sense to hold US growth stocks in TFSA over the long term. 

Q11: 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? 

A11: No specific plans here just yet. The tax rates are fixed so when it comes to it, it’s about doing the math and being diligent about the withdrawals.

Tawcan: You might want to consider this RRSP early withdrawal strategy.

Q12: Has your investing strategy evolved over the years? What are some of the challenges you have faced? Do you see your investing strategy evolve moving forward? 

A12: I started with the usual dividend investing with banks, utilities, telecoms and so on … Then during a stable market, I realized that those stocks weren’t growing that much. They did not keep up with the S&P 500.

It was about that time when I started reading about indexing and the simplicity so I decided that I needed to beat the TSX index at least. I also got really fed up with the Canadian Dividend Aristocrats that increase the dividend by 1 cent per year just to stay included…

That led me to stumble upon a strategy by a firm where they screened their investments by focusing on stocks with 10% dividend growth on average over 10 years. I started using that and found some really good holdings this way and slowly switched my portfolio to stocks matching those.

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: It’s not possible. My conclusion is that you can’t really have the same portfolio during the accumulation period compared with retirement. The goals are different as to how the portfolio is used even though it’s to fulfill financial independence.

I am not sure I can hold a stock forever either as forever is 40 to 50 years and the business cycle of a company changes a fair bit (excluding a few). I think every recession, or large economic cycle, you want to review and assess. That seems counterintuitive but it’s about business in the end, and the business world changes every now and again.

The concept of buy and hold forever is so flawed…

Q14: Can you go over the parameters you look for when evaluating dividend stocks? How do you determine which one you should buy on your list?

A14: This has evolved quite a bit. I started as an investor playing defense and now I play offense. Nothing fancy though …

• The business needs to be a tollbooth type of stock where you have an annual membership, subscription, or necessary ongoing need for the product.
• The stock needs to have 10 years of dividend growth.
• The stock needs to have 10% annual dividend growth or thereabout.
• I compare the current yield against the 5-year yield to assess valuation.
• I filter on the 5-year and 10-year total returns where 5-year needs to be over 100% and 10-year should be over 200%

It usually leads to a small number of stocks.

Q15: 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? 

A15: Someone who is starting should start by building $100K in VFV first and see if they can resist the gambling temptation or the prediction of markets. 

Once they reach $100K, then they should really assess if they can do better than VFV. 

Hopefully, they have established some investment parameters to go by.

For those planning to live off their dividends, the biggest thing is to know that the largest nest egg is the best for dividend income when it’s time to withdraw, until then, the dividend income doesn’t mean anything (even if I report it monthly as a journal, it’s meaningless). In retirement, you can easily get a 4% yield and shift your portfolio if needed.

Q16: Any final comments you’d like to share with us to wrap up this Q&A? 

A16: The most important advice I can share is to know your annual rate of return. It’s the most critical metric to understand your trajectory to financial independence. 

If you cannot beat the index after a couple of years, time to rethink your strategy. Very few investors share their annual rate of return – why do you think that is?

The next point to consider is that you only need the income in retirement, don’t sweat the number during the accumulation years. My yield is just around 2% … I can easily double the yield but at the cost of my total growth.

Dividend Growth Investor Q&A series – Wrapping it up 

Thank you, Dividend Earner for your insight. You definitely have a different view than many dividend growth investors – focus on growth during the accumulating phase then shift to dividend income later when needed. Considering total return, this view does make a lot of sense, however.  

For me, it’s always interesting to get different points of view and see what I can learn to fine tune our overall investing strategy.

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