I have been a long-time dividend investor, but 2020 was the third year in a row that I significantly underperformed the Canadian and US indices. Now I question my strategy. Specifically, three actions – Inter Pipeline Ltd. (IPL), Wells Fargo & Co. (WFC) and Altria Group Inc. (MO) – let me think I should just buy index ETFs rather than trying to hold a basket of dividends. payers. How do you know when to throw in the towel?
If that makes you feel better, my Hog Yield Dividend Growth Portfolio model also had a rough year. It generated a negative total return of 0.5% in 2020, behind the total return of the S & P / TSX Composite Index of 5.6%. The good news is that, even after a bad 2020, the Model Portfolio’s total return of 25.6% since its inception on October 1, 2017 still leads the S & P / TSX’s total return of 23.5% as of October 1, 2017. during the same period. (Total return figures include dividends.)
But let’s be honest: those returns pale next to the scorching performance of the S&P 500. Even in the midst of a global pandemic, the S&P 500 posted a total return of 18.4% in 2020. And the S&P 500 climbed 58, 7% since my portfolio model was launched in 2017.
So, is it time to throw in the towel on dividend investing? I do not think so. Unfortunately, you’ve stepped on a few landmines in 2020: Inter Pipeline and Wells Fargo both cut dividends, and the Altria Group’s share price fell even though the company increased its payout. But many US and Canadian dividend growth stocks are performing well in the double digits. Examples include Microsoft Corp. (MSFT), Apple Inc. (AAPL), Brookfield Infrastructure Corp. (BIPC), Brookfield Renewable Corp. (BEPC) and Innergex Renewable Energy Inc. (INE). (Full disclosure: I personally own BIPC, BEPC, and INE.)
Rather than forgoing investing in dividends, consider adopting a hybrid strategy. You could, for example, own a core group of dividend-paying stocks, including Canadian banks, utilities, power producers, and telecommunications. These stocks are on the conservative end of the risk spectrum, pay above average returns and increase their dividends steadily, giving you a growing income stream.
To add some diversification, consider investing in one or more index ETFs. Information technology stocks have been a huge driver of the S&P 500’s performance, but many of these stocks do not pay dividends, which is one reason dividend strategies have lagged behind these days. last years. By investing in an ETF that tracks the S&P 500 – which has a 28% weight in tech stocks – you’ll gain exposure to this important sector, as well as hundreds of other companies.
In my personal portfolio, I have a mix of individual dividend growth stocks and Canadian and US index ETFs, and I have been pleased with the results. Of course, if you don’t want to own individual stocks, there’s no reason you can’t go for a portfolio made up entirely of ETFs.
I have an unregistered brokerage account in the high six digits that contains 12 stocks. Currently, however, three companies – the Canadian National Railway Company (CNR), WSP Global Inc. (WSP) and Brookfield Renewable Partners LP (BEP.UN) / Brookfield Renewable Corp. (BEPC) – represent 43% of my holdings. I still love all of this and would take a huge capital gain if I sold. My question: How much is too much in a wallet? Would it be safe to take action? I’m thinking of donating BEP.UN / BEPC to charity next year as a way to rebalance.
If you were to start a portfolio from scratch, would you allocate 43% of your capital to just three companies? I guess you wouldn’t. This would violate the basic principles of diversification, the purpose of which is to control your risk.
However, your situation is complicated by the fact that you would be subject to capital gains tax if you reduced any of your positions to achieve better diversification.
With that in mind, here are a few things to consider: How much tax would you pay if you sold some of your bigger titles? (Remember, capital gains are taxed at half the regular income rate.) Do you have any unused capital losses from previous years that you could carry forward to offset a portion of the capital gains? Do you expect to be in a lower tax bracket this year, or in a year to come, when triggering a capital gain would result in a less severe tax cut?
There is an old investment adage that says you should ‘let your winners run’. If your stocks continue to rise, following these tips will of course work very well. But if one or more of your businesses stumbles, you might wish you had rebalanced. At the end of the day, you will have to decide taking into account your confidence in the companies and your comfort level in the face of the risks of not rebalancing.
As for donating some of your BEP.UN / BEPC shares to charity, I think that’s a good idea – especially since so many people are in need these days. (Note that although Brookfield Renewable is a company, it has two types of shares.) When you donate listed securities that have appreciated in value, you benefit in two ways: you avoid capital gains tax and you receive a charitable donation receipt. Depending on the province or territory, your donation would produce a tax credit of at least 40% of the fair market value of the shares. (This assumes you’ve already made $ 200 in charitable donations, as the charitable tax credit is significantly above this threshold.)
Send your questions to [email protected]. I cannot respond to emails personally, but I choose certain questions to answer in my section.
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