Thursday, June 23, 2016

Five Common Mistakes Dividend Investors Make - My Self Assessment

My favorite newspaper columnist who covers the world of dividend investing is The Globe and Mail’s John Heinzl. Last Wednesday in his ‘Yield Hog’ column, John presented Five Mistakes Dividend Investors Make. Since critically assessing my performance as an investor can only help me improve, I thought reviewing how often I make the five mistakes John pointed out in his recent column would be a beneficial exercise.   

1.       Focusing Solely on Yield

Focusing solely on dividend yield at the expense of dividend sustainability and growth is perhaps my biggest challenge as a dividend investor. Most screens I run to identify potential investments include a minimum dividend yield of 3%, thus limiting potential higher dividend growth companies. Additionally, by only focusing on two metrics of portfolio performance (forward expected dividends and weighted average dividend growth rate), I tend to shun dividend stocks with better growth trajectories in favor of current income. In order to compensate for my preference for a higher initial yield, I make a special effort to analyze the sustainability of a company’s a dividend payment in order to avoid dividend cuts. Despite the above mitigant, until I start assessing my portfolio’s performance by total return, I freely admit to focusing too much on dividend yield at the expense of dividend growth.

Self-Assessed Grade = D

2.       Selling Too Early

Even though I claim to be a long-term investor, my actions sometimes prove otherwise.  Through the first half of this year, I conducted six short term trades earning a profit on each. However, each of the company's shares I bought and sold are now selling at a higher price than when I closed my position. In the past, I sold positions in Walgreens and Home Depot after they had grown to prices that I estimated to be unwarranted given their earnings multiples and growth rates. Although selling too early is a weakness I am well aware of, and I feel that I am improving in this area, it remains tempting to make a quick profit in the hope of buying back into a great company at a later date. 

Self-Assessed Grade = C-

3.       Avoiding Tax-Sheltered Accounts

Despite the many mistakes I make as an investor, I routinely maximize my investments in tax-sheltered accounts. When I report on my progress toward my 2016 goals later this month, my greatest achievement will be contributing the maximum amount to my TFSA and RRSP, and my son's RESP. With the exception of shares of Riocan REIT I hold in my unregistered account, I also manage to be incredibly tax efficient with two Canadian REITs in my TFSA, and all my US stock holdings in my RRSP. The accountant in me shines through in this area in order to avoid and delay paying unnecessary taxes on my investment income.

Self-Assessed Grade = A

4.       Not Diversifying

In John Heinzl's article, he makes the case that many Canadian dividend investors stick to certain sectors that have a history of dividend growth (i.e. utilities, telecommunications and banks). Although I am overweight in both telecommunications and banks, I do not own any utility companies (though I recently considered five). I also feel that my largest position, Alaris Royalty, provides me with decent diversification given their investments in 17 partners. Lastly, I have a growing stable of nine US companies in my RRSP that help give me some geographical diversification. All that said, I continue to look for investments that add diversification to my portfolio, but they must be quality companies with attractive growth prospects.

Self-Assessed Grade = C

5.       Not Reinvesting Dividends

Mr. Heinzl makes the strong case of using dividend reinvestment programs (DRIPs) or at least using dividends to buy new shares of quality companies. Although I have yet to find a DRIP program I feel comfortable enough to enroll in for the long-term, I do use my dividends to invest in quality companies, mostly those currently in my portfolio. However, as recently mentioned in various posts, I am having a hard time pulling the 'Buy' trigger over the last three months. My only new position in 2016 is Granite REIT, but there are a couple of restaurants I hope to initiate positions in shortly. 

Self-Assessed Grade = B-


Looks like my overall average for the five mistakes most common to dividend investors is about 'C', making me average. I will have to maintain course on my plan to add positions to better diversify my portfolio, focus on the long-term to avoid selling too early, and think more in terms of total-return instead of solely dividend yield. 

Of the above five mistakes, which is your greatest challenge?

8 comments:

  1. Really like this article. Self assessment is a skill lot of people dont possess and never even think about. Looks like I do pretty good on most of those categories.

    Also a big fan of John Heinzl's work in TGAM. He really puts out some great articles.

    Thanks for sharing
    R2R

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    1. Glad to hear you're doing well in minimizing your mistakes R2R. I clearly have more work to do in order to imrpove.

      Complete sidenote, but I really enjoyed the personal interview your provided that was posted yesterday. It's interesting to learn more about the person behind the excellent blog.

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  2. These are some great points to have in mind when constructing your portfolio. I applaud your desire to evaluate yourself, in order to become a better investor.

    I have found those mistakes to be rather pervasive. However, I have found that i am usually better off reinvesting my dividends selectively.

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    1. Reinvesting dividends selectively as opposed to through DRIPs has been my personal choice as well. Probably the control freak in me shining through. Glad to hear I have excellent company in my decision.

      I appreciate you stopping by and re-tweeting my post today. Although I'm an infrequent commenter, I'm a huge fan of your blog and have followed your progress for many years now.

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  3. I've been guilty of several of these myself but the key is the self assessment. I think too often investors find something and then focus too much on it without revisiting whether it's truly accomplishing your goals and is a successful strategy. Having a system and rules in place can do a lot to help keep you from making the majority of mistakes that can be made.

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    1. Very sound advice JC. Effective systems and rules can help minimize errors. I'm totally comfortable making mistakes, so long as I continue to learn from them.

      I appreciate your input.

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  4. D,C,B,A,A I to seek stock at a value that is yield 3%. Those type of stocks make up the bulk of my portfolio. Some fast growers with lower yield are also acceptable but in smaller portions. Dividend Life had done some articles with spreadsheets were you can see the affect of to low of entry yield.
    Cheers,
    DFG

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    1. Congrats on a much higher average than I obtained. I enjoy your idea of sprinkling in some lower yield, higher growth stocks to your holdings. I'll have to check out those spreadsheets you're referring to in your comment.

      All the best!

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