Friday, March 24, 2023

Dividend Reinvestment Plans Are Not For Me

Every November when it comes time to renew the domain name for this blog, I promise myself that I'll write more in the new year. My best intentions usually lose steam in late January or early February. In order to recreate the spark, here is the second of what could best be described as 15 30-minute, quantity over quality, blog entries. 

     Many dividend growth investors choose to use dividend reinvestment plans (“DRIPs”) to add shares to their positions instead of receiving their dividends in cash. With some DRIP programs offering shares at a discount to the current share price, and given the long-term objective to grow large positions in certain companies, it can make sense to leverage these plans. However, I’ve made a choice never to use DRIPs in order to avoid complexity and maximize financial flexibility.

     Having complained about my discount brokerage many times over the years (never create an account with Scotia iTrade), and looking to keep my interactions with them at a bare minimum, not using DRIPs makes sense for me. Having to register shares for a company’s DRIP program, or even using a synthetic DRIP provided through iTrade, I’m happy to use the month or two it usually takes my brokerage to respond to requests in more productive ways. Plus, any DRIPs I started for positions in my unregistered account would entail me keeping track of the adjusted cost base of shares, given I have no faith in iTrade’s calculations based on past negative experiences. As I’ve gotten older, and had kids, I’ve learned that sometimes avoiding complex situations is important to maintaining my sanity.

     In my opinion, the best thing about being a dividend growth investor is the growing cashflows that appear in your investment account each month. Given my preference to make one or two purchases a month, I choose to retain control over my investment process and decide which companies are the best use of cash each month. Investors act as the Chief Investment Officer of their respective portfolios, and their most essential duty is deciding how to best allocate capital. When a share price shoots up prior to a dividend payment, adding more to a potentially inflated position wouldn’t leave me with a good feeling; nor would adding to a position that was on a losing streak. Receiving cash each month provides me with optionality in how I choose to allocate it in congruence with my current goals and the realities of the financial markets.

     Although avoiding complexity and maximizing financial flexibility are good enough reasons for me not to use DRIPs, I can see how they might be great for younger investors, with different goals, and better brokerages to pursue those plans. There might come a time when I rethink participating in DRIPs, but for now, I’ll keep receiving my dividends and distributions in cash. 

Wednesday, March 15, 2023

My Dividend Growth Investing Origin Story

Every November when it comes time to renew the domain name for this blog, I promise myself that I'll write more in the new year. My best intentions usually lose steam in late January or early February. In order to recreate the spark, here is the first of what could best be described as 15-minute, quality over quantity, blog entries. 

Since I love hearing about how people decided to adopt a certain approach to investing, I wanted to share my “origin story”.
Like most 20-somethings, I started to make lots of mistakes after I opened my self-directed brokerage account. A couple of my first purchases of shares were in companies that ended up going to $0 (Nortel and 360 networks). I also bought shares in a China ETF that ended up losing ~80% of its value, and a Canadian technology ETF whose performance was only slightly better than that of Nortel. On the other hand, the shares I bought in the Bank of Montreal and RioCan REIT, climbed steadily, and also distributed cash regularly.
Collecting dividends and distributions felt great given I was working in a series of entry level accounting and finance jobs that are notoriously difficult. Realizing that by investing some of my salary from these tough jobs, I could built a side income that could be leveraged to perhaps work less in the future, or at least pick a more enjoyable, if slightly less well paying job, held strong appeal to me.
For context, during this period in the early 2000s, a number of large corporate fraud cases were being discovered, leading to the downfall of such companies as Worldcom, Tyco and Enron. Hearing about these frauds caused me to distrust corporate executives, which coincided well with the idea of looking for companies who decided to return funds to shareholders, instead of retaining them to build their personal vanity projects.
Although the transition from a growth oriented, story-focused form of stock picking to dividend growth took almost ten years, I’m still proud of making that change. Looking back, I see lots of mistakes I made chasing yield, being seduced by management guidance, and concentrating my holdings in obscure, semi-illiquid shares, but those are the type of mistakes that pay figurative dividends now that I can hopefully avoid them, or at least minimize them.