Diversification - so does your 30 stocks include large/mid/small cap, Europe, Asia etc as well?

Horizon - I don’t think so - an ETF investor who has enough money that they can use the 4% rule should be able to handle market turbulence.

Market timing - The fact is that withdrawals from a portfolio INCLUDE dividends so a div investor who has a yield of 4% from his/her portfolio is doing the exact same withdrawal as a ETF investor who does a 4% rule withdrawal by selling shares.

On another note I just bought some BNS at $48 and a touch of CIBC @ $69 as well this week.ur comment here.

2. A couple of points: (a) many Canadian blue chips have international diversification. Power Financial has Pargesa in Europe, Manulife has operations in China, and subsidiaries (John Hancock) in US. RY, TD and BMO have subsidiaries in US. BNS has operations in South America. Great West has Putnum. Our railway companies have tracks all over North America. And obviously we export our natural resources to all over the world.

(b) The post sticks with the Canadian equity side of things where the dividend tax credit is applicable.

My exposure to Europe is through VAE. US though VV. Small cap though mutual funds.

4. Horizon - Define “enough money”. Does that involve working longer than dividend investors?

There is another key difference between dividend investing and ETF. Dividend investing’s withdrawal is dollar based. On the other hand, the ETF withdrawal is percentage based. The 4% withdrawal on ETF fluctuates with the market. In an extended 5-year bear market, the retirement income will dwindle along with the market in the midst of a rising inflationary environment.

5. Market timing - But dividend investors don’t have to time their withdrawals. These distributions automatically delivered to their bank accounts every month even when the investors are vacationing in Timbuktu. No market timing is involved. However, ETF investors must burden themselves by constantly monitoring the ETF charts praying for attractive exit points. If the market is hurting in January (like this January), should he withdraw the 4% in a hurry, or chance it by hoping for a better result over the remainder of the year?

I don’t hold Canadian ETFs.

As mentioned in my last post, Canadians have no preferential tax treatments from US and international stocks. Which is why I own VV, VAE and VWO.

More tax efficient - you’re assuming all investments are made outside of an RRSP. Investments within an RRSP are still the most tax efficient investment. Considering most of us have small to non-existent pensions and can make contributions of up to 18% of our salaries, you can’t gloss over this issue.

Extended investment horizon & Less Market Timing - I would argue that both the ETF investor and the dividend investor will have to protect their nest egg from the effects of market volatility. A dividend investor with no FI component will need a HUGE portfolio to live solely off dividends unless they include income trusts which brings the volatility issue back to the forefront.

If both the ETF investor and the dividend investor retire using the 4% rule, with the ETF investor selling equities and withdrawing dividends while the div. investor withdraws dividends only, the ETF investor will be able to retire earlier as he or she won’t require as large a portfolio.

I’d happily quit the rat race a few years earlier and have to scrimp a bit during a bear market. But that’s just me…:)

Diversification - Good point, I forgot about that.

Horizon - enough money is when you can live off the portfolio alone without too much danger of running out of money while you are still alive. I think how long you have to work will be mostly be determined by how much you save and how much your retirement expenses (or needs) are, rather than the type of investor that you are. Another factor is how much of an estate you want to leave.

4% withdrawal on ETF fluctuates with the market That’s not how the 4% rule works although you could do it like that. Next Friday I have a post on the 4% rule.

Market timing - see my post next Friday.

Telly I would argue that as far as the 4% rule is concerned, there is no difference as to what type of investments are held in the portfolio. We tend to assume that a dividend investor will live off of whatever dividends are produced from the portfolio. The fact is that the retired dividend investor can still reinvest part of the dividend income if they choose.

For example, regarding to tax efficiency, sure dividend pay less tax than capital gains, but if your investment strategy is buy and hold (as dividend investors claimed), then why can’t it still by buy and hold if you are investing ETF? If you don’t sell it, then no capital gains and no tax at all while you still pay some tax on dividend.

I think a more balanced view would be to analyze the pros and cons of different strategies and people can decide what is the best for their individual situations.

1. Indirectly speaking, part of the dividend growth *is* inflation, otherwise who is collecting the inflation? However, bonds are guaranteed to fall behind inflation, and both bonds and capital gains are taxed heavily relative to dividends.

2. What is the fascination with beating or keeping up with the market? People retire on annual income, not net worth. MER eats into income, that’s bad. If the stocks are tumbling (regardless if they underperforming the market or not), new savings and dividend income can be reinvested to buy even more TransCanada or Royal Bank shares, and together with tax refunds will accelerate the income growth.

3. I did some rebalancing in 2007, but I don’t expect a high turnover in 2008 or forward. So far this year, I sold a non-dividend paying stock, diversified BMO into CM, and moved an income trust into my RRSP, and that should be it for the year. I’m sure ETF investors will receive a tax bill on the BCE sale.

4. There’s generally a ~2% yield differential between the ETF and a typical dividend portfolio. This market correction has driven XIU’s yield up to 2%. Dividend investors can expect ~4%. In addition, MER eats into ETF distributions. 0.17% MER /2.17% Yield = 7.8% swindled.

5. Either way, it doesn’t change the fact that ETF investors who rely on equity appreciation must unwind equities into bonds sooner than dividend investors whose withdrawals aren’t subject to market volatility.

6. How can new savings outmuscle the ~10% annual appreciation from existing equities?

Volatility is in the eye of the beholder. There’s the net worth volatility, and then there’s the income stream volatility. During retirement, income stream stability is more paramount than net worth.

I’m an RRSP advocate. We maxed out our RRSP, but the majority of our investment is in non-registered accounts. Capital gains and bond interests still matter to us, but others are free to write their own top 5 reasons for RRSP.

>>“A dividend investor with no FI component will need a HUGE portfolio to live solely off dividends unless they include income trusts”

Why is that? Most Canadian can earn ~$50k in dividends tax-free. Retirees living off bonds and equities require a larger nest egg to match the after-tax income. Again, dividend investors welcome market corrections. I just padded a little more of BNS and IGM @ > 4% yield. I couldn’t have done that had TSX shot through the roof. The correction also enabled me to diversify into real estate: Calloway at 7.6% yield and H&R REIT at 7.9% yield.

>>” the ETF investor will be able to retire earlier as he or she won’t require as large a portfolio.”

I think my responses invalidated that. Dividend investors don’t have to unwind equities as early, dividends receive preferential tax treatments, and dividends are a better hedge against inflation than bonds.

MER - you can’t just calculate the MER starting at a point when it’s convenient for your argument. I agree that buying div stocks through Questrade will produce an MER that is pretty close to (but not exactly) zero. The other thing is that most investors in the accumulation phase will be make periodic trades so again, $100 of trades/year on a $100k portfolio is really good but not zero (yes, I’m being picky).

Diversification - Good point, I forgot about that.

Horizon - enough money is when you can live off the portfolio alone without too much danger of running out of money while you are still alive. I think how long you have to work will be mostly be determined by how much you save and how much your retirement expenses (or needs) are, rather than the type of investor that you are. Another factor is how much of an estate you want to leave.

4% withdrawal on ETF fluctuates with the market That’s not how the 4% rule works although you could do it like that. Next Friday I have a post on the 4% rule.

If both the ETF investor and the dividend investor retire using the 4% rule, with the ETF investor selling equities and withdrawing dividends while the div. investor withdraws dividends only, the ETF investor will be able to retire earlier as he or she won’t require as large a portfolio.

Telly I would argue that as far as the 4% rule is concerned, there is no difference as to what type of investments are held in the portfolio. We tend to assume that a dividend investor will live off of whatever dividends are produced from the portfolio. The fact is that the retired dividend investor can still reinvest part of the dividend income if they choose.

Most “diversified” Canadian dividend investor’s portfolios will not yield 4% without loading up on some income trusts which are not favourably taxed or becoming less diversified by owning only high yielding dividend companies.

I agree that income producing investments are extremely important in retirement but for us, income will come from both dividends earned outside our registered portfolio and interest income as well as cap gains from our registered account. It sounds like you are saying the same. I was under the impression you were preaching the “Derek Foster Way” (i.e. no RRSP investments).

In the meantime though, I’m happy to see some growth in VWO for example while I’m waiting for retirement in about 15-20 years. I don’t need the income now.

If you’re maxing out your RRSPs and still have a majority of your investments in non-registered accounts then you’re probably doing better than 99% of the rest of the population, dividends or ETFs!

It’s quite easy to assemble a diversified Canadian dividend portfolio that exceed 4% yield. This is especially true now given the recent slide. I think it’ll be a fun little project to create a sample dividend portfolio and share it here this weekend. Would you guys be interested?

On a side note I picked up some more BNS today at $46.

My new stock buying strategy is to only buy a bit at a time (ie $2k) that way I can buy more at cheaper prices later on. It’s working but I don’t want it to work TOO well…(ie prices keep dropping).

Mike

I still have concerns about divident cutting off. Even your portfolio today yields more than 4%, there is no guarantee it will continue to be. Take a look at CITI, the dividend is reduced by 41%.

Bad apples do exist from time to time, and I’m sure we can recall many more in the TSX60 during Nortel’s glory days.

How long you work is also a function of how volatile the 4% withdrawal is. Since the downside volatility of an ETF towers over the income stream of a diversified dividend portfolio, ETF investors will require a bigger cushion to absorb recurring market corrections.

Telly wrote >> “If both the ETF investor and the dividend investor retire using the 4% rule, with the ETF investor selling equities and withdrawing dividends while the div. investor withdraws dividends only, the ETF investor will be able to retire earlier as he or she won’t require as large a portfolio.”

Not if the dividend portfolio is yielding 4%.