The Canadian Investor - Should You Invest for Dividend Income or Maximize Total Returns?

Episode Date: February 13, 2025

Following Dan’s debate with Kanwal from Simply Investing, Simon and Dan dive into one of the biggest debates in investing—dividend income vs. total return. They break down the pros and cons of each strategy, discussing capital retention, income predictability, sequence of return risk, and sector concentration. Is relying solely on dividends a sustainable retirement strategy, or does a diversified total return approach offer better long-term outcomes? They also share their own experiences, including how Simon structured his parents' portfolio.  Tickets of stocks/ETFs discussed: NOBL, XIC.TO, CDZ.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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a news and earnings because we're recording this in advance so we wanted some content while Dan is away. I think you're going to a golf tournament, that's correct? Yeah, I'm going down to the waste management open or as a lot of people call it the wasted management open because it's such a... Oh, the wasted. Oh yeah, that's right. I remember seeing that where it's just a total bleep show, right? I think they're toning it down this year but yeah, it's quite a fiasco.

It's in Scottsdale. I've been a few times. It's pretty fun. Okay. Well, make sure you stay hydrated. You're in your 30s. So you need to make sure you keep those electrolytes coming as there's booze. But I think it'll be a fun one today. I think this will be an evergreen episode too. It'll age pretty well because we're going to be talking about dividend investing versus total returns. So two different approaches and I think it's important to put some ground beliefs, I guess, lack of better words here

where we stand and we were talking about that and correct me if you don't agree with me, but for me, the issue I have with people that solely do dividend investing is on the first part, they will not look at any company that does not pay a dividend. So they're reducing the amount of potential investment options. They will also typically be invested 100% in equities even at retirement. And I know it's not for everyone, but again, a lot of people what I've seen is they tend to be 100% in equity. And the reason we started doing this episode is because last week you had a debate against Kanwal from Simply Investing. I listened to it. I think you did well. Kanwal is obviously a really

nice guy. I didn't really agree with a lot of his arguments but that's okay. It's worked well I think for him over the years. He's been doing that for 20 plus years so I'm not one to question him on his actual returns. I disagree with the philosophy but again I think it'll be interesting. I'll try to play a little bit of devil advocate too because I think we have similar beliefs when it comes to that. But anything else that you want to add before I go into some of the main arguments that a dividend income strategy will use and specifically dividend income strategy at retirement? Well, yeah, it was a pretty interesting debate.

So he debated the dividend side of things and I debated the total return side of things. Effectively, not even just through your investing career I would call it, but also in retirement. A lot of people believe that dividends provide, you know, some sort of buffer in retirement, but just, you know, historically from a lot of people that have actually researched the subject, a lot of like highly, highly accredited researchers, William Sharp being one of them, the Sharp ratio, he won a Nobel Prize for portfolio theory and things like that. So these people have researched the subject for multiple decades and have kind of found that there's really no correlation between dividends and sequence

of returns risk, which I imagine we'll talk about quite a bit as well. So that was kind of my main focal point against it. And when we started the debate, 10%... So they took a vote. So they effectively took a vote of all the attendees that were live and they said, do you think investing in dividends for retirement is a good idea? And before the debate started, 10% believed in total return. So one out of 10 people believed that the total return was the best approach.

And by the end of the debate, I think it was half the audience. So they took kind of a check at the end and over half the audience kind of switched their views. So I imagine by the time this will go live, I'll actually have that debate on my YouTube channel. So maybe we can link to it in the show notes or something for somebody who actually wants to watch the full debate. Yeah, I think that's a good point. And I think for me, where I'm coming from is

I don't love dividend investing only for retirement just because it's very it's very intro like it's not flexible as a strategy it's very strict you're doing it only in one asset class and I know some people will probably have dividend payers mix with some fixed income. But what I've seen a whole lot with this community on Twitter slash X is it's all or nothing dividend income and they're relying solely on the dividend income in retirement. And the main arguments for going with a dividend income strategy at retirement is capital retention

because you don't need to sell shares since you have sufficient income coming from dividend. The second one is gives you a steady and predictable income stream and not to worry we will dive deeper in each of those. Your income keeps up or surpasses inflation. Number four, it reduces the likelihood that the investor will panic and sell shares at a loss when there are significant drawdowns in the market. 5. If you don't need dividend income, you can always reinvest the dividends and grow your income stream.

6. It can be more tax-efficient. Before we dive in each of them, would you be able to explain you did mention sequence of return risks So SOAR, SOR, you want to explain what that is because I'll be honest I knew of the concept but I didn't know that it was called that so I think it's good for our listeners to know what The term is that's actually like something that a lot of people don't they don't understand the terminology They kind of apply it with a dividend portfolio. They don't realize this is what they're doing, but it is in effect what they're doing.

So sequence of returns risk would effectively mean like the timing of your withdrawals in retirement. So what people are trying to do is prevent having to withdraw when the market tanks. So you get into retirement, the market falls by 30% and you have to, if you're not living off those dividends, then you'll have to sell shares and your sequence of returns risk is higher because you're having to draw down when your portfolio is down. Yeah. Yeah, exactly. Well put. And before we start diving into some of the main arguments that a

dividend income portfolio of retirement, some of the main arguments that they would have, I just wanted to be transparent, just to be fair. I had set up my parents' portfolio more focused on dividend income until the start of 2024. However, it was not just dividend income. So it had about 15-20% of fixed income. And I think that's already a big difference of what you see with a lot of these dividend investor. And I say a lot and don't be offended with me saying that. I know there's probably some people that have diversification in terms of asset,

and these are things that will look. But I was able to give them some extra cushion. And I'll explain why a bit further on why I think it's important to have other kinds of assets in your portfolio, even at retirement, because relying solely on dividend income is also being very concentrated in one asset class. Yeah, yeah. So I'll go back to the sequence of returns risk for a bit. I mean, if you, if your idea is that you're going to build a portfolio of dividend stocks, say you have, I don't know, I'll just, I'll make up numbers here. You have a million dollar portfolio and you say,

okay, I have $40,000 in dividends coming in. If the market crashes 30%, I'll make up numbers here. You have a million dollar portfolio and you say, okay, I have $40,000 in dividends coming in if the market crashes 30%, I'll still have that $40,000. You might not realize that you're trying to mitigate that sequence of returns risk, but that's effectively what you're doing. You're trying to offset the risk of the market tanking with collecting dividends. And I mean, if we think of, and you had mentioned the asset classes, there's pretty much three core ways, historically that have been, again, they're in all this research. These people have, they've researched the topic for decades and

the three core ways to mitigate sequence of returns would be flexible withdrawals, it would be cash reserves, and it would be diversification across assets that are not positively correlated. So when you think about a dividend strategy overall, flexible withdrawals, you're not flexible at all. You have your dividend income and that's it, which is again, as you mentioned, not guaranteed. And when you think of the cash reserves, you can't actually build cash reserves because that would require you to sell

some of your dividend stocks, which would ultimately lower your income. And then you had mentioned this before, the concentration, like you are absolutely in assets that are positively correlated, especially when you think of, you know, in assets that are positively correlated, especially when you think of, you know, in this lower rate environment, like what is the S and P 500 yields like 1.25% or something crazy right now.

So obviously if you want to live off that dividend income, you're probably going to need, you're either going to have to have a ton of money or you're going to have to seek out higher yields. And I did some data on it. 50% of the Canadian dividend aristocrats are either in the financial or energy sector. And in the U S I believe it is 45% are in consumer defensive healthcare or I believe it's financials, financials or industrial companies. But again, like obviously, you know,

with a hundred% equity portfolio heading in retirement based on that dividend income, you're 100% in assets that are positively correlated. Yeah, yeah, exactly. Welcome back into the show. This is the Canadian Investor Podcast made possible by our friends and show sponsor EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking.

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That is QuestTrade.com. So that comes back a little bit and we'll come back with the main arguments here. So capital retention, so like you mentioned, over-reliance on equities. Canwall was mentioning, like many other dividend income investor, they seem to be over-reliant on equities. I don't know their exact portfolio and it's possible that they have some fixed income, but typically the sense I get is they don't. So it's 100% dividend payers. And companies can cut dividends. Dividends are not guaranteed. So if you're relying on that income and you have several

companies in your portfolio that cut the dividend, then what's your backup plan? If you don't have any fixed income, if you don't have cash for a couple of years in terms of withdrawal, you either cut your expenses or you have to sell those shares that you were saying you were not gonna sell because you were good with the dividend income. So that's always going to be a risk. It gives you no margin of safety because you're banking on those dividend if you don't have other assets like fixed income or some cash reserves. If you structure your portfolio with other assets like fixed income, you can build yourself that cushion. And that's why I built my parents portfolio. I mentioned that the way it is right now.

They have 22% in US treasury bills, about 3% in high interest Canadian savings account just because their withdrawals are in Canadian dollar. So it was important for me to give them a little bit of that. And that allows them to get steady income for several years, even if there's a prolonged bear market without having to sell any of their stocks, they also have a little bit of cash, sorry, a little bit of gold and a little bit of Bitcoin as well. But that cash allocation in the form of treasury bills actually acts as a very big hedge and protects them against that sequence of return risk that you were talking about, because they would be good for more than five years by just drawing down on that cash as it currently stands.

And I think that's something that's often missed, I think with dividend investing, solely dividend investing is that there is some value, especially right now when you can get 4% on US treasury bills, like why wouldn't you do that? And I have been back testing this portfolio now for seven months and I'm actually looking forward to a bear market or correction because I want to see how it will do during that. But I'm going to go on a limb and say that despite having a 10% Bitcoin allocation, I

wouldn't be surprised if it's less volatile than a fully dividend portfolio and nothing and no other asset classes. Yeah I mean when we look to I actually ran a portfolio like back in the financial crisis I ran a 60-40 portfolio against the S&P 500 and it actually it had about half the drawdowns and it also took it it took the S&P 500, I believe it was six or seven years to catch up to the returns of the 60-40 post financial crisis. So I mean, it's not, in terms of the fears

of the market drawdown, like you're actually amplifying the risk of a drawdown by, you know, going say, and it's not necessarily 100% equity. I mean, everybody can structure their portfolio however you want, but that 100% equity and that my dividends are always going to be there that actually could amplify your volatility. And as you mentioned, companies can cut dividends. I mean, when we look to the COVID pandemic, I can't remember the research firm that put it out now, but they had from Q2 to Q4 of March, 2020,

there was $220 billion in dividends cut. So it accounted for about, I believe it was 13% of all dividend payments. And fast forward to the end of 2022, and 40% of those companies still hadn't started paying dividends again. So I mean, the fact that your dividends can't get cut, if anybody tells you that they're lying, they can get cut. And you know, there's kind of the notion that, you know, let's say,

let's talk about the Canadian banks, you know, they pay dividends for 160, 170 years, they'll never not pay the dividends. You never know. You absolutely do not know. We couldn't have predicted the COVID pandemic. What is to say that some crisis comes along that impacts those banks materially? Obviously it's probably not likely, but are the odds zero? No. It's impossible to predict the

future. So to say you know look at trailing dividend payments and you know kind of and you can create some assumption that you know trailing dividend payments will probably mean forward dividend payments but there's no no guarantee anything can happen. Yeah exactly and dividends will usually be the first thing cut. Yeah. When a company is starting struggle, the dividend will be one of the first thing to go. Sometimes they'll try to cut expenses before that, but a lot of the time, the dividend will be the first or second thing cut because if the company has debt, the debt has a higher

priority and they're obligated to pay those interest payment. At least they're obligated until they're no longer solvent. So they will do those interest payments on the debt that they have, on the bonds that they have, so those will have higher priority. And that would be the case for at least having some fixed income. And to your point that dividends are not guaranteed and people will point to blue chip dividend stocks, well GE at some point was a blue chip stock. They cut the dividend. Kraft Heinz, company that Buffett invested in, ended up cutting its dividend and has been one of

his worst investments. The best investor of all time, if you like, in equities has made mistake, has seen companies that he owns cutting the dividend. AT&T is another example. 3M is another example. There's countless examples of companies that were typically seen as blue-chip companies that cut their dividends. And it's important to remember companies are not obligated. I don't care they've been paying a dividend for 50, 60, 70 years. 70 years ago no one from that management team is still in the company. Zero. They're all dead, like pretty much. Like I don't wanna be like a grim person,

but that argument of looking like 60, 70 years, like it has no relevance on the company today. You wanna look back five, 10 years, 15 years, sure. Have at it, but again, past dividends have no bearing on future dividends. The future dividends will be decided by the company's growth, its profitability, its payout ratio, and all these different things. And unfortunately, you might get some

right, some wrong. It's not easy to pick stocks. And right now, why not? You want to have a mostly dividend paying portfolio? Sure, that's fine. There's no issues with that. I was talking about my parents portfolio, my own portfolio. I have dividend payers but I don't think you should limit your investing universe to just dividend payers and right now like I said, you can get 4% on US Treasury bills I mean you can look for bond funds and you won't have to look very hard to find bond funds that are yielding 5% plus even higher if you're willing to go to less Credit worthy type of companies so more in the Jung bond area, but these are just examples of

It's not as predictable as you think. So consider diversifying in other asset classes even if you keep that dividend strategy that's fine but maybe think about having 20% in fixed income whether it's short term or longer duration that diversification can go a long way and prevents you from having to sell those dividend stocks that you don't want to sell in the event of a market downturn? Yeah, I think like as we go through like post-financial crisis, I mean the interest rates were just so low fixed income wasn't really, especially if you were looking to build a portfolio that could live off the income in retirement. I mean you just equities yielded so

much more and it ended up you know causing a lot of people to structure their portfolio like that. I mean, in terms of dividend cuts, when we look to something like Suncor, all it was was the bad timing of share buybacks and then the pandemic hit and they had to cut the dividend. That's a very small mistake from a outstanding company that has operated quite well. They paid a dividend, a very reasonable dividend for a while and they ended up having to cut because pre-pandemic they were allocating a bunch of money towards buybacks because obviously energy companies have been discounted for quite some time. COVID hit, oil went negative, and they just couldn't afford the dividend. So they had to stop it. And I believe I can't, I don't actually know the rebound time in

terms of Suncor's dividend, but you probably waited a year or two for it to get back to that previous level of income. So I mean, it's, yeah, dividends, they're not guaranteed. No matter what you look at in the past, again, any sort of financial event can impact any sort of sector. And I'll repeat it again, I mean, if we look to the banks, let's say, you know, they paid dividends for a long time, there's no guarantee that some sort of financial event happens that doesn't impact the banks and that completely changes the story, right?

No, exactly, and I'm just sharing my screen here because you mentioned Suncor Energy, so their dividend history. So clearly, there was a big, like like you said they cut the dividend during the pandemic and then they had a couple years year and a half just going visually here where the dividend was much lower they increased it back up kind of in line with the pretty close to the Russian invasion of Ukraine which shot oil prices up, at least not temporarily, but it still shot it up. Now it's higher than it was pre-pandemic, but it's to your point

if you're relying on that dividend income, even if it's just for a year or two, now you're in trouble because if you didn't have any cash reserve or some fixed income to be able to dip into, then that sequence of risk return just happened. You just lived it and now you probably had to sell shares of SONCOR in this instant at a big discount because I didn't have the share price there but I know the share price tank during the pandemic so you'd have to sell or a lot of companies had some issues during the pandemic so you'd have to take a loss and one of the other arguments that I mentioned was your dividend income keeps up with inflation and this can be true but also again assumes a dividend never gets cut but it also assumes that the company who have raised their dividend

in the past will continue to do so and you'll often be faced with a decision when you're picking companies, if you're building just a solely dividend portfolio, you'll have to decide whether you want a higher starting yield or a low that's not growing or growing very slowly or a lower yield that is growing pretty rapidly outpacing inflation, but then you have a smaller starting base. So you often are faced with that decision. The reason why I say that is most dividend investor probably want to have a 3.54% yield overall

on their dividend portfolio. If not, it would take probably a lot of money. Yeah, multiple million of dollars to have a decent lifestyle not living Outlandishly or anything like that, but think about it. You have a million have 2% of that portfolio That's giving you a dividend. That's twenty thousand dollars I don't know about you, but I need more than twenty thousand dollars a year to live off so if you have that 4% like we're talking off about then you just doubled that and

that 4% like we're talking off about, then you just doubled that. And it just is a good example of some of the tough choices you'll have to make if you're solely focused on that dividend income. And one of the other issues is when you start getting into the dividend aristocrats, there's different, of course, I know there's different definition for Canada versus US dividend aristocrat. I think the US is 25 consecutive years of dividend increases and then you have the dividend kings, which is 50 years. If I'm, yeah. And then Canada, do you know what it is for aristocrats?

Like 10 years, five years? Five, okay. It's five years and actually the worst part about it is, is they let you keep the dividend flat for one year. So you get a freebie. You get a freebie. So you can actually have a year where you don't raise a dividend

and if you raise it the next year, they'll keep you in the index. Whereas if you don't, they remove you. Like I think a company, like I think Scotiabank is going to be removed because they didn't raise, they had their buffer year and they still couldn't raise this year.

So I'm pretty sure they're gonna be removed from the index but we're really really lax on the definition of aristocrat. But the reason why I mentioned that is I know you've seen that, I've seen that before where you have especially in the US, companies are well aware of their streaks and you'll see companies that have raised a dividend and they their dividend aristocrat for like 26, 27, 30 years and clearly they should not be raising the dividend. They should probably be cutting it but then they'll raise it by one cent. Yeah. Because they just want to raise it so they stay in that elite group however you want to put

it and then that starts creating perverse incentive for management where they just want to increase the dividend even if it's not the right thing with the company. And I think BC is a good example, though now they've it will remain flat for the upcoming year, but I guess we'll have to see whether they cut it or not. I still think that they will end up cutting the dividend next year, but it just goes to show that I think this obsession with paying a dividend will oftentimes put some really good companies into financial trouble because they'll wait too long to cut that dividend and then the business starts spiraling because interest payments are too high or the business is

struggling and they're they weren't able to reinvest in the business because of that obsession with making those dividend payments. Yeah, if you look to a company like 3M, so from 2013 to 2020, they raised a dividend from 63 and a half cents a quarter to $1.44 a quarter. But then what happened from 2019 to 2024, it started going up by a penny. They would go buck 45, a buck 46, buck 47, buck 48, and then it just gets slashed down to 70 cents just because they couldn't really survive

in the current environment. They had a lot of lawsuits and they had, yeah, so you're showing the chart here. I mean it shows, you know, they were a huge dividend raiser for I I'm pretty sure they were a dividend king. I don't want I can't guarantee that but i'm pretty sure they were a king Uh, so 50 plus years of raises and then all of a sudden you see these huge raises And then you start to see it flatline and they're throwing in these penny raises and then all of a sudden the dividends just toast Yeah, they're back to like 2013 2014 levels now. Yeah, so is that dividend kept up with inflation? I don't think so and I mean, I think they reported today by the way, I think they probably had a good report because it's

Yeah, the thing is and I know this goes back to the debate, and it's nothing against Canwell at all because I own individual stocks as well, but it kind of went down to the point of, oh, just don't pick bad stocks. I mean, people pick bad stocks all the time. If you look to BCE, that's not only one of the top stocks held by Canadian retirees. If you look to any high yielding Canadian dividend fund, that's one of the top companies in that fund. And I mean, they've, they're kind of the same thing. I mean, growth started slowing. I mean, interest rates hit a lot of these high yielding companies. They were very heavily in debt. They're slow maturing

businesses. They don't really have any other way to utilize that capital, so they pay it back to shareholders. A lot of them were in a lot of debt over the course post-financial crisis, and that didn't really hurt them because policy rates never really went anywhere. And then you look to the pandemic, interest rates skyrocketed, which again is another focus of like, oh, they've paid dividends for X amount of years. Well, until a global pandemic hits, interest rates go through the roof, their interest expenses triple over the course of three years, and then dividend growth slows to a halt. And in the case of BCE, I mean, they should have cut the dividend a year ago. And as a result, investors have paid the price for that through,

you know, the lack of, not even the lack of growth, the absolute cratering of their share price overall. So I mean, dividends, yes, in general, if you buy companies that raise their dividend more than inflation, you will keep up with inflation. But 3M was doing that for the better part of 10 years until they weren't. Yeah, it's, it's always something to consider. And until they weren't. Yeah, it's always something to consider and people have been listening for a while then I think you know me. I'm all about having some flexibility when I invest. I don't like having rigid rules because I think it prevents you from being opportunistic in other types of assets, other types of companies if there's an opportunity and if your mentality is just

one type of stock, whether it's growth stock, dividend, only equities, I just think that's too rigid for me. I like the flexibility. I like to be able to change the way I invest a little bit on the margin depending on new data that I get. So that for me is one of the other issues but that's not specific to dividend investors right it could be applied to other type of investors like I said growth investors and one of the other

arguments that I've seen is it reduces the likelihood that the investor will panic during market downturns that sell shares a little bit like we talked before that psychological argument which I think is probably one of the better arguments for dividend investing because at the end of the day, if that's a thing that helps you not panic during a market downturn, I don't think it's a bad thing. But again, it may not be optimal from a total returns perspective. So as long as you're aware with that, if you think that you might panic

if you're more diversified in different type of companies, different type of assets and you'd panic and the dividends prevent you from doing that, then it could be an argument for it. Yeah, and I mean, I would counter that with the fact I'm kind of speaking in retirement. I believe you're actually, there is a psychological benefit to not selling the shares. And I mean, obviously human emotions come in huge when it comes to investing.

We fear loss way more than we- I think it's twice as more. Than we- Yeah, as the gains. Yeah, as we try to, as we benefit from gains, you know, but I would offset that with the fact that if you're building a portfolio of say 100% equities in retirement, trying to rely on that income

and you've probably built that equity portfolio because you probably can't get that yield from fixed income. I mean, you're actually like, you're amplifying your volatility during retirement. I mean, I did on that debate, I took a portfolio of Canadian dividend aristocrats and US dividend aristocrats. And I think I went 65% Canadian and 35% US just because it was a Canadian debate. So that's probably the structure of a lot of people's

portfolios when it comes to dividends. Obviously, it's not guaranteed. But that benchmark of those aristocrats actually had more volatility than an all-in-one ETF. So what I did was I created XEQT, like the all-in-one fund, but XEQT didn't exist during the financial crisis. So I had to custom build the portfolio so that it was the same funds and it the aristocrats had more volatility than that That global fund. So I mean again, I mean what what else reduces the chances of panic selling is just You go back to that

Diversification of assets that aren't correlated. I mean it as I mentioned during the financial crisis the 6040 portfolio Crushed an all-equity portfolio for for quite mentioned during the financial crisis, the 60-40 portfolio crushed an all-equity portfolio for quite a while post-financial crisis. Yeah. No, and that's fair for me. It's just the argument of the psychological perspective. I can't understand that. I don't think it's optimal, but I can understand it that for some, it helps them sleep at night

having that dividend income. But again, I think it would help them sleep better if at night having that dividend income, but again, I think it would help them sleep better if they had maybe that dividend income plus some fixed income or some short-term treasury bills. I'm trying to play devil advocate, like I can't understand. I wouldn't let it affect me, but I'm also someone who has seen wild swings with Bitcoin, so you know, take that with a grain of salt that I have You know, I have a a better risk tolerance than a lot of people Welcome back into the show

This is the Canadian investor podcast made possible by our friends and show sponsor EQ Bank which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April or February. Their GICs are perfect because the interest rate is guaranteed. And I know I won't be able to touch that money until I need it for tax time.

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That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service.

Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questade.com. One of the next argument here is if you don't need the dividend income, say you're building your portfolio and you're 15, 20 years away from retirement, you can always reinvest the dividend and grow your income.

And I know that Mark McGrath that was on the podcast has a lot of exchanges on Twitter. He's pretty active with some dividend investor. And his argument, and I totally agree with him, is if you go for a more total returns approach, why not do total returns for 20 years until you retire? And then when you're about to retire, take that money and then put it into dividend stocks to generate income. If you had more total returns than a dividend strategy over that 20-year time period, then when you reinvest that money after 20 years into all dividend stocks, you'll have more income. It's a bid. The yield on

cost doesn't impact the yield you're getting now. So I think it's important for people to just remember that that you could actually get more income by using a total return strategy and then switching that up at retirement. Yeah, and I think a lot of this comes from, well, first off, there's kind of a, I don't know the word for it. But I mean, people like to see their dividend income grow because market returns. They do. They post that on Twitter. They post that stuff on Twitter.

It's like no contacts, just dividend income here. Oh, I got this. I'm getting like, I'm like at 80k for this year, 10k or whatever it is, that is a pretty common thread. Yeah, so that's, I actually mentioned this in the debate as well. It's the mentality that a bird in hand is worth two in the bush, because you don't know what the market returns are gonna be over the long term,

but really, like, if you think about it, you do. Like, if we look to, you know, 100 years of history in the S&P 500, we can have a pretty good assumption that it'll return 8% to 10% annually before inflation, obviously. But people with, and that's actually why I say, if you're structuring it for dividend income, the longer your time horizon, the worse it is rather than achieving total returns.

And I'm not even talking about like picking stock type total returns. I'm just thinking I'm just strictly speaking on just buying a broad based ETF. The index. Yeah. If you look at a lot of income based portfolios, income based funds, uh, income base, anything they underperform. I, I couldn't find, I researched at pretty much every Canadian dividend based ETF before that debate. I could not find one that outperformed the TSX,

let alone the S and P 500. Yes, which one found on which So I had to be under a specific time period side to pick and choose the data And that's the one thing I'll mention for people is make sure when you hear an ETF outperforming something else or Whatever you're comparing just make sure you look at different time periods because often time it will be very different. So looking at the TSX 60 against the Canadian dividend aristocrat, so I used 2ETS for that, XIC and CDZ. Since 2007, mid 2007 until today, so 17 years, 6 months, the dividend aristocrat outperform on a total return basis 222% versus 203% for the TSX 60. However, however, if you go and then look at the

last five years things switch over where the TSX 60 has outperformed at 67% and then the dividend aristocrats over the last five years is at 48.4%. If you start looking then at the noble ETF which is the dividend aristocrat in the US against any of the S&P 500, then it's just getting crushed and the noble is the dividend aristocrat in the US. So pretty much any time period DSNP 500 has done a lot better. Yeah. Yeah, I mean this goes back to what we're what we were talking about before the recording I mean a lot of people will say well, that's only because of big tech

But the thing is is like big tech has been successful for a very, very long time now. It's not just like they popped up overnight, you know, over the last five years. I mean, big tech has been some of the strongest drivers of returns for the better part of what it's, it's got to be, you know, 15 years. So when you, when you think, oh, it's only because of tech. Well, you know, on an indexing level, you would have owned tech if you were, you know, try, none of them. Well, on an indexing level, you would have owned tech if you were trying. None of them paid dividends, right? Maybe Apple. Apple might've paid a dividend back then. I'm pretty sure they did, but none of them paid dividends. So if your methodology is you don't want to own dividend

stocks, I mean, none of these would have been in your portfolio during arguably one of the biggest bull runs in history. And again, it's not like they just, you know, happen to pop up overnight. I mean, these were very prevalent in the indexes for quite some time now. So I don't think you can use that excuse or kind of justification anymore. I mean, they've been big players for a long time.

And I kind of see it, I kind of see that mentality a lot too is, you know, like, no, I won't, I won't buy Amazon until they start paying a dividend. And I mean, Google alphabet started paying one recently. So it's kind of gaining some more popularity among that, among that crowd. But I mean, you could argue that the large scale returns from big tech. I don't want to say they're done, but the monumental bull run was during a period where none of them paid dividends and were ultimately trying to achieve total returns, which includes

dividends, obviously, like total return. I think a lot of people, when people mention total return, they kind of get the idea that you're suggesting like people go out and chase these high growth stocks, like total return includes dividends. It includes both of them bunched together. Yeah, exactly. Yeah, it's something we probably, you know, we've been talking about for a long time, kind of get the idea that you're suggesting like people go out and chase these high-growth stocks like total return includes dividends. It includes both of them bunched together. Yeah, exactly. Yeah, it's something we probably should have mentioned.

So total returns is the combination of dividend income that you're getting plus the price appreciation of your shares. When you're looking at a total return strategy, you want to maximize those returns, whichever way you get them. So whether it's through dividend or price appreciation you're just combining both whereas dividend income strategies will tend to focus on the income portion obviously they would I'm sure they would like the price of their shares to go up but their main preoccupation is that stream of income dividend growth yeah and I mean if we look at the S&P 500 since pretty much the but their main preoccupation is that stream of income. Dividend growth, yeah.

And I mean, if we look at the S&P 500 since pretty much the second World War, dividends have accounted for around one third of that return. So I mean, two thirds of your returns come from, the actual capital appreciation of that. Obviously dividends, a lot of people when you say you're aiming for total return, they kind of, I get this a lot.

Like they say that I hate dividends. I mean, dividends are a part of total return. It's- Yeah, and I know your portfolio and I think you've mentioned quite a bit on this podcast, some of the companies you own. A lot of them pay a dividend. I mean, Home Depot has been paying a dividend

for a very long time. So it's not like, don't take this as we don't like dividends. We both have dividend payers in our portfolio, but it's just another thing that we consider and it doesn't have to be exclusive. So if we find a company that is not paying a dividend, it's a great company, we won't rule it out because there's no dividend income. And I think that's the main point you are trying to make and I'm trying to make is having some flexibility

because we've talked about it and you just mentioned it. Dividend payers, at least if you want to have more than a 3.5% dividend yield on a company, you're pretty much focusing on a handful of sectors, especially even more so in Canada, but some of the sectors, and I know I mentioned them before, energy, financials, real estate, consumer staples, utility, telcos. Technology, it's going to be slim pickings. And if they pay a high dividend, then it's probably a company like Intel that was paying a high dividend because they were about to cut it and it wasn't sustainable. So if you're getting a dividend from tech, and I just looked at Alphabet, I think it's

0.5%. I haven't looked at Apple, but I think it's probably around 1% if you're looking at Apple for its dividend. Oh, not even 0.5%. I haven't looked at Apple, but I think it's probably around 1% if you're looking at Apple for its dividend. Oh, not even 0.4%. So it's even lower. So you're not getting much of income from tech companies. So what ends up happening is, especially if you're 100% into equities, is you tend to be very, very, very dependent on a handful of sectors that tend to be very levered as well, may I add. Yeah. And I mean, that just goes back to the ways to mitigate sequence of returns risk.

I mean, you want to be diversified among assets that aren't correlated. And this isn't even my opinion or anything. This is actually like historical studies and data-driven conclusions from many very, very smart people, much smarter than me. I mean, this is what they're saying you need to do to mitigate sequence of returns risks. And then when you look to Canada, like I personally know probably like a handful of retirees and like the structure of their portfolios. And some of them, it is crazy.

They have, I know people with multi seven figure portfolios that are so heavy in Canadian financials and energy because they're trying to live off those dividends. And like it, you know, you might not, again, it goes back to the theory of they paid dividends for you know centuries but you know what it's never guaranteed that they're gonna be moving forward and and if an event a financial shock happens to the Canadian financial system I mean you never know and it just it does seeking out that yield kind of goes against everything that you you know, again,

some very smart people say is one way to actually mitigate sequence of returns in retirement. Yeah, I think that's well put. I don't have too much else to add here. I know there was some mention of tax efficiency. I'm not a tax expert, but I also know that it will vary depending on each individual situation. Not only that, if you have some dividend stocks in a TFSA, it won't be taxed if it's a Canadian payer, if it's a US payer, you'll still have a withholding tax.

So it's not optimal oftentimes to have those, at least not optimal if they pay too big of a dividend. And then if you have them in RRSP, I mean, it's gonna be taxed the same exact way because you're going to be taxed when you start withdrawing the money. So it doesn't matter if it's capital gains or dividend, it doesn't matter, it'll be taxed to your taxable income. So it's really starting to be more of a consideration

if you hold some non-registered accounts, some dividend payers and non-registered account. But even then, I think it varies depending on the situation. Yeah the tax is all you know it's specific to the individual. What I will say is one of the main things that's actually like talked about is the fact that I don't know the exact number but there's a certain threshold of income where if it was just solely dividends you would pay no tax. But this comes down to the fact that you can't have any other income.

As soon as you have any of that other income, the benefits are gone. So if you have CPP, old age security, any employer pension, RSP withdrawals, things like that, it won't apply. I've rarely ever met somebody who this applies to. I've met a few people. We have actually a few members on our platform that do fall into this criteria, but it's going to be a very big rarity. But I believe that's something that's preached quite a bit, but almost next to nobody will qualify for. And then on the front of Canadian dividend stocks, and again, I'm saying this over and over again, but it's actually correct. I mean, when you think of the assets with correlation, I mean,

if you're seeking out taxable Canadian dividend stocks, like what are you doing? You're concentrating your assets into a very specific set of companies. Because if you look at US dividends, they're taxed at 100% of your marginal rate. So I mean, a lot of people will be like, oh, like I don't want to own those stocks. I want to own the Canadian dividend stocks to qualify for the dividend tax credit. And then ultimately you get down to that point where you're hyper concentrated in one specific area which kind of goes against all the theories of actually mitigating your volatility. Yeah, I think that's well put. Anything else you want to add? I think we covered most of some of the arguments.

I tried to play devil's advocate a little bit, even though I believe more in a flexible approach, not concentrated in one asset type or one type of stocks. I think to me that's the best way. Some people, they may just like the dividend approach, that's fine, but just understand that you are taking some risk in other ways. So yes, it may be dividend stock may end up being less volatile than a high growth stock, most likely it will be less volatile than that. But when you're doing that, you're just looking at things in a vacuum, right? You're comparing kind of just two things that are pretty inherently different and having a just well-balanced portfolio with different asset classes.

I think the studies I've shown, like you mentioned, that it will perform better longer term. And I'm happy to keep people updated with what I'm doing with my parents because it's a little different approach with different asset classes included in there, but I think it'll be interesting just to see how it does especially during a market downturn and one of the things that I'm doing for them is I'm making sure that I'm rebalancing the portfolio too and that's something I don't think that was touched in the debate and I was portfolio too. And that's something I don't think that was touched in the debate and I was gonna wrap it up on that point but what's your sense with income focused investor, dividend focused investor? Are they rebalancing or they're not? I don't really know. I mean, I guess the one thing in retirement that would be the key thing and I

mean it goes down to the building cash reserves. I mean, I think they technically, well, the building cash reserves and the diversification, I mean, ultimately, I think the rebalancing comes into effect where if the market were to crash and say, you were in a 60-40, you could not only utilize your income from your portfolio, but possibly draw down on that fixed income and then possibly rebalance into equities when the markets are lower and they rise. And then when they're rising, ultimately, the theory is that you would build more cash reserves and shore up that fixed income element. I mean, I don't know if a lot of dividend-focused investors are doing this just because they're 100% equity. And I mean, ultimately rebalancing, they're just-

But even rebalancing their equity is holding is more what I was referring to. Yeah. And I don't, it's hard to say. I mean, I've never really had that talk with anybody. I mean, I would imagine the thing about the rebalancing is, is if we're seeking out yield, we're probably just rebalancing into assets that are pretty closely correlated anyway. So I mean, what is the rebalancing really do in a nutshell?

I mean, unless you're rebalancing into maybe some other sectors that aren't higher yielding, but the thing is that ultimately, if your goal is to just grow that underlying income, you're not gonna do that because you're gonna be lowering that income and ultimately, you know, kind of pushing you farther away from your goal.

Yeah, and I think that's one of the biggest and most important things at retirement is rebalancing your portfolio. Because if you don't, that's where you see people being 90% plus in equities, even if they had fixed income to begin with, That's where you see people being 90% plus in equities, even if they had fixed income to begin with, because the equities we've seen the last three, four, five years have run up so much

that you get overly exposed to the S&P 500 or whatever their strategy is. And I'm not just talking specifically about dividend investors, just equities in general. And I think that's important to remember to rebalance your portfolio in terms of your target weighting to make sure that you're not at risk too much for any given asset class. And the 60-40, I think there are some cautionary tales there in 2022 that perform atrociously. So I think people have to remember that. There are some alternatives. If you don't want capital risk

and you still want some fixed income, then you can look at the shorter end of the curve, like treasury bills. Oftentimes they will give you less income. That's fair, but you won't have the same type of capital risk that you would have with bond ETFs that are longer duration. So that's just something I wanted to mention because we've seen that sometimes fixed income

can be correlated with equities. Yeah. I mean, I think it was the worst year for the 60-40 in history or something like that. But I mean, I guess in that end, I mean, you know, the run-up in equities would have allowed somebody to rebalance more to get back to that allocation. And I'm pretty sure bonds have had a pretty good, pretty good run recently, at least. I mean, not not crazy good. It's been hit or miss.

Yeah, it's been up and down since 2022. I don't think depending on the type of bond ETFs that you own, you may have decent returns, but there's been time periods even since where especially in the last, I think the last four or five months or ever since, but yeah, pretty much ever since the Fed started cutting bond yields have risen, which means if you held bond ETFs that were longer duration, your principal or your capital would actually have declined so you'd be looking at a either breakeven or slightly underwater investment. Yeah, and that's kind of these bond funds, you know, with a normal bond, you buy it and you know, you'll get your-

Buy and hold. Yeah, you'll get your capital back in maturity where the funds are a little bit different. I mean, it happens underneath the surface as the bonds mature in the funds, but it's not like, it's not, I think like once you run the math of it, all those bond funds, like it does end up over the longterm being ultimately the same thing, but I mean, it's a little bit different

than buying a single bond. But I think a lot of the, in regards to the rebalancing, I think a lot of it comes down to the, I guess, the complexity of it as well. Whereas, a dividend portfolio, it's just, you got your dividend income, things like that. It's simple. It's a strategy that is simple. I mean, in reality is simple. You buy dividend stocks, you grow your income. But is it the most optimal study show? No. I mean, a lot of studies show no. Nobody has ever, when we look to sequence of returns risk, nobody has ever mentioned dividends as something that has worked. Whereas, I mean, you look to a lot of dividend bloggers, you look to a lot of dividend accounts on X,

they might not be outright saying sequence of returns risk, but they're saying, you know, if the market tanks 30% tomorrow, your dividends will still be safe, which is false. Like there's, nobody can predict the future. There's no, there's no way to do it. We don't know what event is going to hit next. I mean, we had the financial crisis in 2008. We had, I mean, I guess that was kind of, you know, probably there, like you probably could have seen it. The COVID pandemic, nobody could have seen that. Nobody could have seen that coming and what actually happened. So, I mean, that's just an unpredictable event.

And who knows what the next unpredictable event is that's going to hit a company that's paid dividends for a hundred straight years or something like that. Yeah, well put and I guess I'll end it on this way. I think the reason why people like this approach is if you have to rebalance, if you have to make some more active decisions in your portfolio at retirement, I think there's a fear that you'll make the wrong decision. Yeah. Whereas having dividends, you don't really have to make any decisions. You just let it ride and collect the dividend. And I think this fear is what drives people towards that. But if you have a good plan and a good strategy in place, you follow that strategy and there's

nothing to fear. Maybe sometimes your timing will be a bit off, but if you're rebalancing because you have a target allocation, you know, it's part of investing, you're going to have some regret and just be at ease with it. Like I've had stocks I've sold, and obviously in hindsight, I regret it a little bit, but at the time, I think I was at ease with my decision and I've come to accept that over time. So I think as long as people do some reflection and are comfortable with that, then they can start looking at other investing strategy that may provide better results for the retirement

income. Yeah, I mean, I tripped my Bitcoin allocation. When was that? And it's up like 40 some percent since. Yeah. But I mean, I... Yeah. Yeah. I mean... $35,000 lower. Yeah.

Yes. That was... But... I get it. No, it's fine. We don't know, right? So I think that's important. I've trimmed a little bit of my ETFs for Bitcoin too. And it made sense for me at the time. I don't regret it. So that's the way I see it. But anything else to add or we'll call it an episode. I think it was a fun discussion. Tried to play devil's advocate a little bit and look at both sides of the argument. No, that's it. As mentioned, by the time this is published, the video should be on our YouTube. It just has to go through compliance on TD's end.

And then I should have a full video of the debate and you can go and watch it if you want. I think it's pretty long. I think it's actually like an hour and 20 minutes but it's definitely a good watch. Just put it on 2x speed and you'll be done in no time. Yeah I think I did 1.25 because it's a 2x 2x. I'm a 2xer. 2xer, okay. So well thank you everyone for listening. We really appreciate the support. Give us a review if you're new to the podcast. Any five stars review helps people find us. If you have friends or family looking to get into investing, you know, tell them about the podcast.

It's always a big help. We also have the Canadian real estate investor. If you're The Canadian Investor podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.