It is crucial, or at least let’s say that it can be very advantageous to separate the accumulation stage and decumulation stage. We build portfolio wealth as much as possible in the accumulation stage. We want the biggest portfolio value possible. More money creates more retirement income. You can create more retirement income with $2 million compared to $1 million, to state the obvious. To create greater portfolio wealth, we would need to embrace more growth and the total return potential of the investments. We’re looking at accumulation vs retirement investing on the Sunday Reads.
It is a popular approach with the Canadian self-directed investor to embrace the dividend income approach. That is to say, they count the dividends and drive the annual dividends received to a level that will fund their retirment. I’ll admit that generous and growing dividends are enticing and they offer an ongoing positive feedback loop. We will receive generous and growing dividends on a monthly basis. When we add new monies and reinvest the dividends recieved, we create a compounding machine. And that dividend stream will be much less volatile compared to the stock prices.
The dividend approach can lead to wonderful investor behaviour. That said, the approach can leave some money on the table if we choose big and growing dividends over portfolio growth.
In this post – Living off of the dividends? you gotta sell shares to not sell yourself short, a demonstration shows how the dividend focus is can be sub-optimal in the accumulation and retirement stages.
Got growth?
I recently looked at the returns for my personal Canadian wide moat stock portfolio. For my RRSP account, I build around 7 Canadian stocks that are ‘moaty’. And the stocks all happen to pay generous dividends. But as I admit in that blog post, if I had followed my own suggestion and had included some stocks that are also wide moat but pay smaller dividends, I’d have a better-performing portfolio. If I include a couple of stock ‘picks’ offered up several years ago, I’d be even further ahead.
I stuck to my orginal 7 and paid the price. On the positive growth front, I did embrace the growth prospects of Canadian energy stocks, and have been rewarded, handsomely.
That home bias
Canadian dividend investors usually admit to a ‘terrible’ home bias. They largely avoid or underweight U.S. and international stocks. As we know U.S. stocks have beat the crap out of Canadian stocks over the last 20 years. If we consider the reutrns of U.S. growth stocks, the opportunity cost of the home bias is tremendous.
As an example, here’s a chart I offered to a friend (Canadian dividend investor) on Twitter.
Over a 10-year time frame (not long for an investor), Apple delivered over 3 times the total returns of CIBC. A portfolio that is 3 times as big can create 3 times as much retirement income. The investor I was addressing on Twitter did admit that if he could go back, he would buy Apple in 2013 or 2014. I picked up Apple in 2014.
A Canadian investor would have benefitted greatly by buying the U.S. market (S&P 500) over the last 20 plus years. If they added some greater growth by way of the Nasdaq 100 (QQQ in U.S. dollars) the benefit would be even more exaggerated.
Here’s an example, dollar cost averaging $1000 per month from January of 2002 to the end of May 2022. Please note, the outperformance is still present if we go back to 2001 and 2000 (the period of the dot com crash).
In the above table, I’ve used the TSX 60 (XIU) for Canadian stocks.
Greater returns, more diversification
The benefit goes beyond a larger portfolio and more prosperous retirement. The investor has a more diversified portfolio and has meaningful currency exposure beyond the Canadian dollar. We can take that a few steps further of course by adding international stock and bonds and REITs and other assets.
On the subject of greater diversification have a read of the new balanced portfolio.
Of course, the risks are greater in retirement. Here’s a recent video on the retirement basics. And here’s the video on portfolio wealth building.
Check out the retirement funding calculations and projections at Cashflows & Portfolios.
If you sign up, tell them Cut The Crap Investing sent ya. That is a very good service for the self-directed investor.
Growth vs dividends, it’s not all or nothing
I am a big fan of the Canadian big dividend approach, such as the wide moats, or buidling around the Beat The TSX Portfolio. Knowing that more money creates more retirement income, you may embrace a growth-oriented approach. Or (like me) you may combine some dedicated growth with your core Canadian stocks that may have a dividend focus.
Keep your eye on the portfolio value as well as the dividend income stream. You might add in some of those red, blue and green lines 🙂
I will be back soon with a post that outlines how we might shade in that growth or transition the portfolio in preparation for the decumulation stage.
The Sunday Reads
Rob Carrick offers a nice summary of the new rules for discount brokerages (paywalll) in regards to mutual fund fees. Discount brokerages can no longer sell mutual funds with trailing commissions. The trailing commission is typically a 1% fee used to pay for the advice that might be attached to mutual fund. But of course, a discount brokerage cannot offer advice. They can no longer charge you for advice you do not receive.
Questrade has never charged clients the trailing commissions for mutual funds.
Rob offered up this table for brokerage fees for mutual funds. Instead of charging trailing commissions, most brokerages will charge a fee when you buy and sell.
Several class-action lawsuits have been filed against discount brokerages. One of the claims estimates that investors have incorrectly paid about $5-billion in trailing commissions on mutual funds since the early 1990s. If you’ve been paying, send me a note and I can hook you up with these law firms.
I would suggest that even when you buy a mutual fund through an advisor at a bank, you are paying for advice you do not receive. The same holds true when you are sold funds through the Investor’s Groups of the Canadian investment landscape. You need about $500,000 of investable assets to access a ‘real’ advisor at a bank. Mutual funds are rarely a good ‘deal’.
You can do better
Investors are better off to keep fees low by creating their own ETF portfolio. If you want a managed portfolio look to the all-in-one asset allocation ETFs. Those ETFs are a 90% off sale compared to mutual funds.
For investment advice and managed portfolios look to the Canadian Robo Advisors.
Best ETFs
At My Own Advisor, Mark offers the best ETFs in Canada on the Weekend Reads. Special thanks to Mark for linking to my retirement video.
Matthew Freeman is growing his income machine on that Weekend Reads.
On Findependence Hub, Pat McKeough asks – Is a higher dividend yield better? Not Always. Learn how to spot the good from the bad to avoid this costly mistake.
At Banker on Wheels let’s have a look at the craziest charts right now. That’s a Sunday Rides collection of links and reads.
Here’s the week in review on Dividend Hawk. A nice roundup, as always.
At MoneySense, Kyle is making sense of the markets. Topics include supersized profits at small Canadian banks, GameStop and Tesla earn more headlines than money, alternatives for income investors (again), and more.
Lessons of retirement
On The Retirement Manifesto Fritz offers 4 lessons after 4 years of retirement.
From that post …
Most of us have some anxiety about retirement, especially in our last few years of work. While it’s true that retirement increases the odds of depression by 40%, it doesn’t have to be that way. The fact that you’re reading a retirement blog is a great sign that you won’t be among those who suffer. You’re thinking about retirement, you’re planning for it, and you’re trying to learn as much as you can.
Another wonderful read from Fritz. A retirement lifestyle must be planned. Don’t learn the hard way.
Banker on Fire shows the only way to become a better investor.
And some timeless rules to keep in mind.
And on the Tweet front, Larry Fink of BlackRock thinks inflation will stay elevated.
Within that thread, Scott Barlow offered.
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