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Dividend investing is sometimes described synonymously with passive-income investing. In reality, it requires initial work and investments, which often come from active work. Additionally, dividend portfolios should be reviewed periodically, such as annually to check if updates are needed. For example, the reviews should determine if the dividends you are receiving are still safe (and growing).
If you’re not careful, what was supposed to be a passive-income venture can quickly suck up your time. The good thing is, you can take it slowly and consider potential dividend stock investments one at a time. That is, you can choose to invest as little or as much money and time as you want when building your dividend stock portfolio.
Dividend ETFs: Getting started with dividend investing
If you are looking for passive income, investing in dividend exchange-traded funds (ETFs) may be the easiest way to get started through online brokerages. Dividend ETFs consist of a basket of dividend stocks, allowing your investment to be diversified on day one. You can explore these popular dividend ETFs:
- Vanguard FTSE Canadian High Dividend Yield Index ETF with the ticker TSX:VDY offers a dividend yield of about 3.8%
- iShares S&P/TSX Canadian Dividend Aristocrats Index ETF with the ticker TSX:CDZ provides a yield of about 3.1%
VDY ETF has a management expense ratio (MER) of 0.21% and consists of 39 stocks. About 59% of the dividend ETF is in the financial sector, 23% in energy, 8% in telecoms, 6% in utilities, and 4% in basic materials. Its top 10 holdings are the Big Five Canadian banks (including 14% in Royal Bank and 13% in TD Bank), Enbridge, TC Energy, Canadian Natural Resources, BCE, and Suncor.
CDZ ETF has a MER of 0.66% but is more diversified than VDY. Its sector breakdown is 26% in financials, 13% in energy, 13% in real estate, 11% in utilities, 10% in industrials, 8% in materials, 7% in consumer staples, 7% in communication, and 3% in consumer discretionary. Its top 10 holdings make up about 23% of the ETF.
Review a number of dividend ETFs, including U.S. and global ones that can provide different exposure for your portfolio, before deciding which ETFs to invest in. Dividend ETF investors may focus on low MER and gaining diversified exposure.
Investing in individual dividend stocks
Investing in dividend stocks requires more work but it can be immensely fun as well! The idea is to identify quality dividend stocks that pay out safe (and ideally growing) dividends. The goal is to save regularly and buy dividend stocks at attractive valuations. Staying diversified is a good idea as well, but diversification will not be achieved in the beginning, as you’ll be 100% invested in your first stock, for example.
When you own a dividend stock portfolio, you’re in 100% control, as you can rebalance your portfolio as needed. Some dividend investors can even buy and hold for passive income that’s growing, as they carefully chose the wonderful businesses they planned to own.
After buying dividend stocks one at a time for several years, you’ll miraculously observe your investment income growing meaningfully.