Since I received access to The Dividend Guy Blog email address, I got a very interesting question from one of our readers. Here’s what Michael had to say:
I’m just starting to look into stock investing and potentially dividend stocks.
After some initial research, my question is this:
How can I make real returns from dividend stocks when the only companies with high dividend payouts have a high cost per stock? If dividends are paid per stock owned, I would need a large number of stocks, but for a large number of expensive stocks, I would need a large amount of capital. I don’t have a lot of money to invest since I’m just beginning (~$1000), so I’m wondering if dividend-paying stocks are more of a strategy once I have an established portfolio and some money to move around.
This is probably one of the biggest questions an investor looking for dividend stocks may have:
When do I start investing in dividend stocks? And, what can I do with my money in the meantime?
In my opinion, you can start investing in dividend stocks with an amount as low as $1,000 without taking too much risk.
But How Can You Invest In Dividend Stocks With $1,000?
You have actually 3 options. However, I would disregard the first option which would be to buy 38 shares of one company trading at $26. This wouldn’t make sense in terms of asset diversification and trading fees. However, you have options #2 and #3 that can be of a great help in your journey to build a dividend portfolio.
Option #2: Consider Dividend Paying ETFs
It is true that $1,000 is too small of an amount to start investing in the stock market…unless you consider ETFs! Exchange Traded Funds have been one of the most discussed investment products in the recent years. Why? Because they can track whatever you want to invest in (stock market, commodities, real estate, bonds… and dividend stocks!). Because they are cheap in terms of fees (compared to mutual funds, ETFs are almost free in term of management fees). And also because they can be traded easily throughout the day.
You can then select an ETF that represents the best dividend paying companies and buy for $1,000. On top of that, you will receive a part of the dividend of each company tracked by your ETFs so it really replicates the fundamentals of dividend investing (i.e. receiving dividends along the way) while reducing your risk due to the concentration of your investment in a single stock.
If you are curious about ETFs that pays dividends, I have sorted the top 5 Canadian and 10 US dividend ETFs:
Top 5 Canadian Dividend ETF:
| Ticker | Name | Market Cap | Price | Return YTD | Fees | 1Y Return | Dividend Yield |
|---|---|---|---|---|---|---|---|
| XDV | iShares Dow Jones Canada Select Dividend Index Fund | 635851000 | 19.22 | 2.469 | 0.5 | 12.895 | 3.8 |
| CDZ | Claymore S&P/TSX Canadian Dividend ETF | 229748700 | 18.86 | 2.528 | 0.65 | 21.57 | 4.6 |
| CYH | Claymore Global Monthly Advantaged Dividend ETF | 64299520 | 14.79 | -3.224 | 0.81 | 14.291 | 4.53 |
| HAL | Horizons AlphaPro Dividend ETF | 10350000 | 10.35 | N/A | N/A | N/A | 0.99 |
| HAZ | Horizons AlphaPro Global Dividend ETF | 10413900 | 10.26 | N/A | N/A | N/A | N/A |
Top 10 US Dividend ETF:
| Ticker | Name | Market Cap | Price | Return YTD | Fees | 1Y Return | Dividend Yield |
|---|---|---|---|---|---|---|---|
| LVL | Claymore/S&P Global Dividend Opportunities Index ETF | 8761600 | 13.69 | -4.724 | 0.66 | 20.509 | 4.98 |
| IDV | iShares Dow Jones International Select Dividend Index Fund | 134714600 | 29.6076 | -3.728 | 0.5 | 15.982 | 4.42 |
| FDL | First Trust Morningstar Dividend Leaders Index | 53021030 | 14.33 | 1.783 | 0.45 | 16.007 | 4.4 |
| DWX | SPDR S&P International Dividend ETF | 195907400 | 50.2156 | -5.058 | 0.46 | 15.442 | 4.37 |
| PEY | Powershares High Yield Equity Dividend Achievers Portfolio | 132678000 | 8.209 | 8.957 | 0.6 | 28.948 | 4.37 |
| IRO | Claymore/Zacks Dividend Rotation Index ETF | 12759500 | 19.63 | 4.683 | 0.99 | 25.277 | 4.29 |
| FGD | First Trust DJ Global Select Dividend Index Fund | 25344040 | 21.12 | -1.705 | 0.6 | 20.311 | 4.14 |
| DTN | WisdomTree Dividend Ex-Financials Fund | 193102000 | 42.44 | 4.745 | 0.38 | 25.061 | 3.89 |
| DOO | WisdomTree International Dividend Ex-Financials Fund | 138552000 | 40.16 | -5.224 | 0.58 | 11.359 | 3.82 |
| DVY | iShares Dow Jones Select Dividend Index Fund | 4202382000 | 45.89 | 5.661 | 0.4 | 23.995 | 3.64 |
Option #3: Consider Dividend Mutual Funds
So tell me, why on earth should you invest your money in a dividend mutual fund when I just said that the ETFs will be way much cheaper? Well, there is always a reason for everything…
The very first thing is that all dividend mutual funds allow you to add systematic investments with no transaction fees. This is not the case with most ETFs (that need to be traded as stocks, i.e. with transaction fees) (however, Claymore offer systematic investments with some ETFs depending on your broker).
Therefore, for beginner investors, starting a dividend portfolio may use dividend funds at first. Most dividend funds will act like stocks, i.e. paying dividends quarterly. They can be reinvested (similar to a DRIP) or added to cash in your account. Since you are starting your investing strategy, I suggest you reinvest all your dividends into the same fund.
As a reference, I have listed a few dividend funds that exist for more than 10 years:
Fund No. Fund Name Fund Type MER\'s Fund Category 1 Yr Ret 5 Yr Ret 10 Yr Ret 15 Yr Ret Legal Status RRSP
1 IA Dividends Equity 1.84% CdnDvIncEq 15.9 7.1 10.6 Segreg Yes
2 IAP Ecflx Dividends Equity 2.11% CdnDvIncEq 15.6 6.9 10.3 Segreg Yes
3 IA Ecflx Dividends Equity 2.11% CdnDvIncEq 15.6 6.9 10.3 Segreg Yes
4 Thornmark Dividend & Income Balanced N/A CdnEqBal 9 5.5 9.2 Pooled Yes
5 TD Dividend Growth - I Equity 1.92% CdnDvIncEq 19.3 5.7 9.1 10.6 Trust Yes
6 RBC Canadian Dividend Equity 1.70% CdnDvIncEq 15.6 5.7 8.8 11.4 Trust Yes
7 Manulife Ser R A Canadian Dividend Equity 2.37% CdnDvIncEq 19.8 3.3 8.7 Segreg Yes
8 Avg Canadian Dividend & Income Eq-Blend Benchmarks N/A Stats 14.2 3.3 8 7.6
9 BMO Dividend Equity 1.70% CdnDvIncEq 13.1 3.4 7.8 11.2 Trust Yes
10 Scotia Canadian Dividend Equity 1.65% CdnDvIncEq 14.7 4.4 7.8 10.6 Trust Yes
11 TD Dividend Income - I Balanced 1.92% CdnEqBal 18.3 4.1 7.7 9.5 Trust Yes
12 IA Clarington Dividend Income T4 Equity 1.89% CdnDvIncEq 18.1 1.8 7.5 8.8 Trust Yes
13 Mavrix Dividend & Income Equity 3.17% CdnFocsSM 27.4 -2.8 7.5 6.1 Trust Yes
14 Med Canadian Dividend & Income Eq-Blend Benchmarks N/A Stats 14.3 2.9 7.5 7.6
15 Dynamic Dividend Equity 1.58% CdnDvIncEq 16 2.9 7.5 7.6 Trust Yes
Once you have picked your options, what is next?
This article will obviously be part of a series where I will describe some beginner steps to dividend investing. For today, I suggest you take a look at the 2 options, consider the trading fees (and MERs for dividend funds) and think a little bit more about how much you want to start investing on a monthly basis. In the upcoming post, I’ll be discussing:
– How to select a brokerage account with dividend investing in mind.
– How to pick your ETFs and/or Dividend Funds.
– When to start investing in dividend stocks.
– What to look at before picking any dividend stock.
– The importance of asset allocation (already discussed on this blog).
– Long term dividend investment strategies.
As I am currently writing this series, please let me know if there is anything else you would like to read about on how to start a dividend investing strategy.
Since I am well aware that I have more experienced investors out there as well, I will publish one post per week on this series. So stay tuned for more advanced tips on trading dividend stocks!