I love dividend investing, but I also realize it isn’t for everyone. It takes time, patience and dedication to stick with an investment strategy through the years – both the good times and the bad.
Related: 5 Advantages of Dividend Stocks
Some investors have turned to low-cost index investing as an alternative to holding a basket of dividend stocks. I’ll always own dividend stocks because I believe in dividends in the long run, but I can see why others prefer indexing. Some people don’t have time to constantly monitor a portfolio of 20 different individual companies and I can understand why some prefer simpler options.
There are several good reasons why index investing might be the best route, and ultimately you need to look after your own money as you see fit. There are no right or wrong answers, only what works best for you.
Personally, I am working towards achieving a mix of low-cost index funds along with dividend stocks. I love dividends but there’s a limit to how much time and effort I’m willing to put in, and constantly rebalancing a portfolio of 30 dividend stocks at this point isn’t exactly ideal for me.
Thanks to some healthy market competition between the major brokers, trade commissions have been going down for years and individual investors are finally able to keep costs low.
Investing in index funds through some key ETFs is a great way to keep costs low because most discount brokers allow you to buy ETFs for free. You only pay the commissions when you sell. If you’re a long term investor, hopefully that won’t happen for a while. In the meantime buying ETFs for free allows you to lower your dollar cost averages when the markets temporarily decline, further increasing your overall returns.
Related: 4 Reasons Why I Like ETFs
Index investing is inherently lower risk than investing in individual stocks. Holding a portfolio of individual stocks means you are exposed to their performance. The returns of your portfolio are tied to a small number of companies, which may not sit well with some people.
Index investing allows you to spread the risk out over a larger number of companies. Of course there is always risk when investing in any stock, but index investing spreads the risk out over a large number of stocks.
XIU (iShares S&P/TSX 60 index fund) is a popular ETF that tracks the performance of 60 of the largest (measured by market cap) companies and the sector allocation mirrors the weighing of the the S&P/TSX Composite Index.
Returns Tied to the Market
Another reason index investing may be right for you is that the rate of return is tied to the overall market. Buying a small group of dividend stocks means your returns may not be comparable to the overall market. Depending on their individual performance they could beat (or be beaten by) the market index.
The nice thing about index investing is that your returns are more closely linked to the market overall. Sure, you probably won’t see significant gains like you can when owning individual stocks, but you also likely won’t see significant losses either (unless the markets drop significantly).
Everyone likes to compare their returns to a benchmark like the overall market, and index investing allows you to easily follow the overall market performance with little work involved.
Less Work Involved
Robb Engen is a Canadian investor who started investing in dividend stocks in 2009. Just recently he sold all 24 of his dividend stocks and switched to a two fund portfolio: VXC (Vanguard all World ex-Canada ETF) and VCN (Canada All Cap Index ETF). The first thing he noticed is that he no longer is swamped with email alerts for each company.
I love dividend investing, but it’s a lot of work – research, buying, selling (although I don’t sell often), rebalancing, reinvesting dividends and portfolio reviews.
Index investing takes care of almost all of that. Some low cost ETFs pay distributions that require reinvestment, but index investors don’t fret about the latest quarterly earnings reports for one specific company.
Conclusion: I will likely always own dividend stocks, but others prefer index investing – with good reason. It’s one stop shopping for the average investor offering returns linked to the broad market, less work, lower risk than individual companies and low cost. If you use a discount broker like Questrade, you can trade ETFs for free.
Do you prefer index investing or owning individual stocks?