Reader Mailbag: Dividend Investing vs Index Investing

*You all know the drill by now, we get a great question through our contact us page and allow everyone to benefit from it.  As always, these are real questions from real readers and identities are always protected.

Hi Kyle,

I’m loving the mailbag feature you started. Here’s my questions I’m hoping you can answer: Do you know anything about dividend investing or any resources to share on dividend investing? It seems like all personal finance bloggers are pushing index investing. I understand indexing and am following that strategy right now. The only “competing” or comparable strategy I see around is investing in stocks with strong dividends. I’m curious how this compares to indexing as an investment strategy, but don’t know where to start to get information on it.

I guess I’m wondering if it’s a “safe” long term strategy like index investing? It must require more time and research compared to just picking index funds. Like I said, I don’t really know much about it besides seeing it mentioned in some articles (and having a family who likes to only buy stocks that give dividends) so I was looking for an introduction.

-Rebecca

Hi Rebecca,

Dividend Investing vs Index InvestingI think I speak for all index investors when I say, “Hey, I got nothing against dividends, I love dividends!”

My index ETFs all have very nice little dividend perks (the cap-weighted average dividend of all the stocks included in the index).  The thing is I don’t really care if a stock produces dividends or not as long as it is awesome.  How do I know a stock or company is awesome you might ask?  I know that it is awesome because it is my index – the 60 biggest companies in Canada, 4,000+ biggest companies in the USA, or 6,000+ biggest companies in the world (check out this article for more information the ETFs I’m referring to).  By making a blanket statement like, “I only invest in companies that pay dividends” (Kevin O’Leary has made this attitude sort of famous) you are leaving some pretty massive winners off the table.  Warren Buffett – who many consider the greatest investor of all time – doesn’t pay dividends out to holders of his company’s (Berkshire Hathaway) shares.  Apple didn’t pay dividends during all of the years it saw explosive growth either.

Apple would have been a stock that growth investors loved.  Growth investors tend to be on the opposite end of the spectrum from dividend investors.  The idea is that if a company is paying a dividend, usually it is a fairly stable, mature company that has a proven record of profits.  Growth investors would argue that the real money is in identifying stocks that are quickly growing and have competitive advantages.  These types of companies are often small companies that are taking large risks and many pay only small dividends or none at all.

It all comes back to the fact that there are essentially two ways a stock can make you money.  It can go up in value (whether through higher profits, stock buybacks, or anything else).  This is called a capital gain.  The other way is through dividends.  Some people will argue for one form of making money over the other depending on tax situations and other various criteria, but since pretty much all of my investing will take place in registered accounts, I’m not too worried about it all.  Ultimately, I find debating the whole growth vs dividend vs value investing models to be a lot of abstract razzle dazzle that usually just results in a typical “paralysis by analysis” situation.  This is where the true value of index investing lies: in its simplicity! Continue Reading

Know Your Mortgage Penalty

With my new zest to pay my mortgage down faster it made sense to do a little research in regards to the maximum allowed payments I could make on my mortgage without having to pay a mortgage penalty.

First of all, if you have an open mortgage (meaning you can pay down your mortgage whenever the heck you please and no one is going to bat an eye) this post doesn’t apply to you.  If you have a closed mortgage (like most of us out there), you pay for a lower mortgage rate but there are more restrictions, such as not being able to pay down the mortgage whenever you please and having to pay a penalty for it.  If you want to find out more information between open and closed mortgages and you’re out shopping for mortgages in the Spring Real Estate Frenzy season, check out this old but good Young and Thrifty post here.

Why it is Important to Know Your Mortgage Penalty

There are multiple reasons why you might want to know your mortgage penalty.

Or perhaps you don’t want to port your mortgage.  As TM mentioned in that post, there are many different reasons when it makes sense to port your mortgage and many different reasons when it does not make sense to port your mortgage.

  • You’re thinking of paying down your mortgage

This is the situation that I’m in right now.   I have a lot of money in cash that I’m not really investing with.  I am pondering about the Smith Maneuvre.  I don’t want to pay too much of my mortgage down to trigger a penalty.  I wanted to make sure that I was aware of the mortgage rules and how much I can pay down.Know Your Mortgage Penalty

  • You’re thinking of taking advantage of the lower interest rates

Continue Reading

Reader Mailbag: If I’m Losing Money Should I Change Investments?

We’ve gotten some pretty good feedback from our readers on this new mailbag feature so we’re excited to keep answering your questions.  Please don’t be shy about hitting up our contact page and letting us know what’s on your mind.  Sometimes I think the internet is like one big high school classroom (sorry, I’m a teacher, my analogy bag might be somewhat limited), lots of people have the same question you do, but no one wants to seem vulnerable by asking it.  As always, these are actual questions given to us by real readers.  The only thing we edit is people’s name to protect their privacy.

Hello Kyle,

I really appreciate the e-book and the website I feel it is important for us to have a site to source from and educate individuals, after reading through a good amount of the e-book. I had a question about mutual funds I had invested in select conservative mutual funds at [insert large Canadian bank here] and have been losing money for over a month now. I am now thinking that I should switch my investments or perhaps wait a little longer to see what happens. Please let me know what you think would be better. I am new to investing and prior to this had only invested in GIC’S as I am planning on purchasing a home within 3 years.

Thank you,

Ritchie

There are actually a few levels to your question of “Should I get out of big bank mutual funds?” here Ritchie.  Here is what you need to take into consideration before making any choices:

If im losing money should i change investments1) Why did you suddenly change your investing strategy from GICs?  Was there a change in the goal you were investing for?  Did you suddenly develop a much higher risk tolerance?  How does this change fit into your long-term plans? Continue Reading

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