How not to DGI

I’m only human, and despite knowing better, I did what I should not have with our dividend growth investing (DGI) portfolio. What should you do with your DGI portfolio and how not to DGI? Let’s look at that today. And yes, it’s personal, it’s grey and not black and white. But you already knew that!

A Dividend Growth Portfolio

What you normally try to do in a DGI portfolio is to find companies that pay a stable and growing dividend over (many) years. You buy shares from these companies and hold indefinitely. You use the cash-flow initially to keep on buying more shares. Down the road you use the dividends to pay for your household expenses. Simple, right?

Now quite. The markets are influx, companies chance, some survive and grow, others don’t (I.e. stop growing/decline). Dividends are cut, or removed all together. In short, your portfolio will change over the years. You will have to make decisions as to keep shares of certain companies or not. Some companies are here to stay, others will come and go. Dealing with this flux is a lot harder than it seems.

Also, it’s sometimes hard to see what prices are reasonable. It’s easy to look back and see prices being much lower than today, and therefore not buying certain shares. Where in reality, due to growth of the company, the new prices might actually still be an undervaluation of reality. It’s also hard to determine/estimate future growth and growth potential for companies. You might as well give up and start to invest in index funds ๐Ÿ˜‰

How not to DGI: Making Mistakes
How not to DGI: Making Mistakes

Where did I screw up?

You might have noticed that we have a certain virus screwing with us. It is also screwing with our minds, society and businesses. Markets are affected and react. I could not sit still either, where I probably should have. I thought I was smarter (I’m clearly not), I thought the downturn in 2020 was going to be worse and last longer. Furthermore, I underestimated the power of the central banks in printing money. I was a pessimist and saw bears on the road. Actually I still see them, but learned my lesson (again) and will try to ignore them more in the future.

A Short Reconstruction

What did I do? How badly did I screw up? Albeit I didn’t go back and recalculate what would have happened if I would have kept the original shares. I think I can present a reasonable approximation of where we would have been if I didn’t touch anything. But first let’s get back to the beginning.

The Origin

In 2015 our FIRE journey was taking shape and we decided to take control over our RRSPs. It was also the last year of our stay in Canada and we moved all our RRSP’s into a self Directed RRSP, plus we added as much as we could for that year to max out the contribution. This was our start to a DGI portfolio to provide us with cash-flow in retirement. The development of this portfolio is shown below (note: we only added the capital at start ($176.836,56) without any further deposits!).

In 2015 and 2016 we bought our initial positions and pretty much went all-in with our money. There was a bit of a dip in late 2018, but we didn’t budge at that point (should have learned then to keep doing that). Over time we replaced various shares and consolidated the portfolio to fewer, but more stable, companies.

How not to DGI: Portfolio Development
How not to DGI: Portfolio Development 2015-2020

The Crash

It’s March 2020 the virus is gaining momentum, I’m keeping an eye on the news and markets. This month we got the, now infamous, drop in markets. Initially I didn’t do much. However, in April I thought that it would get worse. So I sold shares from companies that were not hit too hard, and bought back some shares that did to profit from lower prices. I also significantly increased our cash position. We primarily kept shares we really wanted to keep in the long run. But we did sell a lot, too much.

How not to DGI: Portfolio Development during 2019-2021
How not to DGI: Portfolio Development during 2019-2021

Then the V shaped recovery set in and we noticed that markets were not going down in the near term. We started to expand the various positions and initiated a few new ones. We brought our cash reserves back to lower values to maintain our dividend income.

For the same period as shown in the graph above, the broader Canadian market did a full recovery to it’s high from February 2020 (it got even higher there for a while).

How not to DGI: TSX Composite Index 2019-2021
How not to DGI: TSX Composite Index 2019-2021

Too Late

However, I was “too late” with deploying a lot of the cash I generated by selling shares in April 2020. Hence, we missed a lot of the recovery. In reality I should have been more selective with selling shares and I should have kept most! This was a dumb and rookie move, one I should not have made considering how long we were already investing and the long term view we have.

Market’s and emotions are a strange thing. You really have to park you emotions at the door. But I noticed once more in 2020 that this is harder than I thought. Also, this proves (at least for me) that time in the market certainly beats trying to time the market. So why do I try?

The Good Better News

There is however one consolation in this whole experience. We ultimately “lost” money in terms of the absolute value of our portfolio, but the damage is limited. We are “only” down about 6% from our all time high (at time of writing). That could have been much worse I guess. But fortunately our dividends have kept climbing throughout the years, even in 2020 (albeit not much, due to exiting various positions and 3 dividend cuts in two REIT’s and one Energy stock).

The dividend graph looks like this for the past 6 years plus the 2021 estimate (based on our current portfolio without any cuts and with DRIPS).

How not to DGI: 2015-2021 Dividend Income (Canadian Dollars)
How not to DGI: 2015-2021 Dividend Income (Canadian Dollars)

Lessons Learned

Short recap of the lessons learned (again):

  • Stop and avoid making investment mistakes
  • Buy and hold companies that pay a stable dividend!
  • Ignore broader market movements, focus only on impacts on each stock and look at the underlying business model and developments
  • Invest, don’t speculate (tempting as that might be).

If you cannot do this, don’t invest in individual shares and buy index funds.

9 Comments

  1. Thank you for sharing your experience and lesson learnt.

    I realize 2 things from this:

    1/ It is always easier to look backward and see the mistakes we did. It is always challenging to look forward to know which way is the right one to go. I have a friend who is a professional poker player and he always told me that a good decision can still lead to a bad outcome (because there is always uncertainty and luck that contributes to the outcome). It is why we should focus on improving the quality of our decision process, so that we can make better and better decisions which tend to give us higher probability of good outcomes. The lessons you wrote down above will help make better investment decisions.

    2/ There is no such an absolute “passive” incomes. In order to get good income from DGI portfolio, it is required to have effort and time spent to do that. Like Claudia said in another comment, it needs active reading and time..

  2. Hey Team CF
    Thanks for sharing your investment experiences. 2020 was so tough for all of us and no-one could have predicted such a steep drop with such a strong recovery. I made some mistakes, too, could/should have been buying much more aggressively as well (in particular in March, April 2020). Hindsight always easier thought than done.
    We all learned a lot and in the long run these experiences will serve us well.
    All the best!
    Cheers

  3. for shares, we were looking first on stable companies that grow slowly and clearly each year. Ok, 2020 was an strange year and we have taken as it is. Dividends came as the cherry on the cake as we ignored and didn’t properly taken in our numbers – 2019 had a ‘spectacular’ dividend income: 150โ‚ฌ.
    So for last months I started to read more carefully about dividends and found some concepts:
    – it is possible to live on dividends. There are blogs of humans and their numbers seems real
    – living off of Dividends is not getting me rich fast.
    – there are companies that pay dividends and some not
    – there are some companies that pay big dividends (aristocrats dividends)
    -it needs time to study and find what is affordable for us (our risk tolerance level, what industry we understand, the company on the market, their competitors etc) . It is not an ETF managed by the specialists, it needs active reading and time…
    So why not?

    P.S. did you write about your portfolio?

    1. The road to a dividend portfolio might actually be longer than that for 4% and index investing. But once you are there, the chances are good that you really will come out on top with a dividend portfolio. Plus the automatic yearly increases (assuming the portfolio works well) is really neat!

      We did write about our portfolio a long time ago, but a lot has happened since. In essence it’s still similar, just fewer companies.

  4. What can I say? Happens to the best of us!

    2020 was also a year or errors, mistakes and setbacks for me.

    Still a good year on the balance of things though.

    Luckily with property you can’t just freak out and press the sell button. In the pandemic at least that’s probably saved us from our worst investing selves.

    1. Real estate is a bit more fool proof indeed, from that point of view. It also has been one of our best investments, considering the massive increase in property prices and good rental income.
      But what you can say is that it was stupid ๐Ÿ˜‰

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