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 😉
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.
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.
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.
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).
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?
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).
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.