Yesterday I read an article about this being a time to invest more in bonds and cash. This is so typical of advice we get when reading papers or talking to financial advisers. Neither of these investments pays much and doesn’t even keep up with inflation.
So why do you want to sit on cash and wait for the right time to go back to equities? Will these pundits tell when it’s the right time? Will you know on your own? I talked to an investor who was sitting on $50,000 waiting for the right time for two years. That’s $4,000 in lost dividends if it were invested. And the shares may also have gone up a fair bit while he waited for them to come down. All this shows is that no one knows when it’s the “right time” to invest. Of course if cash starts building up before you’re ready and a bargain becomes available, that’s even better.
When starting out to build a portfolio of dividend paying equities, the most important thing is to be invested. You get paid while you wait for the shares to go up.
If you are a seasoned investor and have a large portfolio and want to switch some of it to produce more income, some diversification is needed. But if you’re just starting out you can buy one or two companies’ shares and use the dividends to start diversifying. Here again conventional advice is to buy a mutual fund or an ETF that has all the diversification built in. When you’re young and start building a portfolio you don’t need bonds and GIC’s, you have a long time to build and can withstand the ups and downs of the market. (Our portfolio is still all equities.)
Diversification I believe is also somewhat misunderstood. Most times advisors say that you must have shares in companies in all sectors of the economy. That is hard to do when you’re buying individual companies. And totally unnecessary. Think about Canadian banks. They do business in all sectors of this country’s economy, and most also have interests in the US and elsewhere. That also is diversification. Our banks have been paying dividends for well over 100 years. So that is a good place to start when starting a dividend portfolio. And why invest in sectors that are very cyclical and unreliable? Oil and gas, mining, and other resources will disappoint you when times are tough and they cut their dividends.
Other reliable areas are utilities. BCE, Telus, Emera, Fortis, are some examples. Pipelines are also quite reliable as they transport fuels regardless of the price. We are still a fossil fuel economy. So these are the fixed income portion of our portfolio. Also some Reits offer good reliable income.
As your portfolio grows you can reinvest your dividends in more shares in the same company, or use them to start diversifying. When we built our portfolio I usually bought one company and left it alone, and used the dividends to buy different companies. I would do this each quarter. There is no point in sitting on cash and waiting for a better price.
One day when I had just purchased BMO shares a colleague asked if now was a good time to buy, I said yes it was as I had cash to spend. Now years later what does it matter what I paid? The share price has continued to increase and so have the dividends.
When investing you should always get other opinions and do your own research and use common sense to make decisions.