“After a meal there’s nothing like a good cigar”

– Blondie from The Good, the Bad and the Ugly – Wikiquote

Ok, so that quote has nothing to do with investing, but you can just picture Eastwood saying it.  Like everything in life, there are good things, bad things, and ugly things.  The same can be said about dividend investing and dividend in general.  Here is how dividends break down when I thought of them as the good, the bad, and the ugly.

The Good:

Dividends provide additional capital to invest in more stocks.

When dividends give off income to the investor, it allows the investor to reinvest that capital into more shares of the same company or shares of another company or asset.  Over time this can compound your returns dramatically.

Dividend stocks have produced a higher return with less risk.

The top-quintile of high dividend stocks has been proven to produce a higher return with less risk than the stocks in the lower quartiles.  The following chart from Lehman Brothers drives this point home.

The Bad:

Dividends are not as tax efficient as stock buy-backs.

Getting dividends has tax implications for the investor.  If these dividends are in a tax protected account then this is not a worry.  However, if they are in a taxable account then the investor needs to be cognizant of these taxes and ensure that they are planned for appropriately.

Cash paid out as dividends cannot be reinvested back into the business.

For the company paying out dividends, there is less money available to reinvest back into the business for future growth.  This can be an issue as investors like to see sales and earnings growth over time and that often requires additional capital.  If dividends are paid then that money is no longer available for those opportunities to enhance growth.

The Ugly:

When dividends are cut the stock price tanks.

Dividends do get cut.  Just look back at Bank of America (BAC) who had paid a growing dividend for years and years.  Then all of a sudden it had to cut its dividend to survive.  This had a very dramatic effect on my investors, including those retirees who relies on BAC to fund their retirement cash flow.  Dividends are never guaranteed!

Dividends can lure you into a false sense of protection.

I have found that dividends provide an investor with a sense of security that may not be warranted.  Just because the company pays a dividend does not mean it is a good stock.  And just because you are receiving income from that stock does not mean you need to never sell it.  You still need to critically analyse that investment to ensure it fits into your portfolio.

Dividends Still Win

Even considering the bad and ugly aspects of dividend investing, there is one aspect of dividend investing that trumps them all.

Historically, dividends have made up the majority of the overall stock market’s gain. Take a look at the image below.  You can see that over time, 64% of the overall return of the stock market has been made up from dividends.  That is in no way insignificant and cannot be ignored.  Dividends are very important and should not be ignored.

Today the Money Crashers 2010 New Year Giveaway Bash officially opened. By acting on a couple of items specified over at the site, you can win from a pool of $5,000 in cash and prizes.

As a contributor to the contest, you will be eligible to win a copy of the The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between, which has been donated by me, The Dividend Guy. If you want to learn more about this book, you can see the author discuss it here.

Good luck in the contest.

I am happy to report that The Dividend Guy was mentioned in Globe and Mail writer Rob Carrick’s new book, Rob Carrick’s Guide to What’s Good Bad and Downright Awful in Canadian Investments Today. The book is a great guide for Canadian investors looking for common-sense information about investing in Canada.

What I liked best about this book was that it was organized into a series of lists that help to answer many of the common investor questions. For example, in the Mutual Fund section, there is a titled, ” Five big, fat mutual fund industry rip-offs” which lists a number of things that mutual fund investors need to understand to avoid getting taken advantage of. The book is structured in this manner so that as an investor you can head over to the section that piques your interest and dive into the lists of advice Rob has to offer.

Book Topics

The book is divided into seven sections, each one providing a number of advice in the form of lists. Rob provides detailed information about each item in the list so that us investors have some key take aways – things we can do to be better and more successful investors.

Getting off to a good start

Examples: Four examples of investment industry propaganda that you can’t take at face value, Four harsh investing realities that investors – amazingly – don’t always grasp.

My favorite: the discussion on mutual funds trying to convince investors that fees do not matter. Fees matter most of all!

Mutual funds

Examples: Five bits of fund jargon you need to know, Five funds that stood up to the bear

My Favorite: the no-holds-barred presentation of six crummy funds that made the industry look bad (and frankly ruin it for the rest of them).

Navigating the stock market

Examples: Three over simplifications about stock market investing that you’ll run into constantly, Three interesting sectors to consider for you portfolio

My Favorite: buy-and-hold investing success does not come from a set-it-and-forget it mentality – it still takes work.

Bonds, GICs and other conservative stuff

Examples: Four rotten ways to put bonds and GICs in your portfolio, Six reasons to say no to principle-protected notes

My Favorite: the notion that buying bonds from discount brokers is just as cheap as for buying stocks – it isn’t!

Do-it-yourself investing

Examples: Five key considerations in choosing a discount broker, Five investments that go great in a discount brokerage accounts

My Favorite: the three online resources DIY investors should use

Investment advisers

Examples: Ten traits of a great adviser, Ten signs of a rotten advisor

My favorite: the presentation of five interview questions to ask an adviser to weed out the really bad ones

Information please

Examples: The surefire way to tell if an investing newsletter or pay website is junk, Three investing newsletters worth your time and money

My favorite: biased here because Rob mentions thedividendguyblog.com, but the presentation of the five blogs that will make you a smarter investor is great!

Is Anything Missing

If there is one thing missing from the book, I would have to say that it is a more robust discussion on asset allocation. Rob does cover asset allocation, and even makes the statement that I personally believe in, “Asset allocation is what really matters in building a portfolio”. As it is such an important topic and really can make or break an investor’s success, I believe more time can always be spent discussing it. Perhaps in future editions of the book more discussion on how to build a proper asset allocation could be covered.

Summary

This is a great book for Canadian investors. I especially like Rob’s take on dividend stocks and how to use them within a portfolio. Although it is geared towards Canadian investors, there is certainly learnings available for readers in the U.S. I highly recommend this book.

Please check out and buy the book here.

Happy New. Thank you to all the bloggers and writers who have created great content over the past year. I have greatly enjoyed reading it all and posting them to my weekly roundups for all my readers to see. Here is a great 2010.

Many of these are straight from members of the Dividend Investing and Value Network (DIV-Net).

Dividend4Life’s 2010 Investing Goals

Dividends Plummeted 21% in 2009

Blogger Michael James’s Top 3 Investing Mistakes

Dave Barry on the money, madness and misery of 2009

Dividends are the key to a sensible investment strategy

Carnival of Personal Finance

The Best Dividends for 2010

Dynamic Dividends

Banking On Bank Of America

Bristol-Myers Squibb, Two other companies raise dividends

OSV & Graham Deep Value Screen

Time to Revive Stock Dividends

Small companies offer up most dividend growth

Check out the Globe’s recent coverage of dividend stocks and see what they can do for your portfolio offer up most dividend growth

(Photo Credit)

I have never had much success with stock newsletters. The trouble is that over the years I often got sucked into subscribing to them with the promise of riches and huge stock market gains. As an example, I have been a subscriber of newsletters such as The Motley Fool’s Hidden Gems and Income Investor, Gordon Pape’s Internet Wealth Builder, and even the Keystone Small-Cap Report.

The trouble with all of these was that they provide me with recommendations for individual stocks that would not fit into my portfolio. I guess an investor could simply buy every stock recommended by a newsletter and build a portfolio that way, but of course you would run into diversification issues. Each investor has a unique asset allocation (relatively speaking) and picking and choosing individual stock picks from newsletters often creates a real hodgepodge of holdings that do not work together.

My approach to portfolio building is very structured: build up a core portfolio of index funds that provide lots of diversification and then supplement that core portfolio with quality dividend stocks that fill a specific purpose, be it dividend growth or high income . I am no longer interested in buying one small-cap here and there as recommended by one newsletter or another growth stock recommended by another. I choose the stocks that go into my portfolio very carefully because I know it is difficult to pick winners.

That being said, I do actually subscribe to one particular premium web service provided by a fellow blogger. It is The D4L-Premium Services offered by Dividends4Life. I have found this service to be very effective in managing and building my portfolio.

What is Included

The premium services offered by D4L include the following:

D4L-Dashboard: Updated weekly, the D4L-Dashboard is a color-coded pdf file that contains a multitude of data for the over 100 dividend stocks that D4L tracks. A quick scan of the file tells me which stocks D4L’s model has flagged as a buy and which ones are not doing well. Have a look at the Sample Dashboard to see how the information is organized and consider how you could use it in your own research.

Personally, I use this list to generate new ideas for my own research and to validate my own thinking on a number of stocks. Recently, I initiated a position in Emerson Electric Co. (EMR) based on much of the research and data I obtained using the D4L-Premium Content.

Analytical Reports

The data that goes into the dashboard is actually compiled from a much larger database of information that D4L tracks. This data is presented in individual Analytical Reports for each of the stocks that D4L tracks.

Each week, as part of the process of updating the D4L-Dashboard he looks at several companies and either creates a new analysis or freshens the data. In addition, before any stock is purchased for his portfolio the report is updated.

What this means for the subscriber is a constant stream of updated information on dividend stocks that would be difficult and time consuming to compile form the free data available on the web. I estimate that having the Analytical Reports cuts about 25 – 35% of my time in tracking down details for many of the stocks I own or track.

Have a look at a Sample Analytical Report to see the detailed information provided.

D4L-Alerts

The final piece of the premium service are the alerts, which provided emails to me about when the premium content has been updated, when D4L makes trades in his own account, and/or breaking news such as dividend cuts for any of the stocks followed.

What I Like

Here is a quick summary of what I like (and frankly why I subscribe) about The D4L-Premium Services:

All of the dividend data I need to run a good stock analysis in one easy to read format

Saves 25 – 35% of my time doing stock research

A focus on dividend stocks provides me with the targeted dividend data I need

Introduction to new stock ideas they get presented in the Analytical Reports and the Dashboard

D4L is very responsive to questions about the data

Low price – I hardly notice it hitting my Paypal account

What I Would Change

I actually struggled with presenting some things that I didn’t like about the service because it does give me what I need – dividend stock ideas organized logically and in great detail. However, to ensure I am providing a fair review I wanted to let you know what I do not get as much value from.

The D4L-Alerts, although helpful for letting me know when the content is updated, do not provide me with much value when D4L lets me know when he made a specific transaction in his own portfolio. I manage my own portfolio according to very strict asset allocation guidelines and every stock and holding has a specific place. As such, it is not very relevant for me to know when a stock trade has been made in another investor’s portfolio. Therefore, I quickly read the emails when they come in and then do not act on them.

Pricing

Pricing is simple, and frankly very cheap. The monthly cost is only $5.95 and you get all three services mentioned above. I pay via Paypal so I am familiar with the transaction engine. I know D4L so I absolutely trust him to be honest and ethical, but having the transaction go through Paypal provides that little bit of extra comfort level.

Summary and Final Opinion

As I said at the outset, I have tried and always ended up cancelling a number of investment newsletters because I was never really looking just for straight-up recommendations on stocks to buy. I would much prefer to build my portfolio and do the research on my own stocks so that I know everything I can about my dividend stocks.

The only premium web content I do pay for is The D4L-Premium Services because it provides me with a lot of the dividend data I need in one nice package and saves me a great deal of time in tracking this data down all over the web. For $5.95 per month, it is by far the cheapest services I have ever bought as well! I encourage you to give it a try here.