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Help! I can’t understand if I’ve made any money with my dividend-paying investments!

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Having difficulty understanding if you’ve made money with a dividend-paying investment?

So many investors look at their statement when it arrives and think:

I haven’t made any money! (Cue gnashing of teeth.)

But is it true?

Let’s say you hold investments that are of a dividend-paying nature. How do they operate?

Well, whether you’re investment is a mutual fund, an ETF or a stock, if it pays dividends, and you don’t really understand how dividends work, you’ll be confused.

Paid to wait

First, it’s important to separate your original investment from your dividend payments (distributions).

Dividend payments might be:

  • Monthly
  • Quarterly


  • Yearly

Most dividends come in quarterly payments.

In this example, I’m going to use Royal Bank, a widely-held Canadian bank stock. It doesn’t matter what dividend-payer you use. It’s also the same with an ETF, a stock or a mutual fund. It’s only the terminology that changes (e.g. shareholder or unitholder).

Royal Bank pays a dividend of .63 cents quarterly. If you hold 100 shares of Royal Bank, you’ll receive a payment of approximately .63 cents four times per year per share.

Why “approximately”? Because depending on the health of the company, it may raise or lower the dividend. For example, Royal Bank raised it’s dividend payments this year. It’s first two dividend payments were .60 cents, and the last two were .63 cents.

To make things easy, let’s assume Royal Bank had made four dividend payments of .63 cents:

4 x .63 = 2.52

In my example, the dividend payment would be $2.52 per year. If the stock were valued at $62.00, that yearly dividend payment would be equal to 4.06 per cent (or one year’s dividend payments). Our example is very close to Royal Bank’s dividend yield (currently 3.94 per cent).

Let’s imagine the Royal Bank illustration above was a mutual fund. If the fund paid a dividend of $2.52, the dividend payment amount would be subtracted from the unit price each quarter.

Each time the dividend was paid (.63 cents), the unit price of the fund would be subtracted by the dividend payment.


But wait! Wasn’t there a dividend payment?

Because your Adjusted Cost Base (ACB) changes when dividends are paid out.  If the unit price of the fund did nothing, for example, ended the year at the same price it began it, your investment would look like it hadn’t made any money. Superficially, at least.

But it would have, because, when you receive the dividend, you get more shares / units. Your 100 original shares will increase in number.

Didn’t that fund pay $2.52 for the year? And wasn’t that payment supposed to be 4.06 per cent? And so, didn’t you, as an investor, make over 4 per cent on your investment?


And every time the dividend was paid out, didn’t you get additional shares in your investment?


But the four dividend payments, when made, count as dividend income if they’re held outside of a registered account. The dividend is reinvested into the fund. So, when your payment of .63 cents per share is made, for accounting purposes, it’s considered new money and a new investment.

In a future post, I’ll give you an example of what this looks like, and a key error less-experienced investors make in understanding their investments.

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Image: Flickr, Daily Dividend.

Written by johnrondina

August 27, 2013 at 5:35 pm

Ch-ch-changes, self-mastery and the stock market

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zenmarketFear, greed and change

The more things in the market change, the more they stay the same

Ah, the markets … If you want to do a great study on fear and greed, look no further.

In summer 2012, I posted Is it better to have invested, and lost investing, than never to have invested at all? (There may have been a little bit of cheek in that title.) The market had taken a bit of a beating after hitting highs in early 2012. Investors were piling into bonds, driving bonds higher and higher. Everybody was piling into Apple, and Apple would soon make an all-time high.

I still don’t know what I was waiting for
And my time was running wild
A million dead-end streets
Every time I thought I’d got it made
It seemed the taste was not so sweet
So I turned myself to face me
But I’ve never caught a glimpse
Of how the others must see the faker
I’m much too fast to take that test

— Changes, David Bowie

Ch-ch-changes: Turn and face the strain

Just when many investors had given up on the markets and run to bonds, bonds peaked and the markets went on a tear. To date:

  • European and U.S. stocks outperformed
  • Many had avoided European and U.S. stocks because of the various end-of-the-world scenarios hitting the headlines hard at the time
  • Apple began its more than 33 per cent decline, losing one-third of its value or more than $230 billion
  • RIM (now Blackberry) more than doubled in value (though it has pulled back lately)
  • Government bonds/treasuries haven’t done a lot while the stock markets have done well
  • Dividend-paying stocks had a good year
  • Gold didn’t glitter
  • More than $140 billion of announced U.S. M&A deals in February alone

Fashionably late doesn’t work in the markets

Suddenly, retail investors felt they might be missing the party. And they were. As these investors came back, a virtual upward spiral led to:

But, is this different than what’s gone before?

Financial information burning holes in space

The avalanche of information that surrounds the stock markets and much larger bond markets is daunting to say the least. Few can digest the information outside of financial professionals. Even Warren Buffett, by far the most successful investor I can think of, will tell you financial professionals don’t know exactly what the market’s going to do — and Buffet says he doesn’t care, in the short-term.

So, what’s an investor to do in the digital age when information travels so fast it seems to burn holes in space?*

Eat what’s good for you

Well, the flood of information’s always been there. The tools of dissemination have just changed. You still need to be intelligent about what you consume.

If you have a good plan, and the conviction to stick with a good plan, you will do well as an investor over time. Being an investor is sort of like being a business owner. You have to be strategic, and you have to devote some time to future growth. That was true fifty years ago, and it’s true today.

More wrong than right

Boys and girls who cry wolf will eventually be right, but are more wrong than right

Mayan calendars, financial crises and the boys and girls who cry wolf will test the mettle of who you are and what you plan to do. It’s always been that way, and it’ll always be that way.

There will be corrections, but there will be long moves forward. You’ll read about high fees and why ETFs** are better than mutual funds, and, in some cases that’s very true, but, what’s even more true is:

  • If you’re avoiding the markets because you’re overwhelmed with information, talk of high fees and the fear that the end is nigh, remember there will always be reasons to set your hair on fire. Markets will correct. Markets will advance. And you’ll always be able to find bad news if you look for it.

The strategy of sticking to your strategy

Get a strategy. Stick to it.

Despite everything, the stock market is still the greatest engine for wealth creation the world has ever seen, and mutual funds are the single easiest investment for the average investor to participate in. The 1 per cent have known about equity markets for a very long time. Information about wealth creation has been widely available for a long time.

While the world may be changing rapidly, especially with respect to communications, investing basics, for the average person, haven’t changed. In a sea of change, there’s still a pattern that holds true.

Keep working your garden

I once watched a gardener working on a Japanese garden. Imagine if he changed his plan every hour and began creating a different garden … Would he ever achieve the aesthetic harmony he set out to?

What separates people from the rest of the animal kingdom is our ability to use our minds. If wealth creation, concerns over retirement or just understanding the great forces at work around us register with you, take a few steps forward.

If you’ve ever watched a baby learn to walk, the kid who’s running like the wind a couple of years later first learned to move forward with a few wobbly steps leading to some serious tumbles as ambition and confidence grew.

Want more information about investing?

Get informed.

Click here for more about bonds/fixed income investments.

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

Click here for articles about dividends/dividend-payers.

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*I’m a fan of social media when used judiciously. Please see my post Social cosmology: Social media is creating its own multiverse and the series of posts that came before it.
**ETFs are wonderful products, but you need to have a trading account in order to buy them. If you’re struggling to keep track of your mutual funds, a trading account may require more time than you’re willing to invest.

Related articles:

$1 Million Invested in Stocks in 1935 is Worth $2.4 Billion Today (If You Held On) (

Teachers’ Pension CEO Says Plan Should Take More Risk (

Written by johnrondina

February 19, 2013 at 4:05 pm

Part Three — Market volatility: Why and how to make it work for you

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In Part Two, I left off discussing benchmarks on investment returns.

Easy as ACB revisited

I stressed that such benchmarks only reveal how your investment would have done if you invested all of your funds at the beginning of the period. These benchmarks assume you were inactive during the time period you’re measuring, and you did zero rebalancing during 2008-2009 or other significant market corrections — exactly the periods of time when you should be (or should have been) more active.

While investors should have been rebalancing during 2009, research shows average investors freeze up during these times, or worse, sell.

The worst case scenario is that they sell heavily.

Let’s say you had a large cash position in your portfolio near the bottom in 2008-2009. New cash, profits you’d taken, whatever …

Now, let’s say you used that cash and bought equities around that time, which turned out to be the bottom or near the bottom of the correction. Your return would be considerably different. And this is why rebalancing is so important to the success of your investments, portfolio and retirement plan.

If you’d been following a sound rebalancing strategy, you would have bought during the downturn in 2008-2009 because your asset allocation would have drifted away from your plan.

Let’s use a simple illustration:

• You bought 50 shares (or units of a mutual fund ) at an average cost of $7

• Then you bought 10 shares at $5 (you were brave and when the market dropped 50 per cent in panic selling, you saw opportunity)

• You then continued to deploy your cash while the market was cheap and bought 10 shares at $6 (because of your rebalancing strategy, which you follow automatically. You bought while prices were cheap because your asset allocation had changed.)

• The market rose dramatically after this period and your asset allocation reached your target. You stopped buying.

So, your adjusted cost is:

50 @ 7= 350
10 @ 5 = 50
10 @ 6 = 60

Your total cost was $460. The price now is $7.
7 x 70 = $490

You now have profit of $30, called a capital gain.

In reality, your transactions will be more complicated, and there will be dividend payments in there somewhere. But the simplicity of this example shows us how following asset allocation strategies with your investments will help you lower your Average Cost Base (ACB).

Your equity component would have been, percentage-wise, less than it had been. Your allocation plan would have kicked in, and you would have bought the underperforming equity investments.

Even if you did this more gradually, before, during, and after the correction, it would have lowered your average cost.

One way for Joe and Josephine Average to get a leg up is to take advantage of what’s available to them. Tax-preferred or (deferred) investments and plans, and sound portfolio strategies included.

But research shows they don’t. Volatility spooks them, and sadly, this will cost the average investor over the long-term.

When I was a kid …

An older colleague I used to work with said the following, loosely paraphrased, about his lack of savings and investments in his youth: “When I was a kid, I was convinced I wouldn’t make it to forty.”

Heavy pause.

“I was wrong …”

I had asked him why he didn’t have an RRSP because I wanted to understand how he thought. He later added that he had lost a ton of money in real estate (Canadians seem to have forgotten the real estate crash that happened in 1989-1990 – Americans have had a harsh reminder).

Looking at real estate in this context reinforces my point of view on buying assets when they’re low. While it took residential real estate a long time to recover from ’89-’90, today’s real estate prices (supported by an extended period of low interest rates) prove that buying assets when they’re cheap is rewarding.

Yet nobody wanted residential real estate in ’89-’90, and many developers lost their livelihoods during that time.

Raising awareness, being startegic

Raising awareness about the investing habits of Joe and Josephine Average will help them over the long-term. They need to better educate themselves about market volatility and be more strategic in their approach to it.

While this is easier said than done, it is one of the reasons the Warren Buffetts do better than the Joe and Josephines when it comes to investing and financial planning.

Market volatility, understood properly, is your friend. Reminding yourself of this completely reframes the way you look at the market, your investments and corrections.

Maybe your friend goes a little berserk once in a while. Maybe he’s a little impatient or a little irrational at times, but he’s still your friend.

You know you can count on him when you’re down. Looking at market events this way, despite difficult times, puts you in control.

Just make sure the relationship is a long, diversified one.

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A simple way to arrive at the right asset allocation for your portfolio

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What’s your piece of the pie? 


Instant asset allocation

Asset allocation can be as complicated as you want to make it. But since many investors don’t have time to get overly complex about assets in their portfolios, here’s a simple look at how to allocate.

Financial planners used to say subtract your age from 100:

  • The remaining percentage is what you should have in stocks

So, if you’re 30, keep 70 per cent of your portfolio in stocks. If you’re 70, keep 30 per cent in stocks.

The best asset allocation for your age

Canadians can look forward to living longer. Because we’re living longer, we have to take this into consideration when it comes to our portfolios. Some recommendations are suggesting the number used should be increased to 110 or 120 minus your age reflecting our greater longevity.

If you’re living longer, you need to make your money last longer. You’ll need the extra growth that stocks can deliver.

Many experienced investors find that adjusting the number to suit their risk tolerance after a large correction, say, like 2008-2009, a good metric. Large corrections can get you in touch with your investor psyche pretty quickly. But be cautious about selling when the mood has reached maximum pessimism. It rarely turns out well.

In “Plan like a pension fund manager when it comes to your investment portfolio”, I discussed the benchmark for the average diversified fund manager. The important thing is to choose an asset allocation you think you can be comfortable with.

For example, if you had a 50/50 portfolio split, you could expect that your stock holdings would move a lot less than a broad index like the S&P/TSX 60 in Canada, or the S&P 500 in the U.S. While you may be tempted to think it’ll move half of one of these indices, it will depend on how close the equity component of your portfolio correlates to either of these indices. If your stock allocation is geographically diversified, this will also change things.

When you compare the S&P/TSX 60 (60 of the biggest companies in Canada) with a balanced fund that is geographically diversified, we’d expect, generally, to see:

  • Less volatility because of the fixed income component in the balanced fund
  • Less volatility because of the geographic diversification in stocks and bonds in the balanced fund

This is exactly what happens when you graph the S&P/TSX 60 and the Claymore Balanced Growth Core Portfolio (TSX:CBN). The Claymore portfolio is based on the Sabrient Global Balanced Growth Index. Roughly an 80/20 balance between growth and income-oriented ETFs holding stocks and bonds.

Diversification reduces volatility

The S&P/TSX 60 shows more volatility than the Claymore ETF. There are reasons for this.

The S&P/TSX 60 is made up of sixty of the biggest stocks in Canada – one country with a big presence in financials, energy and materials.

The Claymore ETF is geographically diversified. It holds stocks from all over the world. It also has a fixed income component. Its equity and fixed income allocations are further diversified. They hold different investments that perform somewhat differently depending on market/economic conditions.

What investors have to remember is that while volatility is reduced when fixed income products are added to a portfolio, it also reduces the upside of the portfolio when markets turn around. A geographically diversified portfolio with fixed income products added into the mix isn’t going to perform as aggressively as the broader stock market.

Most investors can tolerate less upside for less downside. As we’ve recently seen, it’s the drops that make people a little shaky in the knees.

Remember, should you want even less exposure to stock, there are plenty of products out there that are closer to a 60/40 split between equities and fixed income.

Asset allocation is going to affect performance and risk. You can always use systems (like the simple ones above) to come up with a benchmark for your portfolio, but in the end, your portfolio’s going to be slightly different because it won’t have exactly the same investments.

Opportunity abounds in down markets. Part of the opportunity of market volatility is figuring out your risk tolerance. If this last correction gave you palpitations, maybe you have too much stock.

But consider:

  • The markets have corrected. This graph is from September 2010 to September 2011. If you sell investments now, you may be selling near the bottom.
  • Having an asset allocation system in place is going to be the best benchmark for rebalancing your portfolio. If you haven’t had such a system in place, think, and act now.

There may be opportunity out there. In fact, the last few days in the markets have seen some extraordinary upward movements in equities. September is often the cruelest month in markets, but October has ended a lot of bear markets historically. Bad news travels fast and furious, yet the sounds of optimism often appear within the pessimism and noise.

*ETFs used here are for illustrative purposes

Get the balance right

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Can we simplify asset allocation?

Yes, we can.

While there may be more to asset allocation than just stocks and bonds, stocks and bonds are the best starting points for most investors. Anyone can become an investor through mutual funds or ETFs.

What have most investors heard about stocks?

• Stocks usually outperform bonds over long periods of time

Ok, now, in this hypothetical, let’s imagine that stocks take longer than average for that outperformance to take place. What can we do to bolster our portfolios?

If we find ourselves in a period where equities take longer to outperform than average, we can arrive at two conclusions:

• Fixed income positions (bonds) are even more important

• Rebalancing is even more important


Because, although a 100 per cent portfolio of stocks should statistically outperform over the long-term, most investors are more human than they are instruments of logic. People are emotional.  Since they’re emotional, what is theoretically true about investing may not hold true in real life.

Volatility takes its toll. Big market drops herald big investor reactions. When bad news reaches a fever pitch about stock markets, many investors start to feel ill. Investors start abandoning strategy and discipline.

After all, there’s Europe, a potential recession, inflated house prices in Canada, and a blue sky that’s sure to fall. (Never mind that equities haven’t been this cheap in quite a while.)

The only things that have really changed are the names of the crises. Not to belittle the difficulties we face economically – these are challenging times – but we’ve always faced difficulties economically. With market corrections, and, with prudent planning, difficulties become opportunities.

Seeing the opportunity in today’s markets may be better than running around screaming the sky is falling.

If your portfolio has a good allocation to fixed income products – if you have a mix you’re comfortable with – and you have a disciplined rebalancing strategy, you should benefit. There are times when stocks and bonds move up or down at the same time, but usually, stocks and bonds move in opposite directions.

If your allocation is 65 per cent equity (stocks) and 35 per cent fixed income (bonds), then when your allocation drifts, let’s say to 70 per cent equity and 30 per cent fixed income, it’s time to rebalance.

What do you need to do? Sell some stocks and buy some bonds. Sell the asset class that has outperformed, and buy the asset class that has underperformed.

Sell high. Buy low.

Everyone knows that, right? But it takes great discipline to do. You have to automate the process.

Some investors worry that they’ll impede portfolio performance by selling stocks when they seem to be doing nothing but going up. True. This happens. Your allocation may change early in a bull market. But many investors struggle seeing future benefit in the face of the madness of crowds. The “noise” affects their focus and their resolve. It can make investors buy at the wrong time or sell at the wrong time. In down markets, too many investors only see current losses or declines.

What might be the best rebalancing schedule theoretically, may not work for the average investor struggling to cope with “noise” during a market correction, especially, if it’s a severe correction like 2008-2009.

While the financial crisis may have caused some grey hair, it was one of the best times in recent memory to test out your portfolio. Recent weeks also put some pressure on investor nerves while squeezing portfolio integrity.

It’s times like 2008 – 2009 that make people happy to own bonds. Bonds performed very well as stocks declined.  Stocks usually outperform bonds over the long-term, but bonds add some insurance to your portfolio.

As the market began the steepest part of its recent decline, we can see that bonds once again outperformed as investors positioned themselves for safety. The steady income from bonds and the hedge they provide against market drops often make them fund manager favourites.

Why should the average investor be any different?

Bonds providing a hedge during recent market correction

Part Two is here.

Acquisitions. Speculation. Trend?

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Fund companies bulking up

Investors in fund companies have seen their investments outperform the market recently. Fund companies are getting bigger and bigger. Consolidation is the foundation for fund company stocks, and competition is pushing companies to bulk up. It’s about economies of scale and buying other fund managers that can complement holes in product lines.

Royal Bank will buy Blue Bay. KKR has bid for Perpetual. AGF wants Acuity. Bank of Nova Scotia signed to buy DundeeWealth. CI Financial is purchasing Hartford.

Dividend increases have also been stimulating conversation around the market. Some think Q1 is

Consolidation trend?

going to see further dividend increases. Will the trend in the fund sector of growing through acquisitions turn into growing dividends, too? In order to compete with other corporations, especially within the financial services sector, we may see fund companies increasing their dividends as well — especially if senior management thinks their business environment has stabilized.

Who’s next and will fund companies continue to outperform?

The Globe has a great chart in the following article showing dividend yields for fund company stocks.


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