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My latest crack at a "Retirement Portfolio"

Wednesday, April 28, 2021

Keep it simple, cheap and diversified

This was written with a relative who is nearing retirement in mind. They are considering dumping their mutual funds in favour of opening a self-directed portfolio account with TD WebBroker.

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There is a belief that new investors when starting out should steer clear of individual stock purchases. Not true. Some carefully chosen, dividend-paying stocks are an excellent addition to any portfolio with one caveat: the new investor's portfolio must have enough value to make diversification possible. Diversification is the "free lunch" of investing. The less money an investor has the more money that should be directed ETFs.

A small portfolio, $25,000 or less, can be well diversified if one buys just three ETFs: 

  • VDY (35%)
  • VFV (40%)
  • VIDY (25%)
  • the percentage in each ETF is flexible

VDY (Vanguard Cdn. High Dividend Yield Idx ETF) contains 48 stocks. The MER is only .21% and the annual yield is 4.16%. The top ten holdings are:

  • Royal Bank of Canada (RY)
  • Toronto-Dominion Bank (TD)
  • Bank of Nova Scotia (BNS)
  • Enbridge Inc (ENB)
  • Bank of Montreal (BMO)
  • TC Energy Corp. (TRP)
  • Canadian Imperial Bank of Commerce (CM)
  • Manulife Financial Corp. (MFC)
  • BCE Inc. (BCE)
  • Canadian Natural Resources Ltd. (CNQ)

VFV (Vanguard S&P 500 ETF) contains 509 stocks. The MER is only .08% and the annual yield is 1.28%. The top five holdings are:

  • Apple Inc. (AAPL)
  • Microsoft Corp. (MSFT)
  • Amazon.com Inc. (AMZN)
  • Facebook Inc. Class A (FB)
  • Alphabet Inc. Class A (GOOGL)

VIDY (Vanguard Developed ex North America High Dividend Yield Idx ETF) contains 533 stocks. The MER is only .30% and the annual yield is 3.44%. The top five holdings are:

  • Nestle SA(NESN)
  • Roche Holding AG(ROG)
  • Toyota Motor Corp.(7203)
  • Novartis AG(NOVN)
  • Unilever plc(ULVR) 
  • Personally, I own VIU but I've noticed that between the two, VIDY is often the best performer.

A new investor should always keep in mind that professional investors, financial advisors paid to beat the market, often fail. Why should a newbie think they can do better than the pros? So stick to the basics, keep it simple, cheap and diversified. For a few individual, high yielding Canadian stocks consult the Morningstar Canada Income Pick List for suggestions like the following:

  • Enbridge yielding 7.3%
  • BCE yielding 6.17%
  • Emera yielding 4.56%
  • IGM Financial yielding 5.87%.

Following the above advice, a new investor with a small portfolio ($75,000) could realize an annual income of $3190 or 4.25%. (10% of the portfolio in each of the four stocks and remainder divided among the three ETFs.) If the investor has more funds available, up to $20,000, keep this in a cash fund (TDB8150) and have some money available for emergencies or for buying stock in a bear market.

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