Rules are there for a reason

I was but a young lad when I bought my first shares. I am not sure it was even legal for a stockbroker to fill orders placed by a boy not yet in his teens. I think he thought it was cute that I was buying Bell Telephone stock. (I still have receipts from purchases I made in my early teens.)

I paid the down-payment on my first home with money raised by selling Bell stock. Years later I sold my shares in Apple computer and Britoil to meet financial demands.

Owning stock has been a good to me.

When I took an early retirement, I took all the money I was given and put it into the stock market. I didn't just pick a stock or two, cross my fingers and invest. I followed the rules. For instance, one rule insists one must be diversified. Never put all of one's eggs into one basket, so to speak.

I spread my investments around a multitude of companies and sectors. Banks, telecoms, energy companies, utilities and more attracted my interest and my money. It was a rich mix and very rewarding mix. Today, 14 years after retiring, my portfolio has kept the wolf from my door thanks to the generous dividends, while the portfolio itself has about doubled in size. Altagas, considered an energy company by some and a utility by others, is one example of the rewards of buy-and-hold diversified investing.

Why is diversification so important? Because one cannot see the future. No one has a crystal ball. If you don't believe me, check out the stock-picking histories of some major players in the stock analyst game. Very few get close to 70% right. Some analysts manage to get into the 60s but many more are in the 50s. At this point, one can do as well flipping a coin.

When it came to investing in Canadian banks, I didn't just buy the top suggestions but the top six Canadian banks. This means, I bought some National Bank along with the Royal, TD, Bank of Montreal, ScotiaBank and the CIBC. Over the years, National Bank of Canada has not rated all that highly. Its doubling in value over the years has been a wonderful surprise.

Diversification works but it should not be asked to work alone. Team it with other rules such as "buy quality." Stock prices do not just climb. Stocks also suffer price collapses. Buying quality helps to lessen the chance a portfolio will go down for the count. Quality rebounds.

One diversifies by investing in a mix of stocks and investments. I like to aim for about 25 to 30 different investments. These are mostly individual stocks but I also add a few ETFs to the mix. For instance, picking an individual REIT is exceedingly difficult. Buying an ETF like RIF or ZRE solves the problem.

Adding U.S. and international stocks to one's portfolio is another way of adding diversity. I like XUS, the iShares S&P 500 Index ETF. With XUS you gain exposure to the 500 largest publicly traded U.S. companies. For international exposure, I like VIDY, the Vanguard FTSE Developed ex North America High Dividend Yield Index ETF. This gives one exposure to a raft of international companies that all share one characteristic: all offer high dividend yields.

Of course, one should not invest too much in just one or two sectors. As I said earlier, I invest in banks, utilities, real estate, energy companies, telcoms, U.S. and international stocks and more. A chunk of my portfolio is always invested in cash. I keep the cash in a money market fund, TDB8150, which pays 4.55% today.

Another good rule is do not try to time the market. You may find this difficult, if not impossible, but it means if you believe a stock is a great buy then buy it. If you put off the purchase while waiting for the stock price to drop, you may miss the buying opportunity completely. This has happened to me more times that I care to admit.

Do not put too much into one investment, especially into one stock. Many believe five to ten percent should be one's outside limit. Why? Think of Nortel. If this name does not set off alarms, click the link: Nortel. I worked with a fellow who shortly before retiring got caught in the Nortel crash. He tried to average down as the Nortel stock tanked. Nortel stock never recovered and it took a great deal of my friend's savings with it. All too sad.

Don't use money to invest that you cannot afford to either lose or to tie up for an indefinite period. If you bought quality, if your investment pays a good dividend, you will be paid to hold and hold and hold. I have often held stocks for very long periods while the stock slowly recovered in value. 

Right now, today, Algonquin Power is in this category. I believe the financial blood bath has stopped, AQN dropped in value by more than half. Ouch! Today it is well off its historic lows and will slowly recover in value. AQN pays more than 5.25%. If the yield is calculated on my original investment, I am still enjoying an almost 4% yield. Yes, I can afford to be patient.

My last thoughts on this topic are that you should make sure your portfolio, your investment mix, is in tune with your temperament. One must sleep at night. Whatever you do, make sure you are comfortable with your investment decisions, that you can live, and live comfortably, with whatever you decide.

For instance, I have about four percent of my retirement income portfolio in TC Energy (TRP). TRP is out of favour with investors today. It is threatening to split into two companies and the market is not happy with the decision. I don't see a Nortel-like demise in TC Energy's future. But no matter, I am not overly concerned as I am not overly exposed.

Building a retirement portfolio is easy

When I retired I put my savings into the stock market. I discovered putting together a retirement portfolio in neither difficult nor all that risky. This is a classic buy and hold portfolio that rides out bear markets with grace.

The first stocks I purchased were bank stocks. The Royal is Canada's largest bank. Today it is paying  dividend of $5.28 for a yield of 4%. TD and the Bank of Montreal are two other must-haves when it comes to Canadian banks. TD pays a dividend of $3.84 for a dividend yield of 4.4%. BMO is paying $5.72 for a yield of 4.5%.

• BMO - 4.5% dividend yield
• CM - 6% dividend yield
• RY - 4% dividend yield
• TD - 4.4% dividend yield

One Canadian bank down on its luck is CIBC. Its depressed share price translates into a 6% dividend yield from a dividend of $3.40. Hold these four banks and you have checked off the financial holdings in your portfolio. Note: These Canadian banks are famous for not cutting their dividends. Invest $60,000 divided equally among these four bank stocks and you can count on about $2835 annually in dividend income.

Next, I would turn to the utilities sector and put about 15% of my retirement savings in a mix of Emera, Fortis, Hydro and possibly a little in Alta Gas. I think of Alta Gas as more of a utility than a pipeline.

• Emera - 5.3% dividend yield
  
• Fortis - 4.1% dividend yield
  
• Hydro - 3% dividend yield
• Alta Gas - 6% dividend yield

Put $30,000 into these four utility stocks, 4% in all but Hydro, which get 3%, and you can count on about $1410 annually in dividend income.

Pipelines are another solid investment paying fine dividends. All retirees have money invested in pipelines even if they do not know it. The Canadian Pension Fund, CPP, has a large exposure to pipelines. Buy Enbridge (ENB), TC Energy (TRP) and Pembina (PPL) and you have three good, solid companies. Note the generous dividends. There is a good reason the CPP likes pipelines: the dividends.

• Enbridge - 6.5% dividend yield
• Pembina - 5.7% dividend yield
• TC Energy - 6.6% dividend yield

Put $30,000 divided equally among these three pipeline stocks and you can count on about $1880 annually in dividend income.

This brings us to telecoms. One simply must have exposure to this segment of the market and there are lots of good companies in which to park some retirement money. Think Bell, Cogeco, Quebecor and Telus. 

• Bell - 6% dividend yield
• Cogeco - 4.4% dividend yield
• Quebecor - 3.8% dividend yield
• Telus - 5.2% dividend yield

Divide $40,000 equally among these four telecom stocks and you can count on about $1940 annually in dividend income.

With only a $160,000 invested, our retirement income portfolio is already generating more than $8000 a year. It is a rare retired couple who have not saved at least $160,000 toward their retirement. The present portfolio contains fifteen different companies. This is approaching what many claim is the ideal number of investments for a small portfolio. 

If our retirees have a bit more to invest, it is time to consider putting a little into the American market. It is, after all, the biggest game in the world. A couple of American-based ETFs does not seem unreasonable. I'd put $40,000 into the States with 66% in ZWA, the BMO Covered Call Dow Jones Industrial Average Hedged to Cdn. Funds ETF, and 34% in XUS, the iShares Core S&P 500 Index ETF. (The ZWA is here for the dividend. Seniors need income. If you do not need the income, put more into XUS.)

• XUS - 1.4% dividend yield 
• ZWA - 6% dividend yield

Invest $40,000 divided as detailed in these two ETFs and it should generate about $1775.

Not having anything invested outside North America would be seen by some as a basic error in building a properly diversified portfolio. I am not one of these folk but if you are I would think of adding an ETF like VIDY to the mix. A Vanguard ETF, VIDY has a very low MER and pays a nice dividend of 4.35%.

If I had $25,000 I'd add some VIDY and increase my income by $1085 annually.

• VIDY - 4.35% dividend yield

At this point, I just might call it quits. I could add some health care but the stuff I would buy does not deliver the dividend income I need in retirement. And what do I like in health care? Think TDOC and XHC.

Every portfolio I have ever had contained something that was there just for fun, to provide some excitement. I wouldn't add a lot of the following but I would be comfortable putting $25,000 in my portfolio split evenly between BN, Brookfield Corporation, and BAM, Brookfield Asset Management.

• BAM - 3% (estimated) dividend yield
• BN - 1.4% dividend yield

Brookfield is a fine holding in any portfolio. BAM, a recent spin-off, promises to pay a good, if not great, dividend. BN has a posted dividend yield of 1.4%. My hope is that the Brookfield investment will deliver excellent capital gains along with a fair dividend to pay one for holding the stocks.

There, we are done. A quarter of a million invested and an income of approximately $11,400. That's close to a thousand dollars a month. This portfolio delivers the almost mythical four percent without breaking a sweat. 

If one does not already have a TFSA, tax free savings account, I'd get one. Putting as much of this investment as possible into a TFSA makes a lot of sense. Avoiding some taxes makes a dividend income in retirement go farther.