ETFs and Dividend Paying Stocks in a Single Portfolio

Another reader question today:

“Do you combine the 70:30 approach with dividend stocks (I mention a 70-30 approach for investing in my book, The Wealthy English Teacher, where I refer to something like having 70% of your portfolio in stocks and 30% in bonds)?

Is it sensible to have a portfolio like the following:

10% HXT Horisons S&P/TSX 60 index
25% Vanguard FTSE Developed Index ETF
30% S&P 500 index
30% Horison’s Canadian Select Bond Universe ETF
5%  Vanguard FTSE Emerging Markets Index ETF

+ shares in various Dividend stocks

Coke
Mcdonalds
Telus
BMO
etc.”

My answer: 

I generally recommend following one of two strategies:

1. Investing in dividend paying stocks almost exclusively, only using ETFs for some diversification. For example, you might buy small portions of GLD or SLV if you wanted some exposure to precious metals, or you could buy things like VDY if you’re Canadian but have most of your money invested in American stocks, an emerging market ETF if you have only big companies from developed markets, or a bond ETF to get some exposure to fixed income. In this case, dividend paying stocks would be 70-95% of your portfolio and ETFs would be 5-25%.

2. Investing in a mix of stock and bond ETFs, such as in the sample portfolios I recommend in my book.

There are a few major problem with your strategy:

1. Any big blue-chip companies you would buy are already major portions of three of the ETFs  you mention (TSX 60, Vanguard FTSE, S&P 500), so you would actually be doubling up on lots of stuff and losing a lot of the value of diversification.

2. Your strategy seems kind of confusing. It would be really hard to keep track of all this stuff and rebalancing or deciding where to employ new money would be extremely difficult. In investing, simple is the best unless you are a professional who devotes hours a day to it. It’s better to just pick a single strategy and stick with it, faithfully.

3. Your trading costs would be too high. If you start investing with say $10,000 and are buying 5 ETFs and 10 dividend paying stocks, that’s a huge portion taken up with fees. With such a little amount of money, it’s better to just buy 3 or 4 ETFs.

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