To go travelling for a year, Ms DGI&R had to quit her job. I was fortunate enough to be able to take a year leave and come back to the same job. Since we’ve been back Ms. DGI&R has been working a temp job and looking for work. Some more concrete options have emerged recently, but one of the job offers doesn’t offer any type of pension plan. This got me thinking of different options for her. I decided that this can be made up for with a higher salary and diligent savings routine.
I’m a dividend growth investor (DGI), so you would think, we would just pocket the extra money and invest it in dividend growth stocks. My DGI strategy involves buying quality dividend growth stocks at cheap prices. My entry criteria for “cheap” is fairly strict, so I spend a considerable amount of time waiting for prices to drop. When you wait around for a long time you are losing potential higher returns because you are out of the market. This is why I thought adding a couch potato element to our portfolio would be a good idea. The couch potato strategy involves investing in a few index ETFs based on your risk tolerance and then rebalancing at a set interval. It got its name because it doesn’t involve a lot of hands on effort. You can laze on the couch while making a decent return.
If Ms. DGI&R gets the job I will strongly consider setting up a personalized pension plan based on this strategy for a number of reasons:
- It’s easy.
- It doesn’t take a lot of time.
- It can have low fees. The plan I came up with would have a MER% around 0.25%.
- It will beat 80-90% of actively managed mutual fund returns over a 5 or 10 year period.
- It provides instant diversification.
- Rebalancing based on asset allocation will generally force you to buy low and sell high.
You may be thinking this sounds great, but if it’s so great why haven’t I always been doing this? I’m relying on an increasing stream of dividend to support my retirement expenses. I’m more focused on dividend income vs capital gains which is the main reason I use a dividend growth strategy. Don’t get me wrong capital gains are still important, but my main focus is on an increasing stream of dividend income. When you invest in dividend paying companies that regularly increase their dividend, capital gains will generally follow.
I think down the road my portfolio will be a mix of dividend growth stocks and low cost index ETFs as I like both strategies and I think the two strategies could work well together. While I don’t currently use the Couch Potato method I did set my sister up with this strategy a few years ago as she doesn’t have a lot of interest in stocks and wanted a hands off approach. The other reason is I’m a DG investor, is that I like dividend growth investing and have an interest in the topic.
If you want to learn more about the couch potato strategy check out the Canadian Couch Potato blog. It’s a great website. On the site they have a variety of different model portfolios. I used the complete couch potato as a starting template and made some adjustments to come up with the following:
Canadian Equity – 25%
VCN – Vanguard FTSE Canada All Cap Index ETF (Estimated MER%: 0.15%)
US Equity – 20%
VUN – Vangaurd US Total Market Index ETF (Estimated MER%: 0.18%)
International Equity – 20%
15% – VDU – Vanguard FTSE Developed ex North America Index ETF (Estimated MER%: 0.34%)
5 % – VEE – Vanguard FTSE Emerging Markets Index ETF (Estimated MER%: 0.40%)
Canadian Real Estate Investment Trusts (REITs) – 10%
VRE – Vanguard FTSE Canadian Capped REIT Index ETF (Estimated MER%: 0.40%)
Canadian Bonds – 25%
VAB – Vanguard Canadian Aggregate Bond Index ETF (Esimtated MER%: 0.26%)
This portfolio would have a MER% of 0.25% with a 65% allocation in equities, 10% in REITs, and 25% in bonds. Ms DGI&R and I are in our mid to late 20s, so we have higher allocation in equities. As we approach retirement, we’d consider lowering our equity exposure and increasing our fixed income and bond allocation.
You’ll notice that I’ve chosen all Vanguard ETFs. This isn’t a mistake. Vanguard generally has the lowest MER% which is why I like them. Also going forward I believe that if someone else drops their MER% Vanguard will decrease their fees to be competitive. Vanguard is the low cost leader, but some of the ETFs shown are quite new to Canada, so you may want to consider other more established options. Check out the Canadian Couch Potato for alternatives. You may also want to consider adding some real return bonds to the portfolio, but I chose just to stick with the Vanguard Canadian Aggregate Bond Index ETF.
If Ms DGI&R takes the job I think I’d have her contribute 10-20% of her gross pay into this type of portfolio. So what do you think of my private pension plan?
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