Dividend Investing: Should You Invest Actively or Passively?

Dividend investing is often used as a passive investing strategy. The idea is to buy and hold quality dividend stocks. At the very least, these dividend stocks should pay out healthy dividends that are well protected. Ideally, though, they should be increasing their dividend payouts over time. 

That said, a passive dividend investing strategy still requires some active investing. For example, non-retired investors would likely be adding to their holdings over time, especially on dips or market corrections. They need to know what price or yield ranges are good for adding and that could change over time. 

For example, with stocks like Pepsi (NASDAQ:PEP) and Fortis (TSX:FTS)(NYSE:FTS) that earn stably growing earnings, you can use their yields as a gauge on when to buy. It would be a yield of about 3.2% for Pepsi and 4% for Fortis.

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Dividend Investing: Should you invest actively or passively?

For your dividend investing, should you invest actively or as passive as you can? Answering these two questions can help you decide.

What are your goals? Do you prioritize total returns or growing your passive income? If you care more about total returns, an active approach might make better sense. The idea is that when your holdings are fully valued, you would take profit and re-allocate to dividend stocks with higher anticipated returns. 

If your focus is on growing a passive income, then you can simply aim to buy quality dividend stocks at attractive valuations (or yields) and sit on your shares.

How much time do you want to put into managing your dividend portfolio?

If you enjoy managing your dividend portfolio immensely and it doesn’t feel like work at all, then you can consider taking a more active approach. However, if you would rather spend your time elsewhere, then you would probably enjoy a more passive approach.

More Food for Thought

Notably, being more active or involved in your investing don’t necessarily lead to greater long-term returns or higher income. For example, you might end up switching from a high-quality stock to a mediocre stock that appears to be trading at a better value. 

When you take a passive approach, you should still review your portfolio at least once a year for risk management purposes. Check on its diversification and whether you need to divest if, for example, the maximum allocation for a stock, industry, or sector is reached. Typically, managers of investment portfolios cap the maximum allocation for a sector to be 25% and a stock to be about 5%.

If you’re not sure whether your active or passive approach works well, track your returns and income over time and make tweaks to your investing plan as needed.

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Disclosure: As of writing, we own shares of FTS.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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