Hi, I'm 25 years old and currently have about 50k in my TFSA thanks to savings and gaining profit from the stock market. I'm currently invested all of the 50k into CIBC (CM.TO) for the dividends. From reading the MMM posts and Canadian Coach Potato, both recommended Vanguard as one of the better options. I read the posts and could not understand how is it better when the dividends is much higher for CM.TO than Vanguards. Even with MER, the bank still comes significantly higher than the latter. Are the only reasons Vanguard is the preferred safer choice is because of the MER and diverification? I would think a bank stock would be quite safe. I do not understand so I'm hoping fellow Mustachians can help explain this to me. Thanks and much appreciated! =)
While there is nothing wrong with disciplined dividend investing, it is quite risky to put all your eggs in one basket. With Vanguard, or many other low-cost Canadian listed ETFs, you are investing in a vehicle that holds the components of an Index. Index investing means diversification at a low cost. This reduces risk and is likely to increase long-term returns when compared to people who buy individual stocks.
Also, don't forget that dividends are only one component of return. Capital gains are also important. Unfortunately there is a lot of bad information out there that is biased to dividend based investing.
As far as Canadian banks go, they have been great investments for a few decades now. However, this has been in a period of generally declining interest rates, massive consolidation and reduced competition, declining taxation, and tonnes of positive legislation. While I believe that Canadian banks are generally good investments, I am skeptical that this long period of out-performance will continue for the following reasons: interest rates are close to as low as they'll ever be so they can only go up from here, there's not a whole lot of room left for consolidation without running into issues with the Competition Bureau, the appetite for ever lower corporate taxes by the voting public is starting to wear out, and the government is finally starting to realize that banks need to have more skin in the game so legislation is shifting out of the bank's favour. All this doesn't include the potential for increased competition by new internet-based financial companies.