Dividend Smoothing is a very simple concept to understand and by the end of this short article you will 1) see why it doesn’t make any sense and also 2) why it actually makes “perfect” sense. But let’s get something unimportant out of the way first up, because surely I’m not the only one who imagined a dividend smoothie? Alas, this is not something we can get off the shelf… yet…that is, until the day I start my own Dividend Smoothie Fund (ASX:DSF).
“Come and get your dividend smoothie! This will keep your portfolio nice and healthy well into your (early) retirement!”.
Definition time: To me, Dividend Smoothing is just the process of adding to your portfolio with the intent to smooth out your monthly dividend income over a given year. What this means for the ETF purists out there, is that (in my humble opinion) you will need to supplement your ETF’s with some LIC’s and, dare I say it, individual shares! This is because most ETF’s here on the ASX only pay out on 4 specific months of the year: January, April, July, and October. That leaves us with a large gap of 8 months where we get nothing! That really sucks.
The whole point of Dividend Smoothing is a practical one: rather than getting few, large, and lumpy dividend payments throughout the year, you’re trying to get multiple, consistent, and budget-friendly payments throughout the year. Think of it as getting your “passive dividend salary” paid to you monthly as opposed to quarterly. What, do you plan to live like a hermit crab for the 3 months until the next payment?
Personally, I love seeing that cash flow come in on a regular basis. That’s why they call it cash flow!
So what’s the catch with Dividend Smoothing? Well, simply put, in the long-run, you’re making sub-optimal investments in the LIC’s, REIT’s and individual shares as compared to purely investing in ETF’s. Why would you do this? I don’t know. But I can tell you why I do it. Because I’m happy to sacrifice some of this (small) downside for the more conveniently-spaced payments throughout the year. Arguably, during your working life it should not matter when you get passive payments seeing as you have a salary coming in, but consider the following scenarios:
- You lose your job and are out of work for 6 months – you still gotta eat, sleep, travel, have fun, and get your fix of avocado toast until your next job;
- You decide to take a mini-retirement of 12 months to “go find yourself” and go travelling around the world – how nice would it be if each month your bank account was replenished!
Now, some of you may be thinking in the back of your minds about the P-word. Ok, let’s talk about property then! If you own property, then you by default have a smooth payment stream coming in, right? Yes, but this is technically only true once you’ve paid off that pesky mortgage. And another important fact to remember is those payments only come in so long as you have good tenants! Look, there’s absolutely nothing wrong with property investing when it’s done right and I plan to buy property along my own life and investment journey. However, until that time comes, I will stick to my concept of Dividend Smoothing.