Succession Planning For Dividend Investors

Today’s edition of the newsletter is going to get a little morbid. Apologies in advance for all the off-colour death jokes.

Besides, it’s Halloween, so I figured it was fitting.

But it’s an important topic, and I think it’s something that will be especially interesting for our boomer readers because hey. If you invest in boomer stocks, you’re bound to attract boomer readers.

And unlike every other millennial out there who complains about boomers, I think they’re great. This here is a boomer safe space.

So, let’s start out with a scenario.

You’ve meticulously built a dividend portfolio for the last few decades, and you’re beyond happy with the results. The current income is enough for your family’s needs, and there’s enough left over to give your kids a gift every year, or to go on a few kick-ass vacations, or whatever. Your children also looking at a substantial inheritance at some point down the line.

And then, the unthinkable happens. You don’t look both ways before crossing the street (you’d think you’d know better by now) and you get pancaked by a bus that immediately crashes into another bus. Then the wreck is immediately struck by lightning. Your last thought is “at least I went out in the coolest way possible.”

Your funeral is an upbeat affair. Everyone mourns your loss (except your enemies — they show up to see if you’re really dead) and many stories are exchanged. The little sandwiches are dry, but nobody minds.

Once the shock wears off, your family realizes something. This dividend portfolio that was paying all the bills is a big mystery to them. Sure, you tried to explain it, but their eyes glossed over and their minds wandered.

Meanwhile, well-wishing friends and family that are in the financial industry try to help. Give your portfolio to my guy, they say, and he can do something with it. Screw all those boring dividend stocks. It’s time to make some real money.

In just a few weeks, all the work you’ve done is poised to be undone by a bunch of people that likely don’t understand you at best and at worst are acting in their own selfish interests.

Here’s how you can take steps today to make sure all your hard work isn’t undone.

Make your plans clear today

I know from experience that getting your spouse involved in your portfolio can be a task, but it’s important to make sure everybody is on the same page.

That means conversations with your spouse today, and then continually over time. 

You might think the ins-and-outs of the portfolio are the key point to discuss, but don’t get too immersed in the details. It’s not really important to tell your spouse that your 5% position in Royal Bank (TSX:RY) be maintained because it’s your favourite bank. Those are details that she likely won’t care about. Her attention span isn’t very big here, so you’ll have to keep it extremely big picture.

(By the way, I’m going to use the traditional husband/wife thing here because it’s the most common situation. But let me take a minute to give all the women who have taken control of their family’s money a shout-out here. I love it, and think too many women outsource such things to their spouses when they have the ability to be really good investors on their own)

What will really help is if she has a document that outlines some combination of the following:

• What the thought process was in building the portfolio

• How you decide what to buy/sell

• What the portfolio’s goals are

You want to keep this extremely high level and as short as possible. I’d try to get it down to a page or two only, and minimize the amount of work your heirs have to do.

The best plans are the simplest ones. Build one today that your surviving spouse can easily execute, and it’ll be like helping her from beyond the grave.

Portfolio construction

Investing is one of those exercises that goes against human nature a little bit.

When it comes to investing, you’re generally rewarded for not doing much. A buy-and-hold approach doesn’t seem very sexy over the course of a few months, but give it a few decades and the results are often spectacular.

More active investors tend to sell when a stock is down and the world looks more pessimistic — which is exactly the opposite of what you should be doing.

But I’m preaching to the choir here, so let’s move on.

The point is this: if you don’t want your heirs to make a lot of portfolio moves, then build yourself a buy-and-hold forever portfolio today. Give them a portfolio that doesn’t need a lot of maintenance.

Too many people want a little bit of action, so they put their cash into things that don’t necessarily mesh with their portfolio goals. Some might dabble in arbitrage plays (guilty!), while others might allocate 1-2% of the portfolio to some risky next gen AI stock.

What happens in these situations is every time you deviate from the plan you’ve created a decision for somebody else. I’ve long advocated investors put themselves into a position to make fewer decisions because, quite frankly, most of us are bad at making decisions. The more we make, the more chances we’ll screw some up. The exercise becomes even worse when that decision is then outsourced to somebody with even less knowledge of the situation.

You want to make these outsourced decisions as easy as possible, and should take steps to do so. Remember, the person you’re tasking with this doesn’t have the knowledge or ability as you do. You’ll want to dumb it down as much as possible.

In short, here’s what I’d do today to minimize the number of decisions my spouse has to do when I die, leaving her time to find a newer, better husband:

1. Create a portfolio where she doesn’t have to sell a thing

2. Leave simple instructions on where she should invest extra capital (like say if one of your stocks gets acquired)

   1. I’d recommend getting her to put it in a dividend ETF or something very similar, just to make it easy

3. Leave specific instructions to spend the dividends. If she can’t possibly spend them all, chances are your kids/a local charity can use it. If she can’t, see point 2a.

Yes, inevitably one (or more!) of the stocks in your portfolio will stumble and you would’ve sold. But you don’t want to give someone inexperienced that much responsibility. Besides, it’ll be fine if she doesn’t sell. The winners have a way of engulfing the losers over time, making those losses less and less important.

Control from beyond the grave

My rough estimate is about 98% of all inheritance issues come from:

1. Being too lazy to actually make a will and/or take care of your business before you die

2. Trying to control your assets from beyond the grave

I’d really advise against doing either of these things, but we’ll focus on the folly of the second point. After all, if you’ve read this far down, chances are you’re interested enough to not screw up the first part.

I often get asked about the viability of putting your assets in a trust, or some other controlling mechanism, and I always respond with the same answer. I’m not a fan, and I would never do it. A gift with strings attached is a pretty crummy gift.

I understand the desire to not have your hard work undone, and I agree that it would be frustrating to witness your heirs fritter away your hard work. But once you’re gone, guess what? That money isn’t yours anymore. It belongs to somebody else, and they get to decide what to do with it.

All you can really do is influence when you’re still alive, and then hope those lessons have been heeded. Even if you leave instructions, they can be easily ignored. Some people just won’t be able to ignore the allure of the

Here’s what I’d do to influence my heirs while I was still alive. I would:

• Point out how the dividend income keeps coming year after year, unless you sell

• Show how the income has increased over time

• Share projections of how much the income stream might be worth in 10, 20, or 30 years

The fact is gifting your children a massive dividend portfolio all at once is akin to a lottery ticket. Some will handle it well, while others simply won’t. No matter how much you try and influence them, or leave instructions, or whatever, it just won’t matter. All they’ll see is that dream house and all the furniture to fill it with. They just won’t be able to resist.

This has the ability to be especially frustrating because typically you can see such a situation developing a mile away. Hence the desire to control things.

The bottom line

I get why inheritance can be frustrating for the giver. I’d be pissed off too if I spent 50 years building up a dividend portfolio only to have someone screw it all up the minute I start taking a dirt nap.

But short of haunting someone from beyond the grave (spooooooooky!), there isn’t much you can do.

The key is to influence while you’re still alive, especially if the recipient is your spouse. If she’s around while you built it, then chances are she’s going to respect what you’ve done. That makes it more likely it’ll be continued. You can then make that all the easier with just a bit of education.

But the really important thing is accepting that your wishes might not be followed, and coming to peace with that. There’s no easy solution for that, unfortunately.