Stop thinking you can’t invest on your own. You can and you really should learn how. Start by educating yourself by reading ‘The Strategic Dividend Investor’. It’s not the only book out there on dividend growth investing but it’s a good one in my opinion.
read what others have had to say about it here.
If you don’t, you might live in regret all the time. We’ve all heard and maybe told those ‘big fish that got away stories’. It’s the same with stocks. It’s hanging on to the stock and taking part in it’s dividend growth year after year that drives it’s price up.
I’m going to give you just a couple good examples and reasons why and how this can work for you in the long run. I’m taking this info from the October edition of Moneysense magazine here in Canada who got it from longrundata.com
If you would have bought Royal Bank shares in 1995 you would have earned an annualized return of 17.17% per year. The value of just a $1000.00 investment would now be worth $30,864.
If you would have bought the lagging bank during this same timeframe which was CIBC, you would have earned 13.48% annually. Your $1000.00 would be worth $15,4440.
You can argue I guess that the past doesn’t necessarily equal the future but in my opinion that doesn’t apply to blue chip dividend growing companies. It’s different than buying a fund or an ETF. The growing dividend keeps driving the price up. It’s very powerful stuff and best of all for me, it’s fun to watch the dividends roll in.
OK you’ve decided to do this, what do you need to do first?
Things to do
- Open a self-directed open account at a major bank. Ask at the branch where you do your banking
- Transfer the money you wish to invest into that account (make sure it’s called an open account)
- If you haven’t already think about which stock or stocks you want to buy.
Let’s say you didn’t do this and went to a broker or heaven forbid a mutual fund salesman like I did back in the day. How many people do you think they each look after, how many accounts do they manage? You really believe they’re going to take care of your money when you walk out the door.
All they want to do is sell you what their particular firm is being paid to sell. Your bank will no doubt try and peddle you their mutual funds. Don’t bite, open you’re open account and do your own buying. Once opened you can do it online from the comfort of your couch. They would never sell you a common stock not even in their own bank. Why is that?
Because they don’t make a commission.
Nobody will take better care of your money than you.
On your own you are never going to manage anymore than a dozen or so stocks. You should hang onto them for the rest of your life. In the previous example why would you want to sell a winner like Royal Bank? Check back on the book
The Investment Zoo I recommended.
It’s not a complicated thesis we’re talking about here and besides that you are going to save a ton of money on fees.
If you let the nice lady at the bank talk you into buying her in house mutual funds, chances are they will cost 2% a year for every year you own them. If you had $50,000 to invest they would be taking out $1000 a year in fees. As your portfolio grows so does the amount of fees they extract. You could lose over a half million dollars or over 40% of your money invested over a timeframe of 25 years. That’s too much to give up. That’s why you have to educate yourself and then keep the faith that you’re doing the right thing.
Never be swayed or talked out of your stock positions because of what you hear on the news or a business channel. Have you heard of a Canadian Bank going bust? But you have heard of Bre-X. That’s why you stick to dividend growing blue chip stocks and hang on forever.
How to Start?
- if you own mutual funds sell them
- get rid of your salesman/planner/advisor/broker – you’re on your own now
- stop all automatic withdrawals to them
- take charge of your money and know what you have left to buy stocks
If you start this journey early enough in your life you will be able to retire early and comfortably. Think back to that return on Royal Bank. That should motivate you enough that you can do this. It’s at most going to take a couple minutes a month. It’s all I do and resist the temptation to constantly look at it. It will grow on it’s own after you plant the seeds.
Focus on this; don’t leave your money in the bank. Buy the bank’s stock!
You’ll do better. A lot better. That bank stock will pay you a dividend 4 times a year. Think of it as another deposit into your account. You will never buy a stock that doesn’t pay a dividend. NEVER! Your investing in the company not putting money in a fund or an interest account. This is different. You’re getting paid for owning a company, I love that feeling.
I keep my purchases pretty much restricted to banks, utilities, telcos and pipelines. It makes choosing in Canada fairly easy. You can look at the yield that these stocks are paying and choose the highest ones first. I always look at it this way, in 10 years it won’t matter what I paid for it today. It will be growing and it’s important to start collecting those dividends as soon as you can so they grow. Take up your stock positions as soon as your comfortable.
In my own account I keep 10-13 stocks each valued at a purchase of $10,000. I’m also collecting pensions from 3 different sources so I’m still growing my retirement fund because I don’t need the money right now. I still employ a dividend growth strategy in this account. If all goes well and it should, the money will double in the next ten years when I will use it to supplement my income.
For this strategy to work best you must have a lot of patience, exercise common sense and get to know who you are as an investor. If you like to gamble this is not going to work for you. This is a very boring strategy but it’s simple to implement and simple to manage. When you get bored just think about all the money you’re saving by not paying someone else to do this for you.
If you would have owned all 5 of Canada’s big banks since 1995 and held them until the end of 2015 you would have earned an annual return of 15.5%. (info provided by longrundata.com) That’s over a quarter million dollars just by investing 10K in each stock. Start as early as you can.
Most Canadian dividend paying stocks increase their dividend every year. Put another way you get a raise every year. This is passive investing and also another way in my case as a retiree, to develop another income stream.
Dividends are also taxed more favourably than other forms of income so keep that in mind. They are taxed at a lot lower rate than earning income you earn on a paycheque or in a savings account.
2016 Federal Tax Rates
- 15% on the first $45,282 of taxable income, +
- 20.5% on the next $45,281 of taxable income (on the portion of taxable income over $45,282 up to $90,563), +
- 26% on the next $49,825 of taxable income (on the portion of taxable income over $90,563 up to $140,388), +
- 29% on the next $59,612 of taxable income (on the portion of taxable income over $140,388 up to $200,000), +
- 33% of taxable income over $200,000.,
For 2016, dividends, designated as eligible dividends are subject to a dividend gross up of 38% and a federal dividend tax credit equal to 20.73% of the actual dividend.
When you buy a stock the yield never stays the same year after year. If you buy a GIC you lock yor money away at that rate and never benefit if an increase in rates is announced. You fall behind with this strategy especially if you lock it away for 5 years as a lot of people do. It’s different with stocks, as the company increases it’s dividend your yield increases too. This happened to me in September when Bank of Nova Scotia raised it’s dividend 2.8% and Royal Bank by 2%. It’s very rare for blue chip companies to cut a dividend. It has happened but not to often.
‘The Strategic Dividend Investor’ by Daniel Peris. If you’d like a copy you can purchase it here
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