One Simple Piece of Investing Advice For You

investLast year Globe & Mail interviewed 12 investors, from Bay Street to Wall Street to Silicon Valley, about how to make money now. Here’s what Satish Rai had to say about investing:

What can a boomer approaching retirement do?

I have a simple piece of advice for boomers: Live off the dividend income, not capital gains from stocks or bonds. If you need the capital gains, you have to try to time the market when you buy and sell. But if you’re able to sustain your lifestyle with dividend income—plus OAS [Old Age Security], CPP [Canada Pension Plan] and your pension plan—you won’t have to worry about fluctuations in the value of your portfolio. You’ll have a very good retirement, because there’s enormous opportunity around this.

This is worth repeating and underlining: Live off the dividend income, not capital gains from stocks or bonds. If you need the capital gains, you have to try to time the market when you buy and sell.

Dividends (the money paid to you the shareholder) are key, forget about timing the market. With sufficient dividend income you don't have to worry when stock prices go up or down.

This advice doesn't only apply to boomers, it also applies to anyone just starting to invest. The younger you are the more time you have to build a portfolio of quality dividend paying stocks. You'd be surprised you may even be able to live off your dividends before you reach your retirement age!

Remember focus on buying quality dividend paying stocks when they are undervalued and you will do very well for yourself.

According to the Globe & Mail:
Satish Rai, 50, joined TD as a management trainee in 1986 and began applying more analytical discipline to the bank’s investment decisions. He is now in charge of investments at TD’s $217-billion asset management division and runs the bank’s own pension plan.

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Are You Hoping for Stocks Prices to Go Up?

diagramMost investor buy a stock and then hope for the price to go up. You can hope all you want, but at the end of the day what really matters is the dividend (the money paid to you the shareholder).

Last year Globe & Mail interviewed 12 investors, from Bay Street to Wall Street to Silicon Valley, about how to make money now. Here’s what Geraldine Weiss had to say about about dividends:

What about the way investors approach dividend stocks?

I look at dividends not necessarily as an income factor, but as the only true measure of value in the stock market. Anything that doesn’t pay a dividend or some kind of return is a speculation—so dividends will always be a big factor in the stock market.

Has there been any change in the way companies approach dividends?

Blue-chip stocks have always paid dividends, and they should—they should share their good fortune with their stockholders. And income is really the main reason why an  investor would go into the stock market—to get a return on his investment dollar. We all hope for capital gains, but the only thing we can really count on is the dividend.

Remember focus on buying quality dividend paying stocks when they are undervalued and you will do very well for yourself.

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What’s the Easiest Way to Grow Your Money?

Would you like to increase the amount of money you currently make? Have you thought about how to increase your income? Getting a raise? Starting a second job? Changing your career? Launching a new business? Investing in real estate? All of these are great ideas but the time and effort involved is huge!

What then is the quickest and easiest way to grow your income? I would suggest investing in quality stocks that pay dividends. Dividends are cash payments made to shareholders, dividends are paid directly to you regardless if shares prices are going up or going down.

Here are a few dividend companies that you may recognize, in brackets I’ve put in the year they first starting paying dividends:

  • Coca-Cola (1893)
  • Enbridge (1952)
  • Fortis (1972)
  • Johnson & Johnson (1944)
  • McDonald’s (1976)
  • Procter & Gamble (1890)
  • Walmart (1973)

Let’s not forget we’re talking about increasing your income, so what if companies have been paying dividends for over 100 years? The key here is that most quality companies increase their dividends over time. Let’s take a look at the same companies but this time with the number of years of consecutive dividend increases:

  • Coca-Cola (52 years)
  • Enbridge (19 years)
  • Fortis (42 years)
  • Johnson & Johnson (52 years)
  • McDonald’s (38 years)
  • Procter & Gamble (58 years)
  • Walmart (41 years)

In 2005 the dividend for Walmart was $0.58 per share, today it’s $1.92 per share an increase of over 231% in just ten years. Has your salary gone up by 231% during the same time?

Suppose you purchased 100 Walmart shares in 1970, your initial investment would have cost you:

100 shares x $16.50 = $1650

Today your $1650 investment would be worth over $15 million, and you would be receiving over $393,216 in dividends annually. Not a bad way to earn $393,216 annually, think of all the money you’ll save without having to drive to a job every day :)

Increasing dividends provide you with the easiest way to grow your income. Start today to build a portfolio of stable large companies that continue to increase dividends year after year. You future self will thank you for the investment decisions you’ve made today.

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Do You Have An Advantage Over Large Institutional Investors?

MarketI've often heard the phrase "You can't beat large institutional investors, they have access to more information!" I disagree, an individual investor has the advantage of being small, and being able to hold a long-term perspective.

Here's what Motley Fool had to say about the advantage of being a small investor:

"While Buffett has buying power and access to deals ordinary investors can only dream of, there's one area where Buffett himself concedes that the small investors have the advantage.

Business Insider noted that Buffett finds it more difficult to achieve high percentage returns on Berkshire's current investment portfolio than to manage a much smaller amount of money.

It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
In managing Berkshire Hathaway's multibillion-dollar portfolio, Buffett needs to produce huge gains in absolute terms to post meaningful percentage returns. While a typical investor with a $100,000 portfolio would see a 50% return from a gain of $50,000, a $50,000 gain for a $1 billion portfolio would only amount to a gain of 0.005%. Berkshire would need many more winning investments to produce a 50% return. Furthermore, when a small investor finds an investment with good return potential, he or she can move a large portion of their portfolio into it. However, with the amount of money under management at Berkshire, only a small part of the overall portfolio could be invested before Berkshire has essentially bought out the company or pushed its price into overvalued territory.

Investors with small portfolios have the advantage of being able to produce outstanding percentage returns. So while you can't get access to Buffett's special deals, you can still profit from finding undervalued investment opportunities too small to move the needle for Berkshire."

Last year Globe & Mail interviewed 12 investors, from Bay Street to Wall Street to Silicon Valley, about how to make money now. Here's what Charles Brandes had to say about small investors versus large investors:

You say individual investors have a big advantage over institutions. How so?

The conventional wisdom is that the institutions always have an advantage over the little guy, and you can’t fight Wall Street. That is wrong. The institutions have the same behavioural handicaps as individuals. However, they can’t overcome them, because there is so much pressure in the short term for institutions to perform.

Therefore stop worrying about what large institutional investors are doing, as a small investor you have the advantage. Focus on buying quality dividend paying stocks when they are undervalued and you will do very well for yourself.

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Helping You Earn More in 2015

Growing Economy 2015I'd like to help you earn more in 2015. The beginning of the new year is the perfect time to set goals, and begin on the path to increase your passive income.

My approach to value investing is simple, build yourself a stream of passive income that increases every year. You can do this by buying quality stocks, and collecting their dividends (cash paid to the shareholders).

The income is passive, because after you've bought the stock there is no more effort on your part. You receive regular dividends (cash) just for holding the stock. The dividends keep coming regardless of stock prices going up or down.

Here's a list of some of the stocks that I own that have increased their dividends in the last 12 months:

International Business Machines (IBM), 15.79% increase
Johnson & Johnson (JNJ), 6.06%
Pepsico (PEP), 15.42%
United Technologies (UTX), 10.28%

BCE (BCE), 6.01%
Canadian National Railway (CNR), 16.28%
Empire (EMP.A), 8.33%

In 2004 Derek Foster retired at the age of 34, earning more than $25,000/year in dividends.

Earning a growing stream of passive income is possible, all it takes is education to learn what to buy and when.

I created Simply Investing to help people like you to learn quickly, and easily apply the principles of value investing. Hundreds of folks have taken my course, and reaped the rewards of building their own stream of income.

Here are my favorite blogs posts to help you earn more:

Do You Know When to Buy Stocks?
How I saved 4672% in Fees, and Continue to Make Over 14% Each Year on a Single Stock
What is the P/E Ratio, Could it Save You Thousands?
Top 5 Reasons Why Mutual Funds Fail

Happy New Year, and I wish you all the best in 2015!

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Worried About Not Having Enough Money?

Portrait Of A Worried Couple Calculating Financial BudgetAre you concerned about not having enough money for your kids, for yourself, for your retirement? The key is to make the right financial decisions today so that your future self will be taken care of.

The right financial decisions are:

  • Spend less than you earn, and invest the difference
  • Pay off your debts quickly
  • Eliminate or reduce the hidden fees you pay in mutual funds

All mutual funds carry fees, these fees are called the Management Expense Ratio (MER). The MER is there to pay the mutual fund manager’s salary, their staff, rent for the office space, the computers, and other administrative matters.

Even a 2.2% MER fee can eat up a large portion of your savings. $1000 invested in the stock market 50 years ago would be worth $514,000 today. However with fees of 2.2% the investor would only be left with $193,000 today. $321,000 would have been lost to fees. More than 62% of your investment would be lost to fees; no wonder most people are worried about not having enough money!

Can you afford to lose $321,000? If not, you owe it to yourself to learn how to invest by yourself for yourself. Investing is simple, focus on buying quality stocks when they are undervalued. Worried about investing in stocks? Don’t be, you’re already investing in the stock market each time you buy equity mutual funds. So you might as well learn how to invest properly for yourself and save the 2.2% fee.

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Should You Buy Growth Stocks?

Red growth arrowShould you buy growth stocks or avoid them? George Athanassakos (Professor of Finance at University of Western Ontario), discussed growth stocks recently in the Globe and Mail (August 26, 2014). Before I share with you the information from the article, it's important to understand the P/E Ratio.

I’m going to keep this simple, let’s begin with the only two definitions you will need for today:

 Price: this is the stock price

 Earnings: this is earnings per share; earnings are the amount of profit that company produces

Let’s take a look at a fictional company XYZ:

Company XYZ’s stock price is $50, therefore Price = $50

The company earned $5 per share, therefore Earnings = $5

Calculating the P/E ratio is easy, just divide the stock price by the earnings:

P/E = $50/$5 = 10

The P/E ratio for company XYZ is 10.

Basically this tells you that in order to buy one share of XYZ you are paying 10 times what the company earned:

10 x $5 = $50

Is it better to buy stocks with low P/E ratios or with high P/E ratios? Here is Mr. Athanassakos's answer, "My own published research has shown that, historically on average, low P/E stocks have beaten high P/E stocks by about 12% in Canada, and in the United States depending on the market, by between 7% and 11%. Research by Louis K.C. Chan and Josef Lakonishok, published in 2004 in the Financial Analysts Journal, shows that low P/E stocks beat high P/E stocks by about 13% in EAFE (Europe, Australasia and Far East) markets."

High growth stocks tends to have high P/E ratios, as we can see from the example below:

ViaSat Inc. (VSAT): 349
The Ultimate Software Group, Inc. (ULTI): 104
Glu Mobile, Inc. (GLUU): 115
Facebook (FB): 75
VMware, Inc. (VMW): 41

Mr. Athanassakos continues to discuss high growth stocks:

"U.S. research by Michael J. Cooper, Gulen Huseyin and Michael J. Shill, published by the Darden School of Business, looked at the stock performance of high growth firms and compared it with the performance of low growth growth firms over a period of 40 years. What they found was that low growth firms had an average return of 26%, while high growth firms returned a meager 4%. The low growth firms outperformed the high growth firms by a whopping 22% annually on average, over a 40 year period."

Conclusion:

Focus on quality stocks with low P/E ratios, and buy them when they are undervalued.

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