PODCAST 171
Safe Dividend Investing
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 171, on June 6th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 3 interesting investment questions.
The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful, self-directed investors.
Question #1
IF A START UP IS NOT SUCCESSFUL AND GOES OUT OF BUSINESS, HOW DO YOU RECOVER THE MONEY YOU INVESTED?
Over many years, I was once responsible for building a commercial risk computerized database of over 2 million companies. I had to set up systems to gather all commercial litigation from all the court houses in the country; all commercial collection claims from as many collection agencies as possible, aged-trial-account receivable balances from thousands of companies that sold to other companies. What did I learn from analyzing this flood of information on businesses?
I learned that less than 20% of the new businesses that are formed today will still be with us in five years. Success is just being able to survive.
We live in a capitalist society that is based on competition. A new business has difficulty overcoming the strength of an established competitor. People are creatures of habit. They will buy products and services that have historically benefitted from. Convincing them to try a competitive product is not easy. The benefit of a start up’s lower competitive price immediately makes it harder for a startup to realize a profit that will allow it to survive. Providing a competitive product with more features makes the product more expensive for the start up to produce.
To be successful a new business must be prepared to operate at a loss for however long it takes to capture a share of the market. This requires persistence, patience and a total commitment to building a business.
Most new business owners who were previously employed by a successful business before they launched their new business venture. They will soon tire of the constant struggle to survive as they watch their available operating capital shrinking.
Some of that shrinking capital to establish their new business may have come from mortgaging property they own, from many years of saving or from raising money in the stock market.
I come from a background in the mining industry where investors are sold on the potential of sudden riches buried in the ground. The reality is that it can take fifteen years to create a producing mine. Those who are behind its development live off the money they have received from selling shares in the mine to speculators.
I once was involved in selling the names, addresses and phone numbers of millions of North American executives to boiler room operations. These operations peddled speculative mining stocks for which the promoters received significant commissions.
It is not surprising that eventually they saturated the market for these speculative shares. Stocks that investors paid a few dollars were eventually trading for only a few cents on the venture stock exchange. At some point an investor realizes that they have lost their money.
The interesting question is why anyone would invest in any company that is not making a profit when thousands of companies exist that you can invest in that are making good profits?
The reason a company is formed is to make a profit. The reason individuals invest in an unprofitable company is because a salesperson has appealed to the illogical emotion of greed rather than the logical stating of facts such as a company’s operating margin percent, its audited book value, its price to earnings ratio and its dividend payout.
Investors in all start ups are gamblers. They think that they are going to be one of the chosen few who will become rich overnight by gambling on a startup.
If you look at decades of share prices and dividend payouts for a company, it is not hard to identify those whose strong management will provide increased share prices and dividend payouts for years to come.
This is why in my two latest investment guides “New York Stock Exchange’s 106 Best Dividend Stocks” and “Canadian High Dividend Investing 215 Scored Stocks” I display share prices and dividend payouts back to 1999 along with the factual financial information for making investment decisions based on facts not emotions.
Question #2
What websites can you go to, to find information to determine if you should invest in a stock?
The fact that you want to know where to find information that will guide you in making safe investments means that you are probably a self-directed investor or aspiring to be one. Most investors rely on a investment advisor to invest their money. Eighty percent of the time an investment advisor will recommend that you buy a mutual fund or a fund of some sort. They are trained to tell you that funds are safe because they diversify your money over many stocks, usually, hundreds of stocks but in some cases thousands. I can assure you that there are not hundreds of stocks worth investing in and that the reason funds are sold is that they provide a lucrative income for investment advisors who charge their fees every year that you own the fund. This annual charge is unlike buying a stock where you pay a nominal fee or no fee just once to acquire the stock.
In my early fifties I was once a naïve investor who listened to an investment advisor. I knew little about investing then and believed I needed an experienced professional to invest my money.
After he had lost $300,000 of my life savings investing in mutual funds, I took back what money remained and vowed that not only would I make my own investment decisions, but I would learn how to invest profitably in individual stocks as a self-directed investor. That was more than 20 years ago.
As a self-directed investor I earn an annual six-digit dividend income. This is realized from a portfolio whose value has grown steadily by several multiples over those 20 years.
There are many financial institutions providing self-directed investment services. Probably the bank you now have an account with provides such a self-directed service. You should be able to open a self-directed investment account within minutes online. Beware of going into your bank branch to do it because bank personnel are trained to pressure you into becoming a full-service investment account. Full-service accounts will eat up most of the profits from your investment account.
To attract self-directed investors your bank will usually provide you with access to free stock research services that are easy to use. This allows you to ask their computer such questions as, “What companies on the New York Stock Exchange are paying a dividend yield percent greater than 5%? How many of these companies have an operating margin greater than 20%? How many have a share price between $5.00 and $50.00? Often, they have standard set search criteria to make stock selecting simple.
Once you have identified as many or as few stocks as you wish you can then look at as much of the free financial and historical information on each stock that they provide to make good buying decisions.
It can take just hours to construct an investment portfolio of 20 strong stocks that will be safe and grow. Since you chose the stocks, you will know exactly what you are invested in and why you chose those stocks. You will not be flying blind like in a mutual fund not knowing what that mutual fund is now invested in. The banks often provide many videos that will also grow your investment knowledge.
To pay for the stocks you wish to purchase, you transfer money from your bank account into your stock trading account. You next access the stock exchange so you can see what price the stock was just sold or bought at. In this access to the stock exchange, you then place a bid for the stock at a price that will be attractive enough to a seller to accept your bid and sell the share to you.
The bank takes care of recording the sale and transferring the stock to your investment account. It will appear in your portfolio the next day. Any dividends now paid by that stock will also be deposited into that same account so they can be transferred by you back to your bank account or invested in the purchase of more stocks.
Depending on the financial institution they may charge a flat fee for each order received, no matter how many stocks you are buying in that order. Their transaction fee can range from $9 down to zero depending on the financial institution you choose to work with. All the recordkeeping and income tax slips are handled by the bank usually along with interesting analyses of your investments.
If you should sell the stocks the procedure is just reversed. The system has been developed over many decades and has always worked flawlessly for me.
There are also several free and fee-based stock information services that provide almost the same analytical data services for choosing stocks as the banks do. One of them would be Yahoo Finance. A google search of stock information services will bring several others to your attention.
In my books I walk new investors step-by-step through the process of using bank research services to choose stocks. I also send these book readers free stock scoring software which makes making their stock choices even easier by reducing stock choices down to an objective number to choose for their portfolio’s.
Question #3
How can I overcome my fear of losing money in the stock market?
The easiest way to overcome your fear of losing money in the stock market is to very carefully choose 20 financially strong stocks that pay high dividends.
What is a financially strong stock, you ask? There are obviously various grades of financial strength but a stock that would come close to meeting the nine following criteria would be very strong:
(1) Its share price is greater than $100.
(2) Its current price is greater than it was 4 years ago.
(3) The audited book value of the company is over $100.
(4) The share price is less than the book value by 50% or more.
(5) Five or more analysts have recommended the stock.
(6) The stock has a dividend yield percent of between 7% and 11%
(7) The stock has an operating margin between 70% and 80%
(8) The stock trades over 2 million shares on average daily.
(9)The stock has a price-to-earnings ratio of 1% to 6%.
You will never find a stock that meets all nine of these high standards. I based a stock scoring system on these criteria which rate a stock’s score from zero to 100. The highest score of the thousands I have calculated was 78 and the lowest was an 8. I avoid stocks scoring under 50. My investment guides sort stocks traded on the New York Stock Exchange and the Toronto Stock Exchange by several criteria including their score, share price and dividend yield percent.
The other factor that relieves the fear of investing is history. In my books I record share prices and dividend payouts going back each year to 1999. I pay particular attention to the market crash years of 2000, 2008 and 2020. I want to see what happens to the dividend payouts when a stock’s share price drops in a market crash when almost all share prices do. I want to see that those dividend payouts remained steady or grew.
Dividends are paid out of profits and profits are the result of revenue and expense decisions controlled by the executives of a company. These executives, at best, can only influence share prices, which are decided by optimistic and pessimistic bidding against each other.
A company that has shown ever-rising dividend payouts for 24 years is most likely to continue to pay dividends out of its profits. The primary purpose of a company is to make profits. Share prices are just a byproduct.
In those years when share prices do decline. You relax, live off your dividend income and watch as share prices recover as they always have for over 100 years. You have lost nothing because you have not sold any of your strong stocks. Their scores are often not impacted by a lower share price because a lower share price increases the scores of other measurements such as the dividend yield percent.
You invest equally in 20 strong stocks because if a major disaster were ever to occur in one of your strong stocks, the deviant behavior of one stock would have minimal impact upon your portfolio. Especially when your portfolio will often be showing a yearly gain in value by 12% and providing a 7% dividend income.
I have invested this way for over 20 years. My dividend income grows every year. The portfolio is several multiples larger than when I started. I pay little attention to share prices and can go for years without making changes to my portfolio. Since I carefully chose the stocks, I know their strength which allows me to sleep well at night.
I have taught hundreds, perhaps thousands, to invest this way and when I hear back from them they tell me they sleep as well at night as I do.
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