The Simply Investing Dividend Podcast
The Simply Investing Dividend Podcast
EP61: Afraid to Start Dividend Investing?
In this episode, I answer your questions about getting started with dividend investing:
- How do I make money with stocks?
- Aren’t funds (mutual/index/ETFs) safer?
- Isn’t investing risky and time consuming?
- How do I get started?
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Are you afraid to start investing on your own? In this episode, I answer your questions on how to get started with dividend investing. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend podcast. Have you been waiting on the sidelines trying to get started with dividend investing? Well, this episode is for you. In this episode, I'm going to answer four of your questions.
Speaker 1:Let's start with question number one. You might be thinking how do I make money with stocks? Question number two you might be thinking well, aren't mutual funds, index funds and ETFs safer? And how about? Question number three, where you might be thinking, well, isn't investing risky and time consuming? And then, finally, the biggest question on your mind will probably be well, how do I get started with dividend investing? So let's start this episode with question number one how do I make money with stocks?
Speaker 1:So, when it comes to stocks, there's two ways to make money. One way is capital appreciation and the other one is dividends. So let's take a look at capital appreciation first. And that is just a fancy name for profit. So in this example, let's say you buy a stock for $25 each and then, eventually, you sell it for $35 each. Well, that means you've made a profit of $10. So capital appreciation of $10 per stock, and so in this example that's a return of 40%, and sometimes that can work out really well for you.
Speaker 1:Take a look at the graph on the screen. So we're looking here at Alphabet, which is the Google company, and you can see that back in 2014, the stock was trading below $40 a share and today, as of this recording, the stock is trading at $132 per share. So that is quite the capital appreciation in the stock price. So had you bought it when it was $35 or $40 or even $50, you could sell it today for $132. And that would be a really good profit.
Speaker 1:But sometimes it doesn't work out that way. Let's take a look at Cisco systems, and so here we go back and look at in the year 2000, the stock was trading at over $75 a share and the stock has never recovered since 2000. So it's 23 years. In 23 years the stock has never gone back up to $75 a share and you can see that, as of this recording, it's trading at $47. So anybody who bought the stock at its peak back in 2000, still has not made any money off of this stock In terms of capital appreciation. So if you're relying on the stock price, and stock prices go up and down every single day, that might not be a very good approach on how to make money consistently and reliably for the long term. So for that, we rely on dividends as dividend investors. That's what we're going to focus on, and I've been a dividend investor for over 23 years and I've been teaching dividend investing for pretty much the same time.
Speaker 1:So now let's focus on the second part of this equation on the screen how do I make money with stocks? Well, the other way here is dividends. So for those of you that are new to this episode, dividends quite simply is the company sharing its profits with you, the shareholder. So in this example, if a company is paying a dividend of $1 per share and you own a thousand shares, you'll receive $1,000 every year. For as long as you own those shares and as long as the company continues to pay the dividend of $1 per share, you can spend the dividends if you want, or you can reinvest them. The dividends are deposited directly as cash into your trading account.
Speaker 1:Dividends at the beginning may seem insignificant and very small, so the power of dividend investing comes with time and dividend increases. So the longer you stay invested and the longer you have to. So five, 10, 15, 20, 30 years or more, that is going to work in your favor. And what happens over time? With consistent dividend increases. So let's take a look at Coca-Cola, for example. The company has paid a dividend since 1893. It has had 60 years of consecutive dividend increases.
Speaker 1:Take a look at the graph up on the screen here. So we're not going back 60 years in the graph, we're just gonna go back to 2005, a little bit earlier than that, and you can see again. The stock price goes up and down and that's in blue on the screen. But what's important to us is the orange line and those are the dividends. And you can see the dividends go up every single year, even when the stock price tanks. In some cases we see the stock price dropping by more than $5 a share, sometimes $10 a share, and those are significant drops. But even when that happens, the dividend keeps going up. So how can the company continue to increase dividends when it's stock price tanks? Well, that's because the dividends are not paid from the stock price. The dividends are paid from the earnings or the profits that the company is making. So if the company is profitable over the long term. Sure, we can have one or two dips here and there, but over the long term, if the company is profitable, it will continue to grow its dividends, such as the case with Coca-Cola.
Speaker 1:So now let's combine this together. Let's combine dividends with capital appreciation over time and see what that looks like. So I'm gonna share with you a real life example with a company called ADM. So suppose in 2003, you invested $4,968 in ADM and let's see how much that would be worth today. So back then the stock price was $10.80 a share and you went ahead, let's say, and you bought 460 shares. So again, that's a total investment of $4,968 in ADM. Back in 2003, the company was paying a dividend of 24 cents a share. The dividend has gone up again. In 2004, it went up to 27 cents. In fact the dividend has gone up every single year since then.
Speaker 1:The dividend today, as of this recording, is $1.80. And you can see that if you add up all of the dividends received every year, that you would have received over $8,700 in dividends. And remember you only invested $4,968, but you got way much more back in dividends and the share price again, as of this recording, was $83.74. That means the stock price has appreciated. The capital appreciation has been 675% since 2003.
Speaker 1:If we add in the dividends, the total value of this investment is over $47,000. And remember, you started with an investment of $4,968. So that's a total return on the investment of over 850%. So in this case, you would have already made your money back, and more, just from the dividends. So if the stock price today is $83, do you care if it drops to $80 tomorrow? Not really. What if it drops to $70 tomorrow or $50 tomorrow or $30 a share tomorrow? Doesn't matter. You've already made your money. All of the dividends coming in are pure profit. So the dividends are essentially your margin of safety. So combine that with capital appreciation. You can see that the returns are really good.
Speaker 1:For your information, adm has been paying a dividend since 1927, and they've had 47 years of consecutive dividend increases. Think about how many market crashes we've had in the last 47 years, how many market downturns we've had in the last 47 years. Remember 2008, 2009, financial crisis. But companies like this, like ADM, like Coca-Cola, have continued to increase their dividends year after year after year. Every time the dividend goes up, that's more money in your pocket. So dividends provide a tangible, a real return on your investment. Without dividends, you're only hoping for the stock price to keep rising, and hope is not going to cover your living expenses. Dividends only dividends can do that.
Speaker 1:So let's move on to your second question, when it comes to getting started with dividend investing. So you might be thinking well, aren't mutual funds, index funds and ETFs safer? And there was so much news and data about these types of funds and the answer is not necessarily. So take a look at this. If you were to put money into an investment fund again, that's a mutual fund and index funds or an ETF what they're doing is they're taking your money and money from other investors, pooling it together and then buying stocks with it. So I've had people tell me well, I've had people say I don't think the stock market is safe, it's too risky. I don't invest in the stock market, but I do invest in index funds and ETFs. Well, if you're investing in index funds and ETFs, you're investing in the stock market because all they're doing is taking your money and buying stocks with it. Okay, so in terms of risk, it's going to be about the same or worse. So let's talk about that.
Speaker 1:What's wrong with investing in funds. So there's a couple of things here. When you're investing in funds, the funds are buying hundreds, in some cases thousands, of stocks and not all of those stocks today are priced low, so they might be overvalued. But when you invest, let's say, $1,000 or $100 or $5,000 into a fund, you are inadvertently buying stocks that are priced high. Remember, stock prices go up and down all the time. So if some of those stocks in an ETF are priced high, you're going to end up buying them anyway. So for more information on that, I suggest you go back and watch episode number one, where I show you step by step how to figure out if a stock is priced low or if a stock is priced high. So it's really simple. It's not that hard. Take a look at episode one and it's going to explain the difference, because as investors, we never want to buy a stock when it's priced too high.
Speaker 1:The other thing with funds is you end up inadvertently buying non quality stocks. So if you want to know what is a quality stock and what is not a quality stock, I suggest you go back and watch episode 21 and I cover that in detail in there. I'll just give you a couple of examples If a stock has a debt of 800% versus a stock that's got debt of 2%, all things considered equal, which one do you want to buy? Right, you're going to buy the stock that has a debt of 2%. You're not going to want to buy a company that has a debt, is carrying a debt load of 800%. But when you invest in an index fund, a mutual fund or ETF, you're inadvertently investing in those kinds of companies, because not all companies today have debt at a low level. Some are very high, some are low, but some are very high. And so we want to avoid that we don't look at, we don't want to invest in stocks that have a debt of more than 75%. So I cover that in episode 21 and I'll touch on that in today's episode later on towards the end.
Speaker 1:And then the other thing is when you're investing in funds, you're getting too much diversification. I know everybody likes to talk about diversification and I, in my course, as well. Diversification is important. You don't want to put all your eggs in one basket. You want to diversify across industries and sectors, but we do that with 20, 30, 40, maybe 50 stocks and that's it. But when you invest in a mutual fund, an ETF or an index fund, you are investing in hundreds, in some cases thousands, of stocks and what happens there is that is too much diversification. So I cover that in detail in episode 44. If you're interested, go back and watch episode 44 and you'll understand why too much diversification is not good.
Speaker 1:And then, lastly, all funds charge a fee, an annual fee. They call it a management expense ratio. And if you want more details, I cover an entire episode about fees in episode 38. But I'm going to share with you an example of some of the fees here in today's episode. So if you look up on the screen mutual funds the fees can range anywhere from 1.5% to 3% or more per year, and that is taken automatically out of your investment portfolio. Index funds fees are a little less 0.5 to 1.5%. Etfs, even better 0.03% to 1%. Now, when you're investing small amounts $100, maybe $1,000 or even $5,000, when you calculate the fees after one year it doesn't seem very significant. So $5,000 invested in the fund that has a 2% MER after one year is going to cost you $100. Another example up on the screen here $5,000 invested in the fund where the fee is 0.05%, after one year that's going to be $2.50. So it doesn't seem too bad when you look at it this way. However, the true cost of fees is going to depend on how much you invest initially, how much you continue to contribute every month or every year, what is the rate of return and how long you stay invested.
Speaker 1:So let's do one quick example together. So I'm going to put in a number in here. The initial amount I'm going to put in $500,000. So for some of you that's going to be very high. For some of you it's going to be low. I'm going to show you a link in the next slide. I encourage you to go to the online calculator and enter your own numbers in there to calculate how much the fees will cost you over your lifetime.
Speaker 1:But in this example we're going to take someone who's in their mid-40s, mid-50s working professional, have been working their entire life, have been saving diligently, and this is across all of their portfolios. So 401k, ira if you're in Canada, rsp, tfsa. Let's combine all that together and let's say okay, so you've got $500,000 across all the accounts. And let's say you continue to save diligently. Let's say $500 a month. For some of you it might be $50 a month, maybe $100 a month. In this example I'm going to take $500. Again, I'm going to give you a link. Put in your own numbers in there.
Speaker 1:Rate of return, let's just say 8.5%, and I'm going to show you what the investment is going to look like after 25 years and after 45 years. So you can see up on the screen here we've got $500,000 invested and I'm giving you four examples. So we have an MER of 2%, 1%, 0.5, and 0.05. So I'm not going to read all the numbers, they're up on the screen here and there's the link. If you go to nerdwalletcom they have a mutual fund calculator. You can put all the numbers in there and calculate the fees.
Speaker 1:So let's take a look at the first example $500,000. The MER is 2%. After 25 years that investment will grow to $2.79 million, which is not bad. After 45 years that investment will grow to $10.08 million. If the MER is lower, well then your investment will be worth even more.
Speaker 1:Now let's take a look at the fees. So same example, $500,000,. The MER is 2%. After 25 years you will have spent 1.5, over 1.5 million in fees and that is a substantial amount of money to lose to fees. After 45 years you're looking at over $12.5 million in fees Up on the screen. I'm going to show you the same example with an MER of 1%. So the lower the fee, the MER, the lower the fee is going to be. And so let's keep going, again, not going to read all the numbers off on the screen. Let's do one last example here $500,000, invested in a low-cost ETF where the MER is 0.05%. After 25 years you're going to lose a little over $48,000. And to me, that is still a substantial amount of money to lose. After 45 years you're looking at over $449,000 lost to fees. So the fees will take a big chunk out of your savings and out of your investments. So it's best to avoid the fees if you can.
Speaker 1:So then the other question I get from most people is and this is a bonus question, it's not part of our four that we started the episode with but the question I get is well, isn't it easier to pick funds versus stocks? Because stock picking seems very complicated and time consuming, and the short answer is it's not. I would argue that it's more challenging to pick funds. Worldwide, there are hundreds of thousands of funds to pick from. If you look at all of the mutual funds out there, all of the index funds out there, all of the ETFs out there worldwide. There are thousands and hundreds of thousands of funds to pick from. So which one are you going to choose? Are you going to look at the MER? Are you going to look at what they're invested in? Who's managing the fund? Are there any front end fees or back end fees? You got to look at all those things to consider, and so I would argue that is a much more difficult task than it is to pick quality, dividend paying stocks, and I'm going to show you how to do that later on in this episode and you'll see that it's not rocket science.
Speaker 1:So let's move on to our third question in this episode. So some of you might be thinking well, isn't investing risky and time consuming? So the two pieces here is risky and time consuming. So let's take a look at risk first. So what is risk aversion? Everybody has that. Everybody's got an aversion to risk, naturally. So it means to shy away from risk or to avoid risk.
Speaker 1:So what happens is you are uncomfortable with the inherent volatility of the stock market, so you don't invest, because you read about the market going up and down, market crashing, recession, depression, interest rates are going high, unemployment is increasing. So you read all this stuff in the news and online and that makes you uncomfortable, which is natural, and so the fear of losing money can deter you from investing in stocks. But then what happens is, if you don't invest and you don't do anything, then you lose. On the upside, and the examples I've just shown you in today's episode, especially with ADM, that was a 850% return since 2003. If you didn't invest well, then you lost. You didn't get that gain of 850%. So you might be in a position where you believe that investing is risky, therefore you don't invest. But is that the right approach? So I don't think so.
Speaker 1:Let's take a look at a real life example here. So we're going to look at Pepsi. Pepsi was founded in 1898. They have over 315,000 employees worldwide, and if you take a look at their stock price up on the screen here from 2008 to 2009, and you can see back, in 2008 the stock price was over $70, and then in 2009 it was at $56.
Speaker 1:So you look at this graph and it seems very scary. Right, because the stock price was high, it went down, it went down, it went down again and it kind of just stayed down. So from September of 2008 to August of 2008, 2009,. Sorry, the stock price just stayed down. It didn't recover, so this could be a scary graph to look at. However, I would suggest you step back a little bit.
Speaker 1:Let's step back and let's take a look at Pepsi again. Let's take a look at the stock price, but now we're going to go back to 2003. And we're going to cover 20 years. Let's look at the last 20 years and see what the stock price has done, and you can see that the stock price has done extremely well. Back in 2003, it was trading below $60 a share and today it's trading at over $180 a share. So that goes back to what I said before the longer you stay invested, the lower your risk, and that way you avoid the short term volatility in stock prices. And in the case of Pepsi, the company pays a dividend. So you would have been collecting a regular dividend since 2003, and the dividend would have gone up every single year since 2003. So you would have taken advantage of capital appreciation and dividends as well. So that's what I'm just saying here on the screen you can lower your risk when you invest in quality, dividend paying companies for the long run.
Speaker 1:Okay, so now let's take a look at the time consuming part. Okay, so a lot of people think it's going to take a lot of time to select a dividend stock and a lot of time to manage your portfolio. The reality is, investing doesn't have to be time consuming. Okay, but it will feel that way if you don't know what you're doing, and that's where a lot of people get caught up. So if you're just listening to stuff online you're listening to the media, there's a lot of noise out there it's going to confuse you and that way. And if you don't have any knowledge on how to invest, what to invest in, then of course it's going to be time consuming because you're going to spend a lot of time doing your own research. The reality is, you only need to spend time on researching stocks when you have money to invest. So if you're only going to invest once a year, well, that's when you have to sit down and figure out what to invest in. If you're going to do twice a year, then you do it every six months, so it's not something you need to do every single day. We are not day traders, so you only need to spend time on research when you have money to invest.
Speaker 1:On average, my students spend anywhere between 45 to 75 minutes a year not a week per year on their investments. So how do they do that? They use the 12 rules of simply investing to save time. And that leads us to our last question, which is how do I get started? So my approach has been to teach you how to invest safely and reliably and to get a consistent dividend income, a reliable source of dividend income that grows every single year.
Speaker 1:Our focus is on the dividend income every year and not on the stock price. Stock prices go up and down all the time. The value of your portfolio will go up and down all the time, so we want to make sure that the dividend income coming in is growing year after year after year. So how do we do that? We invest in quality dividend stocks when they're priced low. So not just any stock has to be a quality stock and not just at any price. We want to make sure it's priced low and not priced high. So how do you know, when you're looking at a stock, if it's a quality stock and how do you know when it's priced low? So for that I've created the 12 rules of simply investing. You can see them up on the screen here.
Speaker 1:This is your checklist. If a company fails even one rule, skip it, move on to something else. A company has to pass all of the 12 rules in order for you to invest in it. So let's take a look here. Rule number one do you understand how the company is making money? If not, skip it, move on to something else. Rule number two 20 years from now, will people still need its product and services? Rule number three does the company have a low cost competitive advantage? Rule number four is the company recession proof? Rule number five is it profitable? Rule number six does it grow its dividend? Rule number seven can it afford to pay the dividend? Rule number eight is its debt less than 70%? Rule number nine avoid companies with recent dividend cuts. Rule number 10, does it buy back its own shares? Rule number 11, is the stock priced low? So there's three things we check in there. We look at the PE ratio, we look at the current dividend yield compared to the 20 year average dividend yield and then we look at the PB ratio, the price to book ratio. If all three conditions are met, then the company passes rule number 11. And rule number 12, keep your emotions out of investing.
Speaker 1:So, for those of you interested, I've created the Simply Investing course. It's an online course, self-paced. It's got 10 modules and module number one, we go over the investing basics. Module two, we cover the 12 rules of Simply Investing in detail with real life examples. Module three, you learn how to apply the 12 rules of Simply Investing using a Google Sheet. Module four, you're gonna learn how to use the Simply Investing platform. Module five, placing your first stock order, step by step. Module six, building and tracking your portfolio.
Speaker 1:Module seven, when to sell, which is just as important as to know when to buy the next. Module, reducing your fees and risk. Module nine, your action plan to get started right away. And module 10, I answer your most frequently asked questions and we also offer the Simply Investing platform, which applies the rules to over 6,000 companies every single day in the US and in Canada, so you know immediately which companies to consider for investing and which ones to avoid. So if you're interested in either of those options the platform or the course to get started with investing you may wanna write down the coupon code, which is save10. S-a-v-e-1-0, save10. This coupon code is gonna give you 10% off of our course, and the platform as well. If you enjoyed this episode, be sure to hit the subscribe button. We have new episodes out every week. Hit the like button as well and for more information, take a look at our website simplyinvestingcom. Thanks for watching.