One Guy's Journey to Passive Income Through Dividend Investing

Last week, I asked you what you would do with an extra $10,000. Most of you answered that you would invest in the stock market, precisely into dividend stocks. I wasn’t too surprised by this answer. While I discussed several options, I didn’t really tell you what I would do with an extra 10K. So here we go…

Pay Off an “Expensive Debt”

I recently bought a pool based on an expected tax return. This was a really dumb move! Last year, we were able to use my wife’s tax credit to decrease my taxes. This year, I doubled my RRSP contribution (I was allowed to put in 10K) so I was expecting an additional return of $3K on top of what I received in 2011. Well, my wife made more money and the accountant used the tax credit to help her save taxes. In the end, it comes down to the same pockets, but I was truly expecting a bigger tax return! So, this is how I’m now stuck with a 5K loan at 6.75%. It’s not that expensive but I would definitely use the first 5K to pay off this loan and “make” a 6.75% return on my money. Considering that it’s after tax money, it’s more like a 10% yield .

Pick Another Stock… MCD?

After my MCD stock analysis, I’m convinced that MCD would be a great fit in my portfolio. This stock will most likely provide more stability to my portfolio (as compared to VNP!) and I can count on a solid dividend as well. The company is on a short slump right now after showing mild results. MCD is currently paying a little bit more than 3%.

Another stock on my watch list is Seagate Technology (STX). It was part of my Best Dividend Stocks for 2012 eBook. It shows strong long term fundamentals and pays a great dividend. The only problem I can see with this stock is that the “party might be over” as the stock surged by more than 80% since the beginning of the year. Would you really think that STX can pay more to its shareholders? Well, you can always count on a solid dividend yield (over 3%) along with a low P/E ratio (7!).

I would also be tempted to increase my position in INTC or Telus (T). I think that INTC still has steam under its hood and will eventually crack the $30 mark. Since that’s another 10% more or less, I would be willing to increase my position in this stock. As for Telus, the high dividend yield attracts me while I’m convinced it’s going to do better than BCE in the upcoming year.

By using 5K to pay off my debt, I would probably use 3K to buy a new stock and 2K to increase my position in one stock (or twice 1K to buy 2 stocks ).

Facebook Anyone?

Another internet money making machine is about to go public in May; Facebook! I’m not a big fan of their site to be honest (I find Facebook highly time consuming so I don’t really use it) but I’m a big fan of its growth and cash generation! The company is going public soon but I doubt they will pay a dividend up front. This doesn’t really make sense anyways.

Is there any money to be made from the Facebook IPO? I can’t really tell. If I had my 10K ready to invest at the moment, I would be tempted to give it a try though… but it’s more gambling than investing. You can’t really tell if the market will value Facebook correctly or if it will go nuts and make the stock surge on the very first day. It reminds me of Google when we thought that $100/share was too expensive… silly me!

Are you interested in the Facebook IPO? Will you give it a try?

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Did you guys get your Mother’s Day gifts yet? I’m sort of torn this year because I’ve exhausted every good gift idea so far (trip to Bahamas, spa days, and surprise parties). I’m also under the impression that my mom still hasn’t cashed in a few gifts yet. Do you have any ideas?

Let’s look at the top dividend articles if you have some spare time this weekend:

1. An Example of Why I am Not Sure I believe in The Efficient Market Hypothesis @ MJTM.

2. Will Investing And Spending On Credit Lead You To Hell? @ IS.

3. April 2012 Cash Flow @ Retire by 40.

4. InfoSonics: More Net-Net Asymmetry @ Barel Karsan.

5. My Challenge For us to Make Money From Freelancing @ Studenomics.

6. IGM Financial Versus CIX and AGF @ The Dividend Ninja.

7. Dividend Stocks that Are as Reliable as Death and Taxes @ D4L.

8. Meredith Corp. (MDP) Dividend Stock Analysis @ DGS.

9. Is Trip Advisor’s Growth Story Just Beginning? @ Sigma Swan.

10. Carnival of Personal Finance: The Color Wheel Edition @ Money Talks Coach.

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After the analysis of MCD last week, there was another stock on my radar that I wanted to check out. To be truly honest, I didn’t know much about this Dividend Aristocrat; Aflac Incorporated. I’ve been trading for several years but I’ve been looking into dividend stocks only since 2008. The fact that Aflac is an insurance company (AFLAC stands for American Family Life Assurance Company) was enough for me to check elsewhere to build my “stock on the radar list”.

But the fact that AFLwas part of our Dividend Growth Index caught my attention. I thought that if a dividend investor such as Passive Income Earner pickedAFL, I should take a look at it. So here’s myAFL analysis.

The Company Stock Description:

Aflac is mainly active in the life and health insurance industry. They operate 2 main businesses: AflacUS(which operation in theUnited States) and AflacJapan(which provide insurance products inJapan). They cover most supplemental insurance products from cancer or care plans to annuities. They do not offer home insurance in Japan so they weren’t affected by the Tsunami. The rise of cancer in today’s society is definitely a great market for them. Most people have general insurance provided by their employer but will look for more protection by dealing with companies such as Aflac.

Stock Graph

The Company Ratios and Financial Info:

I was mostly impressed by 2 things when I looked at theAFLmetrics. The first one is the fact that they kept increasing their dividend in 2008. WhileAIGwas going bust andAFLhad lost 30% on the stock market, they sent a strong message by keeping their Aristocrat habit of raising their dividend. With a payout ratio of 29%, we can understand that even the worst economic crisis of the century was not enough to slowAFL’s dividend growth.

The second metric that impresses me is its sales growth in a relatively mature market. Since insurance products have been around for so many years, you wouldn’t expect a double digit growth during a tough economy. Both sales and earnings grew significantly. This also explains why the dividend growth is in the double digits as well.

Stock Technical Analysis

AFL is trading on a down trend. Click Here to get a free AFL technical analysis report.

Upcoming opportunities and dangers:

Back in 2009, 73% of Aflac’s revenue came fromJapan. While it provides a great geographical diversification, three quarters seems a little bit too concentrated. It’s more like having a Japanese company operating in theUS;-). The currency risk is not too important for Aflac as they rarely convert their assets. Therefore, they use their Yen to invest in Yen and their US dollars to do the same on this side of the planet.

Aflac’s presence inJapanis also an advantage when compared to their main competitors (AIGand MetLife (MET)). While they are both a lot bigger than Aflac, theJapanniche is well guarded.

After missing Q4 estimates in January,AFLrecently increased its expectation for itsJapandivision for 2012. Overall EPS should be between $6.46 and $6.65 vs an estimate of $6.47. With a very low P/E ratio, I guess you can’t really go wrong withAFL.

Final Thoughts

Looking atAFL, I’m still a bit reluctant to go forward and add it to my watch list since it’s an insurance company (never invest in something you don’t understand, right?). I do understand how insurance works but what I don’t know is how they manage their asset portfolio to make sure they are able to cover all claims. The success lies in how they assess their cash flow needs along with how they manage their assets in the meantime.

AFLobviously does a great job in both cases if you look at their continuously growing numbers. The fact that their payout and P/E ratios are both very low leads me to guess that the both the dividend and stock price will rise in the future. For that reason,AFLwill be added to my “stocks on the radar” list.

Disclaimer: I do not holdAFLposition at the time of writing this post.

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I was talking with a friend the other day and he asked me a very interesting question: what is the best investment that I can make TODAY? I’m not going to explain the whole context around this discussion but I wanted to mention these thoughts on this blog. Let’s say you have a specific amount (for this article, let’s put it at $10,000) that you can use to make more money. You don’t need this money for a while and are looking for the best investment possible. What would you do?

What is the “Best” investment?

In today’s economy, the “best” investment is relative to your global financial situation. It is also conditional to a specific risk tolerance as well. So the “best” investment will not be the same for everybody. However, we can see some similar patterns when you look at the options. Bond rates suck regardless if you are a young entrepreneur or a retiree generating income from his portfolio. So I’m offering a few options to invest your fictional $10,000:

Do Nothing

Sad but true, when confronted by many options but not clear direction, most individual will decide to let the money sleep in a “high yield” (whooot! 1.50%!!!!) savings account and wait “for good timing”. I’m sure you have heard this several times; it’s not the right time; I’ll jump in when I’ll be sure to make money. This is a very risky decision as you are guaranteed to lose money (since the interest rate is not enough to cover inflation) and you may make bad investment decisions once you are “tired” of letting the money sleep.

Bonds & CDs

The second worst thing to do with your money (in my humble opinion) is to buy bonds and CDs at the moment. We all know that we have reached the lowest yield environment possible and can only face rising interest rates again in a few years. So what’s the point of buying something that has a very low yield and that will lose (or keep a minimal) value in the near future? No stress when you look at your statement, but that’s all you get.

Diplomas

How about using this money to go back to school? Depending on your field and competencies, additional diplomas or specific training could worth a lot more than $10,000 in the future. You obviously have to consider the tuitions fees vs the potential return in terms of pay check raise and a promotion. But in my case, getting my CFP and MBA was definitely worth the investment (mind you, it had cost more than $10K!). If you are aware of a hole in your resume, you might want to use this money to add some interest. Sometimes, investing in yourself is the best thing you can ever do!

Pay Your Debts!

Another interesting way to invest money is done by not investing it! Sometimes, it’s the best way to invest your money. By paying down a debt at a 5% interest rate, you are not only paying down your debt and saving on interest; you are also generating a “before tax” return of 6.67%  at a 25% tax rate. Since you are paying your debt with “after tax” money, the return of 5% is “net of taxes”. This is a huge improvement in your yield without any risk!

Dividend Stocks

You can bet that I’ll tell you that dividend stocks are a very interesting place to put your money in. In all honesty, I think that dividend stocks could be one of your best investments at the moment. The current stock market is trading under its historic P/E ratio average and dividend stocks are sought after by bonds and CD investors. Since the interest rates are very poor, these investors are ready to accept more risk in exchange for a bigger yield. Since there is an obvious interest toward dividends, I think you can’t really go wrong with this choice. For the record, I do have a preference for Canadian Dividend Stocks at the moment (since US stocks have been surging for the past 4 years).

Real Estate

I’ve heard a lot that people wanted to secure their money by investing in Real Estate. The only thing you are securing by investing in Real Estate is the fact that you don’t receive a quarterly statement and don’t get access to a daily updated value of your property via internet. Real Estate in Canada seems overpriced right now. I’m not a fan of the Canadian housing bubble burst theory, but I definitely don’t think that there will be rapid growth coming in the next 10 years! Some areas in the US seem promising but I don’t know the market well enough to take a position on that. If I had to invest in Real Estate, I would do it through REITs. They are professionally managed and I certainly don’t want to get called for a leaking sink!

Stocks

Along with dividend stocks, I think that the overall stock market is probably the best place to invest your money at the moment. There is no question that once the uncertainty aroundEuropeand theUSdeficit is gone, the market is going to explode. The only trick is to know when . So if you can wait and are not nervous, check out what’s interesting in your brokerage account and start trading… unless…

Side Business

Unless you have a side business in mind! While the risk of any startup is way higher than investing in the stock market (only 5% of startups survive the first 5 years), this is always where you can get the highest return on your investment. For example, since I’ve started my online company, I’m making at least 33% of growth over the past 4 years. When you invest in your own business, it is “normal” to expect a double digit return. It’s normal, since the risk is a lot greater!

Where is your best investment?

If I had extra money right now, I would do 2 things: invest in my company and invest in dividend stocks. I would rather diversify my $10,000 investment in 2 sectors instead of concentrating everything in the same place. I see interesting growth on both sides and dividend stocks have the advantage of working for me while I sleep. I still have to work on my company to make it run .

What about you? Where is your best investment right now? What will be your next investment move?

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Let’s start this weekend off by checking out a few links from around:

1. Dividend Stocks to Buy and Hold for the Next 50 Years @ D4L.

2. The Importance of Business Efficiency @ Retire by 40.

3. Consolidated Edison Appears Overvalued @ Dividend Monk.

4. Are Gold Stocks Cheap? @ Dividend Ninja.

5. Do You Want to Transfer Your Credit Card Balance? @ Studenomics.

6. What if You Can’t Start Your Career? @ Do Not Wait.

7. Do You Mind Non Voting Shares? @ IS.

8. Learning From A Random Outcome @ Barel Karsan.

9. One Stock Market Game That’s Worth Playing @ Sigma Swan.

10. The Importance Of Social Media For Small Business @ KNS Financial.

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So…. how was the month of April on your portfolio?

Mine wasn’t too bad, but it wasn’t great either! It’s a good thing we have dividend to get paid to wait! Speaking of which, if you are looking for dividend increasing Canadian stocks, I’ve put together the fast growing dividend stock list. I bet you can find a few interesting pick there!

I know you are waiting for it, so here’s the TSX 60 dividend yield and ex-dividend date stock list:

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Today I wanted to discuss dividend ETF’s. I know, many of you will be surprised to hear me discuss using dividend ETF’s. Why? If you are here, chances are that you want to build you own dividend portfolio. And why wouldn’t you?

Choosing your own stocks has a lot of upside

-You save on management fees (between 0.20-0.60% usually), those do add up over time
-You have flexibility over how dividends are reinvested
-You can decide which stocks to include or not
-You can decide on your general dividend strategy (focus on growth, avoiding certain industries or names, etc)
-You actually know what you hold (often, ETF issuers only disclose their holdings periodically)
-etc

That being said, even the most hardcore dividend investors among us might need to scale back on our individual dividend stocks at some point. Why? There many reasons. There are multple reasons (health issues for members of your family or yourself, job obligations, etc). As great as being a dividend investor is, it does require time. Why? To find, research both potential purchases but also current holdings. I’m not one to believe in buying “stocks for life”. Sure, some great dividend stocks can be great for a very long amount of time but that does not mean you can hold them without checking on how they’re doing.

Lacking time is certainly one reason but so would be reaching a certain age. I know for a fact that we have several readers in their 60s, 70s and even older. That is absolutely incredible. Others are not as fortunate and I do think that over time, as we start to lose some of our ability, it becomes less of a great idea to personally manage our dividend holdings.

What’s Next? Scaling Back

At some point, for whatever reason, you might want to start scaling back on dividend stock investing. That can be a permanent decision or not. No matter why though, starting to buy dividend ETF’s can be a good alternative. You don’t need to witch your entire dividend portfolio to ETF’s but over time, you can start putting a portion of those holdings into dividend ETF’s and gradually move towards building your own ETF portfolio (link to BYETFPF).

How Do Such ETF’s Work?

You can find out more about ETF’s and building an ETF here but the short story is that an ETF is a fund that holds stocks in a similar way to mutual funds. One difference though is that you buy them on the markets which does means paying commissions upfront but the annual costs are generally much lower.

How The ETF’s Manage Dividend Payouts

There are many different alternatives for dividend ETF’s so it’s important to look at the different ETF’s. In general, dividend ETF’s keep track of all payments that they receive and pay back that amount to shareholders on a quarterly basis. Some might choose to pay more than what they are receiving (covered call etf’s for example), or even less. It is even possible for an ETF to aim for a steady dividend payout. I would argue that looking for ETF’s that simply pay back whatever they receive is the best way to go in general.

Steps To Get Started

-The first step is to look at different dividend ETF’s that exist in order to determine which one is closest to your dividend investing philosophy. In Canada, some major ones are

XDV (ishares Dow Jones Canada Select Dividend Index Fund)
CDZ (Claymore S&P/TSX Canadian Dividend ETF)
HAZ (Horizons Global Dividend ETF)

While in the US, there is plenty of choice:

SDY (SPDR S&P Dividend ETF)
VIG (Vanguard Dividend Appreciation ETF)
HDV (iShares High Dividend Equity Fund)

Researching An ETF

In general, in order to find information about an ETF.,, the easiest is to go on the website of that’s ETF issuer. For example, for VIG, if you go to Vanguard’s website, we can find more information about it

On that website there is a summary prospectus that specifies that:

-Total fees in the fund are 0.18%
-The fund buys dividend stocks that are known and are likely to increase their dividends consistently over time
-We can also find the top holdings as of the last date that VIG reported them:

Research Is Still Involved

Of course, you might argue that there is also research to be done when buying the ETF in a similar way to dividend stocks. That would be correct. The big difference is that when that choice is done, you can then rely on the ETF managers to do the research, to add & remove stocks from the ETF, to reinvest dividends, etc. That certainly makes it much easier. You can also find out more about building an ETF portfolio, the different steps involved here.

You Might Not Be There Just Yet

If you are reading this blog, chances are that you have little interest in letting a fund make the choices for you. That is more than fine, it’s also my case. But in time, you might end up reconsidering and I would argue that building an ETF portfolio with dividend ETF’s among others is a great alternative when you will reach that point. If you are looking for more info on ETF, I’d suggest you get the free ETF eBook written by My University Money

Any thoughts on this? Do you hold any dividend ETF’s?

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