• I’ve admitted it in the past; Im not the typical dividend investor. I started investing by trading, buying & selling every two weeks while most dividend investors usually buy and hold completing the sale transaction after several years holding their shares. In my opinion, the dividend investor is the upgraded version of the buy & hold investors. More often than not, the buy & hold and dividend investor is the same guy. I strongly believe in dividend investing, that is why 100% of my portfolio is composed of dividend paying stocks. I even wrote two books and created a whole investing platform around dividend stocks called Dividend Stocks Rock. Still, I’m not convinced a 100% buy & hold strategy is the best way to maximize your investment these days.

     

    The Investment Thesis Behind the Buy & Hold Strategy

     

    Before I present my view of investing, I think it’s important to mention why the buy & hold philosophy is so seductive for many investors. First, several famous investors have used this method in the past. Guys like Warren Buffett have reputations for success to make following their path seem logical. Invest in solid companies that you can understand and buy only if you intend to hold the stock for ten years… or more. This is roughly what you can learn from the buy & hold strategy.

    Then, there will be a horde of investors with shocking examples of company success over the years such as Coca-Cola (KO) which shows a total return of over 5,000% since 1978. But my point is not to debate as to whether or not you should buy & hold stocks for several years. This totally makes sense for your core portfolio, but if you want to maximize your return, I think you should add more trading habits to your investing strategy.

     

    The Way I See Things: a Buy & Hold Core + a Growth Segment

     

    I’ve had several reactions about my latest trade: selling a dividend aristocrats (McDonalds  NYSE:MCD) to buy a speculative company working in the oil industry which is down 35% since January 2014 (Black Diamond Group TSE:BDI). For many, this transaction looks like a trader’s move at best and like a gambler for others.

    I told you already: I’m not the typical dividend investor. I have a set of 7 investing principles I follow religiously and I also allow some cash to make “growth additions” to my dividend portfolio. The point is simple: I have most of my portfolio in shares of companies I truly want to hold forever (such as JNJ, KO, Telus(T), ScotiaBank (BNS), DIS, WMT, etc) but I also allow myself to forget about 1 of my investing principles if I think there is a great opportunity on the market. I have done it in the past with STX, INTC and HSE which all reported profits over 25% over a short period of time. I’m currently holding AAPL, HP, Gluskin & Sheff (GS) and Balck Diamond Group (BDI) in my “additional growth” segment. When I sold MCD to buy BDI, I simply sold a part of my core portfolio to transfer it to my “growth” segment. My point is the following, what if MCD is the new KO that did an astronomic 1.82% (plus dividend) over the past 16 years???

    buy & hold

    You see it right, someone who bought and held Coca-Cola (KO) since June 30th 1998 until today only made 1.82% in appreciation. Thank god there is a dividend attached to this stock!

     

    BDI’s drop in price is directly linked to the oil sand industry. BDI rents & sells modular equipment for remote areas. Its biggest market is renting modular homes in Northern Alberta for oil sand exploration businesses. However, nothing is stopping BDI from exploring other markets (basically any company with an interest to develop in a remote area) and generate additional revenue. The company shows solid fundamentals and pays over 5% in dividend yield right now. Between a stagnating company like MCD which is probably going to trade around $95-$100 in three years and BDI which can easily trade at $30 (from $19 right now) in 12 months, I’ll take the chance. Keep in mind that I’m not buying a weak company with shaky financials, if you look at BDI’s fundamentals, you will see that the company shows strong basics. Now it’s only a matter of going through the oil barrel storm before we see the light. The 5% dividend is more than enough to keep me waiting in the meantime.

    To be honest, in this specific situation, the perfect scenario would have been to keep MCD and use new money to buy BDI. But since I didn’t have more liquidity at the moment and have been following BDI for the past 18 months, I thought it was the right time to make this move.

     

    I’ve been using this strategy for a few years now and it has served me very well. Let’s see if its only luck or a solid investing strategy. I personally think it’s the latter!

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  •  

     

    We will never repeat this enough; You can never start saving too early! And being a father of three, I can appreciate that savings is not always the top priority when you work on the budget. Not so long ago, I wanted to start a new portfolio for my kids’ education (called an RESP in Canada). My oldest son just turned 9 this summer and college is not too far away. However, between my mortgage payments and retirement savings, I don’t have much cash left to save. This is why I started this portfolio with only $50 per week.

     

    Is $50/Week Enough?

     

    You might think $50/week is not much to start investing, but it’s more than enough. Between a an 30% Gov’t subsidy for education and two good years of market return, my portfolio is now showing a value over $8,500. As you can see, you don’t need a fortune to build an interesting portfolio.

     

    I must admit I made a mistake when I started this portfolio; since I didn’t have much money to start with, I started by investing in mutual funds. When I compare my two portfolios (my self-managed RRSP vs mutual funds in the RESP), I can see that it is a mistake:

     

      2013 YTD
    RRSP 21.70% 12.50%
    RESP 17.23% 12.09%
    Difference 4.47% 0.41%

     

    The choice of picking mutual funds cost me about 5% total over almost 2 years. It’s not the end of the world, but still, it is still money I didn’t make. When I realized this; I started working on how to build a portfolio with a small amount. If I had to start over with $0 in hand and savings of $50/week, this is how I would start my portfolio:

     

    #1 Setup an online brokerage account

     

    Well… this may sound obvious for some of you, but as soon as you are committed to start investing, you should open an online brokerage account. You don’t need $10,000 to start investing with a brokerage account; most companies will accept your money, no matter how much you want to save. If you are American, I recommend you start with TradeKing for two reasons: #1 great customer service and #2 the lowest trade commission in the industry ($4.95/trade). It definitely matters a lot if you intent to invest small amounts.

    You can check out TradeKing’s account special features here.

     

    If you are Canadian like me, Questrade is the way to go. They offer a USD RRSP (not all brokers do) and they are also the cheapest online broker on this side of the border. They offer promotions when you open an account so check out their website for their latest promotion.

     

    #2 Set up an automatic savings plan in my brokerage account

     

    The first move to make once you have opened your brokerage account is to setup an automatic savings plan in a money market fund or an index fund/ETF if you are more aggressive like me. I don’t like having money sitting on the sidelines. This is why I always prefer to have my small cash amount invested in an index instead of seeing it dying at 1-1.5% in the money market. However, this is up to you; both strategies will lead you to the same point: growing your fund up to $1,000. The $1,000 mark is important because of the transaction fee charged. If you pay $4.95 per trade, this represent 1% on a complete buy and sell transition ($9.90 on $1,000). Since your goal is to keep saving on a weekly basis, I wouldn’t bother buying with a smaller amount on hand (you will eventually have too many stocks with small positions).

     

    #3 While you save; build your “buy list”

     

    As soon as you start saving, build your buy list. At $50/week, you will be able to make your first trade only five months down the road! This is enough to make a list of about ten stocks that will meet your fundamental requirements (you can read mine here) and follow these companies through at least one quarter.

     

    I would personally aim for blue chips that show great diversification such as Procter & Gamble (PG) or Johnson & Johnson (JNJ). They are almost as diversified (product wise and geographic wise) as a mutual fund!

     

    #4 Get your first $1,000 to work for you!

     

    Once you reach $1,000, it’s time to buy your first stock. Make sure you keep your $50/week investment plan in your money market fund or index to make sure you build another $1,000 very fast. You can also use your dividend payouts to build your next $1,000. Since the dividend payout will be very small on a $1,000 investment, dripping at this point is not very useful. Keep in mind that in another five months, you’ll have enough money to buy another stock!

     

    Risk management and diversification is extremely difficult when starting a new portfolio with a small amount. Your investment return for the first two years are pretty much luck as it will be hard to compete against the market with so few positions in hand. In order to help new investors choose their first stocks, I built a starter portfolio with four stocks.

     

    #5 In two years; you’ll have a “real portfolio”

     

    With an annual savings of $2,600, you will get reach a total of five different companies in only two years. At this point, you will have something that looks like a real portfolio and going forward will be easier. The point is to keep buying stocks with your next $1,000 available until you have 10-15 stocks in hand. This will happen after another two-three years of savings. Then, you can add to your existing position through dripping or by adding an extra $1,000 to each of your positions.

     

    It’s a long process but as you can see, you don’t need much money on hand to start investing. Only $50/week is enough to build your nest egg! Now, I have to get moving and sell my funds to start trading for my kids’ future!

     

    Disclaimer: I hold shares of JNJ

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  •  

     

    Four years ago, I bought this blog. This was my first move towards dividend investing. I started investing back in 2003 but my first dividend stock was bought in 2010. Over the past four years, I’ve worked on building my own investing philosophy (you can read about it here). My investing model didn’t appear overnight and it was the result of a long process.

     

    What I really like about investing is that you are never done learning. There is always a new situation that will generate new results in your portfolio. After four years of dividend investing, here are the most important investment lessons I’ve learned:

     

    #1 I Love Receiving Money in my Account

    I guess the biggest difference between dividend investing and all other strategies is the fact that each month; my cash account grows bigger. Receiving dividend payouts each month is a great feeling. Since I don’t lose any time tracking my dividend dates, I sometimes open my brokerage account and find $20, $50 and up to $171 once! Since 2010, my dividend payouts have never stopped growing:

    dividend payout

    In 2014, I expect to receive almost $1,500 in dividends on a $50,000 portfolio. This equals a 3% yield. It is a modest amount so far, but it will greatly increase over the years to come. It took me two years to make the full transition from my previous positions to a 100% dividend portfolio this is why the yield is still relatively low.

    Besides the fact that it’s fun to receive money each month, I also appreciate this extra cash flow so I can buy more stocks. I usually build my dividend payouts up to $500 to buy an index fund and wait until I have about 10% of my portfolio available to buy another position. For example, I’m now waiting for my annual RRSP contribution of $5,000 in January to buy my next stock. I will definitely add all remaining cash in my account to this transaction.

     

    #2 It’s Easier to Follow Dividend Stocks

    I used to trade heavily on oil and other resources stocks. There is a lot of money to be made in these fields but it also requires several hours of work and daily check-ups. I still spend several hours before buying a dividend stock, but once it’s added to my portfolio, I don’t have to check my position every day… not even every week!

    When you buy a dividend stock, you usually buy a sound & healthy companies. Therefore, following quarterly results is usually more than enough to make sure one stock doesn’t slip through the cracks and start rotting.

     

    #3 Don’t Chase High Yield

    I recently wrote a case against high dividend yield but I must admit I learned my lesson the hard way. I bought a covered call ETF back in 2011 (ZWB). ZWB is a covered call ETF that follows the six Canadian banks. Over about a year, I lost almost 9% on that trade. Mind you, when I bought ZWB, the dividend yield was… roughly 10%.

    Today, the ETF is up 15% since its inception in 2011, while the worst bank during this period is CIBC (CM) at +23% and the best are TD (+54%) and NA (+50%). Plus, the ETF now pays *only* 4.61%.

    The lesson to learn from this is that high yield investments always carry limited growth potential and/or higher risk.There is a reason why you get a higher yield and it’s not because Santa Claus exists!

     

    #4 Dividend Growth is better than Trading Regularly

    One of the reasons why I switched to dividend investing was to reduce the time required to manage my portfolio without affecting its performance. It turned out that I’ve improved my performance and reduced the time spent managing my stocks.

    But I had to face my old demons; a part of me wanted to trade more and use capital gains to buy other companies. The best part about dividend investing is you don’t always need to sell your stocks to benefit from growth; the dividend payout increases too!

    When I bought Telus (TSE:T) back in 2011, the dividend paid was $0.26 per quarter per share. Now the current dividend is $0.38 per quarter per share. That’s a 46% increase over just 3 years! I could have sold the stock and cashed out a healthy profit, but the truth is that Telus pays a 5.6% dividend yield based on my cost of purchase. In a few years, I’ll be able to add a new position to my portfolio only by cumulating the dividend payouts. This means I won’t have to dip into my pocket to grow my portfolio!

     

    #5 Yield Doesn’t Matter if you Select the right pick

    At first, I used to select only companies paying over 3% in yield. It was my way of identifying “good dividend stocks” amongst other factors. I used to ignore lower yielding companies because they were simply not good enough for me.

    I quickly made my first exception and selected Coca-Cola (KO) at 2.75%. I knew KO’s dividend would reach over 3% in a heartbeat due to its dividend growth policy. It did and I was encouraged to dig further into similar yielding companies.

    The truth is that I found several gems among low dividend yield stocks. Among them, I bought Disney (DIS) with a 1% dividend yield now showing a +40.18% in my portfolio. I also bought Apple (AAPL ) with a 2.25% yield (back then) now showing + 39.96%. More recently, I bought Gluskin & Sheff (TSE:GS) at 2.50%. The stock is already +11% before dividend payments this year. The dividend yield is not the most important metric when you select a dividend stock. Instead, I look for companies with the ability to increase its payout consecutively for the next 10 years and beyond.

     

    #6 Patience is the Most Important Investor’s Asset

    During these four years, I’ve bought several stocks that didn’t go into the green right away. In fact, both Chevron (CVX) and Johnson & Johnson (JNJ) stagnated a while before I realized any profits. I bought JNJ when there were quality control issues causing important expenses. Let’s just say there wasn’t any hype around the company at that time.

     

    But since then, JNJ has soared boosted by great results in 2013 and 2014. Sometimes you get lucky and your stock keeps going up the minute you buy it. But most of the time, the result of your trade is not instantaneous. On the other hand, patient investors will receive their rewards sooner or later.

     

    I’m excited to finish 2014 with my current portfolio as things are going very well for me right now. I also know that will learn a lot more in the upcoming years as it will be interesting to see how my portfolio will react to a bear market although I don’t think we will see it any time soon.  I’m not stupid either; there’s always a drop in the market after such a boom.

     

    Tell me, what have you learned from dividend investing in the current bullish market?

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