Sep 6 2005

My Investing Principles

Posted by The Dividend Guy in Principles
8 Comment

The Path of Least Resistance
I can be a pretty lazy guy. I am also deadly serious about my money. My goal is to have $300,000 or better in dividend paying investments by the time I am 40 years old. How do I plan to do this? By following these investing principles:

- KISS: Yes that’s right, keep it simple stupid. I try to keep things as simple as possible. I don’t use options (too freakin’ complicated), I don’t use futures or derivatives. I not smart enough (or very smart, depending on which way you look at it). Give me dividend paying stocks and exchange-traded funds and I am a happy man.

- NO Mutual Funds: I stay away from mutual funds. Why? Because they are expensive. I don’t like paying someone 2 -3% of my money every year to pick stocks for me. Especially since mutual funds fail to beat the stock market index most of the time. If you don’t believe me, read section 6.1 in this research article. Want to see the impact of the MER on your investments? Keep this in mind, “Actuaries like Malcolm Hamilton of William mercer Ltd. in Toronto and Fred Thompson of Thompson Actuarial Ltd. in Singhampton, Ont., have shown the the average Canadian MER of 2.1% curtails registered retirement savings plans by 47 percentage points over 30 years”*
* Financial Post – December 24, 1999 – Jonathan Chevreau

- Consistent Results: I use a couple of different measures when I am doing my due diligence on an investment. These measures include:
1. Revenue that has been increasing steadily for at least 5 years, 10 is even better.
2. Earnings per share has been increasing at a similar rate for at least 5 years; 10 is even better. I like to plot these using my Canadian Shareowner Association software to see that earnings has been rising at a rate equal to, or better, that of revenue. This is a good indication that management has their head on straight.
3. The dividend payout ratio has remained steady, indicating that the company is able to pay out dividends from earnings.
4. MY FAVORITE – A dividend that has increased for at least 10 years, 30+ is even better.
5. The stock’s current P/E ratio is below the average P/E ratio for the past 10 years. This is where I get some indication of where the current price of the stocks sits in relation to its historical price. If it is below, this suggests an under-valued stock. If it is above, the stock might be overvalued.
6. The stock’s current dividend yield in relation to the average dividend yield for the past 10 years. Similar to the P/E ratio analysis, this provides me with an idea of where the stock price sits in relation to its historical values.

That is it. Pretty simple. I do ensure that I read through financial statements and any news items from the past year. The key is to try and understand as much as I possibly can about a company. I would appreciate hearing what I may be missing, or other factors that you take into account. Comment away…

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8 Comments on this post

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Viagra wrote:

alternative investments to stocks…

Well said! …

October 10th, 2006 at 1:03 pm

Dieter said:

Hi,

I’m working on the same thing, dividend investing to get a passive income flow. I wish I was Canadian, you have some good stocks to trade there. I have some Suncor stocks (up 100% since last september) and some PWI (Energy income trust). What do you think about these income trusts ?

Regards,

Dieter

September 8th, 2005 at 6:44 pm
The Dividend Guy said:

I don’t know much about either of these, but I do know that as the price of oil keeps going up, the return on investment for companies like Suncor (oil sands) can earn more and more as margins increase. Income trusts can provide good income, just be sure you are properly diversified.

Thanks for commenting.

The Dividend Guy

September 8th, 2005 at 9:32 pm
Farhan said:

I’m confused about your no mutual-fund rule. What about mutual funds that track the indexes. These can have MER’s of 0.31%!

September 11th, 2005 at 9:55 pm
Chad said:

Not sure about your “no mutual fund” rule. I work for a financial planning firm and our whole strategy is based on picking quality managers of mutual funds to fill up a portfolio. We do macroeconomic analysis to find the areas we should be and then find quality management to get us there. We acknowledge the fact that mutual fund managers devote a lot more time that we can to finding opportunistic investments within the object of the fund. These managers also have a much quicker access to information than the average investor. Therefore, the fund expenses are a small price to pay. I have been investing with strictly mutual funds for the last five years and beat the appropriate blended benchmark every year. It’s certainly not for everyone but with a solid process mutual fund management can be very fruitful.

September 12th, 2005 at 2:57 pm
Pagar said:

After buying the stock that is right for your dividend investing; The decision to write covered calls on that stock is much easier.
Dieter-Is your Suncor stock symbol SU?
Do you intend to hold that stock? I don’t own it, but SU seems to have some very good covered call premiums right now. Write a call on 65 Strike Oct (with 24 days to expiration) this morning and you put an exact $100 in your account per 100
stocks owned
(minus your broker fee) Go further out on your dates and put even more in your account.
For the most return on a rising stock, short expiration dates seem to give the most return (In my opinion)but watch brokerage fees.
PWI also has options so one can write a
covered call. The Implied Volatility is lower than for SU, but if you already own the stock and intend to hold it, the Implied Volatility doesn’t really matter.
Some of the investors on sites I follow are saying that Ameritrade is the broker for Americans wanting to trade Canadian stocks. Mentioning that they can trade them directly over the internet without talking to a live person at the brokage.
I don’t use them, but I note that their Ad states that the have no IRA fees. For
my purposes, I only trade in IRA accounts, in order to avoid tax events, makes life much simpler for me. Hope this provides some useful info.

September 27th, 2005 at 4:14 pm
The Dividend Guy said:

I received this comment over at my old site and wanted to address it here:

–Comment–
Dividend Guy–Thanks for the work you’ve put into your site and the link selection. However, I don’t understand why you seem to ignore the benefits of diversification in reducing the risk-reward ratio. By selecting primarily individual stocks, and a rather small number of them at that, you expose your portfolio to unnecessarily high company risk, eg., as happened with Merck. If you only wish to have a portfolio of high/increasing dividend stocks, I would think you could achieve equivalent return with lower beta by buying one of the ETFs you’ve linked to such as PEY or DVY. If buying an ETF is not practical because of the recurring brokerage charges, then why not one of the equity income funds from Vanguard for no brokerage charge and expenses of less than 50 basis points?

As a separate, broader point, I think you also ignore the benefits of diversification in your asset allocation model. Several of your asset categories appear to have a very high overlap, and I don’t know why you have such an overall concentration in Canadian stocks. If you like high/increasing dividend stocks, that rationale should apply equally to US and other global developed market stocks; in theory you could just create your own private mutual fund by choosing the top 50 stocks in the world which satisfy your investment principles (assuming you reject the low cost fund alternative described in the preceding paragraph).

Finally, you may want to consider another diversification issue that necessarily follows from using only a high/increasing dividend stock screen–virtually all of the stocks that get through the screen will be large-cap or mega-cap stocks, tilted towards value stocks, and concentrated in financial, utility, REIT, and consumer staple stocks. Nothing wrong with any of that, but you will find yourself in just a portion of the upper right-hand corner (i.e., large cap value) of the 9 square Morningstar grid.

I hope this didn’t sound too critical, since I was really only interested in probing your thought process, which is helpful for helping any investor, including me, test his assumptions. Thanks again for your work! David
–Comment–

The Dividend Guy’s Response:

Good point on the diversification. I realize that I am at risk in terms of company-specific risk. The lower number of stocks tend to make my portfolio more volatile. However, I have a longer term plan and am willing to put up with more volatility in the short term. I ultimately want to hold approx. 20-30 individual stocks, which from the research I have done indicates that this is a good number to substantially reduce company-specific risk.

My reason for a higher concentration of Canadian stocks is that I am a Canadian and I understand these companies a bit better. Keep in mind that I don’t think I am too far out of whack here as ~40% of my investments are in US and foreign investments.

In terms of my large-cap focus, you are absolutely correct. As I become a more sophisticated investor (i.e. more money available to spread around) I would like to start a allocating some funds to smaller-cap stocks/funds. I believe these stocks are much more difficult to choose and I need to study this more before I am more comfortable.

I hope I have addressed your comments. If not, or you think I should be looking at things in a different way, please comment. I greatly appreciated the comments and did not think you were being too critical – these comments are the whole point of blogging. Thanks again.

October 18th, 2005 at 3:37 am
Charles Pedley said:

“MUTUAL FUNDS DON’T PERFORM AS WELL …” That is like saying the AVERAGE MUTUAL FUND does not perform as well as …. Then you would be correct. But WHO would want AVERAGE mutual funds? I personally want only funds in the top 2 quartiles consistently over 3 – 5 years. That is where the myth about Financial writers being experts disintegrates! If they were SO GOOD, THEY WOULD BE FINANCIAL WHIZES AND MAKE MORE MONEY! Who knows most about the football game, the player or the sportscaster?

Above average mutual funds can consistently beat the index. Check out Morningstar or TheFundLibrary and filter for funds that consistently outperform the index.

Then, if you like to invest as a hobby….if it is a great pleasure to you, then do it! But picking out the BEST FUND MANAGERS and the BEST MUTUAL FUNDS saves HOURS of time and allows the TOP professionals to do the work of investing for you.

Just had to clear up that myth about mutual funds not performing as well as the index. Hope what I have said is clear.

One more example. Suppose you knew a black man who was lazy on the job, do you generalize and say black people are lazy? Of course not! Same goes with mutual funds.
cpedley@gmail.com

October 27th, 2005 at 7:25 pm