This is exciting, isn’t it? After only three days, you are ready to make your first trade 😉 Seriously? Not really. The idea of creating a series called 6 days to dividend growth investing is not to have you trade within 6 days. However, this is a good route to follow if you want to avoid major investment mistakes. This article is about how to use your investing knowledge in order to buy solid companies. You can’t just put money in a brokerage account and start trading. The portfolio building process is serious business and this is how you can make real money from investing.
Put money aside for your first trade
The very first step is obviously to save money before making your trade. While you don’t need a penny to build your investing process and start looking at potential stocks through stock filters, you will need cash to buy your first shares.
Some investors want to use their first $100 to buy stocks. I’d suggest piling up to at least $1,000. Reasons behind this will be shared in a moment. But first, I have to answer a more pressing question; where do you put your money while you are piling it up? In my opinion, there are two great solutions.
#1 Invest in a savings account. If you don’t want to risk your hard earned cash before you pick the hidden gem, I suggest you open a savings account. All savings accounts pay a small interest rate and allow you to deposit money periodically. The key to invest money is to be able to put money aside on bi-weekly or monthly basis. This is the best method to successfully build a fund to invest.
#2 Invest in low fee ETFs. If you are willing to start investing right away and you don’t mind fluctuations (sooner or later, you will have to suffer them anyway), you can start investing your monthly savings in a low fee ETF or index mutual fund. Through your online broker, you can find a general ETF of index mutual fund that will follow the market. I personally use a no transaction fee US index mutual fund to build more cash prior to making my next trade. You have the advantage of benefiting from the market if it goes up as your money is already invested and your return doesn’t get eaten-up by transaction fees.
Open a brokerage account
In order to invest in ETFs or mutual funds, you will need an online brokerage account. If you are American, the best online broker is definitely TradeKing. They are the cheapest in the industry for stock trading with a $4.95 cost per trade. On top of this, they offer one of the best client service supports.
Another very interesting option for US investors is to open another account with Loyal 3. They offer a limited list of 60+ stocks to invest in with no transaction fees. You can also buy fractioned shares. Among the available stocks that could be interesting for a dividend investor, there is Apple (AAPL), Coca-Cola (KO), Walt Disney (DIS), Hasbro (HAS), Intel (INTC), Kelloggs (K), Kraft (KRFT), Mattel (MAT), McDonalds (MCD), Microsoft (MSFT), PepsiCo (PEP), Unilever (UL), Wal-Mart (WMT) and Yum Brand (YUM). As you can see, this is definitely a good trading option.
For Canadians, the best choice is definitely Questrade. Once again, this is the cheapest online broker in Canada with trades at $4.95. Many banks offer the same service for double the price ($9.95) and don’t offer more than Questrade. On top of that, Questrade offers USD trading for all type of accounts (including RRSP and TFSA). The impact of currency exchange applied on dividend payment will greatly reduce your investment return over time. You can avoid this by using the right online broker.
Wait to accumulate at least $1,000
Why should you wait until you have at least $1,000 to buy shares of a single company? To avoid the impact of transaction fees. Assume you are smart and you opened an account with TradeKing or Questrade and pay only $4.95 per trade. If you buy shares with only $300 in hand, the transaction cost in % of your holding is 1.65%. But it gets worse…. As you need to sell the stock to realize your return. Therefore, a complete transaction (a buy and a sell) will represents 3.3% of $300. In other words, your first 3.3% in return or your full year in dividend payments at a 3.3% yield is eaten up by your fees. I always aim to pay less than 1% fee on a transaction. This is the whole point of managing your money by yourself, right? If not, you are better off buying a mutual fund at 3% MER and not having to worry about buying individual stocks!
Start with a “balanced mutual fund” stock
Wait… a mutual fund stock? What is that? I’m not talking about a mutual fund company but rather a company that is so diversified, it is as good as buying units of a balanced mutual fund. A perfect example would be Johnson & Johnson (JNJ). They are geographically diversified as 50% of their revenues are coming from international sales. They are diversified product wise as they own hundreds of different well-known brands. They are industry diversified as they not only sell consumer products but do lots of R&D in the pharmaceutical industry as well as selling medical devices.
There are several companies like this (mainly all US based though) that are diversified enough that are not really more volatile than a balanced mutual fund. This is the best way to start building your dividend portfolio as it will minimize potential losses. Don’t start with an aggressive perspective by taking chances with your first purchase. Wait until your core portfolio is built before you go ahead with the growth component of your portfolio.
If you are unsure how to start your portfolio, we have created starter and 25K portfolios at Dividend Stocks Rock. These portfolios are meant to help investors start building their own portfolio with a set of predetermined stocks. Speaking of resources, the next article will be about the best internet resource you can use to manage your dividend growth portfolio.
Day #5 Tools of the Trades – Dividend Investing Resources
Day#6 Portfolio Management Tips
Disclaimer: I hold shares of AAPL, DIS, KO, JNJ.Google+