The Loonie Bin: Dividend Investing 101

The Loonie Bin: Dividend Investing 101

Dividend Investing 101

A few friends of mine asked me some questions about dividend investing this weekend and I guess it might be easier to start from the very beginning with charts, diagrams and figures. I'll be adding these upcoming posts to fixed tabs that can be easily found for future reference. After all, this blog is all about learning investing basics and if anyone is looking for advanced strategies and material, you got the wrong blog.

The investing world is very complex and is intimidating to the average person. It's full of cycles, markets, commodities, bonds, futures, securities, stops, holds, ripples, ups, downs, bears, bulls, and a lot of other crap that's too long to list. Analysts try and study trends and graphs to predict where the markets are heading but investing in a sense, is like gambling, you never know what's going to happen. To someone who wants to learn investing it can seem very overwhelming and down right scary. But with a little patience and the desire to learn, the investing world can less complex then it's made out to be.

There are many strategies out there, but when I decided to tackle my own investing, I wanted a strategy that's:

1. Proven to work over time.
2. Lower risk.
3. Yields a decent return.
4. Very easy to manage.

Hello Dividend Investing!

Ever since I learned about dividend investing, I wanted to shout about it from the roof tops so that everyone can learn about how amazing it really is. I have a lot of examples and from many different angles so I decided to make continuing posts so that each part is full examples and diagrams and is easy to find for future reference.

Part 1: Mutual Funds

Now a lot of people are saying, "Whoa whoa whoa! Investing in the stock market? Are you crazy? That's the fear of the unknown talking and that fear must be conquered. A lot of people invest in mutual funds, so in a way they already invest in the stock market. The only difference is that they pay fees for someone to manage the fund for them. One of my friends said, "I'd rather pay someone who knows what they are doing to manage my investments then to try and do it myself" and that's fine. But what most people don't realize is how much the fees end up costing them.

Let's say you have $55,000 invested in a mutual fund. It has a MER( Management Expense Ratio) of 2.5%.

Each year it's going to cost you $1375 for someone to manage the fund. If you earned 5% on your mutual fund, you really only earn 2.5% because of the MER eating your return. To further the example, if your mutual fund is up 5%, your investment will be worth $57,750. That profit is locked in according to how well the markets performs. If you wanted any of the profit, you would have to sell units to get it. If in the next month the stock market hits some economic turbulence and the fund is now down -6%, your investment will be $54,285. The stock market can be very unstable and your return on your investment can be up and down all year long .

Now if you did some research and invested in a blue chip dividend paying common stock with the same $55,000. Let's say the stock paid a dividend of $2 a share a year and had a current price of $40. It would yield a return of 5% . You would have purchased 1375 shares and would be paid $2750 in dividends every year guaranteed and the funds would be available to you without selling any shares, allowing maximum return on your initial investment. If the stock price ever decreased, you would still be paid $2750. If you did manage your own trades, the commission fee would be $29 or lower depending on which brokerage you chose. That's a helluva lot cheaper then $1375.

I myself like seeing a guaranteed 5% return on my investment, and the bonus of increasing stock price on top of it. Some question how hard it is to maintain your investment in dividend paying stocks. If you research a company, and buy when a stock is yielding an ideal return, you might spend an hour a month reading about your stocks, and that's about it. Others would argue that the dividend is not guaranteed to stay the same on common shares. This is true for some companies, but a blue chip company is established and well managed to be able to maintain the dividends they pay out, allowing for peace of mind AND future dividend increases.

If a company ever did decrease its dividend, you could sell the shares and re-invest in another company easily enough and only pay two additional commissions.... still a far cry from $1375 a year for management fees. Even if you wanted some diversification with 10 different stocks, the fees would only cost you $390 to buy 10 stocks. No ones going to work harder to make you money then yourself, so you might as well get paid what you deserve.

Do you have what it takes to manage your own investments and pay yourself the management fees?