My Investing Principles
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...
posted by My Personal Hedge Fund at 9/06/2005 08:01:00 AM
6 Comments:
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
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
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%!
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.
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
Hey there anonymous...please ensure you check out my updated domain at http://www.thedividendguyblog.com.
I would like to respond to your comment here:
http://thedividendguyblog.com/2005/09/06/my-investing-principles/#comments
Thank you so much.
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