In this episode, learn how to grow your money with dividends:
Also covered in this episode:
- 6 steps to grow your money with dividend stocks
- what is Real Total Return
- what are industry leaders
- how an investment in CIBC returned over 167%
- how an investment in CNQ returned over 235%
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In this episode, I'm going to cover with you the six steps to growing your money with dividend stocks. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. Our approach to investing is to invest safely and reliably for the long term, regardless of what happens in the stock market. And to help us achieve that goal, I'm now going to cover the following six steps in this episode. Step one you're going to learn that dividends are key. Step two you need to make sure that you're investing in profitable companies. Step three you want to invest in market leaders. Step four invest in dividend growers. Step five hold for the rising dividend. Step six focus on quality and value. And then I'm going to show you some real life examples. So let's get started with step one Make sure that you invest in companies that pay dividends. So what is a dividend? A dividend is basically the company sharing its profits with you, the shareholder. Let's take a look at a real life example with a Canadian company, fortis. This company operates as an electric and gas utility company in Canada, the United States and the Caribbean. The company was founded in 1885, has over 9,000 employees and a market cap of over $26 billion. The company pays currently an annual dividend of $2.36 per share and in this example, if you own a thousand shares, we multiply that by the dividend, you would receive $2,360. $2,360 a year in dividends. Now, remember, you can spend the dividends if you wish or reinvest them. The dividends are deposited directly into your trading account. So, again, you can spend them or, as dividend investors, we prefer to reinvest those into other stocks that pay us dividends. So let's take a look at Fortis. This is the stock price up on the screen in blue or in purple, and you can see that the stock price goes up and down all the time. What we're trying to show you here is that, even though the stock price can be inconsistent, the dividend doesn't have to be so. Here on the graph, the orange line represents the dividend and you can see that the dividend has gone up every single year. And as dividend investors, our focus is on the dividend income and not on the stock price. So this is really good. We can see the dividend growing year after year after year. In fact, fortis has a history of over 50 years of consecutively increasing its dividend. So now let's take a look at real total return. Now in this episode, I'm going to go very briefly into this topic. For those of you that are interested, please go back and watch episode 34. That entire episode is dedicated to real total return. So for this episode, the only thing you need to know is that your total real return is based on three things Capital appreciation plus dividend income plus dividend growth. So we've just talked about dividend income. I showed you an example with Fortis. You can see what a dividend is and how much you would receive in dividends. So let's move on to step number two and that'll help us with getting to the real total return. Okay, step number two is to invest in profitable companies. So I'm going to go back to the graph we just saw a couple of minutes ago. This is Fortis. It's a Canadian company and you can see over the many, many years, the stock price goes up and down. But if you look carefully, you can see that in some instances the share price drops by $5 a share, even $10 a share, even $15 a share. So how can a company continue to pay you a dividend and increase the dividend every year when its stock price tanks? And the reason for that is the dividends are not paid from the stock price. The dividends are paid from the earnings. So now let's take a look at the same stock price graph, but here the orange line represents the earnings, the earnings per share. How much profit is the company making? Now you can see that in some cases the earnings have dropped. Then they come back up. They drop and they go back up again. That's okay. We're looking long term 5, 10, 15, 20 years. So in this example we see 1, 2, 3 times in this period when the earnings dropped. But overall the trend is that the earnings have gone up over the long term. And as long as the earnings continue to grow, the company can afford to increase the dividend to you, the shareholder. So now let's take a look at a quick example. I'm going to show you two companies on the screen and I want you to decide for yourself which company would you invest in. So here we are going to look at the last 15 years of earnings per share. So on the left hand side of the screen we have United Health Group. Take a look at that graph. Over the last 15 years the company has consistently increased its earnings per share. Now if we look on the other side of the screen, we can see Nokia, and here you can see that the earnings have gone down, come up, again down. They go a little bit up, then they go down again, maybe down some more. It's completely random, it's unpredictable. So just because of that reason alone, all things considered equal, we would not invest in Nokia. Instead, we would invest in United Health Group. Again, all things considered equal In terms of debt, the payout ratio, dividend growth and all of that. But looking at the two graphs, the United Health Group graph gives me confidence that the company will grow its earnings in the next 5 to 10, 15 years. So here is just a small list of some companies and you can take a look at their 20 year average EPS growth. Again, all things considered equal. The higher the average EPS growth, the better. And the final column on the right hand side is the number of EPS increases in the last 20 years. So you can see we have some companies here that have consistently increased their earnings 16 times in the last 20 years. 15 times in the last 20 years. So again, all things considered equal. The more increases the better. And what does that mean for you? Well, the higher the earnings ultimately means the company is going to increase its dividend, which means more money in your pocket. So the key here is to focus on companies that are profitable, that have a long-term history of profitability. Step number three we want to invest in market leaders. And why? Because, again, our approach is to invest safely and reliably. So the market leaders provide us with some measure of safety and consistency and reliability. So we want to invest in companies that are market leaders in their industry. And again, the question is why? And the reasons are simple Industry leaders are well-established, they have majority market share, they have a large customer base, they have customer loyalty and they make it very difficult for competitors to challenge them. So let's take a look at some examples. If we're going to look at toothpaste, you can see that Colgate and Crest are some of the biggest names in this industry. Then there's also Sensodyne and Tom's of Maine. You know there's other brands, but the biggest ones that are easily recognizable are going to be Colgate and Crest, and those are the ones that most people will go to when they are shopping for toothpaste. Now we move on to something completely different telecommunications In Canada, the entire telecommunications market. This is Internet access, cell phones. It is run by just these three companies. We have Bell, bell Canada, rogers and Telus. So it doesn't matter which phone plan you have, which internet provider you're using at home. At some point or another your data or your telecommunications is going to be going through one of these three networks. So the key is that when these companies are priced low, when their earnings are good, their payout ratio is good, their debt level is good, and we're going to look at a couple of other things that we need to check for as long as all those are good and the price is undervalued or priced low, then that's when you want to acquire these companies and over your lifetime, if you can acquire all three of them. Well, now you own a part of the entire telecommunications market in Canada. So now we're going to shift gears to a US company, coca-cola. This company is easily recognizable. They were founded in 1886. They have over 79,000 employees and their products are sold in over 200 countries worldwide, and you can look on the screen here. They own so many different brands. We have Sprite, we have MinuteMade, and a number of brands are up on the screen here Powerade, they're all on the screen. The company is an absolute market leader and, between Coca-Cola and Pepsi, they own the majority beverage market in the US, if not in the world, and that market leadership has allowed this company to be paying dividends since 1893. Coca-cola has consecutively increased its dividend every year for over 62 years. Think about how many market crashes, how many recessions we've had in the last 62 years, but yet this company has been able to increase its dividend every single year for 62 years, and every time they do that. That's more money in your pocket if you are a shareholder. So the key lesson here is investment companies that are industry leaders. Okay, let's move on to step number four. Invest in dividend growers. Why? Because A you want to get paid dividends right, that's the money that gets deposited directly into your trading account and you want increasing dividends Because, if we go back to our formula of real total return, this is a big piece Dividend income, which we talked about in step one and now we're talking about dividend growth. That's the other piece of it. So you not only want a company to pay you a dividend, but you want that dividend to go up year after year after year, because that will add up in your portfolio and generate more income for you. Now here's a short list of some Canadian companies up on the list, but you can see that some of these companies have been consecutively increasing their dividends for the last 25 years, 28 years, 30 years, 49 years, 50 years of consecutive dividend increases and the Coca-Cola example. I just gave you 62 years of consecutive dividend increases, and there are some companies on the list that have been paying a dividend since the 1800s. So this should give you some level of confidence that companies like these will continue to pay you a dividend in the future and hopefully increase that dividend in the future as well. So step five it's important to hold for the rising dividend. So let me give you an example with CIBC. This is one of the largest banks in Canada. Now imagine in 2010, you purchased 300 shares in this bank and you can see the stock price at the time was $31.95. So your total investment at the time would have been $9,585 in CIBC. Now this bank has increased its dividend every single year since 2010. Back then, the dividend was $1.74. And you can see, if we take the dividend at the time divided by the purchase price, the dividend yield at the time was 5.4% and in that first year, in 2010, you would have received $522 in dividends. Today, the dividend is $3.48 a share. So today you would receive over $1,000 in dividends from this one bank and if we take the current dividend divided by your purchase price, you can see that your dividend yield, based on your purchase price in this example, would be over 10% 10.89% to be exact and that would be the return on your investment every year. While you hold on to those shares, you're not having to sell any shares, but yet you would receive over $1,000 in dividends every single year. Now, if we add up all the dividends received from this bank alone, that would be $10,302 in dividends, and remember, your initial investment was only $9,585. So that is fantastic, but it gets even better. We still have to account for capital appreciation, and that is the third piece of our formula to calculate total real return. So now, if we consider capital appreciation, the shares today, as of this recording, are $51 a share, and remember, you bought them back in 2010 for $31.95. So if we take the share price today, multiply it by 300 shares and then add in the $10,000 in dividends, you can see that your $9,585 investment in CIBC today would be worth over $25,600. And that is a total return of 167% a little more than 167% return. So the key lesson here is hold for the rising dividend, because that's going to mean growing passive income for you, and the income is passive. Once you've bought the shares, there is no other work for you to do. You don't need to buy more shares or sell them. You just hold on to them and the dividends come to you every single year. Now let's move on to step number six focus on quality and value. Okay, so we want to make sure that we're investing in quality dividend stocks when they're priced low. So not just any stock. Make sure it's a quality stock and not just at any price. Make sure it's priced low, make sure it's undervalued. Stock prices go up and down all the time and we want to be able to buy them when they're priced low. So we'll talk about quality a little later, but I'm going to focus on value right now. How do you know when a stock is priced low? So for that, what we do is we look at the current dividend yield. If the current dividend yield is greater than the stock's 20 year average dividend yield, then the stock is undervalued. It's priced low. If the current dividend yield is less than its 20 year average yield, then the stock is overvalued and it's priced high. If that's the case, then you would avoid the stock for now, but if it's undervalued, then you could consider it for investing. Now for more information on this topic about price low and price high, undervalue and overvalue I would suggest you go back and watch episode number one, and I talk about this in more detail in episode number one. But for now, let's focus on quality and priced low. So we've covered price low. How do you know, when you're looking at a stock, that it's a quality stock and, of course, that it's priced low any stock in the world? So when you look at it, you'll need to look at the 12 rules of simply investing. So today's episode we've covered. Rule number three low cost, competitive advantage. Those are going to be the market leaders in their industry. Rule number five is the company profitable? Yes, we talked about looking at the earnings earnings growth over time. And rule number six does the company grow its dividend? So we looked at the history of consecutive dividend increases for companies. And then we have the other rules. I'll get to those in just a minute, but these are the 12 rules that you want to follow in order to make good investing decisions to lower or minimize your risk and maximize your gains. So, but first, let's take a look at some four real life examples. So I'm going to show you a four Canadian companies. We're going to look at Canadian national resources, we're going to look at Fortis, we're going to look at Bell and we're going to look at CIBC. So here on the screen, you can see the stock price in 2010. So that was 11 years ago. You can see what the dividend was 11 years ago for each of those four companies and you can see that the stock price today this is as of this recording. So that's the stock price today and that's the dividend today that the companies are paying. Okay, I'm not going to read out all the numbers. That's a lot of numbers on the graph here on the screen, but you can take a look at it. Certainly pause the video if you want, and you can take a look at those numbers. So what we're going to focus on here is the total return total real return, including dividends. And we can see that Canadian natural resources An investment in that company in 2012, today, would return to you over 235%. That's capital appreciation, including the dividend income, including dividend growth. Fortis same time period would have returned over 127%. Bell would have returned over 137% and CIBC would have returned over 139% Now, but this is assuming, of course, if you were to sell them today, which I don't want you to do. I'm not suggesting that you do that. This gives you an idea of how much the stocks have gone up in price and how much dividends you've received over the time period since 2012. This is even more important is your dividend yield based on your purchase price. So Canadian Natural Resources purchased in 2012, today would be providing you annually with 13.1% return in dividends alone. You never have to sell the shares. That's how much you would be getting in dividends alone. Fortis would be returning you 7.1% a year in dividends, bell would be giving you 9.3% a year in dividends and CIBC would be giving you 9.7% annually in dividends, and so those are great returns and over time, we expect these to grow to double digits. Now, canadian Natural Resources is already there with 13% return, but I would expect Fortis, bell and CIBC over the coming years, as they grow the dividend, that your dividend yield based on your purchase price will then be in the double digits. So don't forget our approach to investing is to invest safely and reliably, regardless of what happens in the stock market. So how do we do that? We invest in quality dividend stocks when they're priced low. So how do we know, when we're looking at a stock, if it's a quality stock and if it's priced low? Well, for that I created what I call the 12 rules of simply investing. This is your checklist. A company must pass each of these rules before you invest in it, not just some of the rules. So if there's even one failure, skip it, move on to something else. Rule number one do you understand how the company is making money? If you don't skip it, move on to something else. Rule number two 20 years from now, will people still need its products and services? Rule number three this is what we covered into this episode. Does the company have a low cost competitive advantage? And typically the answer is yes if the company is a leader in a market leader in its industry. Rule number four is the company recession proof? Rule number five is the company profitable? Rule number six does it grow its dividend? Rule number seven can it afford to pay the dividend? Rule number eight is the debt less than 70%? Rule number nine avoid any company with recent dividend cuts. Rule number 10, does the company buy back its own shares. Rule number 11, is the stock price low? And that's three parts. We look at the PE ratio. We also compare the current yield to the 20 year average, which I showed you in today's episode, and we look at the PB ratio, the price to book value. And then rule number 12, keep your emotions out of investing. So, for those of you that are interested, I've created a simply investing course. It's an online course. I show you the 10 video modules, and module number one is covering the investing basics. Module two we cover the 12 rules of simply investing. Module three I show you how to apply the 12 rules using a Google sheet. Rule number module four using the simply investing platform, I'm going to show you how to do that. Module five placing your first stock order. Module six building and tracking your portfolio. Module seven when to sell, which is just as important as to know when to buy. The next module is how to reduce your fees and risk, especially if you own mutual funds, index funds and ETFs. The next module is your action plan to get started right away. And module number 10, I answer your frequently asked questions and, for those of you that are interested in the platform, this is. It's taken two to about two to three years to build, and this is a web application that automatically applies rule these rules to over 6000 companies in the US and in Canada every single day. So when you log in, you can automatically see which companies pass which of the rules, which companies fail which of the rules, and then you can determine which companies to consider for investing versus which companies to avoid for now. So if you're interested, you can. You may want to write this down. We have a coupon code save 10 SAV E, one zero. This coupon code is going to save you 10% off of the course and off of the simply investing platform. So if you enjoyed today's episode, be sure to hit the subscribe button. We have new episodes out every week. Hit the like button as well and for more information, take a look at our website, simply investingcom. Thanks for watching.