In this episode, I show you why you shouldn't wait to start dividend investing.
I cover the following topics in this episode:
- The common investing fears
- 5 types of investors
- How much can you earn?
- The cost of not investing sooner
Link to SI Future Value Google Sheet:
https://docs.google.com/spreadsheets/d/1kN1RgR9Tojnz78Peq2y_S-ZoV4lHKYJ2TJnXgPaRAyk/copy
Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.
In this episode, I show you why you shouldn't wait to start dividend investing.
I cover the following topics in this episode:
- The common investing fears
- 5 types of investors
- How much can you earn?
- The cost of not investing sooner
Link to SI Future Value Google Sheet:
https://docs.google.com/spreadsheets/d/1kN1RgR9Tojnz78Peq2y_S-ZoV4lHKYJ2TJnXgPaRAyk/copy
Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.
In this episode I'll discuss why you shouldn't wait to start dividend investing. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode we're going to cover four topics. We'll start first with looking at some of the investing fears that you may have with getting started with investing on your own. Then we're going to take a look at the five different types of investors. Then you can see if you fit in any one of those categories. Then we'll look at how much can you actually earn with dividend investing. The last topic will be the cost of not starting to invest on your own.
Speaker 1:Let's get started with our first topic investing fears. What are some of your fears of investing on your own? The number one fear that we get from most people is the fear of losing money, of maybe taking on too much risk. Then they have questions like well, what do I invest in? How do I invest? What if I make a mistake and I lose my hard-earned money? The biggest thing comes back down to the fear of losing your money. That prevents you from not investing, or most people, from not even starting to invest because there's that strong fear of losing your money. Let's see what the five types of investors look like and see if you fit in any of those categories. Then we're going to continue and look at what is the result of not starting to invest. That's our next topic in this episode the five types of investors.
Speaker 1:For this topic, here we're going to be using information from the Schwab Center for Financial Research. You can see their link up on the screen right now. What they did is they studied the impact of timing on the returns of five hypothetical investors who had $2,000 in cash to invest in the stock market once a year for 20 years, starting in 2003. Let's take a look at what that looks like for 20 years for five different investors to start investing in the stock market. In this example, they used the SNMP 500 index. Here are the list of five investors that we're going to go through.
Speaker 1:We're going to talk about Peter Perfect, ashley Akshon, matthew Monthly, rosie Rotten and Larry Linger. Let's start with Peter first. These are hypothetical investors, but you may find yourself in one of these five categories. Peter had invested, we're assuming, had incredible luck and invested on the best possible day each year. What Schwab did is they went back and looked at the historical data for the last 20 years and they looked at when was the stock market at its lowest point every single year. And then they imagined that, okay, peter Perfect took his $2,000 and invested all of it on the lowest stock market point of the year, which means he had perfect timing. He invested when the market was at its lowest point in the year and did that for 20 years. Okay, so every year it fell obviously on a different day, but let's assume that Peter Perfect invested $2,000 on the perfect investing day of every year.
Speaker 1:Okay, so then we move on to our next investor, ashley Action. So what she did is she invested her $2,000 immediately at the beginning of each year, so at the either January 1st or January 2nd, depending on the first day when the stock market opens of each year. She invested all of her money in the SNMP 500 index. Now, matthew, monthly, had a different approach. He took the dollar cost averaging approach. So he took his $2,000 and divided by 12, and so you can see it's roughly $166.66 every month, and he invested at the start of every month, $166.66 and did that every single month for 20 years. Now, rosie Rosie Rotten had incredible bad luck and invested on the worst possible day each year, which is when the stock market was at its highest point in the year. So again, schwab went back and looked at the stock market data for the last 20 years and they looked at what was the highest point of the year for the stock market for that year, and Rosie Rotten invested her $2,000 on the worst possible day of the year.
Speaker 1:And then finally, we have Larry Lenger. Larry left his money in cash using treasury bills Every year. He left it in cash, never invested in stocks. He was convinced that lower stock prices and better opportunities were just around the corner. He was waiting for a good opportunity to invest and he just kept waiting and waiting, and waiting. So for 20 years he just put his money in treasury bills, leaving it in cash, and did not invest in the stock market at all.
Speaker 1:So now you may find yourself in one of these five investor types. Maybe you're the person who is just waiting on the sidelines, waiting to invest, haven't started investing yet, waiting for the perfect time. You're not sure if the market is at its peak right now or if the market is low. You're not sure if the market's going to crash in the next month or next year, so you're just waiting. Now Peter Perfect is going to be impossible to predict when is the perfect time to invest in the stock market and, naturally, rosie Rotten invested at the worst time. And again, it's going to be very difficult to pick the worst time to invest, so you're probably, for the majority of folks that are investing, are probably going to be somewhere in the middle, with either Ashley or Matthew.
Speaker 1:Now, which one of these five investors do you think had the highest returns after 20 years? Well, that was Peter, right, obviously, peter Perfect invested at the perfect time of the year for 20 years, and again, these are hypothetical investors, but you can see that, peter, his investment after 20 years was worth a little over a hundred and thirty eight thousand dollars. Now Ashley, who invested at the start of every year automatically the entire $2,000 every year at the start of the year, came in second place and her portfolio was worth a little over $127,000. Now Matthew, who was doing dollar cost averaging, came in third place, very close to Ashley, and he earned. His portfolio was worth a little over $124,000 a year. And then Rosie, who invested at the worst time of the year, actually came in fourth place and her portfolio was worth a little over $112,000 a year. And then Larry, who stayed on the sidelines, didn't invest in the stock market for 20 years and his investments were worth $43,948. Now you can see the stark difference between Larry and the rest of the investors. Now, if we want to take a look at the difference between Rosie who invested at the worst time, had the worst timing, the worst bad luck still made $68,000 more than Larry. So there's some good news here Even if your timing is not perfect like Peter, even if your timing is the absolute worst, you will still come out ahead by investing rather than waiting on the sidelines. Now, for most of you, if you're going to be somewhere in the middle, of course, like I said, you're not going to have your timing perfect like Peter, and you're not going to have your timing the absolute worst like Rosie you're going to be somewhere in the middle. So, for you to look at where Ashley is coming in, the difference between her portfolio and Larry's is over $83,000, and that is substantial. That is a huge difference. Again, the lesson here is you don't want to wait on the sidelines to start investing.
Speaker 1:Now. Some of you might be thinking well, 2003 to 2023, it's a specific period of time. We had COVID in there as well, like what happens outside of this. What if somebody started investing in 2001 or 1994, or different periods of time? So this is on their website, schwab, the link that I just showed you earlier. In this episode I'm going to quote some thoughts on this and quote some other periods of time that they considered. So, schwab, I'm going to read it out to you, and the quote is regardless of the time period considered, the rankings turned out to be remarkably similar.
Speaker 1:We analyzed all 78 rolling 20 year periods dating back to 1926. In 68 of the 78 periods the rankings were exactly the same, that is, Peter was first, ashley second, matthew third, rosie fourth and Larry last. But what about the 10 periods where the results were not as expected? Even in these periods, investing immediately never came in last. It was in its normal second place four times, third place five times and fourth place only once. From 1962 to 1981, one of the few extended periods of persistently weak equity markets. What's more, during that period, fourth, third and second places were virtually tied. We also looked at all possible 30, 40, and 50 year time periods starting in 1926. If you don't count the few instances when investing immediately swap places with dollar cost averaging all time periods followed the same pattern In every 30, 40, and 50 year period, perfect timing was first, followed by investing immediately or dollar cost, averaging bad timing and, finally, never buying stocks. So the lesson here in this episode is don't wait for the right time to start investing, because that's never going to happen and you can see there's a huge cost to not doing anything at all.
Speaker 1:Now, before we get into the actual what is the cost of not investing, there's one more topic we want to cover, and that is how much can you actually earn with dividend investing? Now, to answer that question, it's going to depend on three things. Number one is going to be your investing knowledge. How do you invest? What do you invest in? Do you know what to buy, what went to sell, how long to hold? So that's where simply investing can help you with that. To get that investing knowledge. And then you need money and time. The more money you have to invest, the more money you can make because you can buy more shares, and the more shares you own, the more money you can make in dividends. And then time, as we saw in the example, we just looked at a 20-year time period, but if we extend that to 30 years, 40 or 50 years. The more time you have to invest, the more time you have to compound your dividends and you can make more money. So having more time having more money having both is even is going to be even better for you.
Speaker 1:Okay, so for this we're going to use the Simply Investing Future Value Google Sheet. It's a simple Google Sheet. It's available for free. I'll put the link down below in the description. Anybody can use it and it's just a tool to estimate. It's not going to be perfect, but it's going to allow you to estimate what your future value of your portfolio could look like. Now, there's a lot of numbers on the screen here, so don't be concerned about that. I'm going to take you through it step by step. So what we do here in the Google Sheet is we cover a 20-year period. Okay, so the next 20 years. What do they look like? The only thing you need to change here, once you download the Google Sheet, are the values that are in green right, the cell that's in green.
Speaker 1:So let's start on the left with the starting balance. So in this example, I'm going to start with $250,000. Now, for some of you, that might be a lot of money. For some of you it might not be a lot of money and that's why the Google Sheet is there, so you can enter in your own values. What I'm taking into consideration here is $250,000 would be the total of all of your portfolios your retirement portfolio, your non retirement portfolio If you're in the US, the 401k, if you're in Canada, your RSP, the TFSA, all of the accounts combined. We put the starting balance here.
Speaker 1:So let's say you've got $250,000 to invest. We're going to keep this example simple Additional investments each year, zero. So we're going to assume you're not investing a single penny more for the next 20 years. You're starting with your initial investment of $250,000 and that's it. Again, that's a number that you can change when you download the spreadsheet. If you invest $100 a month, then you would put in $1,200 as an annual additional investment each year.
Speaker 1:Okay, then we're going to move on to the right, the dividend yield. We're going to keep it three and a half percent. That's the average yield. Stock growth, very conservative. We're going to leave that at four and a half percent. So what does that look like? So, for over 20 years, let's say you start with an initial investment of $250,000, you will earn and again, this is an estimation you will earn total a little over $237,000 in dividends. That's all of the dividends received over the 20 years. We just add them up and the value of the portfolio should be roughly around $1.1 million. Okay, after 20 years.
Speaker 1:Now what happens if you don't invest and you're more like Larry Right in the example we showed earlier, where Larry waited on the sidelines to invest? Right, he wasn't sure if this was the right time. So what if you wait and let's say you end up waiting 10 years Before you start investing and then you start with the $250,000 investment? Well then your total dividends earned is going to be around 126,000 and your portfolio will be worth around 539,000 dollars. So by waiting 10 years, you would have lost out on a hundred and ten thousand dollars in dividends and your portfolio Would be 625,000 dollars less than what it could have been had you started investing sooner. Now, for those of you that like to see percentages, you can see that waiting 10 years Will cost you 47% in dividends and the portfolio will be worth 54% less. So half, pretty much more than half that's how much your portfolio would be worth. So you can see that there's a lot of money that's Going to be lost Opportunity costs, right, that are going to be lost here. So the lesson again is don't wait to start Investing. You're never going to get the timing perfect, but, as we saw in the examples earlier in this episode, you don't have to have perfect timing.
Speaker 1:So let's get on to our last topic in this episode. So what is the cost of not investing sooner and you probably already know this, because that's where we're headed to so the loss of potential income and gains, even capital gains, and then inflation is going to eat into the value of your cash, and and so we just saw this right. We're looking at the difference here between Ashley and Larry. That is a difference of 80 over 83 thousand dollars Just by investing every single year at the beginning of the year, versus waiting on the sidelines, right. So that's a huge difference there. And then the slide that we just looked at, right. So your portfolio is going probably going to be less than half of what it could have been, and the dividends, 47%. That's also around the halfway mark, half of what you could have earned if, in this example, you waited 10 years to start investing, and then inflation is a big one. So in this example really quick example we're going to use the Bank of Canada calculator. You can see the link up on the screen so you can try it yourself and Take a look at this. Right in 2003, something that would have cost a thousand dollars this is cost of goods would be now worth. Would now cost, in 2023, $1,533. So you can see that inflation increases the value of goods and it decreases the value of the cash that you hold on to. So in the case of Larry, who is just sitting on cash for 20 years, while the value of his cash over time is going to decrease as inflation either remains steady or goes up, so there is a cost to not doing anything. So again, final lesson here don't wait to start investing and get started immediately by learning how to invest, and that's where Simply Investing can help you.
Speaker 1:Our approach to investing and I've been doing this for over 24 years now is investing in quality, dividend-paying stocks when they are priced low. So you can see the key words. Highlighted here is quality dividend stocks, and when they're priced low, when they're undervalued. So not just any stock, but a stock that's paying dividends. Not just any dividend stock, but it has to be a quality stock and not just at any price. We want to make sure that the stock price when we invest in it is historically priced low, that it's undervalued.
Speaker 1:So how do you know when you're looking at a stock any stock in the world? How do you know, when you're looking at it, if it's a quality stock and how do you know if it's priced low? Well, for that I've created what I call the 12 rules of Simply Investing. This is your checklist. If a company fails even one rule, skip it, move on to something else. Company has to pass all of the 12 rules in order for you to invest in it, and the rules are up on the screen here. I'm going to read them out, in case you're listening to this podcast instead of watching it. So rule number one do you understand how the company is making money? If you don't, skip it, move on to something else.
Speaker 1:Rule number two 20 years from now, will people still need its product and services? Rule number three does the company have a low cost competitive advantage? Rule number four is the company recession proof? And rule number five is it profitable? So we look at the last 20 years to see 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 a recent dividend cut. Rule number 10, does it buy back its own shares? Rule number 11, is the stock priced low? So there's three things. We look at the PE ratio, we compare the current yield to the 20 year average yield and then we look at the PB ratio. If all three conditions are met, then the company passes rule number 11. And rule number 12, keep your motions out of investing.
Speaker 1:So, for anyone that's interested, I've created the Simply Investing course. It's an online course, self-paced. It's got 10 modules and we cover everything you need to get started. Rule one we cover the basics of investing. Module two we cover the 12 rules with real life examples. Module three I show you how to apply the 12 rules to discover for yourself quality companies that are priced low. Module four show you how to use the Simply Investing platform. Module five placing your first stock order step by step, especially if you've never done it before. Module six building and tracking your portfolio. Module seven when to sell a stock, which is just as important to know when to buy, and module eight to reduce your fees and risk. Especially if you own mutual funds, index funds and ETFs, those fees are going to be very large over time, so we cover that in module eight.
Speaker 1:Module nine I give you your action plan to get started with investing immediately. In module 10, I answer your most frequently asked questions. We also have the Simply Investing platform, which is an online subscription-based service. The platform automatically applies the rules to 6,000 companies in the US and Canada every single day, so it'll tell you immediately which companies pass which of the rules, which companies to avoid, which ones to consider. If you're interested, there's a coupon code you may want to write this down Save 10, save10. Save 10 is going to give you 10% off of the course or the platform. So if you enjoyed today's episode, be sure to hit the subscribe button. We have a new video out every Wednesday. Hit the like button as well and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.