The Simply Investing Dividend Podcast
The Simply Investing Dividend Podcast
EP66: Can You Invest on Your Own?
In this episode, I show you how to start dividend investing on your own.
I cover the following topics in this episode:
- Can you invest on your own?
- Our approach to investing
- What is a quality stock?
- How to know when a stock is priced low (undervalued)
- 4 attributes of a successful investor
- What happens if you don't invest on your own?
- The high cost of fees (MERs) on your investments
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In this episode, we're going to answer the following questions Can you invest on your own and how would you do it, and what are some of the downsides of not investing on your own? Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, we're going to cover the following four topics Number one can you invest on your own? Number two we're going to look at our approach to dividend investing. Number three we'll look at the four attributes of a successful investor. And finally, number four we'll look at what happens if you don't invest by yourself. Let's get started with our very first question Can you invest on your own? And the answer is simply yes. This isn't rocket science. You don't have to have a degree in economics, finance or accounting. Investing on your own is really quite simple and it doesn't take a whole lot of time. That's another thing that most people think that you have to spend hours and hours and hours of research into figuring out what stocks to buy and when to sell them, and the fact is simply, it is not true. You don't need to spend so much time, and our goal here is to keep it simple and I tell people it's so simple that a nine-year-old could do it, and I had both of my kids start investing, become dividend investors, when they were nine years old. So you can start small, and it is so simple that, again, it's not rocket science. And so how do we keep our approach to dividend investing simple? Well, we get rid of all the financial jargon, and I speak in plain English in my courses as well the simply investing course. It's done in plain English and we eliminate all of the technical jargon, and then you can see how simple investing can really be. And so let's move on to our next topic in this episode, which is our approach to dividend investing, and it's quite simply the ability to invest in quality, dividend-paying stocks when they're priced low. And you can see there's three key phrases here. So we don't want to invest just in any stock that pays a dividend. We want to make sure that it's a quality stock. So quality has to be there, it has to pay a dividend, and then we don't want to buy it at any price. We want to buy it when it's priced low. So those are the three key elements of this statement, so let's take a look at them one by one. So we're going to start with dividends first, and then we'll look at quality and then we will look at priced, low or undervalued stocks. So a quick reminder for anyone new to this podcast Dividends are simply the company sharing its profits with you, the shareholder.
Speaker 1:So in this example, if a company is paying a dividend of $1 per share and you own a thousand shares, you will receive $1,000 for as long as you own those shares and as long as the company continues to pay the dividend, the dividends are deposited directly into your trading account as cash, so you can spend the money if you wish, or you could reinvest it into other stocks that pay dividends. So now you'll see over the years I've been practicing this myself for more than 24 years. I've been teaching for many, many years as well and our students some of them make $1,000 a year in dividends. Some of them make $5,000, $20,000, $60,000 or more a year in dividend income. So the dividend income starts off really small in the beginning and then it can grow quite quickly as you continue to compound and reinvest those dividends into more stocks that are paying you dividends. Our focus as dividend investors is always on the dividend income and not on the stock price. So now let's move on. Having said that, the key thing to remember is when you purchase those stocks, when you invest in those, you want to make sure that they're undervalued Afterwards. The price can go up and down Over the long term, over the next five, ten, fifteen, twenty years. Our focus and priority is on the dividend income, but let's go back to our statement here. So we covered dividends.
Speaker 1:Now we're going to look at how do you know when a stock is priced low, and another word for that is undervalued. So the stock, when the price is low, historically low, the stock is considered to be undervalued, versus if the price is too high, it's going to be overvalued. Now, stock prices go up and down all the time. You can see that up on the screen. We have a graph here. You can see stock prices go up and down. Even on any given day, the stock price will go up and down.
Speaker 1:Now, the key here is to invest when the price is historically low or undervalued. And why is that? Because when the stock price is low, you're going to be able to buy more shares for the same amount of investment. Let's say you were going to invest five thousand dollars into a company. So if the shares are ten dollars a share, you're going to be able to buy more, versus if the shares were trading at ninety five dollars a share. So the more shares you own, the more you can make in dividend income, because the dividends are paid Based on the number of shares you own and not on the stock price fluctuating.
Speaker 1:So the quickest way to know when a stock is priced low is to follow this formula that we have up on the screen here, and it's simply says to take a look at the current dividend yield today and Make sure that the current dividend yield is Greater than the company's 20 year average dividend yield. Then you know that the stock is priced low. So, for example, if you were looking at a stock today and its current yield was four percent and the 20 year average dividend yield was two percent, well then you know four percent is greater than two percent. The stock is considered to be priced low. Now for more information and more details on how we came up with the formula. How do you know when a stock is priced high? I would highly suggest and recommend that you go back and watch episode one, where we cover all of this in much more greater detail.
Speaker 1:So now we're going to move on to our last piece in the sentence With, which is our approach to investing. So we said we want to make sure that the stock is priced low, it's undervalued. We want to make sure that the company is paying a dividend, the stock is paying a dividend to the shareholders. Well then, the other piece is quality. So how do you know that you're looking, when you're looking at a stock, that it's a quality stock? So there's a couple of things to check here. Right, we're going to look at when we look at stocks or companies. We want to make sure that the companies are financially healthy. They have low debt. They have very little competitors. They are virtual monopolies in their field. Canada is a perfect example. Rogers, bell and Tellis pretty much covers the entire telecommunications market in Canada. If you look at the five big banks, the largest banks in Canada, they pretty much have a virtual monopoly in that industry. Also want to make sure that the companies are consistently profitable and we want to make sure that the companies are paying dividends and increasing those dividends year after year after year. So a nice way to put all of this together, because all of these things will tell us if we're looking at a quality company.
Speaker 1:But our goal here is to make this simple, easy so that anyone can apply these types of rules. So what I've done is I've created the 12 rules of simply investing. You can see the 12 rules up on the screen. These become your checklist. So you want to make sure that a company passes all of these rules before you invest in it. So you can't have a company that fails one rule, maybe, fails two or three. No, if there's even a single failure, move on. Move on to another company or another stock. So the rules are quite simple. I'll go through them right now, very briefly.
Speaker 1:Rule number one do you understand how the company is making money? If not, skip it, move on to something else. 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 it recession proof? See, we only want to invest in companies that are recession proof. Rule number five is the company profitable? Rule number six does it grow its dividend? Rule number seven can the company afford to pay the dividend? And rule number eight is the debt less than 70%? Rule number nine avoid companies with recent dividend cuts. Rule number ten, does it buy back its own shares? Rule number 11, is the stock priced low. So we talked about that at the beginning of this episode. And then rule number 12, keep your emotions out of investing. So if a company passes all of the rules from one to ten, you know that you have a quality company in front of you. Company passes rule number 11, then we know that the stock is also priced low. And then rule number 12 has nothing to do with numbers or looking at financial data, but everything to do with you as an investor, and we're going to talk a little bit more about that towards the end of this episode.
Speaker 1:So these 12 rules are designed to minimize your risk but maximize your returns and specifically the dividend income. We want to make sure that income is growing every year and you're making as much money as possible through the dividend income. Now some people might look at these 12 rules and say to themselves well, this looks complicated, this looks time consuming, and I'm here to tell you that you only need to spend time when you're ready to invest. So we're not the type of investors that are investing 50, 60, 80, 90 times a year. We're investing maybe once a year, maybe twice a year, maybe three or four times a year, and that's it. So when you have additional funds to invest, that's when you would sit down and go through the 12 rules and determine which companies you should invest in, which ones you should avoid. So that takes a little bit of time, but it's not like most people think. Well, you have to spend hours and hours and hours every week trying to figure out which stocks to buy, and we make it a lot easier in simply investing in the Simply Investing course. I provide you with a Google Sheet. You can plug all the numbers in there and we show you where to get the numbers, and the Google Sheet will highlight which company passes all the rules, which companies fail which rule. So it's a lot easier to narrow down that list of stocks to consider for investing. So, again, it doesn't have to take a whole lot of time. It takes a little bit of time when you're ready to get started with investing.
Speaker 1:Let's move on to our third topic in this episode, which is to talk about the four attributes of a successful investor. So I'm going to go through these four and think about do you have those attributes? Is this something that you could learn, something that you could gain, because, if you can, that's going to make you much more successful. So the four things to know are knowledge, investing knowledge, have some optimism, have some patience and have some discipline. So knowledge is the first one, at the top, because it's one of the most important. Before you invest dividend stocks or any kind of stocks, you have to have knowledge about what you're investing in, and you have to know why you're investing in a stock. How do you select dividend stocks to invest in? And so I just showed you the 12 rules. So in the Simply Investing course, we cover the 12 rules in detail, we go through the 12 rules with real-life examples, and so that's going to build your investing knowledge and, additionally, it's going to build your investing confidence. And, like I said in the beginning, it's simple. It's not rocket science, we don't use any technical jargon and we keep it simple, and so the knowledge is going to be the first attribute that you need to have, and this is something that you can learn and it's easy to learn.
Speaker 1:And then, after that, we talk about optimism. You have to be optimistic about the stock market in general, about business in general. Now, I've been doing this for over 24 years. I've seen firsthand the tech bubble crunch. The bubble burst in 99 in 2000. The financial crunch was in 2008-2009. Then there was 9-11 and there was other times over the last 24 years where the stock market was down, and during COVID, march of 2020, we also saw the stock market crash. But you have to know that these things will happen. Markets go up and down. It's all in cycles. We can't predict when the next crash is going to happen and we don't know how long it's going to last, but these things do happen. But you have to be optimistic about the future and what history tells us is that after every market downturn, the stock market rebounds and it comes up and it brings all the stock prices up with it. So you have to be optimistic, otherwise you're just going to keep your money under a mattress at home, so that doesn't get you very far in terms of staying ahead of inflation and growing your investments.
Speaker 1:So the next thing is patience. I always tell students, if there's any money that you need in five years or less, if it's to put a down payment on a house or buy a car or vacation or education, that money should not go into the stock market, which means it shouldn't go into mutual funds, index funds or ETFs either, because they're just turning around and buying stocks with your money. So you have to have the patience to ride out any market downturns. So this is what we're talking about today about investing is investing for the long term Five years or more, ten years or more, fifteen, twenty years the more time the better. So you have to have the patience to ride out those market downturns. And then you have to have the discipline to stick to this approach, so you can't be a dividend investor one week and then turn around and be a growth investor another week and then turn around and put all your money in crypto and then, the week after that, do something else. This approach, like I said before, takes time, so you have to have the discipline to stick to this approach. I've been doing this for over 24 years and there's many investors out there that have been doing it for even longer and that they can tell you that patience and discipline go hand in hand.
Speaker 1:The other two things that are not up on the screen here and I want to mention these to be successful over the long term as a different investor, is two things additional things time and money. So the sooner you start investing, the better off you'll be, and that's why I got started with the kids when they were nine, and so the more time you have, the money has time to grow and compound and you can reinvest those dividends. So that's time. The other thing is money, of course. The more money you have to invest, the more stocks you can buy. The more dividend stocks that you buy, the more dividends you can receive. So if you've got both time and money, that's even better for you.
Speaker 1:So let's move on to our final topic in this episode. Is so what happens if you don't invest on your own? Because I know some people are going to say, even after watching this, that it seems complicated, it takes a lot of time. I have no interest in learning how to invest on my own. I don't want to do it on my own. I am just going to put all my money in mutual funds, index funds or ETFs, or I'm going to give it to someone else to go invest on my behalf and they're going to turn around and put it into mutual funds, index funds or ETFs.
Speaker 1:So what's the downside to that? So there's a couple of things here. There's going to be, in general, poor returns Because, as I just showed you with the 12 rules of simply investing, those are the rules that help you identify quality companies. Well, when you're investing in a mutual fund, in an index fund or an ETF, not all of those stocks today are going to have a payout ratio that's very low. Not all of them are going to pay dividends, not all of them are going to have low debt. So because of that, you will naturally may get poor returns because in that pool of stocks you have a number of stocks that are not quality stocks. And the same is true with lower dividend income, because not all those stocks in an ETF or an index fund or a mutual fund are going to be paying you dividends or are going to be paying very little dividends. So that also lowers your dividend income, which is why I prefer and what I teach is that we pick our own stocks, we select our own stocks that are high quality, that are paying us dividends and that are priced low. So we also don't want to overpay for those stocks. And that also attributes to poor returns is when you overpay for a stock that's already overvalued and naturally your returns are going to be lower in the future. And so there's higher risk. Again, it's going to be for the same reasons, because when you buy a pool of stocks, a fund that has 500 or thousands, thousands of stocks in there, not all of those stocks are going to be high quality. So anytime you buy a stock that's not high quality, you're putting your money at higher risk.
Speaker 1:And lastly, is going to be the fees. So with any mutual fund, index fund or ETF, you will have to pay fees. The fees are deducted automatically from your account. These are MERS the management expense ratio because it costs money for the company to run a mutual fund, an index fund or an ETF. Now, the fees may seem low in the beginning and especially if you're only investing $500 or $1000 or even $10,000, it's going to seem low. But as you get older and you continue to invest over your lifetime, the fees will certainly add up. You can see up on the screen here.
Speaker 1:I've provided you with four different examples. In each example, the initial investment is $500,000. The only difference is the fee. So at the top we have a fee of 2%, then we go down to 1%, then we go down to 0.5% and then even lower to 0.05%. So I'm not going to read out all the numbers, they're up on the screen so you can see it for yourself. But let's start with the highest MER and then the fee, and then we'll go to the lowest fee and just to give you an idea, so $500,000 invested over 25 years where the fee is 2%, you're going to spend a little over $1.5 million in fees and that's quite substantial. Now I know folks will say, well, your investment would have gone up in value anyway in 25 years, and that's true, and there's online calculators that you can put the numbers in and figure out what is the value of your investment going to be in the future. So in all of these four cases, the investment's going to be much higher, for sure, over 25 years, but nevertheless, that doesn't negate the fact that you're still paying fees, whereas if you had your own individual stock portfolio, you would not be paying these kinds of fees.
Speaker 1:With dividend stocks, it's a one-time fee. It's a commission. It's usually $5 or $6 per trade. On half a million dollars, you would probably buy maybe 30 stocks and that's it, and you would pay the commission fee to trade and purchase those 30 stocks and that's it. That's a one-time fee, what we're talking about here in this first example is a 2% annual fee, so it gets deducted automatically from your investment portfolio every single year. Now let's take a look at $500,000, where the fee is 0.05%. So it doesn't seem like a lot, but after 25 years, you're looking at over $48,000 in fees. After 45 years, you're looking at over $449,000 lost to fees. So this is incredibly huge. That is a lot of money that you could be keeping for yourself and reinvesting it over that many years.
Speaker 1:So for anybody that's interested, I would highly suggest you go back and watch episode 38. We cover we talk more about the fees in detail in episode 38. So keep in mind this is what you're looking at. If you don't take responsibility for investing on your own, if you're gonna outsource that to someone else or outsource that to a company to invest on your behalf, then you may get poor returns, you may get a lower dividend income, you might be putting your money at higher risk and you're gonna be paying the fees. There's no way around those fees unless you invest by yourself. So I wanna leave you with some positive thoughts as we close this episode, and I'm gonna share with you a quote from Stephen Drozky, who wrote this book many years ago called the Investment Zoo. You can see the cover on your screen right now and Stephen is a self-made, very successful investor and in his book he says, I quote first of all, don't complicate things with a lot of variables that you will have to keep track of.
Speaker 1:Keep it simple. Avoid frequent trading. Develop long-term rather than short-term policies. Don't try to guess the length of market cycles and forget strategies that require a lot of knowledge or constant research. Don't get led astray. All kinds of companies will want you to part with your money. Don't be sold. Be a buyer. The game I suggest is not very complicated and it works. You can paddle your own canoe with great confidence. Okay, end quote. So that was a quote by Stephen Drozky, who talks about the importance of paddling your own canoe, which what he's trying to say is that you can invest on your own successfully. You just have to ignore all of the noise that's out there, and the key is to keep it simple, and that's what we do here. That's what I teach at Simply Investing is to keep it all simple. So I've already covered the 12 rules in this episode, so I'm not gonna go over them again.
Speaker 1:For those of you that are interested, I've put together the Simply Investing course. It's an online self-paced course. It consists of 10 modules. They're video lessons that you can watch. Module one covers the investing basics. Module two covers the 12 rules. Module three, I show you how to apply the 12 rules using the Google Sheet. Module four, we look at the investing platform. Module five you learn how to place your first stock order, step by step. Module six is building and tracking your portfolio. Module seven is learning when to sell, which is just as important as to know when to buy. Module eight reducing your fees and risk. So that's especially if you have mutual funds, index funds and ETFs. Module nine is your action plan to get started right away. And module 10, I answer your most frequently asked questions.
Speaker 1:And, for those of you that are interested, I've also built the Simply Investing platform, and this is a web application. A web app that tracks over 6,000 stocks in Canada and the US every single day, and we apply the rules to all 6,000 companies. So when you log into the platform, it will automatically tell you which companies are high quality companies, which ones are undervalued and which ones are overvalued. So you can skip those for now. So that's a much quicker and faster way to get the same type of information and data that you would be gathering and looking for in the course. So if you're interested, write down this coupon code save 10, save10. It's gonna save you 10% off of our course and the Simply Investing platform as well. If you enjoyed today's episode, be sure to hit the subscribe button. We have a new video out every week. Hit the like button as well, and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.