After 11 years of dividend investments and more $ 70,456 In terms of dividends earned over that period, I’ve grown as an investor and I’ve gained some insights in the process. Fast forward to the post Covid-19 and a new lesson will be learned for a total of 6.
I would argue that it is virtually impossible to start investing early and have all the knowledge at hand, but investing is vital to financial freedom. My kids, for example, are already investors through Computershare and are starting to familiarize themselves, but there are still a lot of skills missing to choose a stock or manage a portfolio.
I have a lot of discussions with them and neglect to teach investing very regularly, even if I want to share many lessons on investing. I will not give up and will continue to find ways to make compound growth more understandable and explain risk management or the emotional fear of risk.
The point I’m trying to get across is that all investors need to learn the ropes and get better with experience (i.e. investment lessons). The journey is different for everyone, but we all invest in the same stock market and play by the same rules.
In the fourth lesson of my investment lessons, I have been sharing my dividend income since I started tracking my dividend and performance in 2010. You can assume the dividend yield averages 2.5% if you want to reconstruct my total dividend portfolio value.
Some of the lessons from investing may be obvious to a seasoned investor, but we all have to start somewhere … To help overs avoid the same mistakes, here are 5 takeaways. These were my insights from my trip and they helped me define my investment rules.
6 lessons on investing
The faster you learn, the richer you will get!
First learning – high yield stocks are risky bets
High-yielding dividend stocks are not going to create wealth in the long run. You can use a high-yield stock as a proxy for interest rates on income, but you risk losing in the end.
Why? Companies need to generate income to cover expenses and then use the profits to grow the company or return the money to shareholders. The return is a function of the price and for the return to increase, 1 of 2 things must happen;
- The stock price is falling, which is usually not a good thing as it signals problems
- The dividend goes up, which means less money to reinvest in the company
Outside of REITs, a high-yielding stock will rarely hold its dividend yield through all economic cycles. That means you need to keep a very close eye on your inventory and its business. It’s not a “buy and hold” situation like other dividend blue chip stocks.
I was a little naive when I started dividend investing in 2009 and realized that high yield stocks weren’t really helping me grow my wealth. Sure, I got a better return than bonds or GICs, but that’s about it. I lacked the growth part of a strong company.
There are several ways to look at high yield stocks.
- The first is to simply look at all of the stocks that are paying more than 6%.
- The second is the rate of return versus the sector.
Investment rule: For each sector you think is acceptable, set and stick to a dividend yield range.
2. Learning – Research by Sector
Compare apples to apples and oranges to oranges. Comparing the dividend payout ratio of an energy stock with a technology stock usually leads to the same result. The payout ratio of energy stocks will be high and that of technology stocks will be lower. It’s just the nature of their business.
Learn how sectors work to compare the right metrics. In the financial world, analysts who rate companies stick to a sector or even an industry. There is an amazing breakdown of the sectors and industries called on Wikipedia Global industry classification standard. Below is a large table that breaks down the 4 groups.
- 11 sectors
- 24 industry groups
- 68 industries
- 157 sub-sectors
Investment rule: Before making any trade, compare your stock selections with the other players in the sector.
3. Learn – Write down your strategy
You will be inundated with the best of X stocks, or now is the time to buy X or other media commentary that will get you to check your holdings. Writing down your strategy means focusing on it and making sure your holdings match your strategy and leaving your emotions at the door.
You can adjust your strategy as you learn more but not make emotional trades. As a dividend investor, will you ever hold non-dividend stocks? If so, what is the percentage? Write it down and be responsible.
Here are some questions to help you define your strategy and investment rules.
- What is your stock selection strategy? Growth? Income? Mixed?
- Which key figures are important to you? I see some relying on debt while others focus on yield or even P / E. Often they are representative of the assessment if a historical comparison is included.
- What’s your sales trigger?
- What is your industry diversification strategy? Or country diversification approach? Or income vs. growth?
Investment rule: Write down your investment strategy and rules. Make it a review and use it when making trades or reviewing your portfolio. Do a quarterly review to decide on major changes.
4. Learning – dividend growth is growing rapidly
I came across two concepts a few years ago that have helped me focus on dividend growth even when the dividend yield is below 2%.
Concept # 1 – An interview with an investment firm on the Business News Network said they only wanted to hold dividend stocks with a dividend growth rate of 10% over 10 years. The concept intrigued me and I started to judge which stocks would meet the criteria and really liked the concept.
Concept # 2 – I read about the chowder rule and the concept resonated with me and my strategy. I found the relationship between dividend growth and dividend yield to be a good indicator when all other variables are within acceptable limits. Using the chowder score to estimate total return is the easiest way to approximate your return. No need for a fancy formula with multiple hypotheses.
See below what the cumulative growth has done for my portfolio over the past few years. Early on, I had some high dividend yielding stocks, and when I found out about dividend growth and total returns, I started reallocating my portfolio and saw the overall growth in action.
I also started focusing on 10 years of dividend growth as the minimum required to gauge the company’s desire to grow dividends.
Investment rule: Does dividend growth matter to you, and if so, what rate do you find acceptable?
5. Learn – Be diligent in tracking your portfolio
If you want to learn from your mistakes and understand where you are going, you need a compass. I always have my finances in view. From the early days of Quicken tracking all expenses on my PC to just tracking my investment portfolio with GoogleSheet as a portfolio and dividend tracker.
There are a few tracking properties that have grown in importance over the years.
Feature # 1 – The dividend income earned to know that I am making progress towards the ultimate goal of using my dividend income to meet my expenses.
Feature # 2 – A diversification meter to understand my individual corporate exposure across stocks to my diversification across sectors. I use it to understand which sector is not popular and add. It’s a borrowed concept from index investing (or at least I learned it there).
Feature # 3 – A real performance metric. I still don’t trust the calculation of my discount broker and prefer to rely on the XIRR Excel formula and my account contribution schedule.
I can easily group the accounts that I want to view together or separately. As a bonus, I can easily compare it to any indices using Google Sheet for comparison. What I really love about Google Sheet is that I can use historical prices to simulate buying stocks from an index and compare the ROR to my own portfolio.
Investment rule: Religiously track my investment transactions and stock details with ratios charts. If you don’t know, how can you make effective decisions? ‘
6. Learn – Don’t sell your winners
Your winning stocks are winners for a reason. Unless fundamentals change, don’t sell your winners to add them to the losers.
I took profits on my winners during the March 2020 decline because I thought I could add some cash to other stocks. As it turned out, my winners bounced back and hit new highs in the summer of 2020, and they continue to make new highs.
How do you choose a winner? I expect the return after holding it for at least a couple of years. For me, anything above + 20% annual return is a winner. If you’re curious, this is most of my US holdings (just check out my portfolio).
Your goal is to have many winners, not just 1 or 2. My Canadian winners are currently Alimentation Couche-Tard Inc. and Intact Financial. Not the usual Canadian stocks. My banks and utilities are fine and are safe stocks.
In short, while I didn’t really lose money during the pandemic, I could have done better if I hadn’t benefited from my winners.