Basics of Dividend Investing (Who, What, Where, When, Why, How)

Now we get into the main objective of this blog.  Getting the ordinary person comfortable with DIY (Do It Yourself) investing.  My preferred style of investing would be Dividend investing.  Now I am not saying this is the correct method of investing, this is my own opinion.  It fits my ideas of how my money should be invested and also strongly answers the question "I am in it for the long term".  A lot of people say that, it is easy to say, it means that they will tolerate downward swings and upward swings with the hope that in the long term, it all evens out with an upward gain.  This is somewhat true as historically, all equities are factored in with an averaged annual gain of about 8%.  That sounds fantastic, annual return of 8%.  This is of course is averaged out over a lot of years.  It's tough when your annual return is negative 5% or lower.  How about when it says at 2% gain for the year?  Where is that great 8% then?  This type of thinking long term works but no one thinks that long term involves the dreaded MER?  Remember my previous example of the average Mutual Fund MER of 2.1%?  Over 10 years?  Over 20 years?  If you have no idea what I am talking about, rewind to my earlier posts regarding Mutual Fund MERs.  It will change your thinking about being invested in Mutual Funds long term?

So the ordinary everyday person asks "So Peter what else can I do? Mutual Funds are the only thing the banks offer?"

We will answer the above question with the 5 W's and 1 H (Who, What, Where, When, Why and How).  We need to sort through the dividend payment process and explain the concept of dividends.  Chances are its not the concept of dividends that confuse you, its the terminology and exactly how it works.

WHO

Who is involved?

The decision to distribute or pay a dividend is made by a company's board of directors.  There is nothing requiring a company to pay a dividend, even if the company has paid a dividend in the past.  However many investors view a steady dividend history as an important indicator of a good investment, so most companies are reluctant to reduce or stop their dividend payments.

Dividends can be paid in various different forms, but there are 2 major categories, cash and stock.  The most popular type is cash.  The money is paid to stockholders, normally out of the corporation's current earnings or profits.

WHAT

What do you need?

First off, you need a brokerage account or self-directed account.  This will require a little work.  If you have all your RRSP money in mutual funds at the bank which was my situation (see previous blog entries) then there is a bit of work to do to get to the brokerage account setup.  Most accounts allow you to buy GICs, Bonds, ETFs, Stocks and alas mutual funds.  Yes that is correct, you can buy and hold mutual funds in a brokerage account.  So why on earth wouldn't you just buy and hold the mutual funds at the bank instead of going through all this trouble?  Well if you are interested in mutual funds, you can with a brokerage account, buy any mutual fund in North American and not be limited to only the funds your local bank can offer.  The bank mutual fund also lets you contribute in small increments (remember that $100 a month) without fees except that MER.  With a self directed account, you will need to pay a fee to buy whatever amount of mutual fund you need.  You will then need to pay again (if you are doing it monthly) to buy that same fund.  So pros and cons in bank mutual funds and self directed mutual funds.

The brokerage account can be several different types.  RRSP, RESP, TFSA, or non-registered.

Yes RRSP, a simple realization that you can self direct your RRSP and save on fees.  You can transfer your bank RRSP account to your self directed RRSP, there usually is a $50 fee or something along that line.  Once the money is transferred, you can sell (which is what I did) your mutual funds but don't confuse the word sell with withdraw, when you sell the mutual fund (hopefully on an up market day), the money is now RRSP cash.  Yes it stays inside your RRSP as cash.  Now you can buy GICs, Bonds, ETFs, stocks and hopefully not back to mutual funds.

Registered Education Savings Plan (RESP) can also be a self directed account also.  You control everything including what you buy.  Imagine 18 years of mutual fund MERs compounded?  Yes the government helps by giving you the option of any capital gains taxed in the child's name and yes they will match up to 20% each year with a maximum lifetime contribution limit amount of $50,000.  Imagine buying a stock for the standard fee which is $10 or less and having dividends paid to your RESP for 18 years compounded vs 18 years of mutual fund MERs.  Now that is "in it for the long term".  What bothers me not so much the banks because they have posters only at the local branch promoting RESP but those strange mall kiosks of some mutual fund company asking if you care about your child's future?  Shaming you into thinking you don't.  They want you, in the middle of the mall hallway, to contribute to your child's mutual fund RESP for a tasty 2.1% MER each year for 18 years.  You will never see them again.  You will never talk to them again.  Why would you trust them with your child's education fund?

Tax Free Savings Account.  Banks have posters offering to give you a special promotional offer of 1.2% interest to open a TFSA account (at the bank level).  They then open a savings account with 1.2% for 6 months, tax free.  They hope you put more money into the savings account, staying under the annual limit of course.  They give you 1.2% and then as always, they make more money on your money while its in the TFSA.  Why on earth people fall for this is beyond me.  If you look up the definition of TFSA, even using the brochure at the bank, it says you can put GICs, bonds, ETFs, stocks and mutual funds into it.  But the bank shoves the idea of a savings account into your face? Why? Its because of the name, tax free savings account.  The word account summons up images of an account, a bank account, savings or checking.  They won't promote a self directed TFSA as they make way less money there.  And as probably someone reading this, the everyday person will open a TFSA savings account.

Non-registered self directed.  Now here you are all on your own.  Buy, sell, hold.  No special gimmicks to encourage putting money in.  With a self directed account, you can spend your dividends or capital gains right away.  Of course since this is non registered, you will need to pay taxes on any gains, dividends included.  There is of course the dividend tax credit, which will be a future blog entry.

WHERE

Once opened and money transferred to your self directed account.  You can purchase stocks of companies in the North American stock markets.  The Canadian markets are the TSX and the Venture exchange.  The U.S. markets are the DOW Jones, SP 500, and Nasdaq.

WHEN

Trading hours are 9:30 am to 4:00 p.m.  Something interesting which I will blog later is, the trading of Crude stops at 2:00 pm.  Asian markets started at about 9:00 pm EST and European markets start 3:00 am EST.  Now you will need to trust me on this, I've stayed up to watch the opening bell in European markets on CNBC.  Very tired next day.

WHY

Why do all of this?  To some, it is very exciting.  To own a part of a company, to share in its profits.  To others, its to make money.  To others again, they may find it fun to own a part of a company of their favourite product like Starbucks, or Nike.  To me, it is back to the beginning of this blog.  In it for the long term.  Which means reduced fees I pay which means saving money.  If you buy a $10,000 of a stock, you pay $10 or less and then you are in it long term and receive dividends.  All you paid was the $10 transaction fee, no ongoing annual haircuts called MERS.

HOW

How do I do it?  Now again, this is my method, you can decide if you think this fits your ideas of saving and investing.  The HOW is a bit of a lengthly process so I will dedicate an entire blog on it.  With examples and charts, and graphs.

Next blog…..How I do it.