If you look at our dividend portfolio, you will see that we are currently investing in 50 dividend paying companies. We hold these company stocks in tax-deferred accounts like RRSP and TFSA, as well as taxable accounts. Building a diversified portfolio with 50 positions is certainly not something that we did overnight. It has taken us years to build our dividend portfolio and we are not finished! There are many more solid dividend paying companies out there and we hope to add more of them to our portfolio one day. Have you ever wondered how to get started on dividend investing? Here is our story on how we began our journey.
A quick glance at our dividend income will show that the first dividend was received in 2007. This was way before Mrs. T and I met. Back then I was still a young bachelor, naive, fearless, dumb, and tried to charm my way around the ladies (yea right, I wish!). Back in 2007 I didn't know much about investing. I had just started working at my first full-time job and spent a lot of time climbing, skiing, and other stupid things that someone in their early 20's would do. Although I had a high savings rate, most of the money was sitting in GIC's, earning very little interests. I knew I needed to invest money in the stock markets to get a higher return.
The first company that got my interests was a company called ING Canada. ING Canada caught my interests because it happens to be the insurance company that my parents used for their house insurance. After very minimum research (oh I was so naive back then), I bought 100 shares of ING Canada at $49 per share. I didn't pay any attention on ING's dividend yield. All I was looking for was stock price appreciation.
Then the financial crisis hit. The stock markets went down the toilet. ING share price dived from the mid $40's all the way down to the mid $20's. I had a paper loss of almost 50% and I was feeling a little nervous. Do I sell the stock and take a loss? Or do I add more?
I wasn't sure what to do. But I knew that every 3 months I was getting dividend deposited into my account for owning 100 shares of ING. At this time, the GIC interest rates were going down. I could no longer get 3 or 4% interest rates on the GIC's. The normal GIC interest rates were sub 1.5%. After doing some calculation, I determined that my ING's divided yield on cost was actually better than what I would get from the banks. So I decided to hold onto the stock and added some more shares to average down my price.
I continued holding onto ING, continued receiving dividend in my account, and continued waiting for the stock price to recover...
In 2009 when TFSA was first introduced, I decided to use TFSA for stock trading. I opened the TFSA with TD Waterhouse and deposited $5,000. Not knowing which stock to invest in, I looked around for familiar names once again. Since my work's extended health is through Manulife Financial, I began to do some research on MCF. To my surprise, MCF's price had recovered from its lows during the financial crisis of $13 to the mid $20's. Considering the price was in the $40's before the financial crisis, I thought to myself that the stock price had a lot of potentials to go back up. I was also pleasantly surprised to see that MCF had a dividend yield of around 4%. This was a lot higher than bank's interest rates. So I purchased 100 shares of MCF and now own two insurance stocks.
While I did a lot of research before buying MCF shares, one key calculation I failed to do was determining the payout ratio. Back then I didn't even know about such a thing called payout ratio. Unfortunately for me, Manulife's dividend yield was unsustainable due to high payout ratio, so in mid 2009 the company cut the dividend by half from $0.26 per share to $0.13. When this happened, the stock price tumbled south and once again I found myself in the same situation as ING.
0-2, pretty crappy record for me so far. Maybe I should give up on investing all together...
Just like ING, I decided to hold onto my Manulife shares and even purchased more shares to average down the cost. I didn't need the money at that time so I was OK on living with the downside of my investment decisions.
I continued holding onto ING and Manulife and kept seeing dividends getting deposited into my accounts. I was waiting for the stock price to appreciate so I could sell ING and Manulife one day.
Then I learned about dividend growth investment in 2011 when I read "The Lazy Investor" by Derek Foster. Reading this book opened my eyes to dividend investing and I was hooked. I began re-allocating capital to purchase dividend paying stocks. Since both ING and Manulife continued paying dividend every 3 months, I decided to hold onto them and forget about price appreciation all together. The dividend received from Manulife was enough to purchase additional shares, so I enrolled in DRIP to take advantage of the power of compound interest.
Once I was hooked on the dividend investing strategy, I was hungry for more knowledge. I was borrowing as many books on the topic from the library as possible. Naturally, I also began to have a strong interest in personal finances. Lucky for me, Mrs. T was on board when it comes to frugal living and investing.
Today both ING (now called Intact Financial) and Manulife are doing quite well. The cost basis for both these stocks are way below the current stock price. We don't plan to sell either any time soon. For the other stocks that we own in our portfolio, we continued with the concept of picking companies that we use in our daily lives. Hence for purchasing companies like Proctor & Gamble, Johnson & Johnson, Rogers, Royal Bank, Fortis, and Apple.
What have I learned from my initial stock purchase experience?
1. When you're young, you're fearless and dumb
Today Mr. T and I wouldn't invest $5,000 in one stock without doing extensive amount of research. I pulled the trigger on purchasing both ING Canada and Manulife without doing much analysis or research. Looking back I was very naive and dumb. Fortunately for me it turned out alright.
2. Research, research, research
Don't buy anything that you don't know. Always do your research and know as much as possible about the stock. As a minimum you must know:
- Is the company making a profit? What is the revenue history?
- What is the PE ratio of the stock and most importantly, where does the PE ratio sit when compared to the competitors?
- What is the dividend yield and the respective payout ratio?
- What is the dividend history?
- What is the return on equity?
- What is the earning per share? What is the EPS history?
- What is the PEG ratio?
3. Always ask yourself the following 3 questions before you invest
- What is the upside of this investment opportunity?
- What is the downside of this investment opportunity?
- Can I live with the downside?
4. Stock price goes up and down, you have no control over it. Stop worrying about the stock price.
Worrying about stock price daily will do you no good. Focus on investing in solid companies with wide economic moats and strong management teams.
Would we buy the same stocks if we were to start my dividend investment journey today? Probably not. But our approach will probably be the same. Having said that, we probably will focus our attention on getting index ETF's to have a better diversification right from the start. It's hard to believe that I put in so much money into two insurance companies and had zero diversification. Boy I was so naive back then. 🙂
What do you think about my story? How did you start your investing journey?