Everyone who invests had to start somewhere.
Folks who have invested for much longer than a new investor started at a time when investing looked a lot more different. I’ll tell you about my investment journey that began over 20 years ago. I’ll also give some tips intended to give you things to think about as you read on.
The ’90s vs. Now: GICs and Term Deposits
20+ years ago, I opened an RRSP and my first investments were term deposits and GICs. These did all right as I was only interested in saving part of my pay cheques and not spending the money. This was at a time when interest rates were better. They were paying me 4.5% to 5%. It made sense for me to start out this way.
Now, putting your money in these is mainly just to lock it up. Interest rates are very low and these only offer a better rate with longer investment terms. It’s safe from you when you have spending urges, but not safe from inflation. If the inflation rate is 1.13% and your investment is paying you at 1.20%, then you’re not getting much of a return. If inflation rises to 1.5% during the term of your investment, you’ll find out the meaning of “inflation risk” the hard way!
If you’re new and nervous about investing and like the guaranteed aspect of GICs, you could get a variable rate GIC if current interest rates are low. You could also get an escalating rate GIC, particularly if you wanted to keep the money invested for a while, like up to five years. If you’ve always wanted to get into the stock market but was nervous, you could get a market-linked GIC. If the market goes up, you can make more money too (although there’s usually up to a maximum amount that you can get). If the market goes down, you get your principal back and you don’t lose any money, just time.
Because the returns aren’t that great with these cash investments, investing in an RRSP at least allows you to claim your contribution and get back more on your tax return.
The Early 2000s vs. Me: Mutual Funds
As my savings grew, I moved onto mutual funds. I had:
- a Canadian bond fund
- a Canadian index fund
- a monthly income fund
- a Canadian blue chip equity fund
- a balanced growth fund
- and a dividend growth fund.
These did all right, but I felt my portfolio should be doing better. I was regularly putting money into my RRSP – these additions seemed to mask the actual mediocre performance of my mutual funds. Little did I realize it was the high MER fees that were negatively affecting my returns.
When I asked an advisor about rebalancing the funds so that they could perform better, he told me I shouldn’t because he’s seen people doing much worse than my portfolio. Wow! That didn’t help me or encourage me. He just said he wouldn’t change anything – besides, I’d lose money from all the load fees I’d have to pay if I did move things around.
I was so frustrated because my online account made ‘switching mutual funds’ look commission-free and as easy as clicking a button. I didn’t know the difference between one fund from another. That’s why I went to the bank to ask for help. Advisors are supposed to be more helpful and if not, at least informative, right? So, I went to another branch and saw another advisor who was even more useless and uninterested in my concerns. It was so different from my experience when I had a big chunk of savings that I didn’t know what to do with. I had received such great service then. After I made the investments, it seemed no one wanted to assist me.
I was much more angry with myself because I didn’t even know how to have the conversation that I wanted to have when I met with these advisors. I lacked the knowledge and vocabulary to know how to drive the conversation to get what I really wanted. I couldn’t tell you what a bond was. I didn’t know what “equity” meant. Is it an advisor’s job to teach me? Or was it more advantageous for them if I knew nothing? I don’t mean to rag on mutual funds and advisors. It really was just a situation that I outgrew and became frustrated with. Sometimes growth just ain’t pretty.
I actually think mutual funds are great for new investors who don’t have much in savings yet. It’s great to be able to buy shares or units in a fund and co-own assets (wait–does that explain the essence of the term “mutual”?) that you wouldn’t be able to afford otherwise. As you grow your money, you’ll be able to afford to buy the actual assets directly. Until then, take advantage of automatic deposit options to enjoy the compounding effects of regular investing.
Mutual funds are so easy to get at your bank. The advisors can help you find the right balance of funds based on your risk tolerance. Just be sure to ask about the fees! Only opt to pay lower fees, but preferably go with the no-load fee options. If you’re deciding between two similar funds, choose the one with lower MER fees. I think mutual funds are best in the RRSP, not just because of the bigger tax return you could get for claiming contributions, but also because if some of your funds have US stocks, the dividends aren’t taxed in your RRSP.
The Late 2000s to Now: In Love with Stocks
I was frustrated enough to cash out my mutual funds and say sayonara to my bank. I parked my money in a discount brokerage and took the free stock trading program that came with opening an account. I took business and financial courses, including the Canadian Securities Course, to become more educated about money. I badly wanted to know what the financial industry knew and how the world of money worked.
The more I learned the more stoked I got about investing, particularly in stocks. While I’m still working on where I want to be financially, I now see my long-term financial goals happening a lot sooner thanks to stocks. And I’m still educating myself and trying to learn.
If you’re new or too busy to know what stocks to buy, get an index ETF for the Canadian and US markets. If you want a bit of diversification, get a sector or international ETF. If you want income, get a fixed-income or dividend ETF.
If you’re new but ready for more than just ETF investing, you can pick blue chip stocks that pay a nice dividend. As your financial knowledge increases, you can build a nice diverse portfolio with a suitable balance of cyclical and non-cyclical stocks.
If you have a US ETF or stock, invest it in an RRSP so the dividends aren’t subject to withholding tax. If your financial goal is more short-term and you’ll want the money in a few years, invest in the TFSA so you can withdraw the money without getting taxed. You can invest your money between both the RRSP and TFSA according to your different goals and needs. If you run out of contribution room, then hold your Canadian equities in a non-registered account to benefit from the favourable taxation on capital gains and dividends.
The 2010s: Educating Others
Once people knew that I was really getting into the markets, the inquiries starting pouring in. I didn’t feel that what I knew was applicable to my friends’ various situations, though. As much as I believe everyone should own even just some stocks, stocks aren’t ideal or applicable to everyone and for every situation.
I began to ask at my bank (not the one I ditched) questions on behalf of my friends. The advisors were so friendly and receptive. Sometimes they’d sit down with me if they felt the questions were more involved. Other times, we’d all be just talking about investment options. I was always impressed with what they knew, how willing they were to answer questions – even if I wasn’t going to invest my own money – and how much more focused they were on the client relationship aspect.
I’m not sure if the great random service I was getting at any given branch was the bank itself, if it was because I knew what I was talking about which led to better, more informed conversations, or simply because financial advisors now are supposed to be more focused on building relationships with clients for their VARIOUS needs, rather than just selling them investment products.
I actually wrote my book for my friends. I wanted the information to be easy enough to access and understand so that even if they had a general concept of how investments worked, they could seek and get incredible assistance from the pros. My book is meant to help liaise between the client and the financial industry and ultimately help investors navigate their available options.
I still get questions from my friends, mainly the ones who haven’t read my book yet! That’s okay. As my confidence over my own investments grows, so does their willingness to learn from me about how their money can make them money.
Part 4: Earning Investment Income from Stocks
Objective: To buy and hold dividend-paying stocks in my retirement fund.
Over the last couple of months, I’ve held off making any long-term buys for my retirement portfolio as I wanted to wait until after the US election. Now that it’s over, I can see how the markets, sectors, and stocks from both Canada and the US reacted. For the last week, JP and I had been watching stocks and making decisions on what to hold for the long haul. If there’s one thing they all have in common, they all pay a dividend.
The Dividend Income Strategy
The big goal with stocks is to be able to sell your shares at a higher price for a capital gain or profit. When stocks give their shareholders a dividend, then it makes it less desirable to sell your shares as they’re now a source of income!
If you’re buying stocks purely for dividend income, then the price you pay per share and what the sector and market are doing at the time have little significance. It’s intended as a long-term strategy and the idea is that over time, a dividend-paying stock of a good company should go up in value the longer it’s around and able to maintain dividend payments to its shareholders.
For me, these stocks are intended for my retirement fund. I’m still decades away from retiring, so I haven’t sold these stocks yet! With lesser ability to work and fewer job options, I want to have an investment source of income, and dividends are just that. In my opinion, this is the most simple form of stock investing and from a long-term perspective, the wisest.
If you have a blue chip company like a big bank or utility company you’d like to invest in for dividends, then you can accumulate shares over time, buying whenever it suits you. For me, when my stock goes down in price, I plan to buy more shares as it’s more affordable. I met a guy who buys shares of just one bank stock — his bank. He watches the stock price and whenever his stock takes a hit, he’s buying more shares. Over time, you can accumulate a lot of shares; the more shares you have, the more you make in dividend income.
So if you look up a stock on its company website, they’ll usually have its dividend payment schedule as well as what they pay their shareholders for each share they own. It’s usually on a quarterly basis, but sometimes dividends are paid monthly.
Here are some things to note:
- Not all companies pay a dividend as they don’t HAVE to;
- Companies don’t always pay the same amount in dividends each time – they can pay more or less each time;
- Companies can suspend dividend payments for periods of time if it financially makes sense for them – doing this can often make the stock price go down;
- If you’re receiving dividends from a Canadian company, you get a tax credit, so you can hold these stocks in non-registered accounts;
- If the company or your brokerage doesn’t have the DRIP (dividend reinvestment plan) feature to automatically buy more shares, the dividend income just goes into your investment account and you can reinvest it at your discretion;
- If you’re receiving dividends from US companies, then you should hold these stocks in your RRSP as we have an agreement with the US that investment income in retirement accounts won’t be subject to international withholding tax.
My dividend-paying stocks so far are in utilities, energy, finance, and consumer staples. My discount brokerage doesn’t offer the DRIP option, so the money just comes in regularly into my investment account and it’s nice to see my portfolio increase in value from both the capital appreciation of my stocks and from regular dividend payments.
If you’re off stock picking, you can also buy shares of a dividend income ETF. The dividends that are generated by the stocks in the fund are paid to you in the form of distributions (but also often called dividends). I, too, own a preferred share laddered ETF that pays me a substantial dividend every month!
Generating a regular investment income from solid dividend-paying stocks of Canadian companies is a great strategy for the long term!