PODCAST 131
SAFE DIVIDEND INVESTING
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 131, on August 31st of 2023.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 3 interesting investment questions that I also addressed in my latest book “Canadian High Dividend Investing” which I loaded into Amazon Kindle on August 26th. This new book follows a format similar to my last book, “New York Stock Exchange’s 106 Best High Dividend Stocks” that was released in late 2022. In the Canadian Book there is a page for each of 215 high dividend stocks showing their stock analysis score plus 24 years of share price and dividend payout data.
The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful self-directed investors.
QUESTION ONE
What are the benefits and liabilities of investing in dividend stocks?
There are pluses and minuses to investing in dividend stocks, However If your objective is to increase the value of your portfolio and generate a reliable income that you can easily live on, then dividend stocks can easily be recommended.
As I see it the advantages of Investing in Dividend Stocks are:
#1. They can meet the needs of investors who rely on regular cash flow from their investments to pay their living expenses. This makes dividend income attractive to retirees and for those seeking safe, financial independence for the rest of their life.
#2. Dividend stocks can not only offer a dividend income but also capital appreciation from the rising share prices of financially strong companies who have long histories of paying ever rising dividends to keep the dividend yield percent in synch with their rising share prices. Such stocks keep dividend income ahead of inflation. Looking at, the easily obtainable, historical records of a stock’s dividend payouts can quickly identify such companies.
#3. Dividend-paying companies are almost always well-established and financially stable. They usually operate in mature industries and have a long history of generating consistent profits. Your dividends are paid out of these profits. This stability can provide a level of income protection during market downturns. Regular dividend payouts are isolated from falling share prices caused by speculators. They have no control over the revenue and expense decisions that result in a company’s profits.
The disadvantages of investing in Companies that distribute a significant portion of their earnings as dividend includes:
#1. They can be seen as limiting the money, available from company profits for reinvestment into corporate growth opportunities. Their share price growth could be slower than some non-dividend-paying companies. This negative is primarily of concern to speculators whose objective to buy a stock at its lowest price and sell it as soon as the share price has reached its highest price. Unfortunately, for speculators, accurately determining when a stock price is at its lowest price and when it is at its highest price is not possible. Not being able to get the timing right, speculators who must constantly keep buying and selling stock to generate income almost always lose money over time.
#2. Dividend stocks can be sensitive to changes in interest rates. When interest rates are high, lower dividend yields can become less attractive than the higher interest rates paid by income investments like bonds. This can influence speculators who fear lower yielding dividends could cause a decrease in the stock price. They would do this even though they know the interest rates will climb temporarily and then come down while the stock’s high dividend payments have historically remained constant.
Dividends are directly tied into a company’s profits. Share prices are not tied into company profits.
Fixed income interest rates are tied to constantly changing volatile national and international economic conditions.
These who intend to hold profitable, high dividend paying stocks for the rest of their life pay little attention to the ups and downs of fixed income rates because they know over the last 100 years inflation has averaged 3.5% and the interest rates of bonds and other fixed investments have averaged just a little above the inflation rate.
3. Although dividend stocks are generally considered less volatile than non-dividend-paying stocks, they can still experience price fluctuations. By looking at share prices after each market crash over the last twenty-four years, a dividend investor can see how long it took for a dividend stock price to recover and reach new share price records highs.
QUESTION TWO
Why do speculators keep speculating if they keep on losing money in their stock choices?
Most speculators seem to get a thrill from buying a stock that they are sure will make them almost immediately rich. Often their certainty of the stock’s potential reward, is based on rumor and media hype. Careful analysis of a stock’s financial strength and history is seen as irrelevant to many speculators.
Speculating on stocks is similar to what motivates those millions who buy lottery tickets. A six-dollar lottery ticket provides the hope that on Saturday night they could be $70,000,000 richer.
When Saturday comes and goes and the lottery ticket buyers are no richer, they shrug it off. All they have lost is the six dollars they paid for the lottery ticket. However, hooked on the thrill of anticipation, they are ready to risk another six dollars on the next lottery draw.
Investing in stocks involves much more than six dollars. Thousands of dollars, even millions, can be in play. The amazing thing is that stock speculators seem unable to recognize that the stock market is not a lottery.
With just a little research it becomes hard not to make money on the stock market. A disciplined, wise investor who carefully analyzes, financially strong stocks can build a portfolio that will increase by several multiples over a lifetime.
Logical investors just need to be shown how to sort out the financially strong stocks from many weak stocks who sell themselves on their elusive potential to someday make investors wealthy.
QUESTION THREE
Why does my bank try so hard to persuade me to become a full-service investment account?
I always recommend, to those who are new to investing in stocks, to avoid physically going into their bank to open their self-directed trading account. If they go in, they should expect to be pressured by bank staff into becoming a full-service client.
If you are already an established customer of the bank, your bank probably makes it easy for you to open a self-directed stock trading account on-line. It takes only a few minutes and is linked to your checking account so you can transfer into the trading account the money to be invested in stocks. Later you will transfer out your dividends and other income realized.
Suppose you ignore my advice and you head into the bank branch so they can “help” open this self-directed trading account. Recognize, that nothing in this life is free.
The bank’s financial advisor, to whom you will be referred, will whisper in your ear these sweet, honeyed words,
“The charge for our wonderful, stress free, full-service management of your investment account is so little that you will not even notice it.”
Recognize that you are being played for a sucker. Over a lifetime what you pay for this service can easily be hundreds of thousands of dollars. Money that could have been making money for you instead of for the bank.
Banks are not religious, charitable organizations. We live in a capitalist society. It is the job of their employees to generate income for the corporation. The bank’s financial advisor’s mandate is to separate you from as much of your wealth as they can with their fees, charges, and commissions.
While the average investor supposedly pays 1.83% for investment services. An inexperienced investor with a smaller portfolio could see 2% to 4% of their portfolio’s value being deducted every year for the rest of their lives. Investors have only a vague idea as to how much the service is costing them. The banks know many ways to cleverly hide and disguise their fees, charges, and commissions.
If you are so fortunate as to have portfolio worth a million dollars you could be paying the $20,000 to $40,000 a year for their investment “help”. In ten years, they would have taken $200,000 to $400,000 of your money. This is a significant amount of money that could have been invested making money for you not them. They will take their cut whether your portfolio grows or shrinks.
Once your self-directed trading account is established you can buy and sell thousands of shares of a stock (no matter what its share price) for a one-time transaction fee of zero or less than $10. The charge depends on the bank. If you held that stock for the next 50 years, the most the institution would receive from you for that purchase would be that initial $10.
How can those financial institutions who charge nothing for the service of processing your ordering of stocks. Nothing in this life is free?
The bank can make money by lending out the idle cash in your trading account- basically making money off the uninvested funds in the account.
They can also set up margin accounts, where for a fee, they will lend you the money to buy stocks at a high interest rate. That loan is secured by the stocks you will be purchasing. If the stock’s price should drop significantly, they will, without consulting you, sell your stocks to avoid a loss on this loan.
Another source of bank revenue is the kickbacks they get from large volume traders who are allowed to use your share orders to their advantage in making large trades.
I expect these money-making strategies are also being followed at those institutions who charge a small fee for handling each trade. That does not bother me because the reason I choose to pay my $9.00 fee to TD Bank for each of the very small number of trades I make in a year, is that I get great benefit out of having free access to their research service. I will review thousands of stocks in a year. I doubt that they feel cheated by my lack of trades in any year.
Choosing an institution only because they charge no transaction fees for buying or selling a stock is not a wise decision if the research services and other services they offer are limited or nonexistent.
Financial institutions promote full-service investing as removing all the stresses from your life. Supposedly they will save you the time of managing your investments. They also pride themselves on acting like a “speed bump” to stop you from making impulsive foolish investment decisions. You will notice that avoid detailing all their possible charges and how much time they will be spending on your portfolio. T
They expect you to put blind faith in the investment choices they will make with your money. They do not want you to ask too many questions or put demands on their time. They are busy trying to maintain their client base which faces a constant erosion of clients through normal attrition.
Even when your self-directed trading account is established, investment advisers will try to switch you to full-service investing. Few investment advisors, if any, have spent time studying dividend stocks. From a potential litigation threat, it is dangerous for them to recommend and sell individual stocks. They want to sell you vague, fuzzy, mutual funds, index funds and ETFS. These pre-packaged products with their minimal returns and high fees, only require a very limited knowledge of stocks, and require no research effort on the part of the investment advisor. They allow the banks to hire huge armies of financial advisors with limited investment and business experience to safely sell these questionable pre-packaged products.
To be a successful investor it requires that you know exactly what you are invested in; what it is costing you; why you are invested in it; and what its history of share prices and dividend payments have been over the last 20 years. This information is not considered when you invest in funds.
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