PODCAST 177
Safe Dividend Investing
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 177, on July 18th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 3 interesting investment questions.
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 #1
WHY DO INVESTORS LISTEN TO THESE PODCASTS?
Every few weeks a listener with roots in the United Kingdom emails me from Dubai where he is teaching English. He has taught English as a second language to adults all around the world.
He is in his forties and like many of you he is investing with his retirement in mind. This week he wrote, “I was pleased to see REIT share prices go up a bit this week. I know share price is not a big deal for you and I, but my two main Canadian REITS SRU.UN and AP.UN had been wallowing along with some of my US ones like VICI.
As I have written before, without your podcasts and books I would at times find it hard to keep my faith in safe dividend investing. We are so surrounded by the wealth managers and their silky words of spend, spend, spend. Their messages are wherever you look.
Then there are the normal people in my investment groups on Facebook who are always saying " just put your money in an index fund because investing in single stock picking is gambling". This type of message is so common and upvoted to the nines by them in polls.
However, I know now that an average guy like me can pick 20 or 30 strong dividend stocks and that anyone can do it. However, picking financially strong high dividend stocks really is a minority view. That most investors are satisfied with mediocre results and investment fees is fine by me.
Keep up the great work with the podcast. Your teachings have been a real eye opener”
I replied, “Yes, I too have noticed that the share prices of REITS were improving. I think it has to do with the expected drop in inflation tied to the lowering of the prime rate. REIT's with their high dividend yields become more attractive buys with the expectation of lower interest rates”.
Your references to the message of self-directed investing that I preach in my books was interesting. I had never really considered my weekly podcasts to be sermons to reinforce my books’ message of investing in 20 financially strong stocks historically paying reliable high dividends, but I guess that is one purpose they serve.
My promotion of self-directed stock investing is just one lonely voice crying out in a wilderness that is surrounded by an investment industry spending billions to sell and advertise ETFs, mutual Funds and index funds to investors who are unaware that there is a simpler, safer, more cost-effective way to achieve financial independence. It is no wonder that with such massive promotion, funds are preferred and upvoted by the vast majority of investors. As I have written before funds are great for making the fund managers and the peddlers of fund investments rich.
In a podcast a few months ago I related how when you combine inflation, and the charges that come with investment advisors, you need to realize a return of at least 6% just to break even.
Many investment advisors think if your portfolio does not lose any money in a year that you are doing as well as they expect. A portfolio that is not growing contributes little to your quest for financial independence.
Market crashes occur every few years. During a market crash, your portfolio may shrink by 30% or more. Your investment institution will still be taking their full percentage of your portfolio’s total value that year and every year you own the funds they sold you. To stifle any complaints and considerations of litigation, they made sure that you signed a document in which you agreed that there is no guarantee of you profiting from the investments they recommend.
They prefer selling mutual funds because with thousands of investors putting their money into their mutual fund it is easier to justify their fees in courts of law. Their defense is that this is just how the stock market operates.
Since the typical fund client has no real understanding of what the fund company has invested their money, they have to stand there looking dumb, having blindly accepted whatever they have been sold.
Some of the stocks in the fund may be paying dividends but little of that dividend income ever reaches the investor. In a fund containing shares from perhaps hundreds, even thousands, of companies, a Tesla or a Microsoft might represent less than 2% of a fund’s total value. The benefits of these giants growing stocks become lost among the hundreds of other stocks which would each represented a fraction of 1% of the fund’s value.
Most of the companies in a fund pay no dividends. Those that do pay dividends will almost always be paying dividends of less than 2%. The total dividend amount when divided by all the hundreds of shares in the fund would most likely reduce the annual dividend yield percent for the total fund to less than 1%. Thus, a million dollars in a mutual fund might have difficulty in realizing $10,000 in dividend income. Compare that to a million dollars invested in a single stock like Enbridge whose dividend yield of 7.5% would provide a dividend income of $75,000.
A dividend return does not become critical until you retire. This is when you are expected to sell off a portion of your mutual fund to generate income to live on. Now, you are living on an ever-shrinking portfolio whose potential for income growth is eroding every month.
If by some fluke a fund’s value increases in a year, many studies show that it is very unlikely for that fund’s increase to be repeated the next year. This is unlike many stocks that have shown increased dividend payouts every year in this century.
Investing equally in the shares of twenty financially strong high dividend payers like Enbridge provides the strength of diversity and an ever-growing annual dividend income that exceeds inflation without eroding the number of shares you are invested in. I am not aware of any mutual funds that can match this.
The number of stocks in a mutual fund does diversify your investment wealth, but not in a healthy way. There are not hundreds of stocks worth investing in. Out of thousands of stocks available you only want to invest equally in the twenty best.
To protect yourself you must also become very concerned about all investment expenses. The investment advisor’s one percent annual charge against your total portfolio seems almost irrelevant, until you realize that one percent of the million dollars you have taken a lifetime to accumulate is $10,000. Furthermore, you are going to be paying that $10,000 every year that you maintain your full-service account with that investment advisor. At some point you may become aware of the hidden charges that get sneaked in by the financial institution each year. That $10,000 can easily balloon up to $25,000 or more.
They do not bring this to your attention by billing you for this $25,000. They just take it out of the funds that you have given them to manage. Most investors are oblivious to their real investment costs.
An investment advisor is not being paid to make your investment expenses as small as possible. They are also not in the business of selecting individual stocks for portfolios. It takes effort, time and risk to carefully select individual stocks. It is safer and easier for them to just take their cut of your wealth by selling you vague mutual funds. 78.3% of what advisors sell to clients are funds.
. QUESTION # 2
Why would anyone invest in penny stocks instead of regular stocks.
If your definition of a penny stock is a stock with a share price below $5 than everything more than $5 must be what you define as “regular stock”. However, a penny stock is just as much a regular stock as one over $5. They too can have good book values, high operating margins, even a history of rising share prices and dividend payments. Their numbers may be smaller, but penny stocks can be financially strong and safe.
Do not assume because a stock’s shar value may only be a few dollars that it is weak. One hundred thousand dollars invested in a stock with a share value of only one dollar that increases by fifty cents is going to give you a capital gain of $50,000. A fifty-cent gain on a $100 stock of which there are 1000 in the $100,000 you are investing is only going to give you a capital gain of $500. Which of these two stocks is giving you the better return?
While many “regular stocks” can easily fluctuate by 50 cents or more in a trading day, It is not that unusual to see a stock worth a $1 increase by fifty cents. Remember that many stocks, like Microsoft and Amazon, all started off as penny stocks.
Do not assume that just because a stock has a low share price that it is financially weak and a poor investment. In choosing stocks for your portfolio, it is always a matter of doing your analysis of each stock’s financial and management strengths to determine if it is worth adding to your portfolio.
If I only had $100,000 to invest, I would not invest all of it in a penny stock, because I believe stock diversification is important, but if a penny stock scored well and was paying a dividend of 5 cents on a $1 share price, I would consider investing $10,000.
There are a few penny stocks traded on the NYSE that are financially strong enough to pay dividends much higher than 5%. A few appear in the book, New York Stock Exchange’s 106 Best High Dividend Stocks, Analyzed and Scored.
QUESTION #3
HOW DO NEW INVESTORS AVOID INVESTMENT SCAMS AND BAD ADVICE?
The typical beginning investor often sees the stock market as a casino where investing is like a throw of the dice or placing a bet on their lucky number. They get caught up in the excitement the media generates about getting rich by investing in the next hot stock whose values are skyrocketing higher and higher on speculative bids.
Rapidly rising share prices can have little to do with the financial strength of a company. They usually have more to do with the promotion of stocks by vested interests and the selling of investment advice.
No one is teaching new investors the differences between a financially strong stock and a weak stock. The school system is not preparing students for a lifetime of investing and money management. Financial advisors certainly do not want to teach investors how to safely invest, presuming they know how to invest safely, because they want clients to just hand them their money. The advisor wants to invest it where it will best line their pockets, not the client’s pocket. If the client is lucky, they both might gain.
Before investing, invest the time to study the wealth of free information available on every stock traded on every stock exchange.
Investing isn’t difficult if you keep your investing simple. For example, only invest in companies that are profitable. A quick way to identify profitable companies is to invest in companies that pay dividends because dividends are paid out of profits.
It is not difficult for an investor to realize a reliable, safe, generous income from a diversified stock portfolio. Achieving financial independence is possible. However, it is not going to happen overnight. It does require patience, persistence and common sense.
You can start your investment education by listening to my catalogue of Safe Dividend Investment podcasts along with my books that guide you step by step through an easy to understand, safe approach to investing. For more information on safe investing go to website www.saferbetterdividendinvesting.com
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