Investing Fireside Chat

I've been thinking about starting a thread for a while now about investing in stocks, and I guess that today is the day. For context, I will be 60 in a handful of years, so I have seen a bit. And my recent observations have made me want to share some of my thoughts. Recent events have also solidified my conviction in this area.

There is definitely a class of people who squirrel away money and throw it at the market regularly. This is what we are told to do, and following this advice will tend to pay off pretty well in the long run. Not many decisions to be made, pick a small number of ETFs and split the money between them with each paycheque. Rebalance every so often if you are so inclined. If this sounds like you, then there are many resources - check out the Couch Potato Portfolio (https://canadiancouchpotato.com/model-portfolios/). You can certainly do worse than this.

Or you may be one of the few fortunates who have a defined benefit plan through work. Not meaning to beat up on government employees, but you guys are about the only ones with them any more. Not looking to debate this point, but just identify a general group who have fewer retirement worries.

But what if you are not one of these people? You may be saving, but you don't know where to put the money. You want it to be safe, and the stock market appears to be frightening/overvalued/volatile. Or you may be open to investing, but your partner is not. So you keep your eyes peeled for the best GIC rates or high-interest bank accounts. At least you are saving, right?

Yes, this is true. But you will find in the current environment that shuttling around your savings to get 1% interest is not a great financial plan. Even if you happen to save up one hundred thousand dollars, that still means only $1,000 per year. Not to mention the fact that this income is taxed as full income. Hope you like Kraft Dinner. Forever.

But not all is lost. Every so often, the stock market goes a bit "weird". This happened in the 80's a couple times, in 2000, 2009, 2016 and to a lesser degree in 2018. Every time, everyone held their collective breaths, and waited for it to pass. And it always did.

The professionals will always tell you to not try to time the market. And this is typically good advice. But during some points, when the conditions are right, things can get very interesting for the cash-heavy investor. While I don't condone this strategy as an overall strategy, for the ultra-cautious cash-heavy investors, the path becomes clear pretty quickly.

More recently 2020 was another dramatic tumble. This was the most recent one, so let's just look at what happened here. Everyone knows the background - businesses were shuttered, workers and consumers were staying home, and profits fell. The market as a whole fell, but some businesses were not hit as hard as others.

Let's just look at the Canadian banks for a minute. Sure, spending is down, but mortgage interest was still accumulating. Even the mortgage payment moratorium just allowed people to skip their payments without penalty. The interest still ticked up, and in fact the missed payments ultimately mean that the banks will make a higher income from interest as the principal of the loan will be higher post-covid than it would have been without the pandemic.

So what happened? For this, let's just pick one bank, CIBC, although Bank of Montreal and Scotiabank were also good candidates here. Not so much TD, RBC and National, but we will get to why in a couple minutes.

Before Covid, CIBC was trading at about $110.00 and was paying a quarterly dividend of $1.44 (although they announced that they were increasing this to $1.46, so we will use that number). So that's all well and good, brunt ol' boy you might say, what does this actually mean?

This means that at that point in time, you bought a share of CIBC in December 2019 for $110.00, and as you hold it, in return for your ownership in the bank, you will receive $1.46 payment every three months. Doesn't sound like much, but four payments make for $5.86 per year. To compare to the "high interest rate" accounts, that is a 5.3% return. Not too shabby, but it gets better. Dividends of Canadian companies is actually taxed better, so you pay approximately one half the amount of tax on dividends than you do on interest. If you are in the higher tax brackets, this makes a huge difference.

"But brunt, stock prices go up and down all the time - I'll go crazy with worry", I hear you reply. But if this is your nest egg, you are looking for income, not a lottery ticket in hopes that the stock will increase through the roof. Banks are pretty solid institutions and are well aware of the fact that stock holders hate having their dividends reduced. So usually, in general market downturns, the banks keep up paying their dividends, and you keep receiving your 5.3% regardless of the current stock price. Sure beats 1.3% at the bank for playing "whack-a-mole" moving your cash around for the best rate. And with the dividends, you sit back in your pjs and slippers and just check your account to see your dividends deposited.

"But what about Covid, it was horrible, stocks were slaughtered", I heard from the back. No, it was wonderful. Fast forward to March, 2020, and CIBC was trading for about $75.00. That may sound like quite the drop, but remember, you have been sitting in cash, right? So whip out your calculators and compute $1.46 times four payments per year divided by the purchase price of $75.00 per share. I'll wait and sip on my hot chocolate while you get your answer.

If you got 7.79%, then you get a gold star. But even better than a gold star is getting 7.79% dividends on your cash savings rather than a measly, stinking 1%. So now your $100,000 is paying you almost $7,800.00 per year, and taxed better to boot. And even better than that is that is that these successful businesses tend to increase their dividends over time, so next year it may be $8,000 and over $8,100 the year after that.

So am I saying that you need to fire up the Delorean and go back to March? No, not at all, but if you learn one thing from this post, figure out how to compute the current dividend return on Canadian bank stocks, like I did above. And in the future, without the assistance of a flux capacitor, wait for when people get jittery, and this rate increases to a point where it becomes irresistible, and make the plunge. Retired you will thank present you greatly for having done it!

Sure, this particular dip may be gone. Or maybe not if the second wave is worse than expected. But if there is one constant with the market, it will fluctuate. And at some point, another short-term thing will come by and Canadian banks will have their dividend rates blip up again.

So do I recommend that you use this as your sole investing strategy? No, I don't - regular contributions will probably be better and far less stressful. But if you are ultra-cautious, and have been saving like a crazed squirrel in late November and have a fat savings account that pays you too little in interest, then keep this in mind, look at the dividend rate rather than the cost of the stock, and keep telling yourself that falling prices is making things better for you, not worse. And when you are satisfied with the level, jump in.

What is the current dividend rate of the big banks? Go ahead and look it up yourself - start here: (https://finance.yahoo.com/chart/CM.TO). Are the rates good enough to pique your interest? Well, that is up to you. But it is important to at least get comfortable with the concept, so that you might be able to benefit in the future.

Now, you may have noticed that I was only talking about the banks. This is with good reason, since these are solid companies that pay out rock-solid dividends. Sometimes other companies will have what looks like high dividend rates because the company is not well run, and it is expected that dividends will fall in the future. That's why, if you are looking to make your first entry to the market, Canadian banks are probably the way to go.

And always remember, while this information may have come from what seems like an honest enough guy on the Internet, I could be anybody. Do your own due diligence, my intent is to arm you with the information to potentially benefit yourself in the future - I cannot be held responsible for what does or does not happen when this information is applied or not applied.

Sorry for the long read, but I hope that you find it worthwhile.

Time in the market is more important than trying to time the market.

Boring dividend paying solid blue chip stocks with strong fundamentals will always come out ahead in the long run. Instead of trying to score a home run with some risky penny stocks.

But some of us need the excitement, slow and steady gets boring heh. I actually recommend to split it up a bit. If you're interested in paying the market have a small portion (5%) to play with and keep the rest in the blue chip/dividend category. Best of both worlds and as long as you follow your rules about the distribution you should be ok.

good read. thanks.i never really looked at the small dividend that way. Im looking into this. With people being home all day i think the investing thing has really taken off lately with the younger generation.