Sep 042021
 

I haven’t had many ideas for articles lately so I thought I’d just revisit some of the idea’s I’ve shared on this website. Specifically what has been working for me as of mid-2021. Disclaimer that these are my personal results and your mileage may vary. Lets get started in no particular order:

Broad ETFs and Index Funds

Rating: A

Index funds have been my bread and butter, and I’ve tried to keep at least 70-80% of my investments within them. They are simply the easiest way to consistently build up your portfolio. Your returns will never be amazing, but they’ll always be good. And if you string enough good investments together you’ll be doing great. Just look at VFV, one of my earliest ETFs that tracks the S&P 500. It has gained nearly 300% since 2013 with a consistent upward trend. Sure it’s been a bull market nearly that entire time, but even in major downturns the S&P 500 has recovered quickly.

I am completely confident in admitting that, if I had just stuck with broad market ETFs like VGRO or VEQT, I would be ahead of where I am now. Don’t be tempted by the siren call of Wall Street Bets YOLO tech investing.

Blue Chip Dividend Companies

Rating: B

A couple years ago I slowed down my contributions to ETFs and started investing mostly in Canadian blue-chip companies like Bell, Canadian Utilities, Fortis, Manulife, Brookfield, and the major 5 banks. These have largely performed well but have a few disadvantages.

  1. Dividends – If you hold these in a taxable account, you’ll be taxed on the dividends every year, which will reduce your overall gains compared to a swap ETF like HXS. Obviously if you hold these in your TFSA or RRSP you will avoid the tax, but any US dividends will be subject to US withholding tax as well. Although ETFs are not immune to these same issues. Also eligible Canadian dividends do have favorable taxation.
  2. Commission Fees – Unlike ETFs, buying an individual stock isn’t free. As a result it’s not worthwhile to purchase small amounts of shares. With ETFs you can buy a single share as soon as you have the funds to do so. In order to make up for the commissions you need to buy the stock in large blocks, normally $1000+, which leads into the next issue.
  3. Diversification Loss – Proper diversification requires you to buy many companies across many industries. As mentioned you’ll need to purchase in large blocks to avoid large commission fees. Thus you’ll need a lot of money to be properly diversified. Furthermore you’ll probably want to keep your money in CAD, so you’ll be buying mostly Canadian companies, and thus you’ll be overexposed to the Canadian market. Nothing can beat the diversification of ETFs. VCN will exposed you to the entire Canadian market and VUN will give you the entire American market and you can get a share of each for about $120 and no commissions.
  4. Complexity – Lets say you now own 20 companies and think you’re diversified enough. Now you have to keep an eye on those 20 companies. Sure, they’re blue chips and shouldn’t need to be watched, but your account will be clogged with many holdings, compared to just a few ETFs, or only one if you go for VGRO.

Conversely, individual stocks tend to have higher dividend payments than ETFs. You will also save on ETF management fees (MER). So is it worth it? Maybe. It’s up to you. It doesn’t hurt to have a few Canadian blue chips for companies you believe in, but if you also own an ETF you’re just increasing your exposure to some specific companies.

One more point about dividends – when a dividend is paid the stock will drop by the exact amount of the dividend (although in practice it’s difficult to see with the normal daily fluctuations). Thus a divided can be thought of as reducing the total share price by the amount of the dividend. If you are trying to build wealth it almost never makes sense to sacrifice share price for income. Especially if you will be taxed on that income in the current year.

Ultimately it’s very satisfying to see a real deposit enter your account, and despite my complaints above I’ll continue to own some dividend stocks.

REITS (Real Estate Investment Trusts)

Rating: C

I used to think REITs were amazing, and I still think they are a good idea in small amounts and specific scenarios. Ultimately they carry a lot of risk and are mainly good for generating income rather than generating wealth. The problem with REIT income is that it’s not subject to the favorable tax rates like eligible dividends from Canadian blue chips. Again, not an issue in your TFSA or RRSP but in a taxable account you shouldn’t even bother.

Furthermore, REITs tend to have very little, if any, capital appreciation. All the value comes out in the dividend, which will then be taxed. And let’s say you were as foolish as I was and you invested in Morguard. They specialize in retail and office space. Not a good industry to be in during a pandemic works and shops from home.

REITs are good for generating income in retirement and getting exposure to different real estate markets, but I would have been better off just buying VGRO.

Buying Stock Options

Rating: F

Yes I admit I dipped my toes in the world of options trading in the style of Wall Street Bets. I would buy put options if I thought a stock was going down and calls if I thought it would go up. I actually had a few successes where I tripled my investment. The problem was that every winner came with two losers.

Lets say that you think a stock will go up. Seems to be a pretty safe bet, stocks normally go up. But if you’re buying an option you need to correctly predict exactly how much it will go up and by when. Say XYZ stock is currently trading at $90 and you think it will reach $100 by next Friday. You purchase a call option for $5. One of three things will ultimately happen after the option expires:

  1. The stock goes up higher than $105 ($100 + the option premium). Congratulations you’ve made money!
  2. The stock just barely goes up and ends at $98. Sucks to be you! Your option slowly decayed and eventually expired worthless. Maybe XYZ stock eventually did go above $100 after your option expired. You were right on the direction but wrong on the timing. Too bad.
  3. The stock goes down to $90. Well that’s not good, your investment just dropped 50% overnight! You can sell at a massive loss, and if you don’t, you’ll likely get a 100% loss.

So if the chances are roughly equal for each of those results (stock goes up, down, or sideways) you’re going to lose 2/3 times. Don’t do it. Don’t listen to Wall Street Bets. Just go to the casino if you feel like gambling.

Selling Stock Options

Rating: B

Options are a zero sum game. For every buyer there is a seller, and for every winner there is a loser. Thus if I’m the loser 2/3 times when I buy options, then maybe I’ll be the winner 2/3 times when I sell options?

On paper, selling options sounds horrible. In the example above, as the seller the maximum I could make is $5/share, but if the stock ran up to $200 I would lose about $100/share. There is a fixed maximum profit, the premium, and near unlimited downside.

In exchange for this crappy deal the odds are in your favor. I normally only trade if the chance of success is above 70%. The winnings are small but consistent. And the losses are normally salvageable.

My options selling strategy is referred to as “the wheel”. I won’t get into it now but it involves selling cash secured puts and covered calls. I’ve been using it for about six months, which is longer than I was buying them. And so far I’ve been earning money on about 4/5 trades and completely made up for my losses from buying options.

“Wow that’s great” you’re thinking. Well not so fast. It’s still playing with options which tends to magnify your gains AND losses. The market has been on a very steady uptrend for the past 5 months, and when it eventually corrects I expect my losses to be magnified. Hopefully the gains I’ve made up to that point will make up for future losses.

I plan on continuing to sell options until someone or something convinces me otherwise. I do NOT recommend this as a casual trading strategy. It’s the most complex strategy I use and it’s difficult to learn. Literally every single person I’ve explained it to has not been able to comprehend it (which is maybe more my fault than theirs). This is not me patting myself on the back, it’s just my experience. If you’re still interested, you can search “the wheel”, “cash secured puts”, “covered calls”, or check out my attempt to explain it.

Conclusion

Just buy index funds. If you want to branch out, get some bank stocks. Maybe telecoms like Bell or Telus. If you’re restless you can look into options with a paper trading account. Don’t be tempted to buy options. Selling covered calls or cash secured puts is more reliable.

Mar 142021
 

In light of the recent Gamestop short squeeze the subreddit Wall Street Bets (WSB) has exploded in popularity. WSB generally focuses on buying options contracts in anticipation of a big move in a particular stock. Essentially a member will guess (educated or otherwise) that a stock will sharply increase or decrease. They’ll purchase an options contract that will reward them for predicting correctly, and due to the leverage of options contracts they can earn much higher returns compared to holding the underlying stock. It’s easy to make a 100% return or more overnight. Conversely it’s easy to lose 100% overnight.

I’ve been dabbling in trading options for nearly a year now and figured I’d report on my results and explain how options work. I’ve broken it down into 3 levels of complexity and detail

Continue reading »
 Posted by at 10:49 am
Dec 272020
 

The Big Short investor, Michael Burry, who predicted the 2008 financial crisis, is now predicting that passively managed ETFs are the next bubble. He’s comparing them to the Collateralized Debt Obligations (CDOs) which were the main cause of the market meltdown of 2008-2009. Should we be worried? Maybe….

How Are ETFs a Bubble Exactly?

Thanks mainly to the followers of this blog and my totally original idea of ETF investing, ETFs and passively managed index funds are exploding in popularity. People are recognizing the value of low cost, diversified investing. Even mutual funds can’t keep up with passively managed index funds.

So what’s the problem? Essentially Burry is saying that investment decisions are no longer based on the underlying stock fundamentals, but rather on their position within an index. In other words, your ETF picks stocks because of their size in the market, not because the business are necessarily profitable. (For clarification, they are picked based on their market cap, not price. Market cap being the value if you multiply the number of outstanding shares by their share price)

To Burry’s credit the situation he’s describing does somewhat resemble the CDOs in 2008. Everyone was buying these CDOs without realizing their contents were utter garbage. Today the garbage is businesses, rather than mortgages in 2008.

Is he right? Sort of, first lets consider the implications if he’s right:

Continue reading »

Oct 052020
 

We all had the pleasure of witnessing a market crash earlier this year. It wasn’t the biggest crash but everything did drop 30-40%. It wasn’t sustained and the market has mostly recovered, but some sectors have lagged behind, including some that I’ve recommended on this blog. Let’s take a look at a few.

Continue reading »
Mar 092020
 



The market is down about 16% due to fears over oil prices and the novel coronavirus. For many of us that’s thousands of dollars vanished. Maybe tens of thousands. Might as well end it right?

Side note – the epidemic of suicides after the 1929 crash is a myth.

First things first. You didn’t sell did you? DID YOU? I sure hope not. If you did you’d better rebuy everything you sold, praying the price hasn’t moved. Here’s what everyone FOOLISHLY thinks:

Oh I’ll just sell my investments now and re-buy them when the market bottoms out

WRONG

How do you know the market isn’t going to rebound the day that you sell? How do you know where the bottom is? YOU DON’T. No one does. Some people will claim they know a bottom, but predicting it accurately is like predicting a spin of the roulette wheel.

Continue reading »

Dec 212019
 

A quick update on the status of this blog:

It’s been a while since I’ve updated this site, mostly because I’m lazy, but also because the site isn’t achieving its main goal. That goal being an attempt to earn passive income. Apparently it takes countless hours of writing quality, useful, and entertaining content to do that! This is my first attempt at public writing and website building. I think I’m doing pretty decently for a first attempt. But as far as generating a profit? I would have been better off getting a part time, minimum wage job. And yet here I am writing more, which brings me to the reason I keep writing despite a lack of financial gain – To figure things out and organize my thoughts. Also it’s kind of fun. And I like seeing the view counter go up and down. Also I like reading comments, especially from non-blood relatives (not that I don’t enjoy those as well).

They say the best way to learn something is to teach someone else. I figure if I can’t explain something in my own words then I don’t understand it, which is why a lot of my content is an attempt to explain complex topics like swap ETFs or the Canadian Pension Plan. But based on page views then most of you just want to hear me rant about BMO (My BMO rant nearly has more views than all other posts combined).

I have a few articles half written but I don’t think they’re ready for action yet, and may never be, mostly because they bore me. And if I’m bored you are definitely bored. Lately I haven’t found any interesting finance topics that I might actually invest in. That is, until now. Let me attempt to explain Preferred Shares:

Preferred Shares

I’m guessing many of you have never even heard of preferred shares (henceforth written as PS). But before we explain PS we must first define PS. How do you choose a PS? Why would you avoid PS? and what makes them so preferred?

Defined in a few words – A stock where you get first dibs on company payouts.

Continue reading »

Jul 282019
 



SuperDuperBankrupcy

I’ve noticed that most new investors, myself included, will check their investments every day, sometimes multiple times per day. If you only have index funds you’re setting yourself up for trouble. Although it applies to nearly any stock. I can tell you’re addicted, and it’s going to backfire if you’re not careful. Mainly because of loss aversion:

Continue reading »

May 132019
 



Step 1 – Open Account

Ready to buy ETFs? Great! First you’ll need a brokerage account. I recommend Questrade. Any brokerage will do but a low cost online brokerage is going to be the easiest and cheapest for most people. Go ahead and open that account now and come back when you’re done.

Step 2 – Fund Account

Your account is open now? Good. Time to deposit some money, or transfer your account from another financial institution. Did you know that you can have multiple TFSAs and RRSPs? As long as you don’t go over your total contribution limit between all your accounts you’re good. If you’re transferring your registered account (i.e. TFSA, RRSP, RESP etc.) make sure you first contact your NEW brokerage(like Questrade). They will send a form to your old brokerage to transfer your funds.

DO NOT withdraw money from your RRSP to your bank account and redeposit it. If you do you’ll pay taxes and early withdrawal fees. If you withdraw money from your TFSA you’ll have to wait till next year to get that contribution room back (i.e. maxed out TFSA, withdraw $50k on January 2nd 2019, you can’t redeposit that till January 1st 2020 and it just sits). Not as bad as the RRSP fees and taxes but still a problem for you money bags with your maxed out TFSAs.

Does your account have money yet? No? Don’t worry it takes a few days for a deposit and a few weeks for a transfer. Come back when you’re ready.

Step 3 – Invest

Ok your account is finally funded! You’re ready to buy! But wow this interface is a lot more confusing than you thought….

Continue reading »

Apr 062019
 



There are too many bills. It’s time to eliminate one of them. If you are savvy with dividends you know what I’m about to go over:

What’s a dividend?

A dividend is an cash payout to all shareholders. The money for dividends comes from company profit. Thus Bell will pay you some of their profits. As long as Bell exists and offers the dividend they’ll keep paying. Theoretically you could get lifetime payments from Bell (or any other company that offers dividends).

The actual payments will seem small – a good dividend is typically 4% of the share price. On an investment of $1000 you’ll get $40 per year. But keep in mind you’ll get that 4% every year for your entire life (potentially). And the more shares you own, the higher your payout will be. 4% of $10,000 is a lot more than 4% of $100.

Make Bell Work For You

Lets say your cell phone bill is $50/month ($600/year). Bell currently pays a dividend of $0.7925/share/quarter (or $3.17/year, or $0.264/month).

-Only a quarter per month???-

Yea a quarter per month is not much but bear with me. If one share will pay 25 cents per month, how many shares are needed for a payment of $50/month?

$50/$0.264 = 189.39 (round up to 190)

You need to own 190 shares to earn $50/month. Okay….. how much is one share? $59.34 (as of this writing). Thus 190 shares will cost:

$59.34 x 190 = $11,274.60

Thus for the small investment of $11k Bell will pay you $150.58 every three months!

Geez $11,274 is a lot

Yes.

But keep in mind that unlike your bill payment you don’t LOSE the $11k. You can sell your shares at any time and get some amount back. Bell has been around for a while. And people like cell phones. A lot. And there’s no reason to believe Bell won’t continue to be around for a long while. Here’s the chart of their stock since 1996:

Should've bought in the 90s

Should’ve bought in the 90s

Even during the dot com crash and the 2008 crash they maintained a considerable amount of value. I’m sure in the upcoming crash (date TBD) they’ll drop 20-30% but recover the value within 1-2 years. They probably won’t even cut the dividend!

But I could just pay the $50 bill for 225 years with that $11,274!

Well yes, but again, in that scenario you’ll LOSE the money. If you buy the stock instead your $11k will (probably) increase with time. I get that not many people have $11k lying around, but even a small contribution of say $2000 could get you about $10/month in dividends. That’s enough for Bell to buy you a sandwich every month!

 

 

For nerds – Other factors to consider

TAX – Dividends are taxable income. If you hold Bell stock in a TFSA there’s no problem, but in a taxable account you’ll be paying. Luckily dividend tax is cheap. Especially when it comes from qualified Canadian companies like Bell.

The actual dividend tax rate depends on your total income for the year. Let’s assume you make less than $95,259, that means your federal dividend tax is 7.56%. Less than 8%!!

Let’s make Bell pay your tax bill as well. To make up for that 7.56% tax you’ll need to own an additional 15 shares, or 205 shares total which will cost you roughly $12,164.70.

In summary if you want to hold your Bell stock in a taxable account you’ll need to pony up an additional $891 to cover the dividend tax bill (assuming you earn less than $95k/year)

TRANSACTION FEES – Most brokerages charge a commission to buy and sell stock. There’s no fee for collecting dividends though. So if you’re with Questrade budget an extra $5 to buy all these shares and another $5 to sell. Other brokerages might charge you upwards of $10 or $20.

LOGISTICS – Bell pays a quarterly dividend (i.e. you’ll get paid on the 15th of January, April, July, and October). Your cell phone bill is due every month. You’ll want to withdraw the dividend as you get it and use it to pay the next 3 months of bills. WARNING – Depending on your brokerage they may charge a withdrawal fee…….. hmmmm…… The big banks make it hard to find their withdrawal fees. Some offer free withdrawals but it looks like TD charges $1.50 for withdrawals from TFSAs and non-registered accounts. Questrade offers free withdrawals from all their accounts as long as you use an EFT to your bank account and not a cheque or wire transfer.

Let’s say you have to pay $5 to withdraw your quarterly dividend. That’s another $20 per year, or two sandwiches!

SEEMS LIKE GAMBLING – No it’s not, I go into that here. But yes there is a risk the stock will permanently go down or they’ll cut the dividend. But it’s a risk you’ll have to accept. Bell has been around for a long time and there’s nothing to suggest they will be going away soon. Nothing ventured, nothing gained!

Conclusion

You can apply this principle to any bill and any company. Why not get Fortis to pay your power bill? or TD to pay your car insurance? or Canadian tire to pay for your BBQ and propane? Why not get the stock market to pay all your bills? If your annual spending is around $40,000 and your average dividend rate is 4% you’ll be covered with $1,000,000 invested. Seems like a lot but it’s entirely possible with a lifetime of contributions. – Isn’t that just retirement? – Sort of. If you amassed $1 million and only lived off the dividends you’d still have the $1 million when you die. With a typical retirement you’d be withdrawing from the $1 million over the years.

Anywho… Dividends seem to be the next step on the investment ladder when you want to move past index funds. If this post confused you stick with the index funds and you’ll do fine.