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.
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
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.
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:
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.
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:
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….
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
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:
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!
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.
For the lazy reader:
Only buy VGRO and you’re fully diversified. Investing complete.
And now for those of you who want more context:
I’ve been know to stray from the index path. When you are in full control of your investments it’s tough to resist that sweet siren call of the Netflix and Amazon stocks of the world. What normally happens when I pick stocks? This image sums it up nicely:
Maybe I don’t have the will power to hold on when I’m down 30%. And sometimes unforeseen external circumstances forced me to sell (Moving to USA). But at one point I realized:
I’ve made more money at the casino than I have picking “risky” stocks
Okay I’ve profited maybe $200 between all my visits to the blackjack table. It’s not much but I’ve lost more gambling with stocks. Luckily my solid foundation of index funds have completely insulated me from any big losses. I have healthy ETF gains over the past few years. And these risky picks are less than 5% of my total portfolio value.
If you truly want to gamble with your investments I’d recommend using no more than 10% of your total portfolio value. Or whatever you’re willing to lose.
Perhaps you’ve heard about the Canadian Pension Plan, but have you also heard about Old Age Security and the Guaranteed Income Supplement? The average Canadian probably doesn’t know what they are, how they works, and what else is available. Some people assume the government will cover them, and often these people don’t bother with retirement savings. Is this a good idea? Lets dig in and investigate:
So you’ve just finished reading The Four Hour Workweek (or any entrepreneurial self help book) and you’re all amped up to quit your job and automate your own business. Except you don’t have a business. And you don’t have the guts to quit your job. And the other suggestions in the book, like hiring an online assistant, are a frivolous use of your meager savings.
What If You Can Almost Retire?
Let’s entertain an exotic thought. Say you’re doing pretty well financially. You have a ton of money saved, and you want to retire. But you don’t have enough to cover all your expenses passively (i.e. earning 3-4% investment interest will not cover your yearly expenses).
As you may know I find reducing expenses more effective than attempting to earn more money(link, link, link). But what if you’re at your expense-cutting limit? Cutting any more expenses would force you onto the street, or stop you from eating.
The answer is creative and extreme savings ideas!
Using Inequality to Your Advantage
Taking a note from The Four Hour Workweek, you can stretch your money significantly if you earn in Dollars but spend in Pesos. Moving to a low cost of living country could enable you to retire years earlier. And lets face it. Your life in a foreign country is likely to be way more interesting than staying at home.
The cheapest countries tend to be equatorial countries for some reason. Maybe nice weather isn’t good for the economy because people are too hot to work. But that’s a good thing for retirement! Think about the benefits:
- Good weather year round (assuming you like it stupid hot)
- Delicious food (assuming you like it spicy and flavorful)
- Nature (assuming you like beaches, mountains, and jungles)
- History (assuming you like imperialism and genocide)
Central and South American countries will keep you close to the same time zone as Canada. They are friendly with delicious food and incredible nature. Southeast Asian countries are further away, but have similar benefits. Especially if you prefer fried rice to refried beans.
So how much cheaper are these places? And how can one decide where to go? Well let’s compare some typical expenses for a typical retiree lifestyle in some typical and non-typical destinations. For more detailed comparisons there are websites like Expatistan and Numbeo
|CANADA, Penticton||MEXICO, Cuernavaca||COLOMBIA, Medellin|
|2 bdrm apartment||$1,500||$900||$650|
|Food (Restaurant per person)||$15-$25||$8-$12||$5-$10|
|Domestic Beer (store bought)||$2.70||$1.70||$1.15|
|Transportation (gas price)||$1.21/L||$1.14/L||$1.06/L|
Now before you start yelling at me, I know there are other things to consider besides money. Language for one, if you don’t speak Spanish you’ll be restricted to English expat communities which typically are more expensive. But come on. Learning a second (or third) language is an excellent way to spend your free time.
And I know you have friends and family back in Canada. And I know you might have Canadian real estate, and gym memberships, and library cards. Well how about becoming a snow bird? Make a cheap country your wintertime destination. You can reap all the benefits of a cheaper lifestyle for half the year, and still maintain a lifestyle in Canada during the best months.
If you want to stay in your new country longer, many countries have retiree visas. Just prove that you have retirement income, no criminal record, and provide a health check. Speaking of health care, bring your medical records, and get health insurance, it’ll probably be $100/month.