Someone rightly said First step is always the hardest. While it is true, one shouldn’t get disheartened because in this internet and social media age, information available is cheap and in abundance. When you get a chance, please browse through some of the links I mentioned under Good Read!
If you have time, take the opportunity to learn the basics of Stock investing, understand fundamentals such as Company’s Core Business, Sales, Revenue, Earning, Profit Margin, Future Growth, Cash Flow, Debt, Market/Sector trend etc. to determine company’s underlying value & future potential. Another very important aspect to investing in stocks is to make a decision whether to invest in:
- Growth stock – Companies who reinvest the profit in business expansion instead of paying the excess money back to shareholders. Typically this would be a company in nascent (or inception) stage and generates higher positive cash flow and whose earnings are expected to increase at a faster rate than it’s more stable peer. This means higher return of investment for an investor but more riskier due to less mature nature of the company, but not necessarily always true. Most of the companies in technology sector falls under growth category and some of them have had excellent returns in the recent past.
- Dividend stock – Companies that pay their excess profit as dividend are categorized as Dividend stocks. The management decides the payout ratio based on Profit/Free cash flow and normally have a future dividend growth planned out for investor’s consideration. A dividend payer company is comparatively more mature and many investors rely on them for their fixed income needs. Since a portion of profit is distributed to investors, the company do not spend a lot on expansion and hence growth may be limited.
- Suitable balance – Based on Investment horizon, Risk appetite and Income need, an Investor can create a balanced portfolio with a mixed of Growth and Dividend stocks.
Below comparison published on Seeking Alpha shows that in a longer run, Dividend stocks fairs better as compared to Growth stocks.
For Dividend stocks, there is a bunch of metrics that need to be looked at:
- Dividend Yield – Expressed as %, this represents the ratio of Dividend Amount paid per share annually to Price of the stock. If the stock price is $50 and annual dividend paid is $2, then Yield is 4%. Unusually high yield is often unsustainable for a company financially and management may cut down the dividend, such stocks should be avoided.
- Dividend Growth – If the Yield remains constant over years, the inflation may eat away one’s income. Hence companies with history of increasing dividend are to look for. Two most important factors while screening dividend stocks are increasing streak and rate of dividend increase. They together implies Company’s Earning power, Financial strength and Management’s commitment towards shareholders. While past performance do not guarantee future behavior but it certainly provides an insight on Company’s Intent and Vision.
- Payout Ratio – This is the ratio between Company’s Profit and Dividend and depicts how much of profit is paid back to shareholders. If a company earns $10 per share and pays $4 annual dividend, the payout ratio is 40%. A lower payout indicates dividend is safe in case profit plummet and also means company reinvests a chunk of its profits to grow the business. Usually payout ratio of less than 50% is safe and ideal but there are sectors where higher ratio is a norm.
After talking about so many terms, one thing I will add here for metrics is – in the end they are just gibberish unless you analyze them, read within the context and compare with company’s peer & sector. Each may have a different norm, for example high debt in financial & REIT sectors is normal while technology may not have high debt.
In the beginning I said if-you-have-time and of course patience and will to learn, take the learning-first route. There is another approach to begin, which is just plunge in and learn as you go along. I am not hesitant (or ashamed) to tell you a secret that I took the easy route (or hard is it?!). Laziness is one of my most enviable attribute and I often hide it with lack-of-time excuse. But whatever it is, I jumped into the pool and for me, that was my first-step. I believe the longer you are in the pool, the quicker you will learn swimming. While I am still learning, I took the plunge by taking the following:
- Bought a paid subscription to Motley Fools, Canada, they do their research and sends you weekly stock recommendation for lazy bums like me. Word of caution though, buried under one of their terms of use page, you’ll find – They reserve the right to be wrong, stupid, or even foolish! Yeah tell me about it? So like everyone else who preaches on stock investing, I utter the same – do your own due diligence! UPDATE: After my initial annual subscription expired I didn’t renew as I had no money to buy their recommendations. Besides I found they started getting too pushy with their never ending new products which I feel was unnecessary. If you are offering stock investment advice, why not just have one package instead of keep inventing newer products! Also even though I don’t own any new paid subscription at the moment, I found there are many such services available notably Stock Trades which is our own Canadian owned research brand with growing popularity and presence.
- Went through CDASL list and bought some of the stocks (highlighted in bold) which are biggest in their respective sector. For your reference, they were*:
- Consumer Cyclical – Thomson Reuters (TSE: TRI)
- Consumer Defensive – Alimentation Couche-Tard (TSE: ATD.B)
- Energy/Pipelines – Enbridge (TSE: ENB)
- Financials – Royal Bank of Canada (TSE: RY)
- Industrials – Canadian National Railway (TSE: CNR)
- Real Estate – Brookfield Asset Management (TSE: BAM.A)
- Resources and Materials – Franco Nevada (TSE: FNV)
- Technology – OTEX (TSE: OTEX)
- Telecom – Bell (TSE: BCE)
- Utilities – Fortis (TSE: FTS)
- And finally I also picked few big names listed on south of our border
UPDATE: More recently I focus on quality dividend growth stocks with below tweeted conditions. I feel such companies have vast potential to grow your dividend income quickly. When I ran this filter on Jan’23 CDASL spreadsheet, I found six solid Canadian stocks and unsurprisingly we already own many such names under our dividend portfolio. Do follow our Twitter handle @SettlingNomads and pay us a visit to know those six stocks!
So now you can see that I did jumped quickly but I didn’t jump blindfolded into the unknown! While initially I didn’t put too much thought into building an ideal and risk-free portfolio, I did focused on diversification (by sector) and mainly dividend paying stocks. As I mentioned under my Goal, my aim is to get $1500 per month from dividend income by 2025, BUT:
- This doesn’t mean I am going to completely neglect growth stocks
- This also doesn’t mean I am going to stick to a strict rule, it is an evolving process
- This surely doesn’t mean I am not going to be occasionally brash and have some fun!
I believe there is no right or wrong approach, important point is to plunge yourself in.. whatever suits you! Good luck with your First Step!
