Catching up with Derek Foster “Canada’s Youngest Retiree”

A few years ago, I got a chance to sit down and chat with Derek Foster, “Canada’s Youngest Retiree”.  Back then Derek shared his thoughts on the stock market, his investment strategy and much more.  I recently caught up with Derek and for this post I decided to playback the things Derek told me then and see what he thinks today.  First up, a quick bio:

• Derek was born in Ottawa in 1970. He left the proverbial rat race at the age of 34 by using various investing strategies, many he believes any investor can emulate.
• Derek is a 6-time National Bestselling author and when not writing books or giving speaking engagements (like at the World MoneyShow in Toronto this week) Derek spends time with his wife and six children in Ottawa (that must be a VERY busy house…)

In our last interview a few years ago Derek, after “The Idiot Millionaire: You Can Become Wealthy!” was released you said this about the economic downturn and getting out the market:

It was largely because of the 2008-2009 economic downturn. Because my personal situation had changed since I originally left the rat race at 34, (I was earning an income from other sources such as book sales, etc) I wanted to switch my portfolio to higher growing dividend-payers as this would save me tax and generate better returns over the long-term. BUT I wasn’t as smart as I thought I was; hoping to sell my stocks at one price and trying to get back in at a lower price. In some cases, it worked. I bought businesses like JNJ, Shoppers Drug Mart and Phillip Morris at reasonable prices. For other businesses, it didn’t work. For example, I waited too long for Canadian bank stocks. I missed the bottom and their subsequent run ups in price. Admittedly I missed that boat.  I guess the title of my book really applies to me, kind of tongue-in-cheek.

What’s new Derek?

Not much has changed since the last interview Mark – I still own most of the same stocks.  The approach has been very rewarding and the companies just keep raising their dividends every year.  The fact that the Loonie has come down from around parity to around 90 cents has also boosted the income, but this could change (who knows?), but I’ll take the extra income for the time-being.

Do you have any plans to write another book Derek?

Not right now.  We bought a camper and travelled around North America for a year with our family.  We got back a little over a year ago, and it’s been pretty busy with the kids because we homeschool.  I have an idea for a book that should be written, but right now I’m just too busy.

In our last interview Derek you said this about your investing strategy, on being primarily a dividend investor:

Before I was more focused on higher yields for income generation but my needs have changed. I mean the books generate income which was an unexpected surprise (because being an author or a writer is not usually the path to riches). Really though, I’m fortunate to have some other income streams with no debt and so things are different for me at 40 than 34 when I wrote “Stop Working” (Here’s How You Can Too!).

Are you still a dividend investor?

Absolutely – I love dividends!  I do have a few stocks Mark that don’t pay dividends such as Berkshire Hathaway, but overall my portfolio is pretty much full of dividend payers. Last year every one of my dividend stocks increased their dividends except one.  Why tinker with what is working?

When I first left the rat race, I was focused on high yielding investments, but now I am happy to have lower yielders with higher growth (more tax efficient if I don’t need the immediate income).  I would never have looked at a company like Visa 10 years ago, but am very happy I bought it while back.  The stock price has pretty much tripled, but the big story is that the dividend has grown 3-fold in the last five years – with more growth coming.  If history is any guide, we will see another healthy increase next month.  With a small 18% payout ratio and double digit earnings growth, this should continue to raise dividends for years.

I also like all the stodgy, idiot-proof stocks I’ve mentioned in the past…Colgate, P&G, J&J, Abbott, BCE, Imperial Oil.  I would like to mention an important point here.  Most companies retain a good portion of their earnings to grow their businesses and over time these retained earnings provide the foundation for future dividend growth as they help power earnings growth.  I discussed this concept in detail in my interview with your friend Million Dollar Journey Why the Second Million is MUCH Easier.

Uh, easy for you maybe Derek! 

OK, a few years back you mentioned this about your portfolio:

I have no bond component. Not that I think bonds are bad, simply, I’m a forty year old Derek Foster and I don’t see why I need bonds right now with my multiple income sources.

Are you still a 100% stock guy Derek?

Yes, I am.  Many people would say this is too risky, but really, are you going to stop brushing your teeth because of an economic downturn?  I want to point to an example to illustrate my thinking…  A few years back, the 10-year US bond was yielding something like 2% or so while J&J was yielding over 3%.  The US bond credit rating was rated ‘AA’, while J&J was one of the few companies in the US with a triple ‘A’ rating.  To top it off, J&J only paid out about 50% of earnings in dividends.  So, you had a higher rated security offering a higher yield with a lower payout ratio and future growth….so why would bonds make sense?

Many people point to the 2008-2009 downturn as evidence that bonds will save you during downturns, but what about the 5 years since then?  Look at the long-term returns of stocks over bonds – I think the stats speak for themselves.

I would also like to add that we have been in a major bond bull market since the early 1980s where bonds yields reached historic highs – so for the majority of my lifetime, the secular climate has been great for bond investors with declining interest rates offering capital gains in addition to very generous interest rates.  Now we’re at historic lows in bond yields – so looking out a decade or more, even if yields don’t climb from here (seems unlikely but who knows?), where will the returns come from?  So stocks with higher yields (example BCE) seem to offer better return prospects with fairly low risk.

I keep some short-term money to cover expenses, but right now, I have no attraction to bonds.  This might change in the future, but not as things stand right now.

Here’s what you said before indexing Derek:

I think index investing is very safe way to go. The problem I have with index investing personally (and maybe you can help me on this since I read your blog, you own some ETFs don’t you?) is the cap weighting associated with some index funds or index ETFs. At one time, Nortel and JDS made up something like 30% or more of the TSX, that’s major over-representation if you ask me.   I told Derek about cap-weighted ETFs…  I know about those products but you are still overweighted in the “hot” sectors.  Do you think your dividend-payers with your dividends reinvested, compounding over time, dividend increases plus stock price growth, stock splits, etc. will do better in the long-run than those capped index products or worse?  I told Derek index ETFs won’t ever “hit a home run” but will ride market returns…  That’s precisely my point. Investors in stocks can. Not to discredit index investing, I think it’s good for those who don’t have or want to take any time to analyze stocks, but I like my strategy. It’s worked out pretty well for me so far.

Has your perspective on indexing changed?

No – I still prefer “idiot-proof” dividend stocks (especially in Canada).  Our market is really skewed towards a few dominant sectors (financial services, materials, energy).  I think you can get better returns picking your own stocks (if you have the time to do it).  Take a look at Jeremy Siegel’s book, The Future For Investors and you can see how the reliable dividend payers have outperformed the market for long periods of time.  In fact, even during the early 70s when the “Nifty Fifty” stocks were trading in the stratosphere compared to the general market, investors in the best companies almost matched the market returns (and this was an extreme case where quality stocks were WAY overpriced compared to the market).  In addition, you can tailor your holdings to where they fit best tax-wise (maybe put higher yielding stocks in your TFSAs) as an example.

What’s next for Derek Foster?

I’m not really sure right now…just keeping busy and enjoying life.  I’m not that great at planning too far in advance…

Thanks again for the interview I appreciated your time and have fun in Toronto.

What questions would you have for Derek?  What do you make of Derek’s investing approach?