A few years ago, along with index investing using ETFs for my RRSPs, I feel like I saw the light and I became a DRIPper of dividend paying stocks.
My first dividend-payer purchase was Enbridge (ENB) and at the time of purchase, I remember how my stomach churned when I made the transaction. I bought a bunch of shares @ $37 when all the talking heads said to run from equities during the financial crisis. That was long before their pipeline breaks and tons of bad press. Today, Enbridge is chugging along, having since recovered from the Marshall, Michigan mishap and others, now lists around $31 after a 2-for-1 stock split earlier this year that saw me double-up my holdings.
One of my investing lessons was bronzed with this transaction – look to be greedy when others are fearful. I figure if this mantra is good enough for Warren Buffett and applied by a Millionaire Teacher on his way to wealth creation, this principle is good enough for me.
Since that ENB purchase, I’ve bought more stocks. Not always at rock bottom prices but when I felt comfortable with the entry point. I’m no market-timer. I simply think being invested is better than not being invested: I think the power of time is much more important that timing. With that, over time, my plan is to diversify my stock portfolio to help mitigate Mr. Market risk. For now, I own a few banks, telecommunications, energy and real estate investment companies. I’ve got much more work to do but my journey is well underway. I’ve also expanded my stock selection rules of thumb beyond:
1. I buy companies when other investors are fearful.
I’ve got three more to share with you – my simple stock selection rules of thumb. Here they are in no particular order:
2. I buy companies within my circle of competence.
Firstly, I’m not that bright. There is absolutely no Nobel Prize in my future. I don’t pretend to understand all companies let alone their lines of business. Secondly, even if I was scholarly I don’t have time to research company after company to find the next Google. Instead of dwelling on what I can’t do, I try to focus on what I can do. I buy companies I understand. I buy companies that my nieces and nephews could relate to: a can of pop (Coca-Cola), a bottle of shampoo (Johnson & Johnson), a bank (CIBC). It may sound kinda funny but if these children can relate to these products, I certainly have a chance of understanding them for investment purposes.
3. I buy companies that have an established history of paying dividends.
“Established” is a loose term I know but basically what I mean by that is this – if a company hasn’t proven (through history) they can reward their shareholders in bad times, down markets, then I don’t want to own that company. Everyone loves a winner; money is always easy when the markets are good yet when things go south that’s what separates (in the NHL as they say) the “men from the boys”.
4. I buy companies that maintain a large market capitalization.
I typically buy companies with a market capitalization of well over $1 billion. Why? These are typically mature companies that require minimal attention. Many of the companies I own have been making money and growing customers for 100 years. I’ll take my chances they’ll be around for another 50. Canadian banks, energy and telecommunications companies may be dull and boring (some investors would say) but I like it that way. I know what to expect from these guys. I’d rather get paid by dull and boring than ride the investment rollercoaster.
That’s pretty much it. In all, four simple stock selection rules of thumb. I could go into P/E ratios, dividend payout ratios, cash flow, earnings, the ability to create and preserve “economic moats” and other details I research when I buy a company but using these four simple rules is always a good start for me. I can always (and will) get into the weeds of a business after these simple rules.
I know I’m biased, but why do I think some of these simple rules are good rules?
I’ve often heard your short-term memory is meant to hold only about seven items. I guess that’s why I can usually remember a new phone number someone just told me but very little else including their name or address if I just heard it for the first time. With only four little things to remember, I should be successful because I have a very simple plan to execute. There’s another benefit to my rules: I’ve got capacity to remember a few other items on my “honey do list” around the house today 😉
What do you think?
Are these rules far too simplistic to help me be successful long-term?
How about you? Any investing rules of thumb you live by?
@My Own Advisor If they came back after the World Wars and a depression I’m pretty sure they can handle a few over-leveraged mortgages and European socialism run amok.
@My University Money, good point! Thanks for stopping by, and comment as often as you wish 🙂
@ Andrew Hallman
I definitely agree. As someone that is in my early 20’s I am desperately trying to increase my income (I already have the frugal thing down pretty well) to take advantage of this bigger investment picture. In a perverse and selfish way I cheer when I see terrible reports come out about the immediate future for equities. I keep hoping that any real rally will hold off another 2-3 years, thus allowing me to buy into the market at decent overall rates. I hope to have a nice nest egg in place when the markets (be it emerging or developed) smarten up on all this toxic debt, and huge deficits garbage and get back to fundamentals.
@ My Own Advisor
Great post. I followed the link from Y & T and definitely will be stopping by regularly!
@My University Money,
Thanks for stopping by! You and I are the same then, we both cheer when equities slide 🙂 They (equities) will come back – they have to eventually in some capacity but it could be a long road back. Then again, I’m willing to ride the winding road.
Just don’t forget the most important part Young. Because you’re still in your 20s, you should hope that your great businesses perform poorly–you should hope that the whole market performs poorly for the next twenty years. If you can get around that paradox, and embrace it if it happens, you’ll be on your way to building very serious wealth in the markets, over the long run. If we do get an extended bear market, you will find that many people start giving up on the markets. The media and “experts” will find a more desireable asset class to tout, and stocks will be considered pariahs. If you are greedy when there’s blood in the streets, you’ll make money.
I agree with Dividend Ninja- my blue chips have been doing well. I think that once you practice employing the stock selection and screening them, it can be easy to make an informed decision (versus a speculative guess or speculative gambling) on a tried and true stock rather than the next big thing that is about to burst.
Thanks Y&T! You’re doing just fine yourself, keep up the great work with your dividend-payers!
Wise tenets, for sure! It sounds like you have read some great investing books on how to pick stocks like Warren Buffett. Which are your favorites?
Hey Andrew – I had some good influences! 😉 Favourite books? I will write a post about that, stay tuned!
Under my “Must Reads” page, I have posted some of my favourite investing books. I’ve read all of these in the last 3 years. I’m sure we share many of the same books in our library 🙂 I’m currently reading Swedroe’s new book: The Quest for Alpha.
Thanks 101! I guess that’s the key, do what works and avoid what doesn’t? 🙂 What works for you?
I particularly like the one where you state you buy companies you understand. I think that a lot of people get into difficulties when they buy stocks (or bonds) in companies where they do not understand how they make their money.
I like to understand how a company makes it money. I also have to agree with how they make their money.
Thanks Susan. I too like to understand how a company makes it dough. Agreeing with it, ethically, is also important. Any other simple dividend-investing rules you live by?
MOA, great set of rules and they’re working in your favor. so far so good. Sometimes one has to keep it simple in order to avoid putting too much time into it and in your case you found the recipe that fits your investment style!
Thanks Mich! Yes, so far, so good. I have to be fair and honest with myself, I don’t have the time nor the energy to learn everything about some companies. I’d rather keep things simple and straightforward. Hopefully that approach will work long-term as well. Thanks for your comment!
The world’s most famous investor- Warren Buffett once said: “There seems to be some perverse human characteristic that likes to make easy things difficult”. In this regard, I don’t think you can go wrong with your four rules, Mark. Investing is like a marathon not a sprint, so even though the companies you own might be classified as “dull and boring”, they will make you rich.
I hope I don’t go wrong, but via this blog, I will certainly show no shame in telling people. So far, so good though. Keeping things simple and trying to use some common sense with my unregistered portfolio seems to be working. I must admit, I’m just not that bright when it comes to finding the next Google so I don’t even try 🙂
MOA, Geat post man! Like Mantra says keeping it simple is the key 🙂 I find both Passive Index Investing and Passive Dividend Investing (with the big blue-chips the way to go). In fact it’s the big blue chips that I buy and forget about that do really well – great return on investment for those guys. Keep up the good work.. and thanx for the mention!
Thanks Ninja! Yes, please, simple is good. Why? I’m just not that bright of a guy!
The $1B market cap doesn’t really demonstrate a ‘mature’ company. Technically, many view companies that small as ‘small-‘ or even ‘micro-cap’. Doesn’t really reduce the field very much since it is rare for such small companies to pay dividends at all.
Fair enough, re: $1 B. I guess I was thinking of my unregistered portfolio and looking at the 15+ holdings I have, there is only one holding under a $1 B market cap; CML HealthCare. That said, you’re right, smaller companies don’t typically pay any dividend, they are a rare breed. They are also subject to more volatility – which I’m not a fan of because I like the stability of getting paid consistent dividends.
What do you prefer? Blue-chips? Mid-caps? Small-caps or a mixture of all three? I recall from various investing forums Sampson, you are well diversifed.
Also, any rules you have to share yourself?
Thanks for checking in, I appreciate your perspective.
I don’t think it has to be complicated. Relying on a few simple set of rules makes it easy to remember and easy to replicate. Like you said, once a company passes the ABC’s..you can get into the more complex stuff.
Thanks Mantra! I like keeping things simple. I can always get into “the weeds” of a company after these four rules of mine. I swear I got almost 20 annual reports this year in the mail to read. It was A LOT of reading but I didn’t mind, it was kinda fun in a weird way 😉