Dividends are the “tried and true” investment focus these days (other than dollar cost averaging through indexing, of course) for those that say “screw off” to mutual funds and want to DIY invest.  Dividend paying stocks USUALLY have a proven track record and continue to give you dividend income even if the entire market isn’t doing so well in general.  However, they are not immune and are vulnerable to the huge market swings even if their dividend payout is strong.

Dividend Reinvestment Plans, also known widely as “DRIPS” essentially help you automatically take the dividend income you receive and reinvest it, usually without having to pay commissions or fees.  For example, the dividend income your receive may not be enough to purchase an entire share, but will allow you to purchase fractional shares.  Over time, these fractional shares add up to one share.

Usually these plans are offered directly by the company, and they will have their OWN brokerage they use for the DRiPs.  You can also choose to use your own brokerage (for me, that’s Questrade) but you won’t receive the discount of the 3-5% on the recent three closing prices of the stock.

Basically, with Dividend Reinvestment Plans, you can “set it and forget it”.  This option is especially alluring for those who have the “buy and hold” mentality, and actually rewards those who like to buy and hold.  Or in my case, prevents those who ideally WANT to buy and hold from panicking and selling their shares for a quick profit (I tend to suffer from that problem).

What Are the Benefits to DRIPping?

The benefits to DRIPing are numerous and I find that they do outweigh the cons.  That being said, I currently only have one DRiP for an individual stock going on right now (but my TD e-series funds are DRiP’d regularly), but I would like to add more (just needs some organization on my part!).

Currently I am DRIPing EIF.TO in my Questrade TFTA and I plan to add FTS.TO and perhaps HSE.TO to the list of DRIP’ing dividend stocks.

PROS:

• You’ll be investing and adding to your positions without having to pay fees or commissions
• Certain Canadian DRiPs give a discount of up to 5% on the price of the equity (usually 3-5% discount) on the average of the price in the previous five days the stock was traded on the TSX (basically you only pay 95-97% of the regular price)
• Compound interest is your friend over many years and much DRIPping
• Oftentimes you can designate the number of shares you want to DRiP
• Allows you to dollar cost average without having to put money in!

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Did I get your attention with the title of this post?  I sure hope so! 

I have seem many friendly stock pick contests between the big Canadian personal finance bloggers but was always too intimidated (or never asked lol) to participate.  Well, Financial Uproar apparently felt the same way too (I think he asked and was rejected) so he thought to create one of his own.  Financial Uproar asked if I wanted to participate in a Canadian underdog personal finance blogger stock picking competition.  His direct words were “because you all don’t suck, you’re all officially invited.”

I’m happy to participate and very interested to see how my picks go.  I just hope I don’t get the gag prize for finishing last (but knowing me, I probably will).  Coming from Financial Uproar, I have no idea what kind of gag prize he has in store.  If they’re chips, I’d be happy.  Though I highly doubt the gag prize will be something so benign as chips.

Here are my stock picks for 2012.  Lately, I’ve resigned (or more accurately, become smarter by choosing indexing) to indexing, but sometimes the gambler, speculator in me just enjoys the wild roller coaster ride of the Toronto Stock exchange.

Please be gentle regarding my picks! No judging lol!

You can also see Financial Uproar’s stock picks here.

Youngandthrifty’s 4 Stock Picks for 2012

Dollarama (DOL.TO)

Dollarama has 667 stores across Canada and they recently opened 57 new stores.  Dollarama became public in 2009, and since then, its stock has increased 93% and had a 25% increase through the first 9 months of 2011.  I know, because I’ve been watching it like a hawk.  I watched it at $30 and now it’s at $44.  I’m still watching it sadly, and kicking myself that I didn’t get in on the action.

It even started paying out a dividend of $0.09 per quarter.  Which makes the annual dividend yield 0.81%.  Small, I know, but hey, this company just came out in 2009.

I LOVE shopping at Dollarama.  It is my new favourite dollar store.  It has everything, I even bought my Christmas ornaments there.  If you need some weather stripping, they have it.  If you need a handsaw, they have it.  If you need some gift bags or birthday cards, they have it.

With the recent (and long drawn/ prolonged) economic downturn, everyone has been pinching their pennies and watching what they spend.  Frugal retailers and frugal fast food restaurants have done exceptionally well in these few years with everyone watching what they’re spending.  I see Dollarama continuing to do well even if the economy improves.  Once you shop here, you’ll not want to shop elsewhere because you can get so many things for so cheap.

Coastal Contacts (COA.TO)

Of course I wish to include a wild card, a growth stock.  If you haven’t heard of them before, they are Coastal Contacts and are also known as Clearly Contacts.  They are the largest and leading online retailer of contact lenses and glasses.  They were founded in 2000 (by Roger Hardy in a basement with one phone and a ping pong table apparently) and eliminated the need for people to pay an arm and a leg for glasses and contact lenses at the optician’s office or at expensive retailers.

In the first year of business, Coastal Contacts achieved $1 million in revenue.  They also have 2 million customers worldwide.

Most of the glasses you purchase at expensive stores are made in China anyway (like everything is) and Coastal Contacts eliminates the middle person, therefore you can get designer glasses or sunglasses at very reasonable prices.

They also run big promotions like giving away X number of glasses to the first X number of customers online.  Their major celebrity advertiser (at least here in Vancouver anyway) is Trevor Linden.

Its current price is $2.63 but unfortunately there isn’t much volume.  Its P/E is high, but this often seen with rapidly growing companies.

At this price, I don’t mind buying 1000 or even 100 shares (yeah, I know)  and anticipate future growth of the company.  They are also a Vancouver born and bred company, and many of you are well aware of my annoying allegiance to Vancouver!

Husky Energy (HSE.TO)

Some of you may remember that I have been keeping an eye on Husky Energy for a while.  It’s current price is $24.28 and its dividend yield is a healthy 4.94%.  It’s Price to Earnings ratio is 11.43. As you can see, its trading at a relatively low level compared to earlier in the year (though what investment isn’t I suppose).  The Price to Book ratio is also excellent.

Husky Energy is well diversified within the oil and gas industry, including involvement in exploration, upgrading crude oil, and retail gasoline.  Its headquarters is in Calgary and it is owned by the son of a multi-billionaire in Hong Kong, Li Ka Shing (eleventh richest person in the world).  So money isn’t really a concern in that regard.

In their website, they also talk about Aboriginal responsibility, and they train their staff to be sensitive to support and interactions with Aboriginal communities across Canada.  To me, that’s a plus one.  How this is actually enacted, I don’t know, but I hope they are as responsible in person as they appear on paper/ website.

 Bank of Montreal (BMO.TO)

Last but not least, I’m going to pick a bank stock.  Any Canadian bank would do, really, but I found that the price of BMO is more affordable for my stock portfolio budget than some of the other banks.  Canadian banks are notorious to be safe and probably the best in the world to invest in.

BMO’s current price is $54.95.  BMO’s 52 week low is $51.83  a has a 52 week high of $66.60.  Their Price to Earnings Ratio is 10.45.  Their dividend yield is 5.10% annually (which is better than any high interest savings account, IMO!).

However with the future being uncertain, I’m not sure how the big banks will fare in the coming year, to be honest.  As a long term pick (and I know that Financial Uproar is not looking for anything long term- lol did you get my little joke?), I think this is great.  For 2012, I’m not sure how it will do.

PS, are you proud of me readers?  I learned how to do a “picture shot” on my MacBook Pro! (yes, two years after owning it… told you I’m computer illiterate in some respects!)

Readers, what do you think of these picks?

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Hello fellow personal finance readers. I go by the pen name “Teacher Man” due to the fact that I recently graduated from university and am in my second year of teaching high school. About 9 months ago my partner and I started a website called My University Money. It is aimed at helping young people (with a specific focus on post-secondary students) and just talking about financial and student lifestyle issues in general. Young & Thrifty was one of the first bloggers to really reach out to us and give us a little recognition when we were just starting off. When I read that Y & T was hitting a busy patch in life I offered to do a little staff writing for her, and she graciously accepted. Many in the investing industry have been singing the praises of the explosion in discount brokerages over the past couple of decades. The fact is that online discount brokerages which cut fees to the bone (as little as $5 per trade) have completely changed the way the investing game is played. It wasn’t so long ago that someone wanting to invest had to ring up their full service stock broker (on a rotary phone) and ask them to place their trade for an exorbitant fee (often $50-$100). Unless you were one of the big fish, your order got put on the back burner until whenever your broker got around to it. These days investors have access to real-time quotes, and a bevy of current information that even corporate investors couldn’t have dreamed of 30 years ago. This is great news for the little guy right? Uh… the jury is still out on that one.

So You Think You Can Trade?

There is no doubt that the internet and the way it levelled the information playing field (kind of), as well as its pricing structure is to most peoples’ benefit IF they practice the same investment strategies as before. Therein lies the major problem. In the past, investors looked to make sizeable investments in companies they believed had a competitive advantage and would consequently do well over time. Paying these large fees to move in and out of investment positions was a major incentive to practice buy-and-hold investing. Today, you can turn on your TV to anyone of 3-5 channels that will be spinning some sort of voodoo about the latest earnings reports, or some new cookie-cutter shaped technical analysis theory, and that makes a lot of people believe that they could be the next Goldman Sachs hedge fund manager if they watch enough of the garbage. When you combine this with the sudden ability to trade whenever, and however you want, for a cheap fee, you can do a lot more harm than good.

Trading With The Stars

Investing is not trading. People often get this confused. When people watch Wall Street movies and get caught up in the adrenaline rush (admittedly, we testosterone-driven types are most susceptible to this) of getting rich quick, they get a ridiculous view of what investing should truly be about. It seems to me that a lot of people have forgotten that the whole point of the stock market is to allocate capital to the best companies. It is the natural extension of free market ideas that the companies that have proven they can do the best with what they have (and produce something valuable) should get more money to work with, and should see their value continue to grow. Online discount brokers have greatly aided this trend where we have moved away from that ideal, into this crazy casino world where people try to make money from nothing by attempting to predict the irrationality of the markets on a minute-by-minute basis. I want to yell at these people that Wall Street has mathematical geniuses working for them that have invented automatic algorithms that are powered by state-of-the-art technology and insider information. Do you really think you can beat these guys at their own game staring at charts? People on my site are probably sick of hearing about my worship of Warren Buffett and his patient, value investing ways, but I always think that this guy is the pinnacle of what true investing should be about – not day traders looking to cash in on some made-up “momentum swing.”

The Cheap Trade Factor

Is the invention of the $5 trade a bad thing? Not if you are realistic about the markets and your strategy within them. I’m by no means a stock guru, but pretty much every single investment study out there will back me up when I say that any sort of diversified, buy-and-hold strategy will work much better than trying to ride the latest trend. It doesn’t matter if you’re a dividend investing apostle, an ETF/Index investing convert, or a value investing Buffett-ite, you will be better off than the guy who trying match wits against the sharks on Wall Street. The $5 trade has saved smart investors a ton of money. It has also majorly cut into the slim profit margins that most investors have seen over the last few years. Go ahead and look for yourself at the studies done over the past 20 years comparing active traders to people who index is boring old index funds once every month. There is an old saying in poker that if you can’t pick out the sucker in the first hour, than you’re the sucker. How do you think these hedge fund guys can make such outrageous returns? Someone has to be at the other end of them, and I know it’s not the guy sticking his money in ETFs and Index funds.

Are You Smarter Than A Hedge Fund Manager?

For years economics professors out there loved to talk about how they had come up with a magical formula for the stock market called the efficient market theory. This approach basically claimed that since everyone now had access to such good information, supply-and-demand fundamentals guaranteed that every stock was appropriately priced at any given moment. This may have had some degree of validity when people carefully considered their investments since it cost $100 a pop to buy or sell any shares at all.  I’m fairly certain that in today’s headline-driven markets it holds almost no short-term relevance at all. We are seeing more volatile markets now than ever before, and there is little doubt that this is influenced by the competition over who can produce the most extreme headline, and the ability of the do-it-yourself investor to rush to their computer and “join the heard” trying to follow whatever the latest “Mad Money” tip was . Humans have always been genetically hardwired to be bad at investing. Our risk-averse nature basically guarantees that most of us will want to buy high and sell low the majority of the time. With trades so cheap and access to accounts so easy these days, those millennia-old instincts have an instant outlet, and this is not good for many investors.

Be a Wall Street Survivor

Don’t be one of these investors that plays right into the hands of the investment industry. Even though fees are lower, investment brokerage employees are still driving yachts (albeit maybe slightly smaller ones now). When you use low-cost trading to justify a hyperactive, instinct-driven investing style, your just eating into your meagre returns (which now can’t compound over time) and buying some rich dude a new Mercedes (regardless of how you do on the actual trade). Instead, take advantage of this competitive new market and save yourself a ton of investing fees over your lifetime.

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Firstly I’d like to apologize to Canadian readers because I couldn’t find any pictures of Canadian money growing on trees LOL.

Unfortunately, money doesn’t grow on trees and in the midst of the growing volatility and uncertainty that has plagued the global economy during recent years, the importance of compound interest has become more crucial than ever before.  It is the one aspect of personal finance that can lead to a luxurious retirement or a financial disaster.  Understanding compound interest and how it affects your personal finances is critical in the “survival of the fittest” of this challenging economy.

What is compound interest?

Compound interest is interest that builds upon itself. This means that if you invest $100 into a savings account that provides a interest rate of 5% annually (okay this is figurative, there isn’t any real savings account that will give you 5% annually!), you will have $105 by the end of the year. It seems like nothing, but by the end of the next year, however, you will have 110.25.  This is because 5% of $105 is 5.25.  With compound interest, the interest rate is applied to the full amount of the previous balance, including the amount that was previously added by the interest rate.  When you begin to understand this simple concept, the importance of compound interest rate starts to become clear.

Where can Compound Interest work against you?

Credit card companies use compound interest rates to their advantage in advertising seemingly low rates (although I can’t say 19.99% is low).  Each month, 1/12 of the annual interest rate is applied to the remaining balance on your credit card.  The next month, that same portion of the interest rate is reapplied to the previous balance.  In the end, you will typically pay a higher percentage of your original loan than the advertised annual percentage rate (since the interest isn’t actually charged on an annual basis).  As a result, a large portion of your monthly payments will actually begin paying off the interest on your loan rather than just focusing on your total balance.  This is why so many people find it nearly impossible to get out of debt.

Where can Compound Interest Work for you?

Enough about the dark side of compound interest, let’s talk about the good side- Compound interest can also be used to your advantage.  As mentioned before, if you invest a certain amount of your money into a savings account (or other investment vehicle) that accrues interest, that interest rate will be applied every year (or whatever time frame your account was set for) in addition to the interest that was already gained.   This money grows after the bank actually borrows some of your money, invests it in a loan, and then provides you with an interest rate as part of your share in their return on the loan’s interest rate.

It is super important to note that compound interest is more effective in the long-term.  That is, you won’t be seeing any glorious results in one years time.  I’m talking about 10 to 20 to 30 to 40 years until you see some impact (especially if your interest rate or rate of return isn’t very high).  If debts are paid off quickly, the total percentage of interest paid will be much lower than if years are spent to pay it off.  The same is true for investment plans.  If the money deposited in an investment account is withdrawn before its 5 year anniversary in most cases, the interest earned will not reflect a significant change.  However, if the interest is allowed to grow for a number of decades, it can provide a very lucrative retirement fund.  Timing is one of the most important aspects of compound interest, which is why investment accounts are a highly recommended choice for young people.  The following chart details a $1000 investment over a twenty year period with varying return on investments (from 5-10%).

So start young and start now!!!  And don’t withdraw!  This magical compound interest can work for you with dividend stocks too, provided you don’t sell them.

Readers, do you “do the” compound?  If so, when did you start? 

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Hi all! Here’s another great staff post from Teacher Man- here’s his intro if you want to read a little more about him: ” I go by the pen name “Teacher Man” due to the fact that I recently graduated from university and am in my second year of teaching high school.  About 9 months ago my partner and I started a website called My University Money.  It is aimed at helping young people (with a specific focus on post-secondary students) and just talking about financial and student lifestyle issues in general.”

With so many personal finance bloggers and newspaper columnists out there these days touting the benefits of index investing it’s fairly likely you have come across the term at some point. Basically, it is a deceivingly simply investing method that allows investors
to set up the equities portion of their investment portfolio in about five minutes, and then forget about it. In addition to this ease-of-use factor, this low-maintenance style of investing will actually beat out traditional mutual funds the vast majority of the time (at least 95% by most estimates). So what is this magic investment called an index fund?

An index fund is like a mutual fund in that it takes your investment dollars and spreads them out over multiple companies. Where a mutual fund will hire an “expert,” or a team of them, to pick specific companies to invest your money in, an index fund will do nothing more than invest your money equally across the whole market it is tracking.  There are now index funds that will spread your investment dollars out across the entire world market, or ones that will follow a certain stock exchange such as the NYSE, or the TSX. In other words, an index fund is a way to lock in your investment return at exactly the market average minus relatively small investment fees.

So Just How Good Are These Investment Experts?

It initially appears ridiculous to believe that the vast majority of investment experts that work in Toronto and New York cannot do better than the market average; however, the statistics don’t lie. A recent study that appeared in the New York Times looked at 452 domestic mutual funds (taken from the Morningstar database) and their performance over the last 20 years. When compared to the Standard & Poor 500-stock index (more commonly known as the S&P 500), only 13 of these mutual funds beat the average returns of the index once their fees and tax disadvantages were taken into consideration.  Those numbers are worth repeating: only 13 out of 452!

When Did The Definition of Expert Become Below Average?

There are a few factors responsible for this eye-popping statistic. One of the primary reasons many mutual funds do poorly is because their managers are extremely well paid and are slaves to the most recent quarterly reports. The tried-and-true method for being able to cash huge paycheques for as long as possible is to simply try and mimic the index itself. If an investment manager follows this strategy, they know that they will never have a period of time where they are too far below the average, and consequently they will get to keep their jobs and their yachts. The next question one might ask is, “If so many managers are just trying to be average, why do mutual funds almost always return less investment income to investors than index funds do?” That answer is actually fairly straight forward, it’s a little thing called management fees. You see those yachts that the Wall Street-types have are paid for with the dollars you invested in their mutual fund, and the subsequent returns they produced. There are all kinds of different fee structures, but 2% is fairly average in the USA, and some hedge funds with big name managers charge well over 10%. Canada actually has the absolute highest mutual fund management fees in the world – yay, we’re number one! (Y&T’s note: HA, we’re finally #1 in something!  No more underdog status!) So to recap, if most managers are simply aiming to get average results, and then charging you 2%+ to do just that, then of course they are going to give investors a much lower (2% a year makes a huge difference over long-term investing periods) rate of return than they otherwise would have gotten.

The other consideration this study focused on was the tax inefficiency associated with many of these mutual funds. Without going into too much excruciatingly boring detail, it is generally accepted that because stocks are being bought and sold constantly within
mutual funds, there are all kinds of taxes and expenses incurred that wouldn’t be under most index investing plans. When your returns are constantly being limited because of fees and taxes, they cannot compound over time, and like Einstein says, “The most
powerful force in the universe is compound interest.” That’s from the guy that created the atomic bomb! While the study concedes that owning mutual funds within a tax-advantaged account would have allowed a few more funds to slip into the “beat the index” category, the overall results would be very similar. The article goes on to state that it would be nearly impossible to predict which funds would beat the index ahead of time, so it is effectively useless to try using past results.

Efficient Market Theory

The whole idea of index investing springs from something called efficient market theory.  What this theory basically claims is that the market is perfectly efficient. This means that if you invest for long enough and make enough trades you are almost guaranteed
to return average results. It takes the whole idea of a competitive market to its logical conclusion: that whatever the price of a company currently is, that is almost exactly what it is probably worth. For investors, the logical conclusion is that you stand almost no hope of “beating the market” long-term. If you can’t control what the market will return, the only thing left to control is the fees you pay; therefore, logic dictates that those who pay the lowest fees will come out ahead over time, and probably sooner rather than later.

Criticism of Index Investing

There are definitely some holes in efficient market theory. Anyone who has looked at the stock markets at all over the last five years can tell you that there is no way they are perfectly logical. Now more than ever, markets can go soaring or fall through the basement due to a rumour, or a slightly lower-than-expected quarterly report. Many index investing converts have modified the theory to claim that while short-term markets may fluctuate illogically, in the long-term stock prices will average out because market fundamentals will ultimately bring a stock back to where it is supposed to be. Another relevant criticism is that the more people that are out there index investing, the less rational the market will become by definition. What supposedly makes the market completely efficient is the fact that there are people out there pouring over every little press release and balance sheet to determine the true value of companies. If people stop doing that, then the market ceases to be perfectly efficient. Finally, studies show that while index investors almost always do better over the long-term, talented traders (the guys who run hedge funds) do substantially better in range-bound markets where the overall index stays more-or-less the same, but certain sectors or stocks will go up or down considerably. Most people believe this will describe North American and European markets for the next few years.

Is Index Investing For You?

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