Author: Mike Holman

Last week the Toronto Star broke the shocking news that Derek Foster had sold all his equity positions and was sitting in cash as of Feb, 2009. Currently he is selling put options on various stocks to make some money – a strategy he proposed in his third book Money for Nothing.

For those who don’t know who Derek Foster is – he is the self-proclaimed “Canada’s youngest retiree”, leaving the workforce at age 34 after accumulating a good-sized portfolio of dividend stocks.
His first book “Stop Working” was a pretty good read – although his math is suspect, he espoused a somewhat conservative dividend investing strategy and is also a big proponent of frugal living.  One of the keys to his strategy was to buy and hold stocks “forever”.

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To answer the title of the post – I don’t think dividend investing is dead – it’s not even “sleeping”.  Here are some thoughts:

Derek Foster wasn’t solely a dividend investor

Although Derek owned a number of traditional “dividend aristocrat” type stocks – he also owned a lot of income trusts which are far from dividend stocks.  Most of them are mid-cap (or smaller) companies that pay out a lot of return of capital.  He also got into a lot of option trading as well – which is clearly not dividend investing.  I think if he had stayed with more traditional dividend stocks, he might have had more luck staying in the market.

Diversification is good

I wrote a post a while back called “Ignore the last 10 years” which contained probably the best advice I’ve ever given on this blog.  I didn’t listen to my own advice and I doubt anyone else did either. 🙂  The problem with relying on a single investment strategy is that if it doesn’t work then you are screwed.

The last 10 years or so (ie 1997 to 2007) have been fantastic for dividend investors – especially in Canada.  Over the last year or two – a lot of investors piled into dividend stocks because they had done so well in the recent past.  This was in part because of Derek’s first book which another blogger has named the Foster effect.  This is a recipe for disaster as anyone who has invested in the Canadian banks knows.

Yes, their dividends haven’t been cut but it is no fun watching your investment sitting at 30-40% of your purchase price – dividend or no dividend, that is a bad investment.  We Canadian bank owners have been very lucky compared to the US bank owners though – I’m not sure if there is a single US bank remaining that hasn’t gone out of business or is owned by the government.  It is amazing how socialist America is becoming.

Derek didn’t follow the 4% rule.

The 4% rule is a basic guideline for how much money you can safely take out of your investment portfolio.  I don’t have the exact details but from what I understand – he was taking more than 4% which increases the risk that he will run out of money (or more likely – will have to change his strategy at some point).

Derek didn’t have much of a buffer

It was clear from reading his first book and several interviews that Derek knew how to live cheaply.  The problem with living cheaply however is that you don’t have anything to cut if times get tough.  Derek’s situation is hard to analyze because he made some money from his books.  Another big factor is that he is still quite young (late 30’s) so it’s not hard to imagine that he could easily get a job of some sort to help pay the bills which might mean that a big safety buffer is unnecessary.

Conclusion

Derek is doing fine – his strategy might have had a big downturn but he is a pretty smart guy and will do ok.

Dividend investing is still a perfectly valid strategy – but like any strategy you shouldn’t rely on it 100%.

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The hosting problems we’ve been having lately are finally over – I’ve moved the blog from Dreamhost to Media Temple.  I don’t normally blog about bloggy stuff but I know there are a lot of bloggers who read this site who might find this interesting.

First of all I’d like to thank everyone who helped out with the blog migration and also to many others who offered to help.  I really tried to do this on my own – although painful, it was a good learning experience.  As a self-proclaimed “serious” blogger – I feel it is in my best interests to learn as much as I can about all the different aspects of blogging – even if I don’t want to!  I’m still not sure if I would have been better off hiring someone like Blogcrafted.com (mentioned below) to do it for me given the amount of time and aggravation it was.

Two people who helped out a lot  were:

Finance Freelance Life – she also runs BlogCrafted.com which is basically a blog consulting company.  Some of the services she provides for very reasonable rates are:

• Migrating blogs from one host to another (like I just did) and from hosted platforms (blogger, wordpress.com) to self-hosted (wordpress on a host).
• Changes to your theme or setting up and modifying a new theme.
• Complete new blog setup on any platform.

Pinyo – this guy has a great website at moolanomy.com as well being the brains behind PFBuzz.com which is a great place to find good blog posts.

Some more hosting stuff

For anyone who doesn’t know – “hosting” refers to the server where the blog material and code is kept – there are lots of different companies around that provide this service and the main differentiators are:

1. Price
2. Service – how quickly do they respond to help requests and how knowledgeable are they?
3. Performance – is the blog slow or completely down at times?

How did I decide on the hosting company?

I narrowed down the possible hosting companies to LunarPages and Media Temple.  Both companies came highly recommended and I know quite a few good sized bloggers who use either.  There are many others out there which I’m sure are comparable but I tend to go with recommendations from other bloggers.

Lunar Pages has what I think is the best value anywhere with their shared server hosting – for only $4.95 per month (if you pay for a year) this is as cheap as it gets.  The great thing is that they are very reliable and have good tech support.  I think the shared server option is best for most blogs – you won’t have to upgrade until you get to at least 2,000 uniques per day or a lot more.

Media Temple has a dedicated virtual server option which is quite good for $50 per month.  This is a lot more expensive than Lunar Pages so not only do you need significant traffic – I would suggest a minimum of 2,000 uniques per day, you also need the revenue to support the costs.  One thing to note is that if you pay for a year up front – the cost is only $500 ($41/month) – not so bad.

I was on the fence for quite a while about which company I should go with but eventually I choose Media Temple because I thought I might have too much traffic for Lunar Pages shared server.

My advice for anyone looking for a host is to go cheap until you know you are ready to upgrade.  Both Lunar Pages and Media Temple have cheaper shared server options all the way up to expensive private server options so you don’t necessarily have to leave the company to upgrade (or downgrade).  I made the mistake of upgrading my Dreamhost account to the virtual private server a long time ago thinking that more traffic and money would be soon to follow.  In the end I think I threw a couple of hundred bucks away.  I should have just stuck with the shared server.

Why did I leave Dreamhost?

The reason I decided to leave Dreamhost was mainly because of an incident several weeks ago where the blog was completely down.  I put in a support ticket (they don’t have phone support) and it took them 22 hours to respond.  In my opinion this is unacceptable and was enough reason to start thinking about switching.  The second reason was that the quality of the support was very poor – in the incident the support person didn’t have a clue what was wrong and thought it was my themes.  I knew this was ridiculous because both of the themes I use are very common (Thesis and Grid Focus) and I never heard of anyone else having problems.

To be fair, I did use Dreamhost for 1.5 years without any incident so they are not bad – it was only when I needed help quickly that they failed.  Dreamhost is no bargain either – I think the monthly base charge was $11 per month and I had a virtual server option which was a minimum of $15 on top of the base rate (you can set it to higher rates for more juice).

What was the problem?

In the end I believe that removing the gravatars from the comments was the biggest factor in getting the blog running properly again.  I have one post that has a ton of traffic as well as comments so all those extra calls were slowing things down dramatically.

No sooner had I labeled the head of the CAW as a dreamer for thinking that he could reach a deal with GM that didn’t involve some sort of wage and pension reductions, then lo and behold – that’s exactly what he did.

[edit]

Apparently the original story was wrong and the union did give some wage concessions – I guess I should have waited a while longer before posting this. 🙂

According to this Globe article – the deal reduces the total compensation (wages and benefits) by about $7 per hour to $63/hour.  This doesn’t seem all that dramatic but it’s a good show of faith by the CAW.  I suspect they will have to give up more in the future but the real cost savings will be in head count – as in a lot less of them.

[end edit]

My first thought was why the heck did GM agree to this deal?  It seems quite obvious to me that significant salary cuts are needed – both in hourly wages and a reduced work force.  It could be just one more example of how GM (and the other car companies) are incapable of negotiating properly with the unions but I think maybe some of these factors might also have been at play:

• This deal was made just to get the bailout money.  The companies and unions have to show some serious money savings in order to qualify for the bailout so they put together a deal which they feel is the “minimum” necessary.  If I was in charge of the bailout money – this deal wouldn’t get a dime.
• Given the worsening financial situation at GM, this deal might not mean much if they file for bankruptcy in a few months which I think is going to happen sooner or later.  Even if they don’t file – financial conditions in a few months might mean this deal becomes irrelevant anyway.