Author: Mr. Cheap

Categories
Investing

Getting Started With Blue Chip Dividends

About a year ago I got really excited after reading Stop Working by Derek Foster. His basic idea is that you buy stable, well established companies that are leaders in their industries which have paid a regular increasing dividend for a long time when they’re on sale. You determine this by looking at the Dividend-Yield (which is basically the last quarterly dividend, multiplied by 4, divided by the share price). The Dividend-yield tells you how much of your purchase price you’ll get back annually (so a $100 stock with a 4% dividend yield would pay you $4 per year, $1 each quarter).

His idea is that these companies aren’t going anywhere, their share price should increase over time, and since the dividends increase you can basically live off of the dividends and use the increases to compensate for inflation. Apparently Derek very aggressively built his portfolio, and he is now retired in his early 30’s with a family of 4.

After reading his book and looking at some stocks I was excited to buy Merck and General Motors. The problem with this strategy is that these companies will only have a decent dividend-yield after there is bad news, so everyone will tell you you’re crazy to buy (which could be considered another good reason to by – they call this contrarian investing). At the time, the bad news scared me off (GM was losing money every quarter, and Merck has a lot of its patents expiring soon with no other popular drugs in the pipeline to replace them).

I never gave up on the strategy, and have recently begun mulling it over again. With the new Canadian tax laws giving very favourable tax rates for dividend income combined with the abysmally low interest rates currently (great news for mortgages, not so great news for GICs), I finally bit the bullet this week and put $6773.77 into the account and have bought 242 shares of Rothmans (a tobacco company) for $5349.87 (including a $20 trading fee, which gives a dividend-yield of 5.45%) and today I bought 65 shares of Bank of Montreal at $68.88 (which would give me a dividend yield of 3.95%) for $4477.20.

For the mathematically astute, yes 4477.20 + 5349.87 > 6883.77. I’ll discuss buying on margin in a future posting.

So far since buying the Rothmans its gone up 5% (so I’ve made a cool $270). Share prices for dividend stocks are somewhat unimportant if your following a buy-and-hold dividend strategy (as you only really care how much you’re getting per quarter – if you’re not planning to sell, the current price doesn’t matter).

One modification on the general strategy that I’m considering is to sell any stock that drops to a dividend yield of 3% or less. This would mean that either they’ve cut the dividend (which would suck if you’re counting on the dividend payments for your retirement) or the price has gone really high (which it might make sense to sell at that point and buy stocks with higher yields). Most people who write about this strategy seem to favour a hold-forever outlook, so I’m not totally committed to this approach yet.

 

 

Categories
Real Estate

Getting Started with Investment Real Estate

In Fall 2006 I was flipping through “The Automatic Millionaire Homeowner” by David Bach and it forced me to re-think my perspective on real estate as an investment vehicle.

Previously I’d always viewed real estate as intensely speculative. You hear about the areas where properties go up in value 36% in a year, but when you view it as a whole, I was very unimpressed with the returns (I don’t buy 11% average returns, I suspect 3-4% is more realistic). Bach gives a list of the 5 ways you get income from real estate, and taken as a whole it seemed a lot more appealing. The one that really convinced me was the idea of leverage. If you can get a property that’s cash-flow positive (makes money every month after all expenses are paid), the apprication is basically increased the lower your downpayment.

E.g.: You buy a house that’s worth $100,000. You make a downpayment of $10,000 and the income equals the expenses. After a year if it goes up in value by 3% and you sell it (for $103,000), you now have $3000 more then you started with, a 30% return.

Obviously this is an overly simplistic example (in real life the transaction fees to buy and sell would cost far more than the $3,000). This concept is the core of “other people’s money” that the get-rich-quick low-lifes love to chant about. Leverage is a very powerful concept, and although it can be dangerous, real estate is one of the easiest ways for normal people to use it (trading on margin would be the other I guess).

My plan was to start small. Instead of getting a 93 unit building, I decided to get a condo near the Subway line. I would get the cheapest place I could find, rent it out if I could, and live there myself if I couldn’t. It seemed like the best way to “hedge my bets” if landlording didn’t work out for me (be willing to live there myself so I wouldn’t have to turn around and start trying to sell a couple of months after buying. I realized from a strictly dollars-and-cents perspective, condos aren’t the best investment, but they have a lower price tag, and it seemed like a good way to learn (with training wheels firmly attached).

Luckily I had a friend who owned multiple buildings (from Condo townhouses up to a recently aquired 8-Plex) and he was a great source of information. I also spent tons of time in Chapters/Indigo reading the Real Estate Investing books (for free).

By chance, my girlfriend got a notice under her door for a free seminar for first time buyers (clearly a sales presentation for a Real Estate Agent). I went to that, connected with an agent, and started my house hunt…

(continue to part 2)

Categories
Personal Finance

A week in the life of…

I got into real-estate (as a first time buyer and invester) last year, and had intended to blog my way through the process. I’ve now reached the point where I’ve competed the process (I own a condo with a tenant in place), so its probably time to start the blog .

Since the first real estate adventure is complete, I think I’m going to try and take a wider perspective and actually blog about all my money adventures (not just landlording).

Money is interesting in that it means such different things to different people. I hate being forced to do boring tasks and having to grin and take it when idiot bosses throw their weight around. For me, money is freedom and security, being able to do what you want, without having to worry about ending up eating dog food on the street.

This this end, like many other, my ulimate goal would be to have passive income that equals my living expenses and then have complete control over how I spend whatever time I have remaining on this planet however I want (probably reading and drinking coffee would take up a large part of it).

I consider passive income as money that comes in that doesn’t require very much ongoing effort. I like to think of my condo as a passive investment, even though I had to replace the dryer duct recently, simply because once I’ve done maintenance work on the condo, I hope that there will be a long period of time where I just cash rent checks and pay the bills (every property owner’s dream).

To give some numbers, I do computer contract work and charge $40 / hour for full-time, longer-term (3+ months) work. This works out to about $80K / year income before taxes (and being self-employed I can deduct a few work related things).

For the last week, I’ve been carrying a notebook with me everywhere I go and jotting down what I spend. This morning I plugged the numbers into a spreadsheet and have hopefully determined a rough cost-of-living estimate for myself.

For my fixed monthy costs:
Rent – $440 (1/2 of $880 rent paid by gf on 1 bedroom apt)
Cable – $40
VOIP – $22.45
locker – $12.50
phone+internet – $40.25
transit pass – $99.25
Cleaning – $45
Total: $699.45

Over a week, my variable spending was $396.26, which works out to a total monthly “cost of living” of about $2,348.26. I think this was actually a fairly representative week as I sent my mother some flowers for mother’s day, ate out at a pricier restaurant and had a night on the town, bought a book, etc. Hopefully if anything most weeks should be cheaper (which I’m hoping to keep tracking and determine).

The thing that blew my mind was that I’m spending $195.21 weekly on food (groceries, lunches at subway, dinner out once in the week). That seemed reasonable to me, until I did some hunting and apparently the average Canadian HOUSEHOLD spends $150 / week on food! I found some US numbers, and apparently single men spend the most on food weekly, and they spend on average $60 / week.

I was always convinced that it would be tough to eat much cheaper than I do, but apparently some people are doing it in a major way. I’ve always felt $7 is a reasonable value for a Sub (try buying deli meats, bread and veggies at the grocery store and your total will hit $7 in a hurry!) and friends always tell me you can eat way cheaper than that at home – I guess they’re right.

I lost a ton of weight (about 70 pounds), so I’m not too eager to start eating cheap and badly, but I definitely want to figure out a healthy way to spend around $60 / week on food (ideally if it was easy too that would be even better :-).

Any ideas?