Investing


Accumulating dividend income through a DRIP may seem like a slow approach to investing at times.  Sticking to the plan is tough, especially in today’s world where we are constantly bombarded with media and business news.

To help me stay motivated I put together a tangible example of how much dividend income can grow in a few years through a DRIP.

Example of holding 200 shares of BNS through a synthetic drip:

  • 03/30/2007 – 200 shares, $84 income each quarter
  • 06/28/2007 – 201 shares,  $90.45 income each quarter
  • 09/28/2007 – 202 shares, $90.90 income each quarter
  • 12/28/2007 – 203 shares, $95.41 income each quarter
  • 03/28/2008 – 204 shares, $95.88 income each quarter
  • 06/07/2008 – 206 shares, $100.94 income each quarter
  • 10/03/2008 – 208 shares, $101.92 income each quarter
  • 01/02/2009 – 210 shares, $102.90 income each quarter
  • 04/03/2009 – 213 shares, $104.37 income each quarter
  • 07/03/2009 – 216 shares, $105.84 income each quarter
  • 10/02/2009 – 218 shares, $106.82 income each quarter
  • 12/31/2009 – 220 shares, $107.80 income each quarter
  • 04/01/2010 – 222 shares, $108.78 income each quarter
  • 07/02/2010 – 224 shares, $109.76 income each quarter

From this one example we can see how quarterly income increased from $84 to $109.76 (about 30%) in about three and half years.  Not a bad raise for very little effort!  Over this period we would have accumulated $247.18 of cash as well since the synthetic DRIP only purchased whole shares.

The example points out key factors that drive performance in a DRIP:

  • Sticking to the plan even during tough times.  The financial crisis during 2008 and early 2009 impacted the share price, allowing our DRIP to purchase a larger number of shares
  • Selecting companies that consistently pay (and increase dividends).  BNS increased dividends in 2007 and 2008 and continued to pay dividends during the financial crisis

Note that I’ve ignored changes in share price in the example as the purpose is to focus on generating a continuous passive income stream.  The exact numbers from a BNS DRIP may also differ slightly as brokers may require several days to process the dividend payment and share purchase (I simplified the example by using the closing share price on the dividend dates).

Even if you don’t own BNS, I hope seeing tangible numbers from a DRIP example helps other DRIP investors out there stay the course as well!

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.

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BlackRock iShares recently changed several of their ETFs to a monthly distribution.  I don’t know the full details of the reasons behind the change, but I imagine that iShares is trying to attract people looking for monthly cashflow to meet their living expenses (retirees, etc.).  Unfortunately, the change comes at the expense of small investors still in the accumulation phase of their investing life since a monthly distribution means that a larger amount of shares will be needed to satisfy most synthetic DRIPs that require at least one whole share to be purchased.

For example, before the change to a monthly distribution, a holder of 100 shares of XDV received $19.25 the last quarter (June 2010); enough to purchase 1 whole share through a DRIP.  After the change, the same investor received $9.64 for July’s monthly distribution, not nearly enough to DRIP a full share at the current share price of $19.05.

To rectify the situation I believe iShares should issue a one-time 3 for 1 stock split for the ETFs impacted by the change in distribution pattern (since a change from quarterly to monthly divides the distribution by 3 on average).  The split will not impact investors looking for monthly income and will help those looking to accumulate more shares through a DRIP.  iShares will also benefit since the distribution will be reinvested in their funds (instead of sitting in cash in the investors accounts, etc.)

If anyone agrees, please let me know how we can convince iShares to issue a 3 for 1 split!  Hopefully they will listen to the little guys!

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.

Friday’s Financial Post featured an excellent article about a family in Alberta and the impact of falling real estate prices.  The family featured in the story “upgraded” from a condo to a house but kept the condo as an investment property.  The overall theme of the story is that falling property prices (in Alberta) is threatening to wipe out the family’s down payment.

This story highlights several problems that I presume to be very common amongst many Canadians in the wake of the real estate boom (or bubble as some would call it).

  • Failure to Evaluate Their Condominium as an Investment – The condo is currently generating $1,100 in rent but costs $1,800 to carry.  If the family looked at the cash flow, potential vacancy, CAP rates and rate of return on their “investment” they likely would not have kept the property.  It’s obvious that they were speculating on property prices continuing to increase.  Unfortunately, this family is probably not unique, I’ve had many conversations with individuals considering real estate investment who have no idea what “CAP rate” means nor have they put any thought into how much of their finances would be tied up in local real estate.  They are simply interested in real estate because they hear of so many other people making substantial sums of money.
  • Over Leveraging (Not Having Sufficient Down Payment) – The family purchased the $375,000 house with a $30,000 down payment.  At approximately 8% (equity) a small change in property prices has eroded their equity.
  • Belief That Real Estate Never Goes Down – The real estate boom of the past decade has created a generation of individuals who blindly buy into the “real estate never goes down” marketing.  I find it interesting that most of these same individuals would most likely agree with the rule “what goes up must come down”.  Logic dictates that only one of those two statements can be true.

It is encouraging to see that the family is willing to lower their asking price to sell the properties (the article indicates that they need to relocate for other reasons).  It seems that they have learned their lesson and will hopefully be able to start over without going into negative equity.  Others in the same position may be tempted to hold firm only to see the market drop even further.

Readers – what are your thoughts on this couple’s situation?  Is this a scenario that you hear all too often in the wake of this real estate bubble?

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.

Preet Banerjee (Where Does All My Money Go.com) had a great post yesterday about BMO’s plan to rename several of their index mutual funds.

BMO’s plan to me is a sneaky way to cash in on the continuing move by investors towards ETFs.  Preet makes a great point  that this will just add confusion.  Having “ETF” in the name of a mutual fund will make the simple concept of ETFs more complicated for new investors.

I encourage you to visit Preet’s blog…

Inspiration and education can come from unexpected sources. I was recently playing the game Mafia Wars on the iPhone 3GS and realized that it was an excellent reflection of important savings and investment concepts.

In the real-time simulation your character is a mafia boss looking to amass a fortune and grow the size of the mafia. Each hour you receive income from the mafia’s various business and have the option to spend the income on either investing in more businesses (to increase hourly income) or purchasing fancy cars, weapons and other fun stuff.

It was very interesting to see that the strategy needed to be successful in the game paralleled many important “rules” of personal finance:

Start Investing Early and Take Advantage of Compounding – Instead of purchasing fancy cars and weapons right away, start the game by re- investing the income in more businesses. The amounts may seem small at first but adds up over time.  By purchasing more businesses every hour you will see your income grow.  This is similar to investing in the real world where income from dividends may seem tiny at first but DRIPing over time can grow income into a substantial amount.

It’s Not Always Exciting in the Beginning – It isn’t very exciting re-investing the income every hour. The game is much more fun when you attack rival mafias and rob banks.  However, patience in the early stages of the game is a key to long-term success.  This is very similar to investing where the early stages aren’t always exciting and it is difficult to see the future rewards.  It may be tempting to trade in and out of stocks for the thrill; but this usually is detrimental to long term success.

Spend Less Than You Earn – The fancy cars, equipment, etc. all have maintenance costs that are deducted from your mafia’s hourly income.  If you spend more than you earn eventually you will have to sell some of the cars and equipment at a loss.  Only buy what you can afford.

Be Ready for Emergencies – You may incur unexpected medical expenses or need to replace cars and equipment when rival gangs attack.  Make sure you keep some cash on hand to pay for these unexpected emergencies.  In your real financial plan, always maintain several months of expenses in cash to handle unexpected situations.

Playing the game really helped bring the rules of investing and savings to life.  Instead of just reading articles and books I could see how the numbers and figures added up over time (albeit in a simulation).

We often hear about how unprepared and uneducated individuals are about their personal financial situation.  Hopefully, the younger demographic playing games like Mafia Wars will be able to take some of these concepts and apply them to their personal financial plans!

Readers, have you come across unexpected sources of investment inspiration?  Please share!

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.

The introduction of Tax Free Savings Accounts a couple of years ago is one of the best programs to be introduced for Canadian investors in some time.  After all, anything to reduce the amount of taxes we pay is a good thing.  There are numerous online discussions on various strategies for the TFSA: emergency cash savings, RSP alternative, dividend income growth, high-growth speculation, etc.

In the first year I didn’t put much thought into the account and threw the deposit into a high rate savings account.  However, recently inspired by various online dividend growth blogs and Lowell Miller’s “The Single Best Investment”, I’ve decided to establish my TFSA as a dividend income compounding machine.  My plan is to buy consistent dividend payers (or dividend stock ETFs), reinvest the income through synthetic DRIPs and take advantage of my 15 to 20 year time horizon to let compounding do its magic.  To start I’m looking at the following stocks:

  • Emera (EMA)
  • Fortis (FTS)
  • iShares Dow Jones Canada Select Dividend Index Fund (XDV)*

* iShares recent switch to monthly distributions for XDV may impact my decision on this stock as the distributions may not be enough to DRIP a whole share

A big advantage (apart from no tax) of using the TFSA is not having to track the adjusted cost base as dividends are reinvested. Over time, I’m hoping that consistently adding to the account each year and reinvesting the dividends will help me supplement my income ~15 years from now.  We’ll see how it works out.  I’ll post updates from time to time.

What are your thoughts?  Are there any readers out there using a similar strategy for the TFSA?  I’d love suggestions.

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.