The Loonie Bin: Dividend Investing 101: The Magic of Dividend Stock

The Loonie Bin: Dividend Investing 101: The Magic of Dividend Stock

Dividend Investing 101: The Magic of Dividend Stock

My last post was about the rules I follow when looking for dividend stocks to invest in. It’s impossible to pick the perfect company, but it has been a useful guideline for me since I started investing on my own and if it’s helpful to anyone else, then that’s a bonus.
I’ve covered many topics in my dividend investing series, but today I’d like to share with you what first attracted me to investing in dividend stocks.

I am a conservative investor by nature. I never gamble with my disposable income, and I would never take a large risk with my nest egg. To make a decent return on an investment, I knew there had to be some level of risk involved. GIC’s paid peanuts, and high interest TFSAs were a joke. When I first signed up for my TFSA, I was told I would be getting 2.5%. I opened it thinking it might help increase the amount I save by not paying tax on the interest. Well, within the same year they cut the interest rate to 1%. I could make more money collecting bottles then by leaving my money in the banks who, by the way, make hundreds of millions each quarter.

Why Mutual Funds Are A Joke
I looked at my mutual fund statements and they said I made 4% last year. What they didn’t show was the 2% they took off to manage the funds. So in actuality I made 6%. I never really made 4%, because the moment the stock market went down, the value of the fund was down and the 4% gain was non-existent. The value of mutual funds always fluctuate with the stock market, as shown in the diagram below.
The people who sold me mutual funds always said that when the stock market is down, it’s the best time to buy more mutual funds. I thought to myself “Why would I buy more mutual funds if they lose value at any given time?” It would be like buying more magic beans from the peddler because the first ones didn’t work. It went against all logic, but everyone I trusted invested in mutual funds, so I figured it was the way to go.

Behold The Power Of The Dividend

When investing in dividend stock, you are guaranteed a return on your investment as long as the dividend is maintained. If you invest in strong, blue chip companies, there is a very slim chance the dividend will be cut. In fact, there is a very good chance the dividend is increased which is what we are after.
When a stock like RIM (which does not pay a dividend) starts to lose value on the stock market, the people who invest in it become concerned and are ready to sell at the most opportune time before losing to much profit. This means they always have to be watching the markets and listening to analysts who are usually wrong all the time. And as the value of the stock decreases, more people sell driving the price down even further. That sounds like a lot of work and some sleepless nights for the average investor. The beauty of blue chip dividend stocks is, if the stock price goes down the yield increases as shown in the diagram below.
When the yield increases, the stock becomes very attractive to other dividend investors who will purchase shares as the stock price comes down, acting like a safety net in a way that drives the stock price back up. It’s proven that blue chip dividend companies rebound faster after market corrections and perform better over the long term then non-paying dividend companies: it’s all because of the increasing yield.
That is the magic of dividend investing. To me it seems logical to buy more shares of something that becomes more lucrative as the share price lowers. That is why I am excited about dividend investing and see mutual funds as only helping the people who sell them.
As a dividend investor, I sleep very well at night dreaming of little dollar signs that keep adding up in my pile of money. And when the markets are down, I get ready to buy more shares when everyone else is selling; their loss is my gain. I encourage people I meet who invest in mutual funds to read up on dividend investing to see how fun investing actually can be. Take control of your financial future!

4 comments:

Financial Cents said…

I love dollar signs dancing in my head as well. Any stocks you’re currently looking at?

I want to buy some more U.S. stock while prices are still moderately low, for my RRSP. I’m trying to save enough to either buy ABT or PG.

Addicted2dividends said…

I would love to snag BNS at a decent yield. I wish I was home when JNJ was yielding close to 4%. I’m going to wait and see what the end September brings, and possibly grab a few good buys before winter hits. Otherwise I’m going to keep saving the dividends to buy a larger position next year.

db said…

All mutual fund performance is quoted NET of fees…

Financial Cents said…

@Addicted – yeah, gotta love JNJ – no truer dividend aristocrat!

About EdR

Tant que les lions n’auront pas leurs propres historiens, les histoires de chasse continueront de glorifier le chasseur. (proverbe africain)

Posted on February 7, 2011, in training tips. Bookmark the permalink. Leave a comment.

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