It's a two-post week this week. I have to admit; golf season has started so time in the office is a little more sacred, meaning I could slip out a half-hour early here and there for a 4:30pm tee time! That leaves less time for posting and more time for hitting balls into the woods.
I wanted to talk about stocks that pay dividends this week. I know there are a plethora of financial products out there that are great tools for diversification and give you exposure to different parts of the world. That said, we have some of the world's best companies right here in Canada and it is very possible to set up a portfolio of Canadian stocks that pay nice dividends. You can do this by paying an up-front brokerage commission too, which means no annual management fees. You just set it and forget it.
Let's first review what a dividend is: we will use the CIBC as an example. If you buy shares of CIBC, you will receive a dividend every three months. Right now, that dividend is set at $3.48 per year or $.87 each quarter. This $3.48 is a percentage of the profits that CIBC makes that they don't choose to reinvest into their business. They would rather pay out their shareholders and let them decide what to do with the money.
Now let's look at some ways we can take advantage of companies that pay dividends:
DRIPs
Many Canadian companies offer their shareholders the option to reinvest their paid out dividends, often at a discount to the market price of the shares. If you don't rely on the income stream from your dividends, then this is a great way to grow your savings. If you assume that a dividend is 5% of the company's stock price, as an example, then by reinvesting the dividends, you could add 50% over ten years, assuming ZERO growth from the shares themselves. As you can see, that's a great way to save money, without having to add more of your own funds to the pot. DRIP = Dividend ReInvestment Plan.
SWPs
Another route to take if you hold shares at a brokerage is taking your dividends each month and having them electronically transferred from your investment account to your bank account. This is very popular with retirees who would use their dividend income to live off. Usually twice a month, the dividends that have been paid into the account from the stocks, (or interest if they are bonds) are 'swept' out of the investment account and transferred to the bank account. It's that easy. SWP = Systematic Withdrawal Plan.
Piece of Mind
I think the nicest part about dividends is that they help ease the pain of bad markets. If you know you are going to collect your dividends every month or quarter, you are less likely to care what your stocks are doing. That can help you stay invested, when it might otherwise feel difficult. If you sell, then you don't get your dividends anymore and you might miss the upswing of the next good market.
Tax Treatment
Dividends are nice too because our government offers preferred tax treatment over regular income. This results in about half as much tax to pay on your dividend paying stocks, compared to your bonds. So if you have a stock that pays a dividend equal to 5 % of the share price, you'd have to find a bond that paid 7.5% interest to get the same after-tax income. With interest rates as low as they are today, 7.5% bonds are not easy to come by.
Hopefully you see how nice a portfolio of good dividend paying stocks can be, if managed properly. You just buy the stocks, make one or two changes a year and collect the dividends. Life is good. Have a great week.
Wednesday, May 5, 2010
Week 15 - Group RRSPs, etc.
I wanted to touch on the options that you might have for saving money at work. I don't think that enough people understand how good some companies can be at helping us save money.
If you work for a company, see if they have a profit sharing plan, a group savings plan, matching plan, etc. There could be an opportunity to make great returns on your investment dollars, regardless of how they actually are invested.
Take for example company X. I will use numbers that I know exist, so you can get a real idea of how some companies do things. Company X has a program where employees can set aside a certain dollar amount from their pay cheque, and X will add 50% to that dollar amount to a maximum of 6% of your pay, which is then invested in X's company stock. So let's say you make a good living - $100,000 per year and you set aside the maximum: 6%. That means you have saved $6,000 of your own money each year as a start. Now remember, X matches half that amount, which means you are now up to $9,000 at the end of the year. Think of this as a return on an investment. If you DON'T do this and choose instead to save money on your own, you would have to make a 50% return in one year to just match that plan!! No chance.
So let's say you work for the company for ten years and do the same thing every year. At the end of ten years, you would have $90,000 saved up, assuming zero growth in the company's stock price! But let's say your company X is a good quality company and the stock might actually grow over that time period, say 5% per year. At the end of year 10, you will now have more than $118,000 set aside. And this only cost you a total of $60,000. That means your annual rate of return on the portfolio is better than 11% per year. And that's if the stock only returns 5% and doesn't play a dividend!
The bottom line is that most companies have some kind of profit-sharing plan or group savings plan. You might have to keep your money there for a certain time period before you can access it but it's still well worth it. I would advise you to look into this before you consider doing any saving outside the company.
Often, the company isn't publicly traded so you can't buy stock in the company with your contributions. In this case, the company will outsource the money to external money managers, who can often do a better job than 5% per year. They are normally in the form of mutual funds though, so you will pay fees.
It's a small post this week because everyone's plan is different. Look into yours and spend some time on the phone with your HR department to see how your plan can benefit you.
If you work for a company, see if they have a profit sharing plan, a group savings plan, matching plan, etc. There could be an opportunity to make great returns on your investment dollars, regardless of how they actually are invested.
Take for example company X. I will use numbers that I know exist, so you can get a real idea of how some companies do things. Company X has a program where employees can set aside a certain dollar amount from their pay cheque, and X will add 50% to that dollar amount to a maximum of 6% of your pay, which is then invested in X's company stock. So let's say you make a good living - $100,000 per year and you set aside the maximum: 6%. That means you have saved $6,000 of your own money each year as a start. Now remember, X matches half that amount, which means you are now up to $9,000 at the end of the year. Think of this as a return on an investment. If you DON'T do this and choose instead to save money on your own, you would have to make a 50% return in one year to just match that plan!! No chance.
So let's say you work for the company for ten years and do the same thing every year. At the end of ten years, you would have $90,000 saved up, assuming zero growth in the company's stock price! But let's say your company X is a good quality company and the stock might actually grow over that time period, say 5% per year. At the end of year 10, you will now have more than $118,000 set aside. And this only cost you a total of $60,000. That means your annual rate of return on the portfolio is better than 11% per year. And that's if the stock only returns 5% and doesn't play a dividend!
The bottom line is that most companies have some kind of profit-sharing plan or group savings plan. You might have to keep your money there for a certain time period before you can access it but it's still well worth it. I would advise you to look into this before you consider doing any saving outside the company.
Often, the company isn't publicly traded so you can't buy stock in the company with your contributions. In this case, the company will outsource the money to external money managers, who can often do a better job than 5% per year. They are normally in the form of mutual funds though, so you will pay fees.
It's a small post this week because everyone's plan is different. Look into yours and spend some time on the phone with your HR department to see how your plan can benefit you.
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