I’ve decided to use this rainy afternoon to devote my time to one of my passion : investing! I love those rainy days, since I can lay on my sofa and just enjoy life like a cat!
While searching the web for interesting literature about the stock market, dividend growth investing or finance in general, I felt on Dan Bortolotti’s blog, “The Canadian Couch Potato”.
I thought “Hey! I’m Canadian! And… a couch potato for the day!! So, why not read his blog?”
Seriously, his blog is dedicated to index investing. This strategy is very interesting because it gives you the potential to achieve market return on your investments, which is not bad of a return since most mutual funds managers don’t even beat the market. And this is without doing all the hard work a dividend growth investor must do to achieve a potential similar return!
In his last letter to shareholders of Berkshire-Hathaway, even Warren Buffett recommended investors (and his estate) to apply that strategy :
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers. (Warren Buffett, letter to shareholders – 2013)
Warren Buffett is one of the “intelligent voices in the crowd”. Every serious investors should, in my opinion, listen to his wisdom. He’s one of the very few investors who has consistently beaten the market… Trust me, not a lot of people in this world has achieved that!
If you read enough of my blog, you should know by now that I could define myself as a mix of value investor and dividend growth investor. Maybe I will evolve over time. Everybody does… But, what I never said until today though, is that I also own index funds in both my RRSP and TFSA saving accounts… And I also own a defined benefits pension plan too… (but I hope to be able to retire before my eligible date of 65 years old…). So, I’m pretty diversified and part of my future retirement income is almost guaranteed. I can then afford to take some more risks with my other savings.
So, while I try to select and pick stocks on my own (I already made mistakes…), I also recognize that I am not a professional, that most professionals are already failing at beating the market and that I will most probably fail too.
But, investing my money, even if I don’t beat the market but get decent return, is already going to put me closer to (early) retirement than doing nothing. I know that to be motivated, I need some action. I think that picking dividend stocks is fun and rewarding. Plus, it keeps me motivated and occupied and forces me to save more then I used too to make sure I can attain my goals of retiring very early.
There is also an old adage saying that a bird in the hand is better than two birds in the bush. Dividends are my birds in hands! It’s hard cold cash available right away to reinvest or spend! It’s diversified passive sources of income that can supplement my current income and also act as an “emergency income source” in case I lose my job. So it gives me kind of security net!
Don’t misunderstand me, I love dividend growth investing. But I’m wise enough to understand that index investing can be as good or even a better strategy in the sense that it’s easier and more “passive” then dividend growth investing. And in the end, what really count is total return! Because, if I could have gotten 1 000 000$ of capital with an index fund strategy or 900 000$ with a dividend growth strategy, then I would have been better off buying index funds. At my retirement I could sell all those funds and invest them in dividend growth stocks and get a bigger paycheck at the end of the month!
Dividend growth investor often believe that they will beat the market on yield alone because of the yield on cost fallacy. What they don’t understand is that they are really getting a 3-4% income based on the current total market value of their shares. So, someone having the same capital could come in the market, buy the exact same shares and get the exact same income. Their yield on cost would be 3-4%…
The Canadian couch potato made it very clear in his series about debunking the dividend myths. I recommend every dividend investors to read his posts about dividend stocks to make sure they don’t assume things that are not right about their strategy. If people could beat the market on yield alone, it would be a known fact and everybody would do it!
[author] [author_image timthumb=’on’]http://quityourdayjob101.com/wp-content/uploads/2014/03/ID-10050051.jpg[/author_image] [author_info]Hi, my name is Allan. I’m the masked blogger. Like you I’m a modern slave, prisoner of a 9@5 job in Corporate America. They told us when we were young that we would live in a society of leisure and that technology would permit us to work only a couple of hours per day. But we live in a society of stress and uncertainty. My situation could be a lot worse and I know it. So many humans are suffering on this planet. But a golden cage remains a cage anyways. At least, I have an escape plan. I will retire before 45 years old over my passive income. This is a dream that is so powerful that I will make sure it happens. To build my wealth, I mainly invest in undervalued dividend growth stocks. [/author_info] [/author]
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