“What is the best way to invest 10000 $?”
That’s a question that many small investors, with a little money to invest, ask. Let’s say you have 10,000$ to invest. You can’t buy a rental property in most locations. You could probably buy an homeowner property with a minimal cash down of 5% but it’s not an investment… It’s sure not enough to qualify for a commercial loan to buy a small business either. Damn, it’s not even enough to start as a real estate investor (they usually recommend to have an emergency fund of at least 25,000$ for the first year).
What is there left? Bonds? When their yield is below inflation, can you really consider them an investment? I don’t. An investment should make me richer not poorer.
If I had 10,000$ to invest right now, I would personally invest them in the stocks of great companies and I’ll tell you why.
I know that stocks aren’t for everyone. I know that they are risky but I can afford some risk. It may not be your case. But, for the sake of this post, I’ll assume you can afford to lose 10,000$ if the world would turn sour! And if the world would turn sour enough, even held in your bank account, your money won’t be worth a lot anyways.
As a dividend growth investor, I invest solely in stocks of great companies who have the policy to not only pay a dividend every quarter to their shareholders but who also have the policy to raise it every year at a rate higher than inflation.
This means that by owning stocks of a company, every quarter, 4 times a year, I get a check deposited in my account. And, every year, I get a raise for doing nothing else than owning shares of great companies such as Johnson and Johnson, Coke, McDonald’s, Wal Mart and so on. There are literally hundreds of companies having such policies and many have had that policy of paying and raising their dividend every year for more than 25 consecutive years. We call them the Aristocrats. That’s probably one of the best kept secret of Wall Street!
Sounds too good to be true huh?! Well, it is… but there’s some risk and that’s why I get paid.
Too good to be true?
For example, I bought shares of Mattel at 35,65$ last year. They are now worth something like 28$… a huge loss… but since I didn’t sold them I don’t have any loss yet. I still own my shares. Price can vary a lot in time. They recently changed the CEO, they are working on plans to revamp the company, who knows how much the shares will be worth a year from now or five years from now. A bouncing principle is part of the game.
I also own shares of ARCP, a huge REIT. Recently, they made an “error” of accounting. The share price dropped by 40% in one single day. I sold half of my position with a huge loss when they cut the dividend and I still own 100 shares, carrying a potential loss of almost 40%, until we know more. They are investigating… That might be good news or bad news but I expect a lot of volatility in a near future.
On the opposite, I bought shares of Tim Hortons in may last year at approximately 59$. In august, Warren Buffett was part of a deal involving Tim Hortons, Burger King and a tax inversion. My shares skyrocketed to 94$ super fast. I sold most of them at 83$ and they exchanged the rest for new shares of Restaurant Brand Intl. That was a great move.
Jean Coutu inc (PJC-a.to), a well known pharmacy store in Canada, was a good deal too. I bought these shares at 18,49$ a year ago and they were recently trading at 28$. Not bad.
Most of my stocks are not as fun. They are pretty flat with either a small gain or a small a loss.
With diversification, I can mitigate that risk a little. By owning shares of many companies in different markets, countries and economy sectors, I can “control” the risk. Dividend growth stocks, as we call them, also usually have a lower beta than the market in general. This means that their share price is more stable then, let’s say, shares of Tesla, Facebook or Twitter. They are more stable because they usually are more established and mature businesses.
I usually seek to buy stocks offering an initial yield of 3,5%. That’s not a lot but remember that it will grow. This means that 10,000$ would yield 350$ in annual income. I know it’s not a lot but hey, it takes money to make money and we all have to start somewhere. Anyway, let me pursue and you’ll see that it is not as poor as it seems.
Dividend growth is the key
When I check for a potential stock to buy, I check the initial yield. It’s important for sure, but I also check for the dividend growth which is at least as important. Because the growth will both serve to increase my income and my wealth and also as a security net to “protect my capital” and make the share price grow too. A higher yield, due to a dividend raise, means a potentially higher share price too because the market wouldn’t tolerate a great company such as Wal Mart offering an 8% yield let’s say. People would run to buy their stock and the price would increase until it would reach a balance.
I usually seek for a dividend growth of 8% which is reasonable and usually also sustainable for companies who can expand market shares, increase profit and who usually also buy back their shares thus increasing the value of each shares.
With a dividend growth of 8%, on year one you’d get 350$, but on year two you’d get 378$ and on year three, you’d get 408,24$. This would go on and on and on until you finally sell you shares or die… After 10 years, you’d get 755,62$. After 20 years, you’d get 1631.34$. After 30 years, you’d get 3521.93$. After 40 years, 7603,58$. After 50 years, 16,415.56$…
Add up all these sums and you’ll be astonished. Your 10,000$ investment would provide you with 39,649.12$ in income over a 30 years period and you know what? You would still own your initial capital. But, it would not be worth 10,000$ anymore. Because, since the yield would have been raised by 8% every year, the share price would have increased too. It’s hard to extrapolate exactly how much it would be worth but certainly 3 or 4 times your initial investment I guess.
Do you start to see why I believe it is a great investment? Every 10,000$ invested can be worth almost 40,000$ in income over the course of thirty years. That’s why I wish I would have started investing earlier. I now have almost 40,000$ invested. That’s not huge but that’s almost 150,000$ in future income over the course of 30 years!
Interested? Get Lowell Miller’s book “The Single Best investment”. That’s one of the greatest investment book I read in my life.
The intrinsic value of an investment
When I evaluate an investment, I try to calculate what it is worth now based on all the income it can reasonably provide me in the future. We call that evaluating the intrinsic value of an investment. I think long-term because my goal is to live from my dividend income. I don’t care much about short-term gains that won’t repeat in the future like buying XYZ for 10$ and selling it at 15$ two weeks later. For me, people who are doing that are just playing lottery. It’s like flipping a coin. You have one chance out of two to be wrong every time you play because the market can go up or down… If you play long enough, you’ll realize it.
For you, what is the best way to invest 10000 $?
Interested in the subject :
Image courtesy of SamuiBlue / From FreeDigitalPhotos.net