January 10, 2024 • 29 mins
In this episode, I answer your top 4 dividend investing questions:
- Why should I invest in dividend stocks?
- Why should I invest in undervalued stocks?
- How long does it take for a stock to go from undervalued to overvalued?
- How should I build a dividend stock portfolio?
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Episode Transcript
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Speaker 1 (00:00):
In this episode I'm going to be answering your top
four most frequently askedquestions about dividend
investing.
Hi, my name is Kanwal Sarai andwelcome to the Simply Investing
Dividend Podcast.
In this episode, I'm going tocover your top four most
questions about dividendinvesting.
(00:22):
And so the first question youmight be thinking is why should
I invest in dividend stocks?
Next, we're going to answer thequestion of why should you
invest in undervalued stocks,meaning when they're priced low.
And then the next questionwe'll look at is how long does
it take for a stock to go fromundervalued to overvalued,
(00:46):
meaning priced low to pricedhigh?
And then the last questionwe'll look at in this episode is
how should I build a dividendstock portfolio?
So let's begin with questionnumber one why should I invest
in dividend stocks?
So the big question is whydividend stocks at all?
(01:10):
Why not look at stocks thatdon't pay any dividends?
So to answer this question, wehave to step back a little bit
and start at the beginning.
So we're going to do a veryquick review of what are stocks
and how do you make money fromthem.
Sorry, what are dividends andhow do you make money from them?
So we're going to jump rightinto dividends, and then we'll
(01:31):
show you how to make money andincome from dividends.
So a dividend is essentiallythe company sharing its profits
with you, the shareholder, andso the dividend is just a fancy
name for the profits that areshared with you, the shareholder
, and as a shareholder, you'reessentially part owner of the
(01:54):
company.
So in this example, if acompany is giving a dividend of
$1 per share and you own athousand shares, you will
receive $1,000 every year for aslong as you own those shares
and as long as the companycontinues to pay the dividend,
regardless of the stock priceand we're going to cover that in
this episode and see whathappens to the dividend when the
(02:16):
stock price goes up and down.
Now you can spend thesedividends as you wish or you can
reinvest them.
That's entirely up to you.
The money gets depositeddirectly into your trading
account, so that is essentiallycash that you are earning for
being a shareholder of a stockthat is paying a dividend.
(02:40):
So then let's take a quick lookat dividend yield.
We're going to do a quick recapand then we're going to
continue with our episode.
So what is dividend yield?
It's essentially the annualdividend divided by the share
price or, more specifically thepurchase price of when you buy
those shares.
And so, if you do the math,that will give you the dividend
(03:03):
yield.
So, for example, let's say thedividend is $1 per share and the
share price today is $20 andyou happen to buy the shares
today at $20 a piece, then 1over 20, we want to express that
as a percentage is 5%.
So what does the 5% really mean?
So take a look at this exampleon the screen.
(03:24):
If you were to invest, let'ssay, $20,000 in this stock, 5%
of $20,000 is $1,000.
So you would receive $1,000every year in dividends for as
long as you own those shares andas long as the company
continues to pay the dividend,in this case of $1 per share.
(03:45):
So the dividend yield is thereturn on your investment while
you hold on to those shares.
Again, regardless of stockprice can go up and down.
But if you bought the sharestoday, in this example, at $20 a
piece and the dividend is $1per share, then your dividend
yield will be 5%.
(04:07):
Of course, if the dividend goesup, then your dividend yield
will be higher.
So now the good thing is, youdon't have to calculate the
dividend yield yourself.
It's done for you automaticallyhere on the screen, you can see
a screenshot from Yahoo Finance, and you can get that also from
Google Finance or any othersites where you can get stock
(04:29):
prices.
In this example, we're lookingat Coca-Cola on the screen and,
as of this recording, you cansee that the dividend the
forward annual dividend is $1.84a share and the dividend yield
is 3.08%.
So that's a very quick way tofigure out the return on your
(04:51):
investment while you hold on tothose shares.
Now some of you might bewondering and I do get questions
about this all the time is thatdividends are not guaranteed,
and that's true.
Companies are under noobligation to pay you a dividend
.
They can reduce the dividendwhenever they want or they can
(05:14):
eliminate the dividend wheneverthey want.
So then, how do you have anyconfidence in investing in
dividend stocks?
And that confidence was shakenduring COVID.
We saw that in 2020, especiallyin March of 2020.
Some companies reduced oreliminated their dividend, so
(05:36):
this scared away a lot ofinvestors, scared them away from
investing and scared them awayfrom dividend stocks.
But here's the truth Most ofthe companies the majority of
the companies did not reduce oreliminate their dividends.
In fact, they increased theirdividends even in 2020.
(05:57):
So I've been doing this forover 23 years as a dividend
investor and I can tell you thatmy dividend income has gone up
every single year, includingduring COVID in 2020, during
2008-2009 financial crisis, in9-11, when the stock market was
closed for a number of days, andother downturns that we've
(06:21):
experienced in the last 23 years, but my dividend income has
continued to go up.
So let's take a look at someother numbers here, which
hopefully should give youconfidence in investing in
dividend stocks.
Now here's a short list ofcompanies.
The actual list is much longer,but this is just a very short
(06:44):
list of companies and you mightrecognize some of them on the
list.
We have Coca-Cola, we haveColgate Palm Olive, stanley
Black Decker, procter Gamble.
A lot of big companies are onthis list and you can see the
year in which they first startedpaying dividends, and this is
incredible.
Coca-cola started a dividend in1893.
(07:08):
So that's not a typo.
They started the dividend in1893.
That's incredible.
And if we look at Colgate PalmOlive, they started in 1895.
Stanley Black Decker 1876.
So there's companies on thislist that you can see on the
screen that have been payingdividends for more than 120
(07:32):
years, and that's an incredibletrack record, but what's even
more important than that is whatI'm going to show you right now
on the screen.
It is the consecutive years ofdividend increases.
So we can see here Coca-Colahas had more than 60 years of
consecutive dividend increases.
(07:53):
Think about how many marketcrashes, how many market
downturns we've had in the last20, 30, 40, 50, 60 years.
But yet companies like thesehave continued to increase their
dividend year after year afteryear.
So, of course, there are noguarantees when it comes to
dividends, but when we look atthe list of stocks that you see
(08:16):
in front of you on the screen,we can have some level of
confidence that companies likethese will continue to not only
pay us a dividend in the future,but also to increase the
dividend year after year afteryear.
Now remember every time thedividend goes up, that's more
money in your pocket.
So what's the takeaway here?
(08:38):
The important thing is highquality companies, well managed
companies, have a history ofincreasing dividends.
So what does a dividendincrease mean to you?
Well, I just said that a coupleof seconds ago.
It means more money in yourpocket.
You didn't have to buy moreshares, you just held on to the
(08:59):
shares you had, but now, with adividend increase, you are going
to get more dividends than youhad gotten in the previous year.
Let's take a look at a real lifeexample, a quick example with
Johnson Johnson, so you can seehere the last 15 years.
I'm showing you on the screenis the annual dividend per share
(09:20):
.
So back in 2008, johnsonJohnson had an annual dividend
of $1.80.
The dividend today, as of thisrecording, is $4.76 a share and
on the screen here you can nowsee the dividends received for,
let's say, 1,000 shares.
So if you owned 1,000 shares inJohnson Johnson back in 2008,
(09:45):
you would have received $1,800that year in dividends.
As of this recording, in 2023,you would have received over
$4,700 in dividends just byholding on to those shares.
So that's an incredible 164%increase in dividends in the
(10:06):
last 15 years, just with JohnsonJohnson.
Now let's take a quick look atthe last 40 years.
So now we're gonna go back alittle further and we're gonna
stick with our example ofJohnson Johnson.
And you can see here, over thelast 40 years, since 1985 and a
little before that, you can seethe stock price has gone up and
(10:28):
down and that's the blue line,and stock prices go up and down
all the time and in some placesyou can see the stock price
dropping by $5 a share, $10 ashare, maybe even $15 a share.
Drop in the stock price overthe last 40 years.
You can see it in the graph.
Stock prices drop.
But what has happened to thedividend?
(10:50):
And that's the orange line thedividend has gone up every
single year, not just stayed thesame, but increased every
single year.
So how can a company afford tokeep paying the shareholders a
dividend when it's stock pricetanks?
And the reason is the dividendsare not paid from the stock
(11:13):
price, they are paid from theearnings.
So as long as the company isprofitable over the long term,
the earnings have gone up overthe long term, then they can
continue to pay a dividend overthe long term and to increase
the dividend consistently.
So J&J has an impressive trackrecord of 60 years of
(11:35):
consecutive dividend increases.
So one of the key things hereto understand to obtain
extraordinary returns, there'sthree things you're going to
need.
So money, of course.
The more you have to invest,the more you can make a
dividends Time.
So the longer you stay invested, the more money you can make,
(11:57):
because over time the dividendsgo up and they increase.
And if you can take thosedividends and reinvest them back
into other companies that paydividends and grow the dividend,
then you can earn more dividendincome and that's dividend
growth.
Right, that's the last piece upon the screen.
So money time and dividendgrowth If we put all three of
(12:19):
them together you can start tosee extraordinary returns.
I'm going to give you threeexamples here.
We'll stick with Coca-Cola,we're going to add Home Depot
and Walmart.
So with total investment andI'm going to show you some
numbers in the next slide butlet's say you invested $8,350
many years ago total $8,350total across these three
(12:44):
companies Today you would bereceiving over $921,000 a year
in dividends and the sharestoday would be worth over $47
million.
So let's take a look at some ofthe numbers.
Here we're going to go way back, of course, to the 1960s, 1970s
and 1981.
(13:05):
So if you had invested $4,600in Coca-Cola back in 1960, today
that investment would be worthover $7 million, but it would
provide you with over $202,000 ayear in dividends.
Now we're going to take a lookat Home Depot and that's $2,100
(13:27):
invested back in 1981 at HomeDepot Today would be worth over
$10.8 million and it wouldprovide you with over $259,000 a
year in dividends.
So now we're going to look atWalmart, and that was a $1,650
investment back in 1970.
(13:49):
Today would be worth over $29.2million and provide you with
$458,000 a year in dividends.
And so that's how we come upwith the combined annual
dividends across all threecompanies as a little over
$921,000 a year annually individends.
If you want more informationabout these three companies and
(14:11):
about the numbers, I cover allof that in episode 7 so you can
go back and watch that.
But the point I want to getacross here is that
extraordinary returns arepossible with dividend stocks.
So then, why a dividend stock?
So we've covered a lot ofreasons why.
Let's just summarize them nowup on the screen here.
(14:33):
So dividend stocks provide youwith reliable and growing
dividend income each year,regardless of the stock price.
We saw that with Johnson andJohnson.
The 40-year chart Some placesthe stock dropped by $5, dropped
by $10, dropped by $15 a share,but yet the dividend was
(14:55):
reliable and it was consistentand it was growing every year.
So that's what you get is thedividend income.
Our focus as dividend investorsis more on the dividend income
than it is on the stock price,so that's an important
differentiation when it comesdividend investing.
Now, dividends can also provideyou with protection against
inflation, because theygenerally tend to outpace
(15:18):
inflation over the long term,and I cover that in detail in
episode number 11.
So go ahead and watch that ifyou're interested in learning
more Dividends, again outside ofyour.
If you're in Canada, you'llhave the RSP or TFSA, where the
dividends will grow tax-freeanyway, but outside of those
accounts.
And in the US you've got the401k or the IRA account I
(15:42):
believe it's called or the Roth.
They're gonna grow tax freeanyway, but outside of those
accounts, generally, dividendsare taxed lower than interest
income or even capital gains.
Now, with dividend stocks, youcan still buy low and sell high
if you want to, and so you couldalso get not only the dividends
(16:04):
but take advantage of anycapital gains, which is to buy
low and sell high.
Which brings us to our nexttopic and next question is why
should I invest in undervaluedstocks when prices are low?
Why would you want to do that?
Well, you can see up on thescreen here stock prices go up
(16:26):
and down all the time, and weare long-term investors.
We want to buy and hold for thelong term because dividends
grow and it takes decades fordividends to get bigger and
bigger.
But if you wanted to, you couldsell some of your shares when
they're overvalued or pricedhigh.
So you can see that on thisgraph here.
(16:47):
You want to ideally, buy whenthe stock price is low.
When it's price low doesn'tmean there's anything wrong with
this stock, necessarily, butwhen it's price low you want to
be able to buy it there and thenhave the option, if you want it
, to sell when the price is high.
So that makes sense.
Let's see what that looks likeif we take a look at an example.
(17:07):
So we're gonna give you afictional company here, stock
XYZ.
We're gonna look at it whenit's priced high and when it's
priced low.
So the annual dividend you cansee on the screen is the same.
It's $2 a share in this example.
So the dividend is exactly thesame.
The stock price you can seewhen it's price low is $40 a
(17:28):
share.
When it's priced high it's $185a share.
So, right there, you might bethinking, well, yeah, why would
I want to pay more for the samestock?
Okay, but let's continue.
Let's see what happens here.
You can see the dividend yield.
Remember the yield we talkedabout at the beginning of the
episode.
It's the annual dividenddivided by the share price.
(17:50):
So, because the share price ishigh, when the stock is
overvalued, the dividend yieldis only 1%, whereas when the
stock is price low, the yield is5%.
So, all things considered equal, you would rather earn 5% on
your investment than 1%.
Let's take a look at the amountinvested.
(18:10):
So let's say you were going toinvest $10,000 and you had the
option to buy the stock when itwas price low or buy it when it
was priced high.
So let's see what that wouldlook like.
So if you bought it when thestock was undervalued, priced
low, you'd be able to buy 250shares, whereas if you bought it
(18:30):
when the price was high, whenit was overvalued, you'd only be
able to afford 54 shares forthe same $10,000 investment.
So you can see where I'm headednow, because now we're going to
look at the dividend income,and the dividends are always
based on the number of sharesyou own.
So you can see here, if youbought the shares in stock XYZ
(18:51):
when it was priced low, when itwas undervalued, you would earn
$500 a year in dividends.
If you bought it when it wasovervalued, the same $10,000
investment, you would only make$108 a year in dividends.
So it makes sense, all thingsconsidered equal, to purchase a
stock when it's priced low, whenit's undervalued, because you
(19:13):
can buy more shares.
And if you have more sharesyou'll make more dividend income
.
In this example, 5% a yearversus just 1% a year.
So how do you know when a stockis priced low, when it's
undervalued, and how do you knowwhen it's priced high, when
it's overvalued?
So it's quite simple thecurrent dividend yield.
We take a look at that.
(19:34):
If it's higher than the stock's20-year average dividend yield,
then we consider the stock tobe priced low, undervalued.
And the opposite is true.
If the current dividend yieldis less than or equal to the
20-year average dividend yieldfor that stock, then the stock
is priced high and it'sovervalued.
So for more information on thathow do we figure that out, why
(19:57):
this approach works I wouldsuggest you go back and watch
episode 1.
It is dedicated to to helpingyou figure out very quickly when
a stock is priced low and whena stock is priced high.
So I would highly recommendwatching episode number one.
Let's move on to our thirdquestion in this episode how
(20:20):
long does it take for a stock togo from undervalue to overvalue
, because a lot of people wantto know well, is it a couple of
weeks, months, years?
How long does that take?
And, as I said before, stockprices go up and down all the
time.
So you can see on our graphhere in front of you on the
(20:42):
screen, you can see over timewe're going to see fluctuations
in the stock price.
But the short answer is onaverage it's about five years.
So some companies may take twoyears or three years and go from
undervalue to overvalue andthen go back to undervalue.
Some stocks may take six, sevenor even eight years.
(21:03):
The average seems to be aroundfive years.
It's not an exact science.
It's going to be different forevery stock, so you have to be
patient.
When it comes to dividendinvesting, let's move on to our
last and final question in thisepisode.
You might be thinking well, howshould I build a dividend stock
(21:25):
portfolio and not just anyportfolio?
You want to make sure that youbuild a resilient portfolio that
provides a growing stream ofdividend income each year.
Remember, the dividend incomeis what's important to us, more
so than the stock price.
So we want to see the incomegrowing every year and a
(21:47):
resilient portfolio that's notaffected by a market crash or a
market downturn.
So how do we do that?
We do that by investing in highquality, dividend stocks that
are priced low.
We don't want to buy it at anyprice, we want to buy it when
it's priced low.
So how do you know, when you'relooking at a stock, if it's a
high quality stock and how youknow when it's priced low?
(22:09):
So for that I created what Icall the 12 rules of simply
investing.
You can see them up on thescreen here.
I'm going to go through them injust a minute, but right now
they're just up on the screen,the 12 rules.
But I want to finish off thisportion of our segment in the
episode to help you build astock portfolio, because that
(22:30):
was the question how do we buildone?
So you want to start off bybuilding a diversified portfolio
.
Never put all your eggs in onebasket, all in one stock or in
one industry or one sector.
Over time, you want to build adiversified portfolio to reduce
your risk In case there is asector or a stock that just
(22:51):
tanks.
So build a diversifiedportfolio.
Then you want to hold for thelong term and for the rising
dividend, because as thedividend is increased over time,
the stock price is going tostart to creep up, and that's
what we want.
We also want the stock price togo up, but we want and we want
the dividend income to go upevery year.
So that takes time.
It doesn't happen in weeks,months or even years.
(23:14):
It takes five, six, seven, tenyears or more, and so it takes
time to build up.
Remember to avoid panicking whenthe stock market tanks and we
know it will.
Stock markets go up, stockmarkets go down and we have
market corrections, marketcrashes.
When that happens, you have toavoid panicking.
(23:36):
Remain calm.
You may have done all yourhomework and applied the 12
rules and bought a stock for $35today and tomorrow it drops to
$30.
That's okay If you've done yourhomework.
It was a quality stock.
It's priced low.
It's fine because you'reholding it for the long term.
(23:57):
The worst time to sell is whenthe stock market is down.
When the stock prices are down.
That's the worst time to sell,because then you solidify your
losses.
So avoid panicking.
Instead, remain disciplined andpatient.
Disciplined means stick to theapproach.
We always want to apply the 12rules before we invest in any
(24:18):
stock.
I'm going to show you what the12 rules are in just a minute.
So we don't want to cut cornersand skip that.
We don't want to jump from onestrategy to another strategy
every couple of months.
Stick to the strategy.
I've been doing it for over 23years.
A lot of other investors havebeen doing it for decades and
decades.
It works, but you have to stickto it.
You have to be patient.
(24:39):
I said avoid panicking.
You have to be patient to rideout any market downturns.
So stock prices are going to goup.
They're going to come down.
They're going to go up, comedown.
The value of your portfolio isgoing to go up and down.
So be patient.
As long as the dividend incomeis going up every year, you
(25:00):
should be fine, right?
We don't want to panic and sellat the worst time possible.
So we're going to stick with ourapproach, which is to build a
dividend portfolio consisting ofhigh quality stocks when
they're priced low.
Now they can.
Once you've purchased it, theprice can go up.
That's fine.
Doesn't mean you should sell itright away.
(25:20):
We're in it for the long run.
We're in it for the dividendincome.
But at the time of purchase,the stock should be priced low.
So how do you know when it'spriced low?
How do you know when it'sundervalued?
How do you know when it's aquality stock?
Well, so for that, like I saidbefore, I've created the 12
rules of simply investing.
They're up on the screen here.
(25:41):
Rule number one Do youunderstand how the company is
making money?
If not, skip it, move on tosomething else.
This is your checklist.
These 12 rules are yourchecklist.
So a company has to pass all ofthe 12 rules in order for you
to invest in it, not just nineout of 12 or eight out of 12 has
to pass all.
If there's one failure, skip it, move on to something else.
(26:04):
Rule number two 20 years fromnow, will people still need its
product and services?
Rule number three Does thecompany have a low cost
competitive advantage?
Rule number four Is itrecession proof?
Rule number five Is itprofitable?
Rule number six Does it growits dividend?
Rule number seven Can it affordto pay the dividend?
Rule number eight Is the debtless than 70%?
Rule number nine Avoidcompanies with recent dividend
(26:27):
cuts.
Rule number 10.
Does the company buy back itsown shares?
Rule number 11.
Is the stock priced low?
That's what we've been talkingabout this entire episode is is
the stock undervalued?
So there's three parts to rulenumber 11.
We look at the PE ratio, welook at the PB ratio, the price
to book, and then, of course, wecompare the current yield to
(26:49):
the 20 year average yield.
If the company meets all threeconditions, it passes rule
number 11.
And rule number 12.
Keep your emotions out ofinvesting.
So, for those of you that areinterested, I have an online
self-paced course simplyinvesting course.
It covers all of the 12 rulesand much more.
You can see on the screen here.
(27:09):
We have 10 modules.
We start with the investingbasics.
In module two, you learn the 12rules and how to apply them.
In module three, using reallife examples.
Module four I show you how touse a simply investing platform.
Module five I'm going to showyou how to place your first
stock order If you've never doneit before, step by step.
Module six Building andtracking your portfolio.
(27:32):
Module seven when to sell yourstocks, which is just as
important as to when to buy.
Module eight Reduce your feesand risk, especially if you have
ETFs, index funds and mutualfunds.
Module nine your action plan toget started right away.
And in module 10, I answer moreof your frequently asked
(27:56):
questions.
For anyone who is interested, Ialso have the simply investing
platform, which we spent twoyears to build.
It's an online platformSubscription service where we
apply the rules to over 6,000companies in the US and Canada
every single day, so you canimmediately log into the
(28:17):
platform and see which companiesare priced low, which ones are
priced high, so you can avoidthose, which ones are high
quality.
How many of the rules do theypass?
How many of the rules do theyfail?
So if you're interested in anyof those the course or the
platform write down the couponcode save 10, save10.
This is going to save you 10%off of the course or the
(28:40):
platform itself.
If you enjoyed this episode, besure to hit the subscribe
button.
We have a new episode out everyweek.
Hit the like button as well,and for more questions or
anything else more information,please take a look at our
website, simplyinvestingcom.
Thanks for watching.
In this episode I'm going to be answering your top
four most frequently askedquestions about dividend
investing.
Hi, my name is Kanwal Sarai andwelcome to the Simply Investing
Dividend Podcast.
In this episode, I'm going tocover your top four most
questions about dividendinvesting.
(00:22):
And so the first question youmight be thinking is why should
I invest in dividend stocks?
Next, we're going to answer thequestion of why should you
invest in undervalued stocks,meaning when they're priced low.
And then the next questionwe'll look at is how long does
it take for a stock to go fromundervalued to overvalued,
(00:46):
meaning priced low to pricedhigh?
And then the last questionwe'll look at in this episode is
how should I build a dividendstock portfolio?
So let's begin with questionnumber one why should I invest
in dividend stocks?
So the big question is whydividend stocks at all?
(01:10):
Why not look at stocks thatdon't pay any dividends?
So to answer this question, wehave to step back a little bit
and start at the beginning.
So we're going to do a veryquick review of what are stocks
and how do you make money fromthem.
Sorry, what are dividends andhow do you make money from them?
So we're going to jump rightinto dividends, and then we'll
(01:31):
show you how to make money andincome from dividends.
So a dividend is essentiallythe company sharing its profits
with you, the shareholder, andso the dividend is just a fancy
name for the profits that areshared with you, the shareholder
, and as a shareholder, you'reessentially part owner of the
(01:54):
company.
So in this example, if acompany is giving a dividend of
$1 per share and you own athousand shares, you will
receive $1,000 every year for aslong as you own those shares
and as long as the companycontinues to pay the dividend,
regardless of the stock priceand we're going to cover that in
this episode and see whathappens to the dividend when the
(02:16):
stock price goes up and down.
Now you can spend thesedividends as you wish or you can
reinvest them.
That's entirely up to you.
The money gets depositeddirectly into your trading
account, so that is essentiallycash that you are earning for
being a shareholder of a stockthat is paying a dividend.
(02:40):
So then let's take a quick lookat dividend yield.
We're going to do a quick recapand then we're going to
continue with our episode.
So what is dividend yield?
It's essentially the annualdividend divided by the share
price or, more specifically thepurchase price of when you buy
those shares.
And so, if you do the math,that will give you the dividend
(03:03):
yield.
So, for example, let's say thedividend is $1 per share and the
share price today is $20 andyou happen to buy the shares
today at $20 a piece, then 1over 20, we want to express that
as a percentage is 5%.
So what does the 5% really mean?
So take a look at this exampleon the screen.
(03:24):
If you were to invest, let'ssay, $20,000 in this stock, 5%
of $20,000 is $1,000.
So you would receive $1,000every year in dividends for as
long as you own those shares andas long as the company
continues to pay the dividend,in this case of $1 per share.
(03:45):
So the dividend yield is thereturn on your investment while
you hold on to those shares.
Again, regardless of stockprice can go up and down.
But if you bought the sharestoday, in this example, at $20 a
piece and the dividend is $1per share, then your dividend
yield will be 5%.
(04:07):
Of course, if the dividend goesup, then your dividend yield
will be higher.
So now the good thing is, youdon't have to calculate the
dividend yield yourself.
It's done for you automaticallyhere on the screen, you can see
a screenshot from Yahoo Finance, and you can get that also from
Google Finance or any othersites where you can get stock
(04:29):
prices.
In this example, we're lookingat Coca-Cola on the screen and,
as of this recording, you cansee that the dividend the
forward annual dividend is $1.84a share and the dividend yield
is 3.08%.
So that's a very quick way tofigure out the return on your
(04:51):
investment while you hold on tothose shares.
Now some of you might bewondering and I do get questions
about this all the time is thatdividends are not guaranteed,
and that's true.
Companies are under noobligation to pay you a dividend
.
They can reduce the dividendwhenever they want or they can
(05:14):
eliminate the dividend wheneverthey want.
So then, how do you have anyconfidence in investing in
dividend stocks?
And that confidence was shakenduring COVID.
We saw that in 2020, especiallyin March of 2020.
Some companies reduced oreliminated their dividend, so
(05:36):
this scared away a lot ofinvestors, scared them away from
investing and scared them awayfrom dividend stocks.
But here's the truth Most ofthe companies the majority of
the companies did not reduce oreliminate their dividends.
In fact, they increased theirdividends even in 2020.
(05:57):
So I've been doing this forover 23 years as a dividend
investor and I can tell you thatmy dividend income has gone up
every single year, includingduring COVID in 2020, during
2008-2009 financial crisis, in9-11, when the stock market was
closed for a number of days, andother downturns that we've
(06:21):
experienced in the last 23 years, but my dividend income has
continued to go up.
So let's take a look at someother numbers here, which
hopefully should give youconfidence in investing in
dividend stocks.
Now here's a short list ofcompanies.
The actual list is much longer,but this is just a very short
(06:44):
list of companies and you mightrecognize some of them on the
list.
We have Coca-Cola, we haveColgate Palm Olive, stanley
Black Decker, procter Gamble.
A lot of big companies are onthis list and you can see the
year in which they first startedpaying dividends, and this is
incredible.
Coca-cola started a dividend in1893.
(07:08):
So that's not a typo.
They started the dividend in1893.
That's incredible.
And if we look at Colgate PalmOlive, they started in 1895.
Stanley Black Decker 1876.
So there's companies on thislist that you can see on the
screen that have been payingdividends for more than 120
(07:32):
years, and that's an incredibletrack record, but what's even
more important than that is whatI'm going to show you right now
on the screen.
It is the consecutive years ofdividend increases.
So we can see here Coca-Colahas had more than 60 years of
consecutive dividend increases.
(07:53):
Think about how many marketcrashes, how many market
downturns we've had in the last20, 30, 40, 50, 60 years.
But yet companies like thesehave continued to increase their
dividend year after year afteryear.
So, of course, there are noguarantees when it comes to
dividends, but when we look atthe list of stocks that you see
(08:16):
in front of you on the screen,we can have some level of
confidence that companies likethese will continue to not only
pay us a dividend in the future,but also to increase the
dividend year after year afteryear.
Now remember every time thedividend goes up, that's more
money in your pocket.
So what's the takeaway here?
(08:38):
The important thing is highquality companies, well managed
companies, have a history ofincreasing dividends.
So what does a dividendincrease mean to you?
Well, I just said that a coupleof seconds ago.
It means more money in yourpocket.
You didn't have to buy moreshares, you just held on to the
(08:59):
shares you had, but now, with adividend increase, you are going
to get more dividends than youhad gotten in the previous year.
Let's take a look at a real lifeexample, a quick example with
Johnson Johnson, so you can seehere the last 15 years.
I'm showing you on the screenis the annual dividend per share
(09:20):
.
So back in 2008, johnsonJohnson had an annual dividend
of $1.80.
The dividend today, as of thisrecording, is $4.76 a share and
on the screen here you can nowsee the dividends received for,
let's say, 1,000 shares.
So if you owned 1,000 shares inJohnson Johnson back in 2008,
(09:45):
you would have received $1,800that year in dividends.
As of this recording, in 2023,you would have received over
$4,700 in dividends just byholding on to those shares.
So that's an incredible 164%increase in dividends in the
(10:06):
last 15 years, just with JohnsonJohnson.
Now let's take a quick look atthe last 40 years.
So now we're gonna go back alittle further and we're gonna
stick with our example ofJohnson Johnson.
And you can see here, over thelast 40 years, since 1985 and a
little before that, you can seethe stock price has gone up and
(10:28):
down and that's the blue line,and stock prices go up and down
all the time and in some placesyou can see the stock price
dropping by $5 a share, $10 ashare, maybe even $15 a share.
Drop in the stock price overthe last 40 years.
You can see it in the graph.
Stock prices drop.
But what has happened to thedividend?
(10:50):
And that's the orange line thedividend has gone up every
single year, not just stayed thesame, but increased every
single year.
So how can a company afford tokeep paying the shareholders a
dividend when it's stock pricetanks?
And the reason is the dividendsare not paid from the stock
(11:13):
price, they are paid from theearnings.
So as long as the company isprofitable over the long term,
the earnings have gone up overthe long term, then they can
continue to pay a dividend overthe long term and to increase
the dividend consistently.
So J&J has an impressive trackrecord of 60 years of
(11:35):
consecutive dividend increases.
So one of the key things hereto understand to obtain
extraordinary returns, there'sthree things you're going to
need.
So money, of course.
The more you have to invest,the more you can make a
dividends Time.
So the longer you stay invested, the more money you can make,
(11:57):
because over time the dividendsgo up and they increase.
And if you can take thosedividends and reinvest them back
into other companies that paydividends and grow the dividend,
then you can earn more dividendincome and that's dividend
growth.
Right, that's the last piece upon the screen.
So money time and dividendgrowth If we put all three of
(12:19):
them together you can start tosee extraordinary returns.
I'm going to give you threeexamples here.
We'll stick with Coca-Cola,we're going to add Home Depot
and Walmart.
So with total investment andI'm going to show you some
numbers in the next slide butlet's say you invested $8,350
many years ago total $8,350total across these three
(12:44):
companies Today you would bereceiving over $921,000 a year
in dividends and the sharestoday would be worth over $47
million.
So let's take a look at some ofthe numbers.
Here we're going to go way back, of course, to the 1960s, 1970s
and 1981.
(13:05):
So if you had invested $4,600in Coca-Cola back in 1960, today
that investment would be worthover $7 million, but it would
provide you with over $202,000 ayear in dividends.
Now we're going to take a lookat Home Depot and that's $2,100
(13:27):
invested back in 1981 at HomeDepot Today would be worth over
$10.8 million and it wouldprovide you with over $259,000 a
year in dividends.
So now we're going to look atWalmart, and that was a $1,650
investment back in 1970.
(13:49):
Today would be worth over $29.2million and provide you with
$458,000 a year in dividends.
And so that's how we come upwith the combined annual
dividends across all threecompanies as a little over
$921,000 a year annually individends.
If you want more informationabout these three companies and
(14:11):
about the numbers, I cover allof that in episode 7 so you can
go back and watch that.
But the point I want to getacross here is that
extraordinary returns arepossible with dividend stocks.
So then, why a dividend stock?
So we've covered a lot ofreasons why.
Let's just summarize them nowup on the screen here.
(14:33):
So dividend stocks provide youwith reliable and growing
dividend income each year,regardless of the stock price.
We saw that with Johnson andJohnson.
The 40-year chart Some placesthe stock dropped by $5, dropped
by $10, dropped by $15 a share,but yet the dividend was
(14:55):
reliable and it was consistentand it was growing every year.
So that's what you get is thedividend income.
Our focus as dividend investorsis more on the dividend income
than it is on the stock price,so that's an important
differentiation when it comesdividend investing.
Now, dividends can also provideyou with protection against
inflation, because theygenerally tend to outpace
(15:18):
inflation over the long term,and I cover that in detail in
episode number 11.
So go ahead and watch that ifyou're interested in learning
more Dividends, again outside ofyour.
If you're in Canada, you'llhave the RSP or TFSA, where the
dividends will grow tax-freeanyway, but outside of those
accounts.
And in the US you've got the401k or the IRA account I
(15:42):
believe it's called or the Roth.
They're gonna grow tax freeanyway, but outside of those
accounts, generally, dividendsare taxed lower than interest
income or even capital gains.
Now, with dividend stocks, youcan still buy low and sell high
if you want to, and so you couldalso get not only the dividends
(16:04):
but take advantage of anycapital gains, which is to buy
low and sell high.
Which brings us to our nexttopic and next question is why
should I invest in undervaluedstocks when prices are low?
Why would you want to do that?
Well, you can see up on thescreen here stock prices go up
(16:26):
and down all the time, and weare long-term investors.
We want to buy and hold for thelong term because dividends
grow and it takes decades fordividends to get bigger and
bigger.
But if you wanted to, you couldsell some of your shares when
they're overvalued or pricedhigh.
So you can see that on thisgraph here.
(16:47):
You want to ideally, buy whenthe stock price is low.
When it's price low doesn'tmean there's anything wrong with
this stock, necessarily, butwhen it's price low you want to
be able to buy it there and thenhave the option, if you want it
, to sell when the price is high.
So that makes sense.
Let's see what that looks likeif we take a look at an example.
(17:07):
So we're gonna give you afictional company here, stock
XYZ.
We're gonna look at it whenit's priced high and when it's
priced low.
So the annual dividend you cansee on the screen is the same.
It's $2 a share in this example.
So the dividend is exactly thesame.
The stock price you can seewhen it's price low is $40 a
(17:28):
share.
When it's priced high it's $185a share.
So, right there, you might bethinking, well, yeah, why would
I want to pay more for the samestock?
Okay, but let's continue.
Let's see what happens here.
You can see the dividend yield.
Remember the yield we talkedabout at the beginning of the
episode.
It's the annual dividenddivided by the share price.
(17:50):
So, because the share price ishigh, when the stock is
overvalued, the dividend yieldis only 1%, whereas when the
stock is price low, the yield is5%.
So, all things considered equal, you would rather earn 5% on
your investment than 1%.
Let's take a look at the amountinvested.
(18:10):
So let's say you were going toinvest $10,000 and you had the
option to buy the stock when itwas price low or buy it when it
was priced high.
So let's see what that wouldlook like.
So if you bought it when thestock was undervalued, priced
low, you'd be able to buy 250shares, whereas if you bought it
(18:30):
when the price was high, whenit was overvalued, you'd only be
able to afford 54 shares forthe same $10,000 investment.
So you can see where I'm headednow, because now we're going to
look at the dividend income,and the dividends are always
based on the number of sharesyou own.
So you can see here, if youbought the shares in stock XYZ
(18:51):
when it was priced low, when itwas undervalued, you would earn
$500 a year in dividends.
If you bought it when it wasovervalued, the same $10,000
investment, you would only make$108 a year in dividends.
So it makes sense, all thingsconsidered equal, to purchase a
stock when it's priced low, whenit's undervalued, because you
(19:13):
can buy more shares.
And if you have more sharesyou'll make more dividend income
.
In this example, 5% a yearversus just 1% a year.
So how do you know when a stockis priced low, when it's
undervalued, and how do you knowwhen it's priced high, when
it's overvalued?
So it's quite simple thecurrent dividend yield.
We take a look at that.
(19:34):
If it's higher than the stock's20-year average dividend yield,
then we consider the stock tobe priced low, undervalued.
And the opposite is true.
If the current dividend yieldis less than or equal to the
20-year average dividend yieldfor that stock, then the stock
is priced high and it'sovervalued.
So for more information on thathow do we figure that out, why
(19:57):
this approach works I wouldsuggest you go back and watch
episode 1.
It is dedicated to to helpingyou figure out very quickly when
a stock is priced low and whena stock is priced high.
So I would highly recommendwatching episode number one.
Let's move on to our thirdquestion in this episode how
(20:20):
long does it take for a stock togo from undervalue to overvalue
, because a lot of people wantto know well, is it a couple of
weeks, months, years?
How long does that take?
And, as I said before, stockprices go up and down all the
time.
So you can see on our graphhere in front of you on the
(20:42):
screen, you can see over timewe're going to see fluctuations
in the stock price.
But the short answer is onaverage it's about five years.
So some companies may take twoyears or three years and go from
undervalue to overvalue andthen go back to undervalue.
Some stocks may take six, sevenor even eight years.
(21:03):
The average seems to be aroundfive years.
It's not an exact science.
It's going to be different forevery stock, so you have to be
patient.
When it comes to dividendinvesting, let's move on to our
last and final question in thisepisode.
You might be thinking well, howshould I build a dividend stock
(21:25):
portfolio and not just anyportfolio?
You want to make sure that youbuild a resilient portfolio that
provides a growing stream ofdividend income each year.
Remember, the dividend incomeis what's important to us, more
so than the stock price.
So we want to see the incomegrowing every year and a
(21:47):
resilient portfolio that's notaffected by a market crash or a
market downturn.
So how do we do that?
We do that by investing in highquality, dividend stocks that
are priced low.
We don't want to buy it at anyprice, we want to buy it when
it's priced low.
So how do you know, when you'relooking at a stock, if it's a
high quality stock and how youknow when it's priced low?
(22:09):
So for that I created what Icall the 12 rules of simply
investing.
You can see them up on thescreen here.
I'm going to go through them injust a minute, but right now
they're just up on the screen,the 12 rules.
But I want to finish off thisportion of our segment in the
episode to help you build astock portfolio, because that
(22:30):
was the question how do we buildone?
So you want to start off bybuilding a diversified portfolio
.
Never put all your eggs in onebasket, all in one stock or in
one industry or one sector.
Over time, you want to build adiversified portfolio to reduce
your risk In case there is asector or a stock that just
(22:51):
tanks.
So build a diversifiedportfolio.
Then you want to hold for thelong term and for the rising
dividend, because as thedividend is increased over time,
the stock price is going tostart to creep up, and that's
what we want.
We also want the stock price togo up, but we want and we want
the dividend income to go upevery year.
So that takes time.
It doesn't happen in weeks,months or even years.
(23:14):
It takes five, six, seven, tenyears or more, and so it takes
time to build up.
Remember to avoid panicking whenthe stock market tanks and we
know it will.
Stock markets go up, stockmarkets go down and we have
market corrections, marketcrashes.
When that happens, you have toavoid panicking.
(23:36):
Remain calm.
You may have done all yourhomework and applied the 12
rules and bought a stock for $35today and tomorrow it drops to
$30.
That's okay If you've done yourhomework.
It was a quality stock.
It's priced low.
It's fine because you'reholding it for the long term.
(23:57):
The worst time to sell is whenthe stock market is down.
When the stock prices are down.
That's the worst time to sell,because then you solidify your
losses.
So avoid panicking.
Instead, remain disciplined andpatient.
Disciplined means stick to theapproach.
We always want to apply the 12rules before we invest in any
(24:18):
stock.
I'm going to show you what the12 rules are in just a minute.
So we don't want to cut cornersand skip that.
We don't want to jump from onestrategy to another strategy
every couple of months.
Stick to the strategy.
I've been doing it for over 23years.
A lot of other investors havebeen doing it for decades and
decades.
It works, but you have to stickto it.
You have to be patient.
(24:39):
I said avoid panicking.
You have to be patient to rideout any market downturns.
So stock prices are going to goup.
They're going to come down.
They're going to go up, comedown.
The value of your portfolio isgoing to go up and down.
So be patient.
As long as the dividend incomeis going up every year, you
(25:00):
should be fine, right?
We don't want to panic and sellat the worst time possible.
So we're going to stick with ourapproach, which is to build a
dividend portfolio consisting ofhigh quality stocks when
they're priced low.
Now they can.
Once you've purchased it, theprice can go up.
That's fine.
Doesn't mean you should sell itright away.
(25:20):
We're in it for the long run.
We're in it for the dividendincome.
But at the time of purchase,the stock should be priced low.
So how do you know when it'spriced low?
How do you know when it'sundervalued?
How do you know when it's aquality stock?
Well, so for that, like I saidbefore, I've created the 12
rules of simply investing.
They're up on the screen here.
(25:41):
Rule number one Do youunderstand how the company is
making money?
If not, skip it, move on tosomething else.
This is your checklist.
These 12 rules are yourchecklist.
So a company has to pass all ofthe 12 rules in order for you
to invest in it, not just nineout of 12 or eight out of 12 has
to pass all.
If there's one failure, skip it, move on to something else.
(26:04):
Rule number two 20 years fromnow, will people still need its
product and services?
Rule number three Does thecompany have a low cost
competitive advantage?
Rule number four Is itrecession proof?
Rule number five Is itprofitable?
Rule number six Does it growits dividend?
Rule number seven Can it affordto pay the dividend?
Rule number eight Is the debtless than 70%?
Rule number nine Avoidcompanies with recent dividend
(26:27):
cuts.
Rule number 10.
Does the company buy back itsown shares?
Rule number 11.
Is the stock priced low?
That's what we've been talkingabout this entire episode is is
the stock undervalued?
So there's three parts to rulenumber 11.
We look at the PE ratio, welook at the PB ratio, the price
to book, and then, of course, wecompare the current yield to
(26:49):
the 20 year average yield.
If the company meets all threeconditions, it passes rule
number 11.
And rule number 12.
Keep your emotions out ofinvesting.
So, for those of you that areinterested, I have an online
self-paced course simplyinvesting course.
It covers all of the 12 rulesand much more.
You can see on the screen here.
(27:09):
We have 10 modules.
We start with the investingbasics.
In module two, you learn the 12rules and how to apply them.
In module three, using reallife examples.
Module four I show you how touse a simply investing platform.
Module five I'm going to showyou how to place your first
stock order If you've never doneit before, step by step.
Module six Building andtracking your portfolio.
(27:32):
Module seven when to sell yourstocks, which is just as
important as to when to buy.
Module eight Reduce your feesand risk, especially if you have
ETFs, index funds and mutualfunds.
Module nine your action plan toget started right away.
And in module 10, I answer moreof your frequently asked
(27:56):
questions.
For anyone who is interested, Ialso have the simply investing
platform, which we spent twoyears to build.
It's an online platformSubscription service where we
apply the rules to over 6,000companies in the US and Canada
every single day, so you canimmediately log into the
(28:17):
platform and see which companiesare priced low, which ones are
priced high, so you can avoidthose, which ones are high
quality.
How many of the rules do theypass?
How many of the rules do theyfail?
So if you're interested in anyof those the course or the
platform write down the couponcode save 10, save10.
This is going to save you 10%off of the course or the
(28:40):
platform itself.
If you enjoyed this episode, besure to hit the subscribe
button.
We have a new episode out everyweek.
Hit the like button as well,and for more questions or
anything else more information,please take a look at our
website, simplyinvestingcom.
Thanks for watching.
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