March 27, 2024 • 24 mins
With rising interest rates, does it still make sense to invest in dividend stocks? In this episode, I compare a dividend stock to a money market fund, which one is the better investment?
I also cover the following topics in this episode:
- Rising interest rates
- What are money market funds
- Typical money market returns
- What will happen to interest rates?
- Money market fund versus a dividend stock
- $10K grows to over $12K in 3 years
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Transcript
Episode Transcript
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Speaker 1 (00:00):
With rising interest rates, does it still make sense
to invest in dividend stocks?
Is a money market fundreturning more than 5% better
than a dividend stock yieldingonly 3%?
I'm going to answer thesequestions in today's episode.
Hi, my name is Kanwal Sarai andwelcome to the Simply Investing
(00:24):
Dividend Podcast.
In today's episode, we're goingto cover the following four
topics First, we'll talk aboutthe rising interest rates in
today's current economicenvironment.
Then we'll talk about what aremoney market funds, then we'll
look at some examples of moneymarket funds and their returns
(00:48):
and then we will compare atypical money market fund with a
typical dividend stock and findout which is the better
investment.
Let's get started with ourfirst topic rising interest
rates and the biggest questionmost people have, and they've
seen in the last 12 to 18 monthsthat interest rates have gone
(01:11):
up and they may continue to goup.
They may not, but let's take alook.
So the question is haveinterest rates gone up?
And the short answer is yes.
Let's take a look at the USfund rate in the last three
years and you can see the graphon the screen and you can
clearly see that the rates havegone up consistently, beginning
(01:36):
at around February, march ormiddle of the year in 2022.
Nevertheless, it was in 2022where the US Federal Reserve had
started to increase theinterest rates, and you can see
on the graph prior to 2022, theywere close to, very close to 0%
(01:57):
, and then we can see that theyear 2022 finished off at around
one and a half 2%.
The year 2022 finished off ataround one and a half two
percent.
Then the rates went up to threepercent, four percent and
currently sitting at five pointthree, three percent as of this
recording.
And the situation is similar inCanada.
(02:18):
If we look at the Bank ofCanada, the interest rates in
the last three years again youcan see on the screen the
interest rates have gone up.
And same thing prior to 2022,they were sitting at almost 0%
for many, many years and theinterest rates have gone up
since then.
And now, as of this recording,they are sitting at 5.25%, which
(02:43):
is all good news for termdeposits, cds or, in Canada,
gics and money market funds,because all of those types of
investments have increased theinterest rates that they are
offering to investors.
So now let's move on to oursecond topic of what are money
(03:04):
market funds?
And, quite simply, a moneymarket fund is a type of mutual
fund that invests in highquality short term debt
instruments and cash and cashequivalents.
If you look at some of theinstruments, it's primarily US
Treasuries or T-bills orTreasury bills, and so that's
what's inside of a money marketfund.
(03:27):
Now there's some pros and consto money market funds.
So some of the pros areobviously it's very low risk,
highly liquid, easy to cash itin and they generally offer
better returns than you'll findin a bank account.
Now some of the cons they arenot FDIC insured, there's no
capital appreciation, the netasset value of the mutual fund
(03:50):
or the unit price is alwaysfixed and they are certainly
sensitive to interest ratefluctuations and changes in
monetary policy.
So if rates continue to go up,then you'll find that the money
market funds will continue tooffer higher interest rates.
However, if interest ratesstart to come down, then the
(04:12):
money market returns will alsostart to come down.
Now let's take a look at some ofthe returns.
That's our third topic here.
Let's see in the short term, asof this recording, what are
some of the money market returnsand you can see up on the
screen here.
I've taken four typicalexamples of some money market
(04:34):
funds.
Now the numbers are high, butwe are only looking at the seven
day yield, not the one yearyield or the three year or five
year.
We're just looking at the sevenday yield.
So, just as an example you cansee on the screen here, fidelity
money market fund has a sevenday yield of 5.04%, the T-Row US
(04:58):
Treasury money market fund isat 5.4%, the Vanguard money
market fund is at 5.27% and theFidelity government money market
fund is sitting at 4.98%.
Now, let's not forget, each ofthese funds have an annual
expense ratio.
(05:19):
Now, I know some of the brokerssay that there's no fee to buy
them.
That's absolutely true.
They may offer no fees to buymutual funds or index funds or
ETFs, but these funds themselveshave an annual expense ratio.
This fee is deductedautomatically from your
(05:39):
investment in any of these funds, investment in any of these
funds.
We'll talk a little bit moreabout the expense ratio later on
.
Just as an example, theFidelity Money Market Fund has
an expense ratio of 0.42%, theTRO is at 0.3%, vanguard is at
(06:06):
0.11% and the FidelityGovernment Money Market Fund is
also at 0.42%.
Okay, so now let's get on to ourmain topic in this episode, and
what we want to do here is wewant to compare a typical money
market fund to a typicaldividend stock and then figure
out which investment is better,which one is going to offer a
higher return.
So I'm going to show you thesame slide we looked at before,
(06:29):
which was the four examples ofmoney market funds up on the
screen, the seven-day yield, andlet's just take an average of
the seven-day yield and you cansee it's at 5.17%.
Now, remember, this is not aone-year yield or a two or
three-year yield, it's aseven-day yield and you can see
it's at 5.17%.
Now, remember this is not aone-year yield or a two or
three-year yield, it's aseven-day yield, but still the
(06:51):
number is quite high.
Let's compare that to fourtypical dividend stocks and what
we're going to look at is thedividend yield.
So Johnson Johnson has acurrent dividend yield, as of
this recording, of 3.08%,coca-cola is at 3.21%, walmart
(07:12):
is at 1.37% and McDonald's is at2.4%.
Now if you take the averagehere, you'll notice that it is
not as high as the money marketfunds.
The average dividend yield forthese four dividend stocks is
2.52%.
Now, if we compare both of theaverages again, what we're
(07:37):
highlighting here is that themoney market funds, the
seven-day yield is typically, asof this recording, higher than
most dividend stocks, so it's at5.17% versus 2.52%.
Now, the goal of this topic inthis episode, is to compare a
(08:00):
typical money market fund to atypical dividend stock.
So to do that, we need to coverfour things.
Number one we need to decide,okay, what are we going to
compare with.
So, which money market are wegoing to select?
Which dividend stock are wegoing to select?
Number two what is the amountthat we're going to invest in?
Number three what is the timehorizon?
(08:22):
And number four what is therate of return?
So we're going to go throughall four of these, but let's
start with number one on thelist.
So, for the purposes of thisepisode and just to keep it
simple I know there's hundredsof money market funds to choose
from.
There's thousands of dividendstocks to choose from.
We're going to try and keepthis simple and short.
(08:43):
For this example, I'm going toselect the Fidelity Money Market
Fund.
If anybody's interested, youcan look up the details.
The fund symbol is SPRXX andwe're going to compare it to
Johnson Johnson, which is adividend stock.
Just a quick little summary ofFidelity Money Market Fund.
(09:05):
The fund was started in 1989.
It has a unit value, an NAV, of$1, right?
So the price is fixed at $1 andthe expense ratio, as we showed
before, is at 0.42%.
If we take a quick look atJohnson Johnson for 2%.
(09:29):
If we take a quick look atJohnson Johnson, it's a US
company.
It was founded in 1886.
The share price as of today, asof this recording, is $154.76
to buy one share.
The dividend yield is 3.08% andthe company has had an
incredible track record ofconsecutive years of dividend
increases at 62 years.
(09:51):
So the company has beenconsecutively increasing its
dividend to the shareholdersevery single year for 62 years.
So that's something veryimportant to note.
Now let's go back to our fourthings that we needed here.
So, number one we know whichinvestments we're comparing with
(10:13):
.
So the Fidelity Money MarketFund and we're going to compare
it with the Johnson Johnsonstock.
Number two what is the amountinvested?
So, for this example, we'regoing to go with $10,000 each.
So imagine you had $10,000, youcould invest it in Fidelity, or
you could invest the same$10,000 in Johnson Johnson.
(10:33):
So that's the amount invested.
We're going to keep it the samefor both investments.
The time horizon for now, we'regoing to keep it at three years
Now.
For those of you who'velistened to all of our episodes,
you know that we are long-terminvestors, long-term dividend
investors.
So when we think in terms ofinvesting, our time horizon is
(10:58):
typically 10 years, 15 years, 20, 25, 30 years like very, very
long term.
But for now, in this video, I'mgoing to keep it at 3%.
We just want to keep it simpleand you'll see why in a couple
of minutes, why we want to leaveit at three years.
But that's the time horizonwe're going to use in today's
(11:21):
comparison.
Next is the rate of return.
So what is the rate of returnwe're going to use for Fidelity
and what are we going to use forJohnson Johnson?
Now to answer that question, weneed to figure out well what's
going to happen to the interestrates in the next three years,
even this year.
(11:41):
A lot of people are curious asto what is going to happen to
interest rates.
Like I said at the beginning ofthis episode, if interest rates
continue to go up, that's goingto mean that the money market
funds are going to be able toprovide higher returns.
If the interest rates come down, then the returns on those
(12:04):
money market funds will comedown as well.
So what is going to happen tointerest rates In the short term
?
In the long term, what is goingto happen?
So for this, a couple ofheadlines.
I did some research.
Most recently, on March 20th,usa Today reported and this is
an actual headline, you can seeup on the screen here.
It says the Federal ReserveMarch meeting rates hold steady
(12:29):
Three cuts seen in 24 this year,despite inflation, this year,
despite inflation.
Another headline from theAssociated Press on the same day
, march 20th.
Their headline reads FederalReserve still foresees three
interest rate cuts this year,despite bump in inflation.
And one more headline fromReuters, march 21st of this year
(12:52):
, march 21st of this year Fedssee three rate cuts in 2024, but
a more shallow easing path.
So what's the common theme here?
The common theme is thateveryone seems to be expecting
at least three interest ratecuts in the US this year, in
(13:13):
2024.
So if that happens, well thenthe money market funds are going
to have lower returns, butthat's fine.
The biggest unknown here is wedon't know when the cuts will
happen and we don't know howmuch they will be cutting.
But that is the expectation inthe market today.
(13:34):
So what are we going to use forthe rate of return.
We still need to put a numberinto our calculator to figure
out what the total returns aregoing to be.
So what I did is I took a lookat the Fidelity money market
fund and I looked up the averageannual returns for one year,
(13:54):
for three years, five years and10 years.
So you can see the one yearreturn is pretty good.
It's 5.02%.
So that would be last year to2023.
The three year return is 2.38%,five years is 1.83% and the 10
year return for this fund hasbeen 1.25%.
(14:14):
So then I did the same thingwith Johnson Johnson and you can
see the numbers up on thescreen.
So Johnson Johnson, theone-year return was not that
great.
It was negative 8.61%.
The three-year return was 8.07%, five-year return was 37.78%
(14:35):
and the 10-year return was111.30%.
So just looking at thesenumbers alone, you can see that
over the last 10 years, johnsonJohnson has done incredibly well
against the Fidelity MoneyMarket Fund.
(14:56):
After five years, same thingthe return is much higher Over
37% return versus 1.83% return.
Over five years, johnsonJohnson versus Fidelity the
three-year return also JohnsonJohnson does really well.
In the one-year return, themutual fund does better the
(15:20):
Fidelity Money Market Fund.
So theoretically I don'trecommend this, but
theoretically you could investin the Fidelity Money Market
Fund just for a year and thenpull your money out.
But here's the thing we justtalked about three interest rate
(15:40):
cuts are expected this year.
So this requires a lot oftiming.
A lot of you got to watch theinterest rates and watch when
the announcements happen, andsometimes you'll see that the
money market funds, the rates,will fluctuate even before the
interest rates are announced.
Maybe I'm not sure, but whatyou need to do then is any money
(16:02):
that you put in the moneymarket fund you're going to have
to watch it.
You may have to pull the moneyout before 12 months because of
the interest rate cuts that areexpected.
So it's a little trickier andmore complex.
If you're going to invest in amoney market fund for the very,
(16:24):
very short term right, we'retalking less than a year,
because that's the only timewhere you can see that it
outperforms our dividend stock,johnson, johnson.
Now, in reality, we're not justputting all of our money in one
money market fund and we're notputting all of our money into
one single dividend stock, right, in both cases you should
(16:46):
diversify so you may owndifferent funds, you may own
different stocks.
So the one-year return maybethe stocks do better than the
money market funds, or viceversa, we don't know for sure.
You'd have to look up all thenumbers.
So, to keep today's episodesimple, I'm going to just use
(17:07):
the three year time frame.
That's our time horizon.
Ok, we're going to stick withthree years horizon.
Okay, we're going to stick withthree years.
Let's see how the money marketperforms against the dividend
stock Johnson Johnson.
So now we have all the data weneed.
We have the two investments.
We've got our money market fund, we've got Johnson Johnson.
(17:28):
Our amount invested is going tobe $10,000 each.
The time horizon we're going tostick with three years.
The rate of return so we'regoing to use the average rate of
return for Fidelity, which was2.38%.
We're going to use the averagerate of return over the last
three years for Johnson Johnson,which was 8.07%.
(17:50):
Now let's not forget the expenseratio.
The Money Market Fund has anexpense ratio of 0.42%.
Johnson Johnson is a dividendstock.
There is no expense ratio.
Some of the brokers are nowoffering zero commissions, so
you could buy Johnson Johnsonwith zero commission.
If not, then just deduct $5 or$8, whatever the commission is
(18:15):
from the total value that I'mgoing to show you right now.
Okay, so the ending value afterthree years Fidelity Money
Market Fund, once we'vesubtracted the expense ratio,
will be worth $10,599.60.
Johnson Johnson over the sameperiod, will be worth over
(18:36):
$12,621.
So that is a difference of19.08%.
So Johnson and Johnson clearlyis the winner here.
It's worth more.
The investment in Johnson andJohnson over three years is
worth more than what you wouldhave received with the Fidelity
(18:59):
Money Market Fund.
Now, keep in mind Johnson andJohnson has a current dividend,
as of this recording, of fourdollars and4.76 a share, the
dividend yield based on thepurchase price if we go back
three years.
So had somebody bought JohnsonJohnson, had you bought the
stock three years ago, yourcurrent dividend yield today
(19:20):
based on the purchase pricewould be over 3%.
If you went back five years andyou purchased Johnson Johnson
five years ago, on January 1stfive years ago, your dividend
yield based on the purchaseprice would be over 3.69%.
And if we go back 10 years andyou had bought Johnson Johnson
(19:45):
10 years ago, not only would youhave collected dividends over
those 10 years, your currentdividend yield based on the
purchase price would be over5.2%.
So now you're making more moneyannually than a typical money
market fund.
So there's an advantage tobuying the dividend stocks and
(20:07):
then holding onto them, becauseyou take advantage of the
increasing dividends coming toyou every single year and if you
take those dividends andreinvest them into other
dividend paying stocks, you cancompound your growth even faster
, and you can do this withoutselling a single share of your
(20:29):
initial investment.
So that's the advantage.
And the other advantage wehaven't talked about is capital
appreciation is, as the stockprice goes up, every time a
company increases its dividendover the long term, the share
price generally comes up, andthat also provides you with
higher returns, and you don'thave that capital appreciation
(20:52):
with a money market fund.
So, having said all of this, Istill think I believe that in
this example, johnson Johnson isstill clearly the winner.
Johnson is still clearly thewinner.
Now, like I said, the moneymarket fund perhaps it does
better in.
You know, if we looked at thelast 12 months did better than
(21:14):
Johnson Johnson.
But going forward, taking intoaccount the potential interest
rate cuts, taking into accountdividend growth, dividend
increases and looking at thehistorical data the last three
years, five years and 10 yearsyou can see that Johnson Johnson
(21:35):
should outperform the moneymarket funds.
So does this mean that youshould go out and buy any stock
that pays a dividend, just likeJohnson Johnson?
And the short answer is no.
There's a couple of more thingswe need to check here.
Our approach to investing is toinvest in quality,
dividend-paying stocks when theyare priced low, so not just at
(21:59):
any price.
They have to be undervalued,and not just any stock.
It has to be a quality,dividend-paying stock.
So how do you know, when you'relooking at a stock, that it's a
quality stock?
How do you know it's price low?
For that I've created what Icall the 12 rules of Simply
Investing.
This is your checklist.
You have to make sure that astock passes all of the 12 rules
(22:20):
before you invest in it.
If there's one failure, skip it, move on to something else.
You can see the 12 rules up onthe screen here.
Rule number one do youunderstand how the company is
making money?
If not, skip it, move on tosomething else.
Rule number two 20 years fromnow, will people still need us
product and services?
Rule number three does thecompany have a low-cost
(22:42):
competitive advantage?
Rule number four is the companyrecession-proof?
Rule number five is itprofitable?
Rule number four is the companyrecession 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 avoid anycompany with a recent dividend
cut.
Rule number 10, does it buyback its own shares?
(23:02):
Rule number 11, is the stockprice low?
Rule number 12, keep youremotions out of investing.
So, for those of you that areinterested, I've created the
self-paced online SimplyInvesting course.
The course is divided into 10modules.
Module 1 covers the investingbasics.
Module 2 covers the 12 rules ofSimply Investing.
(23:24):
Module 3, I show you how toapply the 12 rules using a
Google Sheet.
Module four I show you how touse the Simply Investing
platform.
Module five placing your firststock order.
Module six building andtracking your portfolio.
Module seven knowing when tosell, which is just as important
as knowing when to buy.
(23:45):
Module eight reduce your feesand risk.
Module nine your action planfor getting started right away.
And module 10, I answer yourmost frequently asked questions.
I also have created the SimplyInvesting platform that applies
these rules to over 6,000companies in the US and in
(24:07):
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(24:32):
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If you enjoyed today's episode,be sure to hit the subscribe
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Hit the like button as well,and for more information, take a
look at our website,simplyinvestingcom.
Thanks for watching.
With rising interest rates, does it still make sense
to invest in dividend stocks?
Is a money market fundreturning more than 5% better
than a dividend stock yieldingonly 3%?
I'm going to answer thesequestions in today's episode.
Hi, my name is Kanwal Sarai andwelcome to the Simply Investing
(00:24):
Dividend Podcast.
In today's episode, we're goingto cover the following four
topics First, we'll talk aboutthe rising interest rates in
today's current economicenvironment.
Then we'll talk about what aremoney market funds, then we'll
look at some examples of moneymarket funds and their returns
(00:48):
and then we will compare atypical money market fund with a
typical dividend stock and findout which is the better
investment.
Let's get started with ourfirst topic rising interest
rates and the biggest questionmost people have, and they've
seen in the last 12 to 18 monthsthat interest rates have gone
(01:11):
up and they may continue to goup.
They may not, but let's take alook.
So the question is haveinterest rates gone up?
And the short answer is yes.
Let's take a look at the USfund rate in the last three
years and you can see the graphon the screen and you can
clearly see that the rates havegone up consistently, beginning
(01:36):
at around February, march ormiddle of the year in 2022.
Nevertheless, it was in 2022where the US Federal Reserve had
started to increase theinterest rates, and you can see
on the graph prior to 2022, theywere close to, very close to 0%
(01:57):
, and then we can see that theyear 2022 finished off at around
one and a half 2%.
The year 2022 finished off ataround one and a half two
percent.
Then the rates went up to threepercent, four percent and
currently sitting at five pointthree, three percent as of this
recording.
And the situation is similar inCanada.
(02:18):
If we look at the Bank ofCanada, the interest rates in
the last three years again youcan see on the screen the
interest rates have gone up.
And same thing prior to 2022,they were sitting at almost 0%
for many, many years and theinterest rates have gone up
since then.
And now, as of this recording,they are sitting at 5.25%, which
(02:43):
is all good news for termdeposits, cds or, in Canada,
gics and money market funds,because all of those types of
investments have increased theinterest rates that they are
offering to investors.
So now let's move on to oursecond topic of what are money
(03:04):
market funds?
And, quite simply, a moneymarket fund is a type of mutual
fund that invests in highquality short term debt
instruments and cash and cashequivalents.
If you look at some of theinstruments, it's primarily US
Treasuries or T-bills orTreasury bills, and so that's
what's inside of a money marketfund.
(03:27):
Now there's some pros and consto money market funds.
So some of the pros areobviously it's very low risk,
highly liquid, easy to cash itin and they generally offer
better returns than you'll findin a bank account.
Now some of the cons they arenot FDIC insured, there's no
capital appreciation, the netasset value of the mutual fund
(03:50):
or the unit price is alwaysfixed and they are certainly
sensitive to interest ratefluctuations and changes in
monetary policy.
So if rates continue to go up,then you'll find that the money
market funds will continue tooffer higher interest rates.
However, if interest ratesstart to come down, then the
(04:12):
money market returns will alsostart to come down.
Now let's take a look at some ofthe returns.
That's our third topic here.
Let's see in the short term, asof this recording, what are
some of the money market returnsand you can see up on the
screen here.
I've taken four typicalexamples of some money market
(04:34):
funds.
Now the numbers are high, butwe are only looking at the seven
day yield, not the one yearyield or the three year or five
year.
We're just looking at the sevenday yield.
So, just as an example you cansee on the screen here, fidelity
money market fund has a sevenday yield of 5.04%, the T-Row US
(04:58):
Treasury money market fund isat 5.4%, the Vanguard money
market fund is at 5.27% and theFidelity government money market
fund is sitting at 4.98%.
Now, let's not forget, each ofthese funds have an annual
expense ratio.
(05:19):
Now, I know some of the brokerssay that there's no fee to buy
them.
That's absolutely true.
They may offer no fees to buymutual funds or index funds or
ETFs, but these funds themselveshave an annual expense ratio.
This fee is deductedautomatically from your
(05:39):
investment in any of these funds, investment in any of these
funds.
We'll talk a little bit moreabout the expense ratio later on
.
Just as an example, theFidelity Money Market Fund has
an expense ratio of 0.42%, theTRO is at 0.3%, vanguard is at
(06:06):
0.11% and the FidelityGovernment Money Market Fund is
also at 0.42%.
Okay, so now let's get on to ourmain topic in this episode, and
what we want to do here is wewant to compare a typical money
market fund to a typicaldividend stock and then figure
out which investment is better,which one is going to offer a
higher return.
So I'm going to show you thesame slide we looked at before,
(06:29):
which was the four examples ofmoney market funds up on the
screen, the seven-day yield, andlet's just take an average of
the seven-day yield and you cansee it's at 5.17%.
Now, remember, this is not aone-year yield or a two or
three-year yield, it's aseven-day yield and you can see
it's at 5.17%.
Now, remember this is not aone-year yield or a two or
three-year yield, it's aseven-day yield, but still the
(06:51):
number is quite high.
Let's compare that to fourtypical dividend stocks and what
we're going to look at is thedividend yield.
So Johnson Johnson has acurrent dividend yield, as of
this recording, of 3.08%,coca-cola is at 3.21%, walmart
(07:12):
is at 1.37% and McDonald's is at2.4%.
Now if you take the averagehere, you'll notice that it is
not as high as the money marketfunds.
The average dividend yield forthese four dividend stocks is
2.52%.
Now, if we compare both of theaverages again, what we're
(07:37):
highlighting here is that themoney market funds, the
seven-day yield is typically, asof this recording, higher than
most dividend stocks, so it's at5.17% versus 2.52%.
Now, the goal of this topic inthis episode, is to compare a
(08:00):
typical money market fund to atypical dividend stock.
So to do that, we need to coverfour things.
Number one we need to decide,okay, what are we going to
compare with.
So, which money market are wegoing to select?
Which dividend stock are wegoing to select?
Number two what is the amountthat we're going to invest in?
Number three what is the timehorizon?
(08:22):
And number four what is therate of return?
So we're going to go throughall four of these, but let's
start with number one on thelist.
So, for the purposes of thisepisode and just to keep it
simple I know there's hundredsof money market funds to choose
from.
There's thousands of dividendstocks to choose from.
We're going to try and keepthis simple and short.
(08:43):
For this example, I'm going toselect the Fidelity Money Market
Fund.
If anybody's interested, youcan look up the details.
The fund symbol is SPRXX andwe're going to compare it to
Johnson Johnson, which is adividend stock.
Just a quick little summary ofFidelity Money Market Fund.
(09:05):
The fund was started in 1989.
It has a unit value, an NAV, of$1, right?
So the price is fixed at $1 andthe expense ratio, as we showed
before, is at 0.42%.
If we take a quick look atJohnson Johnson for 2%.
(09:29):
If we take a quick look atJohnson Johnson, it's a US
company.
It was founded in 1886.
The share price as of today, asof this recording, is $154.76
to buy one share.
The dividend yield is 3.08% andthe company has had an
incredible track record ofconsecutive years of dividend
increases at 62 years.
(09:51):
So the company has beenconsecutively increasing its
dividend to the shareholdersevery single year for 62 years.
So that's something veryimportant to note.
Now let's go back to our fourthings that we needed here.
So, number one we know whichinvestments we're comparing with
(10:13):
.
So the Fidelity Money MarketFund and we're going to compare
it with the Johnson Johnsonstock.
Number two what is the amountinvested?
So, for this example, we'regoing to go with $10,000 each.
So imagine you had $10,000, youcould invest it in Fidelity, or
you could invest the same$10,000 in Johnson Johnson.
(10:33):
So that's the amount invested.
We're going to keep it the samefor both investments.
The time horizon for now, we'regoing to keep it at three years
Now.
For those of you who'velistened to all of our episodes,
you know that we are long-terminvestors, long-term dividend
investors.
So when we think in terms ofinvesting, our time horizon is
(10:58):
typically 10 years, 15 years, 20, 25, 30 years like very, very
long term.
But for now, in this video, I'mgoing to keep it at 3%.
We just want to keep it simpleand you'll see why in a couple
of minutes, why we want to leaveit at three years.
But that's the time horizonwe're going to use in today's
(11:21):
comparison.
Next is the rate of return.
So what is the rate of returnwe're going to use for Fidelity
and what are we going to use forJohnson Johnson?
Now to answer that question, weneed to figure out well what's
going to happen to the interestrates in the next three years,
even this year.
(11:41):
A lot of people are curious asto what is going to happen to
interest rates.
Like I said at the beginning ofthis episode, if interest rates
continue to go up, that's goingto mean that the money market
funds are going to be able toprovide higher returns.
If the interest rates come down, then the returns on those
(12:04):
money market funds will comedown as well.
So what is going to happen tointerest rates In the short term
?
In the long term, what is goingto happen?
So for this, a couple ofheadlines.
I did some research.
Most recently, on March 20th,usa Today reported and this is
an actual headline, you can seeup on the screen here.
It says the Federal ReserveMarch meeting rates hold steady
(12:29):
Three cuts seen in 24 this year,despite inflation, this year,
despite inflation.
Another headline from theAssociated Press on the same day
, march 20th.
Their headline reads FederalReserve still foresees three
interest rate cuts this year,despite bump in inflation.
And one more headline fromReuters, march 21st of this year
(12:52):
, march 21st of this year Fedssee three rate cuts in 2024, but
a more shallow easing path.
So what's the common theme here?
The common theme is thateveryone seems to be expecting
at least three interest ratecuts in the US this year, in
(13:13):
2024.
So if that happens, well thenthe money market funds are going
to have lower returns, butthat's fine.
The biggest unknown here is wedon't know when the cuts will
happen and we don't know howmuch they will be cutting.
But that is the expectation inthe market today.
(13:34):
So what are we going to use forthe rate of return.
We still need to put a numberinto our calculator to figure
out what the total returns aregoing to be.
So what I did is I took a lookat the Fidelity money market
fund and I looked up the averageannual returns for one year,
(13:54):
for three years, five years and10 years.
So you can see the one yearreturn is pretty good.
It's 5.02%.
So that would be last year to2023.
The three year return is 2.38%,five years is 1.83% and the 10
year return for this fund hasbeen 1.25%.
(14:14):
So then I did the same thingwith Johnson Johnson and you can
see the numbers up on thescreen.
So Johnson Johnson, theone-year return was not that
great.
It was negative 8.61%.
The three-year return was 8.07%, five-year return was 37.78%
(14:35):
and the 10-year return was111.30%.
So just looking at thesenumbers alone, you can see that
over the last 10 years, johnsonJohnson has done incredibly well
against the Fidelity MoneyMarket Fund.
(14:56):
After five years, same thingthe return is much higher Over
37% return versus 1.83% return.
Over five years, johnsonJohnson versus Fidelity the
three-year return also JohnsonJohnson does really well.
In the one-year return, themutual fund does better the
(15:20):
Fidelity Money Market Fund.
So theoretically I don'trecommend this, but
theoretically you could investin the Fidelity Money Market
Fund just for a year and thenpull your money out.
But here's the thing we justtalked about three interest rate
(15:40):
cuts are expected this year.
So this requires a lot oftiming.
A lot of you got to watch theinterest rates and watch when
the announcements happen, andsometimes you'll see that the
money market funds, the rates,will fluctuate even before the
interest rates are announced.
Maybe I'm not sure, but whatyou need to do then is any money
(16:02):
that you put in the moneymarket fund you're going to have
to watch it.
You may have to pull the moneyout before 12 months because of
the interest rate cuts that areexpected.
So it's a little trickier andmore complex.
If you're going to invest in amoney market fund for the very,
(16:24):
very short term right, we'retalking less than a year,
because that's the only timewhere you can see that it
outperforms our dividend stock,johnson, johnson.
Now, in reality, we're not justputting all of our money in one
money market fund and we're notputting all of our money into
one single dividend stock, right, in both cases you should
(16:46):
diversify so you may owndifferent funds, you may own
different stocks.
So the one-year return maybethe stocks do better than the
money market funds, or viceversa, we don't know for sure.
You'd have to look up all thenumbers.
So, to keep today's episodesimple, I'm going to just use
(17:07):
the three year time frame.
That's our time horizon.
Ok, we're going to stick withthree years horizon.
Okay, we're going to stick withthree years.
Let's see how the money marketperforms against the dividend
stock Johnson Johnson.
So now we have all the data weneed.
We have the two investments.
We've got our money market fund, we've got Johnson Johnson.
(17:28):
Our amount invested is going tobe $10,000 each.
The time horizon we're going tostick with three years.
The rate of return so we'regoing to use the average rate of
return for Fidelity, which was2.38%.
We're going to use the averagerate of return over the last
three years for Johnson Johnson,which was 8.07%.
(17:50):
Now let's not forget the expenseratio.
The Money Market Fund has anexpense ratio of 0.42%.
Johnson Johnson is a dividendstock.
There is no expense ratio.
Some of the brokers are nowoffering zero commissions, so
you could buy Johnson Johnsonwith zero commission.
If not, then just deduct $5 or$8, whatever the commission is
(18:15):
from the total value that I'mgoing to show you right now.
Okay, so the ending value afterthree years Fidelity Money
Market Fund, once we'vesubtracted the expense ratio,
will be worth $10,599.60.
Johnson Johnson over the sameperiod, will be worth over
(18:36):
$12,621.
So that is a difference of19.08%.
So Johnson and Johnson clearlyis the winner here.
It's worth more.
The investment in Johnson andJohnson over three years is
worth more than what you wouldhave received with the Fidelity
(18:59):
Money Market Fund.
Now, keep in mind Johnson andJohnson has a current dividend,
as of this recording, of fourdollars and4.76 a share, the
dividend yield based on thepurchase price if we go back
three years.
So had somebody bought JohnsonJohnson, had you bought the
stock three years ago, yourcurrent dividend yield today
(19:20):
based on the purchase pricewould be over 3%.
If you went back five years andyou purchased Johnson Johnson
five years ago, on January 1stfive years ago, your dividend
yield based on the purchaseprice would be over 3.69%.
And if we go back 10 years andyou had bought Johnson Johnson
(19:45):
10 years ago, not only would youhave collected dividends over
those 10 years, your currentdividend yield based on the
purchase price would be over5.2%.
So now you're making more moneyannually than a typical money
market fund.
So there's an advantage tobuying the dividend stocks and
(20:07):
then holding onto them, becauseyou take advantage of the
increasing dividends coming toyou every single year and if you
take those dividends andreinvest them into other
dividend paying stocks, you cancompound your growth even faster
, and you can do this withoutselling a single share of your
(20:29):
initial investment.
So that's the advantage.
And the other advantage wehaven't talked about is capital
appreciation is, as the stockprice goes up, every time a
company increases its dividendover the long term, the share
price generally comes up, andthat also provides you with
higher returns, and you don'thave that capital appreciation
(20:52):
with a money market fund.
So, having said all of this, Istill think I believe that in
this example, johnson Johnson isstill clearly the winner.
Johnson is still clearly thewinner.
Now, like I said, the moneymarket fund perhaps it does
better in.
You know, if we looked at thelast 12 months did better than
(21:14):
Johnson Johnson.
But going forward, taking intoaccount the potential interest
rate cuts, taking into accountdividend growth, dividend
increases and looking at thehistorical data the last three
years, five years and 10 yearsyou can see that Johnson Johnson
(21:35):
should outperform the moneymarket funds.
So does this mean that youshould go out and buy any stock
that pays a dividend, just likeJohnson Johnson?
And the short answer is no.
There's a couple of more thingswe need to check here.
Our approach to investing is toinvest in quality,
dividend-paying stocks when theyare priced low, so not just at
(21:59):
any price.
They have to be undervalued,and not just any stock.
It has to be a quality,dividend-paying stock.
So how do you know, when you'relooking at a stock, that it's a
quality stock?
How do you know it's price low?
For that I've created what Icall the 12 rules of Simply
Investing.
This is your checklist.
You have to make sure that astock passes all of the 12 rules
(22:20):
before you invest in it.
If there's one failure, skip it, move on to something else.
You can see the 12 rules up onthe screen here.
Rule number one do youunderstand how the company is
making money?
If not, skip it, move on tosomething else.
Rule number two 20 years fromnow, will people still need us
product and services?
Rule number three does thecompany have a low-cost
(22:42):
competitive advantage?
Rule number four is the companyrecession-proof?
Rule number five is itprofitable?
Rule number four is the companyrecession 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 avoid anycompany with a recent dividend
cut.
Rule number 10, does it buyback its own shares?
(23:02):
Rule number 11, is the stockprice low?
Rule number 12, keep youremotions out of investing.
So, for those of you that areinterested, I've created the
self-paced online SimplyInvesting course.
The course is divided into 10modules.
Module 1 covers the investingbasics.
Module 2 covers the 12 rules ofSimply Investing.
(23:24):
Module 3, I show you how toapply the 12 rules using a
Google Sheet.
Module four I show you how touse the Simply Investing
platform.
Module five placing your firststock order.
Module six building andtracking your portfolio.
Module seven knowing when tosell, which is just as important
as knowing when to buy.
(23:45):
Module eight reduce your feesand risk.
Module nine your action planfor getting started right away.
And module 10, I answer yourmost frequently asked questions.
I also have created the SimplyInvesting platform that applies
these rules to over 6,000companies in the US and in
(24:07):
Canada every single day.
So the platform is a reallyquick way to filter out and look
at which companies you shouldconsider for investing and which
ones you should avoid.
If you're interested in thecourse or the platform, write
down the coupon code SAVE10.
S-a-v-e-1-0.
(24:32):
This coupon code is going togive you 10% off of the course
and the platform as well.
If you enjoyed today's episode,be sure to hit the subscribe
button.
We have a new episode out everyweek.
Hit the like button as well,and for more information, take a
look at our website,simplyinvestingcom.
Thanks for watching.
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