In response to a recent post titled Dividend Milestone I reader Jeroen wrote,
“I was very impressed when I read your blog post and learned that you are currently receiving more than $8000 in annual dividends! Congratulations! This is very inspiring to me as I am around the same age as you are. At the same time, however, it raises questions. I currently get just over $X in annual dividend income…like you, I also decided to take on a conservative amount of leverage to take advantage of the many bargains that were out there during the painc at the end of 2008 and at the beginning of this year.
So my question really is ‘How do you do it’? Can you give me an idea of how much you invest per month/quarter/year? Perhaps you can share some tips or give some advice on how I can also achieve such a goal? How long have you been investing in your DivG portfolio?“
First I will admit that reaching this milestone in my Dividend Growth Portfolio (DivG) didn’t occur overnight. It look time, a lot of work, patience and an incredible amount of discipline taught to me by a number of individuals.
I do feel there is an important lesson hidden within my response to Jeroen’s questions: “When investing we often look directly to the result instead of studying the process.“
Warren Buffett is one of the greatest investors known in our time and he is a great example of far too much credit being given to the result of his investments instead of the process through which he got there. Understanding what contributed to any successful investment or portfolio is the foundation through which I learned to become the investor I am today.
How I achieved this milestone is simple: I saved, invested and saved some more. I had a certain amount of luck, skill and opportunities that others may not have had, but the key, as I tell everyone who asks, is the difference between what you make, what you spend and how much you can save. My family and friends often laugh and call me “cheap” but in reality I’m frugal and proud of it.
The key, to any success in life, is often how hard you work at something. My work ethic (whether as a business owner, Registered Nurse or investor) is very high and something I pride myself on. Investing takes skill, luck and time but when you’re young the power of saving is something that many people lose sight of.
ThickenMyWallet made reference to this recently in a post titled, Observations from an investment seminar where he made reference to the fact that he and a friend were by far the youngest (in their 30’s) attending the specific event. The scary truth is that far too many individuals wait until it’s too late to allow compound interest (Rule of 72) to help advance their wealth in their own favour.
I started saving at the age of 11 or 12 when I began cutting grass in my neighbourhood for a number of elderly individuals. I would charge $15-20 per cut and each summer make around $2,000 tax free. By the time I began my business degree I was making enough money through a part-time job to support my living expenses and tuition while investing the money I had saved during all those summers. When I began my nursing degree I had another part-time job that paid me nearly double my living expenses (which were very low) and all additional savings each month went towards my investments.
By the time I created my first Value Portfolio in 2006 I had $20,000 to start the portfolio and another $20,000 in savings. For the first two years I was able to compound the investments in my Value Portfolio at an average of 65% leaving me over double what I started with when I closed that portfolio and created DivG. In restrospect I was taking far too many risks with the time horizon and type of investments I was making and what I was doing is something I would have difficulty doing again with the type of risk adversion I have now.
When I started working fulltime as a RN my monthly expenses were only 20% of my income and all additional funds went into savings and investments. Over the next year and a half my savings contributed nearly 30% of the new funds to my portfolio. The huge factor in the growth of my investments, even if you take out the returns of my first Value Portfolio, was how much I was able to save.
I didn’t live like a hermit, but I was making more then I was spending. I drove a nice car, rented a room with a friend in a nice house and lived cheaper then I could afford. I kept a monthly budget and tracked all my receipts (something I still do today) so I always knew how much I was spending and saving.
When the credit crunch rolled around in the summer of 2008 I began investing heavily into the companies I already owned or had studied for years. I opened a line of credit (LOC) for $30,000 and used $25,000 to invest over the past year in companies such as Manulife (MFC), the Canadian banks I already owned (RY, TD & BNS) and a number of depressed preferred shares trading near $15 ($25 par value). I invested on a regular basis in each of my holdings with some near their 52-week lows and others at fair value to keep my portfolio balanced with each holding comprising 3-5%. I still owe a large sum on the LOC, but the dividends that are borrowed are paying off a considerable amount of my LOC each year moving forward. 50% of the dividends are invested directly back into the portfolio and the other half immediately used to pay back the outstanding balance on the LOC.
Having the intestinal fortitude, discipline and skill to invest in an environment of fear and chaos helped substantially, but any long-term investor needs to realize that what we’ve experienced in the last two years is normal and will happen again. The severity may change, but panic creates opportunities and as long as you understand the risk the reward at times can be proportional.
Today I certainly don’t take risks I did with my money when I was younger, but back then I didn’t know any better and those choices, in retrospect, made me a better investor today.
I can’t stress enough the importance of living within your means and focusing on savings. When you’re young its very easy to spend wildly and not take account of how much is going out. I’ve travelled the world and spent a lot of money on a beautiful home in the process, but my priority even now in life is saving for the future. We have a discretionary spending budget each month that accounts for 7.5% of our combined income. Setting a limit on spending and sticking to it makes a big difference. I walk to work each day (8-12 min) so we only need one vehicle. There are many changes anyone can make to their monthly budget to save even $100 that over the course of a year leaves you with $1,200 to invest for the long-term.
Remember that, “when investing we often look directly to the result instead of studying the process” and if you embrace that knowledge you’ll find that your successes when investing over the long-term will increase considerably.
Great article. I am surprised on how your investment process evolved over the years. Thanks for sharing.
That's a great story. Congratulations
Nice. Some interesting ideas in there.
What percentages do you contribute to RRSP, TFSA, and Cash accounts? Was your entire LOC investment done in a cash account in order to pay off the LOC?
Love the posts, thank you!
I don't have specific targets for contributions to my accounts, but I have contributed the maximum to my TFSA and contribute enough to my RSP to take advantage of the tax return and grow investments in that portfolio. If I had to take a guess for a breakdown I would say 20%, 20% & 60% (DivG).
I don't use a margin account so yes the LOC was used in a cash account at TDW with dividends used to pay off the LOC directly at TDCT.
Thanks for clarifying. I'm in the process of leaving an advisor and collecting my funds together to manage myself.
I've been struggling with the allocations in these different accounts, whether to keep contributing heavily to the RSP or concentrate my Div portfolio strictly in the cash account, etc.
M: If you haven't already read my post on my portfolio allocation here is the link:
You might find that helpful by looking at what I do in my accounts when separating my investments.
So is the $8K net of your investment interest on the loan or not?
No the $8k is from direct dividends from the portfolio. My interest cost (at this present time) is about $800.00.