PODCAST 134 

SAFE DIVIDEND INVESTING 

Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 134, on September 21st of 2023.  

My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 6 interesting investment questions. 

The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful self-directed investors.

QUESTION #1 

Why do most Americans not invest in the stock market? 

For almost everyone, Americans or not, the stock market is intimidating. The professionals from their lofty perches preach to prospective investors using jargon and confusing terms that normal humans do not use. It is a B.S. industry full of salespeople (who prefer being called advisors) selling wonderful, magical investment products that will make the buyer rich, rich, rich. 

Unfortunately, most people will not make money. They will lose money. Mutual funds and other funds do make money - for the investment advisors who sell them, the financial institution that employs the advisors and those that manage the mutual funds. These professionals not only make money this year from your investment but every year the investor owns them whether the investor makes money or not. 

Those fearful of investing in the stock market feel safer investing their money in real estate and in bank savings accounts. They appear to be more tangible and relatable. Real estate has its problems. Keeping money in a safe deposit account allows it to be eaten away by inflation. 

The strange thing is that that self-directed investor, free of investment advisors, who choose to invest in several financially strong companies who have paid high dividends for decades have a hard time losing money. However, no one (especially investment advisors) is teaching the investing illiterate how to identify strong, dividend paying companies or how to track share prices and dividend payments for decades. Investors must to learn self-directed investing on their own. 

Financial independence can be realized by owning a safe stock portfolio and by carefully managing your expenses. Unfortunately, Americans are taught to be workers, consumers, and borrowers, not investors. Self-directed investing is something that should be taught in high school but who is going to lobby for it to be done? Not those who gain from the population’s financial ignorance. The financial professionals have nothing to gain from self-directed investors. 

The media does not help. Every hour of every day they continue to concentrate on the drama of rising and falling stocks, the fortunes being made, and fortunes being lost, anything that will attract speculators to their media. All with the objective of selling financial advertising with little regard to how they scare the average citizen who worries about pensions and security. 

QUESTION #2 

How do you recover your losses in the stock market after selling shares at a low price? 

You only lose in the stock market if you sell your shares when the price is below what you paid for them. If you buy financially strong stocks paying high dividends, it is very easy to see how share prices and dividend payments have behaved over the last several decades. 

There are many stocks that have consistently increased their share prices and dividends over the decades. You can see how they may have dipped down after the 2000, 2008 and 2020 market crashes but within a year or two their share prices reached new record highs. You can also see that during these market crash years the dividend payouts did not dip, they remained steady or climbed. 

If you buy such stocks, you quickly learn to recognize that any dips in share price are temporary. You do not panic and sell such stocks. You live off their dividend payouts until share prices recover. You also look for the signs of strength in the stocks whose share prices have declined. Do they still have a low Price -to -Earnings ratio, a high operating margin and a book price close to the share price. 

For those who are losing money in the stock market, are the stocks you are losing money on speculative stocks. Are they unprofitable stocks that were being promoted as having “great potential”. Have they only been traded for only a few years. If this is the case then you are paying for your lack of basic stock analysis. 

To recover your losses, you must learn to be very careful about only choosing strong stocks with very little chance of shrinking over the long term. It will take time to recover what you have lost but it can happen. 

QUESTION # 3 

What causes a stock price to fall when buying pressures have increased significantly? 

The stock market is an auction vehicle. Optimistic speculators who think the stock is going to go up buy stocks from pessimistic speculators who think the stocks are going to go down. To make the speculators sell, the optimists must increase the price significantly above the current price to get the pessimists to sell. Pessimists to sell their stocks must lower the price below the current price to get the optimists to buy. 

If the stock price is falling this means, there are far more pessimists lowering their price than optimists increasing the price. If previously, the share price was increasing because of optimists buying, then optimists must no longer see an opportunity for increased prices in this stock. 

Optimistic and pessimistic traders are both speculators. They concentrate on the share price movement, not on the fundamental strength or weakness of a company. This is why a recently listed company that has never made a profit is able to sell stocks based on its promoted “potential” not on the reality of their current weak financial condition. You see this now in the promotion of lithium and artificial intelligence stocks. 

Investors who only invest in financially strong companies with long track records of rising profits and dividend payouts have zero interest in unprofitable companies. They pay little attention to the daily fluctuating price of a strong stock being pushed up and down by speculators. They recognize that in time the share price of a financially strong company will rise. 

QUESTION #4 

How easy is it to become rich these days using easily accessible online investment information? 

What is “rich”? Where are you starting your journey to “richness” from? What money do you have to invest in this journey to wealth? How disciplined are you? What are you willing to sacrifice to become rich or did you think it was like a lottery where only a few lucky people are chosen randomly to be the next rich person? There is no lottery. Making money requires that you have money to invest. 

How are you going to accumulate enough money for your initial investment, whatever that investment may be? 

If your total wealth is now $100 in cash, then realizing $1,000 in cash would be a major gain. However, you are not going to make $1,000 by investing $100 in the stock market. 

One valuable asset you may have is a good credit rating. If it is good enough, you may be able to borrow $100,000 providing that you have an employment income sufficiently high to pay the interest on the loan and no record of ever defaulting on a loan. 

You now have $100,000 in cash. Do you feel rich? No, you don’t because now you must repay that $100,000. In a sense you are now worse off because you now have the burden of this $100,000 debt hanging over you. 

To get that loan, the bank is going to demand that you to invest it in something that will assure them that if you re-nag on your loan obligation that they can then seize that asset to cover their loss.You have just acquired a partner. They are called the bank. 

The problem now is how are you going to use this $100,000 to become rich. Let us define rich as having access to sufficient unencumbered money that you will never need to be employed to maintain your desired lifestyle. How much money is that? The amount depends on the lifestyle you aspire to and how much longer you will live. 

Being 90 years old and living in a small tent in a public park requires very little in the accumulation of wealth to maintain such a lifestyle. Somehow, I think this is not the lifestyle that you aspire to. 

If you invested the $100,000 in the stocks of financially strong companies with histories of paying high dividends for decades, it would not be difficult for you to realize a safe annual income of around 6% and see the value of your investment portfolio grow by as much as 12% most years. All the information needed to identify such stocks is instantly available, free of charge, on the internet. (To make it even easier the work of scoring such stocks and sorting them out has been done in my books “New York Stock Exchange’s 106 Best High Dividend Stocks” and in “Canadian High Dividend Investing – 215 Scored Stocks”). However there is a catch, since your portfolio is financed on borrowed money, you may find after paying the bank loan you are only realizing an income of 1%. 

That portfolio should still grow in value due to average annual share price increases of 12%. Thus in a year the portfolio’s value can grow to  $112,000. This gain would result in a higher dividend payout because now you are getting 6% on $112,000 instead of the $100,000 you started with. If you liquidated some of this $112,000 to put some money in your pocket, you would be reducing your future dividend income. However, if you invest in what is now a higher dividend payout, this surplus money will make your portfolio’s value increase faster. 

After 10 years, you would have paid off the bank loan. By then the portfolio may have grown to be worth more than $200,000 and be paying you an annual dividend income exceeding $12,000. This may be sufficient income for the 90-year-old to survive in that tent in the city park if they are still with us at 100 years of age. 

However, you are not a 90-year-old living in a tent in the park. You want to be financially independent with an income that allows you to live in a house, own a car, take vacations, and live comfortably. To achieve that level of “richness” requires much more than a $100,000 bank loan. To reach financial independence means investing, from your employment income, a few thousand dollars every month into those carefully chosen, financially strong, high dividend paying stocks. Now that your bank loan is paid off, you would have more to invest. 

Maximizing the amount, you can invest requires great sacrifice. It means questioning every penny you now spend. It may mean doing without things that you took for granted like a $5 coffee or other expendable consumer goods. Driving the same car for 10 years can release thousand of dollars to be invested. Perhaps taking on a second job will further increase what you can add to your portfolio. No one ever said it was going to be easy to reach your goal of financial independence. 

This financial sacrifice isn’t forever. Within ten years you could have a portfolio well over a million dollars. It will continue to grow even after you quit your job and begin to live solely on your now generous dividend income. 

Will you now feel rich? Probably not. You will still have to control your spending to live within that dividend income. Frugal living becomes a habit that is hard to break but now you will be able to indulge yourself more often without feeling guilty. 

The value of your portfolio will be your anchor and your insurance policy for emergency funding which hopefully you will never need to draw upon. No longer worrying about money will leave you relaxed. You will sleep better at night and live longer. 

Is there a quicker alternative? We have all heard of those who speculated on financially weak, penny stocks “who only had a potential for profits”. Within a short time that stock’s share price increased by 1,000 percent. What did these now rich speculators do with their quick, easy money? 

Did they cash in the speculative stocks and now invest in financially strong, high dividend paying, carefully stocks? No, they invested in more speculative unprofitable stocks. Why? Because based on one lucky choice of stock, they thought they must be stock picking geniuses. You later hear how they kept on investing in weak companies until all their money was eventually gone. It is one thing to acquire wealth. It is another, to be able to hang onto it and make it steadily grow decade after decade. 

Speculators have access to the same free financial information at Yahoo Finance, Google, or their bank. However, in their quest for quick wealth they ignore the availability of such information to guide them. Instead, they followed their “instincts” and bought the latest hot stocks being promoted. 

You might ask, “would it not be easier to just give money to a financial advisor every month and let them grow your wealth for you? Unfortunately, most financial advisors are paid to sell mutual funds. This means you now have the financial advisor, his employer and whoever manages the mutual fund sharing in whatever gain could be realized from your investment. This sharing is done whether your portfolio makes or loses money. Somewhere between 2% and 4% of the value of your portfolio is going support this gang of “professionals” every year that you invest with them. 

If a 6% return on your money is considered good, then recognize after the professionals take their bite you are losing most of that 6%. You will also find that their funds can and do lose money. They give you no guarantees of financial gain. 

Since they know little about high dividend paying stocks, do not expect the professionals to propose such an investment. Their company lawyers feel much safer to have their financial advisors sell fuzzy mutual funds that can be more easily defended in court cases brought by disgruntled investors. 

With a fund, you have only a vague idea what the fund is invested. Most of the typical fund is made up of mediocre weak stocks. To achieve success in investing, you must choose very carefully which ones to add to your portfolio. You limit your chances of achieving wealth by investing in funds which are created to make fund companies rich. 

For some insight into the dangers and the opportunities you face when investing in the stock market. You could go to my website http://www.informus.ca.. Safe investing is not that difficult once you are shown how to do it. I am not an investment advisor. I am just a guy who shares how he achieved financial independence through careful stock selection over many years. 

THE END