Starting Your Passive Income Machine (For Beginners)
While I thoroughly enjoy jumping head-first into nitty gritty numbers; analyzing 52-week range lows and highs, P/E values, dividend yields and growth rates, payout ratios and EPS – I get that this is not for everyone.
Investing Made Easy
Some people don’t want to pick stocks; I hear people often say “I don’t know the first thing about investing. I’m afraid to lose money. I don’t trust the stock market“, etc, etc. and the list goes on. And for those people, I wouldn’t recommend picking stocks. I can already see this kind of person making a quick pick following the herd, losing a couple hundred dollars, and then swearing off the market for good. This is terrible because while you can lose money picking hot stocks, or even on good picks, the overall trend of the market is upwards over an extended period of time.
The best thing you can do as a young person (or even an old person) is to start investing as soon as you’re humanly able to. The power of compounding will be on your side and over time, you’ll have a fortune amassing itself as you sit back and live your daily life; all you have to do is put some money aside every month, or every three or four months – whenever you can! Obviously the more often, the better, both to add to your portfolio and to dollar cost average your purchases (so you buy more when markets are down and buy less when markets are up). If you don’t realize just how incredible compounding is, you can see my 20 year plan to build a passive income machine.
For those who
- don’t have the time to dedicate to analyzing and picking stocks
- are afraid to lose all their money in the stock market
- want to start building a passive income machine of their own
- want to get paid every month without lifting a finger
you should kick-start your investing careers by investing in a dividend growth ETF (exchange-traded fund).
Investing In A Portfolio of Canadian Dividend Aristocrats
An ETF is just a passively managed portfolio comprised of multiple stocks that usually follow a theme or objective. In this case the objective would be to invest in companies which regularly increase their dividends.
Since we all know I’m Canadian by now, I’ll be looking at the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF, which has the ticker CDZ.
They list their investment objective as:
“The iShares S&P/TSX Canadian Dividend Aristocrats Index Fund aims to tracks the S&P/TSX Canadian Dividend Aristocrats Index, less fees and expenses.
To qualify, securities must:
a) be common stock or income trust listed on the TSE and in the S&P Canada Broad Market Index;
b) have increased ordinary cash dividends for at least 5 consecutive years;
c) have a minimum C$ 300 million market cap.”
Now if you were to purchase shares of this ETF through your brokerage, which you can set up with your bank (just give ’em a call, they’ll be thrilled to open an account for you); you wouldn’t have to do another thing! From then on you can just sit back, and purchase more shares when you’ve saved up enough money so that paying any brokerage commissions isn’t a big deal. I pay $6.95 in commissions per trade with CIBC Investor’s Edge, so I wouldn’t invest anything less than $1, 000 at a time.
The CDZ fund consists of 71 different holdings, meaning by purchasing one share of this fund you are essentially buying a stake in 71 different companies. This greatly reduces your risk of losing a large portion of your money. Even if one of these companies go bankrupt, you will not lose nearly all your money. This is a great safety net for those who are afraid to enter the stock market; you’re already diversified across financials (26.56%), energy (21.08%), industrial (15.05%), discretionary (11.66%), materials (7.55%), telecommunications (5.81%), utilities (5.08%), information technology (4.59%), consumer stables (2.47%) and cash / derivatives (0.16%). So your stock picking is all handled, and your asset allocation is also taken care of.
Watch The Money Roll In
This ETF also pays dividends every month, which is something I really like about certain stocks. When you’re getting payments coming to you every month it enforces the good habit of investing, since the more you invest, the more you’ll see coming into your accounts every month, which will compound monthly.
CDZ has an MER (management expense ratio) of 0.66%, which is a comission they keep for managing your portfolio, while this may upset you, the mutual funds that banks will sell to you will have MERs of 1% to 2% at least. So you’re getting a deal by purchasing ETFs instead of mutual funds. In fact, mutual funds are generally terrible investments and will cost you A LOT of money in the long run in comparison to ETFs.
CDZ has a dividend yield of 3.68% as of today (this will fluctuate with the price of a share, as it’s relative), and has paid a yield of 3.31% in the past 12 months. That means that if you had been invested in CDZ over the last 12 months, you would have seen 3.31% of that money come right back to you, for each month over 12 months, without having lifted a finger. This definitely creams the measly 1% interest you’d get from your savings account with your bank. Your money will make more than triple what it’s making in your bank account if you’d invested it in this fund.
Put It In Perspective
Now let’s image we’ve invested $5, 000 into CDZ just to put things into perspective. With the share price at $25.99, we would have purchased 192.38 shares… in reality we’d have bought 192 shares with a total purchase investment of $4990.08 + a commission fee ranging from $5 to $10. So now we’re proud owners of 192 shares of CDZ, a portfolio consisting of Canadian Dividend Aristocrats, who’ve raised their dividends for the past five years straight. These are companies that appreciate and reward shareholders.
On a yearly basis, going forward with the current 3.68% dividend yield, you’d be receiving $184. So every month, by having stored your $5000 into this fund, you’d be receiving $15.33 a month. You might be saying “That’s not a lot”, but neither is $5000 in the grand scheme of things. If you consistently reinvest these dividends and put away a little something every month, you’ll see this money grow exponentially, compounded monthly.
You can enroll in a DRIP (dividend reinvestment plan) program, which basically means all of the dividends which you’d receive (in this case $15.33) will automatically be reinvested into purchasing more shares, and you don’t have to pay a commission for this. This is a great option if you don’t plan on purchasing often and if you don’t plan on purchasing other stocks with these dividends. This way, every two months or less in this case, you’d have another share of CDZ, and you’ll get another dividend payment.
While this wasn’t my traditional post for the more experienced dividend growth investors who know what they’re doing already and pick their own stocks, I hope this helps at least one person in understanding a little bit about starting their passive dividend income machine. The hard part is starting, once you own those first couple of shares, you’ll probably find a passion for investing and want to learn even more – and as they say, knowledge is power, and in investing – knowledge is also money.
Let me know in the comments if this type of post is helpful or not, and I can provide a few more tutorials if it’s desired.