A few weeks earlier, my partner sent me an email telling me how interesting it would be to write an article about the difference between dividend investing and making money online. He thought it would be fun as I’m a big fan of both dividend stocks and making money blogging. But there is a law out there that says that great minds think alike. Well if I’d do my post today ignoring this law, I would have to ignore Dividend Ninja’s guest article on Young & Thrifty: Website Income Vs Dividend Stocks: Which One Come Out On Top?
I was stunned that someone had the same idea but was 10 times faster than me to write an excellent article ;-). My comments on the site were that I thought it would be easier to make money through dividend investing than through a website. But this is for Mr and Mrs anybody. But what I didn’t say is:
If you know what you are doing; you will make a LOT more money through websites than through investing!
You want to know why? Here are a few reasons:
The growth potential with a company is usually pretty limited compared to the growth coming from a website. The main reason is that the company being listed on the stock market has already grown for several years before issuing its first IPO. Therefore, you are buying a company that has already gone through its most beautiful growth years. For example, private investors that were able to invest in Google in Year 1 or 2 would have made 100000% on their investment as compared to those who got into the stock after its first IPO. The same story is about to repeat with Facebook in a few months. I doubt that FB will see such incredible growth in the upcoming years. Now, you can expect a double digit growth (that is still interesting) but you’ll never see triple, 4 or 5 digit growth as it has in the past.
The potential growth is usually even worse for dividend stocks. In order to be able to pay dividends, a company must be stable and also willing to sacrifice a part of its growth potential since it is distributing cash flow to its investors instead of using this money to grow even faster.
On the other hand, a website is usually a very small property. And what do all small properties have in common? They have a huge potential for growth! So this is whyUSgrowth is slower thanChina’s. This is also why my son learns more things and learns them faster than me ;-). Websites have this potential to grow by 20% each year for several years. Just take my company’s revenue since I started:
2009: $33,412 (+253%)
2010: $74,854 (I’m excluding important sales in this year) (+124%)
2011: $114,158 (+52%)
I’ve recently mentioned that you can buy a major website for 36 times the monthly income. Some people told me that I was a nutcase. Fine. But when you think about it, this is some incredible return on investment! Forget the blogger’s or pity individuals’ perspectives for a moment and focus on an investor point of view: You have $50,000 to invest. Your first option is to buy a stock (or a group of stocks) paying a 4% dividend. This will generate a $2,000 dividend payout each year + the potential of seeing your portfolio grow over time. If you are a top notch investor, you will most likely get a 8% investment return over the long run (4% dividend + 4% in capital gains).
Why do I count only 4% in capital return? Because, historically, the stock market shows an investment yield of 9% (before fees and taxes). So unless you are the next Warren Buffet, you won’t be able to score over 8% after a period of 5 – 10 years. The main reason why you can’t score higher is due to the lack of information and comprehension. You are limited to your own little brain reading financial statements. You are not in the company, not managing the business and don’t have the feel of the company.
Now, consider a second investment proposition and look at a blog or a group of blogs to be bought for $50,000. At 36 times the monthly income (and you are not getting a deal at that price!), you will get a yearly dividend of $16,666. This is more than EIGHT TIMES your dividend investment. The best part is that you can expect a much higher growth from the value and income generated from the same sites due to the reasons explained in point #1.
The only thing to consider is that you need to spend time to manage the website. But technically, a minimum of 5 hours per week would be enough to keep the revenue as is. Therefore, if you “pay yourself” $25/hour, you are now down to a “dividend” of $10,166 per year. This is the same as a 20% dividend yield. Even better, if you are smart enough, you’ll find someone that you will pay $125/week to manage the site for you. I can send you a few names of good bloggers that would be glad to it ;-).
As I previously mentioned, you don’t get hold of every single little detail about each stock you own. You can read the financial statements but you can’t get in touch with every CEO to know what is truly going on within the companies’ walls.
This is something you can do when you own your site. You get access to all the stats and can see in a heartbeat if there is any problem with it. Better knowledge leads to better risk assessment. On the other hand, if you don’t know what you do with websites, this can be highly dangerous too! Always invest in something that you understand, says Buffett!
I’ve been telling you that investment sucks during the whole article but it doesn’t mean that I don’t invest in the stock market. In fact, I’m maximizing my RRSP account each year because I think it is good to have a great diversification across all your assets. But to be honest, my RRSP account is my “B plan” along with my company shares. So if I have another $10,000, guess where I would put it ;-). But what about you? What would you do with $10,000?
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I know, you told me already from my previous 2011 best stock pick update; I should have sold RIM! I actually did it in my portfolio, but this stock picking contest doesn’t allow you to make trades during the year. In fact, it’s pretty basic. We all picked 4 stocks at the beginning of the year and then we try our best to smile throughout the contest.
Without RIM in my portfolio, I would be among the leaders… but it’s easy to say that and others could take off their worst pick as well ;-). However, having a stock plunge by almost 50% in your 4 stock investment portfolio is pretty hard to swallow ;-).
Highly Speculative Choices
This year, I chose 4 highly speculative picks. I thought I would place either very high or low in the overall rankings. Mike from Money Smart Blog actually did the same thing last year betting on the drop of the price of gold… well he finished where I should be finishing this year! Hahaha!
RIM was my baby until not so long ago but I knew this stock would rock it up and down during the year. I just didn’t expect to see such poor results!
CVX will, naturally, follow the price of oil pretty closely. Since the commodity is on a downtrend for the past month or so, so is the stock! I don’t mind since it’s paying a healthy dividend and the price is still up more than 8% this year. It was also a great fit in my own portfolio (I do own shares of CVX).
I also bet on the rise of the Silver Surfer ;-). However, speculation has brought down the stock to a “normal” return (while I was up more than 50% at one point this year!). Here again, it could also gain or lose 20% during the next 6 months J.
Finally, Potash was picked on the same assumptions: there should be some speculation around it. The stock is up slightly but if rumors of mergers or acquisitions arise again, it could fire its way to the top in a few months!
As you can see, this portfolio is not… a real portfolio! This looks more like gambling than investing… but that’s the purpose of this game ;-).
Intelligent Speculator 9.35%
Dividend Growth Investor 8.89%
My Traders Journal 8.67%
Million Dollar Journey 8.06%
Where Does All My Money Go -1.01%
The Financial Blogger -3.74%
Money Smart Blog -5.72%
Wild Investor -7.69%
Beating the Index -12.01%
Robert @ The College Investor 14.41%
Financial Cents 2.50%
Jaymus (RealizedReturns) -0.20%
Passive Income Earner -0.39%
Steve Zussino -1.80%
Kevin @ Thousandaire.com -2.39%
101 Centavos -17.88%
Stock Glory -29.73%
Financial Uproar -44.22%
What will be the best stock picks for 2011? I don’t know yet but I can tell you that I didn’t make the right choices in 2010 for our stock pick competition! So before I write about my best stock picks for 2011, I’ll review what happened in 2010 with my stock picks…
When bad news comes in waves
I still believe I had good picks for 2010 and that, over the long run, those companies will perform. The proof is almost there as my 3 loser picks (RIM, MFC and GS) had grown in dramatic fashion over the last quarter. Too little, too late, I’m stuck with a losing hand for 2010!
RIM was hit big time as Apple entered in the smartphone ring with a huge uppercut. Bad news and rumors are now driving down RIM stocks towards the bottom of the pile. Fortunately, the company showed positive results and the stock is now back up.
When I first wrote about my best stock picks, I thought Manulife’s problems were over. I thought 2010 would be a great year for them and that the management team was strong enough to overcome their maelstrom…. Bad move, Manulife got hit by more bad news and was eventually downgraded by Moodys.
My last bad news bearer is one of the strongest investment banks that survived 2008 credit crisis; Goldman Sachs. If the SEC didn’t fill a lawsuit against them, they would have been pretty good in 2010. The stock is now back to where it was at the beginning of 2010, so just a small loss for a great stock pick…
And the Winner is….
Here’s the final result of our 2010 stock pick contest. If you click on each name, you will get their latest post on the stock pick competition. Wild Investor is winning our stock competition this year but one of my reader beat all of us: Brian end-up with 94%! (here’s his picks: RHIE, ISCO, BTIM, ACTC)
Intelligent Speculator -0.45%
The Financial Blogger -1.64%
Wild Investor 27.15%
Million Dollar Journey 3.79%
Where Does All My Money Go 26.56%
Four Pillars -35.25%
Zach Stocks 20.87%
My Traders Journal 10.39%
Dividend Growth Investor 26.08%
HUZ – Silver ETF, There is a problem with gold
I’m not a big fan of commodities. Why? Because they are based on pure speculation…but this is also the goal of our stock pick contest, isn’t? I’m taking a Silver ETF because I think it is undervalued compared to gold. The price of silver usually follows gold by 1/16 and now we are at…. 1/46! So either the price of gold is too high, or the price of silver is too low. I’m betting on the latter.
RIM – Research in Motion Strikes Back!
I still believe RIM is a good stock pick. And I think that it will be one of the best stock picks in 2011. RIM is the best player in emerging markets and now that the economy is restarting, they should increase their sales. At least Apple shouldn’t be able to play in this market for now as the iPhone cost and network coverage are too expensive for emerging markets for now.
CVX – Chevron, For those who are scared
I am slowly converting to dividend investing with my latest buy; The Dividend Guy Blog. I have a Chevron stock analysis over at this blog and I think this will be a good stock pick to stabilize my gambles. I think that Chevron will continue to pay a good dividend and the stock should be stable throughout the year. Therefore, it will be a good pick if silver or RIM fail at some point ;-).
POT – Potash, once investors are converted to believers, it will blow!
In 2010, we almost lost the biggest potassium producer in the world with the hostile bid by BHP Billiton. While this event helped Potash to be one of the best stock picks in 2010, its value will increase as the commodity will continue to rise. Potash seems like a good bet for such a competition.
Here’s the chart with all the participants. If you click on each name, you will get more details on their stock picks (more to come in the upcoming days 😉 )
Last year, a few readers posted their picks, I want to encourage you to do it and I’ll offer a prize to the winner if you can beat our group of bloggers for the 2011 Best stock pick contest. If you want to participate, you simply have to put your 4 stock picks in the comment section and use the tweet box on the top of this blog (or the following: Best Stocks Picks 2011 Contest @FinancialBlogr : http://bit.ly/gooxCw. Enter your 4 stock picks in the comment section to be in!) . I like Apple products, do you?
disclaimer: I do hold RIM in my portfolio (and Chevron is on it’s way!)
I actually like what is going on in the markets right now as I believe there is a huge opportunity for us to make money over the long term. While many investors thing the stock market is sick, I’d say it is just another rough patch to ignore.
The good side of things is that our Canadian dollar is still pretty strong (fluctuating between $0.95 and $1.00 US) and the US stock market hasn’t recovered as it should have (keep reading to know why).
This should give you 2 great reasons to think about investing in the US stock market:
Our dollar is strong
The fact that our dollar is strong compared to US money is really good news. We presently benefit from the good reputation of our economy (thanks to our Canadian Banks 😉 ). This brings more foreign investors to invest in Canada (either in our stock market or via Canadian bonds, government and corporate). We also host several major players in the oil and gold industries. Since China and India are still very hungry for these resources, our Canadian dollar has remained at a higher level than usual.
However, I think that once the concerns about the US economy are resolved, our dollar will start going down again. The US has a more diversified economy and was built with strong companies with a lot a liquidity and positive cash flows. Sooner or later, this will have an impact on their economy and it will recover from their housing-bubble-credit-swap mess.
In the meantime, it gives you a great opportunity to convert strong Canadian dollars into weak US dollars and buy US stocks. And this leads me to my second point:
US Stocks are being ignored
Since the credit crunch in 2008, there is a cloud of fear over the head of the US stock market. People seem to think that all companies have the H1N1 virus and we best kept our distance from them.
After further analysis, I have realized there are several interesting plays to make on the stock market. If you just take into consideration their PE ratios, you will notice that some US stocks are just ignored by most investors:
|Company||Ticker||Price (Aug 13th 2010||PE Ratio||Dividend Yield|
|Johnson & Johnson||JNJ||$58.52||12.09||3.69%|
|Procter & Gamble||PG||$59.99||17||3.21%|
As you can see, you can probably find great investing opportunities with some companies providing serious dividend payouts as well. If you are looking for a long term investment such as inside an RRSP, I think that some US investments couldn’t hurt ;-).
If you are not completely decided as to which stocks to buy, you can also consider US index ETFs or mutual funds (you can look at this article for more small portfolio investment ideas: investing a $1,000 or less). But take one that is not hedged against the currency to make sure to benefit from the future Canadian dollar drop (it may happen faster than we think if you agree with the idea that we are about to burst the Canadian housing bubble soon…).
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I have an important dilemma to debate right now. When it’s time to talk about investing, I have 2 convictions:
– Index investing is probably one of the best way to make money without worrying too much about the trades to make.
– Dividend investing is also a great way to build a strong portfolio that generates income.
And yet the 2 strategies are not serving the same purpose:
– Index investing is looking forward to produce long term growth.
– Dividend investing is looking to produce a steady flow of income right now and benefit from an eventual growth.
But what really bugs me in this dilemma is not the purpose of investing but the results you get when you compare the 2 strategies (beware, this is going to be ugly!):
In order to make a comparison between index investing and dividend investing, I have taken one of the best index funds vs one of the best dividend funds. How did I choose them? I looked at established mutual fund companies and took funds that have more than 10 years history to be able to make a real comparison. Then, I took one of the best yields for both of them (looking at 3, 5 and 10 year annualized yields). So I have the Altamira Canadian Index fund Vs the RBC Dividend fund. Since the Altamira fund was created in 1998, I had to take this point to make the comparison. So here we go (click on image to enlarge)
So there are 2 things that you can see while comparing index investing vs dividend investing:
#1 Over the past 11 years, investing in dividends shows a better return.
#2 When you look at the annualized rate year by year, you can see that the index funds will out beat the dividend fund easily in periods of growth but drop rapidly and lose the advantage as soon as it hits a market drop.
So, after looking at those two graphs and taking a good sip of coffee, I still wonder if it really worth it to suffer bigger fluctuations and ending-up with a smaller yield with an index.
On the other side, there are a few considerations to take for the upcoming year if you think of buying a dividend fund versus dividend stocks:
#1 Growth is unlikely to come from Canadian banks. They will do fine but I don’t see them increasing their profits like Apple!
#2 If you buy dividends funds, they usually include bonds and preferred shares. Therefore, their value will drop upon increases in interest rates.
#3 If we are going to enter another period of economic growth (most major companies in the US show strong financial results), chances are that index investing will be a winner for the upcoming years.
#4 We are taking 11 years to make the comparison where we had 2 majors economic crisis. If we take the same 11 years period in a few years, we would start our calculation after the techno bubble and chances are that the same graph will show different numbers.
So I’m still not convinced which one is best for a long term project…
What about you? Dividend investor or Index investor?
and if you want to learn more about dividend investing, I suggest you go look at our new blog; The Dividend Guy Blog.Comments: 15 Read More
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