Dough in the S&P 500!

 

What is the S&P 500 and how can Canadians invest in it? The S&P 500 is an index that is composed of America’s 500 largest companies. It’s a collection of stocks that come from many different sectors of business. Why should a Canadian invest in the S&P 500? Since 1970 the S&P 500 has achieved an average growth rate of 11.99%! Some years the growth rates have been as high as 33% and other years as low as -37%. However, the S&P 500 has managed to consistently grow over time.

Canadians have the opportunity to invest in the S&P 500 through index funds, or exchange-traded funds. One ETF would be XSP. XSP is sold on the stock market and trades in Canadian dollars. This is an advantage because a Canadian can invest in the American stock markets without using American dollars, which is relatively expensive at this point in time.

My own experience with investing in the S&P 500 has been positive. Starting 6 months ago I have been buying shares of XSP with a dollar-cost approach. I’ve been able to achieve a return of 4.81%! I am happy with this return because compared to a savings account, I am growing my investment almost 10x faster.

Advertisements

Dough in the Dow Jones!

ZDJ is an index fund that has copied the Dow Jones Industrial Average. ZDJ tracks the Dow Jones, which means when the Dow Jones grows, my ETF will grow; when the Dow Jones falls, the ETF will fall. But what composes the Dow Jones Industrial Average? The Dow Jones is a collection of 30 large American companies that come from a handful of important industries. The Dow Jones includes companies like Apple, American Express, Boeing, Nike and Walt Disney. Clearly the Dow Jones is made up of large, successful and diverse companies. When people say ‘the markets are up’ they are usually referring to the Dow Jones and other indexes like it. However, the success of the Dow Jones depends on the success of the companies that compose it. The Dow Jones is diversified. When Nike falls in price, Walt Disney might go up. It’s all balanced out. Since 1975, the average annual growth of the Dow Jones has been 9.18%. Some years the annual growth has been as high as 38% and as low as -33%. This means that after averaging the ups and downs of the stocks within the Dow Jones, the average growth for those years have been as high as 38% and as low as -33%. Is investing in the Dow Jones risky? Yes because from year to year we cannot predict how it will perform. If the American economy falls into a recession, the Dow Jones will certainly fall. But it might not.

The ZDJ is an interesting investment because it is a Canadian version of the Dow Jones. It is an index fund that holds shares in the same companies as the Dow Jones. It currently costs about $32CDN per share, it pays a dividend and does not cost any American dollars to invest in American companies. I am optimistic that the ETF will continue to grow because, historically, the Dow Jones has grown at an average of 9.18% per year. This means we can expect our money invested in the ETF to grow by approximately 9.18% per year. Odds are that some years it will grow more and some years it will grow less than 9.18%. Comparing these returns to a typical savings account, money is growing at a much faster rate than at the bank. For example, at RBC a High Interest eSavings account will yield 0.500% per year. That’s a high interest account too, not a basic savings account. Therefore, by investing in the ZDJ exchange traded fund, your $300 dollars would grow almost 7 times larger than at the bank.

If you liked this article or have any general questions about investing I would be more than happy to chat! Comments are greatly appreciated!

 Shrinking Our Canadian Dough!

Inflation is basically the rise of general prices across the country. In Canada, the inflation rate for 2016 was approximately 1.5%. Since our Canadian prices have risen by 1.5%, the purchasing power of each Canadian dollar has decreased; each dollar can buy a fewer amount of goods. Specifically, every product we would want to buy would require an additional $0.015 for every dollar spent. Not much, right? If something costs $100 last year, because of inflation, it would now cost an additional $1.50. For consumer products, inflation probably doesn’t seem to make a difference. For example,  you would only notice the price increase in a Tim Hortons coffee if you buy coffee often! Even big ticket items costing $1,000 would only increase by $15. Relatively speaking, inflation doesn’t make a big difference for consumer goods. Over time though, which is highlighted when we look at carton of eggs costing $0.31 in 1935 and now $2.94, the cost of our consumer goods are likely to increase drastically over the decades to come.

A lot of investors talk about trying to ‘beat the market’. I would encourage people to, at a minimum, beat inflation. If you can find a way to ‘beat’ the inflation rate than you have actually grown your money over time and maintained a purchasing power for the goods that you may end up needing to buy one day, for yourself or a loved one. For example, if you want to be able to buy a car in 15 years from now, inflation will likely cause the price of that car to increase each year. So a $10,000 car today could cost an additional $2,502.29 (assuming inflation stays at 1.5% each year) 15 years from now. One purpose for investing money is to ensure that your nest egg is able to buy the same bundle of goods in the future. How do we beat inflation?

You are sure to fail to beat inflation by keeping your money in a savings or checking account. For example, a High Interest eSavings Account at RBC yields approximately 0.5% per year. So, if you have a nest egg of $10,000 in a High Interest eSavings Account, your $10,000 would grow by approximately $50 at the end of the year! However, the price of everything else has risen by 1.5%. If you take the nominal interest rate, which is the 0.5% promised by the bank, and subtract the inflation rate (1.5%), which gives you a real rate of return, the value of your nest egg actually decreased by 1%! You’re $10,050 that you earned this year really be like having approximately $9,899.25 at the end of the next year. By ‘investing’ in a low yield account you are actually losing value each year. Imagine how much value you’re losing by keeping your money in a bank account that earns less than the High Interest eSavings account! What if you never start investing, there may be trouble.

Although the impact of inflation on consumer goods may not be major, it has a significant impact on investments! One way to look at inflation is as a decrease in our purchasing power. Since goods are costing 1.5% more each year, our Canadian dollar is buying 1.5% less of goods each year. This basically means the power of our money is falling by 1.5% per year. So, if you have $4,000 CDN in a basic savings account, the ‘value’ of that $4,000 is falling by ($4,000 x 0.015) $60 per year. If you buy Tim Hortons coffee everyday at $1.70, that’s like losing out on 35 medium double doubles every year! What’s worse is that inflation can fluctuate from year to year, but the Bank of Canada tries to keep inflation manageable at a rate of 1% to 3%. What should investors do?

One way to possibly beat inflation is to invest in index funds. An index fund is like a mutual fund at a fraction of the cost. It may seem penny pinching to compare high cost and low cost investments, but when it comes to percentages every penny counts! Another good place to start is a mutual fund, but there are better investments out there in Canada and abroad!

Remember, to protect the value of your Canadian Dough, you just need to beat inflation!

Dividends: Collect Your Canadian Dough!

If you’re thinking about investing in a particular stock, or just looking to get started and not too sure about what kind of stock to invest in, a stock that pays dividends may be the answer for you.

A dividend is a payment made to you, a shareholder, by the company that you bought shares from. Although you may not have bought your shares from the company itself, but instead from another shareholder, you may be eligible to collect a dividend. Collecting dividends are easy! You don’t need to sign up or register for them; they simply get transferred to you from that company you own!

Dividends can be paid monthly, quarterly (every 3 months), bi-annually (twice per year) or even annually. The amount you can collect depends on the number of shares that you own as a shareholder. For example, RBC pays a quarterly dividend. According to publicly available information on RBC’s website, their last dividend was $0.83 per share. This means for every share you own you would get paid $0.83. It doesn’t sound like much, but these small dividend payments may be enough to cover your transactions fees, plus more if you hold on to them long enough. Additionally, by continuing to contribute to your investment on a consistent basis, that dividend payment will grow, which will add to your overall cash flow. Ideally, it would be great to invest enough money to be able to survive off of dividend payments. On a smaller scale but still sizeable, if you own enough shares you may qualify for a DRIP, which is a direct reinvestment plan. The idea here is to buy shares with the dividends collected.

Using a hypothetical situation, if someone has invested approximately $3,300 in the stock market within dividend paying stocks and exchange traded funds, they would have collected approximately $46 in dividends after one year. This number is based on an investment portfolio invested in the following stocks and exchange traded funds: 7 shares of RBC, 17 shares of VRE, 17 shares of CDZ, 46 shares of XSP and 10 shares of ZDJ. Before buying a stock or exchange traded fund, it would be smart to look at how often a dividend is paid and in what amount when making your informed decision.

Dough in The Royal Bank of Canada!

The Royal Bank of Canada, or RBC, is Canada’s largest bank with seventy-eight thousand employees and twelve-hundred branches that are serving approximately ten million Canadians. According to the Globe and Mail, RBC is Canada’s largest company by market capitalization (total value of shares outstanding) and revenue (total sales). RBC is a seriously big company.

RBC shares are traded on the Toronto Stock Exchange, New York Stock Exchange and Swiss Exchange under the symbol RY. According to publicly available information, RY is currently trading at $89.25. Over the past 52-weeks, RBC’s highest stock price has reached $90.00 and its lowest price has dipped to $64.52. If an investor would have bought RBC closer to it’s lowest point, they would currently be enjoying handsome returns. The rise in the price of a stock is called capital appreciation; although an investor may have the opportunity to enjoy capital appreciations, RBC offers more.

A dividend is a payment made by a corporation to its shareholders, usually from their profits. RBC currently offers a dividend of $0.83 per share and it is paid four times per year, or quarterly. This means that for every share of RY that an investor owns, they will be paid $0.83 this November 24th, 2016. RBC’s dividend payments have increased over the years and throughout this quarter. For example, in November 2000, the dividend payment was $0.15 per share. In November 2010, the dividend payment was $0.50 per share. Throughout 2016 the dividend payment has increased. In February 2016, the dividend was $0.79 per share; in May 2016 it was $0.81 per share. Now, it’s $0.83 per share. Investors like to see an increase in the dividend as it shows that the corporation’s profits have been increasing over time.

My experience with RBC over the past three months has been fortunate. I bought RY when it was listed around $82.27; now it’s listed at $89.25. I have earned a return of approximately 8.48% which is a growth rate that is nearly 17-times stronger than RBC’s High Interest eSavings account which gives investors a return of 0.500%.