Since I started sharing my journey to retirement with the rest of the world, one of the most common and difficult questions I’m asked is:
“So Mr.Dividends, which stock should I choose and when should I buy it?”
The Answer: It’s a loaded question because it’s different for everyone. Some people buy when the yield is right, others buy when they see a lot of potential for growth. Also I’m not a certified to answer that question because, well, I’m not a certified financial adviser. I can only share with everyone what I have done, and not what I would do. It really comes down to a personal decision of which investment approach you are comfortable with and how much time you spend studying quarterly reports.
I would be lying to you if I said I study the latest quarterly reports forwards and backwards for the companies I own. Personally, I nose through and look at the amount of positive cash flow and make sure the amount of money coming in is more than the money going out. That’s the beauty of investing in blue chip stocks that have been paying a dividend for longer then I’ve been alive. When a stock I own reports that the company made billions of dollars in 3 months, I nod with approval and wait patiently for my share of those billions to end up in my account. No need to over analyze anything; just sit back and let the company do what it has been doing for decades.
So to answer a question which really has no definitive answer, I can only share my personal experience and let anyone who hasn’t fallen asleep, learn what they will from it.
For the novice
When you first start out investing on your own, I don’t think anyone should just dive in head first with both barrels blazing. I started by asking a lot of questions in the form of anonymous posts on investing websites. I then made a list of stocks I wanted in my portfolio on a piece of legal sized loose leaf in no particular order. I then went through the list and crossed out any that had an inconsistent dividend history. For example:
If a stock pays a dividend of $0.25 cents per share one quarter then pays $0.17 cents in the following quarter, then it would be crossed off the list. That kind of random income could really throw off your retirement routine
Then I would go through the list and cross off the companies that had little or no cash flow. Without a stable amount of cash flow, a company could possible cut or even cancel a dividend.
Finally I would take a good hard look towards the future of a company. Do they provide large yellow books full of telephone numbers that no one uses anymore? Scratch that one out. Do they provide a service of transporting energy or goods with expansion into renewable energy sources? Keeper!
After that simple yet highly effective elimination process, I was able to narrow down my list to a group of stable, dependable companies that I could possibly invest it. At the end of each week, I would keep track of the highs and lows of the share price and would compare the prices to the 52 week highs and lows of the current year. I would then compare the 52 week highs and lows of past years to give me a better idea of the history of each stock and its price.
Was it constantly increasing year after year?
Has it been stagnant with little growth?
Is it rising like a rocket ship and am I able to jump on at any time without worry about timing?
By studying the past stock prices , a novice investor like myself was able to tell if a certain company was priced high, sitting moderate or priced lower than previous years. Before jumping on low priced stocks, I would do some sleuthing around and read any news involving the company to make sure there wasn’t a major reason why they were on sale. I remember looking into BCE when it was priced in the mid $20 range. The company looked solid, they just had a bad rap from the Ontario pension ordeal. It had a great yield, moderate dividend ratio and I was a Bell subscriber so I knew what the company was about. Was it a lucky guess or simple investigating that paid off?
You dip, I dip, we dip?
Since I had this list of screened prospective companies that I wanted to invest in, it made choosing the right company easy. The only hard part was deciding when to buy. For me I caught the tail end of the recovery and all of my initial investments are sitting pretty on a nice cloud of appreciated growth. Now that the markets have generally recovered, it makes choosing an entry point even harder.
Typically I wait for the markets to correct before making a new investment. Some corrections are miniscule while some others are a little more disturbing to investors. I like the large dips in the markets because it allows me to buy in at similar positions of previous investments. When the markets recover, my portfolio grows with it. That’s when I know I have done something right as an investor. I might not be the oracle of any disclosed State, but my simple technique seems to be working.
So there you have it. I answered a question without really giving an answer. Every investor is different and I’m sure some of them reading this might not agree with my logic or process of elimination, but it has worked well for me. If investing was easy, everyone would be rich, right?
This article was written by The Loonie Bin. If you enjoyed this article, please consider subscribing to his feed.