All posts by Financial Independence Hub

The Resilience of Dividends

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Franklin Templeton: Image by iStock

By Nick Gétaz and Matt Quinlan

Franklin Equity Group (Sponsor Content)

As fund managers with the Franklin U.S. Rising Dividends team, we believe that a company increasing its dividends is evidence of three key characteristics: growth, strong capital allocation, and resilience.

Firms that show substantial and sustainable dividend growth also tend to experience greater long-term stock price appreciation. Being able to consistently increase dividend payouts, even during periods of wider economic malaise (the past year being a perfect example) points to a company that is well managed and with a resilient business model. Investors can therefore participate in market growth, while still protecting their capital against downside risk.

Dividend-paying companies can be found across all sectors, and diversification is an important element of the Rising Dividends portfolio. Currently, Industrials, Information Technology and Health Care have the largest allocations in the fund, while there is no exposure to Communication Services, Utilities and Real Estate: the latter two sectors’ growth prospects make them generally less attractive at the moment.

In Health Care, current holding Medtronic PLC is a good example of the type of company we seek out for the portfolio. With consistent dividend increases for 43 years, the world’s largest medical device manufacturer has a diversified and resilient product shelf. Medtronic is a leading provider of cardiovascular and surgical products, and the development of surgical robots and a suite of cardiac rhythm products position it for potential sales growth and efficiency gains in the coming years.

The largest position in the fund is Microsoft, which has accounted for 8–9% of the portfolio over the past year. In our view, Microsoft has a number of different growth drivers among its cloud, enterprise productivity and gaming offerings. Microsoft Teams has also become a vital tool for many companies that had employees switch to working from home over the past year, which is further evidence of Microsoft’s resilience and ability to thrive through different market cycles.

Dividend cuts were less severe than expected during the pandemic

Resilience, on a variety of fronts, has certainly been required over the past year as the COVID-19 pandemic has hammered the global economy. At the outset of the crisis, dividend reductions were widely predicted, but these cuts weren’t as far reaching as expected: in our portfolio, approximately 3% of holdings reduced dividends in 2020.

Historically, the evidence shows that dividend-growing stocks have tended to perform better than stocks that don’t provide dividends, and they have done so with less risk. The chart below shows dividend growers against the S&P 500 Index over the 30-year period ending December 31, 2020. This time frame includes multiple market cycles and downturns, including the Dot-Com collapse; the Global Financial Crisis; “The Lost Decade”, the 10-year period up to 2009 when U.S. equities (represented by the S&P 500 Index) had a near-zero return; as well as the correction of last February/March.

 

Taking a long-term view, corrections and drawdowns are inevitable, so it’s crucial to build portfolios of high-quality companies that can navigate different economic cycles. Continue Reading…

Digital Banking: the smarter way of saving that’s here to stay

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By Dave Schurman

Special to the Financial Independence Hub

By nature, we’re creatures of habit, but this past year has taught us that necessity clears the way for change. In a relatively short time, we’ve adjusted how we shop, work and study. The same can be said for banking. We’re looking for new ways that check all our boxes: easy, convenient, safe and smart.

What is digital banking?

Easy. It’s like having a financial institution at your fingertips.

Digital banking is fully online: it gives you the same financial products and security you would find in a traditional financial institution without need for expensive bricks and mortar, achieving cost savings that are then passed on to customers in the form of better rates and lower fees. And, the really good news in digital banking is that the “doors are always open,” so you manage your money on your time, not bankers’ time, and you do it from anywhere you want!

Who should consider digital banking?

Pretty much anyone looking for something more. We all like to get more from the services we use. More convenience. A more intuitive experience. More value. Here are the top reasons digital banking has taken off:

  • Low or no monthly fees
  • Better rates
  • Access whenever you need it
  • Easy-to-use and secure online experience
  • Ongoing innovation and updates based on customer feedback

 How do you choose the right digital banking platform?

Shop around.

First, decide which banking products you are looking for. If it is investments, what are you saving for: Retirement, an upcoming purchase or just a rainy day? Are you willing to lock your money in for a period of time to get a higher rate or do you prefer to have quick access to your money? Once you’ve figured out what you are looking for, next look into rates. How does one digital bank compare to another? Searching online is a great place to start. Once you have a shortlist of possible digital banking options, consider the following questions:

  • Is this digital banking solution backed by an established financial institution?
  • Will you have easy access to a real person if you need help or have questions?
  • What do the reviews say?
  • Will you have to pay for fees and, if so, how much?
  • What is the deposit insurance limit?

What is a HISA?

Don’t worry; it’s better than it sounds.

HISA stands for high interest savings account, and here’s what people love about digital HISA accounts: The rates are generally higher than what you get at traditional financial institutions with branches. So, for example, let’s say you find yourself in the middle of a pandemic. You’re not spending as much, so you have more money to save. A good move would be to put your money in a HISA and watch it grow faster. Saven’s HISA offers a competitive 1.55%* rate with no monthly fees, no minimum deposit and free e-transfers and direct deposits! Plus, your money is not locked in, so you can access it at any time.

What about GICs?

A smart choice to give your savings even more of a boost. If you want to lock in, then a Guaranteed Investment Certificate is another great way to save. This option is best for long-term savings at a fixed term (usually anywhere from one to five years). Saven’s GICs offer up to 2.05%**. Our super competitive rates are locked in so you see consistent growth. Continue Reading…

Was the F.I.R.E. movement doused by the pandemic?

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Cutthecrapinvesting: Image by Mohamed Hassan via Pixabay

By Dale Roberts

Special to the Financial Independence Hub

F.I.R.E is an acronym for Financial Independence Retire Early. It is a very popular movement that gets a lot of attention in the blogosphere and on social media. The idea is to eat excess amounts of ramen noodles, squeeze your budget until it squeals, save 90% of your income, invest like crazy in an all-stock portfolio, and then never work another day of your life after the age of 38. I’m kidding, please don’t “OK Boomer” me.

In reality, most from the F.I.R.E. movement will not “retire” early, but many may reach a wonderful form of financial independence. In 2020, was the F.I.R.E. movement doused by the pandemic?

2020 brought us a very quick and violent stock market correction. It was the most violent in history, but so was the recovery as governments and central banks came to the rescue of stock and bond markets. Looking back it feels like a blip. But in the moment it was more than scary, considering that we did not know the path of destruction that SARS-coV-2 might leave behind.

We still don’t know.

Did the F.I.R.E movement change course?

From what I read from my F.I.R.E friends (they’ll say I’m being rather presumptuous with the use of that friends description), they embraced the volatility. After all, volatility is not risk, if you can handle that risk, and you have an incredibly long time horizon. Volatility and falling stock prices are an opportunity, whether you are seeking to build that growing dividend stream or plan to one day also harvest shares to create retirement income.

In March of 2020 I asked …

Is this an incredible investment opportunity or what?

In the Globe and Mail, Brenda Bouw offered how F.I.R.E investors are managing through the pandemic. (Sorry that is paywall, but I’ll give you the important deets). That is a great piece with some good commentary, especially from advice-only planner Jason Heath.

The F.I.R.E. traps

F.I.R.E. followers need to be extra vigilant as their nest eggs need to last decades longer than those who retire in their 60s and 70s. There is the perception that the F.I.R.E. gang have less risk, because they are young. In fact the opposite is true. From Jason …

“You may need to over-save and underspend longer than you might think when you’re pursuing the F.I.R.E. movement,” says Jason Heath, an advice- and fee-only certified financial planner at Objective Financial Partners Inc. in Markham, Ont. “When you’re retiring at age 40 versus age 65, there’s so much more margin for error.”

Jason also pointed out that funds can quickly disappear because of costs associated with an extraordinary event, such as a serious injury or illness that requires long-term care or having a child with a disability.

“If you don’t budget for the unexpected, that could really compromise your early retirement plan,” he says.

Of course it is true that the F.I.R.E. folks may have the opportunity to go back to work if need be. But it’s also important to use the word “MAY.”  It’s not a given that health would permit the opportunity to work. There is no guarantee that meaningful work would be available. I hate to be a Dale Downer, but this is the reality that we should accept and recognize.

The good new is, they won’t actually “retire”

Nobody really retires early except for teachers and other public servants. So if you want to really retire early, you know where to apply for a job. You’ll need that guaranteed, defined benefit, indexed-to-inflation-for-life pension. And those may be hard to come by these days as governments are also doing the math on funding or backstopping those options.

Most will use that F.I. and ditch the R.E. And most will admit to that reality. They just want that freedom to do more of what they want in life with respect to leisure and travel and work. And that’s why I am a big fan of the movement. It is based on a wonderful end game (freedom) and it employs some more than important financial basics, behaviour and lessons.

You build wealth by living beneath your means. Here’s my personal finance book. OK, you may notice, it’s a blog post. Who needs a book? It all ain’t rocket surgery.

Everybody say FIWOOT!

Jonathan Chevreau calls it all Findependence. That’s perfect. Mark from My Own Advisor frames it nicely with his own acronym …

I prefer Financial Independence Work On Own Terms (FIWOOT) versus FIRE The Financial Independence Retire Early (FIRE).

Here’s Mark’s Weekend Reads.

Dance with the one that brought ya?

The greatest mistake within the community will likely be the commitment to an all-stock portfolio. There is that expression that you might ‘dance with the one that brought ya’. But that’s not the case when it comes to protecting your wealth and your F.I.R.E. Continue Reading…

10 Stock Types investors could consider in 2021 

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By Emily Roberts

For the Financial Independence Hub

Following a challenging year for us all, we are confident that those reading this and beyond are more than happy to see the back of 2020. As we make our way further into 2021, the pandemic’s impacts are beginning to show themselves more, and we can see the different ways that the pandemic changed our lives in some way or another.

Financially, the last year has been one of the toughest that many of us have ever faced. A large majority of the world population experienced the economic crash of 2008 but have stated that the last year has been similar in some elements but drastically different in others. It is no surprise that experts have estimated that the pandemic’s financial impact across the globe is set to be much worse than that felt back in 2008.

As a result of this, there is little surprise that people are searching for ways that they can be more economic themselves, and how they can improve their current situation. We are seeing more and more people monetizing on their existing skills in every direction, creating a small, online business selling some type of arts and crafts or baked goods.

While these are certainly effective ways of boosting your income following a set-back, this is not the only avenue available to those searching for a side hustle. With an increased interest in the world of cryptocurrency as of late, and with a 350% increase in how many Google searches have been made into Bitcoin, there undoubtedly appears to be an interest in investing our money.

If you are interested in finding out more about investing your money moving forward and the different stock types to consider when exploring this world, you are in luck! Detailed below is a helpful list of the best stock types to consider in 2021. Read on for more.

Before deciding to invest

Particularly when exchanging money, you want to make sure that you have put some thought into this. The last thing that you want to do when attempting to boost your income is to put yourself into any sort of financial difficulty.

Those who are clued up on all thing’s stocks are probably aware that there is risk involved in investing in stocks. But for those who are not, this is one thing that is well worth considering before jumping into this world.

By ensuring that you correctly understand the ins and outs of what you are getting yourself into, you can rest assured that you will be moving money around in a safe manner.

It is worth noting that investing in stocks takes some time and patience; you will not see the results overnight, so it is worth monitoring over time. On that note, let’s get to the main event: what types of stock exist.

Different Stock Types 

  1. Common Stock: As the name here suggests, this is the most common type of stock that exists and which you can invest in. Common stock is an ideal stepping-stone into the world of investment and is suitable for those who are first starting out on their investment journey and building up a portfolio. When you invest in a common stock, you own a share in the stock and in the company’s profit as well. Those who choose to invest in a company through common stock can also expect to get the ability to vote on the company policy and anything else of importance that requires shareholder’s input.
  1. Preferred Stock: This type of stock is often compared to bonds. Unlike common stock, preferred stock pays investors a fixed dividend, whereas the common stock offers investors the opportunity to earn dividends, but these are not guaranteed. Preferred stock is an ideal choice for those looking to invest in something while prioritizing income rather than any sort of long-term growth. Much like that of common stock, those who invest in a company’s preferred stock can vote on matters involving shareholders but are also given more preferential treatment. What’s more, if a company is to go into liquidation or declare bankruptcy, those who own preferred stock are returned their dividends before those who have common stock.
  1. Mining Stocks: Unlike other aspects of the investment world, this may well be a term that not many people are aware of. That said, these are also stocks worth investing in during 2021. More so when wanting to boost your income. Much like our other suggestions, it is advised that those interested in investing into these particular stocks do adequate research levels first. Mining stocks have multiple elements to them, and these are known as either major or junior mining stocks. Major mining stocks are known to work in a similar way to that of blue-chip stocks. On the other hand, junior mining stocks are akin to  penny stocks. To learn more about mining stocks and how you can go about investing into this particular type of stock in 2021, check out the guide created by Wall St Now on their website.
  1. Blue Chip Stock: Following its brief mention previously, we thought it best to explain further what we mean by Blue Chip Stock and why it is one of the best stocks to invest in as we head further into 2021. Blue Chip Stock investors can expect to experience relatively low risks regarding their investment into a business. Companies that allow the opportunity to invest in Blue Chip Stocks are generally considered leaders in their industry. With strong reputations regarding products and services, those who choose to invest in this particular stock can rest assured that they will receive some sort of pay-out at some point.
  1. Cyclical Stocks: Another term those outside the investment world may be unfamiliar with, but another excellent type of stock worth investing in when wanting to make some profit in 2021. Cyclical stock is also known as equity stock and is generally used in businesses and companies that are manufacturing certain goods; this can include cars, houses, and other equipment. Generally speaking, we pay for necessary goods like food and drink on at least a weekly basis. We don’t tend to put a second thought into these purchases, and it is something that we need and therefore pay for often. Cyclical stocks rise and fall in value based on the ups and downs that come with being a business and any external influence. Think of economic crises – much like what we have seen in the last year – as well as economic booms. To make a profit through cyclicals, you would need to purchase a stock in a company during a time when the price is at its lowest. This could be during an economic crisis, so it is certainly worth considering at a time such as the present. To make a profit, simply sit with your investment and be patient until a time when the price has risen, during an economic boom. When investing into cyclical stocks, one thing that should be considered is that during times of recession, the investment you have made could be regarded as worthless. So, make sure to do your research before making the jump.
  1. Defensive Stocks: While on the topic of investment during the recession, our attention turns to the world of Defensive Stocks. Another suggestion for those looking to invest in 2021 is an ideal suggestion on the off chance that we enter another recession in the future. Continue Reading…

To Infinity and Beyond: Whither the Efficient Frontier?

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Buzz Lightyear from Toy Story

By John DeGoey, CFP, CIM

Special to the Financial Independence Hub

With apologies to Buzz Lightyear, there seems to be a fair bit of cognitive dissonance in the world.  Over the years, advisors have collectively convinced their clients that it would be reasonable to expect high single digit returns on a fairly traditional (say 70% stocks; 30% bonds) portfolio.  I got a call this week from a fellow who told me that, as a former wholesaler for the industry, he “knew” that a 7% to 9% long-term return was a reasonable expectation.  I didn’t have the heart to tell him it isn’t.  Some day soon, I’ll have to break it to him.

What do you suppose has happened to the efficient frontier in the recent past?  As a reminder, the efficient frontier is a concept pioneered by Harry Markowitz in the 1950s: “efficient” because it is optimal and cannot be improved upon; a “frontier” because you cannot go beyond it.  Like infinity. It is the theoretical model of the best return you could plausibly expect for any given level of risk.

Historically, stocks have gotten returns that are about 5% higher than bonds.  Bonds, for their part, have averaged about 3.5% over the post-world war II era.  So, that’s around 3.5% for bonds and 8.5% for stocks.  At a 70/30 split, that’s something like 7% return for a balanced portfolio using historical index returns.  Those are historical numbers.  Of course, if products and financial advice cost (say) 2%, the expected return is more like 5%.

Efficient Frontier has shifted downward

The thing that very few advisors mention, in my personal experience, is that the efficient frontier has almost certainly shifted downward.  Bonds are now more likely to earn something like 1% and stocks, with valuations that are approaching generational highs, are, over the foreseeable future, likely to earn a premium that is less than the 5% historical spread.  Jeremy Grantham at GMO has gone so far as to project that virtually all asset classes have a negative expected return over the next seven years. Continue Reading…