Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

Can Savvy Stock-picking outperform Investment Funds?

By Ian Duncan MacDonald

Special to the Findependence Hub

Why spend days building a stock portfolio when you can almost instantly invest the same amount of money in the units of a popular mutual fund or Exchange Traded Fund [ETF]?

One of the most popular are the Standard and Poor’s  500 Index Exchange Traded Funds and Mutual Funds that are sold by probably hundreds of banks and investment dealers. The rise and fall of the S&P index has become a standard by which the success of all portfolios are often measured against.

The Standard and Poor’s 500 Index is a compilation of stocks selected by a committee called the S&P Dow Jones Indices. It is managed by S&P Global Inc., which sells financial information and analytics. This company is an evolution of the century old McGraw-Hill publishing company.

The S&P 500 tracks the 500 largest American companies selected by their stock market capitalization, which is the value of all the shares held by investors in a company. Fund management companies selling units in their S&P 500 mutual funds and ETFs are quick to brag that just nine of the 500 companies account for 31% of the market capitalization of all 500 companies. These nine are Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, Tesla, Berkshire Hathaway, and JP Morgan Chase. The sales pitch for buying fund units is, how you can lose with such well known, successful companies in your S&P 500 fund.

These very high-profile companies are the bait to distract you from considering the hundreds of mediocre, but large low-profile stocks in the S&P 500.

I have described the “Magnificent Seven,” which are included in the above nine, as being overvalued when you compare such things as their very high share prices to their much lower book values. For example, Apple’s book value was $4.00 compared to its share price at the time, which was $185. Book values are calculated by professional auditors subtracting what is owed by a company from their assets. The net figure is then divided by the number of outstanding shares to arrive at the stock’s book value. A book value’s logical calculation is far removed from the chaos of optimistic and pessimistic speculators bidding daily for millions of Apple shares in a stock market influenced by media hype, greed, and fear.

Many Investors seek safe stocks that will provide them with a reliable income to support them in their retirement. They look for companies that have demonstrated for years that they share the company profits with the company owners, who are the shareholders. This sharing is done through significant regular dividends.

Only 2 Mag 7 stocks pay dividends

Only two of the Magnificent Seven pay dividends. Their dividends are so small you wonder why they bother. Nvidia is paying a token dividend yield of 0.03% and Microsoft is paying 0.71%.

There are about 25 million companies in the United States. Surely “owning” shares in the 500 largest stocks must be a good investment? However, that very much depends on what your definition of a “good investment” is? My definition of a good, strong, safe stock investment has nothing to do with high market capitalization, which is the primary qualification for being classified as an S&P 500 company.

To me a good stock investment primarily includes:

  • A share price that has steadily increased over the last 20 years.
  • A high operating margin percent that is calculated from the percentage of the amount remaining after you have subtracted the expenses to generate the revenues from the revenues.
  • A company that shares its profits with its shareholders by paying ever-increasing annual dividends yields of at least 5% over the last 20 years.  These would include even the market crash years of 2000, 2008 and 2020.
  • The profitability of a company as reflected in a price-to-earnings ratio that would be below 20.
  • A book value for the company that would be close to or even higher than the share price.

Perfect stocks meeting all these criteria rarely, if ever exist.  You thus are required to make compromises based on how close you can come to your ideal stock.

Creating stock-scoring software

To make such compromises easier, I invented for myself stock scoring software that calculates an objective number from zero to 100. This number allows the sorting of stocks from the most to least desirable. The higher the number the more desirable the stock. Having scored thousands of stocks, the lowest I have ever calculated was an 8 and the highest was a 78. I avoid stocks scoring under 50.

For safe diversification and to avoid disastrous surprises you should aim at investing equally in 20 carefully chosen stocks. Your expectation from historical trends of strong companies is that most of your dividend payouts and your share prices will increase steadily.  This will keep your dividend income well ahead of inflation.

There are about 16,000 stocks available in North America to choose from. Sorting through these thousands of stocks for your “best” 20 is not difficult once you are shown how to do it. It can be done in hours, not days.

When I reviewed all the stocks that make up the S&P 500, I found only 5 stocks that would qualify for consideration in my portfolio. 113 of the S&P 500 had been immediately eliminated for consideration because they pay no dividend. Even some of the very largest companies in the S&P 500 like Amazon, Alphabet, Tesla, Berkshire Hathaway, Facebook, and Disney pay no dividends. A further 288 of the S&P 500 stocks only paid dividends between 3.5% and 1%.

Why would a 3.5% minimum dividend yield be important? For the last 100 years the average inflation rate is reported to have averaged 3.5%. If you had bought a share that never increased or decreased in value but paid out a steady 3.5% in dividends your stock would theoretically have stayed ahead of inflation if it were invested back into the portfolio.

Strong shares have histories of steadily rising share prices.

As share prices increase many companies steadily increase their dividend payouts out of pride and competitive reasons to at least maintain their traditional high dividend yield percents. Usually, the dividend payout increase percentages rise much faster than share prices. This can be easily observed.

Only 100 S&P500 stocks pay dividends higher than 3.49%

Within the 500 stocks you are left with only 100 that are paying dividends higher than 3.49%. To give you a reasonably generous income, the ideal is to realize an annual dividend income generating at least 6% of your portfolio’s value. On a million-dollar portfolio this would be $60,000.

There are only 12 of the S&P 500 companies paying a dividend greater than 5.97%. Two of the 12, AT&T and Altria Group, had return-on-expense percentages of zero or less which eliminated them from consideration. When the remaining 10 were scored it was found that 7 of them were now paying a dividend of less than 6% which eliminated them. Of the remaining three only one had an operating margin greater than zero. This left just one company, Verizon, out of all 500 that would meet my minimum requirements for inclusion in my portfolio. It had a good score of 62.

Verizon’s score was based on a share price of $40.48, a price 4 years previously of $58.22, a book value of $21.98, Ten analysts recommending it as a buy, a dividend yield percent of 6.57%, an operating margin of 16.57%, a daily trading volume of 12,645,534 shares and a price-to-earnings ratio of 14.7.

We still needed 19 more stocks to create a strong diversified portfolio.  Fortunately, there is a wide choice of companies with lower capitalization who are paying dividends of 6% and will have scores higher than 50. Some of these are foreign based companies traded on the New York Stock Exchange who were automatically excluded from being included in the American centric S&P 500. Some had high capitalizations that could have easily included them. Foreign stocks can give a portfolio a geographic diversification which strengthens it.

If you had $200,000 to invest, you could do far better investing the $200,000 in 20 carefully chosen, high-scoring, high-dividend stocks than investing that $200,000 in S&P 500 fund units. While the 20 stocks could generate a dividend income of $12,000, the dividend income  generated from the fund units of an S&P 500 fund would be a diluted 1.3% or an annual dividend return of $2,600. The total dividend income received from all 500 stocks becomes diluted when it is split among all those S&P 500 stocks paying little or no dividends. Continue Reading…

7 crucial tips for Homebuyers navigating the market in 2024

By Jack Roberts

Special to Financial Independence Hub

2024 brings exciting opportunities for homebuyers in the real estate market. The market is poised for growth with the ongoing demand for housing and favorable economic conditions. However, buyers must navigate this landscape with informed decision-making. 

With interest rates expected to be cut by the Fed, the real estate market could experience a boom, and there are various options available for homebuyers. That said, it’s essential for potential buyers to prepare their finances ahead of time and explore affordable mortgage options. In addition, buyers should prioritize must-have features and location preferences to narrow their search. 

Below, you’ll discover 7 crucial tips for homebuyers in 2024. Homebuyers can confidently navigate the market by following these tips and achieve successful results in 2024.


Importance of Informed Decision-Making

In the competitive real estate market of 2024, informed decision-making is crucial for homebuyers. Buyers can make well-informed choices that align with their goals and preferences by conducting thorough research and staying updated on market trends. 

Being informed allows buyers to understand the current market conditions, such as housing inventory and pricing trends, enabling them to make competitive offers and negotiate effectively. 

Moreover, buyers can ensure they are investing in a desirable location by gathering information about the neighborhood, schools, amenities, and future development plans. 

Informed decision-making also involves assessing the property’s condition, conducting inspections, and considering potential renovations or repairs. By making informed decisions, homebuyers can minimize risks, maximize their investment, and achieve long-term satisfaction with their purchase.

Financial Readiness and Budgeting

Financial readiness and budgeting are essential for homebuyers to navigate the 2024 real estate market. It is crucial to carefully assess personal finances and establish a realistic budget to ensure a successful buying process. 

Typically, banks have more stringent requirements than other lenders when trying to secure a mortgage to buy a home. That said, homebuyers should strive to save for a down payment and maintain a strong credit score to increase their chances of securing a favorable mortgage rate. 

Buyers can enhance their financial position and have a stronger negotiating stance by managing debts and ensuring sufficient savings. 

Additionally, it is important to consider other costs associated with homeownership, such as property taxes, insurance, and maintenance. 

By creating a comprehensive budget and sticking to it, homebuyers can confidently navigate the market and make informed decisions that align with their financial capabilities and long-term goals.

Now, if you’re looking to buy a home to fix and flip it — there’s financing for house flipping available.

Must-have Features and Location Prioritization

When buying a home in 2024, it is important to identify the must-have features and prioritize the location based on personal preferences and needs. Homebuyers should consider factors such as the number of bedrooms and bathrooms, the size of the yard, and the availability of amenities like parking and storage space. 

It’s also important to assess the proximity to schools, healthcare facilities, and transportation options. Making a list of non-negotiable features will help streamline the home search process and ensure that the chosen property aligns with the buyer’s lifestyle and long-term goals. 

By prioritizing the features and the location, homebuyers can find a property that meets their needs and enhances their overall living experience.

Due Diligence: Inspections and Property Conditions

During the home buying process, one critical step is conducting due diligence, specifically inspections and assessing property conditions. It is crucial to thoroughly examine the property to identify any potential issues or concerns before making a final decision. Hiring a certified home inspector can provide a comprehensive report on the property’s structural integrity, electrical systems, plumbing, and other essential components. 

Inspecting the property’s exterior, including the roof, foundation, and drainage systems, is also recommended. Evaluating property conditions helps buyers understand the potential costs and repairs they may incur. 

Homebuyers can make informed decisions by conducting due diligence and negotiate any necessary repairs or modifications with the seller.

Crafting competitive offers and managing Negotiations

Once you have found your ideal home, it’s time to craft a competitive offer and effectively manage negotiations. Start by determining the property’s fair market value based on recent sales and comparable properties in the area. This will help you make a strong, yet reasonable, offer.

Consider including contingencies in your offer, such as a home inspection or appraisal contingency, to protect yourself from potential issues. Remember, negotiations are a give-and-take process. Be prepared to negotiate on price, repairs, or other terms with the seller. Continue Reading…

Should Millennials prioritize paying down Debt over saving for Retirement?

Image via Pexels: T. Leish

Paying down Debt versus Saving for Retirement has always been one of those conundrums facing every generation.

As a semi-retired baby boomer myself, I was a bit late to both the housing party and Retirement savings exercise.

Once I got married in my mid 30s, buying a house and paying down a mortgage was our priority, although two reasonable incomes made it possible to do both: pay off mortgage debt while also saving for retirement and enjoying some tax savings through the RRSP.

Certainly, I’ve always believed paying down debt on high credit-card interest is a priority, certainly over TFSAs. I think TFSAs are great but it’s hard to beat the guaranteed return of paying down interest being charged at 20% or so per annum.

Mercer’s latest Retirement Readiness Barometer

Now a new report from Mercer Canada released earlier this week — the fifth annual Mercer Retirement Readiness Barometer (MRRB) —  warns that millennials and younger Canadians who divide their disposable income between saving for retirement and paying down debts could find themselves delaying their retirement by one or two years compared to if they focused solely on paying down debt in the short term.  

The MRRB says that in today’s economic climate of elevated interest rates, a 30-year-old with $30,000 of personal (non-mortgage) debt could retire one year earlier with $125,000 more in savings if they solely focus on paying off debt within 10 years, before then shifting focus to saving for retirement. 

But if that individual instead splits disposable income between saving for retirement and paying down debt for the entire period until retirement at age 65, it can take more than three times as long to pay down the debt. 

These findings assume a 30-year-old worker is earning $70,000 and can allocate 5% of their income either to paying down debt or saving for retirement; with the interest rate on their debt being higher than the expected rate of returns of their investments. 

Higher interest rates may help retiring Boomers

Interestingly, despite the MRRB’s focus on the young, it does mention boomers near retirement age and the importance of financial literacy surrounding decisions on what to do with retirement savings as they transition into a period where they are no longer working.

The second infographic shown below shows that while high interest rates make it tougher for young people to get out of debt, boomers already at or near Retirement may find higher interest rates to be an advantage as they retire. It explains that “in an elevated interest rate environment, retirees may have windows of opportunity, although financial literacy will be required to navigate various retirement income options.”

I recently touched on this in a MoneySense Retired Money column on the need to wind up RRSPs at the end of the year you turn 71: in most cases, cashing out and paying stiff taxes is not advised, so most people either convert to a RRIF and/or  use the funds to buy a life annuity from an insurance company. Part 2 of that column will run later in April.

You can find the full Mercer release from Tuesday here.

Background on Mercer Retirement Readiness Barometer

Included is an infographic, the major elements of which I’ve reproduced below.



Continue Reading…

Vanguard S&P 500 is a third of my portfolio

Vanguard S&P 500


By Alain Guillot

Special to Financial Independence Hub

My investment strategy is to buy more every time I have more money. I don’t time the market. I know that investments (on the long run) will eventually go up.

No one knows when the market will tank or when it will rally. So why waste my brain energy trying to stay informed and anticipate, or react to the market? I just buy and buy some more.

When will I sell? Hopefully never, but the second best answer is: When I retire, when I need the money for personal living expenses. In that case, I will just take the money out when I need it, not when the market conditions are right (we never know when the market conditions are right).

Generally I divide my investment in three parts: 1/3 Canadian stocks, 1/3 U.S. stocks, and 1/3 international stocks.

I don’t know how much money I have made since I don’t know how to account for all the dividend payments I have been getting. But it’s a lot.

Investing in the stock market is safest way to invest your money. Yes, there is day to day volatility. If you learn how to ignore the new, the latest development, the latest emergency crisis, the latest election, you will be OK.

Of course, it’s not easy to avoid all the noise. Media companies spend billions of dollars every year finding new ways to capture your attention. The worst part is that “bad news” is a very potent attention-grabbing tool and many people fall victims of it. I have friends who have their money in cash, gold, or silver because the next financial catastrophe is coming. If they only knew how to calculate all the money they have left on the table, it’s worse than any catastrophe they have envisioned.

The bedrock of my U.S. investment is the Canadian dollar Vanguard S&P 500 Index; here is the symbol, VFV. It trades in the Toronto Stock Exchange. My strategy is to buy some more every December.

The Vanguard S&P is a fund that invests in the stocks of some of the largest companies in the United States.

This is a great investment because it’s well diversified and is made up of the stocks of the largest U.S. corporations. These large corporations tend to be stable with a solid record of profitability.

How much money can you earn?

We are not in the business of predicting the future, but here are some of the past results:

Rate of return investing on the S&P 500

As you can see the rate of return for 3 years is 42%, for 5 years is 66%, and for 10 is 304%. This is the best return you can get for your money. This is a great investment opportunity if you have the patience to wait for it.

How to invest in the Vanguard S&P 500

You can buy shared of the S&P 500 as you buy shares of any stock. Continue Reading…

92% of investors have a better mindset if they do this one thing, research finds

By Carol Lynde, Bridgehouse Asset Managers

Special to Financial Independence Hub

If you Google “what contributes to positive mental health?,” you’ll find helpful tips on exercise, diet, getting enough sleep and mindfulness. You’ll find advice on connecting with people, building resilience, gaining control over your life and getting help from a mental health professional. You might find mention that reducing your debt and controlling spending can reduce stress. But you’ll find very little about financial planning or that making a financial plan can contribute to positive mental well-being.

It can.

Bridgehouse Asset Managers recently released research confirming a direct link between planning your finances and positive mental well-being. The more financial planning activities you do, the better your sense of security, control, ability to bounce back from life’s challenges and positive mindset. Further, having a financial plan makes you less anxious about today’s financial issues, such as cost of living, debt levels and saving enough to retire.

The Bridgehouse national research project included focus groups and an online survey developed in partnership with the Canadian Mental Health Association (Toronto) and an advisory panel including mental health, legal and financial advisor experts from across the country. The research found that it’s not the amount of money you have, it’s doing something that counts. Planning your finances and creating a plan for the future leads to a sense of hope, security, resilience and control:  all attributes associated with positive mental health.

There’s a compounding effect: the more financial planning you do, the better your mental health. The survey asked participants how many of 10 financial planning activities they had completed and compared the results to their self-assessed mental state.

The research concluded the more activities respondents completed, the better their sense of security, control, ability to bounce-back and positive mindset. Financial planning activities included: calculating retirement requirements, calculating net worth, determining short-term goals, determining long-term goals, determining insurance requirements, establishing an emergency fund, creating a debt management plan, creating a budget, actively finding day-to-day savings and scheduling regular meetings with a financial advisor.

Of respondents who did seven or more financial planning activities:

  • 73 per cent expressed a sense of security about their financial situation.
  • 73 per cent felt in control of their financial situation.
  • 79 per cent felt an ability to bounce back if life throws tough challenges.
  • 79 per cent reported a positive mindset.

Respondents who took even small steps claimed positive mental well-being benefits. Of those who did only one-to-three financial planning activities:

  • 52 per cent reported a sense of security.
  • 54 per cent reported a sense of control.
  • 73 per cent felt an ability to bounce back.
  • 71 per cent reported a positive mindset.

According to regression analysis (a research method to rank contribution weighting), establishing/maintaining an emergency fund and scheduling regular meetings with a financial advisor were the two most important drivers of positive mental well-being and the ability to sleep at night. Continue Reading…