Month: March 2022

Know Your Ex-Dividend Date & Maximize Cash Flow from Dividends

This post is about creating cash flow by understanding ex-dividend dates. Buying a share in companies that pay regular dividends is way to creating passive income for yourself. Once invested, your money will be put to work. The dividends will come to you for as long as you own the shares. It’s a great way to create a steady cash flow for your later years, when you’re no longer will or able to send your body out to work. If you’ve sent your money out to work instead, then you have some assurance that it will generate an income for you at some point.

I am not promising you that this method of generating a retirement income will be quick. I’ve been investing for decades. While I’ve learned a lot along the way, I’m still not at the point yet where my dividends can support my current lifestyle. My first dividend payments amounted to tens of dollars per year, then hundreds of dollars per year. I’ve finally reached the point where I’m earning a five-figure amount of dividends on an annual basis. It’s comforting to have that passive income, even if I still have to rise-and-shine for my employer most days of the month.

You should definitely consider whether a dividend portfolio would be a good fit for your finances. If you need to hear an inspiring story about someone who did phenomenally well at divided investing, then please check out this 2-part interview at the Tawcan blog.

Dividends & Date of Record

Companies pay dividends to shareholders who buy their shares before the ex-dividend date. There is a date of record that entitles shareholders to a portion of the profits that are distributed as dividends. It’s a very important date to know if you’re planning to receive dividends. If you aren’t listed as an owner of the underlying security on the date of record, then you won’t be paid any dividends even though you bought shares or units in that security.

Every stock, mutual fund, index fund or exchange-traded funds that pay dividends will list their ex-dividend date on their website. Personally, I have a good chunk of my portfolio invested with Vanguard Canada in the VDY ETF. This ETF pays dividends on a monthly basis. I receive dividends based on a distribution price per unit. For the most part, I know in advance just how much money I’ll receive from this security before it’s paid to me. I simply multiply the number of ETF units I already own by the distribution price to be paid. So long as I’ve bought my units before the ex-dividend date, I can get an accurate amount of the dividends that I will receive on the payment date.

Click on the link and scroll down to the bottom of the page. There, you will find the distribution frequency for VDY. Pay attention to the ex-dividend date. If I wanted to be paid on any new purchases of ETF units, then I would have to buy those new ETF units before March 31, 2022 in order to get paid dividends on those units on April 8, 2022. This is because I have to be listed as the owner of those new units on the record date, which is April 1, 2022. If I’m not listed as an owner on April 1, 2022, then I won’t be paid for those units in the month of April. Instead, I’ll start receive payment for those new units in the following month.

As I said earlier, companies pay dividends to those who are listed as an owner of the underlying security on the date of record.

Creating a Cash Flow of Passive Income Takes Time

Knowing the ex-dividend dates of the securities that you’re buying will help you to forecast your cash flow. Once armed with this information, you have the ability to know exactly when you’ll be receiving your passive income.

In the interests of transparency, I can advise that I spent years and years investing in dividend-paying ETFs. (In October of 2020, I tweaked my investment strategy and have been investing new contributions into VXC.) My two dividend ETFs of choice are VXC and XDV. As with VXC, the link for XDV will disclose its distribution dates and amounts. Both of these ETFs pay me dividends every month.

I track my purchases on a spreadsheet. Each month, I update my spreadsheets with the distribution price. This way, I’m able to calculate how much passive income I’ll be earning. It’s awesome! Unlike the money from my 9-5, these dividend payments are effort-free money. Contributions to my portfolio that were made 10 or more years ago are still churning out passive money for me.

When I was a child, my parents purchased bank stocks for my brother and I. I still own them today. Those stocks have paid me dividends for decades. I just wish my parents had been wealthy enough to buy me more! Now that I’m at my current stage of life, perhaps I should do that for myself.

Procrastination is your enemy

When it comes to investing, procrastination is a cancer. It slowly and irrevocably eats away at the potential growth of your portfolio. Your money must be invested in order to work its hardest for you. Creating a steady, reliable cash flow based on dividends won’t happen through wishing and hoping and good thought. You need to actually invest the money then leave it alone to do its thing.

If you let procrastination win, then you’re not investing before the ex-dividend date. That means you don’t receive your dividends until the following month. At the start of your investment journey, you might be missing out on a few cents or maybe just a dollar. Big deal, right? It is a very big deal. The sooner you receive your dividends, the sooner you can re-invest them through a dividend re-investment plan aka: DRIP.

While you’re building your dividend portfolio, you want to earn dividends as soon as possible. They can be re-invested with your regular contributions so that the following month’s dividend payment is even bigger. Compound growth is a key to increasing your dividend payments every month. If you invest after the ex-dividend date, you’re not doing yourself any favors.

Now, I know that you can only invest when you have the money in hand. This is why I suggest that you set up an automatic transfer so that a chunk of your paycheque is diverted to your investment account. Doing so means that you have money to invest. Sometimes, the transfer will take place after the ex-dividend date. While this is unfortunate, it’s also out of your control. You cannot invest what you don’t have.

By the same token, procrastination is entirely within your control. I don’t want you to set up an automatic transfer and just let the money accumulate. If it’s not invested, then your money isn’t being given the opportunity to grow. When you’re interested in pursing cash flow through passive income, then you need to be investing your money in dividend-paying securities as soon as you can. I do my investments every month, but you may want to do your investing quarterly or every other month or once a year. Whatever you choose, ensure that it’s result of your choice and not the result of procrastination.

As with everything you learn in life, you have the option of how to put the lesson to use. If you want passive cash flow, then start today. Get your money invested. Buy your securities before the ex-divided date. Then go about your daily life while your dividends do their thing in the background.

Is now a good time to invest in the stock market?

Yes.

Short though the answer may be, it is accurate. Today is the best time to invest in the stock market.

Since the start of 2022, my portfolio has seen a lot of volatility. My personal definition of volatility is that its value has moved between $7,000 and $15,000 in one day. Some days the swings are negative, and my portfolio value has dropped. Other days, the swings are positive and my portfolio has increased. Either way, I count it as volatility. During the Big Market Drop of 2020, my portfolio lost $247,000! It might have lost more, but I simply stopped checking it at that point.

Do I enjoy volatility? Not particularly, but it doesn’t bother me very much. I’m the same as most everyone who invests – I don’t want to lose money. No one wants to lose their investment! After all, we’ve worked incredibly hard to earn the money to invest in the first place and a loss means that all that hard work was in vain.

One of the secrets I’ve learned over my many years of investing is to never lock in your losses when the market is volatile. If you buy at $10/unit, and the price drops to $5/unit, then that’s a 50% loss. If you sell when the price is down, then you’ve locked in your loss – and that’s not a good thing. The key is to keep your money invested because the stock market’s trend over the long term is to go up.

Check out this image from personalfinanceclub.com which visually explains why stock market investors should ignore short-term volatility. It’s a picture of a person walking up the stairs while working a yo-yo. The yo-yo’s up and down movement represents the daily gyrations of the stock market. The stairs represent the long-term upward trend of the stock market.

If you stay invested for the long term, you will be financially rewarded. Your portfolio will be bigger than your initial investment. Yay for you!!!

Now, I have to caveat that last statement. This works for equity-based exchange traded funds and for equity-based mutual funds. If you decide to invest in a single stock, then you’d better have far more insight and wisdom than I do. You’ll do what you want, but I would suggest that you stay away from individual stock picking until you’re a sophisticated investor. It is between extremely hard and impossible to determine which stocks are the ones that will make you rich over the long-term. For my this very reason, I don’t invest in single stocks.

All of my money is invested in exchange-traded funds. ETFs are very diversified because they hold a basket of stocks that have done well over time. When one of those stocks starts doing poorly, it is removed from the basket and replaced with something else. When I invest in my ETFs, I don’t need to do the stock analysis to determine which stocks are good and which ones aren’t. That analysis is done for me. I can spend my precious time doing other things I enjoy. For example, last night I tried this absolutely delicious recipe for Thai Yellow Chicken Curry instead of poring over a prospectus. My portfolio continued to work in the background while I tried my hand at something new and tasty.

Money needs time to compound. The sooner compounding starts, the bigger your money will grow. Now is a great time to invest in the stock market! War breaking out? Check! Social unrest somewhere? Check! Inflation spiraling? Check! Devastating natural disaster? Check! There will always be some world event that makes the stock market volatile. That’s just how life goes with 8 billion people on the planet. Don’t let those extremely disturbing events stop you from investing in the stock market. Money that is not invested today never benefits from compound growth. You can’t go back 20 years and start your investment portfolio. You have today so start today. Once lost, time can never be recovered.

Do Future You a favor and start investing in the stock market via equity-based exchange traded funds. Start today. Set up an automatic transfer to your investment account so you’re investing on a regular basis. Personally, I invest every month. I know others who invest every 90 days. There are those who invest once a year. The key is that the investment gets made. Once you’ve started your investment journey, continue to learn about personal finance and investing. Start where you are and build from there because when you know better, you do better.

Money – A New Normal

As we gradually move into a vaccinated post-COVID world, I wonder how many of us have discovered a new normal for our money. The lockdowns forced many of us to curtail our spending in many areas of our lives. Those lockdowns have all but disappeared in my corner of the world. However, there were some changes to my spending habits in the interim. How about you? Did you change the way you spent your money?

For my part, my social life took a beating! ZOOM calls simply don’t replace face-to-face meals in a nice restaurant. Virtual hugs aren’t the same as real ones! Where I used to share meals with friends 2-3 times a week, that was all but eliminated during the pandemic as I cooked most of my meals at home. There were those few brief months when I diligently participated in Take-Out Tuesday. It was my way of ensuring that local mom-and-pop restaurants stayed afloat. I didn’t want my post-pandemic restaurant options to consist solely of chain restaurants. The pandemic induced a second, major change in my annual spending. l stopped travelling. No more trips for work or leisure. All told, I haven’t left my home province in three years!

Believe me when I say that has never happened before. I’ve been travelling somewhere atleast once a year since the time I was 6 weeks old and my parents took me to the mountains. Travel used to be as familiar to me as brushing my teeth. I was the person who planned her next trip on the flight home from her last trip! Being grounded for the past few years hasn’t been fun. At the same time, I know it’s been a very small price to pay while living through a global pandemic. First world problem, right?

The World Health Organization declared the pandemic on March 11, 2020. Take a look at your expenses for the past two years. Where were you forced to cut back? What did you do with the money? Was it funnelled into savings? Did you pay off some debts? Perhaps you chose to simply spend more online?

The pandemic did not impact everyone in the same way. Some people lost their jobs and subsequently fell into debt & unemployment. Others transitioned to working from home, or otherwise continued to work in their essential jobs. The fortunate ones who continued to work had the opportunity to invest and pay down debt. They could do so because they were essentially stuck at home! Thousands of dollars were no longer going to sports activities, concerts, travel, eating out, gasoline, commuting, dry-cleaning, salon visits, etc… That money was now available to be spent paying down debts such as credit cards, auto loans, student loans, and other consumer debt. Alternatively, for the Debt-Free, those funds could be diverted to RRSPs, TFSAs, and non-registered investment accounts. The money could have also been used to bolster previously-anemic emergency funds!

Ask yourself if you’ve got a new normal for your money. You need not share your answer with the class. Instead, consider your spending choices during the height of the pandemic lockdowns. What were you forced to stop purchasing? And will you go back to making those same purchases now?

For my part, I look forward to socializing more with my friends and family outside of the house. Will I go back to the same frequency as before? That’s doubtful! These past two years have inspired me to try new dishes and to expand my culinary repertoire. The frequency of socializing will definitely go up, but I have a feeling that I will be doing more entertaining in my home.

As for my travel-habit, I suspect that my comfort level will not return to pre-pandemic levels for another few years yet. My annual international travels are still on hold for another year or two. Truthfully, it was an expensive habit. I wish I could say that all my travel funds have been piling up in my savings account. In reality, a lot of that money has been re-directed into my house. In 2021, I had to replace the sewer pipe that connects my house’s water to county’s water line. That particular project cost me as much as my 2016 trip to Italy!

Do you have a new normal for your money? Maybe take some time and think about whether you want to resume your pre-pandemic spending habits. If the lockdowns and restrictions forced you to curtail your spending, then maybe that’s a good thing. It’s your money and you’re the only one who can determine if you’ve found a new normal for how you manage it.

Commission Free Investing is Fantastic!

Allow me to be very transparent, right from the start. I’ve had a non-registered investment account with BMO Investorline for decades. They’ve recently introduced a list of exchange-traded funds that can be purchased for free. Let me tell you say it again. Commission-free investing is fantastic!

I suspect that this move to providing commission-free purchases is in response to newcomers such as Questrade and WealthSimple. I don’t have an account with Questrade or WealthSimple, but it’s my understanding that their platforms both allow investors to buy ETFs for free.

This is wonderful. Commissions on investments through brokerages can run from $4.95 to $9.95. If you don’t have to pay them, then you can invest your former commission fee. Remember! The sooner you invest your money, the sooner it can start compounding for you. One of your goals during your accumulation phase is to invest your money as soon as you can. Investing without commissions allows you to do that.

For my part, I buy units in my preferred ETFs every month. Luckily, my paycheque is bi-weekly. That means, money shows up in my account every 2 weeks. I siphon off a chunk for investing. Every other paycheque, or every 4 weeks, I take my investment-money and buy more units in my preferred ETF. At the same time, my ETFs pay me dividends every month. While all of my ETFs are on the dividend re-investment plan (DRIP), there’s usually a little bit of dividend money left over after I’ve received my new DRIP-units.

For example, my ETF might pay me $100 in dividends. If my ETF is trading at $15/unit, then I only receive 6 DRIP-units valued at $90 (=$15 x 6). That leave $10 in dividends sitting in my account. Four weeks later, the same thing happens. I receive another $100 in dividends and my ETF is still trading at $15/unit. Again, my DRIP feature kicks into action and buys me 6 more units, leaving another $10 worth of dividends in my account. (For the ease of calculation, assume that my ETF’s trading price stays the same. In real life, the price of my ETFs fluctuates from month to month.)

Wait a minute – hold the phone! Now, I have $20 in “leftover” dividends. Yet the cost of each unit is still only $15. Since there’s no commission to buy, I simply do a trade for 1 unit at $15. There’s still $5 leftover in my account, since $20-$15=$5, but who cares? I’ve done all that I can to get as much of my money working for me as soon as possible.

This is why commission-free investing is fantastic! More of my money can be invested sooner. The more units I have, the more dividends I earn the following month. This is self-reinforcing cycle that increases my passive cashflow, via DRIP-units and commission-free units. As I’ve said before, passive cashflow is awesome. You work once – you invest money earned from your blood, sweat and tears – that investment pays you dividends. So long as you don’t spend them, those dividends earn you more dividends as they compound over time. What’s not to love about this process? Now that you know about it, you can create the same system for yourself.

Earn it once, invest it until retirement. Dividend ETfs have been the bedrock of my investment portfolio for the past 10+ years. Happily, I can report that my dividends hit the 5-figure mark years ago. At this point, I expect that they will be a very nice supplement to my other retirement income when my employer and I part ways. Up until a few years ago, commission fees constrained how often I reinvested my “leftover” dividends. Today, those fees no longer a concern. Whenever I have enough money in my account to buy a unit in one of my ETFs, I’m investing it immediately. The sooner my money’s invested, the sooner it can start to compound and to increase my passive cashflow.

Ever since commission-free investing has been available, I have done my best to take advantage of it. You should take advantage of it too!