Yay! The time has finally come. You’ve opened your brokerage account and you’re ready to start filling it with money-makers. It’s time to ask yourself if you want dairy cows or beef cattle?
Steers are grown to become beef. You buy the calves, grow them up, then send them to slaughter. If you’re very lucky they grow nice and big while you own them, then return a good price to you once sold. Of course, between buying the calf and selling the steer, you’re going to have to hope that it doesn’t get sick or getting into any kind of accident that damages its value. You’ll have to wonder about the kind of feed its getting and whether the rancher is taking good care of it on your behalf. And you most definitely don’t want the animal to die, since that means you’ve as good as burned your money in a pyre. Raising a calf to a full grown steer entails a lot of hope that nothing goes too terribly wrong between buying and selling.
On the other had, dairy cows produce milk. Good ones produces 9 gallons each day! Such a cow is never sold, just the milk that’s produced. So long as you own healthy and productive dairy cows, you’ll get paid when the milk gets sold. It’s reliable, steady income – all you had to do was buy the cow. Easy peasy, lemon squeezy.
So which one do you think you’d prefer to own in your brokerage account?
Blue Lobster… what’s wrong with you? Why are you talking to me about cows?
For some newbie investors, thinking about cows is easier than thinking about financial products.
Since this blog is simply a collection of my rambling thoughts about money, I’m using an analogy that I heard this week. Investments that produce dividends are like dairy cows that produce milk. However, growth stocks are like beef cattle. You want to buy these stocks when they’re cheap (young & small) and sell them when they’re expensive (big & strong) so that you can reap the increased value.
For my part, I was a staunch believer in dividend-paying exchange-traded funds, i.e. the dairy cows. I still love watching dividends pour into my brokerage account every month.*** Every month, a modest 4-figure amount of money flows into my account and is automatically re-invested into more ETF units. It’s a wonderful self-perpetuating cycle that generates more and more dividends every month.
That said, I’m learning more and more about growth ETFs and mutual funds. They might pay dividends or capital gains, but they might now. These are products that are focused on growth companies. Generally speaking, they are way more volatile than my dividend-paying products. Their returns are higher and their losses are deeper, but over the long run they are probably the better bet for long-term investors. Again, I’m suggesting – not guaranteeing – that investing in a broadly-diversified, equity-based ETF will give you higher returns over 10+ years. If you’ve got a long investing horizon, then that’s where you should put your money.
I want to make another thing very, very clear.
I do not invest in individual stocks.
Before continuing, please go back and re-read the last two sentences. I don’t want there to be any confusion whatsoever. I do not invest in individual stocks.
I’m not interested in learning how to master that art, but I can see the benefits for those who do. If learning how to buy individual stocks is something you’re interested in, then visit Tawcan’s blog. He buy individual dividend-paying stocks and is earning a very impressive amount of dividends each year. Let’s just say that his herd of dairy cows is sizeable! I’m pretty sure the same analytical principles can be applied to buying growth stocks too, but that’s not my field of expertise or interest so enjoy yourself. I’ll stay here and stick to ETFs since they’re cheaper than mutual funds and easier for me to understand. Also, I’m a bit lazy and don’t mind paying minuscule MERs to someone who’s already done the work for me.
Finally, there’s no rule saying that you can only have one and not the other. Maybe you want a bit of both. For my part, all of my new money is going into VXC with Vanguard Canada. I switched to buying steers when the market was on the upswing in 2020. Had I been paying attention, I would’ve started buying steers in March of 2020 when the market was at its bottom. Oh, well – better late than never! I wised up and switched my investments to growth-oriented ETFs. It was the right move for me.
Keep in mind, I didn’t sell my dairy cows. In other words, I kept my dividend-paying ETFs. After nearly 10 years of faithfully investing part of my paycheque, the dividends from those ETFs are going to comfortably support me in my retirement.
So nearly 3 years after the stock market was pummelled at the start of the pandemic, my portfolio is the healthiest its ever been. You have the power to do the same thing with your portfolio. Despite the doom and gloom of the headlines, you’re in this for the long haul. Like investors who came before you and who didn’t sell at the bottom, you can make money over the long haul. All you need to do is add some dairy cows, or some steers, or a little bit of both, to your portfolio. Invest a little bit of every paycheque you earn and do so no matter what. Don’t spend your dividends and capital gains. Instead, re-invest them every year and let time do the rest while you go about building the life that you want for yourself.
It may not always be easy, but it really is just that simple.
*** For the very first time ever, I’m on track to receive enough total annual dividends to cover all of expenses for the year barring any big financial emergencies! It’s a very good feeling.