Cash Machine - Millionaire on the Prairie

Build a reliable cash machine.

This is not personalized financial advice, nor is it a get-rick-quick scheme. It’s a roadmap. If you follow these steps and stay consistent, then you’ll create a cash machine that can supplement and/or eventually replace your paycheque. The more money you invest on the front end, the sooner you’ll be able to support your lifestyle with dividends.

Step One

You’re going to need a brokerage account. I use BMO Investorline. (I’m not being paid for mentioning them in this post.)

Why do I use BMO Investorline? It was the only one I’d ever heard of when I started my portfolio. BMO Investorline satisfies my needs so I’ve never felt the urge to switch to another brokerage.

You can open a brokerage account online. It won’t take very long. At a minimum, you will need the following:

your Social Insurance Number,
your bank’s transit number and its institution number, and
your bank account number.

The brokerage account needs to be linked to a bank account so you can automatically transfer money from your bank account to your brokerage account. Similarly, this link will ensure that the dividends flow to your bank account when the time comes for you to start living on them.

Create an automatic transfer between the two accounts. It should be scheduled to happen on the day you get paid. This way, you won’t have to decide whether to send money to your brokerage account every payday. You’ll simply fund your brokerage account and be in a position to invest.

Step Two

Buy as many units in dividend-focused exchange-traded funds (ETFs) as you can. The more money you transfer, the more units you purchase. More units means more cash flow. Higher cash flow necessarily results in faster compounding. The cash machine starts as soon as you make your first purchase.

For my part, I buy units in XDV and VDY. These ETFs pay dividends on a monthly basis. Depending on the month, I earn between $0.14-$0.19 per unit. Admittedly, this isn’t a lot of money at first blush. Keep in mind that I’ve been buying units for decades. I earn a four-figure amount every month.

Different ETFs have different payment schedules. I prefer monthly payments, so I used dividend-focused ETFs for cash flow. I use equity-based ETFs for growth. They also distribute dividends every three months.

Step Three

Brokerages charge commissions to clients for the privilege of buying and selling ETFs. The commission price ranges from $6.95 to $9.95 per trade.

Questrade and Wealth Simple are exceptions. They allow for commission-free trades of ETFs. I’m not being paid for mentioning these brokerages. I don’t have accounts with them.

To compete with Questrade and Wealth Simple, many brokerages now allow clients to trade select ETFs for free. To save on commissions, you should pick a brokerage that has a list of commission-free ETFs.

I’ve stayed with BMO Investorline due to the fact that they have a very long list of commission-free ETFs. My chosen ETFs are on that list. What I’ve saved in commissions has been invested to build my cash machine.

Step Four

Compound growth works faster when you rely on a dividend re-investment plan (DRIP). Always use the DRIP feature. At the beginning, your dividend payment will be small. You can live without it, so re-invest it.

Once the DRIP is in place, your dividends will buy more units in the ETF. With the DRIP turned on, your paycheque and your portfolio will be buying more units. Your dividend payments will grow exponentially.

Step Five

Be patient. Earning enough dividends to fund your entire life won’t happen overnight. It takes years, maybe decades.

The sooner you buy more units, the sooner your cash machine replaces your paycheque. My suggestion? Increase the amount you invest each time you get a raise.

There’s an easy way to do this. Pick a fixed percentage of your income to invest. For example, pick 20%. When you earn $1,000, then $200 goes to your investment portfolio. When your income goes up to $2,000, then $400 goes towards it.

A fixed percentage ensures you’re always investing part of your raises. You’re free to contribute more if you choose.

Step Six

Please don’t ignore the rest of your financial life.

You still need an emergency fund. Getting out of debt should be a priority. You’ll need sinking funds for your hobbies, pets, travel, and whatever else brings you joy from day to day. You should also have a little something set aside in case you need to quit you job.

Investing is great, but it shouldn’t be the focus of your life. No one is promised tomorrow. Spend time with loved ones. Build strong relationships. Exercise and drink water. Get enough sleep. Laugh and look for joy. Smell the roses along the way. It’s wise to have an eye on the future, but you need to live in the present.

Make Money While You Sleep

Passive income is my favourite kind. If there’s an easier way to increase my cash flow, then I haven’t found it yet. Generating passive income takes a modicum of effort on the front end, then time does the rest. You will make money while you sleep. It can’t get any easier than that!

When I first started investing in dividend-generating securities, my monthly dividends were roughly enough to buy a pack of gum. It wasn’t exciting and I didn’t tell anyone about them. Instead, I went about the business of setting up a dividend re-investment plan, aka: a DRIP, so that all those little amounts of money could compound as fast as possible. In the meantime, I sliced off a chunk of my paycheque every two weeks and sent it to my investment account. Over time, the monthly amount of dividends steadily increased. The first time I earned $1K in a single month was pretty exciting! My plan was finally working and I could envision living off my dividends in retirement. Woohoo!!!

What I love most about dividends is that they’re the easiest money I’ve ever earned. The money that I invested 30 years ago is still working for me. That fact still blows my mind. Yes – I had to go to work to earn a paycheque. And I had to live below my means, which is just another way of saying that I had to choose to invest-for-tomorrow rather than spend-every-nickel. Finally, I had to leave it the hell alone for a very long time so the DRIP could work its magic.

The beauty of a DRIP is that it compounds the dividends automatically. I don’t need to re-invest the same earned dollar over and over and over in order to see the dividend amount grow. The compound growth from that first contribution will continue indefinitely until such time as I sell the underlying investment. So every time I invest new dollars, I’m increasing the assets that will work for me 24/7/365. Those assets grow for me in two ways. First, each subsequent contribution makes my asset base larger. Second, companies increase their dividend payments. This is known as organic dividend growth, and I love it.

The invested dollars are the ones that are buying me my financial freedom, one paycheque at a time. I can’t deny that the size of my paycheque mattered too. After all, one can’t invest if one has barely enough to cover the bare necessities from one paycheque to the next. Thankfully, I wasn’t in that position. I was fortunate enough to be in a position where I had plenty leftover to splurge on the wants. Instead, I curbed that impulse and chose to invest a good chunk of my disposable income.

(Lest you think that I lived like a miser, rest assured that I did not. I’ve travelled to Europe 3 times in the space of 5 years, visited the US more times that I can remember, attended 3 destination weddings in not-inexpensive locations, maintained seasons tickets to Broadway Across Canada, gone to many concerts at home and abroad, and socialized atleast twice per week with friends. The pandemic slowed me down, but only because everything was closed for a bit. I’ve had many great experiences with family and friends, while avoiding the relentless marketing & exhortations to spend everything I earn.)

Looking back, I credit those three steps – earn, invest, DRIP – with putting me in the position that I am today. If it becomes necessary, I could live on my dividend income. It would be tight, but I could do it. Do you know how comforting that feeling is? I’ve reached Lean FIRE, as the kids call it.

One of my favourite YouTubers talks about how she set up an investment account for the sole purpose of paying for her home’s mortgage. At the time of her video, Dividend Dream had an investment account that generated enough cash every year to pay for her mortgage. Watch her video. After giving it considerable thought, she decided that it made little sense to liquidate her account to pay off her mortgage. I’m convinced that she’s right. When you have a cash machine steadily paying for some, if not all, of your expenses, there is no good reason to destroy it. It makes more sense to keep the cash machine running smoothly so you can live off the income it generates.

Speaking from personal experience, Dividend Dream’s method works. As I said early, my first few dividend payments were enough to buy a pack of gum. Then they grew to be enough to cover my monthly Netflix subscription. Soon after that, they were enough to put one tank of gas in my vehicle. The next big step was paying for half a mortgage payment, then a full mortgage payment. Today, my monthly dividend cheque is enough to cover 90% of my regular monthly expenses – both needs and wants. That’s pretty good, if I do say so myself.

Invested money works non-stop. It doesn’t get sick, need time off, or otherwise stop working for you. Once you get the ball rolling, there’s little else that you need to do. Earn the money then invest it in dividend-producing assets. Time will do the rest. You can sleep without worry, comfortable in the knowledge that you’re earning money through passive income. Unless you’re paid to sleep, I can’t think of a better or easier way to earn money.

I Love My Cash Machine!

Happy New Year! I hope that you 2024 is off to a great start for you.

I’m happy to report that my cash machine hit a new milestone in 2023. After crunching all my numbers and updating all of my spreadsheets, I was quite pleased. For the first time ever, my cash machine generated more dividends in my non-registered account than the amount of contributions that were made. Woohoo! I’ve waited a very long time for this to be the case, and I can tell you that this achievement is sweet.

When I first started investing in dividends, I was doing it just because my parents had been investors and they’d bought some bank shares for me. Naive as I was, I simply loved the idea of dividends. My thought process in choosing my investment strategy had been… shall we say… unsophisticated. Passive income? Money sent to me just because I owned some shares? Even more money sent to me through the power of dividend re-investment plans? Where do I sign up?

I was hooked on dividends from the word go! At first, I barely earned $50 per year. The first time I earned $1K in a year, I smiled to myself. It dawned on me that I might one day earn $5,000 in dividends in one year. And the first time I earned five figures in dividends, well… let’s just say that was a very good day. Without a shadow of a doubt, I know that if I continue to invest wisely then I will one day hit six-figures per year in dividends. Yay, me!

So even though it wasn’t the best way to invest, I continued to buy more and more dividend-producing securities. (Looking back, I should have contributed to equity-based securities. I would’ve benefitted from the bull-run and likely be several years closer to retirement by now. Oh, well – coulda, woulda, shoulda!)

If I absolutely had to, I could live on the dividends produced by my portfolio. It wouldn’t be a lavish existence by any means. I’d have to cut out a few things – like travel and theatre – and I’d definitely have to watch my nickels & dimes more carefully. But, I’d be able to do it.

It’s amazing to me that I’m in this position. I have made so many investing mistakes. Like I alluded to earlier, I invested in dividend-paying securities instead of equity-based securities. In hindsight, the biggest money mistake I made with my portfolio was choosing passive income over growth. Given that I started investing at age 21, I see now that I’ve made a huge mistake with my portfolio! I wasn’t terribly knowledgeable about investing at that tender age, and my parents weren’t experts in the area either.

They taught me to stay out of debt, to live below my means, and to invest in banks and energy stocks. That’s not bad advice, and I really didn’t go too, too wrong. However, they didn’t teach me about the differences between growth investments vs. income-generating ones. They didn’t teach me most of what I now know about investing. To be clear, I’m not blaming them because you can’t teach what you don’t know. Had they known, they would have stuffed it into my head just like every other life lesson they imparted to me.

And the internet was nascent when I was young. Today, there are blogs and websites and many, many, many online platforms for self-directed investors. The knowledge is literally at everyone’s fingertips so long as they have a device and an internet connection. Anyone with disposable income has the ability to create their own cash machine and watch it grow over time.

Had I been smarter sooner, I would’ve tweaked my investment plan sooner. My cash machine would’ve been kicked into high gear even sooner. Instead, I believed that a person had to stick to one investment strategy forever. This belief was another huge mistake that I made with my investment portfolio. Still somewhat begrudgingly, I have come to realize that tweaking things isn’t always terrible.

For example, I tweaked my investment plan back in October of 2020. As you’ll recall, that’s when the stock market started to recover from the devastating impact of the pandemic. I decided to start buying units in VXC. From that point one, I decided that all contributions to my non-registered portfolio and my RRSP would go towards buying VXC. That was a very smart decision on my part. I can happily report that my returns since 2020 in those two accounts reflect that my tweaking was the right move.

This year, I’ve decided to tweak my TFSA account. (Why didn’t I do this back in 2020? Honestly, my failure to course correct in my TFSA can be chalked up to ignorance about the tax implications of owning securities where I’d pay a withholding tax.)

This year, my TFSA contribution went towards buying units in VGRO. I’m getting a bit more bond exposure in my overall portfolio while also adding some needed equity exposure. Since I plan to hang onto my TFSA for a very, very, very long time, this is the perfect place to add a growth-oriented investment product. There will come a day when I might want to start drawing out tax-free money from this account, so it’s best to tweak my TFSA holdings today. If I’m burdened with too much money, then it’s a cross I’ll have to bear.

So what are my future plans for my cash machine? Well, I’m hoping that it will soon kick off more dividends than the amount I contribute to both my brokerage account and to my TFSA. There’s a chance that might happen by 2026, but only time will tell. By the time I retire, I hope that it generates enough for my basic needs and for my nice-to-have’s. In short, I want my cash machine to generate six-figures of income. Wouldn’t that be nice?

Using a Cash Machine to Fund Your Dreams

This weekend, I happened across a wonderful video about building a cash machine to fund dreams. It was created by a YouTuber that I discovered about 2 months ago. She goes under the handle “The Dividend Dream” and I’ve learned a lot from her videos. The one that I’ve bookmarked in my Favorites folder is the one about how she plans to use her dividends to buy a beach house.

Mind blown! What?!?!?!

Anyway, I want to unpack some of the things she talks about in this video. Feel free to watch the video first or watch it after you’ve read my Sunday afternoon ramblings. Just so you know, I’ve watched her video several times already and plan to watch it a few more times. Her example is one that I hope to follow because I think it’s repeatable for anyone, both on a large scale and a small one. Your mileage may vary.

Poor People Thinking

As explained by the TDD, poor people thinking is to earn, cut expenses, save up money, and use that money to pay off debt. This isn’t a terrible plan. Truthfully, it’s a bajillion times better than staying in debt and paying unlimited amount of interest to creditors over your lifetime.

However, it’s not an optimized plan. Poor people thinking doesn’t allow for the creation and maintenance of a cash machine.

If you watch TDD’s video, you’ll hear her say that she started a brokerage account to save up enough to pay off her mortgage. She doesn’t say how long it took her to save up $425,000, but that doesn’t matter. The point is that she started to save and invest her money in dividend-paying stocks. While she was investing her money, she continued to learn strategies for optimizing her wealth. In other words, she never stopped learning. By the time her mortgage was down to $430,000 and her mortgage-payoff account was up to a balance of $425,000, her MPA was earning $23,677 annually in dividends. Her mortgage payment amount was $22,404.

By this point, TDD realized that her MPA could pay her mortgage payments every month. Eventually, her mortgage would be paid and she would continue to earn $23,677 in dividends every year. In fact, she would earn more than that because she would still be investing money into her MPA thereby earning more dividends.

TDD had transitioned to rich people thinking.

Rich People Thinking

While it’s rarely called by this moniker, rich people thinking is to create a cash machine that will pay for life’s expenses. In TDD’s case, her MPA is a cash machine. It generates enough money to pay for her mortgage every month until her mortgage is gone. When that $430K debt is out of her life, she will still have an intact cash machine that will pay her over $23K in dividends every year.

I’m not suggesting that it’s super-fast to invest enough money to generate $23K every year. Of course not! I’m living proof of that. I started investing 30 years ago, and am only now on the edge of earning $40K per year from my portfolio. I made a lot of mistakes over the years, but mid-5 figures of dividends isn’t to shabby.

However, when I started, it didn’t take very long to earn $18 per month. That’s enough to cover my Netflix bill each month. By the following year, I could’ve covered Netflix and something else***. Go and watch TDD’s video and pay attention to the main lesson: once the cash machine is paying for an expense, it will continue to do so forever.

Your assignment, should you choose to accept it, is to start building your own cash machine. Do not be discouraged by how long it will take! Start with small goals and move up from there. The magic of compound interest takes times to impress. Going from $1 of dividends per month to $2 won’t exactly blow your socks off. That’s just a taste of better things to come. Believe me when I tell you that I was very pleased the first time I earned $1,000 worth of dividends in a month. The first time I earned over $5,000 in a month was even better. And now that my portfolio generates more than a full-time employee earning minimum wage in my province ($15/hr)… well, let’s just say that I do very much believe in the power of my cash machine.

*** In the interests of clarity, I will admit that I didn’t spend my dividends…and I still don’t. Instead, I re-invested them automatically through a dividend re-investment plan. What I do instead is track my annual expenses against my monthly dividend payments. Symbolically, my dividends currently pay for 97% of my current expenses. This is a huge jump from only 4.5 years ago! And I’m still investing a chunk of each paycheque on a monthly basis.

When I retire, my cash machine will cover all of my life’s expenses. If I continue to invest a little bit each month, then it will still continue to grow and kick off even more dividends each year.

Your cash machine can do the same thing for you. All you have to do is feed it consistently by investing a part of every paycheque until its returns are enough to cover your expenses. So go back to the start of this article and watch TDD’s video, then watch it a few more times. Do what TDD and I have done and reap the rewards. You’re welcome!