dividends - Millionaire on the Prairie

Mistakes with Money

Not a single one among us is born knowing how to use money perfectly. Our skill with money comes from making mistakes and learning from them.

For my part, I’ve made several notable mistakes with money over the years. I’ve written before about how I failed to take action with my investment plan for 5 full years. That one still hurts when I think about it. It took me 5 years before I finally rectified that situation by committing a good chunk of my paycheque towards my automatic savings plan. Now, I benefit from using dollar cost averaging to invest my money on a regular basis.

I hate to admit it but choosing to invest in dividend products instead of equity products is one of my biggest money mistakes! Had I started investing in equity ETFs instead of dividend ETFs way back when, then I’d be in a position to retire today…even with the recent volatility in the stock market.

Sadly, this money mistake cannot be un-done. I have been investing in a dividend portfolio since 2011, instead of a broad-based equity exchange-traded fund. The financial media has spent the last 3 months talking non-stop about the pandemic’s effect on the stock market, and how it has brought the 10-year bull run to an end. It’s true – the market took a deep fall in March. However, it has bounced back. It’s still quite volatile, and – in my completely amateur opinion – the stock market will continue to be volatile for the next 2-3 years.

I’ve been forced to realize that one of my biggest mistakes with money was to delay investing in equity ETFs. I’ve only just started investing in equity investments in 2019! It’s true that I managed to catch almost the very tail-end of the bull market, but the smarter play would’ve been to start investing in equity ETFs back in 2011… ideally, back in 2006.

Water Under the Bridge

‘Tis true. I can no more turn back the hands of time than I can lick the spot between my own shoulder blades. We make our choices then we take our consequences.

I shouldn’t be too, too hard on myself. Nine years of consistent investing has yielded a nice little cash flow for me. While my monthly dividends are in the 4-figure range, they’re not quite enough for me to retire just yet. I equate my little army of money soldiers to income from a part-time job that I don’t have to actually perform. Truth be told, it’s nearly a perfect side hustle since it’s money I earn without the sweat off my brow. How cool is that?

So why am I divulging one of my biggest money mistakes to you?

Two reasons. First, people in the personal finance world don’t talk about their mistakes with money nearly enough. The only regular mention I see of this reality is on the ESI Money website, where the millionaires who are interviewed are asked about some of their errors with money. I think it’s important that people realize that everyone who is good with money has made their own mistakes with it. Like I said at the beginning, no one is born as an expert with money.

Secondly, I don’t think that there’s any reason for you to make this mistake yourself. You can just as easily learn from someone else’s mistakes as you can your own. The more information you have, the more likely you’ll be to make a decision that best fits your particular circumstances. I firmly believe that people make the best decisions they can with the information that they have at the time. When you know better, then you do better.

Hard-Won Truths

Money mistakes are unavoidable. Mine isn’t the worst one in the history of the world, and it certainly won’t derail my financial future. And, let’s be honest – I ought not complain too much. I earn a small boatload of dividends month in and month out. How bad of a decision could I have really made 9 years ago?

My investing journey isn’t over. And I’m sure that I will make different mistakes in the future, but I just don’t know what they are yet. I still have choices and options for my money. I can choose to continue building up my army of money soldiers. The other option is to start investing in equity ETFs and take part in the stock market’s recovery. I’m quite confident that the stock market will continue to trend higher. It’s recovered before, and it will recover again. A third option is to simply coast on what I’ve already invested a la Military Dollar, so that I can spend today’s money on today’s things – home renovations, landscaping, a new vehicle, spa treatments, whatever…

I want you to accept that mistakes with money are an inevitable part of investing. That’s why it’s so very vital that you continually learn about it throughout your life, and that you put what you learn into practice. Invest as much as you can as early as you can. Invest for the long-term. Keep your mitts off your investments by simultaneously building an emergency fund for those emergencies that will crop up in life. Live below your means and stay out of debt. Save, invest, learn, repeat – this is a recipe that works.

By following these foundational principles with your money, the impact of your money mistakes will be minimal rather than nuclear.

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Weekly Tip: Set timelines for your goal so you know which ones are short-term, which ones are medium-term, and which ones are long-term. Generally, short-term goals are the one to be accomplished within the next 12 months. Things like vacations and concerts would fall into this category. Medium term goals are one that take between 1 and 5 years to accomplish. Think new vehicle and down payments on a home or a business. Long-term goals are those that will take longer than 5 years. Common examples are retirement and paying off a mortgage. Once you have a timeline, then you’ll be in a better position to prioritize where your money goes and to segregate your money so that each goal is funded.

My Army is Growing

Longtime readers of this blog are familiar with my plan to build an army of little money soldiers. Each soldier is a dividend-producing unit in my investment portfolio. Every month, I direct money to my brokerage account and buy as many units as I can afford in my preferred exchange traded fund.

I’m not proficient at reading income statements or at assessing whether it’s a good time to buy a stock. There are people who are exceptionally good at doing this, like the magnificent fellow who runs the Tawcan website. I’ve chosen a different path to building cash flow from dividends – I simply buy units in two dividend-paying exchange traded funds every single month.

I’ve been doing so for the past 8 years. And I’m seeing the rewards of my diligence. My dividend cash flow covers 50% of my monthly expenses! This is fantastic news! This means I can cut back my hours at work, or move to a lower-paid position, and my lifestyle will stay the same. My dividends are supplementing my day job, but they could also be re-deployed, if necessary, to replace my income!

When I first started building my army of little green soldiers, I’d been hoping that the dividend funds would kick off a few hundred dollars a month by the time I retired. That had been my only goal. However, as I started reading blogs and learning about ETFs, I realized that my dividend cash flow could become a viable alternative to working.

I expect that by the time I’m ready to hang up my hat, the cash flow from my dividends will be several thousand dollars per month. Woohoo! Consistent monthly cash flow is the lifeblood of retirement. And whatever’s not needed can be reinvested to even even more little money soldiers. I don’t spend on things I don’t need or want right now. I’m hardly likely to change this aspect of my personality after I retire.

If you’re interested in building your own cash-producing dividend army, consistent investing in dividend ETFs is one path to take. There are many others! If you’re more inclined to learning the technical aspect of buying individual stocks, then I would strongly encourage you to visit the Tawcan website and learn how Mr. Lai built his portfolio. You’ll then be in a better position to decide which option is more appealing to you.

Building an Army of Little Money Soldiers

One of my life’s goals is to build a nice, solid flow of passive income without getting a second job. The way I decided to do this was by building an investment portfolio using a dividend-paying exchange traded fund (ETF). I think of the individual units in my ETF as Little Money Soldiers whose sole purpose is to acquire more and more dividends for me every month. The dividend income that I earn can be used any way I want, and right now I want it to fund my dream of financial independence. Every single month, I add to my army of Little Money Soldiers by buying more units in my ETF and I send them out into the world to do their thing – they do it well. I don’t have to do anything beyond sticking to the plan of contributing to my portfolio regularly and watching my dividends grow. My Little Money Soldiers do the rest.

As a Singleton, my paycheque is the primary source of income in my household. Years ago, I’d heard about how smart couples of means would live on one income and bank the other. Ideally, the really well-off couples would bank the higher income and live off the smaller one. I envied such couples! The reality was that I was not in a position to live on 50% of my take-home pay. I wasn’t willing to live that close to the bone because I wanted to be able to socialize with my friends each month and do some travelling. When I learned about dividend income and started doing some blue-sky dreaming about how dividends could be used to supplement my income, I couldn’t buy them fast enough!

Dividends are a second income in my otherwise single-income household. Unlike married people in a single-income household, I don’t have a partner who can go out and earn some money if my main income source dries up. My monthly dividend income is financially akin to having a partner with a part-time job. If I were to lose my paycheque, my dividends could help me survive from one month to the next. Obviously, I would lose the benefit of the dividend re-investment plan (DRIP) because I would need the dividends to pay for my absolute necessities while I looked for employment. As a single person, the dividend income created by my Little Money Soldiers provides a certain level of psychological comfort because I know that, should I lose my current job, I will continue to have income until I find new employment and start getting a paycheque again.

Right now, my investment portfolio produces a part-time income. If I continue to invest on a regular basis and if I refrain from spending my dividends rather than re-investing them, then my investment portfolio will eventually produce a second full-time income for my household. I will have the financial benefits of an imaginary spouse/partner without the real-life drawbacks that come with sharing money with a sentient human. And unlike other side hustles that are regularly touted on the Internet, my army of Little Money Soldiers goes out to work on my behalf thereby allowing me to indulge my inclination towards laziness. I don’t have to do anything outside of my comfortable routine in order to earn this money. It’s all mine – it’s tax-advantaged – it’s automatic – it’s wonderful!

For the past 7 years, I have consistently been investing in dividend-producing assets. I’ve reached a point where I consistently receive a 4-figure dividend payment every month. And since I don’t spend the money, it is automatically re-invested on my behalf. (Check out this awesome article for a primer on how DRIPs are the next best thing since sliced bread: My dividend employee Steve.)

I was very lucky that my parents were interested in the stock market. Both of them invested on a regular basis so I knew that there was a way to make money without actually having to go to work. Of course, my six-year old brain didn’t quite grasp all the intricacies of what each call from my mother’s broker meant but he phoned on a regular basis. (As an adult, I’m quite convinced that he merely churned her account to generate fees instead of acting in her best interests to make money. Nowadays, my mother invests on her own through her self-directed brokerage account and she’s doing quite well!)

My father’s style of investing was much different. He introduced me to the concept of dividends, and bought me several shares in companies that are still around today. When I was in my early 20s, I opened my own self-directed brokerage account and used my initial principal to buy shares in the various Big Banks. Again, betraying my youth and lack of knowledge, my only criteria for which bank stocks to buy was whether the bank participated in a DRIP. If the answer was yes, I bought $1,000 worth of stock in the bank. To this day, those banks still pay me dividends every quarter. I freely admit that this wasn’t the smartest way to pick my investments, but I could’ve done a whole lot worse! Every one of those banks is still around and the stock price has grown over time. Buying those bank stocks was one of the best financial decisions that I’ve ever made, even if the reason underlying the decision was not well-founded.

As we all know, time waits for no one. I learned more and more about investing by reading books, internet articles & personal finance blogs. They were all consistent that the way to earn outsized returns was to be invested in the stock market. I had little interest in becoming a expert in the stock market but I appreciated that the best historical returns went to those who had equity investments. Buying stocks in companies that paid dividends meant I was investing in equity. Dividend payments were a passive way for me to earn money and to participate in the stock market – to me, it was the best of both worlds! I started contributing more regularly to mutual funds which paid me dividends, then I learned about ETFs and index funds and a light went off in my brain. Why should I willingly pay higher management expense ratios (MER) for my mutual funds when I could buy the same basket of assets through an ETF or an index fund for a fraction of the price?

So, after paying off my mortgage at 34 and becoming debt-free, I turned my focus to building my non-registered investment portfolio. I promptly found an index fund that paid out dividends every single month so it was time to say bye-bye to my mutual funds. I was still investing in dividend-paying assets but I would be paying a lower MER to do so. My new index fund would simply pull the money from my chequing account and the investment would be made. Making the switch was a no-brainer! I set up an automatic contribution from my paycheque to my index fund. My first index fund offered a DRIP feature and I was not responsible for re-investing those dividends into new units of the index fund every month. The dividends were DRIP-ped, i.e. automatically re-invested into more units of my index fund, rather than paid out to me in cash. It was fantastic!

Two years ago, Vanguard came to Canada and I started doing some investigating. Vanguard has very low MERs on their products. One of those products was an ETF that paid out dividends every single month, offered a DRIP feature, and had an MER that was much lower than the one on my index fund. This was a hat trick! I could get all the benefits of my previous index fund portfolio while saving money on the MER and accruing even more units of the ETF every single month. Sadly, Vanguard will not simply withdraw the money from my chequing account – I have to transfer money to my brokerage account. Big deal! For $9.95 a month, I’m paying a much lower MER and earning sufficient dividends which more than cover the cost of the monthly purchase. I spent 15 minutes opening my online account. Then I spent another 3 minutes setting up an automatic bi-weekly transfer from my paycheque to my brokerage account to fund each month’s purchase. I haven’t looked back. Every month, I buy more units in my Vanguard ETF after the last month’s dividend payment has been automatically re-invested.

Earning money through dividends is awesome. I don’t have to do anything other than purchase the underlying asset and the dividends flow to me every month like clockwork. In the words of my very wise hairdresser, it’s money that I don’t have to sweat for. What could be better than that?