Brian Stephen's Investing for Income Tips:
Tip # 1 – Understanding how different types of income are taxed
When looking to invest for income you first have to understand how different types of income are taxed. For example: interest income from a GIC is taxed at a higher rate than an equal amount of dividend income. I think one of Canada’s best kept secrets is that an individual in Ontario with no other taxable income can earn over $50,000 a year in dividends and not pay any income tax. That’s right no income tax. Before you invest take into consideration your taxes as well as your expected return. This information does not constitute tax advice. You should consult an accountant when planning to implement a tax strategy. RBC Dominion Securities Inc. is a member of the Canadian Investor Protection Fund.
Tip # 2 - The rule of 72 is a helpful tool to remember when investing
When investing for income and growth it is helpful to remember something called the rule of 72. This rule helps you to determine how long it will take for your investment to double. You simply take 72 and divided it by your expected return. For example: if you expect an 8% annual return you would divide 72 by 8 and get 9. This means your investment will double every 9 years. If you earn only 4% it will take 18 years for your money to double.
Tip # 3 - How can you invest for Income and Growth at the same time?
It is easier than you think. Start by investing in companies that pay consistent and attractive dividends. Once you own these you can use the dividends they pay to establish a dividend reinvestment plan. This is when you use the same dividends the company pays you to automatically purchase more shares of the same company without any additional costs or commissions. For example if a company pays a $40 dividend and their shares trade at $20 you can automatically purchase an additional 2 shares at no cost. These additional shares will also then pay you dividends thereby growing the number of shares you own…A combination of Income and Growth!
Tip # 4 - The importance of a Retirement Plan
Approaching retirement can be both exciting and scary. Many Baby Boomers can expect to have a longer, more active retirement which may equate to the need for more retirement money. Most people already know that a retirement plan is an essential tool for anyone approaching retirement however, many people aren't aware that their retirement plan should be broken down into two distinct phases. 85% of Boomers currently have no plan as to how to convert their savings into a retirement income stream...they may have planned for retirement but it is just as important to have a plan once you are IN retirement.
Tip # 5 - Regular upgrades to your Portfolio's investments
Whether you’re flying, renting a car or purchasing an item it is always nice to get an upgrade. The same goes for your investments, you should always be looking to upgrade. Having an investment discipline means selling an investment when you find one that you like even better. Regularly review and upgrade your portfolio. If you reach a point where you like all of you investments then stick with them, but don’t be afraid to admit mistakes and move on.
Tip #6 - The benefit of investing in dividend paying companies now
By investing in strong dividend paying companies today, you will be a part of their inevitable growth and demand increase. The aging of the Baby Boomer generation should lead to high demand and above average gains for companies paying dividends. The oldest Canadian boomers are turning 59 and 60, many are already retired. As such, there will be a shift in demand to lower-risk, income generating investments as a means to support these retirees who rely on income. Buying dividend paying companies today lets you benefit from this growing trend.
Tip #7 - If you focus on mistakes of yesterday, you will miss the new opportunities today
When investing don’t be afraid to admit mistakes and reposition your self for a brighter tomorrow. Last year has many investors wondering what could have been done differently. People are happy to realize gains quickly but procrastinate selling at a loss. Many console themselves by hanging on to investments that they should sell in the hope that in time these investments will come back. This usually ends up hurting them more in the long-run as they watch the values drop lower and lower.
Tip #8 - Remove the emotions from your investments and focus on your goals rather than the what if
Why did so many smart people not see the market collapse of 2008 and 2009? It seems so obvious now doesn’t it? Hindsight leads people to think the future should be easier to predict. If you did happen to sell at the top of the market before the drop, did you manage to get back in or did you miss this opportunity. Hindsight messes with your decision making and regret can add to the sting. As your mother said don’t cry over spilt milk.
Tip #9 - Avoid the lure of fear and exuberance and don’t let gains or losses derail your decision making
Investment success stories are like lottery winners. When is the last time you saw a commercial showing the latest lottery losers or how many losing tickets were sold at a store. The same can be said for investment success stories. For every story of a stock going from 10 cents to $100 there are many more less interesting stories. Money is worth nothing if it is not attached to a goal such as buying a house or funding retirement.
Tip #10 - Dollar cost averaging takes the emotions out of investing
For example if you have $50,000 to invest divide it into 10 pieces of $5,000 and invest $5,000 each month for 10 months. If the market drops after you invest $5,000 you will take comfort that you still have $45,000 not invested. If the market is up you’ll be happy with investing the $5,000. If you are not sure whether to get back into the market or if their might be more turmoil to come, dollar cost averaging can be a pretty smart way to reduce your regrets.
Tip #11 - In business and investing it pays to follow success.
If you thinkof the most successful people in the world, they probably share many qualities. They own a select number of high quality businesses, they know them very well, they are in high growth areas and they own their businesses for the long term. What if you applied these same criteria to your own investing decitions? Follow these rules when making your own investment decisions and share in their success.
