How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.
~ Robert G. Allen
Today I want to share with you my strategy for how to invest money wisely. This is an approach that I have been using for a few years and it has been working quite well for me.
But before I share with you how to invest your money wisely, here is the regular disclaimer. I am not qualified to give financial advice so please consider this article more of an entertaining read rather than specific advice. As always, you should consult your financial adviser before making any investment decision.
Just as an aside, my financial adviser is me! It is part of my outlook and belief here at OPOB that we should be taking back our own power when it comes to looking out for number one.
Obviously nobody is going to have your best interests at heart like you do. At One Plate One Bowl we want to live rich, authentic lives where we are the captain of our ship and that ship might be called the good ship frugality. I want to share with you how to enjoy life cheaply and inexpensively but richly in experience and memories.
And one way to free up your time to live a rich life is to invest well while at the same time minimizing risks.
I am sure that there are many ways to invest money wisely. Some folks might suggest that investing in gold right now is wise and safe. I am not one of those people. Some folks might suggest that the best way to invest money right now is in real estate.
I would agree that investing in real estate at the moment is something that I would consider a great strategy, but it is outside the scope of this post.
No, I want to invest in something tangible, simple to understand and that has been around for many decades at least.
I’m talking about investing in stocks. But not just any stocks, specifically, I am a huge fan of investing in dividend stocks particularly. I know, many folks consider these widow and orphan stocks like the utilities. And in fact, I like utilities well enough too.
But if you research well and invest prudently you will find that dividend stocks can offer some great returns.
For an insightful book on the subject I recommend you take a look at Preferred Stock Investing by Doug Le Du.
If I won $250k or even just $100k I would likely put it into a half dozen or so dividend stocks. In 20 to 25 years the dividend alone would be likely be a modest full time income for you.
So how do I choose the best dividend stocks to invest in? Well, here are my investing money tips for investing in dividend stocks.
The first thing I’d do it limit them to the Dividend Aristocrats. This is to minimize the field of investment opportunities and also to add some additional safety.
What are the Dividend Aristocrats? They are dividend stocks that have been paying out dividends for at least 25 years while increasing that dividend pay out each and every year over those 25 years.
That sounds like a very tasty stock to me. And further, this is a great way for investing with little money. You can often start by just investing in one share. And one share of many of these companies can be as little as $20 to $25.
You can download an up to date spreadsheet of the current Dividend Aristocrats from the S&P’s website if you register with them.
The next thing to do when learning how to invest in the stock market with dividend stocks is to sort these dividend aristocrats (DAs) – these 51 stocks – by their dividend yield. This is the amount of money as a percentage of the current stock price that they pay out on a yearly basis. You’ll need to do a bit of research to find all of the dividend yield’s for these stocks. But it shouldn’t take you longer than 20 or 30 minutes searching on Yahoo Finance.
For example Coca Cola’s dividend yield as I right this is 3%.
I like as high a dividend yield as possible but it is not how I choose dividend stocks. What I do is go down my list of DAs which have been ordered by dividend yield and I look for stocks that I know well as a consumer.
I want to invest in stocks that I understand, or businesses that I understand. Let’s continue on with the Coca Cola (KO) example.
I know Coke and I like their business, so does Warren Buffett. But now I need to know if KO is a stock I’d want to buy. I want to buy it on sale or as cheap as possible.
One of the great things about investing for income is that you don’t have to worry as much about ratios like P/Es and things of that nature. These key statistics can be helpful especially if you’re trying to understand a company that you are not that familiar with, but I have found if I am investing in a well known company that has been around increasing their dividend for 25 years then that is pretty safe or as safe as I think I can get as an individual investor.
Of course it is also a good idea to have a look at their last financial report and consider things like their debt and income. To me, those are key issues, just think about your own household.
You can carry some debt but too much debt will eventually bankrupt you. Keeping your investment approach simple is always a good idea in my opinion.
So back to KO. How do I know if it is cheap or if I am getting it on sale? Well, it doesn’t matter if I want to know how to invest 100 dollars or 10,000 dollars I am looking at the price of the stock. Same as if I was buying a car or anything else for that matter.
But just looking at the price of KO right now does not tell me if it is cheap. It is currently at around $69 as I write this. But is that cheap?
No, it’s not cheap. How do I know, well I look at the 5 to 10 year price chart to get an idea.
You can easily find this out at Yahoo Finance, and so looking at KO’s 5 year price chart I see that at $69 and change KO is peaking at almost the most expensive price it’s been at over those 5 years.
Okay, cool, but how do you set a price at which you’d like to buy the stock at? Well this is where it gets tricky and where the fine art of investing comes in.
I’ll tell you what I do. I look at the high and low prices – roughly – over that 5 or 10 year horizon.
On the 5 year price chart, KO has been as low as around $39 and as high as $71. $39 is 55% of $71, so KO has in the last 5 years sold for a discount of 45% of its highest price. So I think at what price would I like to own it at?
Generally, I want to own it at a discount of at least 10% and up to 33% off of its 5 year high. That means, I’ll consider buying KO at anywhere from $47 to $63.
Btw, those are just arbitrary discounts, but you have to give yourself some parameters. Needless to say, I don’t own KO because it hasn’t been at my buy price since early last year at which time I wasn’t looking at it.
The best tip I can give you is that sometimes the best investment is in cash. Don’t chase stock prices, let them come to you. They won’t always come to you and that is why you should have a dozen or so dividend stocks you are interested in buying at any one time to increase the chances that you’ll pick something up.
I think the above is a great way for how to start investing and I hope you found it helpful. Don’t buy on tips or advice from anyone unless you’ve done your own due diligence first. Good investing and may you learn how to be a millionaire by the time you retire!