By Charles Fournier on December 28th, 2017
Charles retired in his mid 50s in May 2016 from a career in Canadian banking. He relies exclusively on income from rental properties and a dividend income stream from a portfolio he amassed over several years.
If one of your burning desires is to achieve financial freedom you:
- May have spent considerable time researching how you can reach this stage in life in the shortest period of time
- May just be beginning your research on this subject matter
I don’t think there is any one right way of doing things. Everyone’s personal circumstance are unique. What works for one person may not work for another.
I am under no circumstances qualified to tell you what will work or what will not work. I can only share with you how Dividend Growth Investing worked for my wife/me.
Bonus: Listen to our interview with Charles Fournier by watching the below video.
I want, however, to provide you with HOPE! Stay focused on your goals and objectives and don’t think you are the only person in the world who might have to tweak things as they go along. That’s just part of life. The world changes around you so you need to adapt to those changes.
In the remainder of this post I will share with you some of the things we did to achieve early financial freedom. Hopefully what I have to share will resonate with you.
Any discussion related to financial freedom must include:
- Elimination of unproductive debt
- Achievement of positive cash flow
The challenge we have is that we are a product of our environment. If our role models are wonderful in some aspects of life but are fiscally challenged in their own life, they are clearly not the role models from whom we should be seeking financial advice.
If you have read the previous sentence and feel like you have been hit in the head with a 2 x 4, you may be in a predicament where you will need to ‘unlearn’ what you have been taught to date regarding money management.
Depending on where you stand on the scale of financial knowledge you may need to start with the most basic of reading material. Jumping straight into ‘The Intelligent Investor’ by Benjamin Graham when you do not have a true understanding of assets, liabilities, or cash flow is only going to result in discouragement. Depending on your personal circumstances you may wish to enroll in the following courses to get up to speed:
Another suggestion I wish to make is that if you have a boat load of personal debt (eg. credit cards, car loans/leases, debt consolidation loans, payday loans, student debt, etc.) you really need to chip away at this debt before you even contemplate investing.
I know it sounds silly to think that some people would even consider investing in the hopes of being able to generate double digit returns when the mere elimination of debt bearing double digit interest rates would be far more advantageous. Paying off credit card debt with a 19% interest rate is far better than investing for 10% a year over the long run.
Positive Cash Flow
If you are not already in a position where you have strong positive monthly free cash flow, you need to get to this stage as quickly as possible. Make more money, repay debt, and/or lower your standard of living! Whatever you need to do to get there… JUST DO IT!
Depending on where you are financially, you may need to go back to the very basics. This means you need to go through the ‘eye opening’ exercise of ascertaining your sources of revenue and nailing down just where your money is being spent!
My wife and I started tracking our monthly inflows and outflows as soon as we graduated from university and started working. At the outset I was somewhat anal in this regard. I tracked our expenses to the penny on a daily basis. Over time I relaxed the degree to which I tracked our expenses but I still had a very good handle on where we stood.
That was just me. You do what works best for you. The last thing you want to do is to set yourself up for failure. Just ensure you are tracking your inflows/outflows with some degree of accuracy otherwise you will be making decisions on the basis of incomplete/erroneous information which gives rise to the old adage ‘Garbage In, Garbage Out’.
Starting Your Investment Journey
I am of the opinion that once that you get to the stage where you have positive cash flow and you’re ready to start investing you should start with low cost exchange traded funds. My rationale is that you can’t expect to invest effectively if you only have a few thousand dollars. If you start self-directed investing with little capital you risk:
- Incurring significant expenses relative to what you have to invest
- Being poorly diversified
- Making poor investment decisions on your journey to learning how to properly determine what are ‘great’ companies and what are ‘dogs with fleas’
It is not for me to tell you what represents a reasonable amount of capital with which to start investing in individual stocks. That is dependent on various factors such as:
- Your existing level of ‘good quality’ investment related knowledge
- The extent to which you can grow your pool of capital in a reasonably short time frame
You, for example, may be in a position where investing in individual equities with a small pool of capital may make sense. Your neighbor, however, might be in a position where low cost ETFs is practical even when they have 6 figures to invest.
Taxable Accounts, Tax Advantageous Accounts, or Both?
Once you have decided that investing in great companies will form part of your journey to financial freedom, you need to ascertain whether you wish to invest through a tax advantageous account, a taxable account, or through the use of both types of accounts. There are pros and cons to both types of accounts.
If you invest through a tax advantageous account you need to be cognizant that the benefit you derive over the course of time has the potential to grow your investment portfolio at a quicker pace since the income generated from your investments will grow on a tax-free basis. There is, however, no such thing as a ‘free lunch’.
In Canada we have Registered Retirement Savings Plans (RRSP); a similar offering in the US is the 401K. While there are similarities and differences between the two types of accounts it is not my intent to delve into a comparison in this post.
I do, however, want to impart a word of caution… You can find yourself in a predicament where the amount accumulated in your retirement account over the course of time places you in the highest marginal income tax bracket come withdrawal time.
In my wife’s/my case, we NEED to start withdrawing funds from our RRSP in our 50s versus our early 70s; we are employing a RRSP meltdown strategy. Unless we do so, all our mandatory withdrawals from our tax advantageous accounts will end up being taxed at the highest marginal tax rate.
An alternate strategy consists of investing in taxable accounts. While the investment income will not grow on a tax free basis, some investors favor investing through this type of account. The reasoning is that once a taxable portfolio is generating a level of taxable income sufficient to sustain one’s lifestyle, the investor may want to ‘step away from the grind’. Some investors may have determined that $40,000/year in taxable dividend income (at a very low tax rate) will provide them a far better quality of life than a $100,000/year salary income (taxed at a much higher rate).
In my wife’s/my case, we knew that working into our 60s or 70s was not on our ‘bucket list’. We also ran several ‘what if’ scenarios but realized that predicting what could happen in the future was a total crap shoot. This is why we opted to maximize our RRSP contributions annually and to ALSO diligently stash away a reasonable amount every year in taxable accounts.
Every family’s personal situation is unique. I am, therefore, not advocating any particular type of investment account over the other. All I am suggesting is that you give some very serious thought as to the type of investment accounts you wish to employ in order to help you achieve your goals.
Once you get to the stage where you have a reasonable degree of confidence that you should start investing in individual equities, I strongly recommend you deploy your money into high quality companies in the following 5 main economic sectors:
- Manufacturing & Industry
- Resources & Commodities
A good place to commence your search for high quality companies are the list of Dividend Kings and the list of Dividend Aristocrats. I caution you, however, not to restrict your search for good quality companies solely to those with lengthy histories of uninterrupted dividend increases.
As I indicated in my Should You Invest When the Market Appears to be Overvalued? article, there are many companies worthy of your hard earned dollar which do not meet the Dividend Kings or Dividend Aristocrats criteria.
The intent is to develop a portfolio where you have a reasonable level of diversification. A reasonable level of diversification is dependent on various factors of which one is the magnitude of your pool of capital.
There is arguably several ways in which you can start investing in individual equities. I provide the following because it is the one I employed and it has worked out well.
When investing in individual equities it is imperative you keep in mind the level of expenses you will incur. In my case, I pay $9.99/trade. This fee applies whether I purchase 400 MasterCard (MA) shares or 40 Broadridge (BR) shares; note the variance in the price per share. I don’t know the commission structure your self-directed brokerage firm offers but I suspect if you make multiple small purchases you could end up spending a fortune in commission.
Depending on your broker’s fee structure, you may wish to restrict your purchases to when you have built up a pool of $5000 cash (this is an arbitrary figure). Once you have reached this level you can then deploy it to acquire, for example, ~35 JNJ shares (currently trading at ~$140); JNJ currently pays a $0.84 quarterly dividend so you would receive $29.40 in quarterly dividends.
If you are in a strong positive free cash flow position and have the wherewithal to quickly build your JNJ position to ~200 shares, I would do so before investing in other companies. The reason I suggest this strategy is so you get to the stage where you own sufficient JNJ shares so the quarterly dividend income is sufficient to purchase at least 1 additional JNJ share/quarterly when the ‘automatic dividend reinvestment’ feature is activated (200 JNJ shares x $0.84/quarterly dividend = $168).
Once you have accomplished the above, you would then deploy the same strategy and build up positions in such companies as 3M (MMM), Exxon Mobil (XOM), Walmart (WMT), and Microsoft (MSFT). Interspersed would be the purchase of shares in companies such as Visa (V), MasterCard (MA), FedEx (FDX), The Toronto-Dominion Bank (TD), and The Royal Bank of Canada (RY). The order in which you invest in the companies would be, naturally, dependent on which are most reasonably valued.
There is no mandate that these be the only companies in which you invest nor that your investments be in the order in which they have been presented. I merely want you to come away with the concept that you should only invest in high quality companies and you should consider building a position in a company so the dividend income is sufficient to acquire at least 1 additional share (yes, you will be more heavily weighted in some companies than in others if you use this strategy but remember I am merely discussing an initial step in what will be a long journey… eventually you will need to balance out your exposures).
Real Life Example – FFJ Portfolio
I draw your attention to the FFJ Portfolio to demonstrate how I have employed the above noted strategy. This is merely a subset of our overall holdings so please keep this in mind if you feel it lacks proper diversification. Furthermore, some of the holdings within the FFJ Portfolio are also held in other undisclosed accounts.
You will also note there are some holdings with extremely few shares. There are shares we received when the legal entities were spun off from Brookfield Asset Management (BAM).
In 2017, the FFJ Portfolio will have generated ~CDN$12,300 and ~USD$13,000 in dividend income. The beauty about this dividend income is that it can be used to service living expenses during our retirement if required.
At present we do foresee the need to avail ourselves of any of this dividend income so we merely automatically reinvesting the monthly dividends thus allowing our holdings and quarterly dividend income to grow; I turned off the automatic dividend reinvestment on a couple of stocks for a couple of months but have recently reinstated the automatic dividend reinvestment feature.
Another nice thing about having built up a taxable portfolio is that we were able to donate some shares from one particular holding to a charitable organization we support. If we had only had tax advantageous accounts and had wanted to donate shares, our share withdrawal would have been subject to withholding taxes. If we had withdrawn $20,000 in shares from my RRSP, the charitable organization would have only received $14,000. I would have had to withdraw $28,570 from my RRSP in order for the charitable organization to receive $20,000 ($28,570 less 30% withholding tax).
While this post is certainly not ‘rocket science’ material it was not meant to be. There is no reason to turn something simple into something complicated.
Starting the journey toward Financial Freedom through dividend growth investing is easy. The tough part is sticking with it when it looks like you are not making any progress. This is why you need a realistic plan and you need to stay focused.
Trust me…you’re not the first person to have had a dream of becoming financially free. Read and learn from those who have already achieved it. Find out what worked/didn’t work for them.
While no two individuals and their personal circumstances are exactly alike, somewhere someone in a reasonably similar position as you achieved financial freedom through dividend investing. If they succeeded there is no reason you shouldn’t be able to succeed! Financial freedom… you owe it to yourself.
I hope you enjoyed this post. If you wish to learn a bit more about how employ dividend growth investing to help you achieve financial freedom, I encourage you to read How To Build Your Dividend Growth Portfolio from Scratch.
This will be my (Charles Fournier) last article in 2017 on Sure Dividend. I, therefore, would like to take this opportunity to wish you and your loved ones a prosperous 2018!