Investing is a marathon and not a sprint. While there are a lot of get-rich-quick schemes out there, a solid investing strategy will lead to a profitable money-making portfolio to last a lifetime. The challenge for many is to get started and to know how to get started.
In 2009, I decided to tackle investing on my own and fired my financial advisor. I have learned quite a lot since and while I have always been a dividend investor, I have adjusted my dividend investing strategy along the way and simplified my dividend stock selection process. You can see my dividend income journey from $3,500 a year to over $27,000.
To invest, you don’t need to know everything about investing. You just need to capture a few concepts and you are good to go. Think about it, when you drive a car, you don’t necessarily know the details of the engine or the transmission, you know you need gas, brakes, tires and oil change each with its own routine and timetable.
When you start, you want to avoid analysis by paralysis where you don’t do anything because you keep researching. There is so much to know about investing, it can be a lot to capture. Instead of trying to understand it all just get started by capturing the basics to invest, afterwards, you can focus on being in control of your strategy and then later on you can master your approach.
3 Steps to Begin Investing
The following steps are exactly what I have my children do. Trust me, they don’t understand all the nuances of investing but they are investing.
1. Select a Discount Broker
When you start, you have to go with Questrade. In Canada, that’s simply the best option to get started. It’s free to buy ETFs (more on this later) and it has the lowest stock transaction cost at $5.95.
When you start, you want to minimize your fees and you want to be able to invest in small amounts. That was always my struggle when I started investing. I would only have $100 or $300 to invest at a time.
The second best discount broker option is the one that offers free ETFs. Scotia iTrade and Qtrade happen to have a basket of them. When you have $50,000 or $100,000 in your portfolio, you can decide if a different discount broker works better for you. I have both Questrade and RBC Direct Investing.
A discount broker is an online tool that allows DIY investors to purchase stocks, exchange-traded funds or mutual funds.
2. Open a TFSA Account
When you get started with a discount broker, start with a TFSA. You can easily find out your full TFSA contribution room with a simple formula. It’s pretty simple but regardless, you can contribute to your TFSA every year starting on January 1st.
There is an ongoing debate on whether the TFSA or RRSP [infographic] is better and it’s not a simple answer but the TFSA is most flexible and tax-free.
An investment account is like a digital folders where you hold stocks, ETFs, or mutual funds with income tax rules. Different folders will have different rules that need to be followed.
There are 3 types of accounts to choose from each with their own income tax implications but as mentioned, the TFSA is the best to get started.
Here is how my TFSA is performing and what a 5% and 10% return will do. Keeping your cash in a high-interest savings account doesn’t even come close.
| wdt_ID | Year | Yearly Limit | Cumulative | 5% Growth | 10% Growth | Dividend Earner | Spousal |
|---|---|---|---|---|---|---|---|
| 1 | 2009 | 5,000 | 5,000 | 5,250 | 5,500 | Not Tracked | Not Started |
| 2 | 2010 | 5,000 | 10,000 | 10,762 | 11,550 | Not Tracked | Not Started |
| 3 | 2011 | 5,000 | 15,000 | 16,550 | 18,205 | Not Tracked | Not Started |
| 4 | 2012 | 5,000 | 20,000 | 22,628 | 25,525 | Not Tracked | Not Started |
| 5 | 2013 | 5,500 | 25,500 | 29,534 | 34,128 | $41,742 | Not Started |
| 6 | 2014 | 5,500 | 31,000 | 36,786 | 43,590 | $52,820 | Not Started |
| 7 | 2015 | 10,000 | 41,000 | 49,125 | 58,949 | $56,307 | Not Started |
| 8 | 2016 | 5,500 | 46,500 | 57,356 | 70,984 | $70,200 | Not Started |
| 9 | 2017 | 5,500 | 52,000 | 65,999 | 84,034 | $78,900 | $13,308 |
| 10 | 2018 | 5,500 | 57,500 | 75,074 | 98,487 | $96,937 | $58,818 |
| 11 | 2019 | 6,000 | 63,500 | 85,128 | 114,986 | $129,467 | $82,596 |
| 12 | 2020 | 6,000 | 69,500 | 95,684 | 133,030 | $153,993 | $95,906 |
| 13 | 2021 | 6,000 | 75,500 | 106,769 | 152,933 | $181,601 | $113,194 |
| 14 | 2022 | 6,000 | 81,500 | 118,407 | 174,827 | $183,031 | $144,633 |
| 15 | 2023 | 6,500 | 88,000 | 131,152 | 199,459 | $207,853 YTD | $157,050 YTD |
| 16 | 2024 | 6,500 | 94,500 | 144,536 | 226,555 | ||
| 17 | 2025 | 6,500 | 101,000 | 158,587 | 256,361 | ||
| 18 | 2026 | 6,500 | 107,500 | 173,342 | 289,147 | ||
| 19 | 2027 | 7,000 | 114,500 | 189,359 | 325,762 | ||
| 20 | 2028 | 7,000 | 121,500 | 206,177 | 366,038 | ||
| 21 | 2029 | 7,000 | 128,500 | 223,836 | 410,342 | ||
| 22 | 2030 | 7,500 | 136,000 | 242,902 | 459,626 | ||
| 23 | 2031 | 7,500 | 143,500 | 262,923 | 513,838 | ||
| 24 | 2032 | 7,500 | 151,000 | 283,944 | 573,472 | ||
| 25 | 2033 | 7,500 | 158,500 | 306,016 | 639,069 | ||
| 26 | 2034 | 7,500 | 166,000 | 329,192 | 711,226 | ||
| 27 | 2035 | 7,500 | 173,500 | 353,526 | 790,599 | ||
| 28 | 2036 | 7,500 | 181,000 | 379,078 | 877,909 | ||
| 29 | 2037 | 7,500 | 188,500 | 405,906 | 973,950 | ||
| 30 | 2038 | 7,500 | 196,000 | 434,077 | 1,079,595 |
3. Start Investing
With a discount broker and an account ready, you can start investing! The beginner model portfolio should help guide you but you want to start with an ETF. An index ETF to be specific.
An index ETF is an investment that holds a basket of stocks or ETFs. An index ETF is setup to track a benchmark such as the S&P500, Nasdaq 100 or TSX 60.
I suggest the S&P500 but if you must insist on the TSX, you can do that. The beauty of index ETFs is that they can be purchased in Canadian dollars even if they match the US indexes. I like the S&P 500 because you have 500 of the major companies in the US which also happens to be doing business around the world.
As for buying stocks, you can do that later. For now, you can invest $50, $100, or $250 regularly at zero cost to you in your TFSA account at Questrade. Just set it and watch it grow.
While I am a dividend growth investor and I beat the index, I made mistakes when I started and got lucky along the way. Learning from your mistake can be expensive and I want to help all new dividend investors to avoid the mistake of buying high-yield stocks or REITs early on. Many had dividend cuts or suspensions early on during the Covid-19 lockdowns.
The reality is that very few can beat the index in the long run so while you are learning to become a master dividend investor, do it safely with a good return matching the index performance. As you save more and can invest in larger amounts, you can start buying stocks following a solid stock selection strategy.
A Word of Caution
The stock market fluctuates daily so there is a 50% chance your ETF is up or down right after you buy it. Don’t sweat it, it’s just normal. Time plays a critical place in investing. See below how the stock market performs over a long time. When you buy a broad index ETF, you buy into such growth over time.
