Getting Started – Passive Income

Note: The meaning of Passive Income used on this blog differs from the definition used by the American IRS. The IRS defines three different categories of income: Active Income (income earned by actively working for it), Passive Income (income generated through rental property or business where you do not actively participate) and Portfolio Income (interest, dividends, distributions, capital gains etc.).

Any income that I earn without actively working or engaging business in, I will consider as passive income on this blog.  My retirement target is to live off of passive income. This is a powerful mechanism where I make my money work for me (and make me more money). There are various ways of generating an passive source of income.

  1. Interest: Most bank and credit union accounts pay out an interest on the deposited money. The interest paid out by the bank may vary from time to time depending on the economic conditions and the current national interest rate set by the central bank.
  2. GICs: A Guaranteed Investment Certificate is a product sold by banks and credit unions that offers a guaranteed rate of return over a fixed period of time.
  3. Bonds: A bond is a security that the bond issuer promises to pay the bond holder the principal at a later date and pays interest on certain dates at a fixed interest rate.
  4. Rental property: Property is rented out for temporary use by an individual or business, who agrees to pay the property owner a regular rate for the use of space.
  5. Dividends & Distributions: Investments in securities such as stocks result in dividends which is a method employed by mature corporations to share profits with their shareholders. 
  6. Royalties: Royalties are usage-based payments made for the ongoing use of an asset such as books, intellectual property etc.
  7. Rewards programs: Corporations offer various rewards programs in order to attract customers. This may include an airmiles program from an airline and/or financial institution or a cash-back program from the grocery store or credit card company.
  8. Peer lending: Also called peer-to-peer lending, is lending money to unrelated individuals without going through traditional financial intermediary such as banks or other financial institutions.
This is not an exhaustive list of sources of passive income, but simply lists a few options available to people to generate a secondary source of income. Passive incomes play a huge role in the Roadmap to Retirement.
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Getting Started – Discount Brokers

In a previous article of the Getting Started series, How to invest, we saw that there are different ways that you can invest in companies. Self directed investing on the stock market provides one of the most flexible options to grow your money and is the reason why it is so popular with the general public. A quick search for discount brokerage comparisons will show you the different options available for Canadians. Since this topic is extensively covered already, I have decided to skip a detailed comparison report here. For your reference, DripPrimer and CBC have a couple of good comparison summaries.

My Pick = Questrade

I picked Questrade as my online broker. I opened an account with Questrade in 2008 and have been quite satisfied as a customer. Why Questrade?

  • Questrade has one of the lowest trading fees in the market at $4.95/trade.
  • There is no inactivity or annual fee.
  • Free real time charts for US securities. Canadian securities have a 15-min delay.
  • Commission-free ETF purchases introduced earlier this year. I only pay when I sell ETFs. I can take advantage of dollar cost averaging in my portfolio without incurring added fees.
  • I can grow my savings tax free (TFSA) and/or tax deferred (RRSP).
  • I can hold USD in the account.
  • Customer support is very agreeable and I can either chat online or communicate and resolve issues via email – which is what I prefer as I do not like calling and being on the phone for hours.
  • Free to transfer account from your current broker. In some cases, if there is a closing fee associated with your other broker, Questrade will cover that fee when you transfer the funds.
  • Ongoing promotions: there are normally running promotions from 100 free trades to three-month unlimited trades to a iPad mini – depending on your funding amount. Click here to see the current promotions at Questrade.

To keep it fair, I want to point out a couple of short comings

  • Questrade is not the best option for investing via mutual funds. While the option is available to buy/sell any mutual fund in the market, each mutual fund transaction costs $9.95. Questrade also does not support an ongoing Pre-authorized contribution plan for mutual funds.
  • Likewise, options trading costs can add up. Options trading is priced at $9.95 + $1 per contract.
  • A trade can be invoked directly from your CAD account, but you will be charged approximately 2.5% extra for currency conversion.

But overall, I felt that Questrade served my needs and started/stayed with Questrade.

Who do you trade with?
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Getting Started – How do I get started?

So, you have decided to invest to grow your money. What next?

You have a few different choices on how to to go about achieving this:

  1. Mutual Funds: Open an investment account with your bank or credit union.
    • Pros: 
      • Risks are lower since mutual funds hold a large number of holdings in different companies spanning multiple sectors, geographical locations etc.
      • There are a plethora of mutual fund products to suit most of your investment goals.
      • Can invest via registered accounts, taking advantage of tax shelters.
    • Cons: 
      • Mutual funds are expensive – they usually carry anywhere between 1-3% (some are as high as 5%) of investment fees (usually stated as the MER (Management Expense Ratio) of the fund). Profit or loss, you always pay the fees first. These add up over thousands of dollars over the lifetime.
      • Your bank may only allow you to buy/sell their own mutual funds, thus limiting your choices.
      • Not designed for active trading – you can only buy and sell at the end of the day.
      • With the introduction of ETFs, mutual funds are a dying product.
  2. DRIP & SPP: DRIP (Dividend Reinvestment Plan) and SPP (Share Purchase Plan) are excellent ways of investing in a company. You can sign up with a company via its Transfer Agent to invest directly with the company.
    • Pros:
      • Absolutely no cost associated with investing.
      • Automatic reinvestment of dividends.
      • Some companies may even offer discounts on the reinvested share prices (ranges from 0%-5%).
      • Dollar cost averaging.
    • Cons:
      • Getting started requires a bit of work such as the initial share, paperwork to setup etc. Slow to get started. If you dont already have an account with the Transfer Agent, it can take a couple of months to get things done before you can start investing.
      • Each company can have its own Transfer Agent. However, there are 2-3 Transfer Agents which cover most of the bigger blue chip companies (in Canada).
      • Not all companies are setup for DRIP and SPP.
      • Non-registered accounts only (some may see this as an advantage, but I dont).
  3. Self directed investing: This mechanism is for the DIY investor, where you have access to the stock market. 
    • Pros:
      • Once setup, you have access to the stock market and can trade any security listed for a small fee.
      • Instant trades – you can buy and sell at will.
      • ETFs – Exchange Traded Funds, a much cheaper alternatives to mutual funds are available for people giving the advantages of in-built diversification without the high fees and intra-day trading flexibility. Some exchanges even offer commission-free ETF purchases, which reduces the fees even further.
      • You have access to various investment products depending on the broker – mutual funds, ETFs, stocks, options, bonds, gold bullion, forex etc.
      • Can invest via registered accounts, taking advantage of tax shelters.
    • Cons:
      • Some big banks charge exorbitant fees for trading (as high as $29/trade). However, there are plenty of options for discount brokers where you can trade for as low as $1/trade). So, choosing the right broker to keep the fees down is imperative.
      • Investing on the stock market can be like gambling – it gives you a rush. Its easy to get carried away and make rash decisions. Listening to some “experts” talk about the hot stock may cause you to make decisions which you may regret later.

My Story

Mutual Funds:

When I started investing in 2007, I started with mutual funds, as I had no experience and didnt know where to begin. I opened an account at Alterna, which had a deal with Credential Asset Management to purchase mutual funds but was later changed to Qtrade. I went to Alterna instead of the big banks, in order to gain access to various mutual fund products from the likes to Fidelity, AGF, MacKenzie, CI Investments etc. I soon started realizing the effects of the fees that the mutual funds were costing me and slowly started moving my money into my self directed investing account that I hold with Questrade. I still hold some mutual funds which serve my target goal for growth and income. Currently, I have approximately 20% of my portfolio in mutual funds.

DRIP/SPP:

I finally signed up and got started with investing via the DRIP/SPP this year (2013). I started with one company for now (Bank of Nova Scotia) and have an account setup with their Transfer Agent – Computershare. Currenly less than 0.1% of my portfolio accounts to this holding.

Self Directed Investing:

I opened an account with Questrade in 2008 as they had the lowest fees of $4.95/trade. I have registered accounts which allow me to invest and grow my money in a tax shelted environment. I hold various stocks, ETFs and cash in my Questrade account which currently accounts upto 80% of my portfolio. 

What have your experiences been?

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Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Dividend Income Update – May 2013

Dividend Income Update – May 2013

Every month I track my dividend income from all my investments in order to track my Roadmap to Retirement. May 2013 has been a good month for my investment returns.

Total Dividend Income for May 2013: $128.48

Contributing stocks and ETFs are:

Stocks:

  • Cineplex
  • CPFL Energia
  • Inter Pipeline Fund
  • RioCan REIT
ETFs:
  • iShares 1-5 Yr Laddered Government Bond Fund (CLF)
  • Claymore S&P US Dividend Growers ETF (CUD)
  • iShares Canadian Financial Monthly Income Fund (FIE.A)
  • BMO Equal Weight Utilities Index ETF (ZUT)
  • A mutual fund yielding approx 6%
My full list of holdings can be found here.
Dividend Income

With this, my YTD Dividend income is at $679.11

New Positions

I have one new positions this month – CHS Inc (CHSCP). CHS Inc is a Fortune 100 business owned by US agricultural cooperatives, farmers, ranchers and thousands of preferred stock holders. This is a stable low-beta stock which pays a current yield of 6%.

Closed Positions

I closed all my positions from IID (ING International High Dividend Equity), a closed end fund, as I did not like the prospects and has been decreasing the distributions regularly over the last few years. A very high yield such as the one on IID at approximately 9.5% should be a warning sign to potential investors. I held this position for a long time and managed to get a decent return during the life of its existence in my portfolio.

Added Positions

I add to my monthly positions in: iShares 1-5 Yr Laddered Government Bond Fund(CLF), Claymore S&P US Dividend Growers ETF (CUD), iShares Canadian Financial Monthly Income Fund (FIE.A) and two globally diversified mutual funds.

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Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.