What You'll Learn in This Episode
How to invest $1000 in dividend stocks—that’s the question we’re answering today. I’ll walk you through the Simply Investing approach, the 12 Rules of Simply Investing, and the key criteria that help you quickly identify quality dividend companies at undervalued prices.
We’ll also look at how many companies to start with and how to use the Simply Investing Web Application to quickly find the best dividend stocks for your portfolio.
Let’s get started and make your first $1000 work harder for you.
Complete Transcript
Speaker 1 (00:00):
How to invest a thousand dollars in dividend stocks. That’s the question we’re answering today. I’ll walk you through the simply investing approach, the 12 rules of simply investing, and the key criteria that help you quickly identify quality dividend companies when they’re priced low. I’m Kanwal Sarai, and welcome to the Simply Investing Dividend Podcast. We’ll also look at how many companies to start with and how to use the Simply Investing app to quickly find the best dividend stocks for your portfolio. Let’s get started and make your first thousand dollars work harder for you. A quick reminder, this episode and all episodes of the Simply Investing Dividend Podcast are for educational purposes only. The decision to buy or sell any stock is yours. Please conduct your own due diligence. Investment decisions are based on many factors, including your personal risk tolerance. When in doubt, consult a qualified professional advisor.
(01:12):
No specific buy or sell recommendations are provided. In this episode, we’re going to cover the following four topics. We’re going to start with the simply investing approach. Then we’re going to take a look at the 12 rules of simply investing and the simply investing criteria. Then we’ll take a look at how many companies should you invest in, assuming you’re starting with a thousand dollars. And then the last topic is we will take a look at the simply investing web application. I’m going to take you through the platform and go step by step on how I go about selecting dividend stocks. Let’s start with the first topic, the simply investing approach. And our approach is to invest in quality dividend paying stocks when they are priced low. So why do we want to do that? We do that because we want to help you build a resilient portfolio, regardless of what happens in the stock market.
(02:14):
And this resilient portfolio should provide you with growing dividend income each year. And how do we do that? Well, for that, I’ve created what I call the 12 rules of simply investing. And we’re going to cover those right now in our second topic in this episode. The 12 rules are designed to lower your risk, save you time, and help you earn more. So we go through the 12 rules in detail in the simply investing course. We don’t have that much time right now in today’s episode, but I am going to provide you with a quick overview and show you what the 12 rules are. Now, the way this works is before you invest in any company, it should pass all of the 12 rules that I’m going to show you on the screen right now. If a company fails even a single rule, skip it, move on to the next company out there.
(03:10):
And this guideline is very important, especially for beginners. I’ve been a dividend investor for more than 25 years, but I still use the 12 rules to help me select quality dividend stocks. So rule number one, do you understand how the company is making money? If you don’t, skip it, move on to something else. Rule number two, 20 years from now, will people still need its product and services? Rule number three. Does the company have a low cost competitive advantage? Rule number four. Is the company recession proof? Rule number five. Is the company profitable? And there’s two parts to rule number five, and I’m going to show you in a few minutes what those are. Let’s go ahead to rule number six. Does the company grow its dividend? Rule number seven, can the company afford to pay the dividend? Rule number eight. Is the debt less than 70%?
(04:10):
Rule number nine, avoid any company with recent dividend cuts. Rule number 10, does the company buy back its own shares? Rule number 11, is the stock priced low? And there’s three parts to that, and I’m going to show you in a few minutes what those are. And finally, rule number 12. Keep your emotions out of investing. So those are the 12 rules. Again, they’re designed to help you save time, save money, and avoid making mistakes by investing in companies that are not of high quality. Now, if we take a look at the rules a little more carefully, you’ll notice that rules number five to rule number 11 are quantitative. And so those are the ones that I refer to as the simply investing criteria. The first four rules are subjective. You could argue with someone whether or not a company is recession proof or not, but when it comes to rule number eight, is the debt less than 70%?
(05:12):
It’s black and white. It’s either going to be less than 70% or not. So rules number five to 11 are quantitative, and those are the simply investing criteria. So let’s look at those in a little bit more detail. So we’re going to start with rule number five, and like I mentioned before, it’s in two parts. So rule number 5A is to take a look at the EPS growth. And the condition to pass this rule is a company must have, if you look at the 20 year average growth of its earnings, must be 8% or more. Now rule number 5B, we also want to make sure that the company has had at least eight increases in its earnings in the last 20 years. So we’re looking at earnings per share, eight increases or more in the last 20 years. Let’s move on to rule number six, dividend growth.
(06:05):
And here again, we’re looking at the 20 year average growth, and it must be 8% or more, and that’s the dividend growth. If it’s not, then the company’s going to fail rule number six and you have to move on to another company. Rule number seven, the payout ratio must be 75% or less. Rule number eight, we take a look at the debt to equity ratio and it must be 70% or less. Now, I know there’s exceptions to the rule. There’s going to be utility companies, which carry a lot more debt, so it’s going to be much higher than that. There could be companies that are lenders, mortgage lenders that might have more debt on their books. So there’s going to be some exceptions, but what we’re looking at here today is for absolute beginners, dividend investors. You’re just starting out. You want to buy or invest in the safest dividend stocks that you can find.
(07:00):
And so each and every one of these rules is to make sure that you are selecting the safest option for you, because we want to minimize any kind of risk to you or your investments. So let’s move on to rule number nine, recent dividend cuts. So we want to take a look at the company’s historical dividends, and we want to make sure there has not been a recent cut in the last year or the year before, right? So that’s important. Rule number 10, share buybacks. If the company’s doing share buybacks, that’s great. That’s what we’re looking for here. Rule number 11, and this is in three parts, like I mentioned before. So rule 11A is to look at the PE ratio, so 25 or less. Rule number 11B, this is what’s going to tell us if the company is priced low, undervalued, or priced high, overvalued.
(07:55):
And the way we do that is we look at the current dividend yield, and if it’s greater than the company’s 20 year average dividend yield, then we know that the stock is undervalued and it passes rule number 11B. Now let’s move on to rule number 11C and here we look at the PB ratio and it must be three or less. So here you can see your simply investing criteria. And so it covers our 12, the simply investing rules. There’s 12 of them, but this covers rules number five to 11. And remember, you’re still responsible for rules one to four and rule number 12. And those are subjective, but they’re still there and they’re still important. So now that we know what the simply investing criteria is, especially the quantitative rules, we can now start taking a look at which companies should we invest in. Now, before we do that, you have to decide for yourself how many companies are you going to invest in.
(08:59):
Now in this episode, it’s simple. You saw the title, it’s $1,000 to start with, investing in dividend stocks. So let’s imagine you’re a beginner investor, you’re just starting out with dividend stocks, you’ve got $1,000 to begin with. How many stocks should you buy? So remember, diversification is important, but not too much diversification. And I’ll explain what I mean here. So there’s a couple of options. There’s actually more than four options, but I’ve given you the four main ones. So you could take the thousand dollars today and put all of that money into one company, or you could divide it by two and buy stocks in two different companies. And then you can do that with three companies or with four companies. So you can see those options up on the screen here. What I meant by too much diversification is you don’t want to end up owning 300 different companies, stocks in 300 different companies, or even 500 different companies, or even a thousand different companies, because now you’re way too diversified.
(10:07):
You might as well just go out and buy an index fund, pay the MER, pay those management expense fees, and that’s it. And when you have too many stocks, statistically speaking, not all of those stocks are going to be undervalued today. Not all of them are going to be quality stocks today. So if you wouldn’t buy them individually, why would you buy them as part of a larger index fund that’s got 5,000 companies in there, right? So I have an entire episode on that. You can go back and watch that where I talk about too much diversification. But let’s get back to our question here. So when it comes to investing the thousand dollars, the best approach here probably, and it’s entirely up to you. It’s your money you can invest it anyway. You have four options here. You can choose any one of the four.
(10:57):
In this example, I’m going to go ahead with investing in, let’s say two companies. So we are going to go look at, if we can find, as of this recording, two companies that are quality companies and are undervalued today, and that’ll give us a good headstart in starting with this $1,000 investment. Let’s move on to topic number four, and that is, we’re going to jump right into the simply investing web application or our platform, and let’s go and see if we can find two companies that are quality stocks and that are undervalued. So I’m going to open up the Simply Investing platform and we’ll go take a look at it right now. So now you can see on the screen in front of you, I’m logged into the Simply Investing web app, our web application. We used to call it the platform, so a lot of people still call it the simply investing platform.
(11:57):
And you can see here, there’s a number of stocks on the screen, and this is going to be accurate as of this recording. So things change all the time. So when you’re watching this video at a future time, these numbers will of course be different. The share price will be different. The current dividend yield will be different. So you can see here, what I’m looking at is the top ranked stocks, and there’s 17. We can see the number here in brackets. The top ranked stocks are the ones that meet all of the 10 simply investing criteria. And if you forget what the top ranked stocks are, you can see the definition right here. And we just looked at the simply investing criteria a couple of minutes ago, rules number five to rule number 11. So there’s 10 simply investing criteria. So these are stocks that get a 10 out of 10.
(12:50):
If they fail one of the criteria, then they’ll get a nine out of 10. If they fail two, it’ll be eight out of 10 and so on and so on. So what we’re looking at here in terms of the timeframe is we’re going to look at the 20 year historical data, the financial data. Now we’re not looking specifically at the 20 year data because that’s a lot of data there, but we are using the 20 year data to help us figure out the values for the simply investing criteria. You can certainly change it. I don’t recommend you change it. I always use the 20 year and that’s the default and that’s what we should be using, but we do have other time periods, but let’s stick with that. Next, you can see the exchange. I’m going to stick with the New York Stock Exchange. We can do the same thing for NASDAQ or the same thing with the Toronto Stock Exchange as well.
(13:42):
So we’ll stick with that. And you can see here up on the screen, it tells us that the table that we’re looking at, the list of stocks, is sorted by consecutive years of dividend increases. And so that’s automatically done for you. If you want to confirm that, you can certainly click here where it says add or remove columns. So right now in the table, I’ve got one, two, three, four, five columns. Let’s go ahead and add one more column here.
(14:13):
Consecutive years of dividend increases. Okay. And now you can see that, of course, as I mentioned, the table is sorted from highest to lowest consecutive years of dividend increases. So we could spend a lot of time here in the simply investing course. We do spend a lot of time in the platform going through all of the options here, but I’m going to keep it short. The title of this episode was to find which stocks to invest in if you’re starting with a thousand dollars. So what I would normally do here is I would look at the list of companies and I would start with the top five or the top 10. And if we want to verify, and it says right here, simply investing criteria, 10 out of 10, they all get a 10 out of 10. We could certainly do that. We can click here and we can look at the simply investing criteria.
(15:12):
So again, we’re using 20 years of historical data and what this is going to do is it’s going to add 10 additional columns to my table because the simply investing criteria has 10 different criteria in there. So if I click on that, it’s going to just take a moment to load and now we can see we’ve got rule number 5A, 5B, rule number six, rule number seven, and so on, and so on. And if you forget what the rules were or the condition to pass, just put the mouse over there. You can see rule number 5A should be 8% or more. Payout ratio should be 75% or less. So we’ve got everything here that we need. We know these are quality companies because they’ve passed the simply investing criteria. And what I recommend for beginners, start with the top five or the top 10 and start with the ones that you recognize.
(16:05):
These are household names. This is sort of the Warren Buffett approach, right? That’s why he invested in Coca-Cola, American Express. A lot of the big name companies that you recognize, a lot of the product and services that you may be using. So if I look at this, and we don’t have too much time today, so I’m going to go through the list. I don’t recognize some of these companies here, but I do know BlackRock. They’re a very large company that sells funds, investment funds. And then if we go down, I can see MetLife is here. That’s an insurance company. And so those are the two that I would start with. These other ones are fine too, but you can go ahead and do some additional research. Now, if you don’t know what they are, so for example, BlackRock, if I click on the stock symbol, it’s going to give me a little bit more information here.
(16:52):
Again, and this is a very large company, $148 billion in market cap. We can see, of course, the SI criteria is 10 out of 10. We can see that the stock is undervalued. You can see share buybacks. They’ve been paying dividends for quite a long time, 2003, and we’ve got the company’s website, so you can always go to that. We also have a description of the company, so you could read that and get a better understanding of the company itself, number of employees, where the company is headquartered. And there is more information here. This is the historical information of dividends and EPS going back to 1999. And we also do have additional graphs that you could look at, but I’m going to save this for another episode. So let’s go back here. I’m going to click back and I’m going to do the same thing with MetLife.
(17:42):
I’m going to click on the stock symbol here. And again, very large company, 46 billion in market cap and undervalued. We can see the debt, the payout ratio, earnings, and a description of the company as well. So I’m going to go ahead and click back. And so it really is that simple.
(18:03):
Most people are very surprised at the amount of research that needs to go in here. The platform has done all of the hard work for you. If you were interested, right? Like I said, all of the simply investing criteria is listed here. So you could go one by one just to confirm the data, and you should always confirm the data, and you can see that everything is in here. And like I said before, I’ve been doing this for over 25 years as a dividend investor. And so you could see how quickly I logged in here. I was able to look at which companies seemed interesting. And in this case, again, just my opinion and from an educational point of view, stick with the companies at the top five or the top 10, because they will have the most number of years of dividend increases. And then as a beginner, start with the ones that are household names.
(18:57):
So in this case, BlackRock and MetLife. I would go with that. Those are common names. Some of the other companies I have not heard of, but sure, you could do your more research and take a look at those and see if those are something that would be interesting to you and would fit in your dividend portfolio. And you can see that BlackRock, as of this recording, has a dividend yield of 2.39%. MetLife has a dividend yield of 3.21%. So those are good, healthy dividend yields. So you are going to make good amount of dividends, and these companies have a history of consecutively increasing their dividends year after year after year. So hopefully next year, they’ll increase the dividend again, and that will also increase your dividend income. So I’m going to show you one more thing. We’ve got a few more minutes left. So one more thing that I can show you is, let’s say we were looking at MetLife and someone said, “Well, why not Aflac?” That’s another big US insurance company, a competitor with MetLife.
(20:08):
And so what you could do here, and again, this is mostly for another episode, but we’ll put this in as a bonus, a couple of minutes here. I would go here at the top, click on analysis, compare stocks. So now I can compare side by side, both MetLife and Aflac, and they’re both US companies. Click on compare, and we can see there it is. That’s Aflac, MetLife, both are insurance companies, both are based out of the US. And then what I would do here is, again, I want to look at the simply investing criteria, and now we can see that Aflac gets an eight out of 10 in the simply investing criteria. It only passes eight of the 10 criteria. MetLife gets a 10 out of 10. So what are the two failures? Well, we make it really easy and we highlight them for you.
(21:02):
So we can see that rule number 10, Aflac gets a no for share buyback. And even more important for us is rule number 11B. Aflac today, as of this recording, is overvalued. And so as I’ve said in many previous episodes and in the simply investing course, we never want to invest in companies that are priced high, that are overvalued. So right there, because of rule number 11B, we would eliminate Aflac from our list because it fails rule number 11. So here you can compare both stock side by side and compare all the values for all of the other SI criteria. And you can see that, again, as of this recording, MetLife is going to be a better, safer investment, a much more higher quality company. So that’s it for looking at the simply investing platform. Let’s get back to our slides and finish off this episode.
(22:12):
Remember, our simply investing approach is to help you build a resilient portfolio that provides you with growing dividend income each year. How do we do that? We use the 12 rules of simply investing. And I’ve shown you this slide before. The rules are designed to lower your risk, save you time, and help you earn more. You can see the 12 rules up on the screen again. I’m not going to go through them again because we already did at the beginning of this episode, and we have an all- in-one solution to help make investing easier for you. You’ve got the simply investing web application and the simply investing dividend course. The web application, as you’ve seen just a couple of minutes ago in this episode, is designed to be very easy to use, and it tracks over 6,000 companies in this US and in Canada, and applies the simply investing criteria every single day to each of those companies.
(23:18):
So you can quickly see which companies are undervalued, which ones are overvalued, which ones pass the simply investing criteria. The course is a self-paced online course. Module one, we cover the investing basics. Module two, the 12 rules of simply investing in detail. Module three, you learn how to apply the 12 rules to any stock anywhere in the world. Module four, you learn how to use a simply investing web application. Module five, I show you how to place your first stock order. Module six, how to build and track your portfolio. Module seven, when to sell, module eight, how to reduce your fees and risk, module nine, your action plan to get started right away, and in module 10, I answer your most frequently asked questions. So if you’re interested in our all- in-one solution, you may want to write down the coupon code, save 10, S-A-V-E-1-0, and it’s going to save you 10% off of our either monthly subscription or annual subscription to the course and to our web application.
(24:21):
If you enjoy today’s episode, be sure to hit the subscribe button, hit the like button as well, and for more information, take a look at our website, simplyinvesting.com. Thanks for watching.
