How Often Is This Heard?

      As the days go by every year, we hear of the Canadian Banks making record profits.  When the banks announce there earnings, you often hear people say "the banks are crooks" or the banks made X amount of profit this quarter.
      Most people like to focus on the negative with the bank profits, but I like to focus on  how to benefit from these profits.  As an investor, these record profits are an opportunity.  The Canadian banks have been paying dividends for over 100 years.  The banks end up sharing these profits with investors in the form of rising dividends.  I currently only shares in 4 of these banks are and gladly will accept the dividends that are paid out to me.
       I can sleep well at night as I am comfortable knowing the banks in Canada are well run and follow strict rules .

 Disclosure: own shares in RY, TD, BNS, BMO and long all these stocks.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

Capital Gains or Cash Flow?

       The average investor can investor for 2 things, which are capital gains or cash flow.

Capital Gain

      If you own a stock and hopes it goes up in value to sell it at a higher price.  When the investor sells at a higher price, that is considered a capital gain. If the investor sells the stock for less than what they paid for it, that would be considered a capital loss.  The thing with this type of investing, is that when you sell, you MUST go out and buy another asset.
      A good example of capital gain is the purchase of physical gold or silver.  These two investments do not yield any cash.  These investments must go up in value in order for the investor to make a profit when they sell. These precious metals are used sometimes by investors to hedge against the US dollar.
       When an investor owns a mutual fund or ETF, they might end up with a capital gain to report on their tax returns, even if they never sold any units of the mutual fund or ETF.  The reason for this is the mutual fund or ETF, might end up with a net capital gain for all their buy and sell transactions. The mutual fund or ETF pass this on to investor.

Cash Flow

         When an investor invests for cash flow, they want to get paid.  This payment of income can be interest, dividends, option premiums, or distributions. Interest payments come from bonds, bond ETFs or bond mutual fund. Dividends are payments that come from equity ownership in a company. Distributions is a form of payment that can come from things such REITs, mutual funds, and ETFs. Option premiums are paid to the sellers of options up front.
        Depending on the form of payment, the tax treatment of the income varies.  A payment of interest is taxed as ordinary income, or at your marginal tax rate. Dividends can be taxed differently depending on a couple of things.  For Canadians, if they own a Canadian company's stock, the dividend will be taxed more efficiently than interest income.  If Canadians own a foreign stock, the dividend is taxed the same as interest income.  When distributions are paid out, the payments can consist of interest, dividends, capital gains, and return of capital.
          Option premiums that are collected are basically capital gains. I am not going to get into options here as it can be more complex than the other types of cash flow.

 Capital Gains or Cash Flow? What is better?
  
         For me, I invest for cash flow mostly. Every month or quarter, I receive a payment. If I do not sell the position, that asset will continue to pay me unless the company, fund or ETF's stop paying dividends, distributions or interest. I will use stock ownership as an example here. Some companies will increase their dividend over time.  These increases are usually higher than the rate of inflation.  I can choose to do what ever I want with these payments. When the cash flow from my investments are greater than my expenses, then I will be be out of the rat race and financially free.
       For capital gains, I trade a stock or option in the hopes of making a profit. I then have to turn around and purchase another position, buy an option, or sell an option.
        A good example of dividend growth investing is Grace Groner. Grace bought 3 shares of Abbott Laboratories in 1935 and reinvested all the dividends.  With capital appreciation, dividend increases and stock splits, this investment grew to over 7 million dollars. You can read about Grace Groner here.
  
Note: Currently,  I sell put options only on stocks I want to own at a lower price. The option premium I receive is a way to make money why waiting to see if the stock falls in value or not. If the stock does not fall below the strike price, I let the option expire. I get to keep the option premium.

DISCLAIMER

     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

Types of Investments - Part 2

This is my second post  for Types of  Investments . The first part talked about savings, stocks, bonds and mutual funds.

  Real Estate

       When talking about rental real estate, people are often referring to income generating rental properties. The idea is by putting down a percentage of the purchase price and then borrowing the rest from the bank to create income. When a tenant pays rent, this rent should cover the mortgage, insurance, property taxes and other monthly expenses. The rent can also include a property management fee. The goal is to have money left which is positive cash flow.
       The downside to rental real estate it takes the average person a lot of money to get started.  Also if the tenant moves out, then the owner of the property must now pay the mortgage.  Rental real estate can have a high "Pain in the ass" factor for those who do not use a proper manager such as early, early morning toilet problems.
       Is there a way for people to get involved in Rental Real Estate without being a landlord? The answer is yes. REITs, or Real Estate Investment Trusts, are income trust that buy real estate. A REIT trades on a major stock exchange. By law,  a REIT must pay out at least 90% of their profits as a distribution to its unit holders. REITs can be involved in residential housing, apartment complexes, retail centers, office space, seniors housing, medical facilities etc.In order for a REIT to grow, it will issue more units (i.e. shares) to build up a cash . The yield on a REIT is usual  high such as 6%. REITs make it easier for the average person to invest in commercial  real estate as this would be really expensive.

 Business

        Starting a business is one of the most profitable avenues that an investor can take.  Starting and running a business is the hardest to maintain out of all the asset classes. When running a business as a corporation, the business can have enormous tax deductions.

DISCLAIMER:

     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

Types of Investments - Part 1

There are various types of investing vehicles. How is an investor to chose which ones to use?  The investor should decide the investment vehicles that are best suited for their risk tolerance. An investor can choose from these types of vehicles.

(1) Savings and Cash Instruments
            - High Interest Savings accounts
            - GICs ( known as CD's in the United States
            - Precious Metals.

(2) Stocks, Bonds, or Mutual Funds

(3) Real Estate

(4) Businesses

Savings and Cash instruments

    An high interest savings account basically pays interest of roughly under 2 percent.  With interest rates so low this is basically below the rate of inflation.  I currently use a high interest savings account for my savings and emergency fund. I want to be able to access the money immediately if need be. The interest that is paid by the investor is taxed at your marginal rate.
    A GIC, or Guaranteed Investment Certificate, pays slightly more interest than an high interest savings account. The down side is that the money is locked in until expiration The interest on a GIC is taxed at the investor's marginal rate. 
    Precious metals such as gold and silver do not pay any yield. The only way for an investor to make money is to sell the precious metals at a higher price than what was initially paid for.

Stocks, Bonds and Mutual Funds

Stocks

     A share of stock represents ownership in a company. The ratio of the number of shares owed by and investor to the amount of shares outstanding represent the investor's percent ownership of the company. Owning shares of stock means an investor owns a partial ownership of company and its assets. The investor (ownership of common stock ) also gets to vote on some matters regarding the company such as election of board of directors.
      If a company makes a profit, the company must decide on what to do  with the cash. The cash can be retained and reinvested back into the business. The cash can also be passed on to the investors in the form of a dividend.  Companies usually have a dividend payout ratio between 40-60 percent. A company raises its dividend, through the board of directors, when the company increases its earnings.
 
             yield = dividend rate / purchase price

The yield represents the annual return on a yearly basis. The dividends that are paid out  are taxed less than regular income.  A high yield means investors do not have high confidence in the company in the near future.

Bonds

 A bond is a debt instrument. A bond is basically a loan by the investor to the government or a corporation. The corporation or government  must pay the loan back plus interest in the time allotted. The interest is paid to the investor usually paid every six months. This interest that the investor receives is taxed at the marginal rate, or as earned income. The interest on a bond is slightly higher than a guaranteed investment certificate. The interest rate , or coupon rate, will not increase of decrease year to year.
       It is difficult for an average investor to invest in bonds directly unless that have money like $10000.  The average investor starting out, would be better to invest in a bond ETF or a bond mutual fund.  An ETF is basically a mutual fund that trades like a stock. Examples of bond ETFs are PCY and JNK on the NYSE.

Mutual Funds

       A mutual fund is basically an investment company. A mutual fund is run by a professional money manager. A mutual fund is a pool of money from investors that is invested in the stock market in instruments according to its own objective. Mutual funds are run by professional money managers, offer instant diversification and allows an investor to diversity with a small amount of capital. When an investor invest in mutual funds they pay a management expense ratio, or MER. A mutual fund does not trade like a stock. Instead, if an investor wants to purchase units in a mutual fund, there order must be in 3-5 hours before the market closes. The net asset value of the assets under management  is calculated at the end of each day for the market being open. If you put in your order early enough in the trading day, the purchase will go through that day after the net asset value, or NAV, is calculated.
        When people are trying to sell there mutual funds, a mutual fund must sell shares of some of its assets they own if they do not have cash on hand. This will cause the assets under management to be less resulting in the price of the mutual fund to be less.
         The distributions that are paid out can include capital gains, foreign income, eligible dividends , non-eligble dividends or return of capital.

Coming soon : Type of Investments - Part 2

D
DISCLAIMER:

     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk