Post on 07-Jan-2016
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DividendRe-InvestmentPlans
Andre J. Trottier
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Introduction
Individual Investor, Retired 1997 Invested from 1975-82 Canadian Moneysaver Articles
Leveraging Split Shares Frictional Costs
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Topics of Discussion
Frictional Costs DRIP
Power of Dividends Efficiency Simplicity
Getting Started
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Taxes, Loads & Fees
Most certain components Negative components Effective management will do most
to enhance returns Goal be avoiding them…..No
Do they really matter?….Yes
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Taxes
Ontario $30,754, MTR 28.16% Tax Factor = 1.00 = 1.39
1.00 - 0.2816 (MTR)
Earn $1.39 to keep $1.00 18.9% VISA = 18.9 X 1.39 or
26.27%
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Federal Personal Tax Rates $30,754 or Less----------16% $30,754 to $61,508------22% $61,629 to $100,00------26% $100,000+------------------29%
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Tax Avoidance Strategies Defer income Arrange income to be Tax Efficient
Capital gains & dividends Interest instruments in RSP
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Management Expense Ratios (MERs) Canadian average 2.50% Was 2.30% in 1997 US Average 1.35%
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Rule of 40
Take 40 and divide it by the MER number of years to consume 1/3 of
your investment 40 / 2.5% = 16 yrs front end load of 33%
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Your Mutual Fund Manager Really Charging You? True Cost per $100,000.00 invested MER 10 yrs 20 yrs 30 yrs 1.0% $9,250 $18,130 $25,950 1.5% $13,930 $25,920 $36,240 2.0% $18,130 $32,970 $45,120 3.0% $25,920 $45,120 $59,340
Fee Impact calculator http://strategis.ic.gc.ca
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Diminishing Returns
1993 43 Top Quartile Mgrs 1994 14 out the 43 1995 5 out the 43 1996 2 out the 43 1997 0 out the 43
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Mutual Fund Facts
“Outperformance” will "Regress to the Mean"
the 1990s 80% of Canadian Funds "Did not beat the averages"
Efficient investing: Never pay >2% commission, total Funds charge 2.5%/yr
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Regression to the Mean
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Tradex Equity Fund
-open only to public servants -since 1961, avg 11% return/yr -Philips Hager & North - Globefund top 15 funds for 15
year performance -"lucky to be a Public Servant“ Reason 1.35% MER
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John Bogle
The easiest and surest way for a fund to achieve the top quartile in investment performance among peer funds is to achieve the bottom quartile in expenses.
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Nortel Employee
BMO Funds 1.5% MER Year Amount 1.5% Fee Direct
2001 $120,000 $1,800 $120,000 2010 $332,769 $4,991 $375,079 2020 $1,033,531 $15,502 $1,330,768 2027 $2,284,806 $34,272 $3,229,041
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A. Trottier’s Situation
AGF American Growth 2.88% AIC Advantage 2 2.72% AGF International Stock Class 2.85% Fidelity Focus Health Care 2.68%
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2.80% MER Chart
Year Amount 2.8% Fee Direct
2001 $120,000 $3,360 $120,000 2010 $299,577 $8,388 $375,097 2020 $827,915 $23,181 $1,330,768 2027 $1,706,435 $47,780 $3,229,041
2027 $2,284,806 $34,272 $3,229,041
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MER Effect on Wealth
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MER and Returns
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Fund Problems
To equal TSE 300, must beat it by 2.5% to be equal
Cash position earns low returns Transaction costs Manager focused on
“Performance”
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Tax Efficiency
Capital Gains distributed to holders Holders pay the tax No control, just tax liability Unrealized Capital Gains
i. e. MSFT on original IPO AIC Advantage BRK.A at $3500
4th Qtr purchase = year’s liability
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10 yr Pre & Post Tax Returns (US )
Pre-Tax
(%)
Post Tax (%)
Vanguard
Gwth & Inc 17.92 14.96
Fidelity
Magellan 18.48 15.47
Dodge $ Cox
Income 8.35 5.60
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Don’t Worry
No big deal, you don’t have to worry about risking your life savings, “We do that for you.”
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Gold, Frankincense and MER Most certain aspect Distinctly “negative” aspect Effective mgmt=enhanced returns Do Loads & Fees matter? ABSOLUTELY
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The Money Machine How the mutual fund Industry worksDaniel Stoffman
Page 220 Should I buy individual stocks as
well as, or instead of mutual funds?
If you've read this far, you've probably figured this out for yourself.
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DRIP Defined
Dividends are not paid to holder Money buys additional shares Additional shares yield dividend These dividends create additional
shares Thus the Dividend Effect
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Dividend Effect
dividend growth - 4% annually Year Dividend
1 $5.50 2 $5.72 5 $6.43 10 $7.83 12 $8.47
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Effect of Increasing Dividends
Year Price (8%) Dividend (4%) Yield on Cost
1 $10.00 0.25 2.50 %
5 $14.64 0.30 3.04 %
10 $21.59 0.37 3.70 %
25 $68.48 0.66 6.66 %
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Hawaiian Electric (HE)
Year Avg Price
Div Rate
Shares Owned
Value
1988 $29.75 $1.95 358.17 $10,665
1994 $33.20 $2.33 518.20 $17,204
1999 $36.00 $2.48 712.91 $25,665
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HE, no DRIP
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HE, DRIP
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HE Chart
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HE Long Term
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Dividends &Capital Growth 1952, farmer retired with $100,000 Invested in CSBs 1983 son “What if BMO in 52” BMO, 3400 shares in 1952 1983, with splits 17,000 shares
worth $456,875 Ignoring Dividends of $410,993
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Dividends &Capital Growth Barron’s Article April 1999 $100 invested in S&P 500 in 1925 1999 would be $9,600
With DRIP $235,000
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Dividend Growth
Year BNS BC Gas
1989 0.44 0.74
1994 0.58 0.90
2001 $1.21 $1.30
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BMO no DRIP
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BMO with DRIP
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BMO with DRIP+$50/mth OCP
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BCE no DRIP
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BCE with DRIP
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BCE with DRIP Today
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BCE DRIP with$50/mth OCP
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XOM no DRIP
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XOM with DRIP
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Cemil Otar’s DRIP
Company June 1990 April 2001
Alcan $166.66 $538
BNS $166.66 $1,624
Aliant $166.66 $1,104
Nortel $166.66 $274
TRP $166.66 $339
TransAlta $166.66 $782
Total $1,000.00 $4,706
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Cemil’ DRIP Summary
Cemil’s DRIP 15.10%
Avg Canadian Dividend Fund 10.40%
Avg Canadian Equity Fund 9.30%
TSE 300 9.10%
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The 5% DRIP Advantage
Some cos offer a 5% discount on DRIPs and OCP
netstockdirect.com-115 US cos Canadian Companies
MDS & W (5% on DRIPS) TD (2.5% on DRIPs) TA (5% on DRIPs & OCP)
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Cdn Cos Paying Dividends Shrinking 1981 - 100 cos 1991 - 80 cos 2000 - 60 cos 2001 - 57 cos
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US Cos Paying Dividends Over 1,600 cos with DRIPs 40% have DSPs 60%, one share registered in your
name
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DRIP Advantages
Can invest small or large amount Compounding dividend increases Stock price appreciation Dollar Cost Averaging (OCP) Basically Fee Free (50% of US co) Stable Shareholder Base Inexpensive Source of Equity $$$
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Dollar Cost Averaging
Fixed $$ amount each wk/mth/qtr Yields average entry price over a
longer period
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DRIP Disadvantages
Can be Cancelled by Company Inability to Time Market Minimum OCP Amounts Fees are Increasing (US) Dividends are Taxable Tracking Adjusted Cost Base Odd Lots from mergers
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Getting Started
Most difficult to do-INERTIA Once begun-ADDICTIVE
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Methods
Direct Investing Single Shares Stockbrokers (Discount) Synthetic DRIPs On-Line Synthetic DRIPS
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Direct Investing
600+US cos and 280 foreign cos www.netstockdirect.com
No Canadian companies Print Enrollment Form (Internet) Complete and Mail Cheque
“Drawn From US Bank” AFL, AXP, PFE, PG, XOM
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Single Share
Most Plans, One Share to Enroll Buy from a Friend
Deregistered from their name Registered to your name
Buy as Group of Five Transfer registration to individuals
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Adjusted Cost Base
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Stockbrokers
Buy Shares Through Broker Pay Commission $28.95 Have Shares Registered to Your
Name - $30.00 Fee Shares Arrive, Contact TA Request Drip & SPP Enroll Forms Complete & Return
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Synthetic DRIP
Offered by Brokerage Firms Selected Shares Only (check) Only Whole Shares (no partial) TOC quarterly $0.175 TOC $52 requires 298 shares Additional Purchase = Commission
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On-Line Synthetic DRIPs
Sharebuider Buy Shares in Fixed $$ Amount
Weekly or Monthly Partial Shares Allowed Selection of 4,000 cos $US4/Trade Canadians Not Eligible NAFTA
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How Many Companies?
Six to Twelve companies selected from different Sectors
Buy “QUALITY” Twelve + is best Canadian Holdings
AL, BCE, BNS, DFS, MDS, TA US Holdings
ABT, AXP, JNJ, KO, PFE, XOM
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What & When to Buy
When $$$ are available Invest in your “poorest performer” Buy Low - Sell High
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In Summary
Frictional Costs DRIP
Power of Dividends Efficiency Simplicity
Getting Started