In part one of this series, we talked about three tips to make you a better investor, including focusing on the long term and building a foundation portfolio to receive an increasing income as an owner of quality dividend-growth businesses. Here are three more tips to make you a better investor.
1. Hold some cash
Hold some cash on top of your emergency fund that makes up at least six months of your living expenses. Having a cash position is especially helpful if you have a big portion of your portfolio in stocks that are known to be more volatile relative to other investments.
Cash helps reduce volatility in your overall portfolio, and in a downturn you can buy shares in the top companies on your watch list. The percentage of cash to hold depends on your comfort level and your portfolio. The higher percentage of stocks you own in your portfolio, the higher percentage of cash you should consider holding.
For example, if you have 60% in stocks, you might want to have 5% in cash. If you have 80% in stocks, you might want to have 10% in cash.
2. Tune out the market noise
A part of being a good investor is being able to tune out the market noise. Buy when there is tremendous fear and possibly sell when a stock’s price is overly expensive and doesn’t make sense anymore. But the best scenario is to never sell after buying quality companies at good prices because these excellent businesses should become more valuable over time.
Dividends are more predictable than stock prices, especially for companies that keep increasing their dividends year after year. To tune out the market noise, income investors can focus on the income they’re receiving instead of the jumpy stock prices.
Such companies include Enbridge Inc. (TSX:ENB)(NYSE:ENB) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI). They both have hiked their dividends for 19 consecutive years at an annualized rate of over 11%.
3. Set realistic goals and buy points
For income-oriented investors, you have it easier than investors who look for capital gains. Dividends are typically more predictable than the stock price. If you stick with blue-chip companies that pay between 3-5% yield and have a tendency to grow dividends at least 5-7% year, you’re probably building yourself a sturdy portfolio.
For example, I set a minimum yield of 4.5% before I bought Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), so that I lock in that yield point when I buy those shares. For Enbridge, I have the minimum yield set to 3.5%. These yield points are set by looking at the stocks’ historical yield points. What is considered a high yield for these companies historically?
Why do I preset these yield points? These desired yield points prevent me from buying when the yield is not high enough. Usually, a lower price implies a higher yield, so by waiting for that higher yield, I’m also paying a lower price for the shares.
In conclusion
By focusing on the income received rather than the stock price, investors can better tune out the market noise. Further, it’s useful to have some cash on hand so that investors can take opportunities when stock prices dip to their desired yields. By setting a yield point, Foolish investors can buy shares in quality companies with lower prices and higher yields, and be less swayed by stock-price movements.
