Some people think investing is difficult, but it doesn’t have to be. You must be willing to explore and learn. Once you decide on a strategy that fits you, you can start practicing with a virtual account if you wish. Here are three tips to help you improve your total returns.
Invest for dividends
Investing for dividends doesn’t mean you’re not investing for total returns. Dividends tend to be more reliable than the ups and downs of stock prices. So, returns from dividends also tend to be more reliable than price appreciation.
What’s magical about dividend investing is that if you hold on to quality dividend companies, you’re going to get price appreciation over the long term. And in the meantime, you get dividend income to use for reinvestment and other uses.
I generally like to invest in companies that yield at least 4%, so if prices fall, I lock in a return of at least a 4%. However, investors should look for companies that pay rock-solid dividends. Find out if these companies earn stable earnings or cash flows, have track records of paying (growing) dividends, and have sustainable payout ratios.
Buy quality companies on dips
By buying quality companies on dips, you pay less for more. If they’re dividend companies, you also get a higher initial yield. In essence, you boost your income and overall returns by buying low.
The big question is, how much of a dip should you wait for before you buy: 10%, 25%, or 50%? For example, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) fell from a 2014 high of $73 to about $52 in mid-January–a 30% decline! Where along its price decline should an interested investor have bought?
Instead of deciding the target price, interested investors can opt to use the simpler method of determining the company’s typical yield range.
In the last five years Bank of Nova Scotia typically yielded between 4% and 4.4%. In January it yielded higher than 5.3%. Sure, that still doesn’t compare to the 7.8% yield that it experienced in the last recession, but compared to recent history, +5% is a pretty good yield.
I managed to grab some Bank of Nova Scotia shares at a yield of 5% in the last few months. I wasn’t too happy that I didn’t buy it at its recent low for the higher yield. However, that’s something that all investors should overcome–accept the fact that it’s impossible to buy at the bottom!
When quality companies are priced at “good enough” prices or yields, investors should consider buying them. The best strategy is to set the target buy price and/or yield ahead of time before the dip occurs, so emotions don’t get in the way of rational investing for long-term returns.
Capital preservation is the number one priority
If investors can avoid big mistakes, such as buying high and selling low, they’re doing themselves a big favour. It also helps to choose an investment strategy that fits your temperament and personality.
It’s too costly to make all mistakes ourselves, so investors should learn from others as much as possible. Stick with the tried-and-true ways of investing, track your actions and results, reflect on your actions, continue to tweak your strategy to fit your style, and you should see improving investment returns over time.
Generally, if you’re investing for the long term, you can’t go wrong with investing for dividends, buying quality companies on dips, and keeping capital preservation in your mind at all times.