It can be scary and daunting for new investors to start investing in stocks. How do you pick stocks wisely? Contrary to common belief, you don’t need a lot to start investing. If you feel your investing knowledge or experience is lacking, you can dabble in with your toes.
Trading platform, Wealthsimple, provides a place for you to buy or sell stocks at no cost – even for the purchase of partial shares, making it very easy for anyone to get started. You can invest as little as $1 if you want to. Of course, it would take a meaningful amount of savings for your investment to get somewhere that will make an impact in your life.
The accumulation of wealth is much like this. Streams turn into rivers. Rivers turn into lakes, which can eventually turn into an ocean. Imagine saving $20/day for investing. In a year, you would have saved $7,300!
The Canadian stock market delivered total returns of north of 8% in the last 10 years. If you invested $7,300 per year and achieved total returns of 8% compounded at the end of each year, you’d arrive at $105,751.91 at the end of the decade. What if you saved like that for 20 years for the same return? You’d arrive at $334,062.34. And in 30 years, your portfolio value would be $826,967.44!
Of course, if you’re able to save and invest more than $20/day, get a higher return, or invest for longer, you can achieve even greater wealth. It’s up to you how you want to balance enjoying life, and saving and investing a portion of your paycheque for your future, although saving and investing can be fun, too.
Here is a dividend stock that has good potential of delivering at least 8% per year over the next five years. That is, you don’t necessarily have to strive for the highest returns (so as to reduce risk and lower the probability of losing money). Another way to reduce risk is to build a diversified portfolio.
BMO and XIU 10-year Total Return Level data by YCharts
Dividend stock example
Big Canadian bank stocks like Bank of Montreal (TSX:BMO) are a good place to start investing your hard-earned money. They won’t deliver the highest returns in the stock market, but in the long run, they could deliver reliable returns. In fact, BMO stock outperformed the market with an annualized return of over 10% in the last decade.
BMO stock offers periodic returns from its dividend. According to the Canadian Dividend All-Star List, it has paid dividends since 1829 and has not cut its dividend for at least 50 years. It just raised its dividend, and its trailing-12-month dividend increase is 6.1% year over year. And its 10-year dividend growth rate is 6.8%.
At about $119 per share at writing, it offers a nice dividend yield of almost 5.1%. Its payout ratio for fiscal 2023 was about 61% of adjusted earnings. This is higher than the normal range of about 50% – in large part due to higher loan loss provisions. In time, the bank results will revert to the mean.
Analysts believe the bank stock is fairly valued right now. Assuming reasonable earnings-per-share growth of 5% per year, investors can continue to approximate long-term returns of about 10% in the blue chip stock.
