It’s tempting to set foot in the stock market when you hear success stories from family, friends, or neighbours making money there. However, it can be scary to consider the idea of investing your hard-earned money in the stock market, especially when it feels like a big casino – at least, initially. After all, stock prices do move up or down unpredictably with news.
The opportunity to build wealth is too good to pass up, though. How do you go from being a novice to an investor? Like anything else, with continued learning and gaining experience through practice, you will get better at investing over time.
Here’s how you can start investing this year. To avoid speculating in the stock market, you can start by picking stocks wisely. Do you like the idea of making money without taking too much risk, then start with dividend stocks. Specifically, focus on identifying wonderful businesses that pay out safe dividends. As a general rule of thumb, these dividends should grow at rates that beat the long-term inflation rate of 3% to 4%.
Start investing with safe dividend stocks
One dividend stock that fits these criteria is big Canadian bank Toronto-Dominion Bank (TSX:TD). The bank stock has lagged the sector over the last year, providing an opportunity to buy TD at a reasonable valuation.
At $86.89 per share at writing, TD stock trades at a price-to-earnings ratio of about 10.9. In the long run, it can grow its earnings per share by about 5% per year. Throwing in its dividend yield of close to 4.7% at the recent price, we can approximate long-term returns of 9-10% per year.
If it exceeds the 5% earnings growth rate, it will have a higher chance of exceeding this return estimate. TD Bank’s dividend is safe, as its normal payout ratio is roughly 51%. Even with higher loan loss provisions that weighed on earnings, in fiscal 2023, its dividend was still covered by its earnings with a payout ratio of about 69%.
In the last 3, 5, and 10 years, TD stock increased its dividend by 7% to 9% per year. In the last 10 years, the bank increased its adjusted earnings per share by close to 8% per year. So, we can safely say that its dividend increases were primarily supported by earnings growth. This is a sign of healthy dividend growth.
TD stock price data by YCharts
More tips for new investors
Even quality stocks like Toronto-Dominion Bank can be volatile. So, no matter how great a company seems, it’s always possible for its common stock to move up or down in the short term. By investing in stocks, you must be prepared for volatility. The graph above illustrates the volatility TD stock experienced over the last 12 months. For example, from peak to trough, it declined about 17%.
You could lose money if you get shaken out of the market in a market correction. Once you have identified wonderful businesses that trade at good valuations and bought shares, you might have to train yourself to ignore market noise. That said, if shares fall to more attractive levels, it could make good sense to buy more to get a lower cost basis and earn more dividends (in the case of dividend stocks).