For Canadians who are new to stock investing, it can be overwhelming to get started. Warren Buffett, one of the best investors of our time and a self-made multi-billionaire, has a number one rule for investing: don’t lose money. Buffett takes a value investing approach, targeting to buy wonderful businesses at good valuations. You can learn to invest like Warren Buffett here.
Simply put, you can make money in stocks from capital gains and dividends.
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Capital gains: Sell stocks at a higher price than your purchase price
You can book a profit from capital gains if the shares of your stocks go up. So, if you bought a stock for $5 per share and it rises to $10 per share, you could sell your shares for a capital gain of $5 per share. In other words, you would have doubled your money. If you invested $1,000, your investment would grow to $2,000, and you would make $1,000 in profit.
Dividends: Earn solid dividend income
Stocks could also pay out dividends. Typically, these are well-established companies that make durable profits such that they are able to consistently pay out dividends. In fact, many blue-chip stocks have track records of increasing their dividends over time. These are streams of passive income for their investors.
Dividend stocks are a good place for beginner investors to start investing because they pay out dividend income. If you hold quality dividend stocks long enough, the dividends could even pay for your original investment!
Furthermore, you can start small with stock investing via commission-free platforms like Wealthsimple. You can invest as little as you want and learn with small steps without having to take on excessive risk via additional debt.
Target sure wins
Here’s a tip for new investors: Target sure wins. What I mean by this is that stocks that are estimated to deliver mesmerizing returns could be higher risk. Targeting sure wins could mean settling for lower but surer returns.
To increase your chance of winning via a diversified portfolio, seek to buy quality businesses with stable growth and ideally pay out solid dividends. Of course, the stock should also be trading at good valuations.
Here’s a quick example. Toronto-Dominion Bank (TSX:TD) stock has been surrounded by bad press lately revolving around money-laundering issues, which will result in a penalty for the bank. This would weigh on the stock in the near term.
However, the large North American bank has a long history of growing earnings and increasing its dividend over time. The stock trades at 16% below its 2022 peak. At about $80 per share at writing, it trades at a cheap blended price-to-earnings ratio of about 10 — a discount of about 14% from its long-term normal valuation.
At the recent quotation, it offers a nice dividend yield of almost 5.1%. Its dividend is covered by its earnings. Its payout ratio is estimated to be about 60% of its earnings this year.
Based on a juicy dividend yield, its long history of operation and dividend payments, and its reasonable valuation, TD stock is a good candidate for a sure win, especially on meaningful dips from news surrounding the penalty.
Every dollar counts for new investors. Here are some cheap stocks you can also look further into.
