Good Morning Everyone.  It’s time for the next post in our “Investing: The Ins and Outs of Dividends” series.  Throughout this series (which I have loved writing) we have discussed everything about Dividends from Why You Should Consider Investing in Dividends to When You Should Not Consider Dividend Investing.  Today we are going to examine some Dividend Mutual Funds from various Mutual Fund companies to help you find the best Dividend Mutual Funds for your investment portfolio.

Most major Financial Institutions and Investment Companies offer some form of Dividend Mutual Fund.  You will notice that they all have similar qualities but the level of risk and the investment strategies can vary among different Mutual Funds.

Smart Dividend Investing

When we are choosing a Dividend Mutual Fund for your investment portfolio there are a few things that we should review on the Mutual Fund Profile to make sure that this Mutual Fund is a good fit for our investment portfolio.  We should always look at the past performance of a Mutual Fund.  Although past performance is absolutely no indication of future return we should be comfortable with the possible fluctuations in the daily unit price of the Mutual Fund.  A Mutual Fund Profile usually displays the 1, 3, 5 and 10 year past performance.  If we are comfortable with the fluctuations between the best and worst days then this Mutual Fund may be a good investment option for our investment portfolio.

Investors should review the Mutual Fund Investment Objectives before purchasing a particular Mutual Fund. The Investment Objective tells us about the investment strategy that the Fund Manager is using and what he/she hopes to achieve over the short, medium, and long term.  The investment objective gives investors an idea of which types of Stocks and Bonds etc. the Mutual Fund Manager will purchase.

Investing in Dividend Mutual Funds

The Portfolio Analysis, the Sector Diversification, and the Top Ten Holdings are also very important for new investors to review when we are thinking about purchasing a Mutual Fund.  The Portfolio Analysis basically shows us (in a pie chart) the asset allocation or the asset composition of a Mutual Fund.  It shows the specific percentages of Cash, Fixed Income, Domestic Equity, and Foreign Equity within the Mutual Fund.  The Sector Diversification shows investors in which sectors of the economy the Mutual Fund Manager invests.  Examples of some sectors are Financials, Health Care, and Technology.  If you want to invest in some of the sectors listed on the Mutual Fund Profile then it could be a good investment option.

The Top Ten Holdings of a Mutual Fund are also important to review because it lists the top companies stocks that are held in the Mutual Fund.  We don’t want to hold stocks of the same companies in all of our Mutual Funds and this is why it’s important to review the Top Ten Holdings of a Mutual Fund.

Check out some of these Dividend Mutual Fund Profiles:

RBC Asset Management offers a US Dividend Fund

PH&N Funds  has a Dividend Income Fund

HSBC offers clients a Dividend Income Fund

Fidelity has a Dividend Plus Fund

BMO Mutual Funds offers a Global Dividend Class

Be sure to check out the previous posts in our “Investing: The Ins and Outs of Dividends” series:

New Investment Strategies for the New Year

Why You Should Consider Investing in Dividends

What Dividends Are All About

Why Do Companies Pay Dividends

Are Dividends Better Than Stocks?

When You Should Not Get Into Dividend Investing

Important Dividend Information for Young Investors

Photo by hpeguk

Basic Investment Advice #1: Buy Low and Sell High

No one can predict the market fluctuations.  We have a 1 in 365 chance that we will buy our investments on the lowest day of the year, and sell them on the highest day of the year.  Since those are really not good odds, the best investment advice is to continuously buy into the market on a regular basis.

The strategy of regularly buying Mutual Funds on a weekly, biweekly, or monthly basis through pre authorized contributions is called Dollar Cost Averaging.  When we continuously purchase investments we are buying into the market when it is high and when it is low.  Therefore, the average cost of our investment is lower than it would be if bought into the market on a high day.

Basic Investment Advice #2: Invest for the Long Term

It is very important to start investing at a young age and stay invested during market fluctuations.  Very often people panic when the market is experiencing a downturn, and they sell their equity investments at a loss to purchase more secure fixed income investments.  This is the exact opposite of a smart basic investment strategy.  We want to buy low and sell high, not sell when the market is low and buy back in when the market is high.

We have to be comfortable with the level of risk versus return that comes with our investment options. Before you purchase your Mutual Fund or Stock Investments you have to ask yourself, am I comfortable with the potential return for the possible risk involved? If you are looking for a 7 or 8% return, then you also have to be comfortable with the possibility of your investment value declining by 7 or 8%.

If you are new to investing consider buying a Balanced Mutual Fund.  This is a medium risk fund that will experience moderate fluctuations in the daily value.  A Balanced Mutual Fund usually has a 60/40 asset allocation in Equity and Fixed Income.  Mutual Fund Investors receive their account statement on a quarterly basis, it is important to review your quarterly investment account statement to make sure that you are comfortable with the risk versus return of your Mutual Funds.

Basic Investment Advice #3: Choose Personalized Investments for Your Goals

Many Mutual Fund Companies offer Select Portfolios and Target Date Mutual Funds which are designed for specific types of investors or for a target investment date.

Select Portfolios offer the perfect asset allocation for your individual investor profile.  Select Income Portfolios, Balance Portfolios, Growth Portfolios, and Aggressive Growth Portfolios are offered by most Mutual Fund Companies.  Select Mutual Fund Portfolios are the perfect solution for investors who want a simplified investment option, and who do not want the hassle of choosing their own individual investments.

Target Date Mutual Funds are designed for investors who are going to stay invested until their specific target date in the future.  These funds are commonly used for investors who are investing for a specific goal such as saving for the down payment of a home, investing for their education, or saving for retirement.

Target Date Mutual Funds are more aggressive the farther away they are from the target date.  Every year as we approach the target investment date the Mutual Fund asset allocation is rebalanced to become more secure and less risky.

Fidelity Investments offers the Fidelity Asset Manager Mutual Funds that focus on the asset allocation.  Fidelity Asset Manager Mutual Funds are based on an Investors tolerance toward risk versus return.  Fidelity also offers Lifecycle Mutual Funds which are also known as the Fidelity Freedom Funds.  These Target Date Mutual Funds range from 2015 to 2050.

Here are the 5 Steps to help create your first investment portfolio:

Set Your Goal.  Having a defined goal will help determine what types of investments you need to create your investment portfolio.  Short term investment portfolios will have lower risk investments such as fixed income mutual funds, bonds, and GICs.  Long term investment portfolios will have higher risk investments such as Stocks and Exchange Traded Funds.

Determine Your Level of Risk.  When you create your investment portfolio you will need to know how comfortable you are with fluctuations in the value of your portfolio.  High risk investments could bring large profits over the long term; however they could also bring losses to your investment portfolio in the short term.  You must ask yourself…am I willing to lose some of my money in the short term to potentially gain profits in the long term?

Find Out What Type of Investor You Are.  Before you buy investments to create your investment portfolio you will need to determine your investment priority.  This can be done by answering a few simple questions commonly known as your Investor Profile or the Know Your Client (KYC) questionnaire. If your investment priority is capital security and not capital growth then you may be a conservative investor.  However, if your investment priority is capital growth over the long term then you may be an aggressive growth investor.  Keep in mind that you can’t have a lot of potential growth with capital security; you can only pick one as your investment priority.

Diversify Your Investment Portfolio.  We should never put all of our eggs into one basket.  Therefore, it is a good investment strategy to have a variety of investment options when we create our investment portfolio.  Diversifying your investment portfolio means investing in different asset classes such as cash investments, fixed income, foreign income, local equity, foreign equity, as well as different sectors investments.  In general an investment portfolio of under $10,000 should have 3 different investment options (such as Mutual Funds), and an investment portfolio of $25,000 should have 4-5 different investment options. If you’re a Canadian resident, you’re going to want to look into Canadian dividend stocks.

Do Your Research.  Before you buy investments and create your investment portfolio please research the investments that you want to buy.  When you are looking at information on investments please remember that past performance is not an indication of the future.

Since we bought this blog, we have written some interesting posts about asset allocation for beginner investors. However, knowing what the difference is between fixed income and the stock market is hardly enough to know how to invest your hard earned money!

This is why we are taking a closer look at how to invest in fixed income asset classes today.

First Fixed Income to consider: Government Bonds and CDs

Government Bonds and certificates of deposit (CDs) are the safest investment products you can use to build your portfolio. However, they are also the least flexible. Picture a bond or CD as you are the banker and not the borrower:

The principle behind this type of investment vehicle is that you are lending an amount of money to either a Government (Country, state or city) or a bank. Since you want your money back, you are lending your money to them for a specific period of time (called the term). Then, you don’t want to lend money for free (no one does this anyways?), so you will do it at a fixed rate of interest (called the APR).

Why bonds and CDs are less flexible investments?

Now go back to your usual borrower’s mind for a second: how would you feel if the money you have borrowed could be called back (i.e. the lender asks to be reimbursed right away) at any moment? You would probably not feel comfortable borrowing money from this person. This is the same way it works when you are lending money to the government or a bank; they want to make sure they have enough time to pay you back.

This is why it is usually harder (read very hard in the case of CDs) to break your contract and cash out your money before the end of term. You will usually have to suffer a penalty which would result in less interest paid to you than the original contract. In this time of very low interest rates, you certainly don’t want to see it reduced to even less than that!

Good news; there is a secondary market for bonds

While I mentioned it was harder to get your money back from CDs before the term expires, it is because you are dealing alone with the bank. However, there is a market (similar to the stock market) to trade existing bonds. This is where you can buy or sell existing bonds on the market. However, this doesn’t mean that your money will be guaranteed if you sell your bond before it matures (i.e. at the end of the term).

Why money invested in bonds is not guaranteed before the end of term? Isn’t it the safest investment?

Picture this: 5 years ago, you bought a 15 year government bond paying 5% interest rate. Today, after the rate goes down, you still earn 5% interest while new bonds issued in 2010 are giving 3.5% (I’m not using real numbers by the way…). Why would you sell your bond that is giving 1.5% more than anything else on the market? Answer: at the same price you paid for your bond, there is no way that you will sell it unless you really need money.

Then picture this second situation: You buy a bond today paying 3.5% for 15 years. In 5 years from now, interest rate rises and the same bonds (i.e. the same issuer) will pay 5% for new issues on the market. How can you sell a 3.5% bonds when anybody can buy a new bond with the same level of security but giving 5%?

There is an answer to both situation and this answer is found on the bond market: When you buy new issue, you buy it at a price of $1,000 per bond (i.e. if you have $10,000 to invest, you will buy 10 bonds). If the interest rate goes up in the future, your bond is less attractive since it is paying a lower coupon (3.5% vs. 5%). Since you have the option to sell it anyway, investors on the market will pay you less than $1,000 for the same bond. Since at the end of the term they will get back $1,000, the difference between what they pay (let say $975) and what they get at the end of the term ($1,000) will compensate for the lower rate (3.5%) that they will be earning in the meantime.

The same math applies if you have a high paying bond and the rate goes down; your bond will be worth more than $1,000.

This is why your fixed income portfolio can go negative from one quarter to another while your capital is secured . This often happens if you buy bond ETFs  or mutual funds invested in bonds. So there is no reason to panic, you just have to hold your bonds long enough to get your capital (and your interest) back!

Author: Mike.

Image source:

There are a lot of interesting quotes talking about the stock market. My favourite one is definitely:”You should buy when there is blood on Wall Street”. I really like the analogy of this quote since it doesn’t only tell you that you need to invest when everybody is running away from the stock market (to buy bond funds) but it also tells you how scary it is to be a contrarian.

Since March 9^th, 2009, the S&P 500 has soared by 70%. While the 2008 credit crunch was the most brutal drop of the index, 2009 showed us the most incredible rise of the S&P 500 of its long history.

According to the Investment Company Institute, 24.6G$ exited the stock market since the beginning of 2009. During this very same moment, 455.6G$ (yup, you read right, 455G$!) were invested in bond funds. While the interest rates were at their lowest level ever, it was the worst time to buy bond funds!

You might have been burnt by the market but it doesn’t mean that you should hang yourself with bonds

I understand the logic where investors who lost 50% of their portfolio twice in the same decade (remember the techno bubble with Nortel, JDS Uniphase and Cisco plummeting?), thought they could not get burnt a third time. However, investing in a bond fund is probably much worse than looking at proper investing strategies (with a sound asset allocation!).

I’ll explain this in another post, but just keep in mind that the value of bonds drop when interest rates increase. Therefore, if you buy a bond fund, your portfolio value will drop at each interest rate increase (note that it already started in Australia and Canada where their central banks have started to increase their prime lending rate). So if you fled the stock market to buy a bond fund, you are doing it at the perfect moment to lose what is left in your pocket…

Rational vs Irrational

The biggest problem is that people always think the same thing: “I’ll come back to the stock market when it’s back up”. What is the point? You will have lost the opportunity to make money? I was granting leverage loans (borrowing to invest) from 2003 to 2007 and the peak of investing came in 2006-2007. People wanted to invest more and more money in the stock market based only on the fact that “it was going up”.  Therefore, they invested with little knowledge and a very bad investing strategy (getting a quick profit out of a few trades).

Those very same people tend to sell everything when it goes bad and whine that they lost a lot of money in the stock market. This is why they are looking for bonds as a safe haven. However, when interest rates start rising, they will lose money again, ironic, isn’t?

The rational approach is to invest in the stock markets when it is low (like right now). In a few years we will look back at what just happened and we will say that it was obvious to determine the right time to invest (2009-2010). In fact, we will say the very same thing we said back in 2004-2005 when we looked at the crash of 2000-2001…

So stay invested and concentrate your efforts on a good investing strategies instead of trying to make the trade of the year or keeping all your money safe in a low interest money market fund…