077: Best Dividend Investing Strategies for Beginners with Kanwal Sarai

00:00 - 00:34 | Kanwal Sarai: What we're talking about today, dividend value investing, has not changed in the last 50, 60, 70 years. And it's not rocket science, right? Warren Buffett talks about it. Benjamin Graham was Warren Buffett's mentor and teacher at Columbia University. So Benjamin Graham, we refer to him as the godfather of value investing. And he was talking about this in the 1930s. So my approach hasn't changed. The approach is, if I could simplify it into one sentence, it's investing in quality dividend stocks when they are priced low.
00:37 - 01:25 | Christopher Nelson: Welcome to Tech Equity and Money Talk. I'm your host, Christopher Nelson, and I'm excited today to be here with Kanwal Sarai. Kanwal is a technology employee, and he's also financially independent, and he's also choosing to work, and he's also the owner of simplyinvesting.com. Kanwal and I met at FinCon in 2019, where he was sharing how he built his portfolio based on dividend stocks to create income for himself. And so we've been looking forward to this conversation for a long time. Conwall is also not only a 20 year investor, but he is also the owner and founder of simplyinvesting.com that has a lot of resources for people who want to learn dividend investing. Conwall, welcome to the show.

01:26 - 01:30 | Kanwal Sarai: Hey, Christopher. Thank you so much. I'm so happy to be here today.

01:30 - 01:45 | Christopher Nelson: I want to get right to the point, which is, you know, what was the pivotal moment for you in your tech career when all of a sudden you realized that dividend stocks could provide the income that you needed to get to financial independence?

01:45 - 03:25 | Kanwal Sarai: Oh, that's a great question. And The answer is there wasn't a one point in time. It wasn't a specific day where the light bulb went off and I realized that dividend stocks was the way to go. It was a bit of a process. And as you mentioned, I've got a tech background. My background is in computer science. I spent 27 years working for large enterprise software companies. So I did like what everybody else did and what my parents told me to do. They said, you know, go out and get a job. which I did, okay, take some of that money now and put it towards your future. And what everybody around me was doing and what my parents did for their entire life was, you know, put that in mutual funds. So I started with mutual funds, held on to those for 10 years, right? This is right after university, graduating college. And then for 10 years, I held on to mutual funds. Eventually I diversified into ETFs and index funds. And I like putting everything down into Excel. I'm a numbers guy. So I would track all of this. Right. You know, every once a year, you get all your statements from the mutual fund company and ETFs and index funds, put everything to an Excel spreadsheet. And I'm doing the math. And I realize, you know, I'm still pretty young, but I realize that I will not have enough money when it comes to retirement. Or I'm going to have to work till I'm 95. Right. Right. And this is why we see people today like at Home Depot and Starbucks, you'll see like 60 year old, 70 year old still working. And because we end up in the situation where there is not enough money for retirement.

03:25 - 04:05 | Christopher Nelson: Well, anyway, I want to I want to pause you right there. No, because this is where because this you're starting to line up with sort of what my experience was, too. And is it because They're not going to have enough money because they're playing this game that was given to us that says, oh, what you do is you build up this big stack of money and then you start draining it and you hope that it grows faster than you can drain it. But nobody talks about income in your portfolio. I want to scream from the rooftops, right? Why is nobody talking about the fact that there's income in their portfolio? So you started to have that light bulb moment too, it sounds like.

04:06 - 07:15 | Kanwal Sarai: Absolutely. That's absolutely correct. If you look at the average return on mutual funds, index funds, and ETFs, the annual sort of yield on those investments, it's very low, right? So there wasn't enough income being generated. And the other thing is fees, right? Like you're paying a lot in fees. I'll share a quick example with your audience here. If you've got a million dollars in a mutual fund or an ETF or an index fund, And let's say the fee is 1%. I know some of them are lower than that, but let's just go with 1%. And I'm going to assume you are no longer contributing to your retirement fund as of this day forward. If you just held on to that million dollars in 25 years, of course, it's going to grow because it's invested in stocks. You will spend over 1.5 million in fees. Wow. Right. Anybody can check this out. We can share the link after this. There's mutual fund fee calculators out there. And that's what I did this morning. I put in a million dollars. I put in over a period of 25 years. I set the MER, which is the management expense ratio, to 1%. And it came back with over 1.5 million in fees. So if you're losing that much money and you're not generating enough income, well, what do you think is going to happen when you turn 65 or 85 or 90, right? You're not going to have enough money. Anyway, to finish your, I got to shorten this because this is a long summary. This could turn into a book. So let's finish it off in the next minute here. So, you know, I looked at other things and I was, I'm old enough and I don't know if your audience remembers the tech bubble. Yes. 1999 and 2000. I got sucked into the tech bubble. Every tech company, you could buy a stock on a Monday for $25 and sell it for $50 on a Friday. The prices were going through the roof. Valuations were super high. Nobody cared what the revenue was. As long as it was a tech company, you were making money. I got sucked into it. The biggest one here in Canada was Nortel, Nortel Networks. I invested money in Nortel Networks. Everybody knows how that ended. They went bankrupt and the investment was zero. Now, because I was a young guy straight out of school, you know, I only put in $2,000 or $3,000 and that went to zero. Right. So I realized, okay, that's not going to work either. So how do I make enough money? How do I generate enough income? And I wanted to do it passively so I could still continue my day job. I had to figure out, I had to find some role models. Individuals who had done this successfully, consistently. Not just somebody who made a million bucks in six months and then lost it all. But who were the ones who made it consistently over the long term? So Warren Buffett's name kept coming up again. I didn't know who he was. Benjamin Graham's name kept coming up. And I started reading up on it and reading up on those individuals. And then I slowly, it was a three-year process. where I started taking money from my mutual funds and slowly putting it into dividend stocks. Um, and then eventually everything got moved over to a dividend stocks.

07:15 - 07:54 | Christopher Nelson: And so when, so let's, let me double click on a couple of things. So when, so you, you start reading Benjamin Graham, you start reading Warren Buffett, how did you zero in? Because I know. I don't know exactly when, because I feel like in the 90s, I feel like dividend stocks still had some favor, but at some point in the early 2000s, dividend stocks fell out of favor, but you sort of zero it in and said, wait a second, I want to purchase a stock that is going to then kick off income and preserve my capital. Where did you find that in the reading, in the research?

07:54 - 09:18 | Kanwal Sarai: Yeah, so that came up in the readings. Benjamin Grime is a wonderful, great read, Security Analysis, which Remarkably, he wrote this in the 1930s, which is a very long time, right? It's crazy, but you read it and history has a way of repeating itself, right? So we talk about the tech bubble in 99 and all these tech companies. In his book, he talks about the railroads and the railroads were blowing up and the stock prices were doubling and tripling in such a short period of time. So if you just replace the railroads with tech companies, you realize, okay, history is repeating itself. And so doing my research and understanding how successful investors were successful, what they did to become successful in the longterm. So we're talking 20, 30, 40, 50 years of consistently growing their income and the value of their portfolio. And it came, so there was two concepts. One was dividend investing, which I'm sure your audience knows, right? You buy a stock. If a company pays you a dividend, That's cash in your pocket, right? You can reinvest the dividends if you want, or you can spend the money, right? So that's one way. The other way was to look at value investing. So my approach, so value investing is buying a stock when it's priced low, right? Right. Buy low and sell high. So my approach is what I call dividend value investing.

09:19 - 09:37 | Christopher Nelson: So that's what I do. And so I do want to take a moment. So, so for people that are listening, right, there are, cause I know some of these have fallen out of favor, but why don't you list off for us like a couple of stocks that we may not be aware of, but are, are nice big blue chippy stocks that kick off a dividend.

09:37 - 11:32 | Kanwal Sarai: Yeah, absolutely. Um, and I'm going to give you three examples and. The history is remarkable. So let's take a look at, we'll start with Coca-Cola. Everybody knows Coca-Cola. Yep. They have been paying a dividend since 1893. Wow. I'm going to say that again, since 1893, which is incredible. Now, even better than that, Coca-Cola has been consecutively growing its dividend for 62 years. Wow. That is incredible. 62 years. The other one was Procter & Gamble. They started paying a dividend even earlier, 1890. 67 years of consecutive dividend increases. And then Johnson & Johnson, also 62 years of consecutive dividend increases. Think about how many market crashes we've had in the last 60 years, how many market downturns we've had. But companies like these have continued to not only pay a dividend, but to grow the dividend year after year after year. So there is a compounding effect, a snowball effect that occurs when you hold on to a dividend stock that keeps increasing its dividend. The dividends in the beginning are very small, right? It's small. You're going to get maybe 25 cents a share, a dollar a share. You know, you're not going to retire off of that. But as you hold on to those and as you reinvest those dividends into other dividend stocks, it really grows. Today, I have clients who are making $40,000, $50,000, $60,000, $80,000 a year in dividend income. To me, that is truly passive income because there's no tenant calling you at two in the morning because the kitchen sink means the faucet is broken. You're holding on to those shares and all you need to do is just keep holding on to them and the dividends keep coming in regularly and keep growing.

11:33 - 11:50 | Christopher Nelson: And so how, so you started this, um, you know, it sounds like around 20 years ago in the early two thousands, you started this, how has now your approach to, you know, dividend investing, dividend value investing involved over time?

11:50 - 12:48 | Kanwal Sarai: Yeah, that's a great question. Um, it really hasn't because what I'm talking about, what we're talking about today. dividend value investing has not changed in the last 50, 60, 70 years. And it's not rocket science, right? Warren Buffett talks about it. Benjamin Graham was Warren Buffett's mentor and teacher at Columbia University. So Benjamin Graham is, we refer to him as the godfather of value investing. Right. And he was talking about this in the 1930s. So my approach hasn't changed. The approach is, if I could simplify it into one sentence. It's investing in quality dividend stocks when they are priced low. So the key is to know when is it priced low? And the key is to know when is it a quality stock? Because not every stock in the world today is a quality stock and not every stock pays dividends.

12:49 - 13:50 | Christopher Nelson: That's right. And so I know one of the articles that you've written, and I believe it was also a podcast that you produce, you talk about a resilient dividend portfolio. And so I want to continue to build off of this because more than anything, I want anybody who's listening to open their mind, open their eyes, because you brought up some key points that This is a grow-rich-slowly type of strategy. I also think for technology employees who are working in getting equity compensation, having the ability to start moving a portion of their portfolio into dividend stocks, is really important as well. And so help us understand, how do you start thinking about this resilient portfolio of these types of companies and stocks you're articulating?

13:50 - 15:43 | Kanwal Sarai: Yeah, absolutely. And it goes back to investing, not just in any company or any stock, investing in quality stocks, There's a mindset that you have to think about and you touched on it. It's long term investing. We're not talking about day trading, so we're not going to talk about crypto and any of those things. And it's not a get rich quick scheme, like you're not going to make double or triple your money in six months. This is a long term approach. But it is a safer approach and your portfolio is resilient regardless of what happens in the stock market. So I've been doing this since 99, so 25 years now, 25 years as a dividend value investor. And I've seen the market go up and I've seen it come down and I've seen ups and downs constantly. 2008 was a big financial crisis, COVID in March of 2020, right? So I've seen all of these things happen over the last 25 years. But we're building a resilient portfolio that's not impacted negatively when the market We have a downturn or a market crash because we will, these things happen. So to answer your question, how do you know when you're looking at a company, if it's a quality company? So if you don't mind, Christopher, I'm happy to share with your audience what I've created, what I call the 12 rules of simply investing. So if stock passes all the 12 rules, then you know, you're looking at a quality company. If it fails even one of the rules, move on, move on to something else. So if you don't mind, we can go through it quickly. So let's start with rule number one. Do you understand the product or service offered by the company? If you don't, skip it, move on to something else. Now this doesn't mean you need to be a subject matter expert, but you want to be able to explain it to a 12 year old or explain it to your grandmother, right? How does McDonald's make money?

15:43 - 16:00 | Christopher Nelson: How does Coca-Cola make money? And that's, and that's why I love, cause Warren Buffett talks about this a whole lot too, where it's like, that's why you see him buying into Heinz and all these, you know, ketchup companies and product manufacturers. Cause he's like, I get this stuff. Like I get it. I'm, I'm putting this on my burger. I get it. Yes.

16:01 - 18:10 | Kanwal Sarai: Yeah, absolutely. So that's rule number one. Rule number two, will people still be using these products and services 20 years from now? So we want to avoid investing in companies that are just trends or just fads temporarily. They're going to disappear after a while. Because you're investing your hard-earned money into a company, You want to make sure the company is going to be around for a long term. Right. And I want your audience and everybody to think about when you're investing in dividend stocks or in stocks in general. Right. What is that? That represents ownership of a company. Yes. So think of it that way. When you're investing in Coca-Cola or Johnson and Johnson, you are part owner of the company, right? It's not just a piece of paper or a ticker symbol on your phone app. It is ownership in a company. OK, let's move on to rule number three. Does the company have a low cost lasting competitive advantage? Right. And Warren Buffett talks about this and I'll use, I'll share his same example is think of a corporation as a castle and around the castle, there's a moat. Right. And so the deeper the moat, the wider the moat, the better it's going to be at keeping competitors away. So if you look at somebody like Coca-Cola, they've been around for over a hundred years, they operate in over a hundred countries worldwide, and it's not just soft drinks, it's all kinds of beverages. You could take that logo anywhere in the world and show it to people and they'll know exactly what you're talking about. If you were to start a company today to compete with Coca-Cola, you would have to spend billions in marketing and advertising. And you still wouldn't get to where they are today because they've built a brand over all these years. Right. So they have that competitive advantage. Okay. Rule number four. Uh, this is a great one. So I'm going to ask you a question, Christopher. Sure. I'm ready. If let's say you're employed, you're working somewhere, you've got a family, right? If there's a chance that you may lose your job or we're in the middle of a recession, right. Are you going to go out and buy a brand new car?

18:11 - 18:14 | Christopher Nelson: No, I am not, sir.

18:14 - 18:28 | Kanwal Sarai: You're not going to do that, right? No. Same question. If you were in a, if we're in the middle of a recession, there's a chance you might lose your job. Are you going to take a expensive vacation overseas with your family?

18:28 - 18:28 | Christopher Nelson: No.

18:29 - 19:02 | Kanwal Sarai: Probably not. Right. You're going to stay local. We're going to try and save some money just for those two reasons alone. We do not invest in car companies or in travel companies. And look at what happened in March of 2020 when COVID hit. What did General Motors do to their dividend? They cut it to zero. Wow. Okay. Boeing, which builds commercial airliners. What did Boeing do in March of 2020? They cut the dividend to zero. So right away we don't invest in those companies. So that is rule number four. Is the company recession-proof?

19:03 - 19:14 | Christopher Nelson: Interesting. While we're on that topic, what happened to other companies that are the positive side of that, that are recession-proof? Did any expand their dividend or do they just continue to pay?

19:14 - 21:24 | Kanwal Sarai: Yes. Coca-Cola increased their dividend. Colgate-Palmolive increased their dividend. Johnson & Johnson increased their dividend in 2020. Wow. And there's Canadian companies too, the Canadian equivalent. They've also increased their dividend in 2020. In fact, all of the banks, the five largest banks in Canada increased their dividend. then as well. Wow. Okay. Okay. Rule number five, rule number five is in two parts and it's to make sure is the, has the company been profitable, right? Nobody can predict the future. I don't know what's going to happen to Coca-Cola six months from now or a year from now. So let's take a look back at the track record. Cause that'll give us some level of confidence. So I call it five a and five B. So there's two parts. So five eight, we're going to take a look at the 20 year average EPS growth, that's earnings per share, right? Is the company consistently making money over time? And we want to look at at least 8% or more. It's got to be 8% growth or more, right? And you can graph this, you can go to Yahoo Finance or any of these websites and you can look at the earnings per share and, you know, take a look at it. And is the graph, if the graph is doing this, and you can see my hands, I'm going down. If the last 20 years looks like this, do not invest in that company. I'm not telling you the earnings have gone down and they continue to go down. If the earnings do this, up, down, up, down, up, down, they made some money, then they lose some money, then there's negative earnings, negative earnings again, went up a little bit, negative again. That is completely random. I have no confidence what's going to happen next year. Are the earnings going to go up again? Are they going to go down? right? And earnings do go down. You have negative earnings where companies lose money. If you see a negative earning, stay away. So for rule number 5a, we want to see over the long term consistent growth. We might have one or two years where the earnings drop. Sure. Cause the company runs into some trouble, but over time we want to see it grow. So 8% or more rule five B we want to see at least eight increases in the last 20 years of the dividend in the earnings and the earnings.

21:24 - 21:24 | Christopher Nelson: Okay.

21:24 - 22:09 | Kanwal Sarai: Got it. Yes. Yep. So that's it. And then rule number six. Yes. You jumped ahead. That's we're jumping onto dividends. So rule number six is similar. We want to look at the 20 year average dividend growth, and it has to be 8% or more. If it's less than 8%, the company will fail rule number six and we move on. Okay. So even it's simple rule number seven, the payout ratio must be 75% or less. This is a quick way to explain it to you. Okay. Let's say a company made earnings of $1 per share. Okay. Last year, that's how much money they made $1 per share, but they paid a dividend of $2 per share to the shareholders.

22:09 - 22:13 | Christopher Nelson: What's wrong with that situation? Exactly. They're paying more than they're making.

22:13 - 22:50 | Kanwal Sarai: Exactly. So where did the money come from? They had to borrow it from somewhere to pay the shareholder. Sure. Right. That is not sustainable. Right. The payout ratio is over a hundred percent. They're either going to have to cut their dividend next year. or they're going to have to really grow the earnings. So rule number seven is a quick way to look at that. Rule number eight, we want to make sure the debt, the long-term debt to equity ratio is 70% or less. Now there are exceptions for companies that are capital intensive, like Caterpillar, for example, construction companies, but that's the general rule. I'm going quick here. We're almost done.

22:50 - 22:51 | Christopher Nelson: We're moving. We're moving. I love it.

22:52 - 23:19 | Kanwal Sarai: Rule number nine, has there been a recent dividend cut? So what we do is we look at the dividend this year. We look at the one last year. Is it, you know, this year, is it higher, lower or the same? Right. If it's lower, that means something's going wrong here. The company's cutting their dividend. Right. Did their earnings drop? Did something happen? Why did they cut the dividend? Are they in financial trouble? That's usually when they cut the dividend is when a company is in financial trouble.

23:19 - 23:25 | Christopher Nelson: Right. Like you just gave the examples earlier of the Boeing and other travel companies. Yeah.

23:25 - 24:20 | Kanwal Sarai: Yes. So rule number nine, if there's a dividend cut recently, we skip it, move on to something else. Rule number 10, does the company actively buy back its shares? So companies do share buybacks. Generally, it's a good thing for shareholders. If there's a share buyback, it reduces the amount of outstanding shares. And then over time, it drives the stock price up. Okay. Rule number 11, we're almost done here. Rule number 11 is to make sure that the stock is priced low, undervalued. Right. Right. You don't want to overpay for a stock. You want to buy one that's undervalued. So this in three parts. So first part is we look at the P ratio. We want to make sure it's 25 or less. Okay. Okay. If you. If your audience is old enough to remember the tech bubble, there was companies with PE ratios of 300, 400, 500. And there was people on the internet saying, yeah, you should buy some more shares.

24:20 - 24:24 | Christopher Nelson: It's going to do great things. You're going to love it.

24:24 - 25:51 | Kanwal Sarai: So we look for 25 or less. If it's anything greater than that, we skip it. Part, so there's three parts. So part, the second part, and this is the key. Now this is a quick hack for all of your audience here. If you don't want to spend time going through all of the 12 rules, skip to rule number 11B first and foremost. If it fails rule 11B, you don't need to look at anything else. And the way we do it, and I'm going to explain it very quickly because there's a whole episode on this where we spent 35 minutes talking about it. If you want to look at the current dividend yield. in case for a company. And you want to compare that to the company's 20 year average dividend yield. If the current yield is higher than the average 20 year yield, then the stock is undervalued and it's price low. Got it. So then it's that check. Yes. If it's the other way around, then the stock is overvalued. Interesting. If somebody emails you or texts you a message and says, Hey, Christopher, you should check out this stock. It's a great stock. It's going to double in price. You should buy it right now. Take a look at the current dividend yield and compared to the 20 year average. If the stock is not undervalued, don't even bother with the rest of the 11 rules. Right. Right. I love that. Okay. Rule 11C, the PB ratio, the price to book ratio should be three or less. Okay.

25:52 - 25:56 | Christopher Nelson: All right, we got the last rule. Let's go, bringing it in. Number 12, bring us home, baby.

25:56 - 27:13 | Kanwal Sarai: Number 12 has nothing to do with looking at financial data, has nothing to do with stocks or companies themselves, has everything to do with you, the investor. And so rule number 12 is to make sure that you keep your emotions out of investing. What's going to make you successful in this type of, you know, I was going to say dividend investing, but investing in general. Sure. You have to have the patience to ride out any market downturns, because it's going to happen. We're going to have more market crashes. It happens. Generally, it happens every year around, on average, six to seven years. Prior to COVID, that was a very fluke. We had like 11-year bull market. But generally, markets will go down. So have the patience to ride out market downturns and have the discipline to stick to the strategy. You don't want to do this for two months and then jump to something else like crypto or day trading and then jump to something else and do something else. I've been doing this for 25 years. If you're going to be successful in this, you got to stick with it. And it's a long-term approach, but it will give you growing dividends year after year after year, regardless of what the stock market does.

27:15 - 27:45 | Christopher Nelson: So there you go. So, no, so, so that, I mean, cause you just literally gave us a, you know, a mini course right here on, you know, what does it take to select, you know, a resilient dividend stock. So thank you for that. Now, how do you think about diversification? So if somebody is going to be deploying, let's say a hundred thousand dollars, they have a hundred thousand dollars in. you know, single stock that they've earned as equity and now they want to start deploying it in dividend stocks. How do you think about diversification?

27:45 - 29:58 | Kanwal Sarai: Yeah, diversification is very important. You don't want to put all your eggs in one basket. So do not take that $100,000 and put it into, I don't know, let's say an oil stock is really undervalued today and it passes all the 12 rules, which is good, right? Doesn't mean you should take all of your money and put it into just one stock. Right. Diversification allows you to lower your risk. And I'm all about lowering our risk. because this is your hard-earned money. You don't want to lose it. The 12 rules are designed to lower your risk. Every rule there lowers the risk. And every time a dividend goes up, every time the company pays you a dividend, and every time they increase the dividend, your risk goes down. Your capital risk goes down. So diversification is key. If you, in the example with a hundred thousand dollars today, you would take a look at which companies pass the 12 rules. Right. And today, just for your knowledge, for your audience, I just checked this morning out of all of the companies trading today on the NASDAQ and the New York stock exchange. Right. So we're talking about over, I think it's over four or 5,000 companies. Common stocks trading on that market today, only 36 of them pass the 12 rules. Wow. Right. We know that because we've built a platform that applies the 12 rules every single night. So when I logged in this morning, I took a look at the list and there's 36 companies. So that is great. That lowers your amount of research you need to do. You don't need to go out and research 4,000 companies. So out of the 36, you can narrow it even further. Right. The way I do it is I say, okay, how many consecutive years of dividend increases have these companies had? Right. So out of the 36, you know, there's some that have had only five years of consecutive increase. All right. You know what? Forget it. I'm not interested in that. 10 years. I'm not interested in that. Let's look at the top, like who have been paying dividends, who have been increasing dividends for 40 years, 30 years, 20 years. So now you're down to like maybe 12 companies, right? Now you can take a hundred thousand and spread it across. 10 or 12 companies.

29:58 - 30:14 | Christopher Nelson: And is that something that you, so when you think about diversification, do you try and keep your positions all around equal weight? Do you let some positions naturally, you know, grow a little bit larger? I mean, what's, what's a little bit of your strategy into diversification?

30:15 - 30:20 | Kanwal Sarai: Great, excellent question. I love these questions, by the way, Christopher, I am passionate about this stuff.

30:20 - 30:34 | Christopher Nelson: And this is no, and you're on the right channel. This is the channel, man. Like we like we love to geek out on all this stuff, because we're, you know, ultimately, you know, we either want to make money working for equity, or we want to be building portfolios that can sustain us moving forward. And this is a critical strategy. So

30:34 - 31:07 | Kanwal Sarai: Yep, absolutely. Okay. So what you're going to do is if you're just starting out today, if you've never bought stocks before, or you haven't had dividend stocks before, if you're just starting out today, I would take that and I would equally distribute it across. Let's go, let's stick with the example, a hundred thousand dollars, right? Let's spread it across 10 companies. That's $10,000 each, right? So we've put it in equally. So that's how you would start. The other part of your question was then what do you do afterwards when you become maybe overweighted in one company or right sector, right?

31:07 - 31:38 | Christopher Nelson: So let's say, so getting back to the example, so I put $10,000 in and everyone, you know, they're, they starting to kick off the dividends and I'm reinvesting, you know, so you have some dividends are higher than another. And so let's fast forward three years, that $100,000 is now $200,000. And I instead of being, you know, $20,000 each, I actually have one one slice of the pie, let's say that's like $60,000. Do you just sort of let that ride? Or do you approach sort of a rebalance scenario?

31:39 - 31:42 | Kanwal Sarai: Yeah. So I, this is my opinion.

31:42 - 31:45 | Christopher Nelson: Sure. We're all talking about styles and opinions. Yeah.

31:45 - 32:57 | Kanwal Sarai: Yeah. A lot of investors have their own style. They'll have like a cutoff, you know, if it goes more than 10% of my portfolio, I'm going to sell, start selling it. Right. In my opinion, I don't, if I have something that's overweighted, you know, in the example, I've got a 20,001 stock now. Yeah. I'll just leave it alone. As long as it's still a quality company, it's still paying dividends and they're still increasing dividends. I'm going to, I don't want to cut my supply of dividend, that stream of dividend income. So I'm going to let it ride. But here's what I'm going to do. Let's say that company is a retail company, right? And then retail stocks of, let's, let's assume they've exploded in the last three years and they're really high. Now what I'm going to do is when I have more money to invest or the dividends, right, we can talk about drips in a second here because I like to collect the dividends in cash and then reinvest them myself. So now when you've got more money to invest. I'm not going to put it in retail stocks. Even if it passes the 12 rules and it's an undervalued stock, I'm already overweighted in retail stocks. So I'm going to invest in a different sector or a different industry. And when you keep doing that over the long term, the portfolio will naturally balance itself out.

32:57 - 34:02 | Christopher Nelson: Well, and this is what I call managing the portfolio. So I think there's a couple, you know, I've gotten some feedback from people over the last couple of years. And I think this is a great opportunity to speak into a couple of scenarios now that we have sort of two personal portfolio managers, you know, just sort of talking about how we do things is I am like you, where I don't auto reinvest dividends, and I'm primarily in private equity, but I'm in private equity funds where there's that opportunity as well. What I prefer to do is collect the dividends. And then if I don't need them to live off of, then what I do is to your point is then I reallocate that because I want to naturally let my you know, I want to let my businesses grow and flourish. And if something is growing faster than others, producing more than others, then I will then reallocate that myself instead of going in and pruning away at it and trying to move that around. That stylistically, I enjoy that.

34:02 - 36:34 | Kanwal Sarai: Yeah, absolutely. I think that's a good, that's a great approach. And then the other question you may have, or your audience might have. Sure. It's perfect timing because it came up this morning. I got an email from one of my clients who said, you know, they said, should I just buy and hold and just hold on to stocks forever, you know, 20, 30 years. And I've done that a little bit with my portfolio. Originally when I started that was I was thinking, yeah, let's just buy and hold. Let's just leave it there. As long as the dividends are coming in and they're growing, that's good. And I think that's a good approach, but I'm going to give your audience something a little bit better. How do I phrase this? Optimized. Let's optimize a little bit more. Now, this requires a little bit more work. Sure. Not too much. I don't want to scare anybody off. And this is what I've started doing over the last seven, eight years, is taking a look at which stocks in my portfolio are now overvalued. The stocks go up and down all the time. Prices go up and down. So back to the question of when you said if something was overweighted, right? If it was also overvalued. Yes. Right. And here's what happens when the stock price goes up. Okay. If the dividend is the same, if the stock price goes up, your dividend yield is going to go lower. Right. And if the stock price goes down, the yield goes up. Right. Because you're taking the dividend divided by the stock price. So let's go back with that example of $20,000 in a retail stock. It's overvalued now, and I've got so much money there. The yield on that stock, let's assume, let's say it's 1% because the stock price has gone up over three years. It's kept going up. You know, the dividend has gone up too, but has not, the dividend increases will not match stock price increases. Stock prices go through the roof. So let's say now you're sitting on $20,000 in a company that is now giving you 1%, right? Couldn't you take the 20,000, sell everything and put it into a stock that's undervalued at that time, which is now probably yielding three and a half, 4%. Or if you're in Canada, we've got five, five and a half, 6% yield. Right. Now I've just taken my dividend income and I've quadrupled it. Right. Just by taking money out of the company that was overvalued now and putting it into another dividend company that's undervalued and the yield is much higher. So that requires a little bit more time.

36:34 - 38:15 | Christopher Nelson: Well, it does. And this is where I'm happy to speak into this. I feel you're holding back a little bit, Kunwal, but I want you to know that you're in a friendly spot where it's This is the difference to me between somebody who wants their portfolio to be on automatic and they don't want to put any work into it versus somebody who treats it as a business. And the reality is, there is a rich, full life waiting for you as the lead, as the CEO of your portfolio. that you can then all of a sudden be making and managing moves like this that will produce you more income, that will get you into better appreciating assets. And it takes work. And one of the things I did an episode a few weeks ago, Kunwal, where I spoke about the fact that the opportunity for us as technology professionals, as we're building our portfolios, is there if we can make the shift from moneymaker to money manager. And when you're a money manager, then you're not going to pull away from these things. You just realize, I can actually have more of my own time if I just manage my money versus working a W-2 job. But it does involve understanding some techniques, some strategies. And what I tend to find more often than not is once you start exposing, you know, technoids to stuff like this, like they geek out on it and they absolutely love it. And so this is why, you know, we here at this show, we don't, you know, shy away from like, oh, let's actively manage our portfolio because ultimately that's what I want to be doing full time.

38:16 - 38:48 | Kanwal Sarai: Yeah, I absolutely love the way you approach it and the way you've described it. It is really a mindset shift in your mindset, which is to think about, like you said, I'm going to take your word, sort of being the CEO of your own portfolio of managing your own investments. And that can make a huge difference. Like, so when I started five, six, seven years ago, started looking at that approach, I was able to double my dividend income in one year. without having to invest any new money in the portfolio that year.

38:48 - 39:27 | Christopher Nelson: Boom. That's the use case right there. No, that's the use case right there. And this is where I keep trying to share with people is there's a couple of big lessons that I want to tease out here. Number one is When you shift from being the moneymaker to the money manager and you're the CEO of your portfolio and you're focused on it and you learn and you study it, you will actually make your money work harder and you will start getting results faster than you ever realized. I'm sure that when you looked back at that year, you said, I didn't think that was going to happen.

39:27 - 39:32 | Kanwal Sarai: That's right. I didn't think it was going to happen. And then I was kicking myself for not have done it sooner.

39:32 - 40:49 | Christopher Nelson: Not doing it sooner. Right. And this is what I keep trying to tell people, because I know people who are sitting on a lot of money, but they're, again, they're locked up in the growth mindset. And I want to talk about that for a second, because there's a lot of people, and I'm curious what your thoughts are on this. I'm going to share my opinion and then you tell me what you think. But I know too many technology employees that will say, Christopher, yeah, I'd like to get into dividend stocks to get income, or I'd love to get into private equity to get income, but I'm not going to do it now because I'm in the growth stage. And my opinion is, you need to start training your portfolio, building your business now how you want it to behave in five years. Because it's really hard to be effective when all of a sudden, okay, I'm now going to take and reposition a two or $3 million portfolio to be income bearing in a short period of time because the market may not be in your favor. The deals may not be there on the private equity side. What is better practice is to be the CEO of your portfolio now, build out a portion that's income focused, and then essentially manage it. And then if you don't need the money, as Conwall and I both said, just continue to reinvest and grow your portfolio.

40:49 - 41:26 | Kanwal Sarai: Yeah, that is absolutely true. And that's, I agree 100% what you said, right? Because you want to get into that, the mindset and looking, thinking about the decisions you make today are going to impact your dividend income. five, six, 10 years from now in the future. So you got to start thinking about that sooner than later. And with this approach, with the dividend value investing approach, the younger you are, the sooner you start, the better off you will be. So you don't want to wait, like you said, have that growth mindset and say, well, I'm going to wait till I'm in my forties and fifties and I'll start then. Well, it's,

41:27 - 42:12 | Christopher Nelson: You could start then, but no, let's actually, I want to, I'm, I'm curious about something. Cause I, I have you here and, and you're so knowledgeable about the subject. Let's, let's talk about how effective do you think is this scenario? Because I mean, I want to, you know, be all transparency, right? There's plenty of people that are listening to this podcast that have two, three, $4 million in tech equity, single stock, multiple stocks, different investments, you know, If they said, I want to take a million dollars, let's just say for argument's sake, how quickly do you think they could deploy that? And what kind of returns do you think they could get off of that? If they said, I'm going to manage a portion of my portfolio in that manner.

42:12 - 43:17 | Kanwal Sarai: Uh, sure. So you could start off right away because there are stocks today that are undervalued, right. And our industries and sectors. So you could start right away. How much money can you make? Well, we're going to take the average. So the average dividend yield in the U S today, and the Canada is the same way is roughly 3.5%. Okay. Right. If you take a million dollars today, three and a half percent of that is $35,000. You can expect to make 35,000 a year in dividend income. Okay. If you put it in higher yielding stocks, you could make a little bit more, but make sure you're still following the 12 rules. Right. But here's what you need to think about. That 35,000 a year today in five years is going to turn into 40 or 50,000 in dividend income. Right. Why? Because all those companies are going to increase their dividends. Yeah. Right. And if you do what we just talked about is when a stock becomes overvalued, You can sell it, so you're also getting capital gains, and then reinvesting it back into another stock that's undervalued, that will also accelerate the growth of your portfolio.

43:17 - 43:33 | Christopher Nelson: Let me ask you something else. This is a bit of an advanced technique, and I'm curious what your thoughts are on it. But would you leverage to get into positions and to exit positions, would you use covered puts and calls?

43:33 - 44:12 | Kanwal Sarai: I don't. I don't use them, and I don't get into them. Uh, that's a, I think it's a whole different topic. Uh, it requires a lot more time and effort. So you'd have to go research that, but that's not what I do. So unfortunately I couldn't answer that, but you did talk about leveraging. So I've had, I've done it myself. Not anymore. Cause the interest rates have kind of, they had gone up and now they're coming back down again. But do you remember when the interest rates were like super low, it was like 1% or something like that? It was ridiculous. You, I did like the home equity line of credit using the money from there. to invest into dividend stocks that were yielding four, four and a half, five, 6% yield.

44:12 - 44:13 | Christopher Nelson: Oh, got it.

44:13 - 44:21 | Kanwal Sarai: Playing the arbitrage. You could do that as well. Right. It's a little more riskier. I wouldn't recommend it. You've never bought dividend stocks before.

44:21 - 45:05 | Christopher Nelson: Yeah. The way that I phrase that is if you're not actively managing your portfolio as a business and you're like, you don't understand what you're doing, don't do it. Yeah. You know, cause I think that there are like, I think it's, it's important that people can hear people talking about advanced plays, but they need to understand like, this is like a part of my job. Like my job is managing my portfolio. And so I may execute some, some different plays like that. Uh, but don't do it if you're not going to, you know, sit on it, manage it, and you don't understand what you're doing. Yeah, absolutely. Yeah. So what about, I mean, tell us a little bit, I know you've been teaching for a while. Help us understand like, uh, what resources that you have out there. I want to help educate people on, on what, you know, where they can start learning about this.

45:05 - 46:16 | Kanwal Sarai: Yeah, absolutely. So the best place to go is the website simplyinvesting.com. And so there's an online course, which is a dividend value investing course, takes you through everything we talked about today, including the 12 rules in more detail. And so we teach you how to do that. From the website, you'll see there's a podcast. So we're 88 episodes in. That's free. And every episode is an educational episode. My big thing is I love teaching. So it's teaching you about uh, different investing, how to get started. Uh, so the podcast is the place to go. The course is a place to go. Uh, the platform, uh, Christopher, you and I were talking before we hit the record button, uh, is about 60 days away from a brand new launch. Uh, the current platform is there. Uh, and what it does is it, uh, applies the 12 rules of simply investing, uh, to over 6,000 companies in the U S and Canada every single day. So it's a, it's an app. It's a web app. You can filter, you can do your dividend research, uh, and find, uh, stocks to focus in on and which ones to ignore. Uh, but the platform will be changing and the website also will be changing, but the domain will be the same simply investing.com.

46:16 - 46:49 | Christopher Nelson: And if people sign up today, they would, their membership would carry over to the new platform, correct? Yes, it will. Absolutely. Excellent. And so we're, so. How do you see like now, now looking ahead, right? I mean, you, you, we talked a lot about dividend investing, you know, what is a resilient portfolio? You walked us through the 12 steps. What is, what does the future look like for this? I mean, obviously, you know, you mentioned earlier that has been around for a hundred, over a hundred years, right? We talked about Coca-Cola and that dividend stock. Where do you see dividend investing going from here?

46:50 - 48:30 | Kanwal Sarai: Yeah, so I'm an optimist. I think as an investor, you always have to be an optimist, otherwise you would never invest. And so I'm optimistic that things will continue when it comes to dividend investing stocks. For example, a perfect example is Google this year just started paying a dividend. That's incredible, right? We didn't think that was going to happen for another couple of years. So they started doing that. Microsoft was the big tech company back in the heyday. They've been paying a dividend consistently. Apple has been paying a dividend consistently for many years now. So I do think that companies that are well-managed, that are financially healthy, will continue to pay dividends. And those that don't will eventually get there, right? And start paying, like Google is a good example. They started paying dividends now. So I don't see the 12 rules changing because they're based on the fundamentals, right? Are you investing in quality companies? Are you investing companies that are financially healthy? Have they been profitable? Do they have a history of that? Do they have a history of paying dividends? Is the dividend sustainable? Right. You look at the payout ratio. Is the debt low enough? There's companies out there that have 0% debt and there's companies out there that have 900% debt. So it doesn't take a genius, you know, which company to focus on. Um, so I don't see a lot of it. You know, I could be wrong because I can't predict the future. But from where I'm sitting today, I would hope and believe that the dividend companies will continue to pay out dividends.

48:30 - 48:38 | Christopher Nelson: So let's take it in another direction, which is, do you think that dividend stocks can become trendy again?

48:39 - 49:57 | Kanwal Sarai: I think so. I've heard recently, and I know in the U.S. there was a recent, the interest rate got cut. In Canada, we've already had two cuts in the last three months. So as interest rates are coming down, people are realizing, well, you know what, I can't make What are 3% or whatever it was in a, in a, like a term, I think you guys call it a term deposit or a certificate of deposit, a CD. Yeah, there you go. A CD, right. In Canada, they're called GICs, right? So if you're not going to be able to make three, 4% there. Because interest rates are coming down. So the CD rates will come down. The GIC rates will come down. That's going to draw more people to dividend stocks where you can get a three, three and a half, 4% dividend yield. That's amazing. Now, keep in mind, when I say three or four percent yield, you know, people might be thinking, well, that's not a lot of money. Like, OK, fine. That's that's OK. That's going to turn in four or five years from now, it's going to turn into four, six, seven, eight percent yield. We talk about the we didn't talk about it, but yield on cost, which is the yield based on your stock purchase price. Sure. So I have companies today where my yield on cost is 20%, 22%, 18% a year.

49:57 - 50:47 | Christopher Nelson: Right. Because of what, of what you actually paid for the stock. Well, and I think people need to understand that, you know, the, the value, like when you buy assets that give you cashflow from operations, and then you're also still on an equity owner, you also have to factor in the growth too. So you're getting the, the 3% is what I call cashflow exhaust, but then you have to look at, to your point, the overall value of the investment and the fact that you know, you're not, you're not, this isn't the drain and pray, like you're not losing value in your portfolio, right? If you get to the point, and I know, I can tell you plenty of retirees that I knew that retired in the early 2000s, that probably wish that they would have taken that 2 million, and had been getting $60,000 off of it a year with their social security versus the draining. And now they're sort of to the end of it, they're still really healthy going, what am I going to do?

50:48 - 51:26 | Kanwal Sarai: Yep, absolutely. And that's a good point you touched on. So I wanted to mention that every time the company increases its dividend, that supports a higher stock price. And you can see the correlation when not in the short term, in six months or even two months, you're not going to see it. But if you look at a five year, 10 year, 15 year graph of a company that's increasing its dividend, you will see a direct correlation with the stock price also going up. So you're taking advantage of the capital gains and getting paid while you're holding onto those stocks in the form of dividends. That's great.

51:26 - 51:33 | Christopher Nelson: Well, Konwal, I can't thank you enough for coming in and sharing all your knowledge today. Let's just list off again real quick. Where can people find you?

51:34 - 51:55 | Kanwal Sarai: Yeah, just go to the website simplyinvesting.com. That'll take you to, you know, information on the course, the platform, and there's a link to the YouTube. On YouTube, if you just search for my name or Simply Investing, you'll find it. But from the main website, there is a podcast button right at the top. It'll take you to my podcast. All of the episodes are available on my website and on YouTube.

51:56 - 52:04 | Christopher Nelson: Excellent, and I will make sure and put all those links in the show notes. I want to thank everybody for joining Thank You con wall for your time and we will see you on the next episode