How many trades should I make a year?

Is there a specific amount of trades an investor should make each year?

Interesting enough, I’ve been called a “trader” from time to time while I define myself as a dividend growth investor. Which type of investor suits me best? I would definitely vote for dividend growth investor, but I will also admit I trade a lot more than the classic dividend investor.

For many, the number of trades you make in a month or a year often define the type of investor you are. If you trade on a daily basis, you are most probably a penny stock trader or a technical analysis fan. If you trade on a monthly basis, you are an active investor, read trader. If you rarely sell any of your holding throughout years, then you can qualify as a buy & hold investor or a dividend growth investor.

I’m having a hard time with these definitions linked to the number of trades completed. In my opinion, there isn’t a minimum or maximum amount of trades you should complete each year. It all depends on where you are at with your portfolio and your investing strategy.

If you are like me and you have decided to divide your portfolio into two sections (core and growth), you will most likely sell one of your holding every year or two. My “growth portfolio” includes companies that I believe are undervalued for a specific reason. These trades are usually more volatile and include a higher degree of risk. In the past, I bought Seagate Technology (STX) while they were in the middle of a growth crisis doubled with a major flood affecting their production capacity. I also bought Apple (AAPL) before the company split as many experts thought their iPhone was about to die (that was before iPhone5… imagine!). Finally, I bought SNC Lavalin (SNC.TO) as the engineering firm was in the middle of a fraud scandal and was brought to justice by the Canadian Government. These are examples of timely trades where I might now keep these companies forever. My investing horizon for such holdings is 18 to 24 months. This is why I will most likely sell one company in my portfolio each year or two.

On the other hand, the core of my portfolio is built with a long term holding horizon in order to benefit from the full potential of compounding dividend growth. These companies are selected upon the 7 dividend investing principles and will most likely be part of my nest egg forever. However, as I previously mentioned, I still follow each of my holdings closely on a quarterly basis to make sure they all continue to show the following criteria:

  • Dividend payment growing each year
  • Payout ratios under control
  • Company is a leader in its market
  • Revenue and earnings on a growing trend
  • Company showing clear competitive advantages

These are key factors to ensure dividend growth over a long period. If a company ends-up failing to meet these criteria or doesn’t meet my investment thesis fundamentals anymore, I will pull the trigger and sell it. I’m not just content about receiving decent dividend income, I want each company I own to be prosperous and grow in value. As the economic environment changes rapidly, it is very possible that a company shows great characteristics today yet loses steam over the years. Some of them just hit a speedbump and are already working on solutions while others can’t find a way to get back on track.

Don’t become trigger happy, but don’t be too complacent

There is a thin line between becoming trigger happy and selling any company that fails to produce growth every quarterly report and being too lenient with management. As much as I want to make sure that each company I hold generates ever growing profits, I can also understand that the economy goes through cycles and there will be poor quarters in any type of industry. The idea is to be able to analyze why there are poor results and to look at what management is putting in place to get back on track.

Making too many trades will only increase your trading fees and reduce your dividend growth potential. Not making any trades could lead to you holding bad companies rotting your total return. There is a balance to reach between the two approaches and this is not easy. I guess the solution is not to determine an ideal number of trades to achieve each year. If you must sell 2 of your holdings during a bad year, so be it. Just make sure you don’t do it out of panic or lack of patience. Always review your investment thesis before pulling the trigger. As long as a company meets the reasons why you selected it in the first place, you should not be in a hurry to sell it.

Should I keep my stocks forever?

Is the classic buy & hold investing strategy dead? Is it just a fairy tale invented by an old generation of investors such as Buffett and doesn’t work anymore? You may read several articles telling you the buy & hold theory is dead. I don’t agree with this statement.

The main idea around dividend growth investing is to benefit from the compounding effect of the dividend growth in your portfolio. You can’t benefit from the compounding growth if you sell your stocks every 4-5 years. The following graph should show you the result of the buy & hold strategy:

As you can see, during the first ten years of this graph, both the S&P 500 and the aristocrats were bringing about the same return. However, the compounding effect of dividend growth started to bring more return after the techno crash. Patient investors have been rewarded handsomely.

The rationale behind this theory is simple. Imagine you use $100,000 to invest in 3M Co (MMM). Let’s assume the current dividend yield is 2.50%. Your money will then generate $2,500 per year. Now, imagine you keep MMM for 25 years and you reinvest their dividend payments during this period. For the sake of the calculation, let’s assume a 6% dividend growth rate. Here are the results of my calculations:

In the span of 25 years, your $100,000 investment has become $378,000 purely through the process of reinvesting the dividend payouts. Imagine now if MMM stock price is also growing in value… yup, you would probably get close to 1M$ in 25 years with an investment of $100,000. I know, those numbers defy our imagination, but they are real nonetheless. You doubt it? Here’s the real number showing MMM stock return over the past 25 years:

You read it right; over 1,330% return over the past 25 years.

It doesn’t mean you should keep all your holdings forever

The problem with the buy & hold strategy is that not every company produces MMM’s results. Therefore, you could be holding shares of companies that will not bring much to your portfolio over the next 10-25 years. I’m pretty sure you want to avoid that. While there are no magical secrets to determine if one company should be part of your nest egg forever, I can identify a few key elements:

  • Dividend payment growing each year
  • Payout ratios under control
  • Company is a leader in its market
  • Revenue and earnings on a growing trend
  • Company showing clear competitive advantages

By monitoring each company you invest in on a quarterly basis, you will be in a position to make sure each of the above mentioned criteria are in place. These companies should be held in your core portfolio forever. This is how you will unleash the full power of dividend growth investing.

U.S. vs Canadian Market

I know that about 50% of my readership is American and 40% is Canadian. I keep getting questions about the benefits of investing on both sides of the border depending on where you live. The question makes sense regardless if you are North or South of the US Canada border: should you invest in the U.S. market? The answer is yes. Should invest in the Canadian market? the answer is yes as well. For the sake of diversification and because both markets are completely different, I think it’s a great opportunity that we can invest on both sides of the border with minimal consideration.

Investing in the U.S. market for 3 reasons

The very first reason why anybody would want to invest in the U.S. stock market is because it is the biggest market in the world. This implies lots of great benefits such as:

  • A highly liquid market (the market value makes sense and it is easy to cash your investment)
  • A transparent market (chances of fraud still exist, but are highly diminished by many regulations in place)
  • A “stable” market (while market volatility is part of any investor pain, the U.S. market is definitely less volatile than emerging markets)

Investing in the biggest world market gives additional security to investors. It comes with the largest choice of companies in the largest number of sectors possible. This is the perfect place to start building your core portfolio.

The second reason to invest in the U.S. stock market is to benefit from international markets’ growth perspectives without having to take additional risk. Companies like Procter & Gamble (PG), Pepsi Co (PEP), Coca-Cola (KO), Johnson & Johnson (JNJ), 3M Co (MMM), Colgate Palmolive (CL), etc. are present in many countries around the world and generate roughly 50% of their revenues overseas.  You can then invest in the U.S. market in companies you know and easily get information while a large part of their revenues comes overseas. This benefit allow you to avoid additional taxes charged on dividends income from international companies, worry about currencies (we will cover this topic later as it deserves a full section) and the difficulties getting timely information you need.

Finally, the third reason to invest in the U.S. market is the pool of high quality dividend paying companies. This is the only market where you can find in 2017;

  • 18 Companies with 50+ years of consecutive dividend increases (Dividend Kings)
  • 50 companies with 25+ years of consecutive dividend increases (Dividend Aristocrats)
  • 272 companies with 10+ years of consecutive dividend increases (Dividend Achievers)

This is like heaven for any dividend growth investor. You obviously can’t count on past performance to guarantee the future (I’m sure you have read this before, right?), but it gives you a very strong start to build your watch list.

Why do you need the Canadian market then?

If you are Canadian, you will obviously invest in your own market for simplicity, the currency factor and tax purposes. However, is there a definite advantage for anybody else to invest in the Canadian market? There is more in this market than you think!

First, there are sectors paying higher dividend yield than anywhere else in the world. Regulations have created two special dividend pools in the financial and telecom sectors. The financial sector includes an elite group of 5 Canadian banks (Royal Bank (RY), TD Bank (TD), ScotiaBank (BNS), CIBC (CM) and BMO (BMO)) paying yields between 3.5% and 5% most of the time. The best part is that Canadians banks have beaten the TSX total return over the past 20 years. The second sector that is also protected by federal regulation is the telecom industry. Telus (T), BCE (BCE) and Rogers Communications (RCI.B) control over 80% of the market in Canada. Barriers to entry are very strong offering a unique opportunity to these companies to pay a strong dividend to their shareholders. All companies mentioned in this paragraph are also trading on the NYSE under similar tickers (Telus is the only exception as it trades under TU on the U.S. market).

Second, the Canadian market also offers great opportunities for income seeking investors in the oil & gas industry along with REITs. Both sectors have been part of the Canadian core economy for several years. The oil & gas sector offers higher volatility, but with additional growth perspectives as well. On the other hand, REITs are quite stable income generating vehicles with limited growth potential. Both industries can serve an interesting place in your portfolio while you look for additional diversification.

If you are Canadian, I think it would be wise to invest 50% of your portfolio in the U.S. market. I personally have 65% of my portfolio invested in the U.S. market. If you are American, I think it would be fair to invest between 10% to 20% of your portfolio across the northern border. This would help increase your dividend yield without adding any more risk.