Today I'm going to share a story about my work colleague from my previous job. Going back to 2010, I knew a guy at my work who quit his job with a 350K stock portfolio. For the purpose of this article, I will call him John (not his real name). For dividend growth investors, a 350K portfolio is very small and it would be almost impossible to achieve financial independence unless your living expense is under a $1,000 per month. In my case, a 350K portfolio would generate approximately $1,450 per month which is not enough to cover my cost of living. My cost of living in Montreal city with two kids is around $4,000 per month. So how did John succeeded to make a living from his portfolio?
John didn’t have big expenses to start with. His kids were grown up and moved out so he lived in a small studio that he rented for $550 per month. He drove a bullet-proof Toyota Camry that never seemed to fail. He followed a frugal lifestyle, but it doesn’t mean he was cheap. He was doing tons of activities and he would spend most of the winter in Mexico. So here’s how he earned a living.
John made a living from his portfolio by trading stocks short-term and collecting dividends at the same time. Sort of like a hybrid investment or a dual plan investing. His first strategy was to buy a stock and sell it for a 1% profit or more. The key was big value trades. He would put $50K on a trade and sell it for $500 profit. He successfully executed 2 to 3 trades per week, making $1,000 to $1,500 per week. Trades that didn’t turn into profit quickly would earn him dividends if held past the ex-dividend date.
John followed this investment approach from very beginning and it was working fine for him. He would generate $4,000 to $6,000 per month which covered his living expense and spend a winter in Mexico like most snowbirds do. His monthly expenses would never exceed $2,000 per month. He even had enough money left to grow his portfolio.
This investment strategy is very simple, but you need to understand that you’re doing. Also, the stock criteria for this strategy has to be very specific. You would only invest in dividend-paying blue chip stocks. Because these stocks are the safest to hold and make short-term trades. And if the stock price goes down, you can simply hold it for dividends and sell it once you reach the 1% profit margin.
John didn’t have big expenses to start with. His kids were grown up and moved out so he lived in a small studio that he rented for $550 per month. He drove a bullet-proof Toyota Camry that never seemed to fail. He followed a frugal lifestyle, but it doesn’t mean he was cheap. He was doing tons of activities and he would spend most of the winter in Mexico. So here’s how he earned a living.
John made a living from his portfolio by trading stocks short-term and collecting dividends at the same time. Sort of like a hybrid investment or a dual plan investing. His first strategy was to buy a stock and sell it for a 1% profit or more. The key was big value trades. He would put $50K on a trade and sell it for $500 profit. He successfully executed 2 to 3 trades per week, making $1,000 to $1,500 per week. Trades that didn’t turn into profit quickly would earn him dividends if held past the ex-dividend date.
John followed this investment approach from very beginning and it was working fine for him. He would generate $4,000 to $6,000 per month which covered his living expense and spend a winter in Mexico like most snowbirds do. His monthly expenses would never exceed $2,000 per month. He even had enough money left to grow his portfolio.
This investment strategy is very simple, but you need to understand that you’re doing. Also, the stock criteria for this strategy has to be very specific. You would only invest in dividend-paying blue chip stocks. Because these stocks are the safest to hold and make short-term trades. And if the stock price goes down, you can simply hold it for dividends and sell it once you reach the 1% profit margin.
This is something I could look into as a separate investment strategy in the future. However, this strategy is not suitable to tax sheltered accounts like TFSA or RRSP. I would need to open a separate taxable account for short-term trades. I suppose that $20,000 is enough to get started.
Let me know what you think of this strategy. Would you do something similar to generate more money and perhaps retire early, or you prefer to live off of dividends alone? Thank you for reading and have a great day!
Let me know what you think of this strategy. Would you do something similar to generate more money and perhaps retire early, or you prefer to live off of dividends alone? Thank you for reading and have a great day!
I like it and use a form of it, but it is just as easy to go down 1% as up, and I think one could find their capital in the waiting mode which would make a consistent monthly income a challenge. I can understand why it is not suitable for a TFSA due to accounts with high levels of trading being subject to tax, but AFAIK the RRSP is not in that category.
ReplyDeleteThat's true, but stocks that decrease in value would pay him good dividends anyway. It's a win-win scenario. High level of trading or day trading inside RRSP will be taxed as business income. I wouldn't recommend trading in registered accounts. It's better to use a margin account and trade with your own money.
DeleteRegarding the 1% plan, I am going to look into this further and see what the results would look like.
ReplyDeleteThis excerpt suggests trading in an RRSP is not taxable:
"This means, for example, that if an RRSP or RRIF were to engage in the business of day trading of various securities, it would not be taxable on the income derived from that business provided that the trading activities were limited to the buying and selling of qualified investments."
https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-10-registered-plans-individuals/income-tax-folio-s3-f10-c1-qualified-investments-rrsps-resps-rrifs-rdsps-tfsas.html#toc22
I do not understand why he sold the stock when it reaches 1%, why not let it run, probably he has not a good exit plan. Why not, let the stock go higher, some blue chip stocks can do 8 to 15% in few weeks, collecting 5000% is better then 500%, this amount can offset some loses.
ReplyDeleteYou are right but where do you draw the line? It could be up 15% and then the next day down to 10%. When to take profits is one of the hardest decisions, so that is my guess why he would go for 1%. He must have figured it was much easier to get a lot of small wins rather than wait for the bigger hits. A strict mechanical system like 1% also takes the emotion out of it. Setting a goal and sticking to it can also be tough.
DeleteKeep in mind that he was supporting himself purely from his portfolio, so short term winning trades were necessary for weekly withdrawals.
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