While continuing to write the series on trust DRIPs certain events came together that lead me to take a break from those boring articles. These events include reading David Stanley’s DRIPs – Your Non – RRSP in the January 2005 issue of Canadian MoneySaver, reading an article on the costs of exchange trade funds (ETF) in a national newspaper and meeting with a small group of investors.
Bearing on the above are two other things I’ve read in the past. First, one writer whose name I’m unable to recall, once referred to DRIPs as the most boring form of investing. Second are the several variations I’ve read on saving for the future 'by giving up one latte or cup of coffee a day and investing that money so that by the time you’re 99 years old you might be as rich as Warren Buffett.
Coffee Shop Investing
I’m always offended by the give up a latte or a cup of coffee example. Have you ever noticed how often anti-RRSP articles never assume you can invest your tax savings as well? It seems most of these writers believe that after topping up your RRSP people have barely enough left over to survive on. These writers never see the whole story.
I view the coffee example the same way. If you give up coffee in a caf' then you have to make coffee at home. That means you have to drive to the store to buy a tin of coffee. Don’t forget the fuel cost getting there. You can’t make the coffee unless you bought a coffee maker. You can’t drink it without the expense of a cup. Milk? Sugar? Never mind the electricity costs and the hot water to wash everything later. What about the time to make it? Every dollar saved is really only fifty cents.
Rather than waste time at home making cost inefficient coffee I prefer to free the mind and develop money making investing strategies in coffee shops while reading investing magazines borrowed from the recycle rack at the YM/YWCA or investing books on loan from the library. That’s the Scotsman in me. Besides, my mother was Greek and even for a half Greek if you can’t sit in a coffee shop bouncing ideas off the other Scottish-Greeks then life is not worth living.
That’s not to say coffee shop investing doesn’t have a dark side. Sitting in coffee shops I often see and hear other couples discussing investing. One person always seems to be trying to pass a pen into another younger person’s hand and get them to sign up for an investment of some sort. I’m always suspicious. Is someone about to be a victim? It’s hard resisting the urge to interrupt their conversation and warn the perceived victim.
So where did I find myself in mid January? You guessed it, sitting at a table with three other people, filling out forms and teaching them how to start a DRIP portfolio through MoneyPaper Magazine. Now I suspect everyone else in the coffee shop thinks I’m the victimizer.
What brought everyone together was David Stanley’s January 2005 article DRIPs – Your Non-RRSP. Each of the three persons at the meeting had talked about starting a DRIP portfolio for years. What caused them to finally take action was reading the outstanding results David achieved with such a passive approach. I decided to take a closer look at David’s results (with his permission of course).
Looking at Dave
In the January 2005 issue of MoneySaver David Stanley reported a 182.49% gain on a twelve company DRIP portfolio he started with individual lump sum investments. Dividends for these companies were reinvested but no further optional contributions or purchases were made. The average investment was 2867 days which is approximately equivalent to 7.85 years. Taking the total return of 182.49% and discounting over 7.85 years gives an average annual return of 14.14%.
If the US companies are removed then the total return on the Canadian companies alone is 206.66%. Discounting back 7.85 years the average annual return on the Canadian companies rises to 15.34%.
While David Stanley’s approach is passive my own portfolio is more active because I make monthly contributions and purchases through each company’s stock purchase plans (SPP). This portfolio is also more aggressive as optional contributions are slanted to the more out of favour companies within the portfolio. Also, the size of any optional contributions varies from month to month.
As the investments were made monthly over time rather than at a point in time an estimate of the period of full investment was necessary. On a pure average basis of the full investment period my Canadian DRIP portfolio had an average annual return of 15.98%. This corresponds well with David’s results. However, after the tech bust I began to make significantly greater optional contributions. Therefore, the period of full investment for the portfolio is shorter than the average period. This makes determining the period of full investment difficult. However, conservatively removing a half year from the period of full investment boosted the average annual return to 18.9%. Whether that is because lagging companies were favoured or by chance alone is not possible to say.
It’s important to recognize that because of the constant contributions, whether they were invested at the beginning or end of the month and variations in contribution size there is considerably more error in determining my annual rate of return than for David’s portfolio. What is seemingly easy to say is that over time it is possible to make excellent returns in the 15% to 19% range with boring DRIPs.
Reading the Paper
While waiting for the others to arrive at the coffee shop meeting I was reading a newspaper article on whether it was better to invest in index funds or exchange traded funds (ETFs). The gist of the article was that the extra costs of an index fund’s average 0.94% management expense ratio (MER) was detrimental to one’s financial health compared to lower cost fees of ETFs. A cost analysis comparing returns over a ten year period roughly corresponding to David Stanley’s 7.85 year period was given. Also mentioned, but not calculated, was the 2.5% MER for the average Canadian equity fund.
The article gave a figure of 10% as the return over the period. This meant that an ETF is expected, after expenses, on average to return just under 10% a year, an index fund around 9% and the average Canadian equity fund 7.5%. Yet, the most boring form of investing (aka DRIPs) returned more than 15% to David Stanley and possibly as much as 19% to me. The moral of this little story is that with little effort and a passive approach David Stanley, at the bottom end of his return, outperformed the client’s expected return on the average Canadian equity fund two to one.
David, we of the cult of DRIPpers salute your recent and most boring article. Please continue to bore us in this manner as much as possible. Besides, one writer whose name I do remember is Peter Lynch who once said about investing:
Boring is Good!
Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 firstname.lastname@example.org. Robert Gibb is a retired school teacher. He gives seminars on dividend reinvestment plans. Mr. Gibb is a frequent contributor to Internet DRIP boards under the nickname OperaBob.