As I write on The Dividend Guy Blog, I notice that many young investors are starting their investing journey and looking for answers. If you are interested in investing for dividends but you have less than $10,000, you might think that it’s not enough. You might be tempted to wait longer in order to build a bigger portfolio before starting to invest in the stock market.
However, if you are putting your money in an ING savings account for 4 years, you won’t be getting much interest and you will be stuck with the same problem (unless your savings’ habits are impressive!). I personally think that you can start investing in the stock market with less than $10,000. Here are a few tricks to start your investing journey with a small portfolio:
#1 Use DRIPs
Dividend reinvestment plans (DRIPs) are awesome since they allow you to reinvest the dividends issued by a company back into its shares. This allows you to grow your position in the same company without incurring additional transaction fees. On top of that, this also gives you the opportunity of not leaving a small dividend payout of $15 for example in your cash account, waiting to have enough liquidity to buy another stock.
#2 Invest for the Long Term
If you have a small portfolio, don’t try to make it big with day trading. In fact, day trading is pretty dangerous and it’s even worse when transaction fees eat up a good part of your yield. Buy shares that you intent to hold for several years. The dividend payouts along with capital growth will compensate for your transaction costs.
#3 Compliment Your Investments with ETFs
You are going to tell me that it’s hard to be diversified if you have $5,000 to invest (once you have bought 3-4 stocks, you are pretty much to the maximum of your capacity). This is why I would suggest that you buy maybe 1 or 2 stocks and compliment it with diversified ETFs (either a dividend or stock market ETF). This will allow you to keep a decent diversification within your small portfolio with little cost.
If you are saving money on a monthly basis, I would advocate selecting an index mutual fund or an index ETF that allows systematic investments. This will decrease your trading fees once again and you will be able to invest your savings right away.
#4 Be Careful With the Choice of Your Brokerage Account
If you are going to open a brokerage account to invest, be careful to review each brokers. Consider DRIP possibilities along with transaction costs. At the moment, you can find good deals at
Questtrade (For Canadians)
Zecco(for Americans)
and Tradeking (for Americans).
#5 Make one Trade at a Time
You don’t have much money to invest, don’t waste it. It’s not a bad idea to take your time and analyse each of your potential trades carefully. Take the time to run it through a dividend stock analysis template and look at the fundamental analysis. There is no such thing as rush or “time limited opportunities”. Remember, you are investing for the long term, don’t waste your time on speculative plays.
#6 Buy Small Lots
If you look at buying a few stocks with a small portfolio, I suggest you buy small lots (under 100 shares). If you look at my current holdings, I own several odd lots (25, 50, 48, 90, etc.). The important point is to have at least $1,000 invested in a specific company. Therefore, if you pay less than $10 per trade, this equals to a maximum of 2% management fee ($20 on $1,000) to buy and sell your shares. As long as you keep it below 2%, you are a winner compared to mutual funds ;-).
Final thoughts on dividend investing with a small portfolio
As I have mentioned before, I think that it’s important to invest as early as possible. However, since you can’t diversify a portfolio of $5,000 with only stocks, adding an index fund or index ETF would be a wise thing to do. In fact, I think that you are better off starting with a small portfolio. Therefore, if you make an investment mistake, it won’t cost you much (imagine losing 30% of a 100K portfolio? I think you are better off losing 3K out of 10K! ).
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I use Fidelity for my brokerage account because it allows automatic reinvestment of the dividend without any transaction costs.
Dividend Guy,
Do you not think it is a bit of an abuse of your position to only recommend Questrade as a discount broker and not disclose what type of arrangement you have with them? Readers should be informed what type of bias you might have when reading the article.
Balk
@Balk,
Abuse? I don’t think so. Questrade is one of the cheapest brokerage account you can find on the Canadian market. If you have one that is cheaper, please let me know and I’ll include it in my post. It is true that if someone open a Questrade account through this link, I will make money, but Questrade is still a cheap brokerage account.
It’s not a Questrade review, I am just suggesting this discount broker because it’s cheap and we are discussing a small portfolio. I wouldn’t suggest a bank brokerage account since they charge around $10 per trade or higher. I’ll be happy to have your suggestions for cheap Canadian discount brokerage account.
cheers,
Mike.
landed here from a link. well written however youngsters need to keep some money out of this $10k in fixed deposits like CDs as well to diversify risk.
This is some of the best advice for investors of all ages just starting to save. Very well done. No pie in the sky, just good common sense.
I use Sharebuilder; they offer automatic dividend reinvestment at no cost & $7.95 per trade.
I started investing in stocks with about $5000 many years ago. Yes, I’ve made mistakes but it’s the only way to make serious returns on your savings.
What if I use my first $1000 to purchase a stock. Than if I have another $1000 1 or 2 months later to purchase my 2nd stock?
It’s not that I only have $1-2k, But I am only moving $1000 into my brokerage account at a time from my savings account. I realize that if that first stock were to drop 30%, I would lose 30% of my portfolio, but I am in it for the longrun and I would wait for it to recover. In the meantime purchase another pick that I have analyzed.
I think your method may be good if I only had a small total amount of cash saved, but since I have a much larger amount, I don’t believe it matters that I make my first purchase into 1 stock, and diversify from there. Have to start somewhere right?
@Future Money-Bags,
If you start with 1K, I would be tempted to invest in a more diversified ETF (with periodic investment) until I reach 5K and sell a part of it to buy my first individual stocks. This will increase your chance to have a better yield over time.
however, buying one stock, if you are right, can be a good strategy too ;-). In order to build your next 1K to invest, I would suggest you put a systematic investment into either a ETF or a ING type savings account.
cheers,
Mike.
Mike, just to add on to your conversation with Future Money-Bags: This is something I’m wondering too. With stocks, after you’ve made a gain some people recommend taking some profit off the table and playing with the house’s money.
What stage does a dividend investor do that (take out some of the initial capital take over and just allow compounding to work its magic) or is it not done at all?
@Daryl,
this is a very interesting question. If you are investing in dividend stocks, you should not get huge growth and be able to “play with the house’s money”. You will usually see such technique (selling to get your original money back) when you pick growth stocks.
For example, in my holdings, I would be tempted to sell a part of my shares of VNP since I’m making a lot of money on it. On the other side, even if I make 10% yield on HSE or CVX, I will keep them as 10% is not enough to make me change. You are better off holding the stocks longer in order to enjoy its dividend 😉
With a dividend portfolio, I like to reinvest my dividends. Then, it is the power of compounding that will really grow your earnings, since each future dividend is paid on the larger amount of shares.
Mike,
Thanks for answering my question and that makes a lot of sense! Love the blog and will keep reading =)
@Mike
That does make sense. I could keep my current buy list on watch while I look for a good ETF with a good track record and at least 3.5% dividend.
I have setup my brokerage at QT for their low $4.95/commision. I want to use this broker for dividend stocks, I already have a small bi-weekly Pac plan that I am increasing contributions on in my TFSA.
The reason I am only starting with $1,000, is because I believe buying that much of each stock is a good starting point; Also meaning the commission will only be 0.5%. Than when I see a good buying opportunity, I will make the next purchase. If for example I see 5 good opportunities in 1 month, than I will invest $5k.
@future money Bags,
I think you have a good setup. paying less than 0.50% in fees is smart over the long run.
good luck!
How do you make this process scalable? I want to go from part-time trading to full-time trading. Thank you in advance, and this is a great article!
MM
Just to point out, in the post you mentioned that $10/trade would be 2% of $1000, and future money bags also said $5/trade for commission of .5% (1% for both ways). This is only assuming you sell after one year. If you can manage to keep these holdings for 2 years, the commission rate gets slashed in half. I think- am I missing something else?
Second of all, most of the financial blogs I’ve found through this blog and similar ones seem to be from Canada, not that there’s anything wrong with that. I’m not the only one from south of the border reading here, right?
Either way, I like what you do, and very much appreciate it. Thanks!