How I Used 12 Simple Rules to Grow a 6 Figure Portfolio From Dividend Value Investing

Kanwal Sarai

Canada
Stocks
Long-Term Investor

Who are you and what’s your story?

I’m from Canada, my name is Kanwal Sarai and I am the founder of Simply Investing (SimplyInvesting.com). I’ve been a dividend value investor for more than 20 years, and in 2007 I began teaching dividend value investing.

Here’s how I got started and went from being dependent on financial advisors to being independent, from losing money to making money.

I bought my first term deposit in 1988, back then I was still in high school, I used the money I had saved up from summer jobs and part-time work to buy my first term deposit.

Fast forward, I graduated from university in 1996 with a degree in Computer Science. I got a full-time job as a software tester and continued to invest in mutual/index funds and ETFs because that’s what my parents did, and my financial advisor told me to invest the same way.

I invested like everyone else, I never questioned if there was a better way. I just did what everyone else was doing, I diligently started buying mutual funds every month within my RRSP (similar to 401k) and outside of my RRSP. I watched the performance of my investments go up and down every year.

Over the course of 10 years I had a number of different financial advisors and financial planners. The so-called “experts” advised me each year to take money out of the poor performing mutual funds and buy mutual funds that had better performance in the previous year.

I did not know it at the time but this constant selling (low) and buying (high) was detrimental to my portfolio, and the fees (MERs) made things worse.

After 10 years I did not have much to show for my investments, but I held on to my funds.

In 1998, friends, colleagues, and family members started talking about technology stocks.

Do you remember the technology bubble in 1998-2000?

During the tech bubble it seemed as though every technology company’s stock (eg: Amazon.com, Yahoo.com, Worldcom, Nortel, Cisco…) was going through the roof.

You could literally buy a stock on a Monday for $25 and sell it on Friday for $30-40.

How could you possibly lose money in a market like that?

I waited a few months, but it looked like people around me were making lots of money.

So without any knowledge, or research, or investment education of any kind, I went out and bought some stocks in technology companies.

I basically bought these stocks based on “hot” tips from family, friends, and “experts” on the internet.

Everyone knows what happens to a bubble when it gets too big

Dot Com Crash

By 2000-2001 the technology bubble burst, and every one of my technology stocks went down and down. I panicked and sold some stocks, but kept the others and watched as they declined in value.

At this point I realized that for me to become a successful investor I had to change what I was doing. Blindly following other people’s advice was clearly not working. I lost money with funds and I lost money with stocks.

I figured there had to be a better way, I had to start with a clean slate, and anything was possible, perhaps real estate, starting a business, or going back to school would be a better investment.

I decided that I needed role models:

  • People who were consistently financially successful year after year after year over the long-term (20, 30, 40 years)
  • People who did not inherit any money, win the lottery, or have rich parents

After I found these role models my goal was to:

Step 1: Learn exactly what they did to become successful

Step 2: Copy and implement what I learned in step 1. I started to research, interview investors, and read as much as I could about investing. After a while I noticed a common thread in all the books I was reading:

  • All the authors advocated investing on your own in quality stocks
  • The value investing approach consistently made money over the long-term, and provided greater returns with less risk, and less work, when compared to other investments like running your own business, real estate investing, running a franchise, or running a restaurant

Equipped with my new found knowledge I decided to try investing in stocks again. But this time I would do my homework and focus on quality stocks when they were undervalued.

I still kept my mutual/index funds on the side just in case the stocks did not work out. I also decided to track every penny I invested and the performance of my stock portfolio.

I wanted to prove to myself that the value investing approach worked, if not I would sell the stocks and probably keep my money in term deposits or bonds, or just in a savings account.

It took me about 3 years through trial and error, and further research and refinement to feel 100% comfortable investing on my own.

At this point I still wasn’t fully convinced that my dividend value investing approach was the best approach. During this trial and error period:

  • I tried growth investing, investing in stocks that I thought would grow quickly
  • I bought and sold stocks too quickly
  • I owned a few stocks that split (2 for 1) and I immediately sold them
  • I sold stocks that gained 15%-20% thinking it was a good idea to take in quick profits
  • I invested in non-dividend stocks (mostly technology stocks)
  • I took investing advice from business magazines or newspapers

I learned over time that these approaches were not the best for me in the long-term, they were also time consuming, and were risky.

Eventually, I could also see that my stock portfolio was doing extremely well, much better than my funds. Over time I slowly began selling all of my funds, and began growing my stock portfolio.

This experience taught me 3 things:

  • At the end of the day financial planners, advisors and experts are mutual fund sales people who work on commission. Their interests may not align with yours.
  • No one cares more about your money than you do.
  • It is very easy to invest on your own; you just have to have the right knowledge. It’s not difficult to learn how to become a successful investor.

Today, my passion for investing and teaching allows me to teach people just like you how to invest successfully, reduce your risk, save time, and earn more.

What do you invest in and why did you start investing?

I prefer to invest in dividend-paying stocks, but not just any dividend paying stock. The stock must be undervalued and be a quality stock.

How do I determine “value” and “quality”?

Easy, before I invest in any company I apply my 12 Rules of Simply Investing.

From 2004 to 2007, I read every book I could find on Warren Buffett, Benjamin Graham, and value investing.

I spoke to other investors, and through trial and error, and collecting and reviewing the data from my investments I refined my approach and came up with these 12 Rules of Simply Investing:

  1. Do you understand the product or service offered by the company?
  2. Will people still be using this product or service in 20 years?
  3. Does the company have a low-cost durable (lasting) competitive advantage?
  4. Is the company recession proof?
  5. Has the company had consistent earnings growth? The EPS growth must be at least 8%
  6. Has the company had consistent dividend growth? The dividend growth must be at least 8%
  7. Does the company have a low payout ratio? Payout ratio must be 75% or less.
  8. Does the company have low debt? Debt must be 70% or less.
  9. Does the company have a good credit rating? Company must have a minimum S&P Credit Rating of “BBB+”.
  10. Does the company actively buy back its shares?
  11. Is the stock undervalued?
    a. The P/E Ratio must be 25 or below.
    b. Is the current dividend yield higher than the average dividend yield?
    c. The P/B Ratio should be 3 or less.
  12. Keep your emotions out of investing. A reminder to keep emotion out of the selection process. Discipline and patience are the keys to successful investing.

My 12 Rules are designed to minimize your risk and maximize your gains for the long-term and they have become my guiding principles for more than 20 years now.

My current portfolio is 6 figures in size, but more important than the value of my portfolio (which changes daily every time a stock price changes), is the amount of income (via dividends) that is being generated annually.

Since I started investing in individual stocks, the income from my portfolio has increased consecutively for more than 20 years.

I started investing because I realized that I did not want to work 9-to-5 each day, and report to a boss/manager, and get 2-3 weeks vacation each year, for the next 50 years.

Financial freedom, and freedom of time was more important to me than holding down a job for 50 years. I also wanted to help people directly, and my day-job was limiting the amount of people I could help each year.

My first stock purchase was Nortel, and everyone knows what happened to Nortel after the technology bubble burst in 2000. Nortel went bankrupt and my shares were worth $0.

The biggest lesson I learned was: never buy stocks without understanding the company, what they do, what is their financial health, what is their debt level…..basically my experience with Nortel led me to design my 12 Rules of Simply Investing, so that I would not make the same mistake again.

Walk us through your process of identifying and executing on investment opportunities?

My investment philosophy is to invest in quality companies when they are undervalued. My 12 Rules of Simply Investing (list above) help me to determine when a company is a quality company and when it is undervalued.

With the 12 Rules I can quickly identify if a company is financially healthy or not, and I can determine if it’s dividend is strong and has the potential to increase in the long-term.

I typically hold stocks for 10, 15, 20 years or more, as long as the dividend grows each year and the company is still a quality company I will continue to own its stock.

The longer you hold on to quality dividend-paying stocks the greater the benefits to you, let me show with with a personal example of mine:

  • In 2000 I purchased 185 shares in TC Energy (TRP), the dividend at the time was $0.80/share, with a share price of $13.40 my total investment was $2479
  • Today, the dividend is $3.24/share which represents an annual dividend yield based on cost of 24.2%
  • Since I’ve owed TRP I have received over $6179 in dividends

As you can see from the example above the dividends alone have more than covered my initial investment in TRP, which has reduced my risk to zero. This year TRP will provide me with $599.40 in dividends.

The truth is my TR invested has provided me with more than $6179 in dividends, because over the years I took the TRP dividends and invested them into other stocks that have provided me with increasing dividends each year.

These 3 skills/habits have helped me to become a successful investor:

  1. Knowledge: the first key to investing is to understand how to select quality stocks when they are undervalued. Which is why my life’s mission is to educate people on how to invest responsibly.
  2. Patience: patience is key in order to become a successful investor. You have to have the patience to wait for quality stocks to become undervalued, and the patience to ride out market downturns.
  3. Discipline: you have to have the discipline to apply the 12 Rules of Simply Investing. Without discipline you will find yourself chasing after the latest hot stocks, and making decisions based on emotions rather than financial data.

Since you first started, what have you learned that has had the biggest impact on your success and the growth of your portfolio?

As discussed above my best investment was in TRP that I made back in 2000.

My worst investment is the one I discussed above in Nortel.

After more than 20 years of being a dividend value investor, I can say that my best decisions have been the ones based on my 12 Rules of Simply Investing. Following the 12 Rules has allowed me to minimize my risk and maximise my gains.

My poor decisions were made early in my career when I did not have my 12 Rules of Simply Investing and I randomly bought stocks based on tips, hunches, and without any investing knowledge.

What tools, platforms or resources do you use for investing?

As a dividend value investor I could not find the right research tools to use, so I created my own called the Simply Investing (SI) Report.

In the SI Report I track over 240 stocks each month and apply my 12 Rules of Simply Investing to each stock. I use the SI Report to help me find quality stocks that are undervalued.

The biggest influence on me was this book:

The Motley Fool: You Have More than You Think, by David Gardner, Tom Gardner

Not specifically a value investing book, but it got me thinking differently about investing in stocks.

And here are other books I recommend in order of preference (Best to Okay):

The New Buffettology, Mary Buffet & David Clark

A step-by-step guide on how to go about selecting stocks just like Warren Buffet. Includes equations and formulas used by Warren Buffet in determining what to buy, what to sell – and when.

The Investment Zoo, Stephen A. Jarislowsky

An excellent investment guide, written in a clear and concise manner. Mr. Jarislowsky’s book covers the basics of value investing and teaches you what to look for and avoid in companies.

Value Investing Made Easy, Janet Lowe

A great alternative to the Intelligent Investor (see below), Ms. Lowe distills Benjamin Graham’s ideas into easy to understand concepts.

The Intelligent Investor, Benjamin Graham

Written by the father of value investing himself, this is the absolute guide to value investing. Benjamin Graham was also Warren Buffett’s teacher and mentor.This book originally written in 1949, covers all types of markets and gives detailed instructions on selecting stocks and constructing your own portfolio. This is a big book and difficult to read at times, recommended for the really dedicated do-it-yourself investor.

What advice would you give to someone who’s just starting out in investing?

My advice to anyone just starting to invest, is to learn how to invest, learn how to identify quality companies when they are undervalued.

Knowledge is the key, once you have the knowledge, only then should you go out and invest your hard-earned money. I created my SI Course to teach people how to invest, and focus on what is really important.

Once you have the knowledge, the next step is to focus on what really matters.

  • Is the company profitable?
  • Is the company recession proof?
  • Will the company continue to grow and pay dividends?

You have to remember to ignore the noise from the financial media. It is not the media companies job to make you wealthy, their job is to make profits for their shareholders, and they make profits by selling advertising space on their platforms.

Do not invest in stocks because you received a “hot tip”, or friend/colleague recommend the latest trending stock. DO your research and then make a wise investing decision.

Here are the three biggest mistakes investors make:

  1. Investing without knowledge
  2. Being greedy when stock prices go up and being fearful when prices come down
  3. Short-term thinking; it takes time to build an income generating portfolio, but if you’re patient one-day your portfolio will generate enough income (via dividends) to cover your living expenses, and when that happens you day-job becomes optional.

What investment opportunities are you excited about at the moment?

During this COVID-19 pandemic, recession proof companies (see Simply Investing Rule #4) are even more important than ever.

Recession proof companies have thrived in the last 9 months and have even increased their dividends (ABBV, HRL, JNJ, PG, TSN, YORW).

On the other hand companies like Boeing, GM, and Ford eliminated their dividends.

Right now I am interested in the following companies:

Can you share a story about an investment opportunity that you passed on and went on to grow beyond your expectations?

I guess I could say Tesla (TSLA), but then again I never would have bought it anyway because it doesn’t pass my 12 Rules of Simply Investing. But I remember the Tesla IPO price was $17, today the stock is trading at $650.

Where can readers go to learn more about you?

Readers can find me here:

Thanks to
Kanwal Sarai

 for doing this interview.

If you have any questions or comments, leave a reply below.

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