Derek Foster needs no introduction! He quit the rat race at 34 and became a millionaire using simple investment strategies. He shared his unique approach in his five National Bestselling Books, including STOP WORKING: Here’s How You Can, and The Idiot Millionaire.
Derek also offers regular financial tips in Canadian MoneySaver Magazine and he has been featured in various media across Canada. When not writing or giving public speaking presentations about investing, Derek spends his time with his wife and five children (which can be quite a handful). Love him or leave him, Derek Foster is an inspiration to many investors using a dividend focused strategy to fund their (hopefully early) retirement.
I was really impressed with Derek’s ability to answer my questions in such depth and candor, without prior review. I really appreciate him taking the time. I hope you enjoy my Friday the 13th Interview (in 2 parts) with Derek Foster:
Hi Derek, I wanted to say thanks very much for taking the time out of your busy schedule to come and visit the Dividend Ninja. I know many of my readers, as well as divided investors whom you’ve inspired will really enjoy this interview. It’s a real pleasure, so thanks again!
Thank you as well, and cool name for the website by the way!
Thanks Derek! You mention to readers you are Canada’s youngest retiree at 34. Even if you started investing in your early 20’s, and ate nothing but Mr. Noodle for days on end, or didn’t feed your kids, how did you do it?
When I started I was a cheap kid! You know how kids got their allowance and they would run off and get candy for $2 bucks or whatever. Well I saved. I remember when I was 10 or 12 and I got my first thousand dollars – I was really proud I saved that up. As a young kid I had a propensity for saving. When I was in university I had about $15K or something, but once I graduated I was very focused on saving.
But to be honest, and this is not an approach I would recommend most people do, but I also used margin. The 1990’s were a phenomenal time to be in U.S. stocks, and I did very well. If I was to take a time machine and go back, I wouldn’t have taken on that risk.
So this is also a good time for Canadians to be buying U.S. Stocks, isn’t it? Especially with the Canadian Dollar doing so well. I just piled up on McDonalds at $75 and wishing I bought JNJ as well. What are your favourite U.S. Stocks, and which ones would you definitely avoid?
I’m not a very smart guy, so I look for simple things, something I can understand. Things like Colgate Toothpaste, Coca-Cola, JNJ, things that I can see touch and feel. So those are the stocks I gravitate towards. I would totally avoid anything that’s dependent on the economy. Airline stocks are the worst I can think of. You know like automotive stocks are terrible, I mean they had to be recently bailed out of bankruptcy with government money. And to be honest I’m a technological idiot, so anything technology based I don’t touch. I might miss out on some opportunities, but so be it – I just don’t go there.
(Derek and I also discuss the U.S. banks in Part-2)
But yes I agree with you wholeheartedly 100%, that U.S. Stocks have been a wonderful place to invest in for a while, because our dollar is so strong. However, I did my buying a while ago, and I’m just finding the prices are creeping up a bit. But yes there’s been a huge and phenomenal opportunities in U.S. Stocks, until recently. If you do the comparison on some of those stocks, you can pick them up cheaper than the March 2009 lows, in Canadian Dollar terms I mean.
That’s an interesting thought, I never looked at it that way. It’s like getting a 5% discount isn’t it?
Absolutely! I bought more shares of Wal-Mart recently, and it’s cheaper if not similarly priced to what it was two years ago in March 2009. JNJ was cheaper, and a whole bunch of them.
Derek, I just finished perusing your recent article in Canadian MoneySaver, “Inflation is coming -What’s your best investment.” You discuss the concept of Pricing Power. Can you elaborate on that point for readers who aren’t familiar with the Jargon? And why would those stocks would be good investments in an inflationary economy?
Pricing Power allows you to increase your prices with at least the rate of inflation, preferably even more. So certain products have pricing power and certain products don’t. So again, this comes back to the brand idea to a large extent, or something that people require. So as Warren Buffet describes – something with an economic moat of some sort.
A perfect example is Coca-Cola because it’s a product that really hasn’t changed over time. So if you’ve ever seen those old retro-signs where it says “Drink Coca-Cola 5¢”, well a Coke was $.05 cents. Now a Coke is $1.50, so over the long term they’ve definitely kept up or more than kept up with inflation.
Absolutely! But if people are going to have less purchasing power with inflation, then why would consumer staples be better stocks?
I think over the long term wages tend to keep up with inflation. So people can still buy as many products and services. And the things they buy methodically, they buy if they need it. You don’t really give much thought to getting up and brushing your teeth in the morning, but you do it. If you’re in the supermarket, and you see a tube of toothpaste you recognize that is $1.29 and another brand that is $0.89 cents, people will dig a little deeper and afford the extra $0.40 cents, because their teeth are so important to them.
That leads me into your latest book “The Idiot Millionaire.” I noticed you shifted your holdings in your Portfolio Update chapter from higher paying dividend stocks and income trusts to larger cap and lower dividend yield companies.
Is part of that due to the recent conversion of Income Trusts into corporations, or just that the big dividend payers are safer? Or are you going for dividend growth instead of higher yield?
OK, there’s a couple of factors here. Number one to be as honest as possible was a bad move on my part to a point. At the time I was trying to shift out and shift back into the market at a better price.
But the big thing for me is that when I first stopped working and created my portfolio to stop working 5 or 6 years ago, I needed the dividend income to live. I also needed the higher yielding securities. And of course the income tax rules at that time for Income Trusts. The tax rules for the Income Trusts have changed now. I needed those higher yielding vehicles in order to have a reasonable retirement income, for the Stop Working strategy.
Well now quite honestly, I mean I’ve written five books. They are all best sellers and I’ve made a few bucks dong it. So from a tax perspective it makes a lot more sense for me to be perfectly content with a much lower dividend yield, with more dividend growth over time. That strategy simply makes more sense for investors who have other sources of income.
So the question is, why bother going for high-yield in the first place? Why not just buy the big dividend blue-chips to begin with? Do you think that would have been a better strategy from the start, and that you would have had more portfolio growth?
That’s a really difficult question to answer, because it really depends on what you are trying to accomplish. I’m a lazy guy (laughing) and I wanted to stop working and have the freedom as soon as possible. And that would have not been achievable by buying the companies with lower dividend yield, even though they did have more growth.
Monetarily I’m not sure, because many of the income trusts I bought in the very late 1990’s. If you recall everyone was enamoured with tech stocks at the time. And Nortel’s market capitalization if you can believe was bigger than the major 5 banks in Canada. It was $200 billion dollars or something ridiculous, and people were chasing JDS Uniphase, and there was a whole bunch of the dot-com companies as you know. And during that time you could pick up income trusts for incredibly cheap prices. So I did reasonably well on those.
That really leads into my next point about Nortel and those kinds of stocks. You are always going to have companies like that in the index. Is that your main reason why you’re not a fan of index investing?
That’s a big part of it, of course, because certain companies are going to be over weighted. And especially in the Canadian Index, because we don’t have the same depth as the U.S. market. You know we have financial services, resources like oil and gas, and a splattering of other things. But it’s really tilted in certain industries by doing the indexing, and yah you’ll find the hot companies monopolize the index. I think Nortel at some point was 30% of the index, or something like that, which to me is a complete overweighting obviously.
And the second reason is habit. I tend to be a creature of habit, and I don’t change very quickly. I started buying stocks in my 20’s and that’s what I’ve been doing for 15 or 20 years. You know “ if it’s not broke don’t fix it.” Buying individual stocks works pretty well for me. So I stick to it
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In Part -2 of my interview with Derek, we discussed: the risks of a 100% equity portfolio, bonds, and the impact of dividend cuts. Derek gives his screening criteria for stocks, and what he learned from the 2008 and 2009 financial crisis.
Don’t forget to read the next half of the interview! Continued in Part-2 …
Derek Foster’s Books
Derek Foster is the author of five National Bestselling Books:
- STOP WORKING:Here’s How You Can!
- The Lazy Investor: Start with $50 and no Investment Knowledge
- Money for Nothing: And You Stocks for FREE
- STOP WORKING Too: You Still Can!
- The Idiot Millionaire