Hi Child Millionaire readers.

 

Just a quick apology for the lack of postings over the past 12 months. I’ve been busy holidaying in Greece, moving houses twice, moving countries once, selling a buiness, buying some land, designing a house and setting up a whole new life.

 

I’ll be back to posting soonish with updates on Mia’s portfolio [she is now 3!] and a load of new Child Millionaire investing ideas.

 

In the meantime, if you are still procrastinating on setting up your Child Millionaire portfolio please go back and read my 4 step Minting a Child Millionaire short course and make it happen!

Cheers!

Rob

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Having followed the previous steps and set-up a brokerage account, funded your Child Millionaire account and selected a single exchange traded fund (ETF), you are now ready to make your first purchase.

 

To spread the cost of the commission payable to the brokerage when you purchase the ETF, you will want to make purchases of at least £500 / $700 at a time. So assuming you are finding the account with a child benefit of £87.97 / $140 per month [£1056 / $1680 per annum], semi-annual purchases would be sensible once half the annual contribution has accumulated in your brokerage account from automatic transfers from your bank account.

 

So let’s assume you will make your first purchase today 29 January 2013 and you have £528 / $840 in cash in your brokerage account. Six months from now on 29 July 2013 you will again have accumulated £528 / $840 in the account and be ready for the second annual purchase.

 

Different brokerages have slightly different interfaces but they all have more or less the same features. Using TD Direct Investing (www.tddirectinvesting.co.uk) as an example, to make your first ETF purchase follow these steps:

 

1)      Login to your brokerage account.

 

2)      Verify your cash balance of £528 / $840 by looking at your portfolio holdings.

 

3)      Select ‘place an order,’ which might be under a dropdown menu titled ‘trading’ or something similar.

 

4)      In the ‘place an order’ dialogue box, fill in the boxes. Select the relevant market, in my case it would be ‘UK Equities’ and enter the ‘stock symbol’ (also called the ‘ticker symbol’) for the ETF you have chosen. In my case I’m purchasing the iShares UK Dividend Plus ETF for my Child Millionaire portfolio so the ticker symbol is IUKD. Click on ‘buy’ and the system will retrieve the current market price of the ETF shares, which in this case is 803 pence per share. Select ‘amount in currency’ and fill in £528. The ‘order type’ is ‘market’ which means the current market price and then click on ‘preview order’. You may have to tick a box verifying that you have read the fund prospectus [you will want to do this as part of the process of selecting your ETF, see Step 3]. In the preview box I see that I’ll be able to purchase 64 shares at a market price of £8.04125 costing £514.64. The commission will be £12.50 so the total cost is £527.14 of the £528 in the account. The spare £0.86 will remain in my account until my next purchase. Click on ‘place order’ and the order will be instantly executed. I now own 64 shares of IUKD.

 

That’s it.

 

Depending on the ETF, dividends will be automatically paid into your brokerage account on a monthly, quarterly or semi-annual basis. In the case of IUKD the dividend distributions are paid quarterly.

 

To automate the Child Millionaire portfolio there are two more steps.

 

1)      Set-up automatic share purchases.

 

If your brokerage account allows (TD Direct Investing does not) set-up another identical purchase to happen for £528 / $840 six months into the future on 29 July 2013, and every six month thereafter. Otherwise put a reminder in your diary, phone etc. to make another purchase every six months from your first purchase date, moving any weekend dates to Fridays or Mondays. It will take all of five minutes to do this.

 

2)      Automate the dividend reinvestment.

 

This step is absolutely vital to the long term compounding effect necessary to create a Child Millionaire. You must reinvest all dividends paid by the ETF into your brokerage account into further shares in the ETF.

 

If you chose an ETF that automatically reinvests dividends then you don’t need to do anything.

 

If you have an ETF that distributes dividends as cash then you will need to reinvest the dividends yourself. To do this, find the tab in your brokerage account for ‘dividend reinvestment’ and select ‘reinvest dividends.’ With some brokerages this service is free, with others there is a small commission charge, perhaps £1.50 / $2. Some brokerages require you to phone and set this up so do this immediately.

 

If for some reason you can’t set-up automatic dividend reinvestment for an ETF then you will have to reinvest the dividends manually. You can do this by simply investing the full cash balance of your account every six months as any dividends will be accumulating in the account as cash.

 

In the early days when the portfolio is tiny the dividends might not be sufficient to automatically purchase additional units or the small commission charge might eat up all of your dividends. In this case manually investing the dividends as part of your semi-annual ETF purchase will do the job for you.

 

That’s it. Simply make two purchases a year taking 10 minutes, let the dividends accumulate and be reinvested automatically or manually every six months, ignore what the market does, and forget about it. There is absolutely nothing else to do.

 

Congratulations on minting a Child Millionaire!

 

Actions:

 

1)      Make your first ETF purchase.

 

2)      If possible automate the semi-annual purchase and dividend reinvestment.

 

Return to:

Minting a Child Millionaire in 2013 Step-by-Step Series Overview

Step 1: Open an Investment Account with a Discount Broker

Step 2: (Near) Painless Funding the Child Millionaire Portfolio

Step 3: The Only Investment You Need to Purchase

 

Coming next:

 

How much will my Child Millionaire portfolio be worth in the future?

 

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So having followed step 1 and step 2, you now have a discount brokerage account open for your Child Millionaire portfolio and you’ve set-up an automatic monthly deposit for any child benefit or equivalent amount (£87.97 / $140 US or CDN per month) saved by axing the morning lattes. So cash will now start accumulating in the account each and every month.

 

We’ve now reached the crux of the issue. What investment(s) should you purchase to build a hands-off, automated Child Millionaire portfolio?

 

In The Child Millionaire I devote quite a lot of time to this question. There are basically two options. The first is to buy shares in individual companies, specifically Dividend Aristocrats. These are companies that shell out profits to shareholders in the form of dividends, and most crucially, they have a track record of raising the dividend each and every year for at least 25 years.

 

The second option, which is the one I’m advocating for this lazy person’s automated Child Millionaire portfolio, is to purchase an Exchange Traded Fund (ETF) comprised of Dividend Aristocrats.

 

ETFs are funds that pool the money of many thousands of individual and institutional investors. ETFs trade on the large stock exchanges just like a regular stock, so they can be bought and sold in seconds at low commission rates and they are highly liquid.

 

Although they pool money, ETFs are designed to track various sectors, investment themes or entire stock market indices, and thus there is little, if any, human stock-picking prowess or folly involved.

 

ETF do this by automatically purchasing a selection and proportion of stocks that matches those tracked by a given index such as the FTSE 100 or S&P 500. Thus the cost of running an ETF is very low because there is little research, work and management compared to an ‘actively managed’ mutual or unit trust fund. This low cost is reflected in the very low annual management fees, referred to as ‘Total Expense Ratio’ or ‘TER’, which are generally 0.2–0.65% per annum.

 

So what we want to do is choose one single ETF that does the job, buy it, reinvest the dividends and forget it.

 

So what to buy?

 

Not surprisingly, most Dividend Aristocrats are American companies and trade on US stock exchanges so the best ETFs are US-listed. However if UK or Canadian residents buy US-based ETFs (or shares) they lose 30% of any dividend to US withholding tax. This can be reduced to 15% by submitting a W-8BEN form to your brokerage. Either way the withholding tax will reduce your overall return but it might be worth it to access US markets.

 

However, if this smacks of effort then it’s ok to use a domestic ETF that does more or less the same job. Here are good ones to buy, follow the links to read the details. Note that I receive no compensation for mentioning these ETFs.

 

US residents

 

SPDR S&P Dividend ETF (SDY)

 

This ETF owns shares in all of the companies comprising the S&P Dividend Aristocrat index.

 

UK residents

 

iShare FTSE UK Dividend Plus (IUKD)

 

Trades on the London Stock Exchange (LSE) and tracks an index of the highest yielding companies on the LSE. Most aren’t technically ‘Dividend Aristocrats’ but this is the best you can do in the UK.

 

Or

 

iShares S&P 500 (IUSA)

 

Trades on the LSE but owns shares in the 500 companies comprising the US S&P 500 Index. Here you get the dividend aristocrats along with a few hundred others that aren’t so aristocratic. As this trades in London there is no need to pay attention to withholding tax issues as they are handled by the ETF internally.

 

Alternatively you could purchase the US ETF above, complete a W-8BEN form and accept the fact that 15% of you dividends will be withheld by US Internal Revenue Service

 

Canadian residents

 

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CUD)

 

Trades on the Toronto Stock Exchange (TSX) and owns shares in all of the companies comprising the Canadian Dividend Aristocrat Index. As there isn’t as much depth of companies in Canada the bar is lower than the US Divided Aristocrats but it’s still pretty solid.

 

Or

 

S&P US Dividend Growers Index Fund (CAD-Hedged) (CUD)

 

Trades on the TSX and owns the shares in the US Divided Aristocrat Index. A good option for Canadians who want to own the top dividend payers in the US.

 

Action

 

Choose one ETF depending on where you live, that will comprise your Child Millionaire portfolio.

 

Next: Minting a Child Millionaire Step 4: How to Buy an ETF Investment and Mint a Child Millionaire

 

Return to:

Minting a Child Millionaire in 2013 Step-by-Step Series Overview

Step 1: Open an Investment Account with a Discount Broker

Step 2: (Near) Painless Funding the Child Millionaire Portfolio

 

Disclosure,  I own units in:

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CUD)

S&P US Dividend Growers Index Fund (CAD-Hedged) (CUD)

 

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