My Negligence Knows No Bounds

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

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

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?

 

Minting a Child Millionaire Step 3: The Only Investment You Need to Purchase

 

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)

 

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

So after following Step 1 you now have an account open with a discount brokerage in which to build your Child Millionaire portfolio.

 

If you haven’t opened an account yet then stop reading this post, return to Step 1 and take immediate action.

 

Ok, now that the brokerage account is set-up we need to fund the Child Millionaire portfolio that we are going to build.

 

The first questions you might ask yourself are: How much can I afford to contribute to my child’s portfolio? Or alternatively, how much will my child need to become a millionaire? Or perhaps even, where am I going to come up with the money?

 

How much you can afford is a personal question with a sliding scale from pennies to millions based on your means. How much you will need to contribute to make your child a Child Millionaire depends on the time horizon available and the probable rate of return.

 

Let’s set both questions aside for you to consider at a later point and look at how you can fund a Child Millionaire portfolio without cutting into your pay. We are going to do this by simply allocating the tax-free child benefit that you receive for your child to the portfolio.

 

In the UK, the base amount that every child’s parent receives for a first born is £20.30 per week (paid every four weeks) equalling £87.97 per month or £1055.60 per annum. There are additional child benefits available depending on circumstances but let’s ignore them and focus on the universal child benefit all families receive.

 

In Canada, the base amount varies by province and other factors such as income and eligibility for additional supplements and could range from say $75 to $300 or more.  For a middle income family $140 a month ($1680 per annum) is probably characteristic, so similar to the UK.

 

In the USA, alas there is no child benefit / baby bonus but there is a tax credit allowing for a refund of up to $1,000 from tax paid on income.

 

Few readers are actually likely to need child benefit money to get by on a day to day basis. More likely than not it goes into your bank account every month and gets spent without a second thought. If you don’t have access to a benefit or it is insufficient then you can almost certainly come up with a similar amount (£88 / $140 per month) by cutting out take-away coffees, fast food, smoking or some beers at the pub.

 

For the quick and easy Child Millionaire portfolio, we are going to funnel the child benefit into the brokerage account and add nothing else. Thus for the remainder of this series I’m going to assume that you fund your Child Millionaire brokerage account to the tune of £87.97 per month (£1055.60 per year) or the equivalent of about $140 per month ($1680 US or CDN per year).

 

Action:

 

Set-up an automatic monthly payment from your bank account into the brokerage account equal to the child benefit (or an equivalent amount) on the same day you receive the benefit or get paid. If you can afford to contribute more then go for it, but for the quick and easy Minting a Child Millionaire Series let’s assume you simply allocate the child benefit to the portfolio and add nothing else.

 

Do it NOW!

 

Next: Minting a Child Millionaire Step 3: The Only Investment You Need to Purchase

 

Return to Minting a Child Millionaire Step 1

 

Minting a Child Millionaire Step 1: Open an Investment Account with a Discount Broker

Don’t be frightened by this. It’s easy.

 

In order to make any sort of non-cash investment – i.e. shares, funds, bonds etc – you need to have a ‘brokerage account,’ which is simply an account with a financial institution that allows you to deposit cash into it via electronic transfer and to place purchase orders on global stock markets.

 

‘Discount broker’ refers to brokerages – companies that provide share / stock dealing – that don’t provide investment advice and often don’t charge annual maintenance fees and thus are much cheaper and better for the do-it-yourself investor. You want a discount brokerage account for the Child Millionaire portfolio.

 

Most people fail to take this first step, which is the most time consuming part of setting up a Child Millionaire portfolio in that it will take you an hour or two to organize. Do this NOW.

 

Most banks and dozens of investment companies offer brokerage accounts. What we want for the Child Millionaire portfolio is as follows:

 

1)      A low-cost ‘discount brokerage’ account, preferably one without any ongoing annual maintenance fees though it varies country to country whether you can find a no fee brokerage.

2)      Low commissions on purchases – look for commission charges under $20 / £15 per share/stock purchase transaction. Generally speaking US readers will get much lower rates than UK or Canadian readers.

3)      Look for a brokerage that allows you to purchase investments on global markets, not just your home country stock exchange, and generally avoid bank brokerages that only allow low-commissions on the bank’s own investment products.

4)      The brokerage account should allow you to make automatic monthly deposits from your bank account.

5)      The account must allow for automatic dividend reinvestment.

6)      Preferably the account is ‘tax-free,’ if allowed within your country.

 

Right now many of you are thinking that this is way too complicated and are losing the enthusiasm. Don’t give up. Opening the account is 90% of the battle.

 

In Canada and the UK I use TD Waterhouse as my broker (Canada: www.tdwaterhouse.ca and UK: www.tddirectinvesting.com, US: www.tdameritrade.com). However there are dozens of comparable brokerages.

 

The point is not to get bogged down by the baffling array of options. Simply choose a brokerage and get the account open. You can always switch brokerages later if you find a cheaper option.

 

You should be able to open the account in minutes though there might be some minor follow-up paperwork involving signatures, however the brokerage will tell you exactly what to do and send you the relevant documents.

 

Note that I receive no compensation from TD Waterhouse; I simply want to give you a one-click, low-effort solution to choosing a brokerage. TD’s fees are generally pretty low, though there may be cheaper options out there, so if you don’t want to do the research and feel your enthusiasm slipping, simply click on the applicable link above and start now. If you are from outside Canada, the UK or US, a quick web search for ‘discount brokers’ should get you started.

 

What’s in a Name?

 

A key issue is whose name should be on the account. Different countries have different rules on taxation on income generated by investments held for children. We don’t want to get bogged down in the detail here lest we lose the momentum to get the Child Millionaire portfolio off the launch pad. I’ll tackle some of the complexities of tax in later posts, however generally speaking your options are as follow depending on your country:

 

1) If permitted, set-up a tax-free account in your child’s name.

 

In the UK the new ‘Junior ISA’ allows investments to be held in a child’s name but the account is controlled by the parent and all investment income grows tax-free. Importantly, there is an annual limit of £3,600 that can be contributed by parents and once in the account, the money legally belongs to the child. Complete control over all money in the Junior ISA transfers to the child at age 18 and can be rolled into a normal tax-free ISA. Canada and the US do not currently offer tax-free options for children.

 

2) If there is no eligible tax-free account for children in your country then an ‘informal trust’ may be an option, provided it is allowed by your tax authority. Check to see whether the tax authority and brokerages allow for you to hold a brokerage account ‘in trust’ for your child.

 

In Canada, within ‘informal trust’ accounts, interest, dividend and foreign income remain taxable in the name of the parent while capital gains accrue to the child. Furthermore, tax is only payable by the contributor on income earned by ‘first generation money’ – i.e. money contributed by you not income earned on investment income. This can get complicated pretty fast once you start earning dividend income and requires detailed tracking of contributions and income.

 

3) Set-up a formal trust. In this case, the trustee (you or someone you appoint), controls the money, the account and can determine when, if ever, the money is transferred to your child. Trusts are eligible for forms of tax relief and are very flexible, however they are expensive and require expert legal advice to set-up and administer.

 

4) If neither option 1 nor option 2 is possible and option 3 is too complicated and costly, then the easiest solution is to open a brokerage account in your name, preferably using a tax-free shelter such as a UK ISA (this is how I hold Mia’s Child Millionaire portfolio), Canadian TFSA or US Roth IRA. Or you can simply use an existing investment account in your name and simply track the portion of the account that is devoted to the Child Millionaire portfolio.

 

For the purposes of getting you started, we are going to assume that you go with option 4 and simply open an account in your name but consider it privately to be for your child. If you already have a tax-free investment account with contribution room that you aren’t using then this is your best option. However bear in mind that if your child’s investments are mixed with your own in a single account then you will need to track them separately in a spreadsheet or ledger.

 

If your tax-free accounts have no further contribution room or such accounts aren’t available in your country, then you’ll need to open a regular discount brokerage account and report and pay tax on any investment income. In the case of the UK, tax will be automatically taken off by the financial institution.

 

If you are in the UK, consider a Junior ISA if you can find a brokerage that allows for stock/share purchases and dividend reinvestment within a Junior ISA account, and if you aren’t bothered by your child having control over their Child Millionaire portfolio at age 18.

 

Actions:

 

Don’t get discouraged or bogged down by the complexities of tax and the myriad options.

 

Research the lowest-cost brokerage account that allows for international share/stock dealing, regular contributions and cheap or free dividend reinvestment with the greatest tax advantage for your situation. Once you find the right brokerage open the account immediately. Once the account is open you are 90% of the way there.

 

Or, the lazy option:

 

Simply click on one of the links above for TD Waterhouse / TD Direct Investing / TD Ameritrade and open the account in your name and fine tune it for tax later.

 

Get to it!

 

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

 

Or: Return to Minting a Child Millionaire in 2013 Step-by-Step Series Overview

 

 

 

Minting a Child Millionaire in 2013

By now you’ve probably broken and dispensed with your 2013 New Year Resolutions. Fair enough. Wine is good and chiselled abs are for Hugh Jackman.

 

However before you toss ‘sorting out your finances’ onto the rubbish heap of ‘things-I’ll-do-when-I-have-time-meaning-never’. I’m kicking off 2013 with a series of blog posts designed to get even the laziest procrastinator (is there such a thing?) to take the vital step of setting up a Child Millionaire portfolio by the end of January.

 

The goals are:

 

1)      To provide you with step-by-step guidance for setting up a Child Millionaire portfolio in one day that requires one hour of maintenance per year.

 

2)      Costs you nothing out of your pay

 

3)      Will generate a portfolio in the region of £40-80,000 / $60-130,000 by the time your child is 18

 

4)      Will turn your child into a Child Millionaire by age 35 and multi-millionaire in his/her 40s.

 

That’s it.

 

One day and one hour a year to create a Child Millionaire and alleviate yourself from the years of work and toil needed to support your child later in life and to give your child unfathomable choices in life.

 

You need to do this NOW.

 

Before we look at how to setup the Child Millionaire portfolio, let’s review and summarize the Child Millionaire investment formula:

 

Shares in high quality dividend-paying companies + annual increase in dividend payout + annual appreciation in share price + automatic dividend reinvestment (compounding using automatic reinvestment) + monthly automatic contribution + lots of time = Child Millionaire, even after inflation.

 

But don’t stress yourself with this formula or needing to know anything about markets and investment, I’ll show you how to set it up and automate it all.

 

So how do we build a one day Child Millionaire portfolio?

 

Next:  Step 1 in the ‘Minting a Child Millionaire’ series.

 

Watching, waiting, deliberating…

With the US elections over and the political terrain pretty much unchanged, the investment world has gone back to worrying about a host of problems that never really went away.

 

Top of the pile is the so-called ‘fiscal cliff’ that the US economy will apparently drive over at the end of December 2012 when the Bush era tax cuts are slated to end and mandatory spending cuts kick in. The fear is that this double-whammy will send the fragile US economy back into an economic death spiral and drag the rest of the world with it.

 

In Europe, Greece needs to roll over billions in debt this week or face crisis (again) and the International Monetary Fund (IMF) and EU policymakers are at odds over how to fill the gap. The Spanish are on the ropes and need tens of billions of Euros. Mass strikes are erupting across Europe, Germany is catching the Euro-flu, and China’s economy is rapidly cooling thus hammering commodities and natural resource-based economies like Brazil, Australia and Canada, which also suffers from a supremely overvalued housing market that is starting to crack as people struggle under record debt levels.

 

All of this means that volatility is up in the stock markets, panic is starting to rear its head and money is pouring out of stock markets and into the so-called safe haven of government bonds, pushing up bond prices yet again and depressing yields to levels rarely seen before.

 

So what does this mean for the Child Millionaire portfolio builder and what should we be doing?

 

As I’ve mentioned before, one of the key components of success with the Child Millionaire portfolio is to purchase high quality dividend aristocrats when they go on sale to achieve the highest possible yield [yield = the annual dividend / the share price]. Over the long term this results in turbo-charged compounding.

 

So right now the time is ripe to be assembling a shopping list of candidate shares for your Child Millionaire portfolio and be ready to pull the trigger if/when any of the on-going crises kick-starts a full-blown stock market panic.

 

Remember that when share prices drop, risk is being squeezed out of the system and you want to be buying when everyone else is selling. Most people do the opposite, which explains their poor investing performance.

 

The key points to choosing companies to invest in:

 

  • Long, unbroken track record of paying dividends with a yield above 2.5% but preferably closer to 5%
  • Payout ratio of dividends as a percentage of net profit <75%
  • Long track record (10+ years but preferably 25+ years) of increasing the dividend year after year – this is fundamental!
  • Dominates an industry sector with the top brand(s) and/or has another ‘moat’ that makes it highly resistant to competition such as expensive hard-to-duplicate infrastructure like pipelines
  • Is not susceptible to company-level catastrophic risk – think BP and the Deep Water Horizon
  • Growing sales and market value year after year, even if very slowly

 

I’ll cover some of the specific shares I’m looking at in the next posting, but for now start researching and create a short list of shares and be ready to pull the trigger when the next crisis erupts and panic ensues.

 

 

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