I've had a copy of Derek Foster's Stop Working: Here's How You Can for a couple of years now, but I just realized the other day I have yet to do a book review on it. So here we go.
Derek took retirement to extremes and managed to get out the rat race at 34. His book was self published and cause a bit a stir in the investing world with some of his ideas. Basically he saved $200 a month plus any extra he had into an investment portfolio, with a couple of good trades and some great market timing he has assembled a portfolio which generates enough dividend cash for his family to live off in a typical middle class lifestyle.
Now there has been skeptics, saying how it that possible. Yet in the book Derek outlines he took a big risk and dumped his entire portfolio on one stock because in his analysis it was very undervalued. The result was he doubled his money. That took some serious conviction to do, so I have to give Derek a hand for that one.
The heart of Derek strategy is to buy a good dividend paying stock when it has suddenly dropped in price to get a great yield. Then he holds onto the stock forever to avoid capital gains and with Canada's wonderful treatment of dividend's for low income earners he pays no income tax. Overall I agree with this strategy for people who never leave the lowest income tax bracket. An RRSP is not going to be that much use to you, so you might as well cash in on the excellent tax treatment of dividend income.
So if nothing else the book is a good read for most people to learn about an alternative investing strategy that works very well for lower income earners.
For me personally it is not going to work out. My wife can use some of this strategy, but for me I do very well dumping the cash in an RRSP or spousal RRSP and taking the refund (I have a 8.5% tax spread between my current tax level and the amount I expect in retirement). Also I know I'm not a good stock picker, hence I stick most of my money into a Couch Potato Portfolio (25% Bond Index, 25% TSX Index, 25% S&P 500 Index, 25% International Index).
For more information on Derek's book check out the following:
-Canadian Capitalist book review
-Million Dollar Journey's book review
-Early Retirement forums at Canadian Business Online where Derek regularly posts
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4 comments:
I like the principles of his strategy, but I think one has to do a fair bit of research to look at the stability of the dividend and the likelihood it will be cut. For instance, Magna recently cut their dividend, but they had an attractive yield prior to that.
I've been looking at Manitoba Telecom recently for the same reason, but right now their earnings and cash flow are well below the dividend value. Management says they're committed to keeping the dividend, but I think it could be hard as long as revenues and earnings drop.
That said, if you factor in a worst case scenario dividend cut and the stock still looks attractive, then it's a good buy.
I plan on using a strategy similar to Derek’s to fund my retirement. However, as part of my strategy I do purchase RRSPs. I would also like to add that in my opinion people who are going to be pursuing Derek’s strategy should not be choosing stocks based on the dividend yield but instead on the dividend growth. This is a long term strategy and in my opinion dividend growth is the most important part of it. Do not be drawn into low growth high yielders like MBT or BCE...go for the high dividend growers like banks, insurance, some utilities etc...
Good book review CD!
I plan to read Derek's book.
MCM,
Good point on the fact you want dividend stocks with good growth potential.
Investoid,
Yes there is a lot of research involved in using this method, which is partly why I don't find it that attractive to me.
CD
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