The Rich get Richer, A Self Perpetuating Cycle

You know the old saying "The rich get richer, but the poor stay poor"? Chances are likely you've heard this saying, or some variation of it before.

So here's the thing about wealth. Once you have it, unless you do something stupid with it, you are pretty much guaranteed to get wealthier over time.

Consider this:

Imagine you own your own home and have $1 million in stocks.

You own the home so you still need to pay land taxes, insurance, and repair bills... but you own it, so you're not paying to rent or lease. It is yours to keep.

Plus you own $1 million in stocks. If they are Dividend Stocks then you might be earning perhaps 5% annually on the value of those stocks. So $50,000 per year, just for owning the stocks.

That $50,000 is more than enough to pay for your land taxes, insurance, repair bills, etc... plus your food, electricity, etc... And you would still have money left over. You don't even need to work and you're still making money.

Add to that a part time job for $20,000 per year (you know, as something fun to do since you don't need to actually work like a normal person) and even with government taxes you've got plenty of money.

Meanwhile let's do the same math for a poor person living in a big city like Toronto or Vancouver.

You are working TWO part time jobs to make ends meet, earning $40,000 per year, minus taxes.

• Your rent is $2000 so deduct $24,000 per year.
• You don't own a car so you're taking the subway regularly. In Toronto a 12-month pass costs you $143 per month, so deduct $1,716.
• You still need to pay for internet, phone bills, electricity, food, etc. So deduct $400 per month ($4800) for all of that.

So you've got $9,484 left before income taxes.

And keep in mind that is someone who manages to earn $40,000 per year working two part time jobs. In order to do that those part time jobs would need to be 40 hours per week, 52 weeks per year, at $19.23 per hour, with zero sick days, no vacation, etc.

The working poor meanwhile aren't making that much. $19.23 per hour for 40 hours x 52 weeks would sound pretty nice to some people because at least they're getting paid a living wage.

Meanwhile a vast number of Canadians are making $14.35 or less. In Ontario the minimum wage is $14.35, but the minimum wage varies by province.

Plus good luck finding two part time jobs that provide 40 hours of work per week without a ridiculous schedule. More likely a person will be working 30 to 35 hours because the schedule fluctuates based on how often their boss needs them to cover someone else's shift.

So $14.35 x 35 hours x 52 weeks = $26,117.

Oh look. Don't bother having kids. You couldn't afford the apartment + expenses. Instead you'll be living in an apartment you share with a roommate and you cannot afford to have children.

If you want to be living, actually living, then people need to demand the following:

#1. Full time work. 40 hours per week. Anything less than full time isn't worth it unless they're paying proportionally a lot more.

#2. A minimum of $20 per hour. Otherwise you will be perpetually poor.

#3. Two Weeks or more Paid Vacation. So you don't burn out doing a job you hate.

People need to be demanding better paying jobs, better hours, and more vacation time. Otherwise it isn't worth their time in the long run.

This is fundamentally a problem which separates the rich from the poor. Decent wages, the ability to own property, and the ability to invest their excess wealth in order to create more wealth.

A wealthy landowner plus stock investor doesn't even need to work in order to make money. Their stocks are doing the work for them. They could spend their life being an artist, a dancer, an actor, etc and never make a lot of money, and still be financially better off than the working poor thanks to the fact that they already own land, don't pay rent + have over a $1 million in dividend paying stocks.

They could take the extra $24,000 they are saving from not having to pay rent and put that into buying more stocks. After 40 years they would have closer to $2 million plus whatever increase valuation of the stocks due to them going up in value over 40 years.

Imagine you bought just $1000 USD in McDonald's stocks in October 1981. Those stocks today, almost exactly 40 years later, would be worth $30,188,890 USD, plus you would have gained the dividends for 40 years. The dividend yield of MCD is currently 2.26%, which amounts to $682,268.91 per year currently.

All that just by investing $1000 back in October 1981. MCD is a great example of a darling stock that really returned on the initial investment.

Anyone sitting on $30 million worth of MCD stock is laughing all the way to the bank.

And thanks to the way governments tax stock investors, this is unlikely to ever change. The rich are going to continue to get richer.

While the working poor, eg. the people working at McDonald's for minimum wage, continue to pay rent while the rich get richer off of the fruit of their labours.

It is an incredibly unfair system, but the sooner YOU realize that you can become one of the people making money and creating wealth for yourself, the sooner you can become one of the people who is making money off of the poor instead of just being poor.

If you want to stop being poor you should sign up for a WealthSimple account today and get 2 free stocks.

Notes

Now I know some people are going to complain about $2000 rent/month. That is pretty normal for a 3 bedroom apartment in a major city, which is what you need if you're raising a family. Roughly 40% of Canadians live in Canada's 10 biggest cities/regions, and due to higher rent and low wages many of them are likely to be the working poor.

Higher Bond Values = Temporarily Lower Stock Market

When the value of government bonds go up, the stock market gets hurt. It is a wound, but it is temporary. That is what is happening right now with the US and Canadian stock markets. The government recently raised the interest rate for government bonds, which means that some investors take their money out of the stock market and buy government bonds instead.

Give it 2 or 3 weeks however and the stock market, I have noticed, will typically recover. Why? Because investors are still making money from their jobs and they want to put their money into stocks (not everyone likes bonds for various reasons) so it is just a matter of time before the market recovers.

It is a temporary shock to the stock market...

But it is USEFUL.

The temporarily lower stock market might cause various stocks to become 2 to 3% cheaper, which effectively means they're on sale. You wait until the stocks appear to have reached the bottom, likely a week or two after the initial sell off, then you buy.

Then you wait another 2-3 weeks later and your stocks have shot up in value by 2 to 3% already.

Just temporary. Nothing to worry about. Check the TSX index in 3 or 4 weeks from now, roughly around October 22nd or 29th, and you will see I am right. Might be a full recovery, or a partial recovery, but guaranteed they will be back up again unless there has been some huge disaster (highly unlikely) in the markets caused by something else.

Eg. I am foreseeing the Chinese stock market to get hard by the Evergrande decline in value unless it gets some kind of bailout from the Chinese government. That house of cards is going to come tumbling down eventually because Evergrande has basically been running a ponzi scheme with Chinese investor money and real estate.

UPDATE OCTOBER 14TH

Evergrande has dropped in value 11.1% since the last time I checked on October 1st. I expect it to keep going down in value. Notice the 52 week low of 0.0001 USD??? I expect it to reach that or lower again.

Evergrande is just the tip of the iceberg when it comes to Chinese companies running real estate ponzi schemes. They take money from investors to build condos and office buildings, but so few people end up living or working in the buildings that in order to make their companies look better than they really are they cheat on the finances and use money from new investors to pay off the old investors, and fudge the records to make their balance sheets look better than they really are. And Evergrande is a HUGE company. It is the 2nd largest property developer in China by sales... But their assets are only worth $306 billion USD, but their debts are over $300 billion... so the stocks are really worth almost nothing.

This is why people really should do their research to determine a company's assets vs debts.

And to make matters worse, Evergrande is hurting China's bond market and its stock market. Speculation abounds that China's stock and bond markets are due for a rough ride.

Plus China is currently planning to invade/conquer Taiwan, which could spell disaster for the global computer chip industry, which could see foreign investment in China collapse.

When Chinese investors start talking nervously about "World War Three" you should definitely worry. An invasion of Taiwan would effect American tech stocks, car manufacturers and more. The USA and their NATO allies will want to secure their access to computer chip manufacturing, otherwise their economies could also collapse. Taiwan makes approximately 65% of the world's computer chips. The global economy depends on those chips. It would be an economic disaster for many companies, including companies in Russia, India, the USA and others who have nuclear weapons who will be very upset if the global production of computer chips is hurt and the global economy collapses.

Hopefully China will come to its senses and realize that invading Taiwan would be economic and military suicide.

Dividend Stocks - TXF

There is another way to measure successful stocks.

By their dividends.

Profitable companies which have already plateaued in terms of their ability to expand (ignore tech stocks, tech stocks are always looking for ways to expand and would rather have excess cash for acquisitions almost never pay dividends) have to do something with all that extra money they are making. So if they cannot expand, and they cannot acquire other companies in the same field, one way for them to attract investors is paying out good dividends.

So how are dividends calculated???

Annual net income minus net change in retained earnings = dividends paid.

Basically it is output as a percentage.

And any percentage about 2% (or above whatever other institutions are giving as interest on bonds) is generally a good company to be putting your money into because of the value of the dividends being paid out.

Thus a company (or an ETF in the example below) that is providing a very large dividend while growing consistently over a 5 year period is a very solid investment which pays you money over time, in addition to growing in value.

I am speaking, of course, about the TXF, which is an ETF that invests in 25 of North America's largest tech companies and currently pays a whopping dividend yield of 10.02%.

So if you own $1000 worth of TXF stock you will be making roughly $100.20 per year in dividends, in addition to it going up in value.

And whenever it goes up in value and pays dividends you are basically making money hand over fist. Which is apparently a nautical term for pulling a rope on a ship, I learned recently. I thought it was a case of you are holding coins in your fist, so many coins that you have to put your hand over the top to prevent yourself from dropping some of them... But apparently that is not the case. It is just a nautical term.

Anyway, back on topic.

TXF took a hit back in March 2020 during the start of the pandemic and then quickly recovered. It has been a solid earner during the past 5 years.

And if you look back further in history to October 2011 then you see it has more than doubled in value during a 10 year period.

I have other reasons why I like it too (asides from that nice growth curve).

Take a look at the stats block below...

A yield of 10.02% is amazing.

Compare that to other stocks like Tim Hortons (THI has a 0% yield) or Canadian Tire (CTC has a 2.56% yield) or Royal Bank of Canada (RBC has a 3.41% yield) and you have to wonder why would you ever invest in a restaurant, a hardware/department store, or even Canada's largest bank.

True, 3.41% yield isn't bad... but it isn't spectacular either.

RBC stock has gone up in value 55.93% in the past 5 years, so it is only marginally worse than TXF, but it is getting only roughly one third of the dividends that TXF offers.

With stocks that pay really good dividends they end up paying for themselves over time, but the length of time could be dramatically different depending upon the stock.

With RBC stock it would take about 29 years to pay off the initial investment.

With TXF stock it would take about 9-10 years to pay off the initial investment.

Stocks that pay 10% or more in dividends are very hard to find. Heck, stocks that pay dividends in the 5% to 9% range are also very hard to find.

If you can think of another stock or ETF that pays 10% or more, while still recording a 5 year valuation growth rate above 60%, please leave a comment below. I would love to hear about it.

Plus TXF invests in the biggest tech stocks in North America... and tech is the future. Like investing in robotics and microchips, investing in tech is a very safe bet.

Canadian Dollar Hedged ETFs

I like these...

Canadian Dollar Hedged ETFs.

These allow me to invest in the US stock market without having to worry about the exchange rate. Plus hedged ETFs on average earn about 0.5% more than unhedged ETFs.

Currency hedging reduces the effect of exchange rate fluctuations on international investments, making it very useful for Canadians to invest in American stocks and/or bonds.

Let's pretend you want to invest $1000 in American stocks, but the Canadian-American dollar exchange rate changes over time. So if your stocks go up by 20%, but the Canadian dollar goes up in value by 20%, how much money have you made when you measure it in Canadian dollars?

Well $1000 CDN of unhedged stocks... x 1.2, but then x 0.8... = $960.

 But if you buy $1000 CDN worth of hedged stocks then the math works like this: $1000 x 1.2 = $1200.

See the huge difference?

Now often it won't be as dramatic as that. I am using an extreme example in which the Canadian dollar goes up in value by 20%... which is known to happen usually about once per decade whenever oil prices skyrocket and the Canadian dollar ends up going up thanks to the value of oil.

Choosing an unhedged ETF can allow you to gain from beneficial currency changes, but you also carry the risk of the negative effects of currency price changes.

So there are pros and cons to using unhedged stocks, but for me it isn't worth it. I would rather hedge my bets and then not have to worry about it.

After all a war could break out in the Middle East literally at any time and the Canadian dollar could go up 20 to 30% because of it. Seriously, do some research. The Canadian dollar and the price of oil always goes up whenever there is a war in the Middle East.

And do you really want the value of your investments to be dictated by whether there is currently a war happening in Iraq, Iran, Saudi Arabia, etc??? It isn't worth the risk.

Plus unhedged stocks usually end up being worth more anyway. So you might as well buy the hedged version.

Gold, Silver, Copper and Nickel Stocks Worth Researching

AYA is a gold and silver mining company in Canada.

CMMC deals mostly with copper, as the name "Copper Mountain Mining Corporation" implies.

CNC (Canadian Nickel Company Inc) deals with nickel, obviously.

Now what I want you to look at is the nice upward curves these stocks have. AYA and CMMC have sharper curves, but I fully expect these stocks to go up in value as demand for gold, silver and copper continue to rise thanks to the electronics industry.

The price of nickel meanwhile has been steadily rising since 2016 and is expected to continue to become a hot commodity into the 2030s.

CNC is one of the biggest nickel producers in the world, and if you want to research more about their company I recommend visiting their website:

canadanickel.com/investor/news-releases/

The point I am trying to make is that these are Canadian companies which are performing very well, and I believe they will continue to perform well during the next 20-30 years as demand for their precious metals continues to grow.

And demand means more profits, which means their stocks keep going up. Right now their stocks are quite affordable too. $3 to $10 per share is very reasonable.

I bought AYA back in July when it was less than $9 per share, and now it is close to $10.

CMMC and CNC haven't moved much since I purchased them, but I am confident they will go up gradually over the long term. I look forward to checking in on these stocks in July 2022 and seeing how well they've been doing since the time I purchased them. Or 5 years from now. Or 10 years.