The Canadian Investor - Episode 4 - Shopify, DRIPS and compound interest

Episode Date: December 22, 2019

In this episode we talk about the Canadian Dividend Reinvestment Plans (DRIPs) and Shopify’s business and valuation. We also provide a few realistic examples of what compounding can do for you in the long term. Tickers of companies discussed : SHOP.TO--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. Live from the great white north, this is the Canadian investor where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. Welcome back to another episode of The Canadian Investor. I'm Brayden Dennis and I'm joined by Simon Belanger.

How am I doing with the accent there, Simon? It's getting better every podcast. Yeah, exactly. You're going to be fluent in French soon enough. Oh, perfect. So today's episode, we're going to talk about DRIPS, which is a dividend reinvestment plan. We're going to talk about the basics of compound interest, different order types when you're buying stocks, and something called stop losses.

And then later in the episode, we're going to talk about the Canadian tech darling Shopify. All right, so let's kick it off with drips. To give you an overview of what that is, it's called a dividend reinvestment plan. And what that allows you to do is set your brokerage to an automatic purchasing of stocks when it issues a dividend if possible. So I will preface it that it's unfortunate that no Canadian broker to this day allows you to drip partial shares like you can in the US. So I'll give a basic example. If you have a stock that dishes out $10 in dividends, but it costs $20, you're just going to get that $10 in cash and you're not going to be able to purchase a full share. In the US, they allow you to buy half a share. So that's

unfortunate. But if you are accumulating a bunch of wealth and you have larger positions, you'll be able to automatically buy more stock with that dividend without purchasing an actual commission, without having to pay that commission fee every time you buy stock. So that's the essence of it. Did I miss anything on there, Simon? No, you went over it pretty well. I have a few trips myself going on. So usually if you have, for example, like $60 for a $50 stock, you'll get the $50 stock and then you'll get the rest in cash. One of the big advantages is when you do it, you actually don't get charged any fees. So that one stock that you're buying, say you're doing the example I just said, the brokerage account won't charge you any fees to buy it.

Whereas if you do a transaction, you'll get the normal $5 or $10 fee. And I've seen, we were talking before we started recording, I've actually seen some real estate investment trusts that have monthly distributions do like 20 for one stock splits so that investors are able to take advantage of the drip in Canada. But yeah, I mean, we're talking last week about Constellation Software, that stock trades for over $1,000 a share. So the chances are you'll probably never drip that stock. But you're still compounding your interest when you're collecting that cash and then adding it to your next contribution.

Whether you're adding it back into that position or a new position, you're still taking advantage of compound interest. But it is unfortunate. I mean, maybe one day Canadian brokerages will allow drips. But I have never seen anything. Have you ever seen any headlines of anyone making way on that? No, I haven't. I mean, I've been obviously listening to a lot of American podcasts about investing.

And obviously, they talk about it all the time where they can do fractional shares. I'm not sure when it started all like exactly, but hopefully it'll come to Canada at some point. Yeah, I'm not even sure how they do the accounting for like outstanding shares when everyone has fractional shares. I'm not really sure how that works in their

accounting of outstanding shares on their balance sheet, but I guess I'll have to do some research. Yeah, exactly. So we'll see maybe with, especially in the States now, they're not charging any fees for transaction that just changed recently with Schwab. And I think a bunch of brokers followed suit. So maybe these type of changes and lower fees, but also drips for fractional charities will come to Canada eventually. Yeah.

But like I said, you're still taking advantage of compound interest, which leads into our next topic, which is something you've probably heard about since grade five about compound interest. And probably heard the quote that Albert Einstein says, it's the eighth wonder of the world. But it really is important when it comes to investing and growing your wealth, it really starts to take off. So Simon did a couple calculations calculations and he's going to share those with you.

Yeah, so I gave like I calculated three examples and you can anyone can do this very easily by just going online. I know the I'm using the one from the Ontario Securities Commission, but you can find some pretty much just type in compound interest calculator. So the first scenario I did was for someone, probably some of our younger listeners that are just starting. So I did an initial investment of $0, regular addition $100 a month. So it's not that much, but still, you'll see how it makes a difference. The interest rate, I put 7%. I mean, historically historically that's fairly reasonable. Especially in this bull market that's actually probably a bit conservative but I wanted to be not too ambitious. The interest is compounded semi-annually in this example and I put 30 years to grow so if someone's in their early 20s and starting out. So what we get at the end of the 30-year period is that we get a

total value of the investment of $119,000 and $618,000. So that's quite staggering that just $100 a month over 30 years will amount to that much money. If you use the same scenario and you put 6% instead, let's say you're paying for some mutual funds that are higher management fees, let's see the difference that it makes. So instead of having $119,000, you get $99,000 over that 30-year period. So that's why we were talking on our other episode, the effect that actually those management fees have. So it's quite staggering, the changes. But I really wanted to use this example with a small contribution for people that think $100 might not make much of a difference,

it actually does. Do you have any comments on this scenario, Brita? Yeah, I like how you brought up the fees and how that can affect it because Nestle did a study that they published on MoneySense that had $320,000 as the average Canadian who hits their retirement target date pays in fees. And so not only did they pay fees, but they're actually missing out on this compounding effect in the future. And that's where it really starts to affect your portfolio early is when you reduce that interest that it's compounding just by one percentage point like you just used or two percentage points. And it makes a massive difference, especially over time. But yeah,

it's good to share some examples. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable

and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then

once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Yeah, exactly. And if you actually use 2% less in that same example, then you go from $119,000 to $82,000 that 30-year period. So that's a $40,000 roughly difference. So it's pretty

staggering and we'll see the difference a bit more with the next examples. So the second example, we're thinking of someone who has a bit of a lump sum, not a large lump sum, so $5,000 say for a TFSA. This person's doing $200 extra a month, again, 7% interest rate. And since this, you know, someone might be a bit more in their late 20s, early 30s, I just put 25 years in terms of times to grow. So when we calculate that, we end up over the 25 year period with $187,000 and if I go again I go down 1% at 6% so we go to we end up at 158,000 home almost 159 and if I go down again at 5% it goes down to 135,000 so you start seeing the big difference in terms of if you pay high fees, what that difference can really make over the long term. And that's again, the compounding

effect works both ways. So if you're paying it in fee, it won't compound as quickly for you. Yeah. And those are using really conservative numbers to like 6%, 7%, but to flex on everyone on this podcast, but I'm up 28% this year. So sometimes the market goes up 30%. So on average, I think the S&P, the number of people throw around is 10%. So it really can go a long way if you're consistently dollar cost averaging over a lifetime. So yeah, that's great. Yeah, we also have been in a bull run, a historical bull run. So I'm taking that into account. But I think 7% is pretty realistic.

What are you talking about? The market is going to go up forever. I don't know what you're talking about. Yeah, exactly. And now the last example. I'm thinking about someone who is probably mid-career, has a decent chunk of money in their RRSP most likely. So a starting initial investment of $100,000. Because this person is mid-career, I'm thinking mid-30s, early 40s, probably around there who's looking to retire around 60. 40s, probably around there, who's looking to retire around 60, $200 in terms of monthly addition. And then again, 7% interest rate still compounded semi-annually. So if we calculate that,

that's just a couple, it's actually just $1,000 shy of half a million. Again, if we do the same exercise and we go down to 6%, we're at $417,000. So we just lost about 80 grand in terms of value. And then if we go to 5%, we're at $350,000. So if you pay a 2% management fee and everything else being equal compared to not paying that fee, you have a difference of $150,000 at the end of that period, which is like the first time I did this exercise, I just couldn't believe it. Yeah, I know. I remember when I started investing, I was messing around with compound interest calculators as well and factoring in those fees just to really see,

wow, that's not an insignificant amount of money. 150K is a lot of money to pretty much anyone. So yeah, that's definitely worth considering. So when you're going to actually execute your investing strategy, you need to be able to use your discount brokerage service so you don't pay these fees and you need to be able to execute what are called orders, which is just simply put, buying the stock or selling the stock as well. And there's two order types we're going to talk about because they're the most important. I believe there's like seven different order types you can go through. I've only ever used two. So chances are you'll only really never use two. And those two are market price and a limit type. So a market is basically just buying it at what the market is trading it at that very time.

And it'll execute whatever the market is pricing it at when you put the order in. A limit is when you actually put in the price you want to pay and it'll execute if it can meet that. If not, it'll just basically expire at the end of the day or if you specify a certain time. But if you're buying a liquid stock or like an actively traded stock, so think of larger companies,

you pretty much only ever need to use market. But Simon brought up a good point last episode that if you're buying an illiquid stock, so like a small cap, for instance, you might want to put in a limit so that you don't have some massive price fluctuation and you get unlucky. Yeah, exactly. That's how I kind of do it when I invest. If something is liquid and I like the price that it's trading at and I want to add into a position or start a new one, I'll just put market order. If I'm looking to buy something that's not very liquid, so small caps, some ETFs won't be traded as much.

So anything that's less, I would say, than 10,000 shares a day is probably not very liquid. So what that means is there could just be one trade that's a fairly significant order and it'll make the price really go up or down. So you want to kind of avoid that with the limit order. Yeah, that's a good point. And another fun little thing you can do on your brokerage account is initiate stop losses. So that is another thing we wanted to talk about today. It is something that I personally do not use. I do not use stop losses. I never have, and I've never really thought about using them. So basically what a stop loss is, you can initiate a price to make your broker automatically sell if it goes below that limit.

Hence the name stop losses. If it goes below that or you put in 25%, so if you lose 25% suddenly, then it's going to initiate a sell. The reason that I don't own those is a recession that happens typically every seven years based on long, long-term macroeconomic studies show that a recession is a loss of 25% in the market. So why would I liquidate my entire portfolio in a recession if it falls 25%? If you are scared of losing 25%, maybe you shouldn't be in stocks at all. That's my synopsis on stop losses. What do you have to add to that?

Yeah, I'm like that too. I don't use stop losses. It's also kind of, it goes against to me like just what investing is, which is more for the long term. So buying into good companies that you believe in for the long term. The problem with stop loss is it just, it implies that you are selling when it's lower. So basically you're buying high, selling lower, but stopping your loss. So it doesn't, I think you can make a lot of bad decisions by doing that, especially if people say, well, you know, I'll sell and then when it keeps going lower, I'll just buy more. Well, that does not always happen. And you also need the courage to, you know, buy some more shares if it goes even lower. So I would not recommend that. I would just make sure that people

are comfortable with the companies or ETFs that they own and that they kind of think about it, do the exercise in their mind and just, you know, making sure that they're okay with their portfolio going down 10, 15, 20, 30, 40 percent and, you know, not having to sell. It's probably a good thing to help with that if people actually have an emergency kind of savings on the side where it's not invested in the market. It's in just a savings account where you can actually dip into that. If you lose your job, if something bad or a big expense happens, you don't have to sell your stock. So that probably helps. At least it helps me having an emergency fund to not sell when one of my

stocks or one of my companies that I really like has a big drop. Yeah, that's well put. It goes against kind of investing inherently is having stop losses. And I'm, I believe don't fall in love with an investment. I mean, don't hold on to perennial losers. But that's not the same thing as initiating a stop loss because I've had positions fall 10% in one day on bad earnings report and picked up the stock at a discount and it's worked out very well for me. So if I was to liquidate my whole position

instead of thinking the opposite of, this is a great company that just, you know, the market's overreacting, I would say that that is value investing, long-term mindset, and that's going to perform much better than acting with emotions and initiating stop losses. So I think we're both aligned on that. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY, do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are

using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons

that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools.

So go ahead, Blossom Social in the App Store and I'll see you there. Do you want to talk about Shopify? I'll let you kick off. Okay, yeah. Well Shopify, obviously, I think everyone's familiar with that. Their headquarters actually here in Ottawa. So they've grown significantly in the past few years, just to say the least. Just looking at them quickly, I'm familiar to some extent with them, but looking at their income statement, so you definitely see a significant increase in their

revenues. So you'll see in 2014 it was slightly above $100 million and now we're looking at more recently over a billion dollar in revenue. So it's definitely increased. One of the big issues with them is they are losing quite a bit of money, but they're reinvesting in growth quite a bit. So I'll let Brayden, I know you, that was your pick that you wanted to talk about. So I'll let you continue on that. Yeah, I kind of put you on the spot there. Yeah. So this is one of the hottest stocks in Canada. So I wanted to bring this one up and to give you some numbers here, the stock is up 168% and up over 1,200% since they IPO'd in May of 2015. So it's been definitely nice to own.

However, it would never meet any of my screens due to the fact that it doesn't produce consistent profits. And at the end of the day, stocks go up because of their earnings over a long period of time, not because of infinite revenue growth, which they are seeming to achieve. They've done triple digit revenue growth, triple digit revenue growth. You don't hear that very often in 2013, 2014, 2015, and then through 2016 onwards. Now they've done over 65% year-over-year in revenue growth. So that is not too shabby. However, they are losing money. It looks like they could,

you know, I hate that term path to profitability. It really bugs me. but it looks like they could they could get there but I mean we're talking about 27 times enterprise value to sales or 28 times 28.9 just price to sales regular price to sales you can't even look at it on a P to E metric because they don't have any earnings. 14.6 times tangible book value. Looking at all my regular metrics that I look at, but they're all negative because they don't turn a profit. So that's difficult to analyze them. But yeah, 27 times enterprise value to sales is outrageously expensive.

And I do not know how to value the company. So I'll be sitting on the sidelines for eternity, it looks like. Yeah, I mean, I'm kind of, I understand what they're trying to do. The problem is, same for me, is the valuation is just crazy. Like, even if you're looking at it, you're comparing it with itself. It's kind of crazy right now. It's 28, 29 times sales. And it was kind of in the low teens in 2015, 2016. So even in comparing Shopify against itself, it seems a bit overvalued.

Well, a lot overvalued right now. There's a lot of price and growth in there. And I think I'll go back to what I've said on previous episodes. And I think when we ripped Uber apart, but I mean, it's a bit the same. Yeah, it's a bit. I mean, it's not the same thing. It's a very different business. So they don't have as much as many expenses as Uber does with its drivers but it's still losing money and I'm looking at their financial especially cash flow their free cash flow is just going more in the negative so they're reinvesting a lot of money in the business and one of the other problems I have with these growth

companies if you look at the share count it's close to doubled in five years. So, I mean, it's fairly typical for new companies. They do want to grow, so they issue a lot of shares. So that's not unusual. But the problem with issuing new shares is it dilutes existing shareholders. So that's something to keep an eye on as well. Yeah, they have been diluting shares quite a bit um and yeah a lot of this stuff is to be expected with a mega young early

growth stage company um yeah however it is i i can't i can't understand that price so every single episode we keep talking about companies that are like, yeah, they're cool. They've done really great but like super expensive. We sound so pessimistic but people keep wondering about really expensive companies. Maybe next – we should do a value pick next episode. Yeah, we should definitely do that. I mean if anyone wants to invest in Shopify, my personal advice would be, you know, if you want to do it, it's your own money. That's really up to you. But do it like just do it a very small portion, at least if it doesn't go well, you're not like wiped out or anything like that. Just I would, I wouldn't touch it. But if someone wants to do it, just do it with like your fun money type of thing and just kind of see where it goes. Yeah, because I mean, they do have a strong moat.

The business model is really good. They allow small businesses, mid-sized businesses to sell online and they make it really easy for everyone. I guess my question for you is at $54 billion in market cap, do you think in five years we will look back at ourselves and think $54 billion in market cap was cheap for Shopify? So you're asking me to give my take on if I think this will be the next Amazon basically. That's how you have to look at it, right? Because I mean, I've said that about certain stocks. I looked at the market cap and thought, you know, maybe they could be the next 200 billion, 300 billion market cap. Who knows?

Yeah, I mean, you can, for each Amazon, you can probably, you know, for one Amazon, you can probably find a thousand businesses that did not go as well as they did. So I know everyone kind of goes back to Amazon and say it was always kind of highly priced. Yeah, I mean, they do have a lot of potential. For my big thing is if we end up entering a recession in the next couple of years, who knows if we will or not, but money kind of dries up a little bit.

Will there be an appetite for um you know people buying into a company like shopify that's we'll probably still be losing money in a few years from now maybe not maybe they'll prove us wrong um so that's that would be my take on it plus they're starting to entering a space where they are competing with amazon and walmart and these big players so how like they've done very well, don't get me wrong, but how will they fare against these humongous companies that are profitable? Amazon may be expensive, but it is profitable. And like, I just don't know.

The competition will ramp up, that's for sure. So I am definitely undecided for them. I don't think I would invest in them right now, maybe if there's a significant pullback, but definitely not right now. Yeah, I know. There would definitely have to be a significant pullback, and chances are if there's a significant pullback, this company could just have a terrible time in a recession, just for shareholders as well,

since it's so high flying in price, it could be bad news bears for everyone. So yeah, I mean, if you want to invest in Shopify, you bring up a really good point, Simon. Maybe a small position would be wise as this thing is super high flying. I think I've said this about 40,000 times already, but it is trading at 27 times enterprise value to sales,

which is, you know, really high, like insanely high. You don't see that very often. So if you were to invest in Shopify, probably take a small position, as Simon said. That is a wise recommendation. That does it for this episode. You can always find investing resources at GetStockMarket.com, which is available in the show notes of this episode. And on there, you'll be able to see a list of high-quality dividend stocks traded on the Toronto Stock Exchange with tons of metrics available there.

Thanks for listening. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions. episode of the Canadian Investor. To get a list of the top Canadian dividend stocks right now and other valuable investing resources, go to GetStockMarket.com.