If you get a positive return on investment (ROI), congratulations, you are making money. If this is a return on your investment on your stocks, some would argue that you haven’t actually made any money until you see the gains.
Moreover, it is not enough to obtain a positive return on investment. You want to achieve a satisfactory return on your investment for the period that you hold your investments.
For example, Canadians can get an almost 12% return on their investment from the GIC at the best rate today. However, it will take five years to get the 12%, as the GIC today only offers an interest rate of 2.25%. So in reality, Canadians would only get an annualized return of 2.25%.
Here are some ideas that can help you improve your return on investment.
Buy dividend stocks
Investing in dividends accounted for approximately 33% of total long-term stock market returns. In particular, dividends from quality dividend-paying stocks are a more reliable source of return than price appreciation.
In fact, long-term investors in Canadian Dividend Aristocrats could be sitting on very high returns on costs, ensuring a high return on their dividend investments every year.
For example, an investor who bought shares of a food retailer Metro (TSX: MRU) in 2001 would be sitting on a return on cost of around 29%. On an initial investment of $ 1,000, the investor would earn at least $ 290 per year in dividends.
Secure returns are supported by the following. First, the investor has held onto the strong stock of dividends through thick and thin, for many years. Second, Metro has been very well run and has increased its dividend at a compound annual growth rate of around 15% since 2001.
Importantly, dividend growth was supported by earnings growth. Metro’s recent payout ratio was around 28%. And its dividend increase this year has remained above average at 11%.
Buy on dips
The market has grown over the long term. If you buy great companies when stocks are going down, in the long run that act will improve your return on your investment. For example, if you bought Metro down this year at $ 54 per share, you would be sitting on an ROI of over 18% plus dividends received.
Over the long term, the stock market has only returned around 10% per year on average. Thus, a return on investment greater than 10% is very good.
Save on taxes
We all pay heavy income taxes on our working income. Capital gains and eligible Canadian dividends are taxed at lower rates. It is therefore very useful for building your wealth by earning investment income.
To take it even further, you can invest in tax-efficient accounts like Tax-Free Savings Accounts (TFSAs) and RRSPs to further protect your investments from tax. You get tax-free returns, like dividend income and stock price appreciation, by investing in your TFSA.
You defer paying tax by investing in your RRSP. The idea is that when you retire you will earn less income and be able to withdraw from your RRSP / RRIF at a lower tax rate.
By protecting the taxes on your investments, you can dramatically improve your return on investment!
The crazy investor to go
Actions go up and down. You can increase your chances of getting a great return on your investment by investing in good companies for the long term, especially if you increase your positions during bear market lows.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We are straight! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer, so we post sometimes articles that may not conform to recommendations, rankings or other content. .
The Motley Fool has no position in any of the stocks mentioned. Foolish contributor Kay Ng has no position in any of the stocks mentioned.