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Book Review: The Lazy Investor

Since the success of the Canadian best seller Stop Working: Here’s How You Can, Derek Foster has written another book called “The Lazy Investor“. I was excited to receive his latest book for review as I really enjoyed his first book.

It’s not surprising to see that Fosters dividend investment strategy is followed by many Canadian investors as he has had great success in retiring at the very young age of 34.

What is his strategy? Foster strongly believes in putting your investment dollars towards steadily increasing dividend paying companies. There are a few reasons for this:

  1. It makes the investor invest for cash flow thus keeping emotions out of stocks buying/selling.
  2. It’s recession resistant
  3. Dividends are taxed favorably compared to other forms of cash flow
  4. Inflation resistant as he only picks stocks that have a long history of annual dividend increases.

What are some examples of strong dividend companies?

Who is Derek Foster?

Derek Foster is known as Canada’s Youngest Retiree when he retired at the young age of 34. How did he do this? Through starting young and sticking with his investment plan of buying strong dividend paying stocks. He feels very strongly about his strategy and rightly so as he has achieved great success. His first book Stop Working: Here’s How You Can is a Canadian Best Seller and his second book is well on it’s way to achieving the same success.

Foster currently lives off and supports his family through dividend distributions, book sales, and a rental property. Note that he retired before publishing his first book. You can read more about him in my book review of Stop Working: Here’s How You Can.

What are the main points made by the book?

  • Starting off with SPP and DRIPs – For those of you who don’t know a lot about SPP (stock purchase plan) and DRIPs (dividend reinvestment plan), Foster does a great job in explaining step by step how to set one up. He goes on to list the few companies in Canada that offer both SPP and DRIP (the combination is important). He also includes a small section on American based SPP and DRIP.
  • Stay in Canada – Foster is a believer in sticking with Canadian dividends due to the tax advantages and currency risk. Most investors would question this lack of diversity, but Foster follows the trend that most wealthy people have their money tied into a single company.
  • Investing in recession proof, consistently increasing dividend based Canadian stocks – This one is self explanatory, the book picks some of his favorite dividend paying stocks and income trusts.
  • Retirement requirements are less than you think – Foster believes in the same retirement principle as “Why Swim with the Sharks“. That is, when you retire, you’ll have fewer expenses to contend with. My early retirement series is based on this conclusion also.
  • Being frugal with non life enhancing expenses while being less frugal on life enhancing costs – This is similar to my “separate your needs and wants” principle. Foster basically is extremely frugal on non life enhancing expenses (taxes), and not as frugal on life enhancing expenses (vacations).
  • Teaching Children about Money – I read this section of the book with great interest as we’re expecting. Foster writes about his opinions on the right way to teach a child about money. You guessed it, through dividend investing and spending the dividend payments as an allowance.

What I liked?

  • The book is extremely easy to read and shows how a beginner can kick start a portfolio with very little upfront money.
  • I appreciated how detailed the book was in explaining how to set up a SPP and DRIP, how to transfer it over to a discount brokerage, and including other frugal ways to purchase stocks.
  • I liked the idea of teaching a child about money through investments. I’m going to try a few of these strategies with the little one coming.

What I don’t agree with:

  • The book neglects to point out some of the risks involved with Fosters style of investing. There isn’t very much diversification, which for some, it’s too many eggs in one basket.
  • Foster doesn’t believe in RESP‘s much like he doesn’t believe in RRSP‘s. I’m the opposite, I think the RESP program is great where the government basically gives you free money for your childs education.

Final Thoughts:

  • I really enjoyed this book and recommend it to anyone just starting out on their investment journey. The book shows how anyone can start a portfolio with very little money and grow it into a real income base in future years.
  • If you are interested in picking up this book, you can get a copy at Chapters or directly from Derek Foster.

Find out how you can save an additional 4% on this book through Chapters.

You can read other reviews by:

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 30 comments… add one }
  • The Financial Blogger January 8, 2008, 8:02 am

    Great review!
    I found weird that he does not believe in RRSP. I mean, what do you need to believe in? He could have done the exact same strategy within a RRSP account and grow his investment tax free.

    At the age of 34, he would have just more money into his RRSP that he had when he retired. Then, with a RIF metldown strategy, he could have take all this money in his pocket without much tax implication… I don’t get why one does not “believe in RRSP”. Any thoughts on that?

  • Pauls January 8, 2008, 9:19 am

    Let’s face it, he got lucky in the market and “retired” I wouldn’t call writing books and looking after a rental property as retired, as much as I would call rental income passive. I’m sure he does it for fun so it’s not called “work”. I think the whole concept of retiring early is bunk.

    I love my job. Why would I “retire early”?

    We all need to do something. he’s found a niche where people think he is smart, so he takes advantage of good marketing to sell books.

  • Traciatim January 8, 2008, 9:31 am

    I think he only doesn’t like RRSPs because if you use dividend income inside an RRSP, and then withdraw it, the income will be taxed as regular income and will no longer get the dividend tax credit. That kind of defeats the purpose of his whole strategy.

  • FrugalTrader January 8, 2008, 10:57 am

    FB, like Traciatim says Derek was always in a lower tax bracket so RRSP’s never made sense to him. Dividends provide him with an extremely low after tax income where he basically pays hardly any tax. I would say that Derek pays more tax now with book income.

  • Silicon Prairie January 8, 2008, 12:43 pm

    If he always planned for the short term maybe he didn’t think RRSPs were a big advantage (and either didn’t know about RRIF meltdowns, thought that they still had too many expenses, or thought they involved too much leverage). It could make sense, since RRSPs have the biggest savings when you get compound gains over a long period. If I was planning to take the money out in a few years, even with a lower tax bracket it would be difficult to avoid losses.

    Some parts of the book sound interesting (specifically about SPPs and DRIPs) but I don’t think I would buy it just for that since it’s not an important part of my strategy. It would be interesting to see how he sells the ideas though – does he stretch the returns to say anyone can retire at the same age as him?

    It also sounds like being “Canada’s Youngest Retiree” at 34 is a big claim… even excluding inherited money, there must be a few people who started with nothing and created the right business at the right time.

  • FourPillars January 8, 2008, 1:57 pm

    I used to be a big Derek Foster fan after reading his first book which is a good read but even when reading it I didn’t think his numbers added up. After reading more about him in the paper and various forums it appears that he was very untruthful about his strategy such as how he used leverage extensively. It doesn’t matter to me how he invests but when you write a book that makes his fictional strategy seem incredibly easy then I think there is a problem. Admittedly you could do a lot worse than follow his strategy since it’s mostly based on reducing spending, saving and investing in good companies but the idea that someone can never make more than $30k (as he claims), save $200/month plus a few extras and end up with the investments and assets at 34 that he did is garbage.

    I’m also not crazy about the “Lazy Investor” – his advice against RESPS is just plain uninformed. If he would have actually researched the RESP rules and penalties he would have realized that RESPs are as good or a better deal in almost every case.

    His logic against diversification is nonsensical – the fact that he thinks the wealthy invest mostly one company is not logical. Most of those people who start successful companies probably wish they could diversify more.

    I also think his section on SPPs and DRIPs while informative are a lot of work to get started. A beginning investor should set up a TD e-Series accoount and buy index funds with periodic purchases.

  • FrugalTrader January 8, 2008, 5:38 pm

    Mike, do you have an e-series account? If so, are there any fees involved for lower balances?

  • FourPillars January 8, 2008, 6:01 pm

    FT – I don’t have an account at TD but from what I’ve read – (mostly over at the Canadian Capitalist) you don’t have to pay an annual fee at TD. Like most financial companies this might be subject to setting up a monthly contribution.

    If anyone knows differently then please let me know.

    Mike

  • just learnin' January 8, 2008, 7:16 pm

    this post and these comments are very informative. thank you everyone. food for thought.

  • White Eagle January 8, 2008, 8:54 pm

    The Ottawa Public Library will be hosting the Lazy Investor at four branches this month. It would be a great opportunity for those of you in the area with questions to get them answered by the author himself.

  • FinancialJungle.com January 9, 2008, 12:22 am

    Despite earning an above average salary, I won’t retire by 34 even though I’m a dividend-investing nerd. So, yes, I think his books are misleading from that perspective. Having said that, 80% of his book is worth a reading, because of all those noble principles such as saving within your means, eliminating non-life-enhancing expenses, etc. Derek also preaches the buy-and-hold mentality as you can do a lot worse by over trading.

    I think Derek’s strategy is more diversified that most people think and definitely more recession proof. If you go with an index ETF, ~85% of your annual gains come in the form of capital gains. So, you’re reward by the market, which, as we all know, is notoriously moody and speculative in the short run. However, with dividend investing, ~40% of the cashflow comes from the businesses’ operations. As a result, your annual cashflow is far more stable and less sensitive to market volatility.

    I won’t declare myself being Derek Foster’s number one fan, but without him, I wouldn’t be the dividend investor I am today.

  • Telly January 9, 2008, 10:54 am

    FT, My husband and I use TD e-funds in both of our RRSP accounts. There are no fees charged for purchasing the funds and MER’s range from 0.31 to 0.50%. An initial investment of $100 is required and PPPs can be as low as $25.

    We’ve considered moving to ETFs with lower MERs but based on my overzealous excitment for trading in my 401k account :( , we’ve decided it’s best to keep with the e-funds and continue making bi-weekly contributions to the TD account.

  • FrugalTrader January 9, 2008, 11:14 am

    Thanks for the info Telly. Those e-funds are much cheaper than other bank sponsored index funds. Others, like CIBC, charge around 1% MER for smaller balances, and a discounted MER for bigger balances.

  • Telly January 9, 2008, 11:46 am

    In so many ways, Derek is an exceptional case. He offers some great advice but readers need to realize that, as Mike mentioned, 99% of people earning what Derek earned, and saving what Derek saved, will NOT come close to being able to retire at 34.

    That being said, Derek’s books have been an eye opener and have probably created many a dividend investor over the last few years. He has created an awareness of the tax advantage of dividend income that many people wouldn’t have considered. However, one thing he neglects to mention in either of his books (that I am aware of – I’ve not read the 2nd) is his big gamble on PhilipMorris / Altria (oddly enough, a US stock and his gains were mostly capital and not dividend) using a substantial amount of margin. I can’t say I blame him for keeping that info out of the book, he’d probably catch even more flack as it was a gamble and not sound investment advice.

    Derek’s books should be read for his advice on tax efficient investing and not as a ‘get rich quick’ manual. But the fact that he ignores RRSPs makes his tax efficient plan lacking imo.

  • FourPillars January 9, 2008, 4:00 pm

    Telly – he doesn’t mention the leveraging in the second book either.

    His advice for not using RRSPs is perfectly valid if you don’t make much money because if your regular salary is about $35k or less then any dividend income won’t be taxed (in Ont at least) – I’m planning a post on this soon.

    As Telly said – most of the ideas in the first book are pretty good regarding dividend investing and savings but like pretty much all PF books you have to be able to figure out which parts are useful to you and which parts to ignore.

    Mike

  • Telly January 9, 2008, 5:23 pm

    I wonder if Derek has changed his tune on RRSPs now that he is earning more than he was when he retired (his dividends have increased at a rate greater than inflation and his book sales have gone really well)?

    I know he’s buying more US stocks these days, including non-dividend payers (SBUX recently) so it sounds like, while his strategy worked for him when he was earning very little, he has changed his approach lately.

    I think the lesson is, telling people about your unique strategy can be rewarding, just don’t forget to change it when an opportunity presents itself. ;)

  • FrugalTrader January 9, 2008, 5:27 pm

    Telly, how do you get all the info on Derek’s financial plans? You must be a really big fan. ;)

  • Telly January 9, 2008, 5:38 pm

    Actually, I don’t have a problem with Derek. I think he’s done a really great job for himself, has brought dividend investing (and the subsequent tax advantages) to many people’s attention, and is pretty open & honest about his finances. As I mentioned, what he chose NOT to write about in his books was a smart move imo.

    Now, as far as how I got all that info, I’ve followed most (if not all) the posts on the Canadian Business forums dedicated to his books. He’s been both praised and burned at the stake there but he’s been very good about responding to virtually every post. I find that admirable.

    Also, and where I learned about his SBUX purchase, I subscribe to Canadian Money Saver, for which he is a contributor.

  • FourPillars January 9, 2008, 6:45 pm

    FT – thanks for the link. Now I can just make a few minor changes and then post on my blog :)

    Seriously, if I do the post I’ll make sure it’s a different angle (and you’ll get a link of course).

    Mike

    p.s. – I heard that Telly IS Derek Foster :)

  • thickenmywallet January 9, 2008, 9:21 pm

    As you mentioned Foster’s strategy may work better if you are a US resident than Canadian in that most of the good dividend paying stocks in Canada are in the financial sector while in the U.S. you can spread your eggs out a little better in terms of industries and sectors.

  • Telly January 10, 2008, 2:56 pm

    TMW, the only issue is that dividends are actually taxed more preferably in Canada than the US, especially if your regular income is so low such that Canadian dividends are taxed at zero. This is what makes Foster’s strategy unique.

    Mike, you’ve got me all figured out. ;) Now, if I could just get a little of that book money….

  • Bill December 9, 2008, 4:53 pm

    Works very well in the states, alot of companies pay high dividends.

  • canabiz March 15, 2009, 10:44 am

    FT, Derek Foster has sold everything he owns in his brokerage account, as per this article from the Star

    http://www.thestar.com/business/article/600754

    I would love to see you dissect this decision, from a man who is an average Joe like the rest of us but who has made it big and now apparently hit some rough patches, just like everyone else I might add.

    I believe this story will have some significant impact. We recently got our first HELOC and my wife was tempting to take some money out and buy dividends-paying stocks, as a form of simplified Smith Manoeuvre, but we are not so sure about that at this point. Derek’s story certainly doesn’t help matters.

    Looking forward to your (and others’ thoughts) on this.

    Cheers!

  • FT FrugalTrader March 15, 2009, 12:23 pm

    Canabiz, yes I read that story as well and it’s very interesting that a die hard buy and hold investor has sold all of his holdings based on market timing.

    However, I guess you can see that for someone who lives off their portfolio they have a lot riding on market/dividend performance. I guess his research on current market conditions has spooked him and couldn’t’ stomach the risk of holding any longer.

    Also note that the SM is a leveraged investment strategy. If you arent’ comfortable with the risk of current market conditions, then perhaps you should re-evaluate your investment strategy going forward.

  • Ray March 15, 2009, 3:47 pm

    I think his no bond allocation has also caused him more looses than a more diversified portfolio would have. a 100% stock portfolio a very risky.

  • canabiz March 15, 2009, 5:33 pm

    Thanks for the advice FT, there are more discussions on Derek’s discussion over at the Canadian Business and Financial Webring forums, should you or other readers are interested. Some of the stuff discussed is way over my head and I like to stick to the K.I.S.S principle but it makes for good reading.

    We will have to approach the SM with caution, we would like to clean up some outstanding debts and reduce our mortgage principle first before making the leap. It has certainly been an enjoyable learning curve so far. Thanks again and keep up the great job!

  • Frank Thomas February 8, 2011, 1:42 am

    Great book. It’s definiltey a good intro to investing into small caps.

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