Warren Buffett’s number one rule to stock investing is to never lose money. If you aim to never lose money, you’ll be super careful when you invest your money.
How do you actually go about investing in stocks while never losing money? Ensure your principal is safe.
Unlike in GICs, you can’t 100% guarantee the safety of your principal when investing in stocks. However, you can greatly reduce the risk of losing money by focusing on three things.
First, ensure you’re buying quality businesses. Second, beware of the price you pay. Third, beware of the price you sell. Fourth, as a bonus tip, it also helps to get paid to wait.
What makes a quality stock? Quality stocks are driven by quality underlying businesses. A part of the quality of Fortis (TSX:FTS)(NYSE:FTS) stock and Royal Bank of Canada (TSX:RY)(NYSE:RY) come from their defensive businesses. That is, their earnings are resilient through business cycles.
And when they experience a bad year in which their earnings drop over the previous year’s, their earnings will recover by the next year. This has been the case for the past 20 years for these two dividend stocks. Mind you, their earnings don’t drop by a whole lot in a bad year. Therefore, it makes it easy for their earnings to recover following a relatively stressful year.
All stocks fall during bad times. However, you can expect quality stocks like Fortis and RBC to recover and become more valuable businesses over time.
When should you buy Fortis and RBC stocks? The price you pay for your investments is important. It will directly affect the returns you get on them. If you pay an expensive price on a stock, you’ll get lower anticipated returns than if you paid a good price on your investment. If the stock also pays a dividend, you’ll get a lower yield on your investment.
When is it a good time to buy Fortis and RBC stocks? Because of the resilient earnings and dividend track records of the two quality stocks, investors can get a good gauge on when is a good time to buy Fortis and RBC stocks from their historical dividend yields.
Here’s the 10-year dividend yield history of Fortis stock and RY stock. You’ll notice that it has been an ideal time to buy Fortis stock at a 4% yield or higher and RY stock at a 4.8% yield or higher.
Dividend Yield data by YCharts.
Currently, Fortis stock yields 3.85%, while RBC stock yields 3.7%. In about six months, Fortis will increase its dividend by about 6%. So, its forward yield is 4.08%. Therefore, if you’re interested in holding the stock for a few years, now is not necessarily a bad time to buy some.
RBC has maintained the same quarterly dividend for five consecutive quarters to be prudent during the pandemic. With an expected rebound in the economy post pandemic and along with it the recovery of RBC’s earnings, it’s only a matter of time before RBC resumes its dividend growth.
When should you sell? If you buy quality businesses like Fortis and RBC stocks at good prices, you don’t necessarily have to sell. Buying them at good valuations allows you to lock in nice dividend yields that will grow your investment income over time. They are the kind of stocks that you can hold for a long time for passive income if you wish to do so.
However, if you intend to sell your stocks, the price you sell is important. If you sell during a market correction, you will get much lower returns than you deserve. Worse, you could be selling at a loss and lose money as a result.
The post Warren Buffett: Do This and Never Lose Money appeared first on The Motley Fool Canada.
Fool contributor Kay Ng owns shares of Fortis and Royal Bank of Canada. The Motley Fool recommends FORTIS INC.
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