On April 2, I deposited an additional $10,000 cash into my DivGro portfolio. This bonus deposit is in addition to my regularly scheduled deposits and follows from having closed a certificate of deposit (CD) account after the CD had matured.
A CD is a promissary note issued by a bank for a deposit made for a specified term. The holder is restricted from withdrawing funds on demand, at least without incurring a penalty. In return, the bank offers an interest rate that is slightly better than those for savings and checking accounts. Deposits are FDIC insured, which makes these type of investments safer than investing in stocks. Unfortunately, interest rates offered on CDs are below the inflation rate (currently 2%), which means your investment actually is losing value (buying power) over time.
Two years ago I funded a 2-year term CD in the amount of $10,000. At maturity, the account had a total value of just over $10,300. I'd say that $300 is a rather poor return on my original investment! Effectively, I earned only 1.5% per year. When my CD matured, I was given the option to renew it with an interest rate 0.25% higher than before. Even at the increased rate, my investment would be losing value over time!
By investing in dividend growth stocks, I can earn a higher (and growing) yield at the cost of increased risk. I'm willing to take on the increased risk in order to beat inflation.
My goal is to handily beat inflation with dividend growth and reinvestment. I also wish to end with at least 10 dividend growth stocks in DivGro by the end of 2013. If I continue to invest in chunks of at least $2,500, I won't have enough funds by the end of the year to buy 10 different stocks. With this bonus deposit, that concern disappears. In fact, now I can seriously consider buying one or two more MLPs, like ETP, in chunks of $5,000 each!
I've updated my current Portfolio page with this bonus deposit, to show available cash of $11,218. I'm on the lookout for fair-valued dividend growth stocks to invest in. With the market (S&P 500 and DJI) at all-time highs, this is proving to be quite a challenge!
In future, if the opportunity presents itself again, I'll consider adding more cash to DivGro through bonus deposits such as this one.
Friday, April 12, 2013
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Wow that's a nice deposit! It will be interesting to see what you end up buying.
ReplyDeleteI use cds to save for a car. I pretend I have car payment (I really don't) which I use to buy cds after it accumulates for a few months. Even though the interest gained is minimal, it's better than paying interest on a car note!
But yeah, cds are a poor investment. Only useful for saving at current rates.
Cheers
That's actually a smart way of using CDs! You're goal is not to invest, but to save up to buy a car. By doing it this way, you're "saving" the interest you would have paid if you bought a car using a car loan.
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