An Interview with Derek Foster

As Derek Foster (DF) is pretty well known in the finance space here in Canada, while reviewing his latest book The Idiot Millionaire, I thought it would be a good opportunity to snag an interview with him. My telephone conversation with Mr. Foster was casual, informative and entertaining.

It turns out that my financial path is fairly similar with DF’s.  He is a millionaire in his early 40’s but indicated that he had a similar net worth at my age with similar frugal tendencies.  What was my impression of Derek Foster?  Although he is smart, knows his stuff, and very willing to speak about any financial topic, he has sincere humbleness about him.  He readily admits when he is wrong, but still doesn’t fear putting himself out there when explaining what he believes in.  We chatted for over an hour and kept things informal, but I managed to come up with some financial questions.

For those of you who don’t know who Derek Foster is, here is the short version:

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.

Foster currently lives off and supports his family through dividend distributions, book sales and speaking engagements. 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.

Best Financial Move

Back in his earlier books, DF mentions about his big bet on Philip Morris, a Tobacco company.   As he does a lot of research on each of his stocks, he was convinced that the stock was oversold.  He was so certain  of this that he went all-in via leveraging.  In hindsight, DF admits that it was an extremely risky move, but the end result was that it doubled his net worth.  Another big bet that has paid off was his investment in Canadian Oil Sands.  In 2002/2003 when oil was low, DF noticed some coverage on the peak oil theory, recognized that oil was cheap and bought into COS when it was a relatively small company.

Worst Financial Move

DF admits that one of his worst financial moves was cashing out in early 2009, about a month before the market bottom in March 2009.  However, fortunately for him, he jumped back into the market at the right time to minimize the damage.  His latest book goes into the positions he bought back into along with the damage (or lack thereof) to his portfolio.  Without disclosing too much of the contents of the book, his portfolio really came out relatively unscathed due to continuing to sell put options (see next question) and pocketing the premiums, being able to buy US stocks with a strong CAD, and only re-buying companies that were cheap.

Selling Puts Now?

In DF’s book “Money for Nothing”, Derek promotes the put option selling strategy. In a nutshell, selling put options is a way to buy stocks at a particular price which is the opposite of selling covered calls.  The investor who sells the put option collects a premium for doing so with no guarantee that the buy/strike price will be hit.  As mentioned above, DF is still selling puts on mostly US companies.

RRSPS/TFSAs?

In DF’s first book, he mentions that RRSP’s may not be the best tool for everyone – and I agree.  So I had to ask his thoughts on RRSP‘s and TFSA‘s now.  While he still believes that low income earners should generally avoid RRSPs, he has high praise for the TFSA.  For DF, he keeps most of his investments in a non-registered account, but is utilizing the TFSA as well.

Favorite credit card?

As I’m a frugal guy who loves to collect reward points, I was interested in comparing my wallet to the credit cards that DF uses.  As I’ve come to discover, DF likes to keep things simple.  He uses the PC Mastercard as his primary card, Petro Canada for gas, and the TD Gold card for business and free roadside assistance.

Favorite Discount Broker?

DF uses TD Waterhouse along with the majority of his banking.  As DF likes to simplify things, he’d prefer to pay the extra few dollars in commissions (compared to Questrade)  if it means that everything is kept in one place.

Current Investment Strategy?

Although DF is known for buying dividend growth stocks mixed in with income trusts for their higher distributions, his investment strategy has recently shifted a little.  When he first retired, his dividend portfolio was his primary source of income, thus extremely tax efficient.  However, with the business income from selling books and paid speaking engagements, the non-registered dividend stream isn’t as efficient.  As such, DF still sticks with strong dividend stocks, but ones with slightly lower yields that have a history of buying back stock.

Plans for the future?

On a personal level, DF and family really enjoy extended road trips and hope to continue with their adventures (he has the time, why not!)  From an investment perspective, DF plans to continue selling put options and buying quality stocks at reasonable prices.

Words of Wisdom?

DF strongly believes in focusing on quality stocks with strong brands and to keep it simple.  For financial success, DF recommends to:

  1. Save
  2. Invest
  3. Avoid the fees
  4. Eliminate garbage stocks, focus on the quality when they are at a fair price.

Derek also offers a free monthly newsletter, if you’re interested, you can sign up on his website stopworking.ca.

Questions for Derek Foster?

Mr. Foster has agreed to answer reader questions, so here’s your chance!   Please place your questions in the comments (here) and DF will be around to answer.

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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.
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Colleen
8 years ago

Hi Derek

I want to invest in DRIPS and hope you can help me. How do I find out what Cdn stocks have DRIPS, if I can invest directly with those companies, if not do I use a discount brokerage etc. As well, what US companies offer DRIPS?

Be careful
8 years ago

Be very very careful when implementing any option strategy. It is far to easy to get badly burnt with options, particularly sell/write strategies.

Ed Danneberg
8 years ago

Hi Derek! I just learned of you and your story and see that you are “speaking” for SPP in Saskatoon this Friday. While I will endeavor to be there in person, I really have one ‘burning’ question” that I’m sure everyone reading would like to have answered:

Based on what I heard you say in an interview on John Gormley this morning, you ‘retired’ (though it sounds like you stay pretty busy with books and speaking!) at 34 with the ability to live off your dividend income. With most dividend stocks paying a 2-5% return quarterly, my question – and many others I’m sure – is, where did you get your first bundle of cash to buy enough stock which would pay enough dividend to live off of? With any quick calculations, one would need at least $1Million dollars in dividend paying stocks in order to live off the dividends – and not live in a box!. For those that don’t do math, $1Million in dividend paying stocks (Kelloggs, Coke, P&G, etc) would equate to about $30,000 a year in dividend income – certainly not enough to live a comfortable retirement and definitely not enough to live like a millionaire!!
Thanks for the honest answer! If we get a reply I will buy ALL your books Friday at the talk!

Cam
10 years ago

Dear Derek,
I’m a 17 year old high school student, and I was wondering what I can do at my age to start investing to ensure a better future for myself?

cannon_fodder
10 years ago

Thanks Nurseb911 for pointing out articles where Derek was interviewed around the bottom of the market downturn in 2009. That was a very tough time for me personally… but I stayed the course and came out in great shape.

Could it have been better? Absolutely… but it could have been a lot worse, too.

I wonder what Derek would do if a similar scenario played itself out 10 years from now…

Nurseb911
10 years ago

Did he mention his true get rich strategy?…..selling books about nothing new? That is books that discuss commonly understood investing principles but not highlighting the most important risks of those strategies?

My Own Advisor
10 years ago

Good interview Derek (and Frugal Trader).

@Derek – have a good weekend in Toronto this weekend.

Derek Foster
10 years ago

Idiot investor fan,

The witholding tax on US stocks is 15% (witheld when you receive dividends). You can avoid this tax if you are buying the stocks inside your RRSP (but NOT inside your TFSA) – due to a tax treaty with the US. In regular non-registered accounts, you pay the tax but can claim some or all of it back thru a foreign tax credit…You can avoid some of the tax sting by looking for companies that repurchase a portion of their shares (which offers the same effect as DRIPping, but in a much more tax-advantaged way)…

For example (and this is NOT a recommendation), I grabbed my copy of the 2009 ExxonMobil annual report. From the report, I see that the company spent a little over $8 billion to shareholders for dividends, but then it spent around $19 billion (net) for share repurchases. So it returned almost 2.5X the amount for share repurchases as dividends.

Realize also that 2009 was a “weak” year for oil prices because of the recession – the company repurchased over $35 billion worth of stock in 2008…

Cheers,
Derek

An Idiot investor fan
10 years ago

Derek:
Can you tell us about the withholding tax when one purchases dividend paying stocks in companies listed on the US stock exchange. For example the rate of the withholding tax, the role of the broker – they withhold and transmit it to the US. Is it possible to apply to get the withholding tax back? Are there any ways to avoid it, for example enroll in the DRIP program instead of receiving the dividends in cash? Are there any US taxes when one sells the US shares?
Thank you,