Wisdom of Rich Dad

f you have financial knowledge, people who know you might view you as a very valuable commodity – a free money manager. All too often, the person asking you to invest his or her money is the person who knows a little something about investing – just enough to get into trouble. If you’re nailing double-digit returns this year, why couldn’t you repeat the performance year after year, right?

The Problems with Investing for Others
You may think that investing for someone else is just a way of helping out a friend, but the thing is, when you start investing for other people, particularly your friends, you enter a world of complications that you might not have foreseen when you started out.

Legal Matters
Managing a friend’s money is a sticky business and if you go through with it you may be breaking the law. Investment professionals must be registered with the Securities and Exchange Commission or have a federal license. They are heavily regulated by the government and by trade organizations like the National Association of Securities Dealers, for the protection of consumers. If you invest for a friend for compensation, you could be breaking laws that are in place to protect investors from people who aren’t qualified to have discretionary control over others’ accounts.

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As good as dividends have been for investors in Canada, in quarters ahead there could be grounds for further rejoicing. The pace of dividend hikes is picking up, corporate cash balances have climbed to Olympian heights, and dividend-payout ratios have room to climb.

So far in 2012 nearly a third of dividend announcements have raised payments to investors. That’s the highest rate since 2006, according to a CIBC World Markets Inc. report by economist Peter Buchanan. The trend has been up since the second quarter of 2009, when only 5% of dividend announcements specified higher payments.

The capacity to raise dividends keeps on expanding. Cash balances on corporate balance sheets recently surpassed $500 million in Canada, an amount equal to about 30% of Gross Domestic Product (GDP). Normally, corporate cash balances are about 10% of GDP.

The pressure to share the wealth is mounting. Not only are shareholders pushing for greater distributions but so are groups seeking economic growth, jobs, and reductions in government deficits. Even business-friendly Prime Minister Harper may be getting into the act: the federal budget due in late March mayimpose penalties on CEOs who hoard cash.

As executives and Boards of Directors feel the heat, it wouldn’t be surprising to see them dipping more into their cash coffers to raise dividends. They could also allocate more to share buybacks, additionally boosting shareholder value. Capital expenditures will also likely be ramped up, generating cost savings and revenue growth that contribute to shareholder value over the longer term.

According to CIBC World Markets, the dividend-payout ratio for companies in the S&P/TSX Composite Index stands at 41% (based on average earnings over the last four quarters). Considering the historical median is 45%, there would seem to be room for this ratio to grow.

In fact, there is some possibility the payout ratio could rise substantially above the historical norm, if comparable (commodity-based) stock markets are any guide. Notably, the companies in Australia’s main stock market index, the S&P/ASX 200, pay out 65% of their earnings in dividends.

In Canada, the utilities, industrials, and materials sectors have the most room for dividend increases. Their payout ratios are the lowest relative to their respective historical averages. Energy, consumer-discretionary and telecom sectors have the least room.

From 2010 to 2011, corporate profits in Canada rose 15% to $208 billion, further augmenting cash reserves. As a percentage of corporate assets, cash currently stands at 7%, up substantially from 4% a decade ago (financial companies excluded).

The materials and energy sectors have been mainly responsible for the growing cash piles. CIBC World Markets says an in-house study found that companies with twice normal cash balances had a 7% chance of raising their dividend in a quarter, compared to 4% for companies with payout ratios 25% or more below their norm.

Many people, perhaps inspired by the books and seminars of financial guru Robert Kiyosaki, are attracted to real properties as an investment. But dealing with tenants and city hall can be a source of aggravation, as highlighted by the current furor over unpaid water bills in Ontario.

Some landlords include the water bill in the rent. Others charge it directly to their tenants to provide an incentive to use water economically. Whenever a delinquency in payments arises, many landlords in Ontario are finding that their municipality has recently transferred responsibility for collection from the water utility to them. They have to retrieve the money themselves or have it added to their tax bill.

Kayla Andrade of Cambridge, Ont. knows the aggravation only too well. She is a young mother of two children, and a landlord with tenants whose delinquent accounts have driven up her taxes.  “Just because I am called a landlord does not mean I am rich—I am just getting by,” she says.

Numerous other landlords in Ontario are finding themselves in similar straits, and a groundswell of protest seems to be building. Andrade, in fact, is circulating a petition that calls on the Ontario Government to end the transfer of water bills to landlords.

Compared to water utilities, small-scale landlords like Andrade have less recourse for collecting unpaid water services, says Rachelle Berube, owner of a property management firm and blogger at Landlord Rescue. A utility can ask for deposits in advance, engage collection agencies, cut off service and sue the tenant.  “The landlord has to wait until the tenant moves out and then take them to small claims court at their own expense,” adds Berube. “And small claims can take a year to get your money back.”

“You’re at risk from the tenants, and the laws are heavily pro-tenant,” she continues. “This is why there is little decent affordable rental housing—it’s just too damn risky.”

It might be supposed that landlords can recoup their losses by raising rents on tenants in other units, or on future occupants of the unit in arrears. But this makes their accommodations less competitive on the market, which can result in longer vacancies and a failure to break even.

Many local taxpayers may prefer that landlords be held responsible in order to avoid having the water bills put on their tax rolls. However, by making the ownership of rental properties even more uneconomical, the stock of affordable rental housing will be at risk of shrinking further. And this could lead to greater spending by local governments in the areas of social housing and related services.

Conservation issues may come into play, as well. Passing the tab to someone less able to collect on overdue payments could mean that the problem of unpaid water usage and over-consumption will grow steadily larger over the years to come—not a socially desirable outcome, it would seem.

Could the next bubble to burst be student loans?

The burden is big: U.S. college students borrowed $117 billion in federal student loans last year, and the Consumer Financial Protection Bureau reported earlier this year that debt from student loans exceeds $1 trillion, surpassing credit card debt for the first time.

Tuition and fees at both public and private universities have been steadily increasing and some higher education institutions are cutting financial aid, reducing class offerings or even freezing enrollment at campuses because of state and federal funding shortfalls. California State University, for example, announced in March that it was not accepting new students at 15 of its 23 campuses for the spring 2013 semester and will wait-list all applicants the following Fall after a $750 million funding cut.

President Obama wants to overhaul the college education system and proposed a new financial aid program during his State of the Union address in January, saying higher education isn’t a luxury. Rather, Obama says “It’s an economic imperative that every family in America should be able to afford.” In a recent speech at the University of Michigan, he told students that colleges were being put on notice. At the heart of the problem: “If you can’t stop tuition from going up, then the funding you get from taxpayers each year will go down,” he says.

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There is much more to life than making money. But it’s safe to say that earning more money can significantly change the course of your life–especially if it’s $1 million or more.

If you’re wondering how to become a millionaire (and who isn’t?), the answer is that most of them are self-made men and women. It’s certainly possible to break $1 million mark working at a corporate job, but as most employees can tell you, you often have little say in who gets promoted ahead of you. Not to mention that a big corporate payoff usually takes decades of work. You won’t find many millionaires under 35 at Fortune 500 companies.

Entrepreneurs, on the other hand, can take control of their circumstances and create opportunities for earning more money. And they can do it much faster than their corporate counterparts. How can you do the same?

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The old have gotten wealthier, while the young have become poorer. That’s the conclusion of “The Old Prosper Relative to the Young,” a recent report by economists and researchers at the Pew Research Center.

In documenting a rising age gap with regard to economic well-being, the authors compare households headed by adults over age 65 to households headed by adults younger than 35. They examine data over time–particularly from 1967, 1984, 2005, and 2009-2010. (The comparison between 2005 and 2009-2010 illustrates the impact of the Great Recession.)

Here are some of their conclusions:

• From 1984 to 2009, the median net worth of older households rose 42%. For younger households, it declined by 68%.

• The gap in wealth between older and younger households widened over time. In 1984, the median net worth of older households was $108,000 higher than that of younger households. But by 2009, the median net worth of older households was $166,832 higher than that of younger households, the “largest (gap) in the 25 years that the government has been collecting this data.” (All figures are expressed in 2010 dollars.)

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