Comments on: Leveraged Dividend Investing for the Cash Flow http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm Building Wealth through Saving and Investing Sat, 21 Nov 2009 03:00:37 -0500 http://wordpress.org/?v=abc hourly 1 By: Slack Investor http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-70009 Slack Investor Thu, 12 Feb 2009 01:37:39 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-70009 This post is an oldy, but goody. I forgot that I read this last year, but something must have stuck because when I met with my financial advisor in January, I talked about now being the time to leverage and invest in dividend paying stocks. We came up with a mix of ETFs with solid dividend paying companies (the ETFs are yielding 6.5% to 7.5%). We borrowed money from our HELOC, which is still at prime (3%) since we got it in 2007 before the credit markets got messed up. This means that we're averaging about 4% return on the investment, so we've got significant positive cash flow by using other people's money. I haven't decided if I'm going to take the extra cash flow to pay down the HELOC or continue to reinvest. Any thoughts? Granted there is risk that companies will start cutting or lowering their dividends as their profits suffer in the year ahead, but we would have to see the payouts drop significantly (more than half) before we need to worry about not being able to cover our interest costs. Another risk is that interest rates start to climb again, but if you believe the media hype, this shouldn't happen until the economy starts seeing significant improvement. I personally think that now is a great time to leverage and buy stocks while they're on sale. (With the caveat that you have a long term investing time horizon). I'm interested to see some updated comments on this thread since the market has changed a lot in the last year since it was posted. This post is an oldy, but goody. I forgot that I read this last year, but something must have stuck because when I met with my financial advisor in January, I talked about now being the time to leverage and invest in dividend paying stocks.

We came up with a mix of ETFs with solid dividend paying companies (the ETFs are yielding 6.5% to 7.5%). We borrowed money from our HELOC, which is still at prime (3%) since we got it in 2007 before the credit markets got messed up. This means that we’re averaging about 4% return on the investment, so we’ve got significant positive cash flow by using other people’s money. I haven’t decided if I’m going to take the extra cash flow to pay down the HELOC or continue to reinvest. Any thoughts?

Granted there is risk that companies will start cutting or lowering their dividends as their profits suffer in the year ahead, but we would have to see the payouts drop significantly (more than half) before we need to worry about not being able to cover our interest costs. Another risk is that interest rates start to climb again, but if you believe the media hype, this shouldn’t happen until the economy starts seeing significant improvement.

I personally think that now is a great time to leverage and buy stocks while they’re on sale. (With the caveat that you have a long term investing time horizon). I’m interested to see some updated comments on this thread since the market has changed a lot in the last year since it was posted.

]]> By: annbanan http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-64094 annbanan Fri, 12 Dec 2008 15:17:57 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-64094 I read recently that with a leverage, it is best to use the dividends to pay out the loan meaning you never use you own money but eventually get the loan paid off. I always thought it was better to reinvest those dividends? Could someone give the pros and cons of each? thanks I read recently that with a leverage, it is best to use the dividends to pay out the loan meaning you never use you own money but eventually get the loan paid off. I always thought it was better to reinvest those dividends? Could someone give the pros and cons of each?

thanks

]]> By: telefantastik http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-47330 telefantastik Fri, 08 Aug 2008 02:49:09 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-47330 Hi FT and readers, If you're aware of any resources (books/articles) on leveraged investing, could you recommend any? It would be interesting to see some more analysis on both optimistic and pessimistic sides of things. The market conditions and especially low interest rates make the strategy seem very attractive for the mid-long term, but I wouldn't want to jump in without doing some due diligence. Thanks Hi FT and readers,

If you’re aware of any resources (books/articles) on leveraged investing, could you recommend any? It would be interesting to see some more analysis on both optimistic and pessimistic sides of things.

The market conditions and especially low interest rates make the strategy seem very attractive for the mid-long term, but I wouldn’t want to jump in without doing some due diligence.

Thanks

]]> By: Chewbacca http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-34862 Chewbacca Wed, 07 May 2008 19:14:30 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-34862 Not sure why you have assumed annual dividend growth rate of only 2%. Here are some of the growth rates I have calculated and even if you take inflation into account, these numbers are much higher than 2%. BNS.TO - Since 1995, 16.87%. CM.TO - Since 1995, 12.31%. BMO.TO - Since 1995, 12.01% SLF.TO - Since 2001, 18.72%. CNR.TO - Since 1996, 17.40% Not sure why you have assumed annual dividend growth rate of only 2%. Here are some of the growth rates I have calculated and even if you take inflation into account, these numbers are much higher than 2%.

BNS.TO – Since 1995, 16.87%.
CM.TO – Since 1995, 12.31%.
BMO.TO – Since 1995, 12.01%
SLF.TO – Since 2001, 18.72%.
CNR.TO – Since 1996, 17.40%

]]> By: FrugalTrader http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-27676 FrugalTrader Tue, 11 Mar 2008 11:50:04 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-27676 Jared, the spreadsheet simply shows the power of dividend growth. The taxes are paid out of pocket and dividends are reinvested until year 20. Jared, the spreadsheet simply shows the power of dividend growth. The taxes are paid out of pocket and dividends are reinvested until year 20.

]]> By: Jared http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-27640 Jared Tue, 11 Mar 2008 03:03:48 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-27640 FT - One last question about the sheet you displayed here. I noticed that you seem to be using the dividend to both pay the interest and to re-invest. Obviously, this isn't possible so are you assuming that you pay the interest from another souce of income so that you could actually put the dividends back into the portfolio? If that is the case, then each year you actually have a cash flow of -$3600 to pay the interest. Or the other option is to use the dividends to pay the interest, in which case you are not cash flow positive until year 9 (using 0% div growth rate). FT – One last question about the sheet you displayed here. I noticed that you seem to be using the dividend to both pay the interest and to re-invest. Obviously, this isn’t possible so are you assuming that you pay the interest from another souce of income so that you could actually put the dividends back into the portfolio?

If that is the case, then each year you actually have a cash flow of -$3600 to pay the interest.

Or the other option is to use the dividends to pay the interest, in which case you are not cash flow positive until year 9 (using 0% div growth rate).

]]> By: FrugalTrader http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-27584 FrugalTrader Mon, 10 Mar 2008 15:50:15 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-27584 Jared, yes, I will be implementing my leveraged portfolio soon under current market conditions. Only time will tell whether or not i'm making a good move. :) Jared, yes, I will be implementing my leveraged portfolio soon under current market conditions. Only time will tell whether or not i’m making a good move. :)

]]> By: Jared http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-27582 Jared Mon, 10 Mar 2008 15:43:14 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-27582 FT, Have you taken a look at doing this leveraged strategy under the current conditions? With the interest Rate Cut, and the current high yield on all of the big banks it could be cash flow positive almost immediately. Actually using the following numbers: Prime Rate 5.50% Marginal Tax Rate 43% Div Tax Rate 19.61% Market Cap Growth 4% Div Growth 0% Div Rate 4.00% Loan Size $100,000.00 It is cash flow positive in year one. Obviously, I am ignoring the risks that the big banks could cut their dividend (did set Div growth to 0%) or that they could continue to lose value. But if you can accept those risks (or diversify more, and keep the Div Rate) this could creat a positive cash flow very quickly. FT,

Have you taken a look at doing this leveraged strategy under the current conditions? With the interest Rate Cut, and the current high yield on all of the big banks it could be cash flow positive almost immediately.

Actually using the following numbers:

Prime Rate 5.50%
Marginal Tax Rate 43%
Div Tax Rate 19.61%
Market Cap Growth 4%
Div Growth 0%
Div Rate 4.00%
Loan Size $100,000.00

It is cash flow positive in year one.

Obviously, I am ignoring the risks that the big banks could cut their dividend (did set Div growth to 0%) or that they could continue to lose value. But if you can accept those risks (or diversify more, and keep the Div Rate) this could creat a positive cash flow very quickly.

]]> By: Jared http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-27576 Jared Mon, 10 Mar 2008 14:09:51 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-27576 Hey, I may be mistaken but looking at your numbers it appears you only apply the dividend growth of 2% in the very first year instead for each year after that. Or was it your intention to use 3.57% as the divdend rate for each year after the first? If it was, why that number? Hey,

I may be mistaken but looking at your numbers it appears you only apply the dividend growth of 2% in the very first year instead for each year after that. Or was it your intention to use 3.57% as the divdend rate for each year after the first? If it was, why that number?

]]> By: The Smith Manoeuvre Resource | Million Dollar Journey http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-27295 The Smith Manoeuvre Resource | Million Dollar Journey Thu, 06 Mar 2008 17:23:19 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-27295 [...] Leveraged Dividend Investing for Cash Flow [...]

[...] Leveraged Dividend Investing for Cash Flow [...]

]]> By: Dividendgrowth http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-24886 Dividendgrowth Thu, 07 Feb 2008 18:46:52 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-24886 With US interest rates in free fall, I think that this leveraged strategy makes much more sense. I was checking Fidelity's margin rates, and boy, if you borrow more than $500k you are only paying a 4.25%, which is a steal.. http://personal.fidelity.com/products/fixedincome/pocd.shtml.cvsr?refhp=cp With US interest rates in free fall, I think that this leveraged strategy makes much more sense. I was checking Fidelity’s margin rates, and boy, if you borrow more than $500k you are only paying a 4.25%, which is a steal..
http://personal.fidelity.com/products/fixedincome/pocd.shtml.cvsr?refhp=cp

]]> By: Wpg dividends http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-24338 Wpg dividends Sat, 02 Feb 2008 21:27:40 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-24338 Nothing sexier than a spreadsheet about dividends. I am a little surprised at the low rate of growth in the dividend. If like Tom Connolly you chose major canadian financials the annual growth would be in the teens. Leveraging aside have you considered a sheet using those numbers? Even a company like Reitmans has a good yield right now and great annual growth in the dividend. Thanks. Nothing sexier than a spreadsheet about dividends. I am a little surprised at the low rate of growth in the dividend. If like Tom Connolly you chose major canadian financials the annual growth would be in the teens. Leveraging aside have you considered a sheet using those numbers? Even a company like Reitmans has a good yield right now and great annual growth in the dividend. Thanks.

]]> By: Finding Passive/Alternative Income Streams | Million Dollar Journey http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-23393 Finding Passive/Alternative Income Streams | Million Dollar Journey Wed, 23 Jan 2008 10:31:31 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-23393 [...] Of course the beauty of strong dividend paying companies is that they are known to increase their payments at least once a year. Increased dividend payouts from these companies usually result in higher stock prices.  Providing that you start investing in dividends early, then with time, the dividends will become increasingly more significant.  [...]

[...] Of course the beauty of strong dividend paying companies is that they are known to increase their payments at least once a year. Increased dividend payouts from these companies usually result in higher stock prices.  Providing that you start investing in dividends early, then with time, the dividends will become increasingly more significant.  [...]

]]> By: Leveraged Dividend Investing for the Cash Flow | passive income http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-23176 Leveraged Dividend Investing for the Cash Flow | passive income Mon, 21 Jan 2008 20:37:45 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-23176 [...] Read the rest of this great post here [...]

[...] Read the rest of this great post here [...]

]]> By: Dividendgrowth http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-23084 Dividendgrowth Mon, 21 Jan 2008 03:09:59 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-23084 If I were doing this strategy, I would be choosing a basket of stocks which do tend pay at least 1-2% above the market yield of the S&P500, but not more than 6%. I think that most companies which show excessive yield ( at least on the US market) are actually paying excessive dividends, which the market says are noit justifiable by the company's current financial position. ( example: Citigroup and a plethora of financial stocks that recently cut their dividends). If you buy stocks in lists like high-yield dividend achievers, or high-growth dividend achievers you will have a peace of mind about specific stock risk (http://dividendgrowth.blogspot.com/2008/01/my-strategy.html). However, you should run different scenarios assuming worst case scenarios as well. I had data about S&P 500 returns from 1871-2005 and I tried researching a similar strategy. However I assumed a 6% interest rate on my loan, buying S&P 500 ( or a similar basket of US )stocks in 1929. My sample strategy resulted in a complete wipe-out several years later.(http://www.econ.yale.edu/%7Eshiller/data/ie_data.htm) I know that bear markets are not as common as bull markets and that stocks tend to rise over time. However, I would use this sort of leverage/borrowed capital ($100,000) only if I already have $100,000 invested in dividend stocks. That way you will be safer on average in case stocks tumble or dividend payment decrease. If I were doing this strategy, I would be choosing a basket of stocks which do tend pay at least 1-2% above the market yield of the S&P500, but not more than 6%. I think that most companies which show excessive yield ( at least on the US market) are actually paying excessive dividends, which the market says are noit justifiable by the company’s current financial position. ( example: Citigroup and a plethora of financial stocks that recently cut their dividends). If you buy stocks in lists like high-yield dividend achievers, or high-growth dividend achievers you will have a peace of mind about specific stock risk (http://dividendgrowth.blogspot.com/2008/01/my-strategy.html). However, you should run different scenarios assuming worst case scenarios as well. I had data about S&P 500 returns from 1871-2005 and I tried researching a similar strategy. However I assumed a 6% interest rate on my loan, buying S&P 500 ( or a similar basket of US )stocks in 1929. My sample strategy resulted in a complete wipe-out several years later.(http://www.econ.yale.edu/%7Eshiller/data/ie_data.htm) I know that bear markets are not as common as bull markets and that stocks tend to rise over time. However, I would use this sort of leverage/borrowed capital ($100,000) only if I already have $100,000 invested in dividend stocks. That way you will be safer on average in case stocks tumble or dividend payment decrease.

]]> By: Weekly Dividend Investing Roundup - January 18, 2008 » The Dividend Guy Blog http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-22945 Weekly Dividend Investing Roundup - January 18, 2008 » The Dividend Guy Blog Fri, 18 Jan 2008 15:19:23 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-22945 [...] me leveraged investing is only appropriate in the right circumstances. Million Dollar Journey provided a good take on [...]

[...] me leveraged investing is only appropriate in the right circumstances. Million Dollar Journey provided a good take on [...]

]]> By: FrugalTrader http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-22775 FrugalTrader Wed, 16 Jan 2008 13:34:43 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-22775 Konstantin, Yes you are correct. If you are in a lower tax bracket, leveraged investing has less benefit as a smaller amount of interest is tax deductible. Same with an RRSP. If you are in a lower tax bracket, it's generally advised to keep most of your investments outside of an RRSP. Konstantin, Yes you are correct. If you are in a lower tax bracket, leveraged investing has less benefit as a smaller amount of interest is tax deductible. Same with an RRSP. If you are in a lower tax bracket, it’s generally advised to keep most of your investments outside of an RRSP.

]]> By: Konstantin http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-22751 Konstantin Wed, 16 Jan 2008 05:56:05 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-22751 FP/ Guys, am I getting this right? If you are in low (<15%) marginal tax rate (tax-efficient income sources) and/or lower tax bracket this strategy is net PV negative (losing)because the effect of the loan interest tax deductibility is pretty minimal and therefore the tax benefits cannot offset the interest burden over the final net PV result? Thank you for your clarifications/explanations. FP/ Guys,

am I getting this right?
If you are in low (<15%) marginal tax rate (tax-efficient income sources) and/or lower tax bracket this strategy is net PV negative (losing)because the effect of the loan interest tax deductibility is pretty minimal and therefore the tax benefits cannot offset the interest burden over the final net PV result?

Thank you for your clarifications/explanations.

]]> By: Four Pillars http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-22746 Four Pillars Wed, 16 Jan 2008 04:22:30 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-22746 For what it's worth - my explanation for the ROC issue: <i>Getting ROC in a dividend is equivalent to selling shares which means the loan covering the amount that you have “sold” is no longer eligible for interest deductibility.</i> Mike For what it’s worth – my explanation for the ROC issue:

Getting ROC in a dividend is equivalent to selling shares which means the loan covering the amount that you have “sold” is no longer eligible for interest deductibility.

Mike

]]> By: FrugalTrader http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm/comment-page-1#comment-22738 FrugalTrader Wed, 16 Jan 2008 02:12:16 +0000 http://www.milliondollarjourney.com/leveraged-dividend-investing-for-the-cash-flow.htm#comment-22738 Ben, I first read the ROC rule in one of Tim Cestnick's books and it's confirmed by Ed Rempel. As a general rule of thumb, capital gains and ROC distributions should not be withdrawn from an investment loan or else the tax deductibility of the loan will be reduced. You should double check this with an accountant. Ben, I first read the ROC rule in one of Tim Cestnick’s books and it’s confirmed by Ed Rempel. As a general rule of thumb, capital gains and ROC distributions should not be withdrawn from an investment loan or else the tax deductibility of the loan will be reduced. You should double check this with an accountant.

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