Comments on: Leveraged Investing and Prime Interest Rates http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm Building Wealth through Saving and Investing Sun, 14 Mar 2010 17:53:00 -0400 http://wordpress.org/?v=abc hourly 1 By: John http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-62391 John Sat, 29 Nov 2008 17:20:38 +0000 http://www.milliondollarjourney.com/?p=696#comment-62391 If the asset you buy falls in value you are done. Think of the situation of investors who bought elements of XDV in the last 6 months that are down 30 to 40% this year. It may be years until they make it up the capital losses If the asset you buy falls in value you are done. Think of the situation of investors who bought elements of XDV in the last 6 months that are down 30 to 40% this year. It may be years until they make it up the capital losses

]]> By: Dividend Growth Investor http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60415 Dividend Growth Investor Thu, 13 Nov 2008 18:42:50 +0000 http://www.milliondollarjourney.com/?p=696#comment-60415 DAvid, That's makes sense, thanks for your input! Dividend Growth Investor DAvid,

That’s makes sense, thanks for your input!

Dividend Growth Investor

]]> By: BrianM http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60302 BrianM Wed, 12 Nov 2008 16:50:55 +0000 http://www.milliondollarjourney.com/?p=696#comment-60302 Do you also have to consider differences in compounding periods for the HELOC vs dividend yield? Do you also have to consider differences in compounding periods for the HELOC vs dividend yield?

]]> By: Paul S http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60298 Paul S Wed, 12 Nov 2008 16:18:22 +0000 http://www.milliondollarjourney.com/?p=696#comment-60298 Another lower risk way to leverage is by borrowing from a Universal insurance plan and investing the funds. The risk is lower because no matter what happens to the market (account value), you are going to die and pay your debts. :-) Happy thoughts... Another lower risk way to leverage is by borrowing from a Universal insurance plan and investing the funds. The risk is lower because no matter what happens to the market (account value), you are going to die and pay your debts. :-)

Happy thoughts…

]]> By: Brad Castro http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60297 Brad Castro Wed, 12 Nov 2008 16:18:13 +0000 http://www.milliondollarjourney.com/?p=696#comment-60297 I'm a little like GKH. I've used 0% promotional credit cards in the past. My Leveraged Investing is through a combination of options and stocks - writing puts to acquire stocks I want (high quality dividend payers) at a discount and then selling covered calls for additonal income once I've acquired the stock. The trick about covered calls is to only write on a portion of your holdings - that way the unused portion of your portfolio is there if you need to roll out and up on the first batch of covered calls without taking a loss on the calls. The biggest risk with covered calls, after all, is to the upside when the underlying stock makes a big move up. My objective is to generate additional income without having to sell the stock against my will. Good luck - I’m a little like GKH. I’ve used 0% promotional credit cards in the past. My Leveraged Investing is through a combination of options and stocks – writing puts to acquire stocks I want (high quality dividend payers) at a discount and then selling covered calls for additonal income once I’ve acquired the stock.

The trick about covered calls is to only write on a portion of your holdings – that way the unused portion of your portfolio is there if you need to roll out and up on the first batch of covered calls without taking a loss on the calls. The biggest risk with covered calls, after all, is to the upside when the underlying stock makes a big move up. My objective is to generate additional income without having to sell the stock against my will.

Good luck -

]]> By: GKH http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60294 GKH Wed, 12 Nov 2008 15:41:08 +0000 http://www.milliondollarjourney.com/?p=696#comment-60294 When I was starting out some thirty years ago I had no money to invest in stocks so I borrowed it against my credit cards. I reinvested all dividends, sold off my portfolio to move half way across the world, and started the entire process again. Today I sell covered calls on several key holdings, have invested in several bond funds paying out monthly dividends, and still re invest everything. Note this is all in my IRA. The markets will come back. They always do and stocks that pay a dividend and have options to buy or sell is the only way to go. When I was starting out some thirty years ago I had no money to invest in stocks so I borrowed it against my credit cards. I reinvested all dividends, sold off my portfolio to move half way across the world, and started the entire process again. Today I sell covered calls on several key holdings, have invested in several bond funds paying out monthly dividends, and still re invest everything. Note this is all in my IRA.

The markets will come back. They always do and stocks that pay a dividend and have options to buy or sell is the only way to go.

]]> By: DAvid http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60291 DAvid Wed, 12 Nov 2008 14:54:57 +0000 http://www.milliondollarjourney.com/?p=696#comment-60291 Dividend Growth Investor, In Canada at least, HELOC are interest only. DAvid Dividend Growth Investor,
In Canada at least, HELOC are interest only.

DAvid

]]> By: Dividend Growth Investor http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60290 Dividend Growth Investor Wed, 12 Nov 2008 14:30:39 +0000 http://www.milliondollarjourney.com/?p=696#comment-60290 I guess my only concern is aren't your monthly payments of the heloc made up of interest and principal? If you only pay out the interest, then I see how you could be cash flow positive.. If you also have to pay principal as well, then you might have to sell stock to cover the monthly payment even if your dividend yield on cost increases over time.. I guess my only concern is aren’t your monthly payments of the heloc made up of interest and principal? If you only pay out the interest, then I see how you could be cash flow positive.. If you also have to pay principal as well, then you might have to sell stock to cover the monthly payment even if your dividend yield on cost increases over time..

]]> By: Finance_Addict http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60288 Finance_Addict Wed, 12 Nov 2008 14:23:55 +0000 http://www.milliondollarjourney.com/?p=696#comment-60288 I don't just focus entirely on cash flow because as moneygardner pointed out you don't just need yield but also capital gains to keep score. I disagree with paul s comments. It's the fact that you leverage that significantly amplifies any gains (and losses.) However you have to at least get in the game if you want to win. I agree with Al that there will come a day when using a HELOC will become more expensive. If that is the case one can scale back or wait and pick your spots. Building a portfolio where your cash flow positive is clearly a good approach but your real gains will not come from your yield but from capital gains. I don’t just focus entirely on cash flow because as moneygardner pointed out you don’t just need yield but also capital gains to keep score. I disagree with paul s comments. It’s the fact that you leverage that significantly amplifies any gains (and losses.) However you have to at least get in the game if you want to win. I agree with Al that there will come a day when using a HELOC will become more expensive. If that is the case one can scale back or wait and pick your spots. Building a portfolio where your cash flow positive is clearly a good approach but your real gains will not come from your yield but from capital gains.

]]> By: DBennett http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60286 DBennett Wed, 12 Nov 2008 14:09:19 +0000 http://www.milliondollarjourney.com/?p=696#comment-60286 Hey, I'm currently a student and have a student line of credit with interest only payments (for the next 2.5 years). I was thinking about using $5k as a leveraged investment in this market. The great advantage I have right now is, if the dividend yields exceed my interest rate (prime plus 1) or close to it, I essentially pay nothing for "renting money". Currently I own BMO, Husky Energy, and Yellow Pages. All pay over a 6% dividend. If I invested similar with a leveraged portfolio, it could be a good buy. BTW, I am a Commerce student majoring in Finance if that helps. What does everyone think? Hey,

I’m currently a student and have a student line of credit with interest only payments (for the next 2.5 years). I was thinking about using $5k as a leveraged investment in this market. The great advantage I have right now is, if the dividend yields exceed my interest rate (prime plus 1) or close to it, I essentially pay nothing for “renting money”. Currently I own BMO, Husky Energy, and Yellow Pages. All pay over a 6% dividend. If I invested similar with a leveraged portfolio, it could be a good buy. BTW, I am a Commerce student majoring in Finance if that helps.

What does everyone think?

]]> By: FrugalTrader http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60283 FrugalTrader Wed, 12 Nov 2008 13:54:18 +0000 http://www.milliondollarjourney.com/?p=696#comment-60283 Good eyes CF, I didn't account for the dividend tax where I probably should have. The bright side is that dividend taxes are very low and even nil for the average person in some provinces (like BC). For those of you interested, here are the tax rates across Canada: http://taxtips.ca/marginaltaxrates.htm Good eyes CF, I didn’t account for the dividend tax where I probably should have. The bright side is that dividend taxes are very low and even nil for the average person in some provinces (like BC).

For those of you interested, here are the tax rates across Canada:
http://taxtips.ca/marginaltaxrates.htm

]]> By: cannon_fodder http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60278 cannon_fodder Wed, 12 Nov 2008 13:44:40 +0000 http://www.milliondollarjourney.com/?p=696#comment-60278 I think another point is that, over time, the gap between the Yield on Original Investment and your interest costs should grow. The interest rates are typically range bound (there are some temporary periods where they are atypically low or high) while the dividend yield should continue to go up. I bought National Bank several years ago and sold it earlier this year (before the meltdown). When I purchased it the yield was around 4%, but after several years the yield rose to over 11% based on my original investment. Currently, my non-reg portfolio is yielding 4.80% on my original investment while the interest is at a rate of 3.85%. In after tax terms (FT - did you also calculate the after tax cost of the dividends not just the interest cost?) I'm cash flow positive by 1.6% x the value of my portfolio. Interest rates will be going down again and stay low for several months before beginning their rise. That will happen when the economy starts picking up significantly which should translate into higher company profits which will result in increases in the dividend yields. Unless the economy starts boiling over, I don't anticipate being cash flow negative with this portfolio. A final note - the tax rates vary by province. The dividend tax rates are least favourable in Quebec, with Alberta, BC and the Yukon the best provinces in which to collect dividends. I think another point is that, over time, the gap between the Yield on Original Investment and your interest costs should grow. The interest rates are typically range bound (there are some temporary periods where they are atypically low or high) while the dividend yield should continue to go up. I bought National Bank several years ago and sold it earlier this year (before the meltdown). When I purchased it the yield was around 4%, but after several years the yield rose to over 11% based on my original investment.

Currently, my non-reg portfolio is yielding 4.80% on my original investment while the interest is at a rate of 3.85%. In after tax terms (FT – did you also calculate the after tax cost of the dividends not just the interest cost?) I’m cash flow positive by 1.6% x the value of my portfolio. Interest rates will be going down again and stay low for several months before beginning their rise. That will happen when the economy starts picking up significantly which should translate into higher company profits which will result in increases in the dividend yields.

Unless the economy starts boiling over, I don’t anticipate being cash flow negative with this portfolio.

A final note – the tax rates vary by province. The dividend tax rates are least favourable in Quebec, with Alberta, BC and the Yukon the best provinces in which to collect dividends.

]]> By: moneygardener http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60277 moneygardener Wed, 12 Nov 2008 13:43:24 +0000 http://www.milliondollarjourney.com/?p=696#comment-60277 The chart title should read "Dividend Yield Required To Break Even on Returns From Dividends Alone During Leveraged Investing". The assumption is always made the not capital gains will be realized. The longer you maintain a strategy such as this in place, the more likely you are to be in a position to realize some capital gains. Being conservative it is wise to ignore this affect, but in reality it should be considered as a piece of the puzzle for someone long term. The chart title should read “Dividend Yield Required To Break Even on Returns From Dividends Alone During Leveraged Investing”. The assumption is always made the not capital gains will be realized. The longer you maintain a strategy such as this in place, the more likely you are to be in a position to realize some capital gains. Being conservative it is wise to ignore this affect, but in reality it should be considered as a piece of the puzzle for someone long term.

]]> By: Al http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60273 Al Wed, 12 Nov 2008 13:23:15 +0000 http://www.milliondollarjourney.com/?p=696#comment-60273 Looking at the broader picture, I'd be closing out a leveraged position if I had one. Tight credit markets should lead to higher cost of borrowing, and the global economic slowdown should have a negative impact on dividend payouts. I used the word 'should' in both cases because I don't have a crystal ball, but basic economics support my conclusions. Looking at the broader picture, I’d be closing out a leveraged position if I had one. Tight credit markets should lead to higher cost of borrowing, and the global economic slowdown should have a negative impact on dividend payouts. I used the word ’should’ in both cases because I don’t have a crystal ball, but basic economics support my conclusions.

]]> By: paul s http://www.milliondollarjourney.com/leveraged-investing-and-prime-interest-rates.htm/comment-page-1#comment-60271 paul s Wed, 12 Nov 2008 12:52:41 +0000 http://www.milliondollarjourney.com/?p=696#comment-60271 It's an incredible risk to take for small returns. Reality is, the Dow Jones Industrial average adjusted for inflation had an annual retun of 1.56% over the last 40 years. Fees paid make that return negative. If you are NOT getting dividends, then you are losing. I say, don't borrow the money, put your cash every month into GICs (or some guranteed investment). No risk AND relatively equal returns to the market. Sadly, the only person making money in that situation is me. Not a Broker, or Trader, or Mutual Fund "Manager", or the Banker...etc It’s an incredible risk to take for small returns. Reality is, the Dow Jones Industrial average adjusted for inflation had an annual retun of 1.56% over the last 40 years. Fees paid make that return negative. If you are NOT getting dividends, then you are losing.

I say, don’t borrow the money, put your cash every month into GICs (or some guranteed investment). No risk AND relatively equal returns to the market.

Sadly, the only person making money in that situation is me. Not a Broker, or Trader, or Mutual Fund “Manager”, or the Banker…etc

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