Margin account buy dividend stocks

[Cookie]

I know that the vast majority wouldn't borrow to invest
Also the vast majority of CFD traders do not make money
So I am expecting a lot of stick for even daring to suggest this!

Not sure if this strategy has a name or has been suggested before. But if you were to use a margin loan to purchase dividend stocks where the dividend would pay for the interest and then pocket any increase in share price or dividend over the interest rate.

IB, for example, offer 2% margin loan on GBP

Obviously the share price and dividend could go down. So possibly best to consider stocks that have stable growth and consistent dividend. Maybe an Investment Trust or dividend aristocrat

[Alaric]

But if you were to use a margin loan to purchase dividend stocks where the dividend would pay for the interest and then pocket any increase in share price or dividend over the interest rate.

If this is a long term strategy, it's a truism that you make money if the cost of borrowing is less than the return on the asset. It also increases risk because of the non trivial probability that the return on the asset is lower than the borrowing cost. It's part of the structure of ITs and REITs that some borrow to invest.

As a short term strategy, in the absence of tax arbitrage, there isn't much point in buying dividends. Take a share priced at 100, about to pay a 5% dividend. In the absence of any other drivers to the share price, it's going to drop to 95 as soon as it goes ex div.

[GoSeigen]

I know that the vast majority wouldn't borrow to invest
Also the vast majority of CFD traders do not make money
So I am expecting a lot of stick for even daring to suggest this!

Not sure if this strategy has a name or has been suggested before. But if you were to use a margin loan to purchase dividend stocks where the dividend would pay for the interest and then pocket any increase in share price or dividend over the interest rate.

IB, for example, offer 2% margin loan on GBP

Obviously the share price and dividend could go down. So possibly best to consider stocks that have stable growth and consistent dividend. Maybe an Investment Trust or dividend aristocrat

I don't see that there's any strategy worth discussing here. The dividend aspect is a red herring. Makes no difference whether a stock pays a dividend or not, assuming cashflow isn't the issue.

The question is whether you want to leverage your gains and losses. In the short term the losses will be very painful. You may be closed out by the bucketshop cfd/spreadbet company. If you can 1. bear these setbacks and 2. have the ability to trade profitably over the long term and 3. have a strong conviction that you should also be shorting cash, then why not?



GS

[Spet0789]

If your account is a personal one, I don’t think this is tax efficient. I think that you will be liable for income tax on the gross dividends received and cannot offset any of the interest cost.

Done within an investment company, with conservative levels of leverage (no more than 30% of the value of a diversified portfolio) I think this may make sense.

[scrumpyjack]

At least you would be doing this with your eyes open but it is a very very risky strategy. Don't forget also stamp duty, dealing costs and market buy/sell spread. That is quite a headwind to overcome. Also as othera have said your dividends are taxable whilst the interest cost is not tax allowable, and the dividends are in any case irrelevant other than providing the cash flow to pay the interest.

[colin]

Why not just take out a long term bank loan secured against your property? Or for smaller amounts a series of loans from a peer to peer site? If we are to remain in a low interest rate world for years to come this may be a good strategy. Perhaps it would be safer to pick shares that would not be hit hard in a rising interest rate environment.?

[moorfield]

Not sure if this strategy has a name or has been suggested before. But if you were to use a margin loan to purchase dividend stocks where the dividend would pay for the interest and then pocket any increase in share price or dividend over the interest rate.

Let's call it LHYP, or Leveraged HYP

Yes, in theory you could hold a portfolio of positions on high yield shares and the dividend adjustments credited to your account should cover the costs of rolling them each quarter. However you make your money on share price increases, not the dividends over interest/spread costs.

But in practice, you must use leverage conservatively. For example I would suggest opening initial position sizes of no more than £100 exposure for every £60 on deposit (*), the margin requirement would typically be £20 for a FTSE350 share. In "mortgage" terms, that's equivalent to an LTV of 40%.

(*) think of this as a sort of synthetic pension contribution - as a higher rate taxpayer, you end up with the same exposure after tax relief on a £60 deposit.

[StepOne]

I seem to remember JimSusan on the old TMF boards suggesting taking out a mortgage with Lloyds bank, at a rate of around 3%, and investing it in Lloyds shares which were yielding about 7 or 8 % at that point. This was before the financial crash.

Nice idea, but it didn't work out too well.

[BT63]

In the past I bought significant quantities of shares with borrowed money (mortgage) after major market declines (2003, 2009).

The profits were good but were offset by some loss of sleep.

If the conditions felt right I would consider it again.

I'm not using any borrowings at the moment nor for the past five years. I don't anticipate any change to that stance within the next twelve months.

[Walkeia]

Hi Cookie,

I’m doing exactly this. Please search ‘margin fiend or fool’ on lemonfool and you’ll find the thread from early this year.

Top level - I wouldn’t put you off and think it’s a great idea; it’s worked out well for me and my confidence is growing as I become more used to the month to month market moves. I personally think this will be the new buy to let as Europe opens up to margin trading (we’re behind the US and Asia).

Points to consider -

1. Single names and portfolio concentration. A big no from me in terms of equity single names but I do hold investment trusts / index ETFs.
2. Long term strategy / disciplined framework - I believe this will be the crux of success or disaster. In total honesty i’ve broken my own rules 3 times this year. Margin limit at IT subscription, couple of single names crept in etc; each time about a week after I brought myself back to the long term plan and corrected the portfolio.
3. Factoring in personal circumstances - total leverage, personal cash generation from employment etc.

There’s a reason 75% of IG index accounts lose money. It’s a form of gambling for most imho. This is in between traditional investing and IG I therefore it needs a super disciplined approach.

Happy to discuss further as when I first looked into this there wasn’t a huge amount of info / discussion out there but I have noticed an uptick in recent months.

PS. I’m set up as an investment company ... long story. Think it makes sense long term - would I do it if I started again - not sure.

[hiriskpaul]

Personally I think this is the wrong point in the cycle to use much leverage, but if you do want to do it, consider using IG. Provided you trade infrequently, funding costs will be comparable or lower than traditional broker margin accounts, such as IB, but you will not pay taxes on distributions or capital gains.

For example, a quarterly bet on the Unilever shares costs around 5-6 points per rollover, equivalent to about 0.5% per year. Add to that the current IG borrowing cost of around 1.3% gives 1.8%. Futures are even cheaper as they have tighter spreads and a borrowing cost set by the market (the risk free rate), rather than IG. FTSE futures currently cost around 1% per year all in and again returns are free of tax.

[Pastcaring]

A simple cost /benefit analysis,very easy.I' ve been doing it for nigh on 40 years.A mix of property line of credit and margin loans.Mix and match to reduce risk.

Using the dividends to pay the loan will produce not a lot.Shares bought in early 1980s at around $3 each have paid a dividend every year.They are now worth $29 approx.Reinvesting dividends is the way to go,every 3K spent then is approx $180K now.

Maximum loan is $500K in Australia,and lenders have maximum amounts for each specific stock.I use 2 lenders for a very large loan,on a very concentrated portfolio.

Nobody will spend the money needed to make it work.Spending $30K all those years ago and using the dividends to pay the loan back produces nothing.

$30K bought 10,000 shares in WBC.Dividend then around 12 cents a share,possibly 13 cents.Dividend today is around $1. 86.The 10,000 shares are worth around $300K,why bother.Reinvest dividends and they are worth well north of $1 million now.

There is no cheap way to get financial security,the more you spend the richer you will be

$30 K back then was around 2.5 to 3 times annual average income.Are you prepared to spend 3 x your annual income after doing a cost/ benefit analysis,I thought not.

Cost benefit here is line of credit around 3.5 to 4 %,margin loan around 4.2%.Market yield around 5%.

Perhaps look at self funding instalment warrants if the UK has them .

All wealth is free if you use the dividends to pay off the loan,however you still need to spend a large amount at the start.

[Pastcaring]

I usually compound over 30 years,over close to 40 years then WBC would be around $220 - $240K over close to 40 years.Sorry for the error.

$3K to $$29K and a bit money in the bank,or $3K to say $230K,your choice.

As we have been on a round the world trip and got back yesterday I' m a bit woozy.

On a concentrated portfolio then CBA makes up 38 - 41% of my portfolio,depending on share prices daily.Floated by the govt in 1990 or 91 at $5.40 per share,now at $80 ish.Call it $6 a share and then average wages around $30K.

Line of credit ,borrow $60K ( two years wages ) and buy 10,000 shares.Dividend then around 40 cents a share,dividend now $4.31 per share.

The loan is long paid off and probably at least $150K in the bank.The 10,000 shares are now worth approx $800,000 and gross dividend is a touch over $61K with the Australian franking system.

However by reinvesting dividends then around 60,000 shares and worth around $4.8 million,your choice.Got any plans to spend two years wages.I thought not.

Just starting to glance through the annual report.Page 286, 8345 people own 10,000 shares,or 0.0033% of the population.What are your plans,follow the crowd,or think for yourself.

Banks are highly leveraged,can you think of any companies that are not leveraged,there may be one or two.

Just to keep it simple then page 292.Average interest earning assets is $864 billion.

Average interest bearing liabilities $761 billion.Just to keep it simple lend it out at 4% and pay 2% on it.

1.1% to cover all costs and a net profit margin of 0.9%,very roughly.

Your choice,be one of that 0.0033% and think for yourself.Or follow the crowd,insist you are thinking for yourself,and tell yourself how clever you are be cause everybody agrees with you.

Why the hell would you ask the crowd for advice.

[Itsallaguess]

Why the hell would you ask the crowd for advice.

Because they might know something about investment-diversification?

Some night-time reading -

Survivorship bias -

Survivorship bias can lead to overly optimistic beliefs because failures are ignored, such as when companies that no longer exist are excluded from analyses of financial performance.

It can also lead to the false belief that the successes in a group have some special property, rather than just coincidence (correlation proves causality).

Diagoras of Melos was asked concerning paintings of those who had escaped shipwreck: "Look, you who think the gods have no care of human things, what do you say to so many persons preserved from death by their especial favour?"

Diagoras replied: "Why, I say that their pictures are not here who were cast away, who are by much the greater number."

https://en.wikipedia.org/wiki/Survivorship_bias

Cheers,

Itsallaguess

[DiamondEcho]

I HYPed on margin [LHYP?] for 5-10 years via Interactive Brokers. On balance across turbulent times it overall was a net +ve for me, but good grief it invited added drama into the day. Bad days always seemed to c.twice as be large as good, plus then when pushing margin your bad day might be say doubled+ in scale. It's not a strategy to follow when approaching the route close-towards/into retirement.

Then again as others have alluded, what's the difference between using a remortgage to invest in more stock vs using modest margin to directly invest? I see pros/cons but the latter appears more efficient/economic and simpler to set up and unwind.

[Cookie]

Hi Cookie,

I’m doing exactly this. Please search ‘margin fiend or fool’ on lemonfool and you’ll find the thread from early this year.

Top level - I wouldn’t put you off and think it’s a great idea; it’s worked out well for me and my confidence is growing as I become more used to the month to month market moves. I personally think this will be the new buy to let as Europe opens up to margin trading (we’re behind the US and Asia).

Points to consider -

1. Single names and portfolio concentration. A big no from me in terms of equity single names but I do hold investment trusts / index ETFs.
2. Long term strategy / disciplined framework - I believe this will be the crux of success or disaster. In total honesty i’ve broken my own rules 3 times this year. Margin limit at IT subscription, couple of single names crept in etc; each time about a week after I brought myself back to the long term plan and corrected the portfolio.
3. Factoring in personal circumstances - total leverage, personal cash generation from employment etc.

There’s a reason 75% of IG index accounts lose money. It’s a form of gambling for most imho. This is in between traditional investing and IG I therefore it needs a super disciplined approach.

Happy to discuss further as when I first looked into this there wasn’t a huge amount of info / discussion out there but I have noticed an uptick in recent months.

PS. I’m set up as an investment company ... long story. Think it makes sense long term - would I do it if I started again - not sure.

Thanks

Can you link to that thread as searching just brings up this thread

[johnhemming]

If people want to gear their investments it is probably worth looking at geared stocks rather than taking the liability themselves. That way the value of the portfolio cannot go lower than zero.

[Gerry557]

Generally the idea is sound but as always there is a risk v rewards trade off.

Endowment mortgages were basically the same idea and for some it worked well but for others, well they are still struggling. Personal circumstances would also play a big part. If it went wrong would your work/lifestyle be able to support you or would you loose the shirt off your back.

You could start smaller, drip feeding into funds/shares using an ISA and start to use this cash to pay the interest. Where do you get the loan? An offset mortgage would give you the flexibility you can add and subtract at will.

What is your discipline and appetite to risk. When the market tanks would you pull your holdings to save what you have left or be upping your loans to add more. Most would find that hard to do.

The last is timescales, the longer the better. There was an article on the chances of making money on stocks. I think 30 years was almost 100%. Do you have that long?

Assuming you do proceed what is the exit plan? If its a mortgage loan for instance when do you repay.? Mortgage free in 12 years, most would be happy with that but no lump left over but shortest risk time. Start paying off the capital instantly using the income as and when it arrives over time and more quickly in the latter years when assets are greater.Reducing risk over time. Pick a medium time sale, say 5 years, reinvest all income up to that point then swap to paying off some. Finally run it for the 25/30 years, if possible and hope the market doesnt tank the day before you pay it back.

I suppose there are many ways to do this depending on your risk profile and your downside outlook. I think its worth investigating further. I donk know if I should mention Woodford investments saga as a potential pitfall

[PinkDalek]

Hi Cookie,

I’m doing exactly this. Please search ‘margin fiend or fool’ on lemonfool and you’ll find the thread from early this year.

...

Thanks

Can you link to that thread as searching just brings up this thread

Go to memberlist.php?mode=viewprofile&u=5295 >>> search.php?author_id=5295&sr=posts >>> go to page 2 where you'll find viewtopic.php?f=8&t=17479&p=218838#p218838

[hiriskpaul]

You've just reminded me I set up a dummy HYP on a well known spreadbetting platform back in February this year.

They 'gave' me £10,000 which I spit evenly between 16 companies a form of buy and forget basic HYP criteria. Except I can't remember why I used 16 and not 15.

......And I ballsed it up on the first 'purchase' and bought a position many, many times larger than I intended. By the time I noticed, worked out what was wrong and closed it I was £600 down.

Anyway, the portfolio is currently down by £591 as we speak - so broadly level I guess. 8 winners and 8 losers on the board. Biggest winner = Standard Life Aberdeen...biggest loser = Imperial Brands.

Daily interest seems to be running at around £4.30.

If you are running positions for that length of time you would pay much less interest if you used quarterly rolling bets rather than daily funded bets. That is certainly the case with IG anyway.

Daily funded bets have tighter spreads, but higher funding costs and so are more appropriate for short term traders.

If you do set up quarterly bets instead, make sure you set them up to automatically roll over.

I believe that there are still some spread betting companies out there that do not credit the full dividend on XD date. I would avoid any company that did that.