Stock investing question

[frugalcanuck]

Just wondering what others think about this.

Allright. Im thinking about borrowing money to invest in stocks. To start, borrowing money is not my style. I made it through university without going into debt and without any financial aid from gov or family. I just worked hard in the summer. I dont like the idea of debt.
That being said, I believe my ideas are entirely rational.

There are stocks that pay dividends and have increased them for many years. Im thinking about getting a bank loan and purchase stocks of a good company with a divdend greater than the intrest rate. The monthly or quarterly dividends will go towards paying off the loan. The stocks will evenentually pay for themselves and I will be left with a steady income that increases.

Here in Canada I dont have to pay tax on the dividends if I keep them in a specific account (tax free savings account) so I will be recieving the full dividends. Also the interest paid on loans are tax deductable so it will lower my taxes a little bit as well.

The company im looking at owns comercial realestate... the land that big box stores are on.
I dont think much could effect this company if the sh!t does not hit the fan. And if it does thats why I have PMs and base metals.

Any thoughts would be appreciated.

[Rodebaugh]

only borrow what you can pay back if you loose everything on the "sure thing". My two copper cents.

AKA a payment you can afford.

[AGgressive Metal]

Real estate in Canada is pretty heated up right now. Maybe you could find someone in consumer non-cyclical? I'm no stock genius, just my 2 cents.

[frugalcanuck]

Thanks for the thoughts. I completely agree with the only borrow what I can afford idea.

Real estate is pretty heated in some areas of Canada... but when isnt it? Im not really looking for cyclical as much as I am look for a solid company that has been increasing dividends every year for many years. The company im looking at owns shopping centers and charges rent to big box stores that suberbs are built around. I dont want to buy high. I think I might sell some puts on it for a lower price once I get my line of credit or loan. The plan is to never sell it so I always have the income.
Im also thinking of a cigarette company as well. The drawbacks on that one is that they are American and the US withholds a percentage of the dividend from foreigners.

Im no stock genius as well.

[Rosco]

I would Not Borrow to buy Stock its a sucker bet.

Save up a few hundred Dollars an invest in junior Miners or some other under $2.00 dollar stock Use Scottrade cost is $7 to $8.50 on penny stocks. Not sure if Scottrade is in Canada but you should find a on line broker that Cheep any way.

[Jonflyfish]

Never borrow money for speculation. A double negative does NOT equal a positive.

[silverhalide]

Interactive Brokers has been pushing this strategy for quite some time. If you decide to do this I would only limit margined securities at most 10% of your portfolio's value. Just keep in mind in order to capture a dividend you typically will have to hold the stock for a quarter and this is after the market averages has risen 100% and usually you can't be reliant on any capital appreciation from a very high dividend paying stock.

[frugalcanuck]

I plan to hold the stock until I die. Hopefully much longer than a quarter or two. Im shoping around for the best interest rates now. I need 5% or lower for it to makes sense for me. Once I get the borrowed capital Im going to sell some put options on the stock and wait for them to expire or force me to buy the stock at a reduced price. I feel it is risky but I am young, with few liabilities,and will be able to pay off the loan if things go bust by liquidating some PMs. And if things go bust PM's will hopefully be much higher.

Thanks for all your thoughts

[Jonflyfish]

... Im shoping around for the best interest rates now. I need 5% or lower for it to makes sense for me...

Only a low fixed rate would stand a chance in this plan. Using the common broker call, Libor/Libid, Cofi, Prime, and retail margin rates will all float.
DYOD

[frugalcanuck]

I agree a fixed rate is necessary and proving difficult to find

[.02FYI]

Well brave some might call you. Others might say foolish. I'm not sure what level of time , understanding , current income you have. My gut says no way. But did you discuss how much money your talking about? Did you state if you had any other debts. Are you married? What does you spouse think? What about you parents if not. Do you have a trusted financial advisor you can talk to ? Obviously your doing the right thing and talking to this group as they have all ready given my 2 cents several times. LOL . Remember there are no new ideas . Realestate is over heated and the talk in Canada by the mainstream, realtors, and the News media is mostly positive. However the stats, facts, sales, new build out numbers. Are as stated very dependent on areas. Commercial might be the next shoe to drop. The financial situation is casued on debt and the real estate sector is haveing huge issues . Yet your bright enought to beat the odds. Well then I say you work you tail off some more and follow the idea someonelse mentioned by buying the miners . More risky yet if your playing with your funds, your young then you will have chance to rebuild. So first save, sell on ebay, garage cell, save your silver , Se what funds you can git gifted to you now by parents, family, spouse etc.. Use a percent as emergency fund and put some at risk .
Yes you want dividends and over time this will serve you well. But do you want to go into hock. The percentages of risk when factored in with interest rate etc.. It cahnges the numbers . IMHO DYODD

[mickeyman]

I used your strategy a couple of years ago when everything had been hit and I was pretty sure they couldn't go down any lower. It was a very successful strategy.

Two things are different. Firstly, the products we bought (income trusts) pretty much no longer exist in Canada. Also, the market has had a long run up.

If I were you I would wait before trying this strategy. There may be a better opportunity in six months to a year.

[TwoPenniesEarned]

It is a very bad time to do this. Printed money is elevating stocks right now, but when people realize that printed money isn't worth owning, they will take actions which result in dollars going back to the treasury (ie buying PM's instead) and the value of the dollar drops relative to those real assets. Thus your dividend will constantly be getting reduced by the relative drop in real value of the dollar (commonly called inflation) while the interest on your debt will constantly be adjusted up to give your lender a real rate of return of approx. 3%.

At today's real inflation rate of 9%, your bank would need to charge you 12% to earn a real 3% return.

Adjusting interest rates WAY UP is the only proven way of restoring confidence in unbacked money. It was done in the early 1980's and everyone with heavily debt-financed investments lost those investments due to unsustainable carrying costs.

In your due diligence, you should use a 10% carrying cost on the debt. If it doesn't generate a profit at 10%, don't do it.

[HelloMeteor]

One more thing. You probably thought of this, but there's a chance you didn't.

If you get dividends every quarter, you'll probably still owe money every month. So you will need to have some money set aside to get through the first few months.

[HelloMeteor]

Also, your dividends will probably not pay for the whole loan payment each month, unless the loan is for a very long term.

A $100,000 loan for 5 years at 5% equals a $1800 monthly payment. If you earn 8% dividends that's only $580 per month.