[Dana]

Hi There,

I have the opportunity to borrow $50k at prime divided by 2 with payments as low as interest only. My plan is to leverage these funds to invest in income genrating stocks/trust units and use the monthly income to payback borrowed money.

We are comfortable with the risks associated with leverage (we use the Smith Manoeuvre to invest in income properties)

We also currently invest in stocks, REITS, Income Trusts and several ETFs (all within RRSPs). We also have a lot of exposure to banks (both Canadian and US).

Any suggestions for high-income-yielding investments?

I have been contemplating: day.un, cgx.un, erf.un, ba.un, liq.un, ala.un, bnp.un

The income from these units more than covers the interest due on the borrowed money.

Any other suggestions and insight is greatly appreciated.

Thanks

 

[Brad911]

Do yourself a favour and don't pursue this strategy strictly with high yielding income trusts or stocks.

Do your homework and create a diversified income portfolio of common stocks, preferred shares and income trusts that in combination give you a smaller overall yield but greater income security.

The last thing you want to do is get overly aggressive in your selection, suffer dividend/distribution cuts and have to make up the difference on your own. If you have the income yourself to do that then fine, but your appetite for risk needs to be identified before you start.

 

[DavidJD]

EIF-T is one that would fit your criteria. It has an impressive board of directors. I am heavily invested in it and enjoy the 13% return (based on my book value). Also it has already converted from an income trust to a corporation and the dividend/distribution is now taxed less.

 

[tundrabird]

Canadian banks?

What about Canadian banks, with margin interest rates about 3.5% and Canadian banks paying 6-8% dividends...

 

[Brad911]

Banks are fine if part of a portfolio focused on income spread amongst a number of stocks in different sectors doing different business. What you don't want to do with leverage is put all your eggs into one basket or the same basket.

If you want to use leverage then learn from the mistakes of the past decade.

 

[FinancialJungle]

I have the opportunity to borrow $50k at prime divided by 2

I'm very interested to know how you got prime divided by 2.

I have no problem with leveraged investing, but I'd go for higher quality investments, and apply both yields and regular savings toward paying down the debt.

 

[Dana]

Thank You!!

I'm very interested to know how you got prime divided by 2.

My better half works in investment banking and his firm is undergoing some "organizational harmonization" - that's seriously what they call it - and some of his benefits are changing. An unsecured LOC at prime divided by 2 with interest only payments is one of his new entitlements.

DavidJD - thanks for the heads-up about EIF...I have started some due diligence on it.

Tundrabird - We have a lot of exposure to Canadian banks. We also have a lot of exposure to US banks. We need to diversify outside of the banking industry.

I am comfortable taking some risk with this money since we can make up the payments or pay it off completely from our own cash flow if the securities we invest in go south.

Brad911 - We too have a history of using leverage. We currently use leverage to purchase real estate, but we have also used leverage to purchase stocks and REITs in the past...our track record is pretty good, but we were always quite cautious with leveraged money in the past...

Everyone - Thank you so much for your input. It is so nice to have a community of like-minded people to bounce ideas off and learn from!

 

[mario 1]

RED FLAG, this is a terrible idea.
Everyone thinks they can beat the market.
I know many people who got burned badly with this strategy, they always
seem to want to do this when the markets are doing well.
Had you asked this question six months ago, maybe it might be a good idea, maybe.
What happens when you buy the banks and they revert to the march lows, unlikely but possible.
You then panic and sell at a huge loss.
How many people got burned during the tech bubble with this strategy.

 

[humble_pie]

i don't know about such a terrible idea. Poster has rare 1/2 prime loan offer, is that exceptional or what. Plus the loan is capped at 50k and the party says they plan to pay it off if securities start to head south. The smart carry trade is benefiting from this strategy en masse. Do you mean to say that we peasants should be blocked.

i'm doubtful, though, about some of the hi-yield instruments mentioned. Think ba.un & other conventional hi-yield unit trusts that have, to date, kept silent about continuity of their distributions after january 2011 risk to drift down as that date nears. One among the list of candidates has already announced it'll cut its distribution by close to 50% when it converts to corporation. Altagas will still yield 5-6% on today's price, which is fair enough for the kind of low-growth corporation it will become, but the market does not seem to have grasped the distribution cut, is likely imo to ratchet down the share price when the information finally sinks in.

eif does not look good to me. There was significant insider selling following conversion to corp. Zero insider buying.
ceo pyle owns very few shares. Sold after conversion, possibly to realize warrant value (see below.) Historically has owned few shares. See sedi.ca.
former manitobe premier filman also owns very few shares.

eif has been pushed recently in this forum. There is a very obvious pump over on stockhouse.

i would not expect fast growth in eif's core businesses, arctic transport & medevac services. Most of this business is fuelled by government, tourism, mining. These sectors are not ramping up. If anything they are declining. On the other hand arctic transport, as a specialty sector in aviation, is insulated & divorced from mainstream global aviation industry.

also wondering why tanks & stainless in manufacturing divisions are still doing poorly with oil industry recovering somewhat, however major equipment purchase may be showing lag effect.

eif charts looking iffy to me. Sh price dropping from 5-year hi. Short-term mov avgs are dropping thru each other.

thin volumes. There is no warrant market yet. Therefore many who rec'd sh + wts in the recent issue must exercise wts & sell sh to collect the warrant profit. This creates persistent warrant exchange selling pressure but market is too thin to support broadscale dumping. Share price has to be maintained. A classic breeding ground for stock pumps.

taxable status of dividend still cloudy, although div appears to be morphing slowly into eligible category.

Will pass on eif for now but worth keeping an eye out. Curious about extent of first nation participation in this instrument, if any.

in general i'm leery of most of the hi-yields paying north of 7-8%. Believe that a 50% of prime loan would work well with these more reasonable numbers.

 

[stinsont]

I'm very interested to know how you got prime divided by 2.

My better half works in investment banking and his firm is undergoing some "organizational harmonization" - that's seriously what they call it - and some of his benefits are changing. An unsecured LOC at prime divided by 2 with interest only payments is one of his new entitlements.

so how do I get in on the prime divided by 2? I have some leveraged investments at prime and would love to pay half!

 

[Spidey]

Quote mario 1: RED FLAG, this is a terrible idea.

I find it curious that many people will say it is a terrible idea to, say, borrow $30,000 to buy investments but nobody would bat an eye toward someone borrowing $30,000 to buy a car.

To me, I would say that the second case is far more of a terrible idea.

With an investment loan all the interest is tax deductible. Therefore if you're paying 3.5% interest and your marginal tax rate is 40%, your real cost is 2.1%. However, in my opinion, the amount borrowed has to be totally manageable and there should preferably be no other debts.

That all being said, I don't know that right now is the optimal time to leverage. It is safer than in early 2008, but more dangerous than it would have been in early 2009 when the market was bottoming out. You may want to consider going slowly. For example, if you have $30,000 that you are comfortable leveraging, you may want to invest in $3000-$6000 increments over the next year-18 months at times when relative bargains seem present.

 

[cmackie]

so how do I get in on the prime divided by 2? I have some leveraged investments at prime and would love to pay half!

I believe it was mentioned that it was an employee perk so if you want in on prime/2, you'll need to get hired.

 

[Dana]

That all being said, I don't know that right now is the optimal time to leverage. It is safer than in early 2008, but more dangerous than it would have been in early 2009 when the market was bottoming out. You may want to consider going slowly. For example, if you have $30,000 that you are comfortable leveraging, you may want to invest in $3000-$6000 increments over the next year-18 months at times when relative bargains seem present.

The line of credit will not be available to be drawn down until the end of December/ beginning of January. That being said, we will likely average into the market over a period of time. I don't know how long, that will depend on market conditions and how much value we feel is present in the securities we identify. We are still in the due diligence stage and have not made any final security selections.

We benefit from flat fee trading, so buying incrementally does not add a lot of commission to our bottom line.

....and I agree with you completely about the car loan - cars depreciate - it doesn't make financial sense to borrow to purchase a depreiciating asset if you can avoid it.

 

[DrStan]

I think it's a great idea. The poster obviously is doing research, is benefiting from a fantastic low borrowing rate and has experience with other types of leverage. As long as the borrowing doesn't create undue risk and the costs are manageable, this can be a very good strategy.

I have done something similar myself, using $35K from home equity at prime to purchase a basket of stocks this past winter. The stocks have appreciated in value since their purchase, have a healthy 5-6 % yield and are solid dividend payers. The interest is only about $70 a month and will diminish as I gradually repay the investment loan. In a few years, this will work out to a nice nest egg with no strings attached. It can work!