# 50K income portfolio - Borrowed @ 3%



## FrugalCanuck (Jan 28, 2010)

Hey All,

Been reading here for a long time but rarely post. I've been playing with a 50K income, 100% TSX-based, virtual portfolio.
It's my first attempt at screening stocks. I'm trying to create a portfolio mostly out of dividend ETFs, with some fav Canadian div stocks thrown in. 

With most borrowing rates @ 3% the goal would be to generate 5% a month = $1500 to pay the borrowing cost then pocket $1K while hedging against any rate increases. Turns out its pretty darn hard when using as many ETFs as I did. I initially weighted everything at 5K each but might be able to increase the yield by moving more $$$ out of the ETFs and in to the stocks (but that also adds risk)

Just curious on your thoughts: What you'd add, what you'd subtrack or if you hold any of the below in your current portfolios.

XDV 
COS 
T 
TUT.UN 
RY.PR.Z 
CYH 
TD.PR.R 
REI.PR.A 
ZWA 
ZDV 

Maybe I need another hobbie?  Thanks for an feedback.


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## HaroldCrump (Jun 10, 2009)

These are all high yield ETFs/stocks, pref. shares, and REITs.
Have you looked into the taxation aspect of these securities?
You should account for taxes payable on one hand, and the deduction for the loan on the other hand.

I mean, it may not be a simple 5% - 3% = 2% yield for you.

You also mention _hedging against any rate increases_ - how are you doing that?
Some pref. shares can be very sensitive to rate increases.


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## lightcycle (Mar 24, 2012)

FrugalCanuck said:


> With most borrowing rates @ 3% the goal would be to generate 5% a month = $1500 to pay the borrowing cost then pocket $1K while hedging against any rate increases.


Every month? Or do you mean a year?


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## Cal (Jun 17, 2009)

IMO in reality you can't do this and make it owrk with ETF's, they weigh you down income wise.


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## FrugalCanuck (Jan 28, 2010)

@Harold - Since it's all Canadian, don't they use the dividend tax credit? That was part of the selection process. I mean't the 1K above the borrowing cost being high enough to cover atleast the first rate increase. 

@light - When I first started playing around I was going for monthly, because the borrowing costs are monthly but as I mentioned above I didn't get anywhere close to what I was going for with those picks.


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## HaroldCrump (Jun 10, 2009)

FrugalCanuck said:


> @Harold - Since it's all Canadian, don't they use the dividend tax credit? That was part of the selection process.


It is also the _*type*_ of distribution that matters i.e. interest, eligible dividend, or ROC.
The preferred shares distribute eligible dividends, but REITs do not.
Some high yield stocks pay out non eligible dividends.

The ETFs can be a crap shoot, depending on what they hold in the basket & how the ETF decides to structure its distribution.
Some ETFs pay out capital gains.
IMHO, you can never fully control your distribution & taxes if you use ETFs.



> I mean't the 1K above the borrowing cost being high enough to cover atleast the first rate increase.


Not necessarily, IMO.
We don't know what market reaction the first BOC/Fed rate increase will bring.
Remember "Septaper" and the "Taper Talk" from last year?
Remember what happened to the REITs and high yield stocks back then?

You may experience capital losses and/or distribution cuts.

I am not saying it is not possible to set up an income producing portfolio using a taxable account.
But if I were setting this up today, I'd adhere to high quality stocks that produce sustainable dividends that can withstand at least a 200 bps (2%) rise in the benchmark 10 year bond rates.
For instance, the 5 Canadian banks, the top 2 telcos, and 2 - 3 oil/energy companies.
If a REIT is to be included, I'd stick to one of the top 2 - either RioCan or Canadian (REF).

Your yield will be lower in this case, but it will be safer.

Think of it this way:
The bond market is yielding 2% for a 10 year, guaranteed bond.
If it were easy and relatively risk free to obtain 5% yield using a portfolio of high quality dividend stocks, why would the bank be lending you money at 3%?
Why would they not allocate that capital to the equity markets at 5%, and offer you an investment loan only at 7%?

_The fact that you are able to obtain an investment loan from a major bank at 3% ought to tell you something _about the relative risk/rewards of high yield stocks currently on offer in the equity markets.


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## lightcycle (Mar 24, 2012)

FrugalCanuck said:


> @light - When I first started playing around I was going for monthly, because the borrowing costs are monthly but as I mentioned above I didn't get anywhere close to what I was going for with those picks.


Just asking because the percentages you are throwing out are typically annual figures. The prime rate is 3% a year, not per month. Dividend investors aim for 4-5% per year, not per month. Yet your numbers ($1500 interest per month on a $50,000 loan) seem to indicate a 36% per annum interest rate, and your 5% return per month is aiming for a 60% yield per year!

So assuming you mean per year instead per month, the net 2% yield (5% return - 3% borrowing costs) will give you $1,000 income per year, roughly $83 a month. Then you have to figure out the taxes owed on that amount and how much you can write off of the carrying costs.

Does that $83/month figure jive with what you were thinking or were you actually aiming for $1,000 per month on a $50K portfolio?


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## FrugalCanuck (Jan 28, 2010)

@Harold - Thanks for putting that in to perspective. At a glance, with rates this low, borrowing to invest seems reasonable. Tax write off the interest + what tax credits you get from the dividends. 

@light - lol not even close and thanks for clearing that up. It takes much more capital to get a decent monthly income. I'll look in to what kind of income can be earned with Harolds suggestions.


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## My Own Advisor (Sep 24, 2012)

Still a virtual portfolio?

If so, enjoy!

If not, and this is a taxable account, I'd personally just go with common, dividend-paying stocks.

Also...curious, how on earth can you make $1,000 per month on a $50K portfolio? If so, where do I sign up?


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## lightcycle (Mar 24, 2012)

FrugalCanuck said:


> It takes much more capital to get a decent monthly income..


True dat.

I'm working on my second million dollar portfolio.

Because I failed at the first one...


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## humble_pie (Jun 7, 2009)

FrugalCanuck said:


> Just curious on your thoughts: What you'd add, what you'd subtrack or if you hold any of the below in your current portfolios.



so very sorry, u are not going to like this ... but me i think you should "subtrack" the entire idea.

margin rates presently stand around 4.25%. 

an investor will be taxed on dividend income from investments purchased on borrowed money, so income tax payable has to be added to the calculation. There are dividend tax credits but these rarely offset all of such income.

bref, an investor would need a guaranteed return of at least 4.50% to break even. No combo of banks, telcos & oilcos are able to secure that these days.

then there is the risk of securities price slippage. Possibly even price collapse.

finally, what will be the collateral? you haven't mentioned any other investments, no broker is going to advance $50k without something like $75-90k already in the account.

imho now is the time to invest ... in studying & learning more about finance. There's a good reading list called Eight with Weight up top. Libraries are full of these & other timely books about investing.


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## lonewolf (Jun 12, 2012)

I think Humble is spot on in above post.

Borrowing to buy stocks is a very,very crowded trade. More then most realize. When the dollar Yen starts to fall there is weakness in the stock market. Corporations are borrowing money hand over fist to buy back their stocks @ a record amount, ( apparently something to do with taxes which I don't understand ? ) This is based on the United states market, Canada ? Crowded trades it is very easy to over stay your welcome making them bad trades.

The emotions involved with borrowing to invest can easily make the trader the weak link.
Trader
/ \ 
market trade

If you do borrow to invest do it when no one else is. Better yet use options for the leverage,


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## lonewolf (Jun 12, 2012)

FrugalCanuck said:


> Hey All,
> 
> I've been playing with a 50K income, 100% TSX-based, virtual portfolio.
> It's my first attempt at screening stocks. I'm trying to create a portfolio mostly out of dividend ETFs, with some fav Canadian div stocks thrown in.
> ...



If you have no experience with putting your own money on the table & have only paper traded or virtual traded you do not fully understand how you the trader can be the weak link. A strong argument can be made that it is better to never paper trade before playing the market. It is like playing a video game of a sport compared to the real thing. There is no way around being in the trenches for gaining tuition. Virtual trading wont pay the tuition of becoming a successful trader. You have to play with your own money. I would recommend only a small amount because when you lose it, perhaps more then a few times, You will have something to play with latter.


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## Just a Guy (Mar 27, 2012)

Never invest money you can't afford to lose. Consider money invested to be spent money.

I once read that, and it's good advice.

Borrowing money for investing, unless you have a solid plan to replay it, is dangerous. The only place I think it's fairly safe is in real estate, and that's only if you find a place at the right price. 

Would you borrow 50k to go to the casino?


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## Eclectic12 (Oct 20, 2010)

FrugalCanuck said:


> @Harold - Since it's all Canadian, don't they use the dividend tax credit?


It appears you are assuming Canadian = 100% eligible dividends. Unless the company says they are paying 100% eligible dividends ... one has to investigate. To complicate matters, people talk about an ETF or REIT paying "dividends" where they pay a mixture of income types, which could be quite different than one thinks.

For example, RioCan is a REIT that most assume pays tax advantaged distributions where in 2013 *61%* of the payment was "other income" and taxed the same as interest/employment income, with no tax advantage at all!

Looking at a few of your list ...
XDV in 2013 paid $1.07757 per unit taxable income but only $0.91346 are eligible dividends which the DTC would apply to. The other parts are capital gains and return of capital (RoC).
http://ca.ishares.com/product_info/fund/distributions/XDV.htm

The RoC means bookkeeping as that part of the payment is reducing your ACB. You need to track this as a negative ACB is the trigger to start reporting the RoC payments as capital gain on your current year tax return.
http://howtoinvestonline.blogspot.ca/2010/07/return-of-capital-separating-good-from.html

The RoC also needs to be reviewed to keep the loan 100% tax deductible.
http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm

TUT.UN appears to pay 100% RoC ... again, bookkeeping.


What's REI.PR.A?


Both ZWA and ZDV are too new to have history from a tax perspective ... but I did notice it said:


> The distributions will either be paid in cash or reinvested in the BMO ETF at the discretion of the manager.


This suggests that there may be more bookkeeping required due phantom distributions.

http://www.theglobeandmail.com/glob...by-phantom-etf-distributions/article18225076/
http://www.theglobeandmail.com/glob...n-with-phantom-distributions/article18409698/


Cheers


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## humble_pie (Jun 7, 2009)

3% is bank prime rate

most of the people able to borrow from brokers at prime for non-mortgage purposes are value clients borrowing $100k or more ... meanwhile, at some brokers, even hi-value clients aren't getting prime ...

last i checked broker rates for most clients were 4.25%; i hardly see how a HELOC rate could be less


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## gibor365 (Apr 1, 2011)

I have LoC (secured by house) for prime, but I've never borrowed any money, especially to invest


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## lonewolf (Jun 12, 2012)

humble_pie said:


> 3% is bank prime rate
> 
> most of the people able to borrow from brokers at prime for non-mortgage purposes are value clients borrowing $100k or more ... meanwhile, at some brokers, even hi-value clients aren't getting prime ...
> 
> last i checked broker rates for most clients were 4.25%; i hardly see how a HELOC rate could be less


 A few years back on Yorba media a quest talked about an exchange (cant remember the name of exchange) in the USA that bypassed the banks & brokerage houses. Investors that wanted to buy stocks on margin could get better rates & those that wanted to collect the margin interest could collect higher interest then government bonds by passing the middleman. Each stock had its own bid/ask for the margin rate & investors could set up different time periods. I forget exactly how it worked. According to this guy the credit rating for the lender was @ ever the credit rating was for United States bonds. If my understanding was correct the stability of the creditor to collect the interest was tied into the CBOE. If the CBOE went under then the creditor lost. The brokerage house do not like investors using this exchange due to the fact it cut into their profits.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> 3% is bank prime rate ...
> 
> last i checked broker rates for most clients were 4.25%; i hardly see how a HELOC rate could be less


For current ones ... that's what I'm seeing ... though there was one web site was claiming Laurentian and Tangerine were offering 3.5% and 3.65%.


If the HELOC was setup a while ago as mine was, it would be 3%.


Cheers


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## humble_pie (Jun 7, 2009)

it looks roughly speaking as if the banks are looking for $100k collateral as minimum before they'll lend at prime?

but the OP here was looking to borrow $50k for investment purposes & did not seem to have other secured assets ...

gibor & eclectic if any 2 guys _could_ successfully run smith manoeuvre type operations, they would have to be yourselves.

gibor, who knows the dividend yield of every single animal, vegetable or mineral on the planet, would have to bone up on taxation consequences of distribution - sometimes called dividend - income in non-registered accounts. Which is exactly where eclectic is super-expert.

imho the rest of us could subtrack the idea, though.


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## humble_pie (Jun 7, 2009)

lonewolf said:


> A few years back on Yorba media a quest talked about an exchange (cant remember the name of exchange) in the USA that bypassed the banks & brokerage houses. Investors that wanted to buy stocks on margin could get better rates & those that wanted to collect the margin interest could collect higher interest then government bonds by passing the middleman. Each stock had its own bid/ask for the margin rate & investors could set up different time periods. I forget exactly how it worked. According to this guy the credit rating for the lender was @ ever the credit rating was for United States bonds. If my understanding was correct the stability of the creditor to collect the interest was tied into the CBOE. If the CBOE went under then the creditor lost. The brokerage house do not like investors using this exchange due to the fact it cut into their profits.



interesting! it makes sense that the CBOE would perhaps be involved in this, since option traders are typically heavy users of margin.

it crosses my mind vaguely that this is possiblly how Interactive Brokers is able to offer those mouthwateringly low margin rates? they are, first & foremost, a huge option house


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## lightcycle (Mar 24, 2012)

Eclectic12 said:


> If the HELOC was setup a while ago as mine was, it would be 3%.


For new withdrawals?

I know you can lock in an outstanding amount on a HELOC at the prevailing fixed rate at the time, but I thought for new withdrawals, it would accrue interest at whatever the current rate is (Prime + x). This would be the case for the OP looking to borrow now.

A fixed HELOC for new withdrawals would be quite a goldmine...


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## dime (Jun 20, 2013)

Never borrow money to invest in the stock market. Only invest what life savings of your own of which you can afford to lose. The market is evil and capable of causing you great pain. Learn about what happened just a few years ago in 2008, the income trust fiasco in 2001, black monday, 1928, and... and ... and..


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## Eclectic12 (Oct 20, 2010)

lightcycle said:


> For new withdrawals? ...
> 
> A fixed HELOC for new withdrawals would be quite a goldmine...


I probably should have said "could be" as each monthly statement lists the updated rate.
That said ... this month's statement is for 3%, where I wrote a cheque on it just before the statement arrived.

A couple of the big 5 are listing on their web site as their prime rate, 3%.


Cheers


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## Eclectic12 (Oct 20, 2010)

dime said:


> Never borrow money to invest in the stock market...
> Learn about what happened just a few years ago in 2008, ...


Never is pretty strong ... I've learned over the years that knowing all the tools in the toolbox as well as when to use them helps tremendously.


I'll have to check for the complete details but as I recall, my 2008 borrowing experience is that of something like thirteen stocks bought, one was sold for a 30% loss, one was sold for a 5% loss, two were sold for a 15% gain, five were for 85% gain, four have a 110% gain and one was sold for 190% gain.

My personal favourite is the one sold for the 190% gain as it initially disappointed me by taking an extra three months to restart it's cash distributions. I was happier when I sold as by that point, I'd received something like 45% of the purchase price as cash distributions, to add to the capital gain.

All the while writing off the interest charged against taxable income.


I did make sure I had cash flow as well as sufficient assets to cover if things didn't go as expected.


Cheers


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## HaroldCrump (Jun 10, 2009)

Eclectic12 said:


> What's REI.PR.A?


Symbol looks like a preferred share issue by Riocan.


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## HaroldCrump (Jun 10, 2009)

humble_pie said:


> 3% is bank prime rate
> ...
> last i checked broker rates for most clients were 4.25%; i hardly see how a HELOC rate could be less


Most HELOCs these days are Prime + 50 bps for preferred clients, and Prime + 100 bps for others.
That'd make preferred HELOCs @ 3.5%.

Unsecured LOCs are higher by at least another 100 bps.

Even at 3.5%, I don't think the current risk/reward ratios in the market make a worthwhile leveraged investing opportunity.
Given that blue chip eligible dividend yields are barely in the 4% - 5% range.

Temporary usage of margin for short-term trading at 4.25% is probably alright, but locking in an "income" portfolio at these days does not seem wise, esp. for a beginner investor like the OP.
As I said above, the fact that banks are willing to lend money at 50 bps above prime ought to tell us something about their perception of market risk.


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## tinypotato (Jul 27, 2010)

Taking an approach to NEVER use margin is a bit strong. As someone else mentioned above, there's a time and a place to implement various tools. Margin is just one tool.

There are scenarios where its completely acceptable for a person's unique situation. Lets say your portfolio total value is $60K and you have $50K equity in it (meaning you borrowed $10K of it). Over time, the dividends on the $60K worth of stock will slowly help pay down the interest on the $10K loan.....

Also, someone mentioned Interactive Brokers above...I believe they charge less than 3% right now..so the spread between the yield on something like Telus, BCE, etc. and the margin interest rate is somewhat "OK"

Not a terrible idea for some younger people with longer time horizons...accumulate quality companies along the way like this and over time it can pay off...


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## dime (Jun 20, 2013)

Eclectic12 said:


> Never is pretty strong ... I've learned over the years that knowing all the tools in the toolbox as well as when to use them helps tremendously."
> 
> Fair enough. I'm just thinking about the sad folks who were interviewed on the news during the income trust fiasco where they borrowed money to invest in income trusts as though it was a sure thing with 0% risk of downside. Then when the income trusts dropped a third in value they were completely devastated. The saying goes, "never invest what you can't afford to lose".
> 
> It's one thing for an investment expert to know how to manage risk in the markets. Its another thing for someone without any training in finance to take on a significant risk. ie borrowing and putting 100% into 1 stock that ends up tanking 20% by next year. You know what I mean?


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## Toronto.gal (Jan 8, 2010)

FrugalCanuck said:


> It's my *first attempt* at screening stocks.


If so, then definitely - - - [səbˈtrakt] the entire idea for now.

Margin investing is not for a total newbie, not even for one with the required collateral. But even with some equity, you need to keep in mind that when the MV declines, so does the very collateral that supports the loan in the 1st place, so it's not just the loan part alone that's at play. 

Example:

- MV = $100K
- debt = $50K
- equity = $50K

If the MV were to decline a very realistic 20%, your account would then look like this:

- MV = $80K
- debt = $50K
- equity = $30K

When such declines take place, you then have to make sure that your would meet the minimum requirements to avoid a margin call. You can ignore the MV decline when investing with your own money if you wish to, but not with borrowed funds. While gains are definitely greater with margin, so are the losses, so never even try margin investing without full knowledge of how it works. 

I definitely second the learning proposal first; if you're a total newbie at this as you said you are, you might want to read 'Margin Trading from A to Z', or the Dummies series. And when you do start, don't do so with $50K, but maybe $5K, or an amount you can afford to lose.


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## Pluto (Sep 12, 2013)

To me, now is clearly not the time to borrow to buy stocks. Even just thinking about doing it is a psychological indicator of a market top. I'm talking an approximation of a top, not an ultra precise indicator. The best time to do this is at the beginning of a new bull market. It is very very risky to embark on such a plan in a maturing bull market. My opinion is you should find your self a very remote beach with no phone or Internet service, lie down in the sun and sip beer, until this idea goes away.


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## FrugalCanuck (Jan 28, 2010)

Thanks to everyone for the wealth of replies.

The 50K figure was picked because that's how much I have actual assets across my TFSA/RRSP.
I think some might have missed it's just a virtual portfolio. A game. Not developing an actualy strategy to implement but an exercise in learning. The same reason why I posted it here.

@Just a Guy - Great way of putting it and does sum up how I feel about investing.

@Eclectic12 - Stellar reply, thank you! I never knew the distributions could be divided in to different sources of income. 

@Toronto.gal - Thanks for the example. I'll do some more research on margin investing and if I actually do try it, will defer to what Just a Guy mentioned.

@Pluto - How do you think I got the idea in the first place? lol.


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## Pluto (Sep 12, 2013)

FrugalCanuck said:


> Thanks to everyone for the wealth of replies.
> 
> The 50K figure was picked because that's how much I have actual assets across my TFSA/RRSP.
> I think some might have missed it's just a virtual portfolio. A game. Not developing an actualy strategy to implement but an exercise in learning. The same reason why I posted it here.
> ...


Oh, good. In that case great idea. Sorry.


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## Eclectic12 (Oct 20, 2010)

FrugalCanuck said:


> ... @Eclectic12 - Stellar reply, thank you! I never knew the distributions could be divided in to different sources of income.


I learned it the hard way with REITs, where some had been bought out so that the RoC distribution info was no longer easy to find. It's soooo much easier to check it out before buying so that what is needed is known and easily documented on a suitable timeframe.

Now if it's going in a taxable account - finding out the types of income/tax as well as bookkeeping requirements is job 1! :biggrin:


Cheers


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