Investing

Dividend investing to pay back a loan

  • Last Updated:
  • Nov 30th, 2020 4:29 pm
[OP]
Newbie
Oct 29, 2020
71 posts
94 upvotes

Dividend investing to pay back a loan

Hi everyone, I wanted to share something new I've been doing with my investments.

I took out a loan, invested that money and am using the dividends to pay it off. I've only just started to do this but I'm documenting this journey so my kids (when they're a bit older) or anyone else can watch and learn from it's success or failure.... or anything that happens in between :) I'm in my 4th month and while that isn't a huge sample size, it's been going great so far.

These are the companies I invested in:
  • Enbridge
  • Bell
  • Tellus
  • Bank of Montreal
  • Bank of Nova Scotia
  • RioCan
I'm earning an average of $346/month
The current interest is $158/month
That leaves me with $188 each month being paid to the principal.

And obviously as time goes on, it will get better... assuming things stay the same (interest rate & dividend payouts).

What do you think of this type of investing?

I've also made videos to document this process. I have a teribble memory so I made these videos so I, and my kids, can reference them in the years to come. Let me know what you think; but please be kind with your constructive criticism :)
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99 replies
Deal Addict
Dec 4, 2011
1711 posts
1197 upvotes
Montréal
People have been doing this forever, called leverage whether you use a loan, your house, margin, etc. Smith maneuver hugely popular

If you keep the loans separate and have traceability directly to dividend bearing securities, your interest is tax deductible vs your investment income (if not RRSP/TFSA)

I just invested some money in late June using a mortgage myself.

https://milliondollarjourney.com/use-sm ... esting.htm
Last edited by admiralackbar on Nov 2nd, 2020 1:36 pm, edited 1 time in total.
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May 11, 2014
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Some things to note:

-You can claim the interest charges of the loan as "Carrying Costs" should your investments be held in a non-registered account. This gives you an added tax-advantage when utilizing leverage

-Depending on how you are managing it, you should consider to spread your holdings in different areas. In your case, you have two telecoms, two banks, one REIT, and one pipeline/utility. I probably would either stick with just one telecom and one bank, and would have spread the type of industry. For instance, an insurance company, a pure utility, industry stalwart etc.

-While using dividends to pay off the loan is fine, I make a point of making regular payments from my income, in addition to the dividends. It's a deleverage risk that is important. While the dividends of the companies you own, I believe are safe, we do not know the future and you should make some mitigation of that risk.

-While holding Canadian companies allows you to take advantage of the Canadian Dividend Tax credit, for diversity sake, holding some foreign holdings especially in areas where Canada doesn't have players might be considered. Eg. Healthcare companies, technology etc.

What you are doing is what many of us have been doing. It is funny as this strategy is the same premise of a rental company, only less management and often safer than having tenants. Of course, you do need to do some maintenance and it is important to have a strategy, and to be fairly diverse.
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Jun 14, 2018
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xgbsSS wrote: Some things to note:

-You can claim the interest charges of the loan as "Carrying Costs" should your investments be held in a non-registered account. This gives you an added tax-advantage when utilizing leverage

-Depending on how you are managing it, you should consider to spread your holdings in different areas. In your case, you have two telecoms, two banks, one REIT, and one pipeline/utility. I probably would either stick with just one telecom and one bank, and would have spread the type of industry. For instance, an insurance company, a pure utility, industry stalwart etc.

-While using dividends to pay off the loan is fine, I make a point of making regular payments from my income, in addition to the dividends. It's a deleverage risk that is important. While the dividends of the companies you own, I believe are safe, we do not know the future and you should make some mitigation of that risk.

-While holding Canadian companies allows you to take advantage of the Canadian Dividend Tax credit, for diversity sake, holding some foreign holdings especially in areas where Canada doesn't have players might be considered. Eg. Healthcare companies, technology etc.

What you are doing is what many of us have been doing. It is funny as this strategy is the same premise of a rental company, only less management and often safer than having tenants. Of course, you do need to do some maintenance and it is important to have a strategy, and to be fairly diverse.
Instead of picking individual stocks that pays dividends, could I just invest in a dividend-paying ETF?
Newbie
Oct 22, 2020
38 posts
20 upvotes
If you are comfortable with what you are doing, that's fine. I took a 25k combined loan/margin this March, a bit less than the 80k or so you took on. But just to be clear, you took on an 80k loan to buy stocks. On the face of it, you have payback period of 15-20 years. That is a pretty long loan and know that there are interest rate risks, risks to the price of your stocks, dividend cut risks, tax policy change risks.
[OP]
Newbie
Oct 29, 2020
71 posts
94 upvotes
admiralackbar wrote: People have been doing this forever, ....
haha you're not the first person to say that BUT I've never known someone to do this, and although you hear about it, I've never seen it actually done. No one I known has done this so for me, this is [kind of] scary and that's also why I wanted to share it. So people can see what I'm doing in detail.
Borrowing $65,000 to Invest - Investing with Leverage YouTube Video Series
I borrowed money to invest and wanted to document the steps and process. I hope others can learn from my experience.
[OP]
Newbie
Oct 29, 2020
71 posts
94 upvotes
MarinersFanatik wrote: Instead of picking individual stocks that pays dividends, could I just invest in a dividend-paying ETF?
You can and I might do that next (borrow money and put it in an ETF) to balance putting money in individual stocks. Again, I'm not an expert but my thinking was that indivisible stocks grow a lot more than ETF in capital gains (generally). Since it will take me years to pay off the loan, at the end of that time, I should have more capital gains than if I put the money in an ETF. Also, not always but sometime to get a high yield, stocks will use covered calls which limits their growth.

And I actually answered this in my 3rd video: (i link to the appropriate spot in the video)
Last edited by MrMikeDD on Nov 2nd, 2020 1:12 pm, edited 1 time in total.
Borrowing $65,000 to Invest - Investing with Leverage YouTube Video Series
I borrowed money to invest and wanted to document the steps and process. I hope others can learn from my experience.
[OP]
Newbie
Oct 29, 2020
71 posts
94 upvotes
xgbsSS wrote: Some things to note:

-You can claim the interest charges of the loan as "Carrying Costs" should your investments be held in a non-registered account. This gives you an added tax-advantage when utilizing leverage
I don't think I can because my money is an TFSA, I'm already getting a tax benefit. I'm told I can't double dip. If this was in a regular cash account, then I could claim the interest.
xgbsSS wrote: -Depending on how you are managing it, you should consider to spread your holdings in different areas. In your case, you have two telecoms, two banks, one REIT, and one pipeline/utility. I probably would either stick with just one telecom and one bank, and would have spread the type of industry. For instance, an insurance company, a pure utility, industry stalwart etc.
You're right but I also had certain criteria that had to be met which limited my options (example, high-ish yield, blue-chip stock to be more safe). But it is very possible there is a better company I could have used. Any ideas?
xgbsSS wrote: -While using dividends to pay off the loan is fine, I make a point of making regular payments from my income, in addition to the dividends. It's a deleverage risk that is important. While the dividends of the companies you own, I believe are safe, we do not know the future and you should make some mitigation of that risk.
I will want to do this next time, if this works out. For this though, I [stubbornly haha] want to see if these stocks can pay for themselves. That way I could say at the end of it that I now have this month and monthly income totally for free :)
xgbsSS wrote: What you are doing is what many of us have been doing.
If you were to do this again, which stocks would you pick? Which have you found to be very success - and I define successful as paying good dividends and, not necessarily have never lost value because i know that happens all the time, but have recovered from capital loss.
Borrowing $65,000 to Invest - Investing with Leverage YouTube Video Series
I borrowed money to invest and wanted to document the steps and process. I hope others can learn from my experience.
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MarinersFanatik wrote: Instead of picking individual stocks that pays dividends, could I just invest in a dividend-paying ETF?
You can, however, dividend ETFs costs a bit of management fees. Depending on your style of investing, it can also mean you lose control of your choice in investments. That being said, if you don't want to pick, it can work.
Generally not a fan myself, but it is feasible.
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xgbsSS wrote:
-While using dividends to pay off the loan is fine, I make a point of making regular payments from my income, in addition to the dividends. It's a deleverage risk that is important. While the dividends of the companies you own, I believe are safe, we do not know the future and you should make some mitigation of that risk.
I think this is important. If you solely rely on the dividends overage vs. the interest you could end up in a scenario where interest rates rise and you are cashflow negative. It's a great play (basically using the companies own money to pay for your investment), especially when you remain cash flow positive - I'd suggest you just want to ensure it stays that way...the companies noted have relatively safe dividends and while that's UNLIKELY to change (no guarantees in life) it IS likely that interest rates are going to change over the time frames involved in paying it off. That could be especially true if you used a variable rate loan...if you have, for example, a 5 year fixed rate term, you might have some breathing room on the additional payments but would need to be prepared for a larger jump in the rate in 5 years. I'd say run some numbers to see what the interest payments are if rates double over the next few years (or the time frame of the fixed period if you went that route) and then try to pay enough principal down to keep it at a level where you'd remain cash positive if rates rise. While rates may stay low for the next couple years - who knows where they'll be in 3-5 years...inflation could certainly raise it's ugly head and drive rates up given the amount of stimulus from governments.

This also works nicely if you are able to shelter the investment - though you lose some ability to easily pay back the loan early if you ever needed to do so, you also gain a very nice initial investment tax break that you can re-invest or put against the loan (personally, I'd put it against the loan if I sheltered it in an RRSP - that way if you ever did need to withdraw to pay it back you've offset the tax benefit against the loan already - obviously that would need to be dire circumstances).
Member
Nov 30, 2017
278 posts
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xgbsSS wrote:
-While holding Canadian companies allows you to take advantage of the Canadian Dividend Tax credit, for diversity sake, holding some foreign holdings especially in areas where Canada doesn't have players might be considered. Eg. Healthcare companies, technology etc.
Do the company have to be listed on the TSX too to get this preferential dividend treatment? Or the same would apply for stock of Canadian companies held at NYSE? (Thinking on ENB here)
Deal Addict
Jul 12, 2008
3332 posts
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There is a book “Money for nothing and your stocks for free” it’s a Canadian book that goes through this strategy.

This is a really good time to do it but it’s a very slow process especially as you didn’t get aggressive with the yield. The author of that book used Riocan in 1999 to do it and covers all you need to know.

I did it once a few years back with a 6 figure amount but got bored with it after a couple of years and some appreciation.
Deal Addict
Feb 26, 2017
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I thinking your goal is to have a higher yield to pay the loan off quicker but in some cases it could make sense to go with some higher quality and lower yielding names. As an example if I had to pick two banks today I'd probably pick RY and TD as I think they're higher quality than CM, BNS and BMO (I own 4 of the 5 from the big 5). I'm saying this as someone who focused on high yield in my unregistered account and by far my worst performing account ;). I also probably wouldn't have picked REI for a REIT and wouldn't want to hold a REIT in my unregistered account.

As other have mentioned I'd also probably want to add some diversity to the sectors even if this lowers the yield a bit (this can be done over time). I don't know what you own in your other accounts so this might be covered but I'd probably pick a Utility and Railroad and something else in a different sector like Couche Tard, Loblaws or Canadian Tire.
[OP]
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Oct 29, 2020
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Chance7652 wrote: I don't know what you own in your other accounts so this might be covered.
While I do have other stocks, the value is no where near the amount I borrowed to invest so even though I do own them, i'm not sure you would call it diversified. Then again, I've heard that if you only have money in stocks, that in and of itself means you're not diversified (meaning you should also own bonds, real-estate, etc...)

In my TFSA, the following stocks have anywhere between $1K - $2K in each:
  • Brookfield Property Partnerns
  • Brookfield Asset Management
  • Algonquin
  • TC Energy
  • Enbridge
  • McDonalds
  • Apple
  • Disney
  • Mastercard
  • Rogers
  • Bell
  • Telus
  • Manulife
  • Royal Bank
  • TD
  • Bank of Nova Scotia
  • CN Railway
  • ZWC - BMO high div covered call ETF
Borrowing $65,000 to Invest - Investing with Leverage YouTube Video Series
I borrowed money to invest and wanted to document the steps and process. I hope others can learn from my experience.
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Feb 26, 2017
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MrMikeDD wrote: While I do have other stocks, the value is no where near the amount I borrowed to invest so even though I do own them, i'm not sure you would call it diversified. Then again, I've heard that if you only have money in stocks, that in and of itself means you're not diversified (meaning you should also own bonds, real-estate, etc...)

In my TFSA, the following stocks have anywhere between $1K - $2K in each:
  • Brookfield Property Partnerns
  • Brookfield Asset Management
  • Algonquin
  • TC Energy
  • Enbridge
  • McDonalds
  • Apple
  • Disney
  • Mastercard
  • Rogers
  • Bell
  • Telus
  • Manulife
  • Royal Bank
  • TD
  • Bank of Nova Scotia
  • CN Railway
  • ZWC - BMO high div covered call ETF
I like the other names listed above but I'm a bit biased as I own 11 of those. You should get some real estate exposure from BPY, BAM and REI. I'm not a fan of bonds and only have a very small amount in one of the RESP accounts I have.
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JKCanada wrote: Do the company have to be listed on the TSX too to get this preferential dividend treatment? Or the same would apply for stock of Canadian companies held at NYSE? (Thinking on ENB here)
No as long as the dividend itself qualifies as as an eligible dividend, which most will.
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MrMikeDD wrote: I don't think I can because my money is an TFSA, I'm already getting a tax benefit. I'm told I can't double dip. If this was in a regular cash account, then I could claim the interest.
Correct. Since your TFSA already gives tax benefits, it isn't worth it. Generally, I maximize my TFSA and RRSP without leverage and use leverage on my non-registered. Of course, since you haven't maxed your TFSA and RRSP, this makes sense. This is also how RRSP loans can work too. But again, carrying costs are only for non-registered.
MrMikeDD wrote: You're right but I also had certain criteria that had to be met which limited my options (example, high-ish yield, blue-chip stock to be more safe). But it is very possible there is a better company I could have used. Any ideas?
There are a lot of companies that aren't in the same industry and have a high dividend than your loan, so perhaps you aren't looking hard enough ;) Mind you, I am not saying your picks are bad, but if you want to have more diversification or different exposures, you might have wanted to pick different companies.
MrMikeDD wrote: I will want to do this next time, if this works out. For this though, I [stubbornly haha] want to see if these stocks can pay for themselves. That way I could say at the end of it that I now have this month and monthly income totally for free :)


It will generally work, but remember a mortgage would work the same way. A property you purchase, you must make mortgage payments. You could then use the rental payments you earn to make extra payments. In your situation, it is like you are using rental payments to pay off the mortgage, but not necessarily regular. There is nothing wrong with that, however, it comes with the risk should those payments cease, you either need to liquidate or start paying off the loan with your cash flow. I make a rule to make an extra payment, personally, especially if you use brokerage margin because of margin calls. But that being said, yours is probably a straight loan or line of credit. As long as you are comfortable with this, go with it.
MrMikeDD wrote: If you were to do this again, which stocks would you pick? Which have you found to be very success - and I define successful as paying good dividends and, not necessarily have never lost value because i know that happens all the time, but have recovered from capital loss.
I won't disclose all my holdings in this case. I am using a value strategy to pick my stocks so I am targeting sold down names that I believe have room for recovery while waiting. For my dividend portfolio, I choose names with undervaluation and room for recovery so they also tend to be sold down names. I can tell you a few names right now include some of your holdings, BNS, ENB. I also hold RCI.B, MFC, ITP, and EIF. I have others but won't disclose as I my strategy isn't the same as yours, but the general gist is the same. I also sell depending on certain parameters. For banks, it will be on outperformance and underperformance. It is seen in Canada that a bank that outperforms will tend to underperform the next, and vice-versa. Scotia is the laggard of late when only a few years ago, this title was CIBC and BMO and now they are doing better. Similarly, I see these kind of long term gyrations. It might not work each time, but in general, the banks (except Laurentian) tend to be solid plays regardless. I make a point of buying a position of about $5-10k per stock for the portfolio. Once I have a hold of at least 20 names, I may decide to double up on some names.
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Don't forget that if claiming interest expenses you have to factor in ROC for REIT and other trust funds. I am about to start doing this myself and will be holding just dividend-paying common shares.
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Apr 14, 2006
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I loaded up on the standard banks + tech. The bank dividends are basically carrying my tech positions. My biggest position is Citigroup though. Book value 0.50 compared to the greater than 1.0+ of the others. Comes with a decent 4.9% yield so I can wait for it to recover. Lose out on the eligible dividends but the upside should be higher.

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