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    After the amazing ride we had in 2013, many investors have decided to sell a part of their portfolio and cash out their profits. They did this because they are waiting for the next dip to buy again. The problem is that since the small dip of 5% (where those guys were probably still waiting hoping it would hit 10%), the market is surfing on another good year.

     

    We still have a little bit of volatility, but overall, both the Canadian and US markets are set on cruise control to finish over +10%. However, this scenario will happen only if the good news keeps coming in. You know, the type of news that makes me want to buy more stocks…because this is what you should do: keep buying more stocks if you have money parked somewhere.

     

    The P/E Ratio is not that Bad

    I agree with you, the easy money is gone for good. There aren’t awesome buying opportunities these days on the market. But it doesn’t mean there aren’t opportunities at all. Both the S&P500 and TSX60 are traded around their historical average values for P/E (16-17). Therefore, most stocks are currently fairly valued.

     

    This also means that if companies keep posting better results, their stocks will continue to rise and follow the same ratio. In fact, this is pretty much what has happened since the beginning of the year. Stocks are following alongside their profits and this is a very good thing for everybody; this means there is not a bubble ready to burst.

     

    Companies Still Have Cash

    For the most part, companies have never kept this much in liquid assets as they do nowadays. They have focused on paying down their debts and reducing their costs over the past 5 years and have kept a very tight budget.

     

    What does extra cash mean for investors? One of these five things:

    #1 Dividend increases

    #2 Stock buybacks

    #3 Mergers & Acquisitions

    #4 Additional investments in R&D to innovate

    #5 The ability to endure a rough stretch (recession)

     

    When I increased my position in Apple (AAPl) a few weeks ago, I bought a company that is sitting on billions. This money is ready to be redistributed to me as an investor through many channels. I would rather buy shares now and keep their dividend in the meantime instead of waiting on the sideline earning 1% from the money market.

     

    The Train is Still Not Steaming

     

    As I’ve previously mentioned, I don’t see the stock market train steaming yet. In the US, there isn’t a big bubble ready to burst. The housing market is growing slowly, consumers’ confidence is rising and employment is getting better. The deleveraging phase is over and consumers have started to buy goods again.

     

    In Canada, the housing market still worries me but it seems that we are landing softly on a zero growth level (eventually) without any crashes.  Mind you, banks are well capitalized and it will not affect their balance sheet too much as profits now come various sources apart from mortgages.

     

    What is Expensive Today will be out of Range Later

     

    If you think the market is expensive right now, you might not be in a good position to manage your portfolio. I’ve talked to people who told me the market would burst last year while others told me the same thing about 2012. Still, we are now past the mid-year of 2014 and the stock market continues to grow.

     

    At the moment, there are plenty of good reasons why stocks are going up. I’m not saying that everything is perfect (far from it), but there are enough factors telling me price will keep going up. What do you prefer; not buying right now, missing the dividend to buy in maybe 2-3 years at today’s price after the stock market will eventually drop?

     

    I think I’m better off buying dividend stocks, cashing in the distributions and continue my ride on the market. What would you do if you had $5,000 to invest? Would you buy stocks or keep waiting?

    3 Comments   |   Read more >
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    Last Monday, I mentioned the possibility of using a margin account to invest in a TFSA account. To my knowledge, only Questrade offer TFSA margin accounts. It’s kind of counter intuitive when you think about it: why would you borrow money to invest in an account where you can’t deduct the interest?

     

    The idea of leveraging in Canada is often linked to the fact we can deduct the interest from your investment income. I’m not a tax expert but the general concept is that you are allowed to deduct the interest from a loan when the money has been used to invest and there is a reasonable expectation of profit. For example, if you borrow 100K at 5% to invest in a bond paying 2%, you can’t really deduct the interest as it is pretty obvious you will lose money.

     

    However, this tax rule doesn’t apply when you borrow money to invest in a tax sheltered account (an RRSP or TFSA for example). So what’s the point of borrowing to invest in a TFSA?

     

    Because my Expected Return is Bigger

     

    If I invest $1,000 in my TFSA margin account and borrow another $2,000, I will have $3,000 to invest. I would pay 6% interest on $2,000, a cost of $120. This represents 4% of my portfolio. By selecting my stocks carefully, I can probably build a portfolio that will pay all interest within 12 months, maybe instantly.

     

    There are many Canadian stocks that would fit in this portfolio:

    Telus (T) 3.71%,

    BCE (BCE) 5.04%

    ScotiaBank (BNS) 3.85%,

    Corus (CJR.B) 4.39%

    Emera (EMA) 4.20%

    National Bank (NA) 4.05%

    Riocan (REI.UN) 5.21%

    Rogers (RCI) 4.19%

     

    This is a short list but it’s more than enough for me to build a $3K portfolio. I would probably buy 2 stocks at first and build on that. The idea is to pick stocks that will pay the interest with their dividend.

     

    Then, the dividend growth will be “in my pocket” along with the overall growth of the stock value. When I look at my current portfolio, my YTD total return is 7.4%. It is a great combination of dividend payouts and stock growth. This is what I would like to create with this margin account.

     

    You Have to be More Aggressive

     

    A margin account is not for the faint of heart. If you don’t want to go “all-in”, it’s better off not doing it at all. I was surprised to find over 100 stocks on the Canadian market showing both EPS and positive revenue growth over the past 5 years and paying over 4% in dividend yield. Then, it’s a matter of researching deeper and look carefully at each company. The short list I just pulled for this article is coming from stocks I know well and that were part of my quick stock filter research.

     

    Let’s say I wouldn’t have any problem building a “bank & telecom” portfolio with my TFSA. This could be a good idea to maximize both dividend payouts and overall growth of the portfolio. I’m not completely done with the idea of investing on margin but I must admit this is getting serious in my mind right now.

     

    Please note that I didn’t mention any US stocks in this article because dividends paid by US companies in a TFSA are subject to withholding taxes (30% if you don’t do anything, 15% if you take care of it). I explain how you can save 15% withholding tax in my book; Dividend Growth Freedom Through Passive Income Canadian Edition.

     

    What do you think? Should I go ahead and use the power of leveraging?

     

    Disclaimer: I own shares of T, BNS, NA

    7 Comments   |   Read more >
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    For the past four years, I’ve been thinking about investing differently with my dividend stocks. In fact, as soon as I started dividend investing, I thought of adding this strategy to my portfolio. But I couldn’t. It wasn’t the right time for me. This summer could be the right time. This is why I’m sharing my new dividend investing strategy with you today.

     

    I’m Going to Buy on Margin

     

    As you know already, the bulk of my portfolio is an RRSP (a Canadian tax sheltered investment account) where I can’t use margin borrowing. Starting this summer, I should have some extra cash to invest outside my retirement plan. This is why I thought of starting to use a margin account. The margin allows you to borrow money based on the value of your holdings. In other words, we are talking about leveraging. I know, this is an evil world in the investment industry. Most people think that the concept of leverage was created by financial advisors for financial advisors. When you think about it, if a client who doesn’t have money can borrow (so the advisor makes money off the interest) and invest (so the advisor makes also money on the investment fees), it’s the best of both worlds… for the advisor! But I’m not an advisor trying to sell you leveraging, I’m just going to explain how I intend to put my strategy in place.

     

    How a Margin Account Works

     

    A margin account works in a simple manner. Your broker is willing to lend you money at a variable interest rate to increase your buying power on the stock market. The more you invest, the more you can borrow. Most brokers will establish different categories of investments and give you a % of its value for each of them. For example:

    Penny stocks (under $2): broker will give you 50% margin

    Regular stocks (over $2): broker will give you 70% margin

    Mutual funds (any kind): broker will give you 50% margin

    Bonds (municipal, gov’t): broker will give you 90% margin

    Etc.

     

    If you invest $1,000 in Johnson & Johnson (JNJ) which qualifies as a “regular stock”, the broker will allow you to borrow 70% of this amount to invest in the stock market. Therefore, you will benefit from an additional $700 to invest.

     

    The Magic Doesn’t Stop Here

     

    When you think about it, after using the $700 to buy more shares of JNJ, your account will show the following:

    Net account value: $1,000 ($1,700 – $700)

    Stock value: $1,700

    Margin: -$700

    Available margin: $1,190 – $700 = $490

     

    Where the $1,190 is coming from? It’s coming from the margin account rules. The Broker allows you to margin 70% of whatever is invested, no matter where the money is coming from. But what happen if you invest the additional $490 left on the margin? Silence….

     

    I wanted to start with this example to show how many people get it wrong: You must not start with the 70% of what you invest. In this example, what you should understand is that the broker requires you to invest 30% and borrow 70%. Therefore, the maximum you can invest with $1,000 in cash is…. $3,333.33. You can either divide $1,000 by 30% or you can keep doing the calculation by investing what is left from the margin each time to invest from it and you will get to the same number.

     

    If you want more details, there is an excellent explanation on the Questrade website about margins and how they work.

     

    Get the Dividend to Pay for the Interest

     

    According to the Questrade website, their interest rate for a small margin account is prime + 3%. Therefore, you are paying a 6% interest rate at the moment to borrow money from them. The interest is charged on the amount borrowed. Let’s assume you borrow the maximum from your $1,000. This makes a margin of $2,333.33 (will discuss margin call in another post). The yearly interest on this amount is $140.00. If you take the $140 and divided by the total amount you have invested ($3,333.33), it requires a dividend yield of 4.20% after tax to pay for your interest.

     

    When I think about it, I understand that this year, my leveraged portfolio will probably fall short in dividend yield to cover the interest. On the other hand, my current portfolio is paying about this yield in dividends after only 4 years. The interesting point about leveraging is that the dividends grow faster than the interest rate!

     

    I’ll go deeper into my strategy in the next article but I wanted to hear from you about the idea of leveraging first.

     

    What do you think?; am I going to make lots of money or simply throw my hard earned cash into a deep hole and never see it again?

     

     

     

     

    Disclaimer: I own shares of JNJ

     

     

    5 Comments   |   Read more >
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