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

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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



    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



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  • Best 2014 Dividend Stock Pick Returns Beating Both Benchmarks!


    I started this “tradition” on my blog back in 2012. The goal is to pick 20 US and 10 CDN dividend stocks that I think will outperform their peers. This is the reason why I use VIG and XDV as my benchmarks. I keep track of my results for accountability purposes. I find that too many analysts and blogs just drop the ball on their picks when they aren’t so great. By posting monthly results, I have no choice but to face my performance and explain it. You can look at my previous picks and returns:

    Best Dividend Stock Picks 2012 (-1.47% vs VIG (US dividend ETF), + 8.32% vs XDV (CDN dividend ETF)

    Best Dividend Stock Picks 2013 (+11.07% vs VIG, + 0.77% vs XDV)


    You can also buy my 2014 Best Dividend Stock Picks for Kindle (Amazon) to get the full analysis:


    2014 book cover 

    2014 Best US Dividend Stocks: +3.77% vs VIG: +1.00% 

    best us stocks

    After five months, I’m not only adding 2.77% to my benchmark, but I’m also beating the whole US market (S&P500) by 2.82%. While we are still in a bullish market, my dividend growth stocks continue to beat even my expectations. I even picked five double digit return stocks (ALV +11.08%, HP +29.21%, LMT +10.41%, LO +17.25% and WEC +17.26%). HP most recent quarterly results were still up but disappointed Wall Street. This had created a buy opportunity in my opinion. The stock dropped 6% on the day HP published its results.


    More on the positive notes, we see McDonald’s (MCD) and Apple (AAPL) finally coming out of limbo. For the first for the past 18 months or so, MCD is finally showing some uptrend (+4.48% vs VIG at 1.00%). Apple published strong results while everybody expected a drop in sales. The stock went up by 8% instantly. I’m still holding my position in this stock at the moment as I believe there is more good news to come for AAPL.


    Like a good father, I tend to be patient with poor results. I’ve given Mattel (MAT) a chance to come back with a strong quarter after a disappointing Holiday season. MAT keeps fooling around with another drop in sales and Barbie, for the first time of her life, is starting to hear the call for retirement.


    2014 Best CDN Dividend Stocks: +2.86% vs XDV: +2.66%

    best cdn stocks

    Making a selection of stocks each year and posting monthly results is a big risk for any blogger. Each year, I put my credibility on the line to show that my investment strategy works (or not! Hahaha!). When I beat my US benchmark by 11% like in 2013 or that I am currently beating it by almost 3% this year, I know this is not just luck.


    This year, I can’t really say I’m riding the Canadian market as strong as I am in the US. I remember having a hard time finding very interesting dividend stocks at the beginning of the year in Canada, and it’s back to haunt me right now. While I am “ahead” of my benchmark by 0.20%, I can say it’s almost just luck. Out of 10 picks, only three of them beat the benchmark at this time.


    I’m very proud of my find from last year; Black Diamond Group (BDI) which is +71.44% since I picked it for the first time in January 2013. The find of this year is Gluskin & Sheff (GS) which is +28.17% this year and +122.26% since January 2013.


    I think my two banks (BNS & RY) will come back strong as the Canadian economy is not improving this year. Their investment/stock market division should bring them to the positive side of the equation.


    It’s tougher for my consumer picks (DII.B, LAS.A and NWC). I anticipated a stronger year for consumers and it seems that it’s not working well right now. But the year is still young so who knows what will happen during the next quarter!


    On May 2nd, I’m dropping Mattel off my portfolio. Dividend Stocks Rock members will receive an email telling them which stocks I pick instead. I will keep the -17% from Mattel in my portfolio and start with the “virtual remaining amount” to buy another stock. Only members of Dividend Stocks Rock will know about this trade. By the way, As at April, 8 of 10 DSR portfolios are beating the market. What are you waiting for to subscribe? ;-)





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