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rated:
Ok, let's start by assuming I understand that the price of any stock can drop and nothing is a sure bet, even over the long run. That being said, I have a theory I'd like to run by you...

I use Robinhood to trade. I'm fairly new, but I've learned a ton of lessons over the past 8 months, and I've read a lot. I have a long list of stocks I follow, and don't own, just because I'm interested. Some of these stocks are BDC's with high yield. I never bought into them because I knew that my horizon to hold wouldn't be long enough for the dividend to outweigh the risk of possibly selling in 3-5 years at a loss. I recently upgraded to Robinhood gold to try out the margin upgrade. I took the smallest amount which was $2000 for $10/month. I've played with it here and there going in and out of certain stocks. I recently decided I'm not too comfortable using someone elses money. But here's the idea I just recently had...

I can borrow up to 6000 on margin and pay a monthly fee that roughly equates to 5-6%/year (10/month for the 2000 would be like 6%, but 25/m for 6000 would be 5%). What if I took that margin amount, and invested the entire thing into a BDC paying a monthly dividend north of 11%. I'd do this expecting to not sell the stock for at least a decade. My logic is, while the cost of the margin is 5-6%, the yield I'm getting back is 12%, so I'm walking away with a profit of a guaranteed 6%. On top of that, the stock I'm looking at pays the dividend monthly so I could reinvest the profits into the stock and continue to grow my holding. Now, yes, like I said in the first sentence, I understand the stock is not guaranteed to give me gains, and it could drop, but if I'm planning on holding this long term, even if it dropped for 5 years, as long as it eventually got back to its buying price, wouldnt this be a smart play?

Essentially, isn't this using someone elses money to earn a 5-6% dividend (and possibly more via reinvesting)? What are your thoughts guys. Thank you,

Mark

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I agree you must pick them individually. How many stocks do you have in your portfolio and what's the largest percentag... (more)

myfrogger (Nov. 26, 2016 @ 11:44a) |

I don't know the total number - dozens.   I didn't see any price drop in my preferreds.  They are almost all european ban... (more)

bluegreenturtle (Nov. 26, 2016 @ 11:51a) |

One way to determine whether or not the company will be able to maintain and raise its annual dividend yield is to look ... (more)

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rated:
Found a comment in a thread elsewhere on the net where someone touches on this concept...

"Regarding the stock market - when investing in stocks you should not only look at the dividend rate but also the capital gain or loss potential. Remember in regards to investing on margin, if the share price drop too much you can get a margin call no matter how much dividend you are getting. It is no use gaining 9% in dividend yield per year if you are losing 15% or more in capital each year. Also, what is the risk of the dividend rate being cut back or dividends not being paid at all in the future? These are some of the risks you should consider before investing and derive a risk management plan as part of your investment plan before you invest."

Guess I'm answering my own question. Do I feel like this company is safe to be around over the long haul, consistently pay its dividends, and do I feel like the stock price will be at or above the buy price in the future if I want to sell.

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Margin borrowing rates are not fixed. As they creep up your potential for loss increases. 

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Its a safe bet that if these stocks are paying a 10% dividend that there is pretty high risk somewhere. Likely in the dividend itself.

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There just isn't any such thing as a safe 10% dividend. That dividend and/or the stock value will have a relatively high risk.

But I've been doing something like your idea via interactive brokers. First, the margin rate there is much lower - well under 2% depending on how much you borrow. The stocks I've held have been paying at least that much in dividends. Usually only a little, but those dividend payments just go directly against my margin balance, so it does keep my buffer on my margin limit pretty consistent. With this arrangement, I don't think the issue you quoted from an internet comment is a big concern. A margin call is worth worrying about, but at least in my case, the dividend payments do contribute directly to avoiding that.

I did buy one REIT with dividend payments around 10%. But I've probably only broken even on it, the share price has dropped since I bought. I sold recently and don't plan to try that again. It was really easy to do a lot better than breaking even over the last couple of years, so I consider that one of several common mistakes I made starting out.

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I'd urge you to think in terms of total return rather than yield. With transaction costs essentially at zero, a dividend isn't really any different than just selling a fraction to create your desired cash flow. Reits are somewhat of an exception since they're required by law to pay out most of their profits as a dividend, so in their case total return = dividend yield.

Also, Interactive Brokers has rates closer to 1.5%.

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firstly, don't pay 6% margin.  Save up until you have enough for an IB account and then you'll only pay 1-2%.  

Second, don't mistake a dividend stock with a "CD-style" investment - they're very different.  From a micro perspective, the stock will drop by the dividend amount, so you haven't really gained anything just because it paid a dividend (except an accelerated tax bill).  From a macro perspective, the stock can fall more than the dividend payments (such losses would be magnified by margin), dividends can be cut or suspended (check out RSO recently), and more specifically BDCs are often very generous in their compensation to the executives and produce modest but high risk returns to the investors.  All the risk of high yield, illiquid lending but with a fraction of the return since you're paying these guys hedge fund style fees to manage it for you.

Sure it could work out, but that would be true of any stock you bought that went up, dividends or otherwise.  On the way up, margin helps you beat the market.  On the way down, the beating goes the other way.

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^agree with Xerty.

I use IB and Robinhood. Robinhood is for transaction free day-trading. IB for everything else (although IB's trades are also very cheap, the interface leaves a bit to be desired). If you're going to do the margin thing, which I don't recommend for most people, IB is the place to be. No other broker has margin rates that come close to Interactive Brokers.


There is one compelling reason to sign up for Robinhood gold though at the lowest tier ($10/mo): pre and after-hours trading. That alone is a perk probably worth the $10/month.

rated:
Thanks for the good responses. I think it basically comes down to the obvious; if I think that stock can head north as well as continue paying the dividends, then it's worth a shot. I guess that's how it goes with any stock you're looking at.

In any case, the stock I was looking into was FSC. It's one of the BDC's that would stand to gain off rising rates in coming years. Just thought it'd be a decent play. I liked the monthly payouts as well.

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Dividend stocks will get shellacked as bonds sell off and yields rise. Or dividend stocks will increase because the economy (and consequently earnings) will grow faster than bond yields rising.

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So what you're saying is...

Your guess is as good as mine? Lol

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markzab79 said:   In any case, the stock I was looking into was FSC. It's one of the BDC's that would stand to gain off rising rates in coming years. Just thought it'd be a decent play. I liked the monthly payouts as well.
 Trying to make your portfolio great again?

http://seekingalpha.com/article/4020905-13_7-percent-yielder-mak...

FSC isn't bad, but you might also consider FSFR or the guys who get paid the fees on both of those, FSAM.  

rated:
Yeah, saw that. Been following FSC for some time now. Not sure what I'll decide to do, if anything. There's still a little voice in my head telling me not to use someone else's money to invest. Lol

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markzab79 said:    There's still a little voice in my head telling me not to use someone else's money to invest. 
At least you can hear it, which is more than most people with mortgages and stock portfolios understand.  I stopped listening to that voice a long time ago, but it's a long road and most people aren't ready to take it.  You need a lot more than a few good stock picks - you need a very good understanding of risk, diversification, and your personal psychology.  If you have to ask, you're not ready yet, but that doesn't mean you won't be.  You just need more experience and the lessons you have to learn the hard way are much cheaper without multiplying them with leverage.  Good luck.

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I have been using 0% no fee balance transfers instead of margin. It's cheaper.

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Why not both?  Get a big 0% BT and use that to get more margin.

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xerty said:   firstly, don't pay 6% margin.  Save up until you have enough for an IB account and then you'll only pay 1-2%.  

Second, don't mistake a dividend stock with a "CD-style" investment - they're very different.  From a micro perspective, the stock will drop by the dividend amount, so you haven't really gained anything just because it paid a dividend (except an accelerated tax bill).  From a macro perspective, the stock can fall more than the dividend payments (such losses would be magnified by margin), dividends can be cut or suspended (check out RSO recently), and more specifically BDCs are often very generous in their compensation to the executives and produce modest but high risk returns to the investors.  All the risk of high yield, illiquid lending but with a fraction of the return since you're paying these guys hedge fund style fees to manage it for you.

Sure it could work out, but that would be true of any stock you bought that went up, dividends or otherwise.  On the way up, margin helps you beat the market.  On the way down, the beating goes the other way.

    xerty, could you comment of these positions for carry trade?: HYEM EMHY EMLC PCY IHY JNK VCIT HYD VWAHX BFK PHT DHF EHI PDI PTY PCI GHY VGI VTA NCZ NCV GOF ETW IGD REM DIV SDIV

rated:
traderranger said:       xerty, could you comment of these positions for carry trade?: HYEM EMHY EMLC PCY IHY JNK VCIT HYD VWAHX BFK PHT DHF EHI PDI PTY PCI GHY VGI VTA NCZ NCV GOF ETW IGD REM DIV SDIV
  Individual stock discussion thread

rated:
traderranger said:   
Sure it could work out, but that would be true of any stock you bought that went up, dividends or otherwise.  On the way up, margin helps you beat the market.  On the way down, the beating goes the other way.
    xerty, could you comment of these positions for carry trade?: HYEM EMHY EMLC PCY IHY JNK VCIT HYD VWAHX BFK PHT DHF EHI PDI PTY PCI GHY VGI VTA NCZ NCV GOF ETW IGD REM DIV SDIV

  I would not leverage up high yield debt ETFs, CEFs, or mutual funds more than a trivial amount if at all (at most maybe 1.2x).  I think the risks of most of their holdings are too high and most will be highly correlated with eachother.  I would not view doing so as a particular good investment approach - the risk seems too high and excess return modest after margin costs.  I think you need to do your own careful securities selection or have a long / short portfolio to use more than a trivial amount of margin for the long term.  

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rlaw said:   Why not both?  Get a big 0% BT and use that to get more margin.
  Because I don't want to pay any interest or fees at all on borrowed money.  

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markzab79 said:   Yeah, saw that. Been following FSC for some time now. Not sure what I'll decide to do, if anything. There's still a little voice in my head telling me not to use someone else's money to invest. Lol
Margin is the equivalent of meth for your finances... your assets will be much more productive in exchange for a chance to be wiped out when the market inevitably turns against you.
When people blow up, they reflexively pull everything out, mistaking their gambling for a "rigged" investment, and destroy future returns beyond that which was lost to the margin call.

Also, people are so desperate for yield in the current environment, their willing to take risks that would have been unthinkable a decade ago, substituting dividend yielding equities for bonds in portfolios. Should these already leveraged companies need to reduce their dividend, the repricing could be a 50% short term loss on unleveraged positions.

- Don't invest more then 5% in any one company
- If you need to borrow money for the investment to have an acceptable rate of return, it's a bad investment.
- If the blown up investment doesn't kill you, the collateral damage to other positions and opportunity cost will.

The best investment advice from any movie (NSFW


)

 

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markzab79 said:   Thanks for the good responses. I think it basically comes down to the obvious; if I think that stock can head north as well as continue paying the dividends, then it's worth a shot. I guess that's how it goes with any stock you're looking at.

In any case, the stock I was looking into was FSC. It's one of the BDC's that would stand to gain off rising rates in coming years. Just thought it'd be a decent play. I liked the monthly payouts as well.

  
Just a quick look at FSC, and I would have some concerns.  As others have stated, a dividend that high is unlikely to be maintained.  Run a 5 year history on that, I see multiple dividend cuts.  In the last 12 months, there was no dividend in September or October.  Earnings are negative, cash flow from operations is negative 3 of the last 4 years.  

rated:
Any dividend north of 10% in this market should be a massive red flag.

Have you done in-depth cash flow analysis of this company? How long can they maintain this dividend. Clearly the market doesn't think it's likely to maintain.

rated:
Some of those high yield dividend stocks may actually be MLPs, which come with complex tax implications as well.  So please be aware of that. 

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markzab79 said:   even if it dropped for 5 years, as long as it eventually got back to its buying price, wouldnt this be a smart play?
 

  
If you're significantly leveraged, you'd need to be prepared for a margin call. The stock getting back to where you bought it isn't going to help much if the broker sold it at the bottom to cover your debt.
 

rated:
bassmanben said:   Some of those high yield dividend stocks may actually be MLPs, which come with complex tax implications as well.  So please be aware of that. 
  
Some are incorporated and issue 1099s to simplify that aspect.  Like one I owned on margin called LinnCo.  Yeah..the OP really doesn't want to go there.

rated:
In this environment, a 10% dividend yield isn't sustainable. There are two ways that dividend yield can come down. I wouldn't bet that it's through an increase in the share price.

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Argyll said:   I have been using 0% no fee balance transfers instead of margin. It's cheaper.
  
Where are you getting these from?  

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http://www.magnifymoney.com/blog/balance-transfer/no-fee-balance...

I've done them with Logix CU, NFCU, and Chase Slate. Logix will do a cash advance with no fee at 0%. Most of these are one-time introductory offers for new cardholders although you can do some of them again after canceling a card and waiting a period of time.


Also, check this thread: https://www.fatwallet.com/forums/finance/902958

rated:
Argyll said:   http://www.magnifymoney.com/blog/balance-transfer/no-fee-balance... 

I've done them with Logix CU, NFCU, and Chase Slate. Logix will do a cash advance with no fee at 0%. Most of these are one-time introductory offers for new cardholders although you can do some of them again after canceling a card and waiting a period of time.


Also, check this thread: https://www.fatwallet.com/forums/finance/902958

  
Thanks. The ones I am particularly interested in are the recurring no fee ones, like CapOne.

rated:
I've done multiple BTs with several of these.

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Argyll said:   I've done multiple BTs with several of these.
  Not a bad strategy for cheap financing but it does go against your credit utilization, unlike a broker margin loan. Probably not a problem unless you're doing it in size.

rated:
TravelerMSY said:   
Argyll said:   I've done multiple BTs with several of these.
  Not a bad strategy for cheap financing but it does go against your credit utilization, unlike a broker margin loan. Probably not a problem unless you're doing it in s
 

rated:
Argyll said:   I've done multiple BTs with several of these.
  
Does Logix let you rinse and repeat no fee BTs every month? 

I would be happy to discuss this in a pm as well.

rated:
What about buying preferred stocks? They pay 5.5-6.5% and can be leveraged 6:1 with a Portfolio Margin account, if desired. Interactive brokers charges ~1.5% on margin balances.

Doug Le Du, author of the book titled Preferred Stock Investing, recommends 10 simple filters, not necessarily in this order. Last revision was in 2013 so I think the current 6.5% is a bit high in this environment. Luckily bonds & preferred stocks took a big dip recently (I think) pricing in nearly 100% confidence of a FED interest rate increase. However, not sure as I'm not an expert---just recently intrigued by this concept!

The preferred stock is rated “investment” grade by Moody’s (Baaa or better).
The stock pays a fixed dividend 6.5% or better
The dividend is paid quarterly
The stock is not convertible to common shares or some such
The stock’s dividends are “cumulative” meaning the issuing company cannot just “skip” paying the dividend without ever paying you back
The company has NEVER missed a dividend payment
The stock becomes callable after 5 years
The stock is issued by a U.S. Company
The stock has an easily accessible online prospectus
The stock has a par value of $25

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myfrogger said:   What about buying preferred stocks? They pay 5.5-6.5% and can be leveraged 6:1 with a Portfolio Margin account, if desired. Interactive brokers charges ~1.5% on margin balances.

Doug Le Du, author of the book titled Preferred Stock Investing, recommends 10 simple filters, not necessarily in this order. Last revision was in 2013 so I think the current 6.5% is a bit high in this environment. Luckily bonds & preferred stocks took a big dip recently (I think) pricing in nearly 100% confidence of a FED interest rate increase. However, not sure as I'm not an expert---just recently intrigued by this concept!

 Most preferred stocks have have asymetric interest rate risk - if rates fall, they are called in a few years and replaced with lower yielding issues, while if rates rise, they are perpetual and you can get stuck with a below-market return and your investment will fall accordingly.  PFF for example lost 5% inclusive of dividends just in the past few months:

http://quotes.morningstar.com/chart/fund/chart.action?t=VBMFX&re... 

think what it will do if they actually raise rates a lot!  The duration of a perpetual preferred is very long in a rising rate environment, so they will fall a lot if those rate hikes materialize.  Do you really want to lose 30% in the past month because you magnified the 5% drop with 6x leverage?

rated:
I should add, I'm recently intrigued because of the 5% drop in the last month. I think it's a good time to buy...but that's a different "strategy" than the book I posted. I like the stock selection criteria in the book. It will be interesting to see what fed rates do Dec 13/14th. It might be a good idea to wait until then. Also, the ex-date of a lot of preferreds is Dec 12th so expect a drop...maybe a double drop, even though they say the market has priced in interest rate changes.

rated:
I've bought plenty of leveraged REITS that have lost more in value (and quickly) than years of their dividend payments.  Your plan can work but it's so far from a safe bet that it's actually about the opposite of what you wanted to do, which is "guarantee" a return.

As to preferred stocks, I've done really well the last few years with them - but in my opinion, you cannot buy preferred stocks in a bundle like PFF.  You absolutely must pick them individually.  PFF has a terrible risk/return, btw. 

rated:
I agree you must pick them individually. How many stocks do you have in your portfolio and what's the largest percentage of any one company? And how did you do with the recent drop in price?

Skipping 2 Messages...
rated:
One way to determine whether or not the company will be able to maintain and raise its annual dividend yield is to look at its free cash flow. This is the amount of money left over after capital expenditures.

Few REITs that are good for 2017 are:
HCP, Inc. (NYSE:HCP) is a self-administered real estate investment trust (REIT) that invests in, develops, and manages real estate that it leases to health care facilities. An S&P 500 company, HCP has approximately $24.3 billion in assets under management, which represents its real estate portfolio.
Realty Income Corp (NYSE is a REIT that purchases commercial real estate and leases it to tenants under long-term agreements (10-20 years). The company currently owns over 4,600 properties in 49 states and Puerto Rico.

Source: Dividend stocks for 2017

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