Dividend investing with leverage (SPOILER: the numbers might surprise you) 

I'm just starting the video but you should check out Ben Felix's podcast. He has a recent episode on this subject. Rational Reminder is the podcast name. Episode 91, The Smith Maneuver

Gino L thanks for letting me know. I’ll check it out!

I tired the whole leverage thing but somehow the compounding negative interest rate felt worse than the positive cash flow, especially with capital at risk in the balance. I’d only suggest it if the market crashed hard again and you buy rock solid jnj and msft

@Dividend Growth Investing I was actually thinking about Taking 6,000 Loan from my 401K at work and put this towards my Roth IRA on M1 finance and invest all on SPHD and now i see your video about this. Again the Idea is since you take the loan out from your 401k you are paying interest to yourselves but you lose whatever percentage you were going to get in the 401k? does that make sense?

Love this video and your other video on new construction home $0 down w/ M1 Borrow. Future video idea How to use Leverage in Personal Finance.

Great story! He's a smart man!

Guy has some big balls. Glad he stuck to his plan. Maybe that's the real trick - sticking to a plan and blocking out the noise from everyone else

Awesome story. Grandfather is a champ - no fucks given. That's some Big Dick Energy and a successful outcome.

Your grandpa would have seen what the market had done before on downturns and knew it would happen again. Great for him and for you for having learnt to buy on discount!!!

@@timwidner8751 That is one of the most important life lessons in general.

I felt the exact same way when I saw the market go down. The hard thing is to not let your emotions take over and make irrational life altering decisions.

​@Where's Waldo??? ? Yeah, we burned through that, leveraged another 30K but would have loved to buy even more.

I'm so glad you commented this. This is exactly what I was trying to get across! I've considered doing it with M1 Borrow, but that would only be short term and not long-term like with a fixed rate. Great comment!

How can you beat M1 Plus Borrow's 2% interest rate?!? Even still, most people are not disciplined enough to make it work, but true investors will use leverage to their advantage in this way. Buy and hold quality companies of course and leverage should work imho

crazy to look back at this a year later.

@@DividendGrowthInvesting and even more interesting 2 years later!

@@BigmikeReviews lesson learned, leverage is for short term period lmao

4 yr later...uh oh.

Words of wisdom I think most people would benefit from. Thanks for watching!

most definitely agree, never invested in stocks with leverage, don't plan on doing it either if i'm quite honest.

Taking it literally, sure, however it is naive to not realize that there is good debt and bad debt

So you buy houses with cash?

@@watson457 not yet. Soon enough

I agree :)

Yeah.. It will likely be a long time before this strategy could work with rates so high.

Bruno Manco that is the power of leverage and control.

Slow and steady wins the race! Love hearing your perspective!

Pussy

Thank you so much for taking the time to comment this. Yeah it makes sense! That could work as well.

SPHD was yielding these numbers back in march when the market crashed.

I’ll be honest I was surprised by the number as well!!! I try and buy consumer items in cash (if I’m able). Hope you are staying safe!! Cheers from Austin Texas!

lol well when I recorded this video, this was back when rates were low and stock prices were crashing. Now it wouldn't work as easy with rates so high.

@@DividendGrowthInvesting my point was, you can have either high yield or high price growth, both don't go usually hand in hand. Also now would be very painful to actually return that loan with a variable interest rate... I often consider this, but the best thing is a margin loan and leverage that way. Leave some 20% downturn room and hope for the best.

Travis Shooks yup! The catch here is it’s a variable rate. It can go up and down and it’s on margin. The risk is higher because it’s tied to your portfolio value.

Hey Austin! I was really surprised by the amount that people spend each month on a car! This investing strategy is not for everyone. Thanks for watching!

@@DividendGrowthInvesting not for everyone but if you invest in a blue chip/aristocrat dividend portfolio I think it can change someone's life.

That is why I was thinking about going with the ETF with this approach. This will add that extra layer of "safety". I really like M1 Borrow especially at 2%. However, I wouldn't use M1 Borrow long-term simply because of the adjustable rate and extra risk that comes with investing on margin. Thanks for watching!

@@DividendGrowthInvesting Absolutely, leveraging a variable rate is kind of what got a lot of people screwed in 2008 with ARMs and houses they couldn't afford even at the lower rate.

How is it working out for you one year later?

Hey Mike! I could see that working out as well.

Justin Shearer very good point! Plus the %0.003 off for the expense ratio.

@@DividendGrowthInvesting can you run the numbers again with the tax and ep ratio?

I think you aren't alone! I can imagine investing in real estate is very intimidating to a lot of people. Have you ever considered or done research on investing into the stock market with debt? It doesn't seem like a lot of people talk about it. My initial thought is too many people lost a lot during the last financial crisis.

Congrats on not smoking!! That is so exciting! Im really happy for you! Use the investopedia dividend calculator to calculate how much $10 will save you over 10-15 years. It will blow you away!

Thanks, I put the numbers in the calculator. That's a lot of retirement money! lol

Hall Paint And Body :)

There are a lot of stories both good and bad when investing in this type of strategy. I don't think this is the right approach for everyone. I think we usually only hear about the really crazy stories of how people got completely rich off of this or completely lost their ass :) We write the pages in our own book of life. Thanks for watching!

yeah it doesnt make sense with high interest rates :(

@@DividendGrowthInvesting I also looked at taking a home equity loan. If I can get a 3-3.5% interest rate then it’ll be a huge opportunity. Sadly I didn’t do much research into stocks 3 years ago but if I could have locked in under a 3% loan and took out say a 100k loan, I could have easily put the whole amount in SCHD and paid off the monthly interest myself. That would have created a dividend machine! I’ll look into it when interest rates hopefully fall below 4%.

I couldn't say it better myself. There are certain things you can do to increase your odds, but there will always be risk. Happy Sunday Tailong!

Dividend Driver James I agree. If I did this, I would do it with the intention of reinvesting but it would be nice to know that you had the option to always use it to pay the loan if you had to. Thanks for watching!

I did do it. I did $7500(12% of my portfolio value) at 2% with SPHD. I love SPHD. Prior to the margin it was tied as my largest holding. While I love the covered call ETFs and own a few, I would consider going with something with a qualified dividend. Depending on your tax bracket you could get killed with taxes on something like QYLD. Idk your situation though. Something I thought of earlier would be to buy tax free dividend government bonds that have a dividend payout percent larger than the loan interest and make money that way. The dividend would be tax free and you could deduct the interest payed on taxes. What do you think of this?

Rol Ando I think you are right. The emotional impact debt can have is often not really worth it for most people. Ich hoffe es geht dir und deine Familie in dieser schwierigen Zeit gut! I habe ein Jahr in Frankfurt und sechs Jahre in München gewohnt. Vg aus Texas!

Dividend Growth Investing You said it. Thanks my friend, we are all good and healthy ✌️

Use portfolio margin with Protective puts to solve this problem.

I remember you mentioning that you bought a piece of land! I’m really excited for you! I think if you had the choice between a good re deal and an ETF, the re deal would usually be the better choice - in my opinion.

Very interesting perspective! I think everyone is walking on egg shells right now trying not to make the mistake of their lives.. time will tell. Thanks for watching!

Robin Haney thanks for watching! It’s definitely something interesting to think about.

Hey Nic! High risk and high reward is how I see it! Investing on margin is very different than investing with leverage in terms of how I explain the scenario in this video. The main difference with the scenario in this video, is as long as you are paying the monthly loan, you can never get a margin call from the bank when the portfolio value goes down.

Dividend Growth Investing Some people take high risks investing in pot stocks, Tesla, and other spec plays. I prefer the risk of using margin to load up on dividend growth favorites like MSFT, JNJ, UNP, CLX. I’d rather get a margin call and have to send Chuck some money to hold onto my blue chips favorites than bag holding a spec play headed to bankruptcy. Though I’m only 26 years old and am more comfortable with this strategy having time on my side.

​@@nicpalmeri6176 9/10 people would tell you are crazy. I think so many people are against this type of strategy because they lost their asses by doing exactly what you mentioned with the speculative investments (most notably back in 2008). At the end of the day it comes down to cash flow. As long as you can continue to fund your portfolio should it go down, you will likely do very well long-term. The cash flow is key.

Dividend Growth Investing I had margin blow up on me in 2015 when I only had 4 different holding and my biggest position was KMI. I learned my lesson then and I feel comfortable covering a margin call and right now have 20 different holdings! I wouldn’t do it if I only had a 5 or 10 year outlook

Thomas Winter I agree! Thanks for watching!

Not bad at all!

@@DividendGrowthInvesting The people who are saying leverage is bad arent differentiating between good and bad leverage. Margin is bad leverage because markets are volatile and broker margin money is slippery and will not stay with us during market drawdowns. I follow kiyosaki rich dad principles and the many real estate developers who do this. Actually if you have a 401K and a mortgage, then you are effectively leveraging. higher inflation is the FED policy which means that a fixed interest expense is a downward sloping line over a long time horizon and if you believe in dividend growth then that means revenue is a upward sloping line. The growing gap difference between revenue and expense is the interest arbitrage.

This is a great question! This is not something I address in the video, but very important nonetheless! To really dive into the nitty gritty, the tax rate would be 15% in this case and you would also need to factor in the 0.003% expense ratio. In my personal opinion I would put a plan in place where you would never have to "cash out" the portfolio. If you had to sell off the portfolio during a 20-30% correction, this would cause a major financial hardship. If I were to invest in this type of a strategy, I would make sure I had multiple options that would prevent me from having to cash out due to a hardship. However, hardships and unexpected situations occur all the time... hope for the best but plan for the worst.

Thanks for watching!!

There is always risk that comes with this. When it comes to this, I just like to plan for the worst case scenario. If the worst case scenario doesn't involve you not being able to pay your rent or buy food, then I think it could work. Just be careful is what I always like to say.

@@DividendGrowthInvesting thanks for reply. the journey will not be lonely with community support like this. :)

The catch here is it’s a variable rate. It can go up and down and it’s on margin. The risk is higher because it’s tied to your portfolio value. I personally would prefer a fixed rate for a long-term investment strategy like this (10-15 years for example). M1 Borrow is something that I would focus on something short-term.

Hey Dejan! Doing well. I haven't left my house in 4.5 weeks... I now see going out to the mailbox as an activity :) Hope you and your family are staying safe!

Hey Ricardo! Thank you for watching! I think if done responsibly, this could be an incredible opportunity for long-term investors! I'm so glad you liked the video!

Hey Matt, just curious, I am a new investor,(2 yrs) what line of thinking did Jake have that you disagree with? Thanks in advance

Hey Matt! I just watched the video you were referring to. I don’t follow Jake Broe’s channel but at a glance it appears he centers his content around finance (mostly credit cards like you mentioned). Jake B is correct when he compares the total market return of dividend vs non dividend companies. Another popular youtuber who stresses this is Ben Felix. I do not agree with Jake B on his characterization that dividends and capital appreciation are the same thing. I like to think of this when comparing investing in real estate to “flip” or buy and sell or to rent the property for cash flow. Think of investing in growth stocks as buying a house to buy and sell. Once you sell that asset your investment is complete. When you buy a house to rent, you focus on monthly cash flow. The price of the house is no longer in focus. You want to focus on the monthly cash flow. This is what creates generational wealth. Capital appreciation is important especially when it comes to the overall health of the company/ asset. That’s why we talk about dividend growth but the focus is on continual cash flow forever.

alex hazuda Well, he said a lot I disagree with, but he did disclaim he’s a “new investor.” However, in the same breath he claimed to have done enough “research” to debunk dividend investing. More importantly, it’s what he left out about dividend investing that bugs me most, his comparisons were incomplete and misleading. Here’s a few items I took issue to: 1. dividend investor videos are just a “get rich quick scheme.” 2. That there’s zero advantage to dividends, and that growth stocks are better. 3. That the numbers for dividend stocks don’t add up.

Dividend Growth Investing That’s exactly what I meant in my last comment when I said “it’s what he left out that bugged me most.” Great explanation.

The tax laws are important to understand.

:) Thanks for watching!

Something to be aware of but most definitely not for everyone!

I see it that way as well!

But of course there is risk. As you pointed out.

Very good call!

Thanks for watching!!

Hey Steve! I learned my lesson a long time ago! This is similar but in some cases very different. The main difference is the money in this example is at a fixed rate and is not tied to the value of your portfolio. I personally will only use margin from M1 borrow for short term expenses and not to buy stocks. I’m considering using M1 borrow for a down payment on a rental. Thanks for watching!

@@DividendGrowthInvesting I am thinking about using M1 borrow for my first place too, good luck to us both and thanks for the content!

Margin debt is tied to the value of your portfolio, so if a market crash happens, they may call your loan or sell depressed stocks to pay it off. Using a HELOC good luck in your debt service, so as long as you keep paying it, it’s fine and doesn’t concern itself with your portfolio value.

I agree!

Thanks for watching!!

Hi Gary! Very important point. This is very true.

@@DividendGrowthInvesting If I were to do this the $ would go into a tax free Roth IRA

@@PitDaddy That would be a really good choice! I love investing in my Roth IRA for the tax advantages that come with it!

Yashwanth Naidu thanks for watching!!

Thanks for watching!!!

Hey Jonathan! Thank you!!!

I know right!!! A lot of value out there right now!

@@DividendGrowthInvesting I am looking forward. Thank you

This is definitely not something for every stomach. Thanks for watching!

LifeCoach44 back in March that is what it was yielding. Crazy how fast the market has corrected

SPHD is definitely not my favorite dividend growth ETF; however, it is one of the better monthly dividend ETFs out there in my opinion.

It is something really to consider!

Even at a higher interest rate (2% higher than dividends) works out after 4 years as the growth in the dividend plus the growth in the stock are compounding upwards where as the interest is reducing and the most you will pay is your first month. I would do this by buying a dividend growth etf (VDY in Canada) which has a 3.77 yield and a 9.3% annualized return over 10 years. This way you remove the risk of a single stock becoming obsolete and also eliminate the risk of dividend reduction one would have in a 7% yield etf. Vanguard also has 1b in assets so the chance of this etf being closed is extremely minimal. By doing this at year 4 you can funnel the excess of dividends over interest back into the loan which can reduce the loan term by 1-3 years depending on the income spread (assuming 10 year term). There is still risk involved with this, but if you have the free income (from a very secure job - and well managed expense and budget) to clear the basic principal and interest payments there is really only an upside to this as your return on investment would be calculated as your earned income in a year / interest which should start swinging really high the further you pay down the loan. The maximum that could be called would be the principal at any given time but if you are able to repay the principal and interest this should not occur. I have to stress that something like this should never be done if you do not have an extreme grasp on your expenses and an extremely secure job or the ability to liquidate other assets to clear the liability if the need arises.

Lol naw at least not right now but maybe in the future :)

Very interesting! Thanks for the recommendation!

Hey Fred! Very True! M1 is a great platform to do exactly that!

lol i love this!

It is definitely not for everyone. Most people would prefer to sleep well at night and not stress about all the potential unknowns. It is hard though to watch people go spend $500 a month on a car but say investing in real estate on leverage is too risky.

It is most definitely not for everyone! I am completely against bad debt. Thanks for watching jason!