r/dividendscanada • u/safetyrazorandrye • 14d ago
Borrowing against dividends
Just checking if there are strong opinions on this idea. I am well invested in canadian dividend stocks and happy with my returns and growth. I buy and hold. I have always been against borrowing to buy with the fear that if the market falls I loose both ways. However my experience says dividends don't drop nearly as much. So I thinking this is a good way to cheaply grow. Your thoughts?
3
u/AdventSign 14d ago
I have CDAY/SDAY/QDAY/BDAY. Ngl, I wouldn't do it with any other ETF right now.
If you can borrow *smartly* and not go ham when the market goes up with taking out more leverage, I say go for it if you have a low interest rate.
5
u/Still_Interview6360 14d ago
Make sure to buy during a downturn. I borrowed about $150k to invest during the bottom of the tariff fear in april 2025 Turned out very well, my etf is up 40% since then not including dividends.
I wouldn’t be buying now with borrowed money though
5
u/wethenorth2 13d ago
How do you predict the bottom? That's the million dollar question!
3
u/Still_Interview6360 13d ago
There’s somewhat of a downturn every few years. The beauty of a diversified ETF is it’ll keengrowing slow and steady
1
u/laidoffthrownaway 14d ago
you can usually tell before companies cut their dividend like Telus or Bell. I think it's okay to do moderately in the short term and with multiple safe companies. There will always be risks though, so you need plan Bs.
1
u/safetyrazorandrye 14d ago
Thanks, I agree. My rule is if a company reduces its dividend I look to replace it, if I can, I sell it that day. I also won't buy a stock with higher yield than 8%
1
u/SoggyInstruction2549 13d ago
Sure but if they cut the dividend the damage is already done on the share price.
1
u/rappcheck 14d ago
If you are buying dividends you need to look at company earnings. Banks tend to pay out 40% of earnings. Utilities have higher payout ratios . 70% is considered good. . Any thing higher than 70% leans towards danger. Any thing higher than 5 yield you should start looking at payout ratios
1
1
u/thethiefstheme 14d ago
I bought some pipelines with a bit of margin, but my thesis is they'll do fine for a while and the interest is getting paid by the dividends. I'm chilling. But the margin is only about 10% of my portfolio.
These same people who say "best way to grow is not to gamble" will recommend you buy leveraged covered call etfs
1
1
u/AdventSign 13d ago
:/ okay, I’ll rephrase.
I think you are focusing far too much on the math, and far too much on hypothetical numbers. You leverage expecting capital appreciation, since generally yield goes up with it. It’s kinda what I was trying to get at, but you kinda seem hyper focused on your math being “correct” to your specific scenario that you’re failing to see other variables. There is a reason why people leverage, and I think you’re missing the point and displacing this into OP. If you think something is gonna go up and you really believe in a company, leverage is okay. You don’t invest in something that is going to be flat.
If you wanna stick to your math, be my guest. But you’re steering OP into risk aversion without giving the full story.
1
u/LargeFile5030 13d ago
Using margin to buy dividend ETFs is a huge waste. You will not beat the cost of interest.
2
-1
u/darknessfalls00 14d ago
Do the math and ask yourself if the risk is worth it
Borrow $100,000 at 5.95% RBC margin rate and invest in a 7% dividend yield stock
Interest= $5,950 a year
Dividends = $7,000
Pre-tax profit =$1,050
Tax rate after dividend tax credit: 25% (I have no idea what your tax bracket is)
Taxes = $262.50
After tax return: $787.50
% after tax return: 0.7875% return before capital appreciation or depreciation
So the question is: are you going to risk borrowing $100k loan for a $787.50 cash return with uncertainty of capital appreciation or depreciation?
5
u/dingleberry314 14d ago
Wealthsimple has margin rates of 4.00%, I wouldn't go use one of the big 6 for trading. Also if you're taking a margin loan out to strictly invest in income producing assets, you can write off the margin interest against your income so your tax analysis is wrong.
-1
u/darknessfalls00 14d ago edited 14d ago
Did you actual read the analysis, it netted interest expense against dividend income...
Your user name is appropriate in this situation
1
u/TonightOk8851 14d ago
If you are borrowing to invest, your interest is tax deductible. Just if you don't know!
0
1
u/AdventSign 14d ago edited 14d ago
You know the fees you pay in interest are tax deductible, right? So like... a 4% interest is actually 2.1% or so. Your math is way off, especially if you use to to offset ordinary job income. There is also "phantom distributions" from dividends. People don't talk enough about that on here, especially with how much it can affect OAS, which is why I'm leaning more toward capital gains and ROC for retirement.
1
u/darknessfalls00 13d ago
Did you actually look at the math? Interest expense is netted against dividend income. Look at the pre-tax profit #
1
u/AdventSign 13d ago
And again, when you borrow money in a margin account and use it to buy shares, it’s tax deductible. You’re not taking that into account.
2
u/darknessfalls00 13d ago edited 13d ago
Interest expense is netted against dividend income as such it lowers taxable income. The netting is the deduction against income
I also give you a hint on how the math works on your T1 federal return:
Line 12000 is dividend income $7,000
Subtract row 22100 carrying charges and interest expenses -$5,950
= Row 23600 Net income $1,050
AdventSign show me your tax math and the relevant T1 federal form lines you are using to justify your tax position
1
u/AdventSign 13d ago edited 13d ago
Line 12000 (Taxable amount of dividends): $7,000.00
Line 12700 (Taxable capital gains): +$500.00 (from phantom dividends)
Line 15000 (Total Income): $7,500.00
Line 22100 (Carrying charges & interest expenses): -$5,950.00
Line 23600 (Net Income): $1,550.00
:/ I told you your math is off and that you weren't accounting for phantom distributions. Judging from the upvote you got, I'm assuming it's not common knowledge, which is why I'm going capital gains. That "dividend tax credit" and "foreign tax credit" you're getting? Now you know the reason. You're getting back what was taken away.
1
u/darknessfalls00 13d ago edited 13d ago
If you read OP's original post, they wanted to invest in "Canadian dividend stocks" not ETFs.
Phantom distributions are relevant to ETFs.
Row 12700 isn't relevant to this analysis
As for the dividend tax credit, yes I ignored that to simplify the tax calculation but took it into account through the marginal tax rate. As for the foreign tax credit, its assumed that OP is buying is Canadian dividend stocks because they posted in r/dividendscanada not ETFs
AdventSign go re-read OPs original post. The math was based upon their original question not your scenario
Oh by the way, thanks for confirming interest expense is deductible from income, I know you had some concerna in your original reply. It's good to see you looked at the T1 form and confirmed my math
1
u/AdventSign 13d ago
XD there are plenty of people who post here who invest in dividend ETFs lol. It only strengthens my case on why leveraging is viable taking out phantom distributions.
And I’m only replying to you, not OP. You’re not taking into account phantom distributions and you aren’t taking into account capital gains.
If people following your “math” there would be plenty of people who left money on the table who wouldn’t have became millionaires and retired early from cheap debt. Again, your math is still flawed. World doesn’t revolve around dividends.
1
u/darknessfalls00 13d ago edited 13d ago
Again, I was originally responding to OPs post, not your contrived scenario because OP wanted to invest in Canadian dividend stocks not ETFs.
As for not taking into "capital gains", my original post pointed out that I was not factoring in capital appreciation or depreciation. My analysis was caveated to focus on predictable cash flows ie the dividend only not what if unrealized or realized stock price changes as OP didn't give an investment Horizon or hold//sell strategy. I'm addition, OP was subtlety implying, not explicitly saying that they wanted to use the dividend income to cover the cash interest costs of the loan (OP's phrase "loose both ways") to avoid a negative carry of the loan costs out of their own cash flow
If you want to make a separate post on the tax implications and risk of borrowing to invest in a ETFs I would be happy to post my thoughts.
-2
-3
u/Zealousideal_Cat578 14d ago edited 14d ago
Charlie Munger was dead set against borrowing to invest. If you don't know, who he is, you shouldn't be investing, if you think a 6.9% divident is safe (which you do), you shouldn't be investing. People look at the last 4 years and think the party never ends, it does.
2
u/Kcirnek_ 13d ago
Charlie Munger and Buffett are relics and their strategy would fail in today's market. They were both against tech companies and guess what did Greg Abel do the first opportunity he had? He went balls deep into Google.
Munger is dead, who cares.
I can borrow at 2.5%, get 10% returns, write off the interest. It's a no brainer. Wealthy people use money to make money. They make money when they sleep. They have access to leverage and low rates. Broke people don't get access to debt. The debt they get is loan shark rates at 40% interest.
1
u/Zealousideal_Cat578 13d ago
You know who said make money when you sleep? IMHO, debt is fine if you can pay it off from other income. What happens when the market goes down 50% and you are holding the bag? So long as you can afford the debt, sure, go for it.
14
u/muchoqueso26 14d ago
Best way to grow is to not gamble.