Margin account buy dividend stocks

stphnstevey
stphnstevey Posts: 3,224 Forumite
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in Savings & investments
I know that the vast majority wouldn't borrow to invest
Also the vast majority of CFD traders do not make money
So I am expecting a lot of stick for even daring to suggest this!

Not sure if this strategy has a name or has been suggested before. But if you were to use a margin loan to purchase dividend stocks where the dividend would pay for the interest and then pocket any increase in share price or dividend over the interest rate.

IB, for example, offer 2% margin loan on GBP

Obviously the share price and dividend could go down. So possibly best to consider stocks that have stable growth and consistent dividend. Maybe an Investment Trust or dividend aristocrat

Comments

  • MaxiRobriguez
    MaxiRobriguez Posts: 1,780 Forumite
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    People borrow to invest. It's not a ridiculous concept but it does increase risk, and honestly at this point I wouldn't bother. If you want to use margin it's best deployed at the start of business/credit cyles not at the end. It's not just a case of "dividend could go down" - what if they're stopped completely? If you don't have enough to cover the margin loan how are you financing it apart from selling down your holdings at what would likely be lower prices.

    If you're really keen to do it does it not make more sense to do so by extending/refinancing a mortgage?
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
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    To adopt such a strategy I'd suggest identifying the stocks first. That's the hardest part. Stable growth and consistant dividend would limit your choice somewhat. IT's can supplement their increasing dividends by drawing on reserves. Don't be fooled by the rising 50 years claims made.
  • jim1999
    jim1999 Posts: 172 Forumite
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    It's nothing new. But margin loans are extremely difficult to come by in the UK. In the vast majority of cases even if margin loans were worth considering, extending the mortgage and pumping cash into a stocks and shares ISA would be a better idea.

    The problem you'll never get away from is that any asset could potentially collapse in value by 50%, and then you're at the mercy of whoever extended the credit.
  • stphnstevey
    stphnstevey Posts: 3,224 Forumite
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    Why mortgage preferred?
  • MaxiRobriguez
    MaxiRobriguez Posts: 1,780 Forumite
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    stphnstevey wrote: »
    Why mortgage preferred?

    To avoid margin calls, which may come at a time whereby you don't have the free cash to fund the margin account.

    At least if you extend the mortgage it's a consistent additional monthly payment so you can forecast and prepare for it.

    Extending mortgage might be cheaper in terms of interest rate on the loaned balanced too.
  • MaxiRobriguez
    MaxiRobriguez Posts: 1,780 Forumite
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    Also, I echo Thrugelmir's suggestion picking the stocks is the hardest part of this.

    It'd be interesting to hear if you've got your eyes on specific stocks to buy?
  • steampowered
    steampowered Posts: 6,176 Forumite
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    It is very common for wealthy investors to do this (e.g. private banks routinely push leveraged products on their clients).

    I don't think anyone offers a competitive margin account to UK retail investors though.

    As mortgage rates are so low, sub-2% in most cases, it does make a lot of sense to borrow with a mortgage and use those funds to invest in shares (particularly if that enables you to make the most of tax relief on pension contributions and to use up your annual ISA allowance).
  • Chino
    Chino Posts: 2,029 Forumite
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    stphnstevey wrote: »
    Not sure if this strategy has a name or has been suggested before.
    You suggested it a month ago in this thread:
    Using Margin account as short term loan
This discussion has been closed.
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