4.5% Yield Year-To-Date, helped by Leverage

The last company on my watchlist reported its quarterly results and dividend declaration on 14-Aug. Along with that, I was able to establish that my dividend yield on cash investment (up to today) is 4.5%. I do not see an issue meeting my 5.0% target by end of the year.

Target

My dividend yield received a boost because I started to increase my use of leverage in shares investment this year via a margin account. I am conscious that i should not over-leverage and I have kept a limit of 30% leverage on total investment as an absolute MAX. I am currently about 10% which I think it is an acceptable risk level. The brokerage company is charging me 3.5% interest rate, an increase from 2.85% at the start of the year. I hope the recent retreat in the US Govt Bond interest rate and SIBOR here will also lead my brokerage company to reduce their interest.

I used the margin account to buy mainly REITs because I require a higher interest to be sure that I can have a high chance of beating the 3.5%. We don’t have to buy individual companies if we are concerned of the higher risk associated with single company. Even if we buy the local REIT ETFs to lower our risk via broad diversification, we should get about 1.5% return as the local REIT ETFs are paying about 5.0% dividend yield. The best thing is that you still get the gain from capital appreciation if share price increases.

I thought of sharing this with you as I felt it has helped me to improve my return. However, I want to caution that we should not over-leverage. In margin trading, there is this thing called the margin ratio that is important to note. My brokerage company set the margin ratio at 140%. This ratio is calculated based on the capital value of your investment with them and the amount of “loan” that you have taken with them.

For the same investment amount, the higher the loan you took, the lower the margin ratio. This ratio is necessary to safeguard the brokerage company such that it can be assured to get its money back (and that’s why it is willing to lend us the money). Say in my case, if the margin ratio falls below 140%, the company will start selling my shares if I don’t top up the account with cash or sell the shares to reduce the quantum of loan by myself.

Hence, if you are interested, do learn more about it  before you venture in. Keep the leverage ratio low (and able to withstand a black swan event) and don’t use the margin to buy risky stocks or speculate. Just a word of caution, my cousin has to downgrade his 5-room flat to a 3-room when he lost big time in margin. Be really careful on how you use it.

But having said that, it is a useful tool to have in your investment arsenal. When the time arises (like a black swan event, it can be used quickly). Furthermore, it works the same way as how the Reits make money and some of you who may hold property investments, leveraging on low interest loan to gain from rental yield.

Leverage is not a bad thing if we use it carefully.

With regards,

Warriortan

 

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