Last updated: March 31, 2014
If you look at my net worth updates, you can see that I have a lots of credit card debts. Yes, I borrow money to invest in stocks. I use those low interest (maximum 1.99% interest rate) credit card loans to invest in high quality dividend stocks because taking modest risk and leveraging are the key to become wealth. Please note that this investment strategy is not suitable for many investors and this is not a recommendation to follow.
What is leverage investing? According to a web definition leverage investing is make use of borrowed capital to finance for an investment. I am using the borrowed money for portion of my investment. I consider this loan as good debt because it is generating positive cash flow for me. In 2011, a Canadian bank revealed that 46% of their high-net-worth clients are using leverage as an investment strategy. Also, some governments recognize the different between good and bad debt with their tax policy and they encourage leverage investing to increase economic activities by giving tax credits for income produce assets.
Everyone borrows money at some point for some sort of investment. Without borrowing, we cannot afford to buy home or invest in our self for higher education. Also people borrow money to help them succeed, so do businesses. Businesses often need loans to fund operations, move into new markets, innovate and grow in general. I started to invest in my dividend portfolio in July 2011 after I graduated with $56 000 student loans and around $8000 credit card debts. After I got a full time job, I had two choices: keep investing or pay off debts. I decided to keep investing and even I borrowed more money using low interest credit cards for investment. If I have decided to pay off the debts first, then I would not have reached this point now.
Here are example how I leveraged my investment. I bought some Canadian bank stocks (Royalbank & Scotiabank) stocks at low 50s, some utilities stocks at low 30s, and BEC Inc at high 30s using $10 000 credit card low interest rate (0.99%) loan. By today, the ‘paper’ return is more than 30% with dividends. Last two years, I made a similar progress to build a dividend growth portfolio that is generating more than 4% cash.
Currently, I am in progress to reduce my debt level for three reasons. First, we are soon going to be in a rising rate environment, so my dividend stocks could be hit by rising rate. The second reason, the high quality dividend stocks are not cheap now and hard to find a value investment, so paying down debts gives a chance to borrow more money if I find a under value stock. Third reason, I am planning to buy a house by end the year. If I have lot of debts, then I will have hard time to get a mortgage with good rate.
Please note this is not recommendation, I am just sharing my investing experience.