Renegotiating mortgage? Get extra to buy bank stocks and collect dividends.

Between trips to Costco to stock up on supplies, or while working from home you may want to consider doing something given the market meltdown rather than just sitting on your haunches and letting opportunities slip by.  Don’t get me wrong, I’m not bullish yet by a long shot (the economy’s troubles have just begun) but there are always smart decisions that be made while others are stunned.

One sensible move is to take advantage of low interest rates and stock prices that have been crushed – with a longer term view.  People often take out 2nd mortgages or use the equity in their primary property to invest in another property.  Rent from the 2nd property helps carry the mortgage.  Makes sense.

On rare occasions, you can instead invest in dividend paying stocks that are less volatile (under ordinary circumstances) than the overall market.  The dividends help carry a loan used to finance the investment.  We are in the midst of such an occasion.  Of course, your lender must be willing to extend the credit based on your collateral and provide an attractive (i.e. low) rate of interest.  This may be difficult right now – check out the message below from a U.S. mortgage comparison site.

Rate for It Pic

If you can get a good rate, there’s good reason to simply buy some bank stocks with the proceeds of a larger mortgage than you’ve been carrying (if renegotiating or moving to a new lender) or a 2nd mortgage – especially if you’re willing to buy Canadian banks which have been hit much harder (no doubt due to the potential for higher energy exposure) than their U.S. counterparts.  Below is a table of yields corresponding to the four larger US and Canadian banks.

Bank Yield Table Mar 2020

The interest paid should be tax deductible (it is in the US anyway) if the loan can be demonstrated to be strictly for investment purposes, and the dividends received are treated preferentially for tax purposes.  The dividends finance the investment while you wait for the inevitable – the bank stocks recover and grow as they will once the economy and markets stabilize.  It’s the proverbial no-brainer.

Keep in mind the dividend yields I quote were at a single point in time – you’ll want to keep track of them to make sure the program is still going to work for you financially.

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About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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