Gearing on Shares

Gearing: e.g. borrow 1 years' worth of dividends; invest immediately; dividends paid to LOC
Please feel free to comment, correct my calculation, assumptions.



1. Admittedly, a bit unsure of how to calculate the franking credits based on different tax brackets.
2. How to guesstimate/calculate deductions on interest payments?

Thanks.

 

I'd add a cell for user to input their salary. This way you can calc tax payable and in turn after tax returns and deductions.

 

All a bit too technical for me, my head spins when I look at spreadsheets. Not being smart, unfortunately it's a fact. I think PT just recommends that to give less experienced investors confidence in borrowing to invest in dividend paying shares. Essentially a stepping stone to get started in the use of leverage.

 

Just do this? Though I know you are doing something somewhat similar.

 

There's a whole thread on debt-recyling from @Terry_w . Wanted a different discussion on gearing

Tax Tip 2: Debt Recycling

 

And no spreadsheet thank goodness.

 

Nice to see an attempt at a working example of the 1-3 year's worth of dividend payments quoted a few times

 

Just sent Peter Thornhill an email and got a response within the hour! A true gentlemen, he basically clarified how his sons use leverage in multiple lics and not just a single lic as some ppl assumed he advocated!

 

This appears to involve borrowing to pay interest or capitalising of interest.
Get some tax advice before trying this.

 

Can you share any further details of his email?

 

Without devouring too much personal info given we are on a public platform he just said it was business as usual especially given the recent dramas of the tax credit saga. In addition, he reiterated that no attempt whatsoever was made or is made by himself or his sons in trying to time the market! This was bold and highlighted. Also he mentioned using loc and or home equity to take small bites to get used to the process of taking on debt within your comfort zone and he and his sons don't drp as it's more paper work they just get the divs put back into the loan then they redraw as they pay the loan down as well to then make a meaningful purchase instead of drp and getting for example 27 extra shares in argo twice a year for example.

One lic as a starter is enough however once a sizeable portfolio is churning away you can branch into several others to get more spp and rights offers etc etc not so much about what is the best value or sitting on commsec all day with your calculator sussing out nta's before you buy as this will lead to decision making fatigue. What if you have a gorgeous partner and or family but your locked in the study doing calculations all day??? Again bold and highlighted!

He also mentioned tax and legislation will change over the next 20 to 30 years so don't panic and spend less than you earn and borrow less than you can afford! Commonsense which we have all heard before! Only coming from a man with such experience makes the penny drop a bit better in my opinion.

Couple other points but more pesonal in his and my case hope this helps guys and gals!

 

Whole post is great but these words are GOLD

 

@trinity168

Borrowing for Shares Calculator | Noel Whittaker

Hi @pippen

How are they using leverage?

 

Margin loan, equity split against the home as well as line of credit what I believe at conservative levels say 20 to 30%.

Borrowing at 6% on 5% yield still comes out in front from the 5% being grossed up and it's a long term play relying on compounded dividend growth similar to noel whittaker preaching having a larger pool of assets working for you instead of solely saving and investing as this becomes a more lengthy process. Risk appetite and margin of safety is crucial here.

 

thanks Red

 

NAB Equity Builder

4.95%

 

Also consider using warrants instead of LOC or margin loan. Keep the LOC for when its needed and margin loans may have an impact on serviceability.

Citi Installment Mini

Citi warrants have an interest rate about the same as margins loans about 6.5%, larger gearing (if that's what you want) automatic stops and some are self funding. OK for super funds too, unlike margin loans.

 

Great advice. May I know if the dividends are paid back into the LOC or home loan ? If LOC, redraw from the LOC again to make a new purchase ?

 

You pay off the home loan (non-deductible debt) and with the increased equity in your home you borrow more on your LOC (deductible debt).

 

Thank you. In my case the home loan is already paid off and now I have an equity loan (LOC) set up ready to invest. I am looking at investing in ETFs & LICs.
When the dividends are paid, can I get these paid into the LOC, build it up and redraw again for further purchases.? Are there any tax implications to consider ?
I understand I will have to speak to accountant but wish to get some knowledge from the experts on this forum.