Margin Strategies

Inspired by the table below I've considered investigating margin Strategies. Commsec are currently offering a limited time rate of 4.95% pa. If invest in stocks yielding >4% with 100% franking I should come out ahead, as long as there are no margin calls. Using a low lvr should minimise that risk. Does anybody else use margin Strategies outside property equity drawdown?

 

Be wary of the margin call risk and keep your gearing to a sensible and conservative ratio. From the look of the table it's looking like you'll be gearing to a LVR of 50% which would be too high for my sleep at night factor.

 

I would not recommend going over 20-30%. Especially if you are new to it. If you are trading froma company or trust look into interactive brokers. Their interest is significantly lower.

 

@KDP @Excalibur1
I'm currently planning on gearing at about 20%. The table above is a worked example I saw on another website. I previously hadn't considered gearing. I am interested in hearing other people's approaches to using leverage though.

 

As with any investment, leverage is great when return is greater than holding cost as it amplified your gains. The converse is also true when total return is less than holding costs (or even negative), your losses are amplified. Over the long run total return for shares do tend to be higher than margin interest rate but there is short term volatility hence the need to be sensible with gearing.

 

If you are leveraging then you want the interest on loan to be as low as possible, if its not it can eat into your gains very quickly.

 

Unfortunately no, property drawdown/loc is my only form of leverage, generally when there is less euphoria and lots of articles/bbq conversations of people loosing X amount on stocks I tend to use 30%

 

I prefer the following. I didn't understand why your "excess tax paid" line meant anything, but added ROI.
SANF runs from high left to low(er) right - the opposite to ROI and nett (well doh!).
Ignore the negative tax part as what happens there depends somewhat on the rest of your income.


Now bringing it uptodate and using 37c marginal rate rather than 34.5, the ROI's go down 0.1% overall.
Earn a motza and at 45c marginal the ROIs are 5.6% (-0.5%), 7.1% (-0.2%), 2.8% (-0.6%) and 1.4% (-0.6%) - the franking helps a lot less.
Conversely, at 19c (under 37,000 p.a. income including dividends), the ROI's are 7% (+0.9%),7.6% (+0.3%), 4.3% (+0.9%) and 2.9% (+0.9%) - not surprisingly franking kicks in nicely.
For me, the sweet spot is more dependent on SANF than the marginal rate . Gearing against property is better SANF than gearning against a margin loan!

 

What about a column for those risk takers that double gear - borrow $100,000 from a LOC and $50,000 from a margin loan and borrow $150,000

 

You have a higher return with no franking, this is incorrect.

 

It's correct since at the 37c marginal tax rate the person is not getting tax benefits from franking - they are paying more than 30c so they end up paying extra tax. In the case of 50% LVR, that extra tax is offset by the loan interest deduction so tax is lower with the loan hence ROI is higher.
It is interesting that even at 19c marginal, the ROI for 50% geared and fully franked doesn't quite catch the unfranked ROI (7% vs 7.6%).

 

Can you add 50k & 100k on top of the investment income & see whether results will be different?

I don't want to think receiving unfranked dividends is better than franked ps:

 

Yeh, you missed the whole 'crediting back' part of franking credits.
Updated spreadsheet attached below. (along with the franked and unfranked at the various gearing levels as others have requested.)

Apologies, there was an error in my cap growth formula.
Fixed now and reattached.

 

Some more excel

Taking the same starting point...


and now extrapolating out to 10 years:



The first box is if the "nett" in each year is reinvested whereas the second box is where it is not. The second box is boring .
The first box is more interesting. The 50% LVR and no franking is almost as good as 100% LVR franked! As I said to Hodor above, this is because the marginal rate is so much higher than the franking. So best on the money-made scale are the 100% LVR (lowest SANF!) and 50% LVR+unfranked. In the middle is 50% & 25% LVR, and least money made is 0% LVR.

Now at 19c marginal:


Things get better on the franked front with 50% LVR+franking getting closer to unfranked/100% LVR, but 100% franking never really catches the unfranked.

 

Oh crud... you're right. I'll redo the 10 year figures...

 

Right, new 10 year returns...



Which is much more sensible thanks @BKRinvesting!
100% LVR and franked wins, followed by fully franked 50% and 25% LVRs.
Bringing up the rear is not franked at all, with 0% LVR getting much better at 19c marginal compared to 37c.

So as hoped/expected, margin loaning works best if you can SAN.
Interestingly, the lower the margin loan interest rate, the worse the benefits at the higher interest rates.

Edited: column names help!

 

@Simon Hampel

What happened to the resources on Investchat, wasn't there some good articles within the old InvestEd, including one on Margin Loans?

 

Interesting how you tried to justify/explain results. Some good lessons for all about fitting our understanding to the data, does the data explain what I think or is there something missing or a mistake? Good to see you worked it out in the end.

It is important to remember that franking has no more or less value to any tax bracket, a dollar in prepaid tax is still a dollar. In most cases it appears (from my anicdotal study of forums) people find it easiest to compare returns if dividends are first grossed up so apples are compared to apples clearly.

 

Was thinking the same thing,
Also the old, "if it doesn't seem right, then it might just be worth a second check".