A while ago I hit a bit of a milestone with my stock portfolio, and collected my 2000th dividend dollar, which has made me somewhat retrospective. I’ve gotten more used to having the dividends roll in, but I still feel a happy rush whenever they show up in my E*Trade account. Because I’m leveraging my account (buying on margin), most of the dividend payments have gone to pay the interest on what I’ve borrowed, so I certainly haven’t made $2000.
My (horribly non-diversified) portfolio consists of BMO, ROC, NA, RUS, and BAC. I bought WM without really understanding the company. I thought they were a conservative, long-term dividend payer, but instead they’re a growth bank (which is why they got hit so hard by the sub-prime fallout – they were in a VERY aggressive growth mode). There was a temporary rally with WM, which let me sell for a little more than a bought it for, which is when I moved into BAC.
Similarly, I didn’t really understand that RUS was cyclical (and hence the dividend isn’t as safe as I expected when I bought it). They haven’t cut their dividend, but they certainly could if we enter a prolonged recession. I’ve been planning to sell it when it goes above what I paid for it (I know, I know this is a fallacy – I should either keep it or sell it and ignore the current price vs what I paid).
So I’ve massively misunderstood 33% of the stocks I’ve bought so far – not too shabby, eh? 🙂
Other then those two, I’ve been happy with the stocks I own, even though they’ve lost about $4k of their value. My plan was alway to hold them long term, and collect the dividends (ala Derek Foster & Tom Connolly). The only two events that would make me consider selling are 1) they cut their dividend (like WM) or 2) the price goes so high without a corresponding increase in the dividend that the yield drops dramatically (at which point I *might* consider selling it and using the proceeds to buy another stock with a much higher dividend yield). Currently the securities are worth $58,632.04, I owe $33,922.79 (for a net value of $24,709.25). This puts my portfolio at 58% on margin. Margin calls occur at 70% (which I’ve had 2 small ones). With hindsight being 20/20, I clearly bought too early during the sub-prime meltdown.
Originally my plan was to maintain a large debt in the account, and to use the preferred taxation of dividends, along with the deductibility of investment debt, for tax planning. If you go to the Morningstar marginal tax rate calculator and put in an income of $80k, you see that the marginal taxation of public dividends is 20.24%. Since the marginal tax rate is 43.41%, if you bought a dividend paying stock on margin, and the interest rate was equal to the dividend yield (as it was recently for BMO), it will act as a 23.17% “tax sink” (after the dividend pays the interest, you get a 23.17% tax credit). This is only for Canadian dividends, this wouldn’t apply to BAC or WM dividends.
Now that I’m back at school, and not earning anywhere close to $80k (plus, given that grad students don’t have to pay taxes on most of their funding), this doesn’t make as much sense anymore. I’ve shifted gears and am now working on paying down the margin debt rather than expanding the portfolio (as I was planning to do when I was working – I was going to target keeping the portfolio at about 50% on margin). I’m somewhat sad as I think I’ve missed an incredible buying opportunity in the recent months.