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It is not just "these days" and the point is not to get lines of credit and spend, as that is unnecessary risk (going short a bond and long a stock is very risk
by rsj_hn 5y ago
It is not just "these days" and the point is not to get lines of credit and spend, as that is unnecessary risk (going short a bond and long a stock is very risky).
You, as an investor, want to save money for longer than one quarter. You want to save money for 20 years. So you'd like to avoid 80 taxable events in those twenty years, especially as you are just going to be reinvesting those dividends anyway. You want the law of compound interest working in your favor and then you pay taxes when you actually sell.
E.g. at a 20% tax rate say a stock pays a 4% dividend once per period and has no capital gain. Suppose you invest $1 and want to hold that for 2 periods, reinvesting the dividend and then selling.
Then after the first period you get 3.2 cents (after taxes) and you now own $1 and 3.2 cents. After period 2 you get $1.065024. Then you sell for a profit of 6.5024 cents (there are no capital gains)
But if the stock pays no dividend and has a 4% capital gain, and you hold for two periods, sell, and then pay the 20%, you will make 6.528 cents.
- paxys 5y agoSure, but this perspective is only for those who are looking to hold an investment for 20 years. A lot of people with large stock holdings also want to buy nice things today. You can do that by (1) getting quarterly dividends and spending them (have to pay taxes), (2) regularly selling some shares (have to pay taxes and reduce ownership) or (3) borrowing on margin. 3 has the biggest tax advantages of the lot.
- cstejerean 5y agoI’ve always wondered, how do you pay off the loan then? Or do these loans not require making regular payments?
- somebodythere 5y agoYou are right about the loan not requiring regular payments. As long as the balance of the loan including interest is substantially more than the amount of posted collateral, the loan can be rolled indefinitely.
- selectodude 5y agoYou only have to make payments if the value of your collateral falls below a certain value. Called a margin call.
- rsj_hn 5y agoThis doesn't pencil out. The mistake you made is comparing the return of a leveraged portfolio with a non-leveraged portfolio. Lever up the same in both portfolios and your savings dissapear.