Buying high dividend stocks on margin?

I know most people avoid dividend stocks because they are taxed as income.

Also it seems that using foreign funds increases your chances of being considered a professional trader, but that (presumably) wouldn’t happen if the stocks you are investing in have higher dividend yield than the interest rate.

Given the low margin rate (IB is around 2.5%), wouldn’t it be feasible to find some high dividend stocks and still be profitable despite the debt and taxes?

Dividends are irrelevant.

If you want margin, just buy normal index funds.

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Companies yield 2.5+ today would be on the junkier, value side of the spectrum. This ain’t no free money, you’re taking significantly more risk than you’re being compensated for in div/borrow rate diff. Might as well look into trading and writing options, it should be more profitable (for one thing, no extra markup on borrow rate) and hedgeable

I wouldn’t necessarily call them junkier. Many of them are just low-growth, “boring” companies - but in many cases low-volatility as well. Energy producers, utility companies, tobacco companies, etc. Bayer or Unilever aren’t “junk” either.

Well, maybe you’d want to look into the exiting world of (U.S.) Business Development Companies then, with their yearly dividend yields around 10%? Don’t say you aren’t going to you own due diligence on them though.

I have bought a couple of them at IBKR, just for kicks. :grin:

@xorfish Taken from Does margin interest rate trading switch you to professional trader?. Here is why I think dividends may not be that irrelevant for margin users:

  1. The investments are not leveraged or the taxable investment income from the securities (such as interest, dividends, etc.) is greater than the proportionate interest on debt.

Or am I missing something?

@San_Francisco I read a few papers from US dividend aristocrats and it seemed that it wasn’t crazy at all to expect nice rates from a dividend focused portfolio. Companies like IBM seem to pay around 5%, combining that with a bit of REITs and other stuff could easily beat the <2% margin rate.

If you can do that without the tax office pinning the “professional trader” label on your forehead, that is.

The leverage you need for this to become an issue is pretty high.

At 50% leverage, with a yield of 2.25%(average VT yield) you are looking at dividends in order of 3.4% of your net portfolio value and interest cost of 0.75% of your net portfolio value.

If your marginal tax rate is above 19.3%, then you should be able to recover all withholding taxes with DA-1.

Clearly not junk …

I made the experience that the stocks that pay dividends usually drop right after the dividend payout date, which would mean that you would get the dividend but then get a loss on selling the stocks…

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