Mike from Four Pillars asked me recently what I had been buying during the TSX meltdown. I had been saving the bulk of my margin for just such a buying opportunity, so I definitely went shopping.

I previously posted my stock position as of the end of July. Since then, on margin, I’ve put another $15K into the market (two $5K buys of BMO and $5K of NA). I regretted purchasing RUS almost immediately after the purchase (somehow I didn’t realize it was a cyclical), so even though its down a lot I haven’t extended my position in it). It was up $200 after I bought it and realized it didn’t meet my criteria, so maybe I should have sold… Hindsight is 20/20. I feel like I over-bought Rothmans, and in some ways I worry that it might be riskier than banks (they haven’t banned banking in public places yet). At one point my portfolio was 1/2 ROC (and I basically said at that point “enough”).

Stock Shares Dividends / month
ROC 705 $70.50
BMO 294 $66.64
RUS 159 $23.85
NA 168 $33.60
Margin $28K -$164.45

On a monthly basis, this gives me a “cashflow” of -$5.42 (so my passive income has become passive debt ;-) ) $32.64 (stupid addition!). I was tempted to pick up another $5K of NA, and actually put in an order for it at $53.38 (2 hours after it had been that price), but its just been moving up since then so I missed out.

My hope is that the dividends will pay the interest charges mostly, and if one or two of the dividends gets raised, pretty quickly it’ll start paying down the debt. If there was a massive drop (to the point where my margin debt reached 70% of the value of my securities – if my stocks dropped 18% from their current value) I would have to pay a margin call (add money to the account to prevent them selling off my securities), which I’d be willing & able to do (I have $10K cash right now, and a $20K LOC). The other risk is if none of the dividends are raised, or if RUS cuts its dividend, eventually I’ll have to transfer money into the account to pay off what would become the mounting debt. I am aware of this risk and accept it. The other risk is if interest rates shoot up, E*Trade’s margin debt interest rate is based on prime, so it would increase as well. I would just start paying it down more aggressively in this situation.

Since I can deduct the interest charges (as investment expenses) and the dividends are tax preferred, I’m expecting the tax savings will more then make up for the $4 / month.

While there are some risks, and my passive income has gone down a bit, I think this is a rationale attempt to take advantage of what I hope was an irrational dip in the market. If all of these companies went bankrupt, I could afford the $163 / month payments (and you’d read me grumbling about it for some time ;-) ).

I realize also that I am very focused on banks (long term I’d love to add in some solid dividends from companies in an unrelated sectors such as Loblaws and an Energy stock and a partially unrelated insurance and investment company). Furthermore I realize I may be over-focusing on high-yielding dividend stocks rather then stocks with high dividend GROWTH. Right now I like the money in the bank and being able to have a foundation I can count on rather then buying for (less certain) future gains. As long as the dividends keep up with inflation (3% annual growth, which would be considered VERY meager), I’m content.

So there I am :-) . It doesn’t really matter, but the current value of my securities is $48.8K (down $750 from what I paid for them) and I’ve received $72.60 in dividends so far (from ROC). I’m expecting my next dividend to come at the end of the month from BMO.