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The Income Method: Margin Is A Mean Mistress

May 01, 2020 8:35 AM ETILPT, MNR.PC, T, T.PR.A, TBB, TBC, THW130 Comments


  • We attempt to address a question we frequently receive from investors.
  • Margin is a tool that ends up harming more than it helps.
  • We provide an outline on how margin works and suggestions on how to use it best.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »

Co-produced with Treading Softly

Often I get asked about various aspects of investing, but none seems to be as recurring as the usage of margin while dividend investing. It may come as a surprise to many of my readers but I do not actively engage in the use of margin to "juice" my returns. Here at High Dividend Opportunities, we feel that the easiest way to ensure a healthy return is to keep it simple. The right tools in the right hands can be powerful, but using a tool incorrectly or relying on it too heavily can be painful.

Let's talk about the benefits and risks tied to margin and why we do not recommend its usage for most investors.

Why Margin Is Attractive

Like any tool, margin has many attractive features on the outside. It's a money-maker for brokerages, so often its benefits are actively advertised to account holders while its risks are in the fine print.

Thinking about margin, investors and retirees will look at it like this:

If AT&T (T) yields 6.7%, I can generate $670 worth of annual income off of $10,000. So I can "juice" these returns and income if I get a margin line at 3%. I can generate an additional $370 off of $10,000. This $370 is the end result of making $670 and paying $300 worth of interest on your margin balance.

It looks attractive, right? T is a stable steady payer, so in a normal scenario, this looks like a no-brainer. This is the lure by which margin accounts attract investors. This scenario does not take into consideration the restrictions that margin trading has from brokerages to protect their money.

Margin Account Details

Margin accounts have multiple restrictions designed to prevent you from over leveraging your account, but more importantly, to protect the

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This article was written by

Rida Morwa profile picture

Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.

Rida Morwa leads the investing group Learn More.

Analyst’s Disclosure: I am/we are long MNR.PC, THW, T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (130)

Thanks Rida. Never used margin, never will.
Toofuzzy profile picture
Since stock options became available there is no reason to use margin.

I can "BUY" a $50 stock by buying a $25 CALL LEAP. That will have almost zero time premium because it is so far in the money. If I really want I can also then SELL an out of the money CALL to cover the time premium.

So I can effectively buy on margin without paying any margin interest.
Thanks for visiting this sensitive topic. I try not to use margin at all. If I have to, then 5% is max.
surfgeezer profile picture
While I can agree Margin use is not for everyone I do have some nitpicking to do.

First a credit line is not necessarily a Margin account. I use my house Credit Line precisely because it has no price covenants like a Margin Account at a brokerage that has covenants tied to price volatility. It is my backstop for my Margin precisely because Margin is indeed a bitch.

We do agree Margin accounts are mean mistress's precisely because of the price ties -ie 50% of stock "value" AND stock volatility. That is indeed one mean combo to be trying to make long term money on, and again I don't.

I do feel very comfortable using a stable, no covenant risk of demanding payback, Real Estate based loan, Credit Line to make "Yield spread" Income-ie the difference between Interest costs and div Income.

I will NOT price bet on the Credit Line as in expecting some "Total Return" to make those Interest cost because in my mind THAT is a substantially different biz than credit spread-ie like a REIT or BDC biz precisely because it depends on the due d of the cash flow expected and NOT the price volatility of "Income" from selling later at a profit.
That is in fact a HUGE difference in using credit- 1) yield spread, 2) covenants.

That said, I also use Margin in my taxable account. I do NOT pay Interest costs, however. I use it to secure my written Puts. Yes, another form of leverage. Options are far more volatile in pricing than stock prices, that is a given. Puts are bought by people wishing to "protect" themselves from price volatility and "Total Return" losses. Again, NOT my biz and why I am comfortable being on the other side of the transaction.

I SELL the Puts precisely because they have defined Price/Yield points for me to acquire stocks-later- that I get upfront cash for. They are a way to effectively DRIP my portfolio's cash flow in a precise manner AND boost that cash flow. By selling they make NAV even MORE volatile and yes make Margin a much meaner mistress because by definition the "buyback cost" goes up as prices go down- why people buy them in the first place.

My point when commenting is always to know your biz- mine is NOT "Total Return". It is boosting my retirement cash flow. To do that I do use leverage based on YIELD SPREAD and it simply is not the same thing as "Total Return" investing. My "Total Return" is after my loans are paid off and I have MORE Income producing assets because I used leverage and it will THEN be based on whatever the market decides is the multiple on the cash flows. It is not one bit different than the way I have done Real Estate for decades.

I am NOT a "flipper" in RE, I know I am just a simple landlord who does good due d on my tenants and then lets them pay off the debt used. We have never sold an RE investment! Why would I when it is very easy to use credit to pull out equity and simply repeat the yield spread model. My biggest leverage in stocks is in fact leverage on a paid off rental, fixed and Amortizing so I can, once again capture NOW and SIMULATANEOUSLY the Increasing yield spread income from BOTH the rents going up and the stock Income, while the Amortizing loan Interests cost decline! I have no idea what the "TR" will be in actuality WHEN the loan is paid and I own BOTH and frankly could care less what it is at this moment BECAUSE I don't have to "trade" to make a "profit". Why is that hard to understand?

Some people get that, others never will and can obsess on today's "TR" or how much I "owe". It is not how I do biz. and I am frankly amazed at how high a % of people in stocks don't get they don't have to either. My only reason for commenting is to push back on the idea that "TR" is the only reason to be in stocks and debt is somehow "evil". Neither is true alone, but combined- yeah we can agree she b a b.....
PendragonY profile picture

Thanks for reading and sharing your thoughts. Thanks for explaining an alternative to margin that addresses some of its biggest issues in providing leverage.
I'm 70 years old this year. One way I got ahead in the 1980's was to buy less car than I needed. I'm a lawyer. Many of my friends drove Mercedes and other upscale vehicles. I always bought what I'll call cheap transportation. I'd take the extra $10,000 I would have spent and put it in stock. That might mean borrowing $10,000 and investing it, or if I had $10,000, I would invest it. I just paid back the debt, and then I would start all over and make an investment and pay it off. It was just a way to save. It probably wasn't the most efficient, but it worked. I used leverage, but the leverage wasn't tied to a margin account where there could be a call. When I bought the stock, I was making an absolute purchase where I knew that I had to pay off the debt even if the asset was under water. Fortunately, I wasn't a speculative stock buyer, and the stocks always made money. Now I use my HELOC which I keep at a zero balance unless I use it to buy stock. I haven't owed a mortgage against my house for 30 years. The nice thing about a HELOC is that the only thing due each month is interest. In my HELOC, the contract states that it has a life of 30 years. So if I'm living 30 years from the date I took it out, I would have to pay it to zero, and the bank would release it. It doesn't hurt that my HELOC is with a community bank where I know the directors, CEO and loan officers personally. In fact, I own a reasonable amount of the stock in the bank that has my loan. I would encourage people to use community banks. The difference in relationship is significant, and it can be very profitable to you, the customer.
Donggle profile picture
"friends drove Mercedes" they were leasing, no big chunk of change out of their pockets.
DAMNYOUMARKET profile picture
I've been using margin for about 10 years now continuously. I keep it to under 20% of my net worth. My borrow interest rate is only 1.5%, no way would I borrow at 3%. I did take same off in March for about even as I suspect this market crash is not finished and want to be ready for the next round of sales.
The Value Portfolio profile picture
How did you borrow at 1.5% for all 10 years?
In Europe, with my broker, I get 1.25% for EUR denominated margin. Been at that rate for a while.
DAMNYOUMARKET profile picture
Another thing you can do when using margin is just put your risk money in the margin account not your whole net worth. If that account were to ever blow up and have a margin call the damage would be limited in theory to the money in the account. Just don't use margin for things like FX trading or futures you could lose more than you put in and actually owe the broker as we saw in the oil crash during the end of April with oil trading at negative $37 a barrel. I stick to using margin on undervalued dividend aristocrat type stock and collect/reinvest the dividends to pay of the margins. If used properly margin can speed up the compounding process with controlled risk.
Tuco's Child profile picture
Scenario :

3% or so margin.

Buy safe and solid divi stocks such as MMM, QCOM, HON, etc. Collect divis

Write calls., collect that income as well.

Note now that the yield exceeds margin by some number.

Write off divi income against margin interest.

The key here is to buy solid stocks lowish, and have a margin interest rate that is low.
PendragonY profile picture
QCOM had a 33% decline. That would have hurt with margin.

HON had a 45% or so decline.

MMM had about a 35% decline.
The Value Portfolio profile picture
This strategy only works if you keep your margin % as a % of your total portfolio very low and you understand that you are taken a much bigger risk from a more significant decline in stock prices.
Tuco's Child profile picture

Pen - read my post, you buy low, not before the crash.
Tuco's Child profile picture
Note: You can write off margin interest against dividends.
DAMNYOUMARKET profile picture
Not really, I've had margin interest for years $1k-2k per year and never been able to write it off. You would need a huge amount of margin interest over $12,200 margin interest in a year! Otherwise you are better off just taking the standard deduction.
The Value Portfolio profile picture

that's assuming you have no other itemized deductions available - children etc. can already get you mostly to the point where itemizing deducations is worth it.
DAMNYOUMARKET profile picture
I don't know about kids, they seem like more hassle then they are worth...
frystinger profile picture
What If you used 17% of your account value requiring like a 70% decline from today’s prices to get a call to buy aristocrats and Kings at prices you may not see for awhile
The Value Portfolio profile picture

Define "a-while" - the market has already rebounded significantly.

The only risk to margin isn't the fact that you can get a CALL but also in a declining market your losses are amplified.
surfgeezer profile picture
@The Value Portfolio - argh. Cave men used leverage with a stick and a rock- you are obsessing about the wrong end of the stick.

By definition one end of the stick moves more than the other- why the shorter end can lift more-ie get more Income if used for yield spread.
You are obsessing with THE most dangerous way to use leverage, betting on price moves with little Income- the WRONG end of the stick IMO.

We agree on using leverage for expected "TR" is dangerous, Income gains- NO.
The Value Portfolio profile picture
Except income can still decline - even that is not perfectly safe
Why do you continue to recommend CEF's if you think margin is a bad idea? It would seem to me that CEF's are using margin of between 25-35% to increase returns. Maybe I am missing something here.
@primarilyreits IMO, CEFs are actively managed by professional managers; leverage is not always bad. They are institutional investors and should have the right skills and resources for this. CEFs are also subject to Investment Company Act of 1940, that puts limits on their use of leverage. They deal with creditors as peers or as business counter parties. Some respectable companies and businesses use leverage as well and add value to their shareholders. For retail investors, margin investing is risky and is not simple, albeit it could work for some.
I agree with you but IMHO leverage is leverage and it's great until it's not and not even professionally managed CEF's are immune from margin calls should the underlying securities fall in value too far. I just feel that CEF's are a risky investment and investors should be aware that they are higher risk compared to a standard low fee ETF that uses zero leverage. I feel like much of the leverage advantage that CEF's use to increase returns gets eaten up by the high fees many of them charge so I personally feel like they are not a great investment vehicle. Having said the above I enjoyed the article and thought it well written.
25-35% margin is acceptable if you need to boost your returns. Even if a total catastrophe is always possible, if you watch closely, you should be able to weather the storm. 100% margin is akin to day trading. Nothing wrong with that but it takes nerves, quick decision and steel discipline. There is another caveat; brokers can increase margin requirements at will when they feel like it, when volatility goes up. So, a position that is still within the margin requirements as per the old rules may be suddenly called.
I agree with Rida that margin investing is a risky proposal that requires active involvement. It is not a simple strategy and risk is augmented during crises. No wonder why regulators do not allow using it in retirement accounts. Trying to outsmart the system by leveraging via HELOC (exposing secured asset/home) or similar, may work for some opportunistic investors over the short term. IMO this is quite risky over the long term for retail investors. I prefer the cautious and simple way. Many thanks Rida again for the good advice.
Rida Morwa profile picture
@Dean Adam margin and even options up the game as far as activity on the part of the investor that is required. Both are tools in the tool box but every tool has its risks if not used carefully and wisely. I agree margin or even a HELOC as a short term buffer until your cash hits your brokerage account could work well, however depending on them longer term is definitely a higher risk choice than using neither.
surfgeezer profile picture
Argh, hate the word "risk" without a definition Rida.

Fact is there are TWO kinds and it is important to define them.

If using leverage for "Total Return" then yes price volatility is a risk, especially if you expect to make payments from trading.

If using leverage for "Yield spread" then the "risk" is if the CASH FLOW continues, AKA "Credit Risk" on the due diligence of the cash flow continuing.

Simply VERY different things!
If you shorted HD picks with margin it worked out very well
The Value Portfolio profile picture
maybe if you timed everything perfectly. if you were shorting HDO picks since inception it would have gone very poorly.
PendragonY profile picture

So, if it works out so well, show the details of this shorting.
Margin is fine if used correctly and with a stop loss
Rida Morwa profile picture
@ilovestocks32567 stop losses are not a perfect safety net. However I will agree to disagree with you on margin. I will encourage investors to be safe over sorry and not risk what they are not willing to lose. Disagreements are what make a market, I wish you all the best.
when you short markets you have to use margin. Stop losses should be used even if you don’t use margin. It would have worked well on those reits your recommended that blew up and dropped 70-90%
The Value Portfolio profile picture
stop losses aren't always perfect - when you have the flash crashes many people had their stop losses result in them executing sell transactions at 20-30% below their stop loss price before the market bounced back in a few minutes.
Amen brother! I’ve done wrong and I’ve done it right… Margin was definitely on the wrong side of the ledger… Other suckers who choose to margin are the reason were able to get Over the top market crashes that produce the bargain basement deals We’ve been feeding on lately… When they have to sell their good stuff to pay off the margin call on their bad stuff…
The Value Portfolio profile picture
Margin is the quintessential sign of a bull market!
01 May 2020
Very easy to understand article on playing with margin. Your explanation with that picture made it easier to understand.
Take care,
Thanks a lot.
Rida Morwa profile picture
@Yhp You are very welcome! Sometimes a picture really does add a large amount of clarity.
Great advice Rida. I share your concerns about margin investing. Keep it simple is the way. A tool in the wrong hands can hurt.
Rida Morwa profile picture
@Dean Adam Thank you for your kind note! I appreciate your readership
GameBuzz profile picture
BTW, “Davey Day-trader,” founder of Barstool Sports, is leveraged to $3 million in a $1 mil account. And he only started trading this year! He can afford to lose, but not a good role model for his fellow millennials, lol.
Rida Morwa profile picture
@GameBuzz That is definitely more than I would ever suggest someone be on the hook for.
GameBuzz profile picture
To put it mildly! 😄 I guess when you’re a billionaire it’s all relative but yeeesh.
GameBuzz profile picture
Well done. Also done with high-growth stocks, which have a larger maintenance req.
Found out about the downside during the Dot-com days. Margin calls are not fun, especially when you didn’t know what they were!

The biggest factor is the interest rate. My broker charges shark rates which is a good deterrent; IBK’s is cheap.

For the first time in years, I used a bit during the March selloff and initial bounce, and only a fraction of it like Rida said. Paid it off after a couple weeks of rallies while raising cash for this next dip. Interest was nominal compared to the gains.

Not recommended for most, and only very rarely (like these Black Swan events), in small amounts in large portfolios by the very disciplined and experienced.
Buyandhold 2012 profile picture
"Margin is a tool that ends up harming more than it helps."

Never under any circumstances buy on margin.
Steve Rasher profile picture
@Buyandhold 2012 Couldn't agree more. Steve
Warren Buffett used margin to become one of the richest people in the world...
DAMNYOUMARKET profile picture
So did Charlie Munger
WW Burgess profile picture
The market is predictably unpredictable. Investors stayed clear of US equities for literally years after the market bottomed following the financial crisis in March 2009. Some brutal bear markets are visible approaching from a distance (tech bubble, RE bubble/financial crisis), others materialize very suddenly (9/11 attacks, coronavirus). Highly regarded individual companies can crash and burn overnight as well (BA after 737 design fiasco).

Margin buying is for day traders and riverboat gamblers, IMO.
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