Monday, June 21, 2004

Get Rich Slow Scheme

Danny Miles is a huge fan of my get rich slowly schemes. Here is the latest one that I thought up yesterday. I may get an honourary CFA for some of my work.

The basis of this one is that there are two things being exploited. First, the difference between the income tax rate and the dividend tax rate. Any interest on money used to invest is written off your taxes (It's a write off, Jerry!) at your income tax rate. This is double the rate you pay on dividends. Second, money can be borrowed at a rate lower than the yield on some stocks, Altria (Philip Morris) and SBC being prime examples. Basically, you are borrowing money to buy a high yielding stock. The money gained from the dividends after taxes is used to pay down the balance. It is not the classical practice of buying on margin because it doesn't matter what happens to the price of the underlying stock. All that matters in the dividends.

Some assumptions:

1) The interest rate remains the same. I get offers daily from PC FInancial for 4.97% for life on my credit card. These offers are not jokes and work quite well. You could also use a home quity loan at prime (3.5ish %)

2) The dividend does not go down. Companies will do anything not to cut their dividend. Philip Morris has raised their dividend a staggering 9% per year over the last five years. Their stock is up 4000% over the last 30 years, excluding huge dividends. This company is a cash machine. All that matters is that the dividend does not go down. Increasing dividends accelerate the paying off of the loan.

3 Comments:

At 3:40 AM, Anonymous Anonymous said...

I really enjoyed looking at your site, I found it very helpful indeed, keep up the good work.
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At 3:45 AM, Anonymous Anonymous said...

Interesting website with a lot of resources and detailed explanations.
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At 3:48 AM, Anonymous Anonymous said...

This site is one of the best I have ever seen, wish I had one like this.
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