Taking advantage of record low margin rates

[DTEJD1997]

Hey all:

 

I am wondering if I am the only one that is thinking about taking advantage of record low margin rates.  As an example, Interactive Brokers is advertising that they are lending money at a rate of 1.3%.

 

If you could find a stock that pays a reasonably high enough dividend that is safe, you could do very well for yourself.  Well, maybe as long as margin interest rates stay low...

 

For example, I was thinking that Ark Restaurants might be a great way to play this.  At the time I was considering it, ARKR was trading for about $16/share and was yielding about 6.25%.  I know ARKR quite well, and it is a very, very conservative company with respect to it's balance sheet.  Their $1/share dividend looked very, very safe at the time.

 

Along comes Landry's with a buyout offer and wrecks my plans...oh well.

 

The other thing I've thought of is to buy a larger cap company that pays a decent dividend and then write covered calls on it to boost income in the margin account.

 

Anybody have any thoughts on this strategy?

[Packer16]

I think the biggest danger is a large drop in your asset that would cause a margin call.  There are 2 ways to mitigate this: 1) have a group of stocks that will not decline as much as the market (maybe some of the owner/operators gio has identified) or 2) have some excess cash to cover possible margin calls.  This is similar to what Cullum Davis did in the 50s and 60s to shelter gains via interest expense.

 

Packer

[HJ]

The other thing to think about is options / warrants with really long expiration dates.  The ultra low "risk fee rates" are embedded in the pricing of those instruments. 

[watsa_is_a_randian_hero]

I think the biggest danger is a large drop in your asset that would cause a margin call.  There are 2 ways to mitigate this: 1) have a group of stocks that will not decline as much as the market (maybe some of the owner/operators gio has identified) or 2) have some excess cash to cover possible margin calls.  This is similar to what Cullum Davis did in the 50s and 60s to shelter gains via interest expense.

 

Packer

 

missing a key 3rd way...buy LEAP puts to turn the leverage into non-recourse leverage. 

 

I've done this with a few of my holdings.

[LC]

The other thing to think about is options / warrants with really long expiration dates.  The ultra low "risk fee rates" are embedded in the pricing of those instruments.

Very astute observation, and one I forgot! Thank you for reminding me. Makes me feel a bit better about locking in low rates via LEAPs.

[Guest wellmont]

Hey all:

 

I am wondering if I am the only one that is thinking about taking advantage of record low margin rates.  As an example, Interactive Brokers is advertising that they are lending money at a rate of 1.3%.

 

If you could find a stock that pays a reasonably high enough dividend that is safe, you could do very well for yourself.  Well, maybe as long as margin interest rates stay low...

 

For example, I was thinking that Ark Restaurants might be a great way to play this.  At the time I was considering it, ARKR was trading for about $16/share and was yielding about 6.25%.  I know ARKR quite well, and it is a very, very conservative company with respect to it's balance sheet.  Their $1/share dividend looked very, very safe at the time.

 

Along comes Landry's with a buyout offer and wrecks my plans...oh well.

 

The other thing I've thought of is to buy a larger cap company that pays a decent dividend and then write covered calls on it to boost income in the margin account.

 

Anybody have any thoughts on this strategy?

 

yeah you would be doing something that warren buffett would advise against. he does not think borrowing to buy stock is a good idea at all. it may sound appealing. but how would you feel if rates spiked and stocks collapsed? these things or other bad things happen. and they tend to happen when investors think about the strategies you are proposing.

[DTEJD1997]

Hey all:

 

Thanks for all replies and suggestions.

 

I was looking at ARKR, as it is very stable in it's price fluctuations, and it had the safest dividend that I could think of at the time that had a high enough yield.

 

If you could put in $50k and then borrow $150k, your $200k of stock would be throwing off about $12,500 a year in dividends.  Margin Interest would be about $2,500 a year, and you simply let the $10k a year excess accumulate as a buffer against a margin call.

 

Obviously in retrospect, I should have done it, as ARKR got a buyout offer from Landry's and the price spiked to $22/share, so that would have resulted in a HUGE capital gain of something like $75,000 and of course the dividend has been paid all the while.

 

I'm almost tempted to try this with Awilco drilling, but I don't have the confidence and knowledge that I did with ARKR.  Anybody have any suggestions for relatively safe, stable high yielding stocks?

[maxthetrade]

Anybody have any suggestions for relatively safe, stable high yielding stocks?

 

BP - 5% yield

[rmitz]

The list of people wiped out by this sort of strategy is very long.  The people who have succeeded with it had various forms of *non* callable leverage.  In addition to the LEAPS discussion, if you could issue 30-year bonds, I'd be pretty comfortable about the strategy too.

 

It all usually goes very right until the whole thing blows up in your face.