Thursday, July 30, 2009

a new use for dividends

Wow, the markets have been flying lately. The S&P 500 index is up 13% over the past 3 months. XDV (and ETF that tracks Canadian dividend paying stocks) is up 21% over the same period.

All this jubilation has caused me to begin to perform a behaviour that is out of character for me. It feels different from my normal long term, more savings = more investment = more dividends = more investment strategy but lately I've been letting the dividend tap run into my line of credit. That's right, I've been taking the money from dividends and interest that builds up in our investment account and using it to chip away at our investment line of credit.

Maybe it is the fact that stocks seem to go up everyday and therefore they get less attractive to me, or maybe it is because I like what it does to our net worth statement, but I'm going with my gut on this one for the time being. It's boring, it's conservative, but it feels good to reduce debt a little bit at a time.


Nurseb911 said...

Don't feel guilty MG; I've been doing the same thing!

Other then rebalancing this month I haven't bought much that was undervalued except CP and SJR.B. I'll wait for a broad pull back or specific stocks to go down for irrational reasons to buy a lot more. In my view paying off an investment LOC is just as good as re-investing dividends because it lowers the amount of capital I owe. I'm not repaying all my dividends towards my LOC, but if I can't find something to buy I'd rather have more gunpowder on hand in the event an opportunity appears then not enough.

MG (moneygardener) said...

Hi Brad,
That’s kinda how I view it. It’s all coming from the same pot. I might as well lower my leverage portion of my portfolio while times are ‘better’ (as far as share prices go anyway)

Sampson said...

I'm not sure if this is an alternate view - to me it seems like its a balance between two things.

1) whether you think stocks are so overvalued now that they aren't worth buying at all.

2) inflation risk

It your LOC interest remains lower than the return of your reinvested dividends, then it makes sense to pay it down. If your reinvested divdend can produce greater return than the cost of the interest, then I don't think its the best option to pay down your debt.

Because the interest on your loan is tax deductible, even if you are buying XDV only (with a present yield of >4%), your LOC would have to be at >6-7% (depending on your income) before paying that down is the better option.

Paying down a mortgage with your dividends is a completely different story. ;)

MG (moneygardener) said...

Theoretically you are correct Sampson and I've though a lot about your last paragraph. I think it is more of a mental roadblock to buying stocks at much higher levels than my last purchases. Also, debt reduction just feels better when you see the numbers moving down rather than cash just sitting there...

I'm sure I'll end up borrowing the space back again anyway and running the debt up once again.

RB @ RichBy30RetireBy40 said...

Way to go using the dividends to pay down debt! That's a no brainer! I'm also amazed how much the markets have risen. In fact, I've sold 65% of all my equity holdings this week!

I'm just afraid of a double dip due to the insistent rise of unemployment. Using your returns to pay off your debt is great!