Should I take out a loan of $50,000 to finance a portfolio with dividend-producing equities?
If I take out a $50,000 loan, and buy dividend-focused ETFs and stocks with a return of 4% that pay monthly rather (than quarterly or annually), is it true that I will receive $2,000 every month? The amount I would be paying every month would be much less than $2,000.
Dividend-paying stocks are a great part of any investment allocation. Stock returns are comprised of two parts typically: capital appreciation (buying low and selling high) and dividends (a payout to stock owners).
Research has shown that stocks that pay dividends tend to perform better than those that don't pay dividends. Other research has also shown that stocks paying a dividend that increases consistently over time do better than even those dividend stocks that pay out a static (or unchanging) dividend.
There are great services out there that may help you select high-quality dividend-paying stocks. Generally, I prefer to select from a list of stocks that have consistently paid out an increasing dividend for a minimum of twenty years. These are referred to as "Dividend Aristocrats". An even more exclusive list are those companies which have paid out an increasing dividend for at least fifty years. These are referred to as "Dividend Kings".
Either of these approaches may be accessed through mututal funds or even ETFs if you don't want to bother with indivdual stock selection.
So, I applaud you for thinking of adding dividend stocks to your investment mix.
Unfortunately, though, you are confused about how monthly dividend stocks may work. While the dividend yield may be 4%, that is an annuallized rate. You as an investor will be receiving a payout of the dividend each month. So, you'll only be receiving one-twelth of the annual yield each month not receiving 4% each month. In your example, an investment of $50,000 in a selection of stocks or ETFs paying a yield of 4% will yield $2,000 per year or $167 per month.
Monthly pay-outs are more attractive to investors so that the cash inflow can match cash outflow needs. But in order to generate $2,000 per month in dividends, you'd need to have a portfolio of about $600,000.
And while a dividend oriented portfolio tends to exhibit lower volatility (i.e. risk) over time, it will still be riskier than holding cash to cover your day-to-day or month-to-month fixed overhead expenses. So, you'd likely need to have a total portfolio that was more than $600,000 when including your cash reserves.
The rate at which you borrow from your broker to fund the stock position would be very unfavorable. In fact, you would almost certainly be paying a higher rate than your current home mortgage. The broker call money rate is 3.25% but retail investors like yourself pay much more than that for a $50,000 loan. Fidelity and Charles Schwab offer 7.375% for loans in the $50,000 range. There may be some discount houses that will offer a promo rate under 5% but that may be fleeting. The bottom line is that your debt service will substantially exceed the dividend payout.
Other responders have correctly adjusted your anticipated monthly income from $2000 to $167. You would be paying net interest cost of $140 per month to sustain a position which, frankly, is quite a bit more volatile than your debt service. In fact, even if you funded your stock purchase with a lower rate home equity loan, you would still be adding dangerous exposure to your financial profile. You owe your lender even if your stocks go down in value or skip dividends.
While dividend paying stocks do a bit better in the long run, we're really talking about rounding error here. Stay broadly diversified and don't get too caught up in factor based investment strategies. There is no need to leverage your position through loans of any kind. Use debt for your home
I usually advise against taking a loan and investing in anything. There are too many moving parts in investing that way that can get you into trouble. Leverage (ie taking a loan to invest) is a double edged sword- it can amplify returns when things go well but it can hurt a lot if things go badly.
Specific to your question- for one thing, if the dividend yield of the ETF is 4% it means on a $50,000 portfolio you will receive $2000 per year not per month. The dividend yield is an annual rate. However, dividends can change- companies can increase or decrease dividends, so there is no guarantee you will always receive the same rate. The ETF can change its stock holdings and that can also change the dividend yield.
Also, keep in mind even if the dividend yield stays stable, stock prices are never constant- they can go up, but they can also go down. It is very possible that in any year despite getting your 4% dividend, the stocks may go down a lot and your total return is less than 0 ie negative return.
The interest you pay on the loan is however fixed no matter what.
This is a horrible idea and yes your math is very inaccurate. For starters you have to pay back the loan and hope the stock appreciate in value, which although in the long run is likely short term who knows. Also a dividend paying stock at 4% would pay $2,000 annually, oh and that is all taxable income at dividend tax rates. You would not receive 4% a month or 48% return each year based off of these stocks. Borrowing to invest in the equity market is a bad idea in general due to the volatile nature of these asset classes. If you can't invest in an equity directly with long term time horizon I'd recommend not investing at all.
Absolutely not! Never EVER borrow money to create an investmentment. Build your account from current cash flow. If your account earns 4%, that is the annual dividend rate, not monthly. Assuming this is accurate, your income from the portfolio will be $2,000 a year, not a month.