Do I have to come up with the interest payments on a margin loan or could it be covered by the dividends I receive on the stocks? Can you give me an example please.
While there is no obligation to pay interest on your margin loan, assuming the loan doesn’t go into margin call, it is possible to set up a margin loan and use dividend payments to cover the interest accrued, however the dividends cannot be paid directly into the loan.
i.e. The dividends would initially have to be paid into your nominated bank account (dividends are usually paid twice a year), then you can either transfer the funds to your margin loan online or BPAY the funds to the loan.
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Alternatively, assuming it’s available, you can elect to have dividend reinvestment whereby you are given additional shares instead of a cash dividend. These shares would be deposited in your loan a/c by the share registry. You can check whether dividend reinvestment is available via the relevant share registry.
Example of how this could work:
You hold 5,000 shares in XYZ, worth $10 each – a portfolio total of $50,000.
You purchase another 5,000 shares through a margin loan. So you now have $100,000 worth of the stock with a $50,000 debt.
XYZ pays two 25 cent dividends per year, so the dividend income over 12 months would be $5,000.
Interest payments on the $50,000 loan at 9.35% would come to $4,675 which is offset by the dividend.
Every six months when you receive the dividend you can either transfer the funds to your margin loan online or BPAY the funds to the loan.
The examples given above are for illustration purposes and do not allow for fees, brokerage, tax and interest charges.
Before considering a margin loan, please consult with your financial planner or adviser.
For further information please refer to our brochure or call us on 13 17 09 from 8 AM to 8 PM, Monday to Friday, EST.
By Stephen Karpin, General Manager, CommSec
The views expressed in this article are those of Brian Phelps, a representative of Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814. CommSec is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 (the Bank) and a Participant of the ASX Group. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this information, consider its appropriateness to your circumstances and if necessary, seek appropriate professional financial and taxation advice. CommSec Margin Loan is a facility provided by the Bank and is administered by CommSec. Please be aware that a CommSec Margin Loan exposes you to unfavourable movements in the value of shares and units in managed funds, and possibly to margin calls. Please be aware that you are personally liable for any shortfall that occurs should your entire portfolio have to be sold to answer a margin call where there have been falls in the market value of your investments. Only investors who fully understand the risks associated with gearing into investments should apply. All applications are subject to the Bank’s credit approval process. Fees and charges apply. Please consider the terms and conditions available from www.commsec.com.au before making any decisions.
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