Question:
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.
Response:
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.
