I believe that there are two kinds of debt, positive debt and negative debt. In this post I will tell you about the way I’m cautiously going to try and get into debt, positive debt that is.
So what is positive debt, and what is negative debt, let me explain. Positive debt is debt you are using to leverage something, a small amount of your money allows you to get access to a bigger amount of cash which in turn you can use to buy an asset. This idea is often used to invest in real estate, which in itself is a very interesting option too, just not what I or this blog focuses on at this time. Negative debt is debt used to buy all kinds of things, or liabilities as I’d say. Think of a fancy car, an expensive guitar or even smaller things like phones or other gadgets. So recapping; positive debt EARNS you money, negative debt COSTS you money. Of course getting debt at all will cost you money in the form of interest, but if you use it to return more money than you pay in interest it could be quite beneficial.
So the kind of positive debt am I currently looking at and slightly dipping my toes in is the credit offer from my broker/employer. The normal interest rate at my broker is 6%, yet as an employee I get access to this money for a much smaller 1,5%. This allows me to use a percentage of the underlying value of my portfolio to invest in other opportunities, and as long as the dividends pay my interest I’m quite satisfied.
Dipping my toe in the water
After activating the credit on my account a few weeks back, friday the 20th of July I purchased my first shares on credit. I had been placing and cancelling multiple orders as I kept changing my mind about what to buy, and how many shares I wanted. I got 60 shares of JD.com for $35,50, as they dropped 4% because of irrational trade war fears. Of course JD doesn’t pay a dividend (yet?) so the interest of €27,47 will have be paid out of my own pocket. Soon I will make sure to gather some dividend stocks at bargain prices with my credit as well. Currently I’m looking a lot at AT&T as they have appeared four times in my ‘Monthly watchlist’ series, and they provide a big dividend to offset all the interest I have to pay for the credit.
The amount of money you get access to is calculated by your portfolio and cash position. 70% of the value of your portfolio (70% if the stocks are solid companies) and 100% of your cash position calculates the amount of money you can spend. Yet if this loaned money is invested in another solid company, 70% of the spend money counts towards the money you can loan. Of course the risk with this is that when your portfolio value drops below the calculated ‘spending limit’ my broker will tell me I have 5 days to put enough money in my account or they will start selling positions of mine.
Right now I got the possibility to use €17,500, when I spend let’s say a €1000 on Starbucks stock, only €300 (30%) will be withdrawn from my ‘spending limit’. I will have to be careful with spending too much money that will get me close to the limit, as I don’t want to be demanded to sell any positions (obviously). As long as I keep a very big margin of safety regarding the spending limit and I keep my interest costs covered by the dividends, I should be fine. As long as I keep thinking about these decisions thoroughly and invest in solid idea’s and companies I feel certain that I can use this debt to my advantage and really kickstart my dividend motor.
What do you think of using debt to your advantage, are you willing to use it for other purposes than just real estate like me, let me know!