Income Investors: Want to Get a 3% Yield With No Money Down?

Robert Kiyosaki, author of many financial resource books, including his seminal, “Rich Dad, Poor Dad,” said the best way to get rich is by using other people’s money (OPM).

You can do this by purchasing assets with higher cash flow than the interest rate you pay on the loan. Record low interest rates have made this strategy very feasible, with historical borrowing costs lower than they ever have been before.

Although Robert Kiyosaki primarily focused on real estate investing, he does speak on using the same technique for investing in stocks. Using margins, or OPM in your trading account can be an excellent way to make some income without spending any of your own cash.

The stocks I list here are not without risk, and neither is the strategy. These stocks are not government bonds or GICs, so every stock mentioned must be monitored constantly should their dividends be cut or the stock to fall sharply.

Low(er) risk

Enbridge Inc. (TSX:ENB)(NYSE:ENB) and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) are the only stocks that would fit into this category at the moment. 

These stocks are diversified operators in their fields, with Enbridge operating extensive pipeline networks and BNS having the most international banking network that Canada has to offer.

Both of these companies have long histories of dividend payments and high yields that currently sit at 6.75% and 5.16% respectively. They also consistently raise their dividends over time. Enbridge, for one, plans to continue to raise its dividend by 5-10% for the next few years.

Medium risk

 Two names, Alaris Royalty Corp. (TSX:AD) and Chemtrade Logistics Income Fund (TSX:CHE.UN) fit into this category. With dividends and distributions of 8.44% and 12.38%, respectively, these will help add income to your leveraged spread.

Chemtrade has not raised its distribution for years, but given that it has paid the same yield for over a decade, there is a good chance that it will continue to do so going forward.

High risk

With the highest risk profile on the spectrum, but also the highest potential for explosive growth, are Whitecap Resources Inc. (TSX:WCP) and Arc Resources Ltd. (TSX:ARX). Whitecap has a yield of 9.7% as of today, a good boost for the OPM portfolio.

Although Whitecap has raised its dividend recently, this is on the back of a cut a few years back. Arc has an even higher dividend at 10.42%. They do operate in the volatile oil and gas sector, which can be unnerving. 

The oil sector is hugely undervalued at the moment, opening the possibility for explosive capital appreciation if foreign investment were to return.

Some risks to watch out for

Interest rate risk is the first and most important risk with this strategy. If rates go up, dividend stocks tend to fall. This can be a huge issue for these companies, as their high- growing yields tend to fall very quickly when rates rise.

Therefore, you should definitely have cash handy to meet your needs if stocks were to fall quickly. 

Dividends can also be cut, especially in the case of risky commodity stocks. If a dividend is cut the stock may fall quickly, so watch your companies and cut your losses fast.

Sometimes you can get lucky and the stock will actually rise after a cut. If this is the case, get out with the higher capital gain. In either case, replace the stock with another high yield play. 

Your free 3% yield

Even if you were paying a margin rate of 5% (you can get much lower margin rates at many discount brokers, even as low as 4.1%). Assuming you put an equal amount of money into each stock, using this strategy would net you a yield of about 3%.

6.75+5.16+8.14+12.38+9.7+10.42=52.85

52.85/6= 8.08%

8.08%-5%(interest cost)= 3.08%

These six stocks are just an example of some of the many high-yield stocks available in Canada today. There are many more you could add to the mix to raise the yield on your investment or lower it to make it safer and more stable.

If you are careful when using the OPM strategy you can make an excellent return without applying any of your own cash.

But be careful. Leverage can be a great way to magnify your returns, but excessive leverage can blow up your account. Always have cash in case things don’t go your way. Remember to monitor this strategy carefully, as the risks can be high.