Investing in Energy Infrastructure – TransCanada Corporation
Pipe dreams can come true. We just have to find the right pipeline company to make it happen. 🙂 In today’s post I’ll explain how to earn a tangible profit in the stock market with minimal effort and risk. And the best part is we don’t need any savings to do this. 😉 I actually use this strategy a lot for my retirement planning. It’s known as the Stable Leveraging technique.
The purpose of stable leveraging is to use credit in a low-interest rate environment to harness the high yielding potential and long term stability of energy infrastructure companies in order to make some easy money. And it only takes a few minutes to set up if we already have a discount brokerage account.
How does Stable Leveraging work?
We simply use borrowed money to invest in common shares of pipeline companies. Then we use the earned dividends from the investment to pay off the interest incurred from the loan until the economic situation changes.
This investment philosophy is very different than “I have $X. What should I invest it in?” because Stable Leveraging assumes we have no money to begin with and therefore puts the risk of investing on both the borrower, and the lender.
What do we need to make the stable leveraging strategy work?
- A publicly traded, large-cap, blue-chip, dividend growth stock in the pipeline sector that’s been operating for at least 50 yrs.
- This stock must also be trading at a discount relative to its peers, and its own historic P/E ratio.
- A reliable source to borrow cheap money from, that costs at least 1 percentage point less than the pipeline stock’s yield.
- A 10 year investment horizon minimum, and the stomach to deal with market fluctuations.
- An exit strategy.
These 5 criteria are the essential ingredients to pulling off this maneuver successfully with minimal risk. 😉 One company that foots the bill is TransCanada Corporation.
Earlier this week I purchased 100 shares of TransCanada Corp (TRP) using 100% borrowed money. I will use my example to demonstrate the advantages of implementing stable leveraging. TransCanada is publicly traded on both Canadian and U.S. stock exchanges. 😉
I used my margin account at TD to borrow about $4,200 to buy 100 shares of TRP at $42 per share. The rate of interest I incur on this borrowed money is 4.25%, which would be the same as anyone else using TD’s services. But since I borrowed the money to invest, my 4.25% annual interest rate is tax deductible which makes my effective after-tax cost 3.0% per year on the $4,200 loan.
I used the loan to purchase 100 shares (for $4,200) of TransCanada Corp, which at the time, had a dividend yield of 5.0%. Since these dividends are eligible for the Federal Dividend Tax Credit, my after-tax dividend yield is 4.8% per year.
Since my effective cost of borrowing is currently 3.0%, and I’m earning 4.8% on my TRP investment, the difference between the two (1.8%) is how much I take home each year. 1.8% of $4,200 is about $75. It’s not much, but it’s $75 of passive income nonetheless. The balance of my loan will remain at $4,200. The principal does not get repaid. Dividends are deposited into my account, and interest payments are withdrawn automatically. 🙂