Nov 202015
 

Investing in Energy Infrastructure –¬†TransCanada Corporation

Pipe dreams can come true. We just have to find the right pipeline company to make it happen. ūüôā 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. ūüėČ 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?

  1. A publicly traded, large-cap, blue-chip, dividend growth stock in the pipeline¬†sector that’s been operating for at least 50 yrs.
  2. This stock must also be trading at a discount relative to its peers, and its own historic P/E ratio.
  3. A reliable source to borrow cheap money from, that costs at least 1¬†percentage point less than the pipeline¬†stock’s yield.
  4. A 10 year investment horizon minimum, and the stomach to deal with market fluctuations.
  5. An exit strategy.

These 5¬†criteria are the essential ingredients to pulling off this maneuver successfully with minimal risk. ūüėČ One company that foots the bill is TransCanada Corporation.

15-11-transcanada-pipeline-corp-stock-investment

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. ūüėČ

15-11-purchase-100-trp-shares

I paid commission of $9.99 to make this trade, so the total cost is $4,209.99. For the purpose of this post I’ll use $4,200 to make the calculations look cleaner and to make the strategy simpler to explain and understand.

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. ūüôā

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Nov 172011
 
¬† ¬† ¬†A government decision has created an indirect benefit to investors. Canada has started to roll out the new plastic banknotes starting with the $100 bill.¬†¬†I think these are much better than our old paper money because they’re more durable, ¬†harder to¬†counterfeit, waterproof, recyclable, and they look amazing. I guess this gives a new meaning to the term “paying with plastic.”¬†( Ôĺü‚ąÄÔĺü)

The Australians invented these polymer banknotes and many countries around the world ¬†have been using this technology for years. Now it’s our turn.¬†These notes will be printed on a polymer substrate manufactured by Securency International in Australia. Yes, unfortunately we have to import our own currency material. The actual printing of the banknotes, however, will still be in Canada of course.

 

But I think there’s an opportunity here for investors looking to cash in¬†on this transition.¬†The base material for these notes, biaxial-oriented polypropylene, is just a fancy term for durable plastic, and we all know plastic comes from hydro carbons made from oil and gas. So going long in energy companies will most certainly prove fruitful as more of these notes are printed in Canada, and are being adopted by other nations around the world. Large integrated names like Suncor Energy, and Exxon Mobil, produce both oil and natural gas. Pipelines like TransCanada Corp, and Enbridge Inc, are also great ways to ride the energy wave.

10 year Investment Returns
Average Stock Market (S&P; 500) = 13%
Suncor:                                          =206%
Exxon:                                           = 99%
TransCanada:                                =102%
Enbridge:                                       =220%

This isn’t a coincidence. Smart investors have been invested in energy/pipeline companies for decades. Natural resources are a necessity in modern society and the demand will only go up in the decades to come. Invest early¬†and get time on your side.

Disclaimer: I own shares of Suncor and Enbridge, and plan to buy TransCanada soon.