Arbitrage Investment Strategy

dreamstime_5141983

dreamstime_5141983There’s a saying that goes. You need money to make money. In the current low interest rates environment, there’s some opportunity for those who can borrow cheap money to invest in higher yielding investments. One very simple example is through credit cards. Some of you may have received low or even 0% promotional interest rate credit card offers in the mail. If so, rather than treat these offers as junk mail, look to take advantage of cheap money that the bank is giving you and put it into a higher interest rate investment vehicle. It could be a higher interest savings account at your bank or a fixed interest yielding bond. Whatever the case may be, you can generate safe and steady returns based on the difference between what you pay for interest costs and the returns you generate from your investment vehicle.

 

For those who are more aggressive and wish to invest into the stock market, there’s a strategy to generate higher returns. With interest rates being at record lows, it’s an attractive proposition to borrow money from your broker to buy higher yielding dividend stocks. Here’s the steps on how to do this.

  1. Open up a margin account with your broker. The margin account allows you to be able to borrow money from your broker. Find out what interest rate your broker charges for overnight positions. Typical rates are Libor +2%, which makes it currently between 2-3% per yr.
  1. Once you determine the margin interest rate, look for dividend stocks that are paying a higher yield than the interest rate. The difference is what % you generate on an annual basis.
  1. Utilize technical analysis to analyze the price charts of these dividend stocks to determine a low risk entry point. Even though you are generating a yield on your investment, it’s prudent to buy these dividend stocks at lower prices so you can benefit from both the price appreciation as well as the yield.
  1. For those who prefer not to buy individual dividend stocks, there are numerous Dividend Exchange Traded Funds (ETF’s) that hold a basket of dividend stocks. Some examples are: the Vanguard Dividend Appreciation ETF (VIG), iShares Select Dividend ETF (DVY) and SPDR S&P Dividend ETF (SDY).
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There is always risk of losing money in the stock market so please make sure that you focus on risk management to minimize your losses.

Mike Ser