Tuesday, February 21, 2006

Financial Leverage: $3.06 Opportunity missed?

So, we have a relatively diversified portfolio for our pre-retirement couple, that should spin off a very nice cash-flow in just a few years.

Now, the thought has been brought up that maybe some people don't like certain sectors or companies (tobacco is a frequent mention in this regard), and they'd prefer not to have them in this leveraged dividend portfolio. Certainly, with some of the yields available today, there's the opportunity to have the portfolio with somewhat of a different profile. For instance, some folks (including me), like the valuations in the banking sector and think it offers above-average potential for long-term gain in comparison to some of the selected companies.

For those people, you might lean away from one sector or company you didn't like, and lean a bit more towards those you did - bearing in mind that you're intending to create long-term value with positive cash-flow as soon as practical (bearing in mind the safety consideration of the portfolio). The thing here is that everybody's ice-cream can be flavored a little bit differently, depending upon their age and individual investment goals and profile.

The other important thing is NOT to sit on your hands forever - right now, mortgages have a fairly attractive interest rate to use for the leverage, and many stocks currently offer pretty decent dividend yields in relation to their stock price. I don't think this situation is going to last forever - I think some of these stocks are going to increase in value (thus lowering the dividend yield), and it's almost certain that the cost of the leverage (mortgages) is going to increase.

It's much harder for those with modest incomes with little ability to service negative cash-flow to make these number work if the average dividend yield drops to 3.5% and mortgage rates increase to 7.5%.

Sometimes opportunity must be seized quickly ... it seems to be one of those times.


The Confused Capitalist

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