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TORONTO (GlobeinvestorGOLD) — It’s not every day $10,000 falls in your lap. At first you tell yourself you will do the responsible thing, invest it wisely, and let it grow for some time in the future. Then along comes a Best Buy flyer featuring the latest high definition wide-screen TV, and you say, screw it — it’s time to rework the numbers. Believe it or not, it is possible to invest the original $10,000 safely, return 30 per cent within four months and still have enough for an awesome TV.
First the TV. There’s a broad range of high definition wide screen televisions at all the major home appliance stores — not just Best Buy. Decent ones range from $2,000 to $2,500 with tax. Let’s assume you can get a good one for $2,200 including tax. Buy it immediately with cash upfront or a line of credit, wrap it, and put it under the tree for yourself to open Christmas morning.
Unless you have cash on hand, one precondition to turning that $10,000 into more than $15,000 in a couple months is a line of credit. All disciplined investors and household financial managers should have access to a cheap line of credit — preferably a secured line of credit tied to equity such as a house. Interest on a home equity loan is normally the prime rate, which is currently around 4.25 per cent. It will be harder, but not impossible, to make the plan work with credit cards that charge in excess of 10 per cent.
Now the wise investment: equity markets have been showing a bit of umph lately, but we’ve seen these short bear-market run-ups before. One of these times it’s going to be a real bull market, but it’s too much of a gamble right now to bet $10,000. So it’s wise to hedge the investment with income-generating stocks that have exposure to a prolonged market upturn. Income trusts are a bit rich at the moment, but individual stocks that pay dividends and tend to track the broader markets may just be the ticket.
There are 125 Canadian dividend funds on the market, but only nine bill themselves as dividend growth stocks. They rely on two return streams: income from the dividends and capital gains from the rising share prices of stocks within the fund.
The top-performing Canadian dividend funds over the past year are also top-performing Canadian dividend growth funds due to an advance of nearly 14 per cent for the TSX 60. The TSX 60 is home to Canada’s highest-paying dividend stocks. The Acuity Growth and Income Fund leads the way with a one-year return of 24 per cent — surpassing the 13.3 per cent average annual return for the broader Canadian dividend fund category. Top holdings include big financial services companies such as Manulife Financial and Bank of Montreal, as well as strong dividend-paying energy trusts such as Peyto and Crescent Point. Other familiar names include portfolio staples such as BCE Inc. and Canadian National Railway Co.
In the end, dividend growth investing will bring in steady returns from dividend payouts and stand to generate capital gains when the broader equity markets finally break free from their meandering ways.
Now the part where that $10,000 has a 50-per-cent return within four months.
All nine dividend growth funds are RRSP eligible. That means you can deduct the contribution from your taxable income and they count as Canadian holdings in a registered retirement savings plan. To find how much you need to draw from your line of credit you need to access an RRSP rebate calculator. Many financial institutions have them on their websites. I use the MoneySense.ca RRSP rebate calculator. The first entry in the calculator is the province where you reside. Income tax varies from province to province. Next, enter your expected taxable income for 2004. From there, enter various amounts in the RRSP Contribution square. Start with your original $10,000, hit calculate, and see your estimated tax rebate. Enter higher amounts until your rebate is enough to cover any amount over $10,000 plus — in my case — what you need to pay for that big screen TV, and the interest you are paying on your line of credit.
According to my calculation, a $13,000 contribution would generate a tax rebate of $5,260. I draw that $5,260 from my line of credit — $2,200 was already borrowed to pay for the TV; $3,000 of that borrowed money is added to my original $10,000 and invested in an RRSP eligible dividend growth fund before the March first contribution deadline. In addition to a new TV, I’m already up $3,000 on my RRSP contribution.
If you file your income tax on-line by late March, the Canada Revenue Agency could have your $5,260 rebate in your account within a few weeks, which you would use to pay off your line of credit plus whatever interest you’ve accumulated ($5,260 at 4.25 per cent for three months is $56). That leaves four dollars to play with.
So, by putting the original $10,000 plus $3,000 of the tax rebate in an RRSP, you’ve generated a total of $13,000 to grow in the plan, plus $2,200 for a high definition TV, plus $56 for interest on a short term loan to pull it all off. Now where’s that $10,000?
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.