For those of you joining us now, this is an update (for a while!) of my portfolio, which is funded by borrowed money from my Home Equity Line of Credit (HELOC) – otherwise known as the Smith Maneuver.
What is Smith Maneuver?
The Smith maneuver, in its simplest form, is an leveraged investment strategy that uses your home as collateral. It is popular because borrowing to invest is tax-deductible on interest. To frame it in an attractive way, Canadians, it enables Canadians to convert their conventional mortgage into a tax-exempt mortgage.
How does it work?
If you have a home with some equity, an easy way is to get a home equity line of credit (HELOC) and invest the balance in the stock market. to create it true The Smith trick is that you get an affordable mortgage that increases your HELOC balance while you pay off your installment mortgage. If you use your HELOC balance to invest in a taxable investment account, over time, as your HELOC balance (and your taxable investment account) grows, your conventional mortgage shrinks. In conclusion, you have a fully tax-deductible HELOC instead of your conventional mortgage.
Sounds dangerous, right? Well, forex investing is definitely risky, so you definitely need to have a high risk tolerance to execute this strategy. You can read more about nuts and bolts here Smith Maneuver Here’s the strategy.
Here’s how I use the Smith Maneuver
As many readers know, I implemented the Smith Maneuver many moons ago in 2007/2008. I got a readable mortgage from BMO and invested $50,000 back Canadian Dividend Stocks. Yes, before the financial crisis! Even though the timing wasn’t great, I knew I was in it for the long haul, with the goal of generating dividend income for early retirement one day.
We eliminated the conventional installment mortgage in our early 30s, but never really maxed out the HELOC. In total, we borrowed over $100,000 and used the HELOC to pay ourselves off (capitalize the interest) and accrue the balance and tax-deductible interest.
Fast forward to today and the strategy is still alive and well, but it looks a little different than it did in 2007/2008. As we capitalized the interest over the years (using a HELOC line of credit to cover the monthly payment), the balance grew over time. That is until now – we are currently using dividends to slowly pay off the Helok balance.
Why the Switch from Capitalizing Interest to Paying HELOC? Basically, we reduce some risk/liability by semi/early retirement! After reaching the million dollar net worth milestone in 2014, we focused on building our passive income to cover our recurring expenses. We basically doubled down and focused entirely on building our dividend and indexed portfolios.
By mid-2020, we were able to reach a major financial milestone – achieving financial independence by increasing our dividend income enough to cover our family’s expenses. At that point, it was just another day. What I didn’t realize was that it started a subtle shift in the way I thought about my daily life. Maybe it was due to the covid pandemic restrictions or partly because of working from home full-time – my basic desire for more freedom got stronger.
So I moved from professional full-time work to a phase of working on new projects and hobbies. Although these projects and hobbies are not very profitable, we have diverted some of the growing dividends over the past 15+ years from accumulating assets to spend.
In the latest Financial Freedom update, our total dividend income is in the $73k/year range. How much comes from our Smith maneuver portfolio? About $8.8k/year yielding about 3.54%!
The big question now is the impact of rising interest rates and my strategy. For a while, we were paying about $3,600/year in interest. As rates continue to rise aggressively, annual interest rises to about $6,500/year. Although there is still a spread between dividend income and interest expense, it takes a little longer to pay off the HELOC balance. On the bright side, this means a huge tax deduction at tax time.
Since we don’t “need” to spend dividends from this account yet, we continue to use the dividends to pay down the investment loan/HELOC balance.
Very little has been added to this portfolio over the years as we have not been interested in increasing our HELOC balance. Occasionally, however, there are some opportunities to add that we can’t pass up. In 2022, we added:
- Telus (T.TO)
- Algonquin Utilities (AQN.TO)
Since this portfolio focuses on dividend development Stocks, the portfolio did not disappoint with a significant number of dividend-paying positions increasing their distributions. The increments of this portfolio are as follows:
- CU.TO (up 1%)
- BCE.TO (up 5.1%)
- TRP.TO (up 3.4%)
- TRI.TO (10% increase)
- T.TO (7% increase)
- SU.TO (up 12%)
- WN.TO (10% increase)
- AQN.TO (up 6%)
- FTT.TO (up 4.9%)
- BNS.TO (up 3%)
- BMO.TO (up 4.5%)
- CM.TO (up 3.1%)
- RY.TO (up 6.7%)
- FTS.TO (up 5.6%)
- EMA.TO (up 4.1%)
Top 5 posts
The top positions in this portfolio vary slightly and all have a strong history of increasing dividends. My current top 5 positions include:
- Canadian Pacific Railway (CP.TO)
- Thomson Reuters Corp (TRI.TO)
- Royal Bank (RY.TO)
- TD Bank (TD.TO)
- Fortis Applications (FTS.TO)
Why focus so much on finance and energy?
In terms of sector allocation, you may notice that this portfolio has a slight focus on financials and energy. Please note that this is one of my accounts, in which I consider all my accounts A large portfolio. In other words, I treat this account as my Canadian exposure (mostly financials and energy) and my US, international and other sector equity exposure in other accounts.
Why Shouldn’t You Use Dividend ETFs?
Two reasons, first, most Canadian Dividend ETFs Hold shares that distribute returns of capital affecting the tax deductions of the investment loan. Second, MER receives dividends. I keep costs very low in this portfolio by buying occasionally but selling rarely.
Should I initiate the Smith Maneuver?
There are a lot of readers who have indicated that they are interested in a forex portfolio. It can be profitable in the long run. However, in the short term, stocks are volatile and can put a portfolio in the red. My portfolio in 2008 is a good example of what happens. If you can’t stomach a 20-30% loss on your portfolio in any given year, your risk tolerance may not be right for leverage.
Disclaimer: The securities mentioned in this post are not recommendations to buy or sell and should be used for informational purposes only.