Leveraging Dividends for Accelerated Income Growth (and How I'm Managing the Risks)

I am an amateur investor with years of experience dabbling in various financial markets including cryptocurrencies. Lately, my interest has been piqued by the consistent income that can be generated through dividend investing. I love crypto;...

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I am an amateur investor with years of experience dabbling in various financial markets including cryptocurrencies. Lately, my interest has been piqued by the consistent income that can be generated through dividend investing. I love crypto; but I need cash. In this post, I will introduce a strategy that I am currently exploring: leveraging to boost returns from dividend investments, albeit in a cautious manner. I have been burned by margin, so I know the dangers of leverage. Therefore, I want to be cautious in my use of margin to grow my dividend income.

The Leveraged Dividend Strategy: The Basics

Leveraged investing is a strategy that uses borrowed money to increase potential returns. However, it is a double-edged sword as it can also amplify losses. Dividends become particularly interesting in this scenario as they provide a steady income which can offset the risks associated with leveraging. Combined with regular personal contributions and monthly dividends, margin can be repaid quickly.

I am considering specific Exchange Traded Funds (ETFs) and Real Estate Investment Trust (REIT) ETFs for this strategy. For instance, 2X Leveraged Dividend ETFs are intriguing because of their mechanics and potential for amplified gains and losses on top of my own leverage. The high monthly payouts these ETFs offer are an added cash flow advantage.

I am also looking at Covered Call Monthly Dividend ETFs. These ETFs use covered calls to generate extra income over a broad number of equities or even very specific equities. They earn from selling the options, receiving dividends, and even some capital gains to generate yield.

The particular reason for using ETFs, in general, is that individual stocks and even straight up REITs are individually more volatile than having them in a basket held by an ETF. Within an ETF, the individual stock fluctuations are averaged out. However, ETFs are not immune to the broader market conditions.

The "Pay It Back Quickly" Principle

My unique risk management rule is to only leverage an amount I can reasonably expect to earn back in dividend income within two months. This is an arbitrary number the might change. It may work out that a three month borrow is better. But I have to start somewhere. This short-term borrowing creates a feedback loop where success progressively allows for more leverage capacity, meaning more credit. Conservative dividend estimates are crucial in this regard. Swinging for the fence can yield bigger results; but there is also a better chance of striking out.

More importantly, by borrowing manageable amounts, I can expect the monthly dividend and my personal contributions to help me pay back the margin quickly and safely.

The 20% Cash Cushion:

To start off, I picked a 20% cash cushion out of thin air. It could be impracticable, causing me to lower it to 10% or some other number to where I can actually use margin instead of just cash. But let's go with 20% for now to illustrate the plan. A cash buffer is essential when leveraging. It allows me to buy the dips when the market swings, avoid forced selling due to margin calls, and maintain peace of mind. But, if you think about it more, when my overall portfolio shrinks, that means that the cash cushion exceeds the 20% allocation, which frees up cash to buy more equities when they're cheap. Yes, I could used pure margin to buy; but then I would have no simple, objective measure to know when to buy more.

That cash ratio also gives me a measure when to buy or accumulate more cash. I don't intend to sell, if it can be avoided. If the opposite happens, the portfolio grows, leaving my cash reserve behind, then I simply keep accumulating cash until I satisfy the 20% ratio. Holding cash is not great. But it's not as bad now as when we had near 0% interest rates. Cash accounts are now paying around 5%, which is nominally better than nothing, even if it's not great in real terms. And having cash plus margin means that I don't have to miss opportunities to buy.

One important thing to note is that cash in some brokerage accounts also contributes to your margin requirement. This means that if I have $100 in cash, it means that I could borrow an additional $50 or more just as if cash were a stock. Therefore, holding cash means that m $1 can buy more than $1.

Selecting Your Investments: Due Diligence

My criteria for choosing ETFs and REITs include a track record of consistent dividends, strong underlying holdings (for ETFs) or properties (for REITs), and reasonable expense ratios (for ETFs). This is not financial advice but my own personal research. Keep in mind that I'm playing with fire and trying to mitigate ways of getting burned. . . again.

The redeeming quality of investments that pay cash dividends is that you keep the cash even if the stock or ETF tanks. So long as there is a consistent stream of dividends, one can be indifferent to market conditions.

At this time, ETFs that hold crypto do not qualify for margin. You can buy them with margin. But you don't get margin credit from holding them. This is why you can't use this strategy entirely with crypto ETFs. If I wanted to buy a crypto ETF, I could borrow so long as I hold other assets that do qualify for margin. The only drag to crypto ETFs is that they don't pay dividends and they have management fees. Maybe I'll hold a 10% allocation. But I will primarily seek ETFs and REITs that cash flow.

At the moment, I am holding Yieldmax ETFs. I plan on adding some JP Morgan ETFs and stock to boost my margin as the maintenance requirement is 25%, meaning that I could borrow up to $75 for every $100 I own. Yieldmax, on the other hand, only gets me $50 in credit for every $100. So, I want to hold some that pay lower dividends only to boost my available margin. This could come in handy during a down market when everything is on sale.

I may also later choose individual REITs that would pay monthly dividends. And, if I can own 100 shares of any of them, I could also sell my own options. However, the risk of that is that I could end up selling, which would reduce my dividend income.

Challenges and Concerns

Leveraging does come with risks like amplified losses, interest costs, and potential for margin calls. My strategy is designed to mitigate these risks, but not completely eliminate them. Emotional discipline and not getting greedy are also very important.

The losses can be mitigated by not borrowing too much. Interest costs can be mitigated by borrowing for the short term. And margin calls can be avoided by both having cash reserves and by not borrowing excessively. This strategy has the potential to amplify dividend income so long as I am patient and methodical. Did I mention not borrowing too much?

Tracking and Adjusting: It's a Journey

I will closely monitor my portfolio's performance and adjust my leverage based on dividend income and market conditions. I am committed to learning and adapting as I go. I'll have to pay attention to the cash allocation ratio to make adjustments. The point is to have the ability to use margin rather than my own cash to grow my dividend income. There's now way I can make meaningful gains with my savings alone. I don't have enough disposable income to make it happen with what is remaining of my lifetime.


I am excited about this experiment and look forward to sharing my progress with you. Please feel free to share your thoughts, experiences, or questions in the comments. I welcome discussion and your feedback if you have experience with traditional investing. I will reiterate that this is not financial advice but my personal journey in the world of investing.

Images in this post were created with Google Gemini AI