I've written about The Smith Manoeuvre since the inception of this blog but I haven't been practicing what I preach. That is, until now.
As you probably know, this strategy is composed of 3 main parts:
- The mortgage
- The automatic readvanceable HELOC
- The underlying investments
Lets get started with my blueprint for setting up a slightly modified Smith Manoeuvre.
The Readvanceable Mortgage
We have written a lot about readvanceable mortgage options available. For the DIY investor, my favorites include:
- BMO Readiline
- Firstline Matrix Mortgage
- RBC Homeline
When it came down to it, I chose the BMO Readiline as their rate was best along with the mortgage being fully open. The biggest downsides of the BMO product is that the HELOC gets reported to credit agencies along with the need to open a BMO branch account in order to get online access. I will be writing more about this in the near future and how exactly the money flows between accounts.
How much of the HELOC do I plan to use to invest? I plan to use the "Rempel Maximum" formula without using an additional investment loan. That is, I'll use as much as my mortgage principle payments will support. I estimate that with the mortgage payment schedule that we chose, we'll pay off around $6,000 in the first year. Dividing that by 6%, will result in a maximum loan of $100,000. Since my HELOC amount is approximately $60,000, I'll use that as my investment amount.
With a new readvanceable mortgage setup, I'm currently in the process of setting up a new joint brokerage account. Once that is setup and ready to go, what stocks will I buy? Will I index? Buy mutual funds? Or pick stocks?
I know that the general advice around the pf blogosphere is to index. I agree that it's a sensible and easy way to get market exposure with less risk than stock picking. I even recommend indexing to most people who ask me "what to invest in".
However, my plan is to implement The Smith Manoeuvre and use the investment loan proceeds to generate dividend income. I plan on using the dividend distributions to accelerate the mortgage pay down. I've done calculations where if I invest in strong/growing dividend stocks, that the dividends will outgrow the interest payments by year 5.
Ultimately, the plan is for my annual growing dividends to comfortably exceed the loan servicing payments when I'm finished paying off the non-deductible mortgage in about 10 years time. That way, when the non-deductible mortgage is paid off, we'll have another reliable and growing income stream. Perhaps just in time for early retirement? :)
On to the actual investments that I'm considering. The leveraged portfolio will primarily consist of dividend paying stocks but with a sprinkle of high growth small caps. I've written about strong dividend stocks before, but here are some that will remain on my watch list:
- Royal Bank – RY
- Canadian Imperial Bank of Commerce – CM
- Toronto Dominion Bank – TD
- Bank of Nova Scotia – BNS
- Bank of Montreal – BMO
- IGM Financial – IGM
- Power Financial – PWF (owns IGM, GWO)
- Manulife Financial – MFC
- Sunlife – SLF
- GWO -Great West Life
- Husky Energy – HSE
- Enbridge – ENB
- Fortis Properties – FTS
- TransCanada Corp – TRP
- Canadian National Railway – CNR
- Brookfield Asset Management – BAM.A
I also like a few income trusts like Canadian Oil Sands and Riocan, but will not include them in the leveraged portfolio as they pay out Return of Capital. Trying to separate the ROC distributions from the dividends would be an administrative nightmare.
There you have it, my complete plan for converting my bad mortgage debt into an income producing dividend portfolio from start to finish. Any thoughts or questions?
As a side note, I've had many readers email me about the new version of The Smith Manoeuvre Calculator. Unfortunately, the newest version is commercial only. I have been in contact with the creator and he has agreed to do personalized calculations for MDJ readers for a very reasonable price. Please contact me if you are interested.
photo credit: Thristian