Do you believe that borrowing money for investments is a bad idea? Think again. Last year we played around with three Canadian Energy Trusts (i.e. AAV, PGH & HTE). Those funds have two major features that make them very attractive to investors:

1. They pay VERY good monthly dividends;

2. Those dividends are taxed at fixed rate of 15% regardless of your annual income.

Let’s crunch some numbers. In our scenario we will pretend that we have $30,000 to invest and that we will borrow another $45,000 from margin account. My brokerage company charge 10% APR on the margin balance which means that every month I’ll have to pay $375 ($4,500 annually).

Now we split $75,000 equally between Canadian Energy Trusts ($25k each). With today’s prices (AAV $12.16, HTE $28.44 & PGH $17.77) we end up with roughly 2,056 shares of AAV, 879 shares of HTE and 1,407 shares of PGH.

Now let’s calculate dividends. In order to simplify the process I’ll use last month’s dividends:

AAV    2,056 x $0.14315 = $291.32

HTE    879 x $0.36266 = $318.78

PGH   1,407 x $0.23859 = $335.70

As we can see we’ve got total monthly dividend payout of $945.80 (or $11,349.60 annually). After we subtract interest payments on margin balance we get ($11,349.60 - $4,500) = $6,849.60 of profit which is approximate 22.83% of our initial $30k investment. Now if you’ll add capital gains on top of dividends you easily can be looking at much higher results.