Can Stocks Pay Your Mortgage?

Brett Arends MarketWatch September 14, 2011

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Sept. 14, 2011, 12:00 a.m. EDT

By Brett Arends, MarketWatch

BOSTON (MarketWatch) "” Should you take out a new mortgage "” or home equity line of credit "” and spend the money buying stocks?

The question may sound totally crazy. It's certainly not for the unsophisticated. But events in the stock, bond and mortgage markets in the past few weeks have made it a question you have to ask.

What's going on?

Mortgage rates have collapsed to unknown lows. Meanwhile the dividend yield on stocks has risen. Remember, too, that you get tax breaks on both.

Bottom line: For many people the mortgage rate is now lower than the yield on a lot of blue-chip stocks.

The gap isn't huge. But it's there. For maybe the first time in memory.

You can get a 30-year fixed-rate home loan now for 4%. That's because the mortgage rate is priced in relation to the interest rate on 10-year government notes. And that interest rate has just collapsed.

The 10-year yields less than 2%, far below historic norms.

Mortgage interest in most cases is tax deductible at the federal (and often at the state) level. If you're in the upper middle class you're probably in the 25% federal tax bracket. So spending $4,000 on mortgage interest will save you $1,000 in federal taxes, and so on.

In other words, your 4% loan is really a 3% loan. (I'm ignoring Alternative Minimum Tax, and assuming you already itemize your deductions.)

Meanwhile, dividends on stocks are taxed at 15%. If a stock pays you $3.52 in dividends, you get to keep $3.

/quotes/zigman/4868283 10_YEAR 2.01, +0.01, +0.60% Yield sign Yields on 10-year Treasurys this year.

So if a stock yields 3.52% or better, and those dividends are either sustained or grow, it is offering you a better return than your cost of capital.

These are the calculations that corporations do all the time. Any project where the return on invested capital beats the cost of capital has a positive net present value.

Which stocks yield 3.52% or better?

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Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand

Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse

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