Loan And Share Purchase

[HaizeyDays]

I have been offered a load on £10,000 over 5 years at 2.8% Total repayable £180.00pm = £10,800.

Now, I am not concerned with the affordability of the loan as I already save over £200 pm, but I wondered if it could be put to good use - Imperial at current prices is yielding about 9% pa.

How horrendous an idea would it be to take the loan and buy the shares? I estimate that on previous performance I could expect to clear £4,000 of dividends. The share price is reasonably low - I can't see it falling too far - it is where it was in 2005.

At the end of the loan term I will have the shares and the dividends accrued.
Or I could just continue to save what I do per month and buy them in five years.

Help me weigh up the risk. (my job is secure, and I have other savings, so loan repayments are not a concern).

[Karolina82]

The value of shares can go up as well as down. You may lose every penny of your investment.
Individual share prices may be volatile.
Get some professional advice beforehand.

[Paigntonian]

Is this compound interest? Figures don't look right.

[Buenchico]

Analysts were suggesting a few months back that Imperial was undervalued, which resulted in increased buying and a corresponding increase in share value. Now that the price has risen, you might have 'missed the boat' with Imperial, whose shares have generally drifted downwards over the past five years: https://ibb.co/Ns5gg59

[ToraToraTora]

figures look wrong to me £10k at 2.8%per annum = 60 payments of £178.80, total=£10,728.
£4k in dividends from £10k of shares seems very optimistic, could take about 20 years. You may do ok on the capital of course, is the stock bullish?
Anyway, it's not a no no to borrow to invest but stocks have a habit of disobedience, so beware!

[davebro]

The interest figure is about right - in fact it would be slightly less £10,718 repayable by my calcs.

Rather that a single share I think if you invested in a tracker or managed investment or unit trust (established & with a good record) you would probably come out ahead.

The alternative would be to not get the loan and simply invest the £200 pm. That way tends to even out the ups & downs of the market.

[ToraToraTora]

good advice from Dave, just invest the £200. In fact I do exactly that, I pay monthly into premium bonds, I get an average of 8 prizes per year.

[ToraToraTora]

apologies haizey, your figures are near enough right, i must have mis read initially.

[New Judge]

Yes, 'Chico is right. Five years ago Imperial shares were trading at somewhere between £35 and £40. Today they are £15.27 to sell.

The 9% dividend yield looks attractive and in fact (leaving out this year because of Covid) the dividend paid has grown by about 10%pa. But... In that five years the share price has declined considerably. So the increase in dividend yield (%age) is more a function of a declining share price than a rising dividend:

2016 155p dividend on a share price (roughly) £39 or 4.0%
170p (£37; 5.0%)
187p (£24; 7.8%)
206p (£19; 10.8%)
137p (£14; 9.8%)

If you had bought 200 shares in Imperial in 2016 they would have cost you (roughly) £7,800. Between then and now you would have received £1,710 in dividend payments and if you sold your shares today you would receive about £3,050. So a total consideration of £4,760 - a loss of £3,040 or almost 40%.

Whilst many shares are in the doldrums at present for obvious reasons, Imperial's declining share price has been evident for the last five years. In fact they peaked in August 2016 at around £41-odd. Of course they may return to those levels in the next five years, but then again they may not.

[Zacs-Master]

Bizarrely, there's a thread running on here about Mark Twain. One of his quotes is 'This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February'

[THECORBYLOON]

Did there not used to be a disclaimer about advice given in Business & Finance?

If no, should there not be one?

[Peter Pedant]

corbo
no because there is no duty of care
if he paid us there would be