As much as we all love our credit, everyone gets angry with their banks and credit card companies when we get dinged for fees or for high interest charges.
For years, however, I’ve used those balance transfer checks in a nifty way.
I don’t even do an actual balance transfer, as many of those same checks can just be deposited in your bank account. The fee for this balance transfer/deposit option runs between 2% and 4%. It’s the cheapest form of an unsecured loan you’ll ever find, and if you have a high credit limit, it can be a very cheap way of borrowing money. (I know some people with $40,000 or more as their credit limit, which is almost the same size as a second mortgage might be — without putting your house on the line).
Sound familiar? This is how big banks make their money — they borrow from you and me for a low rate (in the form of offering us, say, less than 1% in savings), then loan it back out to us in larger amounts for higher rates (in the form of say, 3.7% mortgages).
In this case, what I’ve done is to invest the bank’s money in what I consider to be a secure higher-yielding investment, and play the arbitrage.
Now, there’s a big caveat here — you must choose your investment wisely. You don’t want to throw that money into a volatile momentum stock or the SPDR Gold Shares (NYSE:GLD). You want something stable.
I take two approaches to this.
#1: Preferred Shares
The first is to drop some of the funds into the preferred shares of a company. Preferreds trade like bonds, and thus their underlying share price tends to move very little. Right now, the secular trend is for preferred shares to move higher as investors who have abandoned bonds chase yield elsewhere. Preferred shares are a great pair of arms for these investors to land in, as they tend to pay generous yields of 6% to 9%.
In my case, I borrow at 3% and own Ashford Hospitality Trust (NYSE:AHT) 8.45% Series D Preferred Shares. Right now, the stock trades at 2% above par, giving the shares an 8.23% yield, netting me a 5.23% spread.
Even better, for the past few years, the dividends have been reported as return of capital to the IRS, so the profit isn’t taxed.
#2: Forever Hold Covered Call Strategy
Another way to go is to take on my Forever Hold Covered Call Strategy. Buy a stable blue chip company like Coca-Cola (NYSE:KO) or ExxonMobil (NYSE:XOM), and sell a covered call against it. If the stock gets called away, buy it again (or another) and repeat the process. (However, avoid months when a company is going to report earnings).
For example, right now on both Coca-Cola and ExxonMobil, April calls at the next highest strike price will earn about 1% in premium (and more if they get called away). KO is selling at $39.31, and XOM at $89.16. Buy both, then sell the KO April 40 Calls and XOM April 90 Calls. If you did this eight months out of the year, you’d make 8%. There’s no need to be greedy and go for huge premiums.
Again, I stress caution. Make sure the checks you use give you the lower balance transfer rate, not the cash advance rate, which is 20% or more. And make sure you annualize the fee — you want that money for as long as you can get it. Some banks give it to you for 15 months or more.
Then choose very carefully. You might even find private investments that give you the arbitrage you seek.
As of this writing, Lawrence Meyers held shares of Ashford Hospitality Series D. He is president of PDL Capital, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.