Any advice for the undercapitalised?

Still, I'm gonna miss some of those dividend deposits!!!

Well they will be replaced by others will they not?

But I'm sure you mean that they were nice dividends!

There is no need to suffer any capital loss (or gain) by accumulating franking credits. I teach ways of eliminating all risk while stripping the franking credits (which I wont get into in this post).

What rozella does is not 'dividend stripping'. His aim is to extract the cash div and resell when the stock rebounds.

Franking credits are not usable by overseas funds/shareholders and as a result ex-div falls do not allow for the franking credits (90% of time - Brown & Clarke paper 1992). This means if NAB pays a $0.70 cash div, the stock will most likely fall 70c once ex-div.

Therefore, if you buy the stock cum div for say $32, then sell ex-div for $31.30, you suffer a 70c capital loss (which can be very useful to offset other gains) and create income of 70c. But you also have a tax credit of 30c.

Now if you have no capital gains to offset, depending on your investor/trader status (or if using a SMSF), these two will cancel out:

Cash div received = $11,666. Capital loss = $11,666. Taxable income = $0. Franking credits used = $0. Tax refund = $5,000.

Thats $5,000 created out of thin air. Every year. One for you, and one for your partner. Then do it on both Super funds.

All of a sudden, you have $20k extra....every year

Now you might think you need $200k to do this. You dont. It can be done with about $3k. Some might ask:

"yeah but what if the stock drops $1.25?"

thats why its important to hedge the risk. We sacrifice the possible capital gain in exchange for eliminating the chance of a capital loss.

And how many advisors / accountants know this? NONE. Ive taught about 3 advisors and 2 accountants this stuff.

So then if nothing goes wrong the hedge is lost?

How long would you need to hold the stock?

You want to be careful Tree I may even buy your course!!
If you keep posting meaty stuff!

hi knobby

Knobby22 said:

Can I just say that I am far from retiring but i know other investors with the same mindset and it serves them well.

If you buy stocks that gradually increase dividends every year (e.g.banks, gambling stocks) and stay away from dodgy stuff like Telstra, you tend to make a reasonable capital gain every year. If you look at the returns of reasonably yielding stocks they do OK. In booms like the present you earn a bit less but in slow periods you can do better.

I am interested if bullmarket thinks the above statement is true.

Click to expand...

Yes I agree with you in general, if you stick to the so called bluechips for at least a few years given that the historical stock market return is about 10% pa. But there will be the odd year where you could experience a loss for the year.

tech/a

re your "I'm genuinely interested in this school of thought as I must say I cant understand it from this view." let me try to clarify.

I am retired now and require a bit over 5% average yield from my investments in order to generate sufficient income for our annual living expenses.

Based on lifestyle choices my no.1 priority now is income with minimal tax and not capital gains (but as I said earlier they are welcome if they occur ). I don't want to be sitting infront of a pc all day watching changing stock prices or analysing price charts.

In June last year I decided to go more defensive and so I am now overweight in relatively low risk listed property trusts (with little or no exposure to property development) and energy/infrastructure trusts for their high yields. The average yield on my investments is now 8.7% which gives me a comfortable buffer over the minimum I require and so I know I will have more than sufficient income for at least the next 12 months regardless of what the market does and that allows us the freedom to do what we want when we want without having to worry about the market and what it is doing. Obviously I still keep a 'weather eye' on the stocks I hold.

The performance of the LPT sector (XPJ) over the last 2 years has been outstanding, although helped by a few mergers. Although I don't expect the same rate of return from LPT's in the next 12 months, I believe that at least some of the higher yielding (8%+) better quality LPT's should provide a good defense if the markets go significantly south for whatever reason in the forseeable future.

The point I was making earlier re dividends and franking credits is that although they are not largely sought by day or short term traders they shouldn't be dismissed as they can be and are very useful to traders/investors with different objectives and risk profiles to you.

I hope this clarifies my "school of thought".

cheers

bullmarket

Thanks bullmarket I can now both see and understand your veiw point.

Just as a side thought 25% use if funds to target capital gain could yield far more than your 8.7% and can be structured with minimal risk.

Food for thought.
I know its not your style.

tech/a said:

Still, I'm gonna miss some of those dividend deposits!!!

Well they will be replaced by others will they not?

But I'm sure you mean that they were nice dividends!

Click to expand...

Yes, but instead of a yield of about 7% I will instead in some cases be getting less than 3% so all up I will definitely experience a drop in income.

Bullmarket has expressed his philosophy very well and there is a lot to be said for it, especially in retirement. My aim is to focus on growth until I reach retirement age, at which time I'll be looking for at least some of the portfolio to include such high yield stocks as Bullmarket has described.

Another factor is that some people just don't get all that much fun out of trading stocks - what activity they engage in on the stockmarket is merely what is necessary to generate sufficient income to live on. And if one's portfolio is focused on blue chips with a high yield, then although the capital gain may not be as much as on some speculative stocks, it is mostly steady and reliable and allows the investor to do what they enjoy more.

Julia

tech/a said:

So then if nothing goes wrong the hedge is lost?

How long would you need to hold the stock?

You want to be careful Tree I may even buy your course!!
If you keep posting meaty stuff!

Click to expand...

a hedge ensures nothing can go wrong. like any insurance it costs a little.

the stock only needs to be held overnight.

money tree said:

This is a typically ignorant view. You dont need losses to get a large cheque from the ATO every year. Remember that franking credits are a tax credit issued at 30%. For those below this tax rate or those with super accounts, franking credits are an unexplored gold mine. For those above or at the 30% tax rate, there is still money to be made easily. My course explains these strategies.

Click to expand...

Let's see. I break even on trading but claim some deductions and reduce my overall tax to zero including tax on income from my job. So maybe I've saved 10 - 15K as a result of trading.

Or I make a decent success of trading and make 100K profit and pay $48,500 tax on that. I'm $51.5K better off as a result of trading.

You decide but IMO it's making profits in the first place which is the greatest priority. Not saying that you shouldn't reduce tax, but it's not the first priority IMO.

Smurf. I agree.

If you're worrying about the tax your paying then your not making enough so you dont have to worry about the tax your paying.

Minimise sure but make it your prime objective above capital gain---regressive thinking--

(General comment)

yield vs cap gains:

Where are the capital growth objectives in Monopoly? There are none! Why? Because capital growth is not the main reason for property investment. Sure it’s a nice bonus. There is an old investor’s cliche that goes: “never ever sell property”. If that is true, why worry about capital gains? You have to sell to realise the gain, which defeats the purpose of investing in the first place. The goal for any investor should be financial independence. This means investments that return regular payments to cover living expenses. Sure you could sell, but then you would have to invest the money somewhere else, as inflation will erode a lump sum. Then you are stepping backwards because the taxman has taken his slice.

When you buy for yield, your investment is cashflow positive from day one. Any capital gains are a bonus. When yields are high, capital growth follows naturally. Investors will pay higher prices when returns are better. When you buy for capital growth, yield does not follow naturally. In order for yield to improve, prices would have to drop! In fact, depending where you buy in the cycle, you could buy when yields are low (meaning you have a cashflow negative return) and you receive no capital growth for several years. Some ‘investment’ that is!

Amateur investors chase capital growth. It’s just like people who buy a lottery ticket. They spend small money on a near-certain loss, in an attempt to chase a large win. If you buy property in the CBD, capital growth is not guaranteed, but a cashflow loss is guaranteed. This is taking a certain, regular loss now, in the hope of a large, possible gain later. Sounds like gambling to me! Investing is about certainties, not gambles. Monopoly teaches us to invest our money before it runs out. When interest rates rise, yield investors are insulated, but capital growth investors are not. They sink deeper and deeper as rates rise, their cashflow leaking like a sieve. Yield investors ride out the storm, able to pay each and every payment on time, with no stress. Ask any investment mogul, investing is all about yield not capital growth. Let the amateurs chase the capital growth with the rest of the crowd. Smart investors demand a positive return from day one.

Hi money tree

I can see where you are coming from in your previous post and I generally agree with most of it.

But let me put forward my view on a few of your points I don't fully agree with.

1) "You have to sell to realise the gain, which defeats the purpose of investing in the first place."

Maybe I'm being picky but I disagree with the above because you can still 'realise' the capital gain without selling the property by using the increased equity as security for a loan to fund additional investments elsewhere. The pros and cons of this strategy I won't go into here now.

2) "Amateur investors chase capital growth."

I'm not sure what you are getting at here since 'professional' investors (or even unprofessional investors )who negative gear a property are buying with capital growth as their #1 priority. Negative gearing means your expenses like interest payments etc are greater than the income (like rent) the investment yields and so the investor is making a loss each year and hence has to rely on the capital growth of his/her investment being at least equal to the nett annual loss just to break even. A negatively geared investor makes his profit from the capital growth of the investment eventually being greater than the losses.

I think you'll be hard pressed to find even a positively geared investor, especially in property, who is not also chasing at least average capital growth from his investment....eg...if after say 5 or whatever years in a +ve geared investment the total return was just say about 5% yield gross (from rent or whatever) and no capital growth, then the investor should be pretty disappointed imo as you can get at least 5%pa for cash deposits at any of the online only banks nowadays.

3) "Smart investors demand a positive return from day one."

Not sure what you're getting at here as the above surely depends on whether an investment is +ve or -ve geared. In the case of -ve geared investments, the 'positive return' you refer to above has to also include a capital growth which I interpret from your post that you don't see as important, but just a nice bonus if it occurs.

Basically the point I'm trying to make from all the above is that I don't agree with you in that yield is the only consideration without any capital growth when evaluating potential returns from an investment. When I evaluate say a potential stock purchase, one of my criteria is that the potential total annual return (share price growth + divs based on forcast EPS and DPS and a fair PER) has to be at least 10% pa for the next 2 years. From what I read residential property yields, at least, are nowhere near 10% atm. In fact they are closer to 3-4% GROSS atm. And so I would be hard pressed to buy an investment property, solely with yield in mind and no capital growth as you seem to suggest, and still get my required 10%pa return.

Finally I'm starting to think this thread is starting to drift away from the intentions of the original thread starter.

cheers

bullmarket

I'm interested in BOTH approaches. Both short term trading and a longer term yield strategy. I can see the point in both of them but a loss IS a loss whether you sell the asset which has lost value or hold on to it. It's still a loss.

If I buy shares in XYZ which pays a 5% dividend and the shares drop by 50% then the bottom line is that I've lost half of the capital I invested in that stock. True, I'm still getting dividends (though that's suspect long term given the large drop in the share price - something's up) but it will take fully 10 years to get back to break even. It'll be unlikely to match cash in the bank in any realistic time frame. That I didn't "crystalise" the loss is meaningless. It's a loss. The money is gone and I can't get it back unless the asset rises in value.

IMO those arguing about a loss not being a loss until the asset is sold, that you never have losses if you don't sell and so on are usually the holder of some asset they bought at the top and didn't sell in time to avoid a big loss. Nothing personal, just an observation having heard too many people tell me that the price of some asset now is "below market value". Absolute nonsense. Whatever it's going for now IS market value by definition. It may have a different value yesterday or tomorrow, but it's a contradiction in terms to buy anything on an open market "below market value". Below your perception of its value maybe, but not below market value.

It would be like arguing that machinery doesn't lose any value until the day it's sold or scrapped. In reality it's wearing out from day one in a broadly linear manner depending on hours of operation. It's losing value every hour that it operates just like a car's fuel tank is dropping in level with every kilometre you travel regardless of how often you actually refill it. A loss is a loss.