Comparing Different Shares Based on Fundamentals

[SharonK]

Hi Julia,

Please excuse my ignorance but I've just realised something that I'm looking at wrong, I was including capital growth as well in my 10%. I'm am very much a novice at this and the more I seem to read the more daunting it all is.

I suppose my way of thinking is that you should earn more than having the money in the bank, which currently I'm getting 5.55% on then surely given the risk factor of investing in shares you should be able to make 10% otherwise it wouldn't be worth while would it? I would be looking at managed funds as well, I've currently got money in Colonial First State Imputation Fund and it has performed extrememly well over the last 9 mths returning over 20% with distributions and increase in unit values. Not sure how to convert an annualised % to reflect that its been earnt over 9mths.

cheers for now
Sharon

 

[bullmarket]

Hi Sharon

The 6% yield I used in my earlier example was just an arbitrary number I used to determine how much investment capital someone would need after they had put together an annual budget as I described earlier. So if your investments yielded a higher percentage then yes, you would require less capital investment to generate your required income.

For example, I see the 4 major banks are yielding 4-5% atm, listed property trusts (LPT's) are averaging ~7% yield atm, DJS is yielding ~5% and FGL ~3.8% and so it shouldn't be too difficult to put together a portfolio that averages ~6% yield or even higher.

cheers

bullmarket

 

[Julia]

Hi Sharon

The 6% yield I used in my earlier example was just an arbitrary number I used to determine how much investment capital someone would need after they had put together an annual budget as I described earlier. So if your investments yielded a higher percentage then yes, you would require less capital investment to generate your required income.

For example, I see the 4 major banks are yielding 4-5% atm, listed property trusts (LPT's) are averaging ~7% yield atm, DJS is yielding ~5% and FGL ~3.8% and so it shouldn't be too difficult to put together a portfolio that averages ~6% yield or even higher.

cheers

bullmarket

bullmarket:

I think Sharon's point was that she felt she should expect a higher return than 6% for the relative risk of investing in shares. She quite rightly suggests that she could easily achieve 6% by putting the $450,000 in a term deposit, so if 6% is all she can expect then why would she take the risk of investing in the share market?

I'm sure you can address this point for her.
Julia

 

[happytrader]

Hi Bullmarket

Just looking at your comments about the 4 banks yield of 4.5 percent. I assume that you are only talking about the dividend yield and haven't mentioned the capital growth component. WBC has experienced capital growth of approximately 20% since October 2005. Low risk and not a bad return in anyones books after all your big 4 banks historically have recovered ground quickly in some pretty rough downturns as I have mentioned in my previous posts on this thread. The other important point is that while they are in a downturn the dividend yield cushions this temporary capital loss which is useful to know if you are a long term investor.

Cheers
Happytrader

 

[SharonK]

Hi Julia,

you've summed up my thoughts in a nutshell, I am looking forward to seeing a response!

cheers
Sharon

 

[bullmarket]

Hi Sharon, Julia, Happytrader

Hi Julia,

you've summed up my thoughts in a nutshell, I am looking forward to seeing a response!

cheers
Sharon

I can see what you guys are saying and I apologise for any confusion

For me, yield means the percentage return solely from the income an investment generates - being rent, interest, dividends etc - and excludes any capital growth/loss.

So in hindsight, my original example describing one way to calculate how much capital someone will need to retire on would have been better worded if I referred to a 6% return (which includes both capital growth/loss and income) rather than a 6% yield.

So as per my earlier example if you determine that you need only say 6% return during retirement then how and where you invest to get that return and possibly even higher boils down to someone's lifestyle during retirement, objectives and how much risk they want to take with their capital....ie....how well someone wants to sleep at night

For me nowadays income is my first priority and capital growth second. My investments in LPT's and energy/infrastructure trusts is yielding ~8.3% atm and the resultant income has a comfortable buffer above the minimum required for my and mrs bullmarket's annual requirements. At this stage of my life I don't want to be sitting infront of a pc watching flickering numbers and analysing charts every day.....but each to their own on that one

Happytrader: :iagree: with you and as I mentioned above how someone invests to get their required return boils down to their lifestyle, objectives and risk profile.

Anyway, I hope this clears up any confusion I may have caused.

cheers

bullmarket

 

[ducati916]

Sharon

You are entering into the area of valuations.
Viz. at what value (price) can I purchase the shares, that skew the risk of holding shares (credit risk) against the potential reward of capital gains.

Dividend yield is not the metric that should be employed.
The reason being that unless the dividend is actually paid, the dividend yield falls to zero.

Therefore, the metric that needs to be evaluated is really credit risk, or the ability of the business to maintain a margin of safety in operating results to prevent the necessitation of a liquidation.

The required margin will approximate a 33% discount on liquidating value.
If this can be found, then the investor can claim a margin of safety over principal invested. The likelihood of finding such a bargain in the current bull market are pretty much zero.

Therefore, a much larger, and slightly different metric will need to be employed. I suggest as a value, a minimum of 50%, and preferrably 100%+ discount from true capitalized intrinsic value.

This should, provide an adequate margin of safety for principal on a diversified basis, with a superior return on capital, in addition to dividends paid out, which will aggregate circa 7%

jog on
d998

 

[Bobby]

Sharon

You are entering into the area of valuations.
Viz. at what value (price) can I purchase the shares, that skew the risk of holding shares (credit risk) against the potential reward of capital gains.

Dividend yield is not the metric that should be employed.
The reason being that unless the dividend is actually paid, the dividend yield falls to zero.

Therefore, the metric that needs to be evaluated is really credit risk, or the ability of the business to maintain a margin of safety in operating results to prevent the necessitation of a liquidation.

The required margin will approximate a 33% discount on liquidating value.
If this can be found, then the investor can claim a margin of safety over principal invested. The likelihood of finding such a bargain in the current bull market are pretty much zero.

Therefore, a much larger, and slightly different metric will need to be employed. I suggest as a value, a minimum of 50%, and preferrably 100%+ discount from true capitalized intrinsic value.

This should, provide an adequate margin of safety for principal on a diversified basis, with a superior return on capital, in addition to dividends paid out, which will aggregate circa 7%

jog on
d998

Hey ?.
Who would like to translate this so Sharon can understand & most of the rest of us : ?.

Bob.

 

[SharonK]

Thanks Bob for saying something, I wasn't game thought I was really stupid as it went right over my head and out the window!

cheers
Sharon

 

[Julia]

Duc

I am similarly mystified. Perhaps that is your intention?

Julia