Investing for income

[craft]

Not really Mr B
A Buy & Hold investor using the State Street ASX-200 ETF (STW) has a total return of -1.96% (incl. divs) since May 2006, an annualized return of -0.348%.
Radge - Jan 2012.V

What makes you assume a buy and hold investor would want to just mimic the index? If they did they could just buy an ETF and never look at this or any other investing site again.

Most investors who are looking at things from an income investing approach would be discerning on what stock they bought and at what price they paid.

Just had my SMSF accounts finalised last week, 23.4% for the 2010/11 FY. My TradeSim backtesting says that I should be getting just over 28% if I took every trade.

Hit and run and give back the minimum is the only way to get results, takes time and work but if you are not prepared for that then you may as well just hand it over to someone else to look after, its buy and hold regardless of who is doing it and in a good year you may get double digit results.

Just my

Wrong! That is NOT the only way to approach the market – it may be a legitimate way but it is not the ONLY WAY. I prefer stock selection based on a value investing approach and it also works just fine. I have also had my SMSF accounts finalised – this year’s return was 64.48%, last year was 44.06%. (Happy to submit the accounts to a moderator for verification)

I have found in the market its best not to dismiss anything out of hand and it is of little use to go looking for confirming evidence of pre-conceived ideas, which is what your post in this thread seemed to be doing.

Learning from each other rather than proclaiming our approach as the ONLY way and everything else as misguided seems a more productive approach.

I think that what those who do invest for income would like to Mr Burns to know, is NOT that it doesn't work as you have been implying. but that it can't be achieved without research, skill and market volatility(which has size of capital implications)

 

[McLovin]

Honestly, I'm beginning to question the value of these fora. Sorry if i seem to be picking on your but be sensible, the original poster did not post "How can I make $250,000 into $1,000,000 in a few years without taking too much risk" did they? They asked for any pointers from members as to solid income stocks.

It's actually possible to have income generating stocks that display strong capital growth. Low CAPEX intensity companies generally spin off large amounts of cash even as they grow.

You just need to be prepared that in some years you could see the value of your portfolio shrink and have the stomach to ride it out. Good companies don't generally go bad overnight. If you bought in at a fair price then you should come out ahead.

 

[tinhat]

It's actually possible to have income generating stocks that display strong capital growth. Low CAPEX intensity companies generally spin off large amounts of cash even as they grow.

You just need to be prepared that in some years you could see the value of your portfolio shrink and have the stomach to ride it out. Good companies don't generally go bad overnight. If you bought in at a fair price then you should come out ahead.

I'm not disputing that. Perhaps you should tell that to those who have posted here arguing the opposite.

 

[tinhat]

That's fine if you have $1 million, you would never go from say $250000 to $1 million with that strategy.
Once you get there then yes, no drama living off it.

How to build it up to there is the issue that I am sure most of us are concerned with at the moment, I am anyway.

OK, well I just read the article linked to in the post you replied to in your quote above. You claim that "you would never go from say $250000 to $1 million with that strategy". Well, taking the author at face value (that they earn a 15% return made up of 7% dividend with franking credits and 8% capital growth). If we take this rate of return and apply it to a starting investment of $250,000 and compound annually it over ten years we get a final value of ... wait for it ... $1,011,388.43

That sort of maths is pretty easy. Any serious investor should be capable of that. Can we have some sensible conversation on this forum?

 

[McLovin]

I'm not disputing that. Perhaps you should tell that to those who have posted here arguing the opposite.

Sorry, it wasn't directed specifically at you. More of a general statement.

The other nice thing about holding for long periods is not having to pay tax on unrealised capital gains.

 

[tinhat]

...

These are my stats and majority of my money are in these

These stocks delivered me real yield increase, or stay the same or decline at the time I buy them up to now

CAB (same dividend)
RFG (increase dividend)
CCP (increase dividend)
HVN under $2.0 (this half decrease dividend)
NVT (Increase dividend)
CPU (same dividend)
TGA (increase dividend)
QBE (decrease dividend)
TLS under $3.00 (same dividend)
CUP (increase dividend)
WDC around 7.50 (about the same)
CCV (Increase dividend)

Speculative JIN (increase dividend) XRF (same dividend)

I expect the following will continue to perform well into future years with rising earnings and dividend in future years....

CAB,NVT,CPU,TGA,CCP,CCV,RFG.

spec like JIN earning and dividend should be extra-ordinary higher should
things fall into place like a US contract selling lottery.

...

Thank you for being so frank in explaining your income portfolio. The following stocks are those which I consider to be inside my "income portfolio" in that these are the stocks I am looking at holding for income over capital gain.

ANZ
BHP
CBA
CSL
GUD
ILU
MGX
OZL
RCG
TGA
TLS
TSM
WBC
WES
WOW

Looking at your portfolio, I did hold NVT at one stage and am happy with the price I sold at last year.

I also held CCA up until last year and am not so sure I did the right thing in selling them in hindsight. I also sold MTU last year and wish I held on to them.

MGX - I made a mistake holding onto this one. I would be happy to be out of this stock.

OZL despite all the dramas has been a good dividend payer although I should have got out of this when it was around $16 ($1.60 pre-consolidation) in hindsight. Long term prospects don't look great for OZL - will try and exit if copper prices recover. I'm more bullish about PNA (no dividend though).

GUD - I'm a bit worried about the growth prospects for this company too.

I'll look into some of the other stocks people have mentioned here too.

 

[Bill M]

Anyone have any ideas on Index funds ? how have they gone over the past couple of years.
In line with the all ords I guess ?

Hello MrBurns, I invest in index funds. They are not for everyone but for me it is an easy way to get exposure to a broad range of stocks at very low cost. The main ones are STW and VAS, they simply track the ASX 200 or the ASX 300. Their gross dividends are around that 5% mark and have been pretty much the same over the last few years. I don't invest much in these two as I need a bit more income than that. I started a thread a couple of Months ago about the All Ords going no where for 7 years, basically if you invested in these 2 the result would have been similar.

My favourite ETF is SYI and I have a reasonable holding in it and I add to it whenever the market take a bit of a dive. SYI is State Street Global Advisors high dividend yield fund. I have held these over a year. My capital is down 6% at this time, sounds bad I know but it has produced 8% gross income returns for me. They claim on their website that at 31/12/2011 that their indicative dividend yield - gross is 9.35%. I don't know how they come to that figure but when I work it out for myself it comes to 8% gross at just over the $22 mark.

I Like the way it invests in dividend paying stocks only. There is a strict selection criteria and set of rules and those that don't make the grade don't get in. As a long term dividend income investor I like this ETF and will continue to hold it and buy more on any dips. The fund pays dividends quarterly and 8% gross in a down turn isn't to be sneezed at.

Buying this ETF is only one of the ways I get the income I need and when everything is crashing and cheap like when the All Ords hit 3800 recently then I find buying this ETF very effective. Here is a link to the facts sheet and there is much more on their website. In particular click on the broker basket and see what stocks are in this ETF, cheers. Link:http://www.spdr.com.au/etf/fund/ref_doc/Factsheet_SYI.pdf

 

[Trembling Hand]

I thought it was a great article and hard to fault the authors logic and numbers... there is clearly a divide between the market participants who are comfortable with holding shares thru price gyrations in both directions and those who are not.

Yeah the numbers looked good, logic looks OK. But do value investors never get it wrong? How do they deal with it when they do?

Just wondering about the risk side of it. Like a frequent trader stating they made 50% last year doing XYZ. What happens when XYZ stops working? will they survive?

 

[Muschu]

I like the way most posters to this forum apppreciate the fact that investment strategy is very much an individual strategy based upon a range of factors. Some posters may perhaps be a little less tolerant of others' views. Surely there is no one "right" way.
I see no problem in "controlled" (choose your own definition of that) income investing.
For example, in terms of some stocks mentioned above, I bought into TLS when the uptrend began. I also sold all my NVT when visa and exchange rates made it clear that the company has some issues at this time. I have also displayed some poor judgement of course.
I read, with interest, the stocks that some posters have been good enough to nominate.
SC: Your approach is interesting and clearly works for you. Yet the stocks you mention appear to be of very low liquidity and I wonder whether you see that as an issue?
My own approach is that we are presently 55% in cash; 35% in ff high dividend stocks and the rest in lower cap uptrending stocks.
Regards
Rick (SMSF retiree)

 

[tinhat]

Another one to add to the list is AAD - Ardent Leisure Group.

 

[waimate01]

Here is a link to someone who is doing it for his SMSF - investing for income.

http://www.superguide.com.au/compar...ibutor-how-1-million-can-last-longer-than-you


"sit out any downturn, so falling share prices have no effect on my investment strategy and anyway my income depends on company profits......"

Hmmmm, don't lke this bit.

Great link. The interesting bit is that both opposing points of view can simultaneously be correct.

If you have a small asset base and wish to get ahead, then by all means trade your socks off. If you're good at it, you'll buy and sell exactly the right thing at exactly the right time and you'll make lots of money.

But if you've already made lots of money (more probably by working hard and living sensibly, or by running your own small business (not saying you can't do it through trading, just that vastly more people do it through these two techniques)), the the "orchard" approach works great.

What this author is pointing out is that it's entirely possible to build a Financial Perpetual Motion machine. Every million dollars you put to one side and invest in your "orchard" of income stocks will generate $50,000 per year FOR EVER. Inflation immune. For ever. For the whole of your like, and the whole of your kids lives, and their kids beyond them, until one of them manages to stuff it up by cutting down the trees, or until our financial system unravels.

So just figure out how much spending power per year (in today's dollars) you want for yourself and all of your descendants, divide by 50000, and that's how many millions of dollars you need in your orchard.

Where do the millions come from? That's left as an exercise for the reader

 

[blue0810]

Some info for dividend:
http://www.sharedividends.com.au
http://www.dividend.com

 

[MrBurns]

Some great links and info here, thanks to everyone, I wont keep thanking all of you as it becomes boring, I'll just keep trying to learn something.
What I guess I really need is a good honest broker, I knew of a guy who had a seat on the Exchange once who gave it away because he couldn't stand lying to his clients any more, I know they have to get you into something to make their fees but I'm at the stage where I cant afford to lose any more so whoever I use needs to be damn good, or I'll just leave it in TD's.

 

[craft]

Yeah the numbers looked good, logic looks OK. But do value investors never get it wrong? How do they deal with it when they do?

Just wondering about the risk side of it. Like a frequent trader stating they made 50% last year doing XYZ. What happens when XYZ stops working? will they survive?

Hi Trembling Hand. You ask a very important question. So you will have to excuse the length of this post as I try to answer it as risk management is intergrated into the whole of the approach.

Of course Value Investors get it wrong. It is impossible to know the future, you can make reasonable assumptions but perfection is impossible. Good research can improve your accuracy but you will never be infallible, so managing when you are wrong is core to success.

The first protection I have in place is some level of diversification – fixed between a minimum of 12 and a maximum of 18 stocks to help with the specific risk of being wrong about a business.

The next protection is in the fact that the most I can lose is 100% of my allocation to any 1 stock, however holding excellent businesses (that remain excellent) for long periods results in Multi-baggers. That’s asymmetrical risk to reward.

The research effort feeds both into the accuracy and my average win to average loss ratio producing a high expectancy and its associated benefits to risk of ruin.

I ignore market risk. To do that requires a temperament and a capital base to ignore whatever the market wants to do to the price of business that I am invested in. All the market is to me is an opportunity. If I think a business has a discounted cash flow of say $50 and I can buy it for $25 then I may take that opportunity. If I hold accompany that I think has a discounted cash flow of $50 dollars and I can sell it for $100 then I may take that opportunity. The gain from exploiting mispricing – over the long term tends to be swamped by the actual performance of the company for this reason the quality of a company is the most important thing to me.

There is ramification in ignoring market prices (beyond being opportunistic) in my decision process, that is that when I’m wrong the market can be way in front of me and marked the price way down in anticipation of something that I didn’t factor in. Then it’s just a case of – cut the loss as soon as I know the business is not of the quality I thought (I do this without fail no matter the size of the loss. I don’t have a bottom draw). Incidentally this can go both ways – sometimes I’m out of a deteriorating business whilst the share price is still rising. At any rate my maximum loss is 100% my average win to average loss is underpinned on asymmetrical risk/reward. I phase into new businesses getting to know them as I go and have never got anywhere near loosing 100% despite investing in some retrospective shockers.

How do I know that excellent business will have their performance rewarded over the long term – I don’t but I bank, what will be an excellent yield if the market price is not bid up.

How do I know my business analyses remains adequate – I track my yield on allocated capital – I have a system stop at this level to stop what I’m doing if the yield (defined as EPS not DPS) trajectory deviates to far from historical performance? Whilst yield to market is volatile, yield to allocated capital is much smoother.

The biggest advantage to me of investing is how much capital I am comfortable applying to it and its low transactional cost. The biggest drag on performance is the limit to opportunities – because the holding period is long you don’t get many opportunities, as I have said I think the performance arising from excellent companies dwarfs mispricing opportunism – I am more tilted towards business quality then some who seem to concentrate on buying anything so long as it is cheap, unless there is a catalyst for repricing I only want the best companies. If I’m in investing predominantly on mispricing I will exit as soon as the catalyst idea has failed regardless of the outcome.

If you see ways of improving my risk management from your trader’s perspective (keeping in mind I don’t want to trade as a way of reducing risk – I want passive income) I would love to hear your ideas.

Cheers

 

[Ves]

I always try to learn from my past mistakes and improve on my process I don't blame anyone for a stock collapse....whether it's fraud, crazy CEO, regulations...that is a risk I am willing to accept as a market participant.

No failed pick stock or market collapse will deter me from invest my money in the market...I spent less than I earned so I never run out of money
but life was never like that until I discover that dead simple secrets

Going forward I expect to make more mistakes but I expect it to be reasonably low because my process already rules out many stocks that I never ever put money toward such as airlines, steel makers or capital intensive business, low margin commodity business...Complex web of financial stocks I don't understand like Macquarie Bank, I also pick some good stocks and that should even thing out and deliver reasonable returns.

Hi ROE,

Thanks for your thoughts. Like craft, I too use a similar approach to you. Although, I am much more a beginner. Trying to learn from reading Buffet's letters, will read Lynch soon. I have read Greenwald and a few other value investing books (and competitive advantage analysis).

I like stocks like WOW, IVC, IRE etc... but it trades outside the price I'm willing to pay so I stay put and that goes on my list to check out when panic set in ....during market collapse should these stocks trade at price I'm willing to pay I'm in

I have all of these on my list too. Agree that they are not "cheap" enough yet. IRE may get much cheaper in the next few years if the financial industry keeps coming under reform, and more planners are made redundant due to lack of market interest. and their earnings take a temporary hit.

Also looking at CSL, COH (still think it is too expensive) and maybe something like MMS.

Have positions in TGA and NVT which you seem to follow. Also DTL and ASZ.

I hold the big banks (except NAB), which is probably a bit of a contrarian play compared to most value investors on this site.

I'm currently chasing CKF at this price ... a bit high risk but I reckon the pay off should be better than sweat ..stock like these I keep a hawk eye on performance...
I have some figure and ideas in my head, once these things don't work out in 2-3 years then I'm out at a loss otherwise It be will another stock bought cheap

I have followed your posts on this with interest. I helped your cause on Friday night when we bought some KFC from one of their Brisbane franchises. This business, providing that it doesn't go on a debt fuelled acquisition binge and get into cash flow difficulties has a fairly good chance of achieving at least growth in-line with inflation over the long-term I believe. Although, I am always wary that the franchisor, not the franchisee seems to have the better returns.

Thanks again

 

[McLovin]

I have followed your posts on this with interest. I helped your cause on Friday night when we bought some KFC from one of their Brisbane franchises. This business, providing that it doesn't go on a debt fuelled acquisition binge and get into cash flow difficulties has a fairly good chance of achieving at least growth in-line with inflation over the long-term I believe. Although, I am always wary that the franchisor, not the franchisee seems to have the better returns.

Thanks again

I had an interesting chat on Friday afternoon with a franchise business broker. He told me that there are only three franchises that make money, KFC, Macca's and Subway the rest you are just buying yourself a job (his words not mine). Gloria Jeans are apparently bombs (most of the leases are way to expensive) and can be bought in the secondary market for 25-30% of their new franchise value. He also thought RFG had paid too much for Michel's and were struggling to find people willing to pay the franchise fees. That could mean a writedown on goodwill coming up. You can't beat good scuttlebutt.

The problem with CKF is that management have shot their own credibility, badly.

 

[pixel]

Some info for dividend:
http://www.sharedividends.com.au
http://www.dividend.com

Good sites, Blue; thanks for sharing.
But before you rush and buy the history spreadsheets, see if 2 years AllOrds history might be enough for you: the text file below is current as of today and has been saved as a tab-delimited spreadsheet.
Excel will open it OK. (I tried)

View attachment DivHist.txt

 

[So_Cynical]

Do value investors never get it wrong? How do they deal with it when they do?

I'm not a "value" investor but i would imagine that they would be in a very similar situation to me, as in they are faced with a decision to buy more or take a substantial loss or do nothing...personally, about 80% of the time i buy more if funds are available to do so.

I have a mantra of:

"Don't enter a stock unless you are prepared to buy more if it falls for no good reason"

Just wondering about the risk side of it. Like a frequent trader stating they made 50% last year doing XYZ. What happens when XYZ stops working? will they survive?

I am surviving because i have no debt and i am not dependant on my trading/dividend income...currently my strategy has stalled, this time last year i was completing a trade every 3 weeks or so now its more like 3 months or so.

------------------------------

I like the way most posters to this forum apppreciate the fact that investment strategy is very much an individual strategy based upon a range of factors. Some posters may perhaps be a little less tolerant of others' views. Surely there is no one "right" way.
I read, with interest, the stocks that some posters have been good enough to nominate.
SC: Your approach is interesting and clearly works for you. Yet the stocks you mention appear to be of very low liquidity and I wonder whether you see that as an issue?

Hey Rick

Low liquidity would only be an issue if i was a forced or desperate seller, which i am not...the low liquidity stocks can be frustrating but because yield is one of the key ingredients of my strategy i figured i had to get involved with a select few of these micro cap, high yield, low liquidity stocks.

GLB - Globe ~ has been fun recently...there has been a cheeky buyer that usually has the bid (first in the buy queue) with a very cheap offer, ill bid a half a cent above him (still cheap as) and my order will sit there for weeks unfilled, then he (assuming its him) will go a half cent above me and his order will sit there for a week unfilled and then ill trump him again by a half cent...and so on and so on.

-----------------------------

What this author is pointing out is that it's entirely possible to build a Financial Perpetual Motion machine. Every million dollars you put to one side and invest in your "orchard" of income stocks will generate $50,000 per year FOR EVER. Inflation immune. For ever. For the whole of your like, and the whole of your kids lives, and their kids beyond them.

Your Financial Perpetual Motion machine will need maintenance... I've had a bit to do with growth things over the years and can tell you any Orchard or Crop will need attention and good decision making to give ongoing excellent yields...but yeah i really liked the orchard bit too.

 

[blue0810]

Good sites, Blue; thanks for sharing.
But before you rush and buy the history spreadsheets, see if 2 years AllOrds history might be enough for you: the text file below is current as of today and has been saved as a tab-delimited spreadsheet.
Excel will open it OK. (I tried)

View attachment 46296

Thanks for the file, BTW with market stuff I never rush

 

[Garpal Gumnut]

I've been loading up on WOW. It is always a yin and yang between Woolies and Coles.

My tuckermeter, as evidenced by Mrs Gumnut's shopping dockets have been swinging back to Woolies, after some 9 months being Coles.

WOW has a respectable divi and if the XAO moves up this year there may be capital appreciation.

gg