Retirees Seeking Dividend Growth

[Muschu]

Pick any random non-investment forum and have a look at their "off topic" section for anything about investing. You'll find one consistent recommendation - index funds.

It seems that everyone from mechanics to hairdressers is, to the extent they're investing in anything at all, piling into this one. Take a look at your superannuation and where it's really invested - you'll find a pretty big chunk is simply tracking various stock market indexes.

Sounds awfully like a bubble to me particularly in the context of overseas markets (USA especially). Easy money - just buy the index and never sell. What could go wrong?

Oh wait, central banks are in the process of taking away the punch bowl.....

I'm learning, for me [not necessarily others] that LICs [and perhaps VAS] may have a bigger argument than I had realised.

For example a significant part of our SMSF was in CBA, also held by ARG and AFI for example. When the bank SP got smashed ARG and AFI barely blinked.....

So my current considerations are around holding some individual stocks but allocating a greater proportion to LICs - and they are not all clones of one another.

Thanks austini and VH.

 

[luutzu]

Pick any random non-investment forum and have a look at their "off topic" section for anything about investing. You'll find one consistent recommendation - index funds.

It seems that everyone from mechanics to hairdressers is, to the extent they're investing in anything at all, piling into this one. Take a look at your superannuation and where it's really invested - you'll find a pretty big chunk is simply tracking various stock market indexes.

Sounds awfully like a bubble to me particularly in the context of overseas markets (USA especially). Easy money - just buy the index and never sell. What could go wrong?

Oh wait, central banks are in the process of taking away the punch bowl.....

An index fund, I guess, is "easy" money in that an investor just buy and hang on for the ride. But that's the aim though - to get one's capital access to the financial market and "grow with (the economy)" as Buffett say.

I think it's a very sensible advise for those that have no interest, or not enough knowledge/experience yet, to study individual companies to invest in.

That's, of course, not to say that the Index/market won't fall. Just the passive investor is expose to the market and so will have to go along.

To pick a managed fund of some sort... I know I would feel comfortable unless I know what's behind their individual assets/company holdings. And if I can or have the time to study each of those, I might as well pick my own individual stock and save on the fees.

Outside of an index, maybe do what VC recommends and buy Berkshire Hathaway. It might actually be worth a lot more soon after the great man kick the bucket and the empire breaks up into various principalities. Not that I wish him ill of course... ey, he does talk about being run over by the bus alright.

 

[austini]

I'm learning, for me [not necessarily others] that LICs [and perhaps VAS] may have a bigger argument than I had realised.

For example a significant part of our SMSF was in CBA, also held by ARG and AFI for example. When the bank SP got smashed ARG and AFI barely blinked.....

So my current considerations are around holding some individual stocks but allocating a greater proportion to LICs - and they are not all clones of one another.

Thanks austini and VH.

I'm not an index fanatic like the Boglehead fraternity but index product can be useful at times. As you said CBA and TLS are major holdings in the older LICs and the index. In reality these older LICs are really somewhat of an index proxy nowadays. So CBA and TLS get hammered resulting in a decent correction in the index. But alas the damn LICs didn't barely change or rediculously they actually went up in price. This is where owning an index ETF such as VAS can be useful. You are guaranteed that the likes of VAS will closely follow the index allowing you to take FULL advantage of a market correction.

A simple rule some use is: when the major older LICs are trading at a noticeable premium to NTA then buy the index ETF, otherwise buy the LICs.

As discussed elsewhere this is all discussed here in the attached basic LIC GUIDE I put together:

 

[Muschu]

....

"... I think it's a very sensible advise for those that have no interest, or not enough knowledge/experience yet, to study individual companies to invest in......."

Rather a "knowing", generalist and paternalistic comment perhaps? NO interest = Zero interest.

Advice or advise? Could there not be more knowledgeable or experienced investors that choose an alternate path?

 

[austini]

Rather a "knowing", generalist and paternalistic comment perhaps? NO interest = Zero interest.

Advice or advise? Could there not be more knowledgeable or experienced investors that choose an alternate path?

I gave up analysing direct stocks years ago. The portfolio once consisted of around 30 to 40 direct stocks with a additional core of LICs. There are only a few direct stocks remaining, the rest is mostly LICs and a couple of ETFs.

I enjoy reading about investing but have better things to do in retirement than analysing companies especially when I can own index ETFs and LICs Managing a portfolio for a tiny fee of around 15 basis points. And I like to keep it simple so that my wife who has little interest in such things can easily manage the portfolio if I'm no longer around.

It's all about having a simple and close to set and forget generous dividend income oriented portfolio for us in retirement.

 

[luutzu]

Rather a "knowing", generalist and paternalistic comment perhaps? NO interest = Zero interest.

Advice or advise? Could there not be more knowledgeable or experienced investors that choose an alternate path?

I must have a talent for insulting people or something.

Anyway, you asked for opinions, I gave it. Quoting and otherwise stealing liberally from smarter people's observation.

I'm sure there are alternative paths to what Buffett recommend. Just that if an investor don't know, or don't care to know, the individual stocks within that listed investment holdings... they better know the stock picker pretty well to entrust their money to them. Just common sense I thought.

I mean, how else would anyone decide the worth of a fund?

Anyway, I too have better things to do.

 

[Value Collector]

Pick any random non-investment forum and have a look at their "off topic" section for anything about investing. You'll find one consistent recommendation - index funds.

It seems that everyone from mechanics to hairdressers is, to the extent they're investing in anything at all, piling into this one. Take a look at your superannuation and where it's really invested - you'll find a pretty big chunk is simply tracking various stock market indexes.

Sounds awfully like a bubble to me particularly in the context of overseas markets (USA especially). Easy money - just buy the index and never sell. What could go wrong?

Oh wait, central banks are in the process of taking away the punch bowl.....

When it comes to investing you only have three options.

1, spend the time to learn the trade, and then more time to apply the trade to put your money to work, in the hope all your effort results in you beating the market average return

2, pay someone else to do the above for you, in the hope they can beat the market average return consistently, by enough that their fees are covered while still deliverying you an above average return.

3, buy an index, and get the guaranteed market average return.

If some one isn't prepared to become an investor, in my opinion the index is the best option.

There are a few rules though.

1, dollar cost average your funds in over time, regardless of the ups and down eg. Don't put more in because it's going up and don't stop putting funds in because it's gone down.

2, don't trade or try and time the market, you aren't in that game, you are in the business of owning a broad cross section of the economy, your a business owner, not a trader.

Buffett resently won a 10 year bet, where he showed the average hedge fund didn't beat the market, the fees are just to big of a drain.

 

[Value Collector]

Thought I'd pop over from Property chat. Forgot I was a member here. Muschu will know who I am.

In relation to BRK vs ASX LICs you may find this of interest:
https://cuffelinks.com.au/lics-vs-berkshire-imputation/

I actually think they cherry picked that data there, they picked a high point from which to measure berkshires performance,

In the 12 months prior to the date they chose Berkshire had doubled in value, and was due for a period of consolidation.

 

[austini]

I actually think they cherry picked that data there, they picked a high point from which to measure berkshires performance,

In the 12 months prior to the date they chose Berkshire had doubled in value, and was due for a period of consolidation.

You may well be correct. I'll check with Peter Thornhill again but from memory I think he had Gluskie from WHF create the charts and that was the only accurate data they had on hand.

But still it makes for an interesting comparison given that most consider these old LICs boring and hardly likely to even come anywhere near the performance of one of the greatest companies in the world.

The thing with BRK that even Buffer I think has stated is that the larger the company gets the harder it is to outperform and the talent he is competing against is of a dramatically higher standard than earlier on. So perhaps the last 20 years is more representative of what to expect from BRK going forward.

As a retiree I favour dividend paying assets especially in the tax free Super pension environment. But BRK is an outstanding investment for someone who is wanting to delay tax until retirement. Hence an internal compounding company like BRK is ideal for this. No cash dividend equals no tax until one starts converting capital to income by selling shares in the company.

I only consider myself an amateur investor so bear that in mind with any of my comments.

 

[Muschu]

I must have a talent for insulting people or something.................................
Anyway, I too have better things to do.

Or judging and assuming.

 

[luutzu]

Or judging and assuming.

Free advice [advise?]... when someone take their time to answer you, it's a bit rude to slap them mate. Even if they're someone who need a good slapping, you shouldn't do it because others who might want to help answer you wouldn't want to risk it.

Was that preachy? So in addition to blah blah, I'm also blah blah.

Good luck.

 

[Muschu]

Free advice [advise?]... when someone take their time to answer you, it's a bit rude to slap them mate. Even if they're someone who need a good slapping, you shouldn't do it because others who might want to help answer you wouldn't want to risk it.

Was that preachy? So in addition to blah blah, I'm also blah blah.

Good luck.

To clarify: I don't think you were "insulting".
I do consider that LICs can suit people of interest, knowledge and experience - austini being one.

 

[Value Collector]

As a retiree I favour dividend paying assets especially in the tax free Super pension environment. But BRK is an outstanding investment for someone who is wanting to delay tax until retirement.

Remember a stock doesn't have to be a dividend payer to be a good "Income" stock. look at Berkshire Hathaway, it hasn't paid a dividend in over 50 years, but has funded thousands of retirement accounts.

If you want a 6% dividend, just sell 6% of your shares each year, you want a 10% dividend, just sell 10% etc etc

If a company has good ways of investing retained earnings, and can turn $1 of retained earnings into $2 of capital gain, it's silly for it to pay out the $1 as a dividend, you are better off receiving no dividend and just selling some of your shares each year.

Take Berkshire as an example, for years its grown at a rate faster than 10%, so you could have sold 10% of your shares every year for 50 years, and still grown your wealth, living off capital doesn't mean you will run out of funds.

 

[Value Collector]

This will be of interest to those interested in the index vs hedge fund debate.

Its 12 mins long, but its very interesting, I recommend grabbing a coffee (or maybe a coke) and watching it.

 

[Muschu]

Thanks VH.

I may be misinterpreting but I just had a look at GLL which has 75% of its funds in Berkshire. It's certainly done well since 2012 when it was 55c.... But before that seems flat.

Haven't watched your video yet but will after I go for a walk.

Still trying to absorb all this info - which I do appreciate.

 

[austini]

Remember a stock doesn't have to be a dividend payer to be a good "Income" stock. look at Berkshire Hathaway, it hasn't paid a dividend in over 50 years, but has funded thousands of retirement accounts.

If you want a 6% dividend, just sell 6% of your shares each year, you want a 10% dividend, just sell 10% etc etc

If a company has good ways of investing retained earnings, and can turn $1 of retained earnings into $2 of capital gain, it's silly for it to pay out the $1 as a dividend, you are better off receiving no dividend and just selling some of your shares each year.

Take Berkshire as an example, for years its grown at a rate faster than 10%, so you could have sold 10% of your shares every year for 50 years, and still grown your wealth, living off capital doesn't mean you will run out of funds.

Yes I'm fully aware of the live off capital vs dividend argument. For over thirty years I've seen this debated so many times I generally avoid the topic nowadays. But one particular piece of history has always stuck in my mind. Unless you're prepared to load up on longer term bonds then given a Great Depression scenario where sharemarket capital value was down 90% it gets pretty scary if needing to convert capital to income. Dividends on the other hand were down much less at 50% and from memory recovered noticeably quicker.

Whether it's Bogle, Bernstein or numerous others I think most tend to suggest that the safest path to drawing on income in retirement is from the natural yield of the portfolio. Very few companies unfortunately allocate capital as well as Buffet. Only problem is of course it requires a lot of capital to generate sufficient dividend income which can delay getting to retirement. And the other issue is that it often requires a high allocation to equities which can be a huge challenge psychologically to many investors during market crashes.

But really it just depends on the nature of each individual and their level of wealth as to which approach is the best fit. Fortunately we're in a position where even in a Great Depression scenario we would still live quite well.

This is probably why there never seems to be a winner in the never ending living off capital vs dividend debate. It depends on so factors, financially and psychologically, for a given investor that there is no right or wrong answer.

Hopefully I'm not coming across as being argumentative. I'm newer here and don't want to come across the wrong way.

 

[Value Collector]

Yes I'm fully aware of the live off capital vs dividend argument. For over thirty years I've seen this debated so many times I generally avoid the topic nowadays. But one particular piece of history has always stuck in my mind. Unless you're prepared to load up on longer term bonds then given a Great Depression scenario where sharemarket capital value was down 90% it gets pretty scary if needing to convert capital to income. Dividends on the other hand were down much less at 50% and from memory recovered noticeably quicker.

Whether it's Bogle, Bernstein or numerous others I think most tend to suggest that the safest path to drawing on income in retirement is from the natural yield of the portfolio. Very few companies unfortunately allocate capital as well as Buffet. Only problem is of course it requires a lot of capital to generate sufficient dividend income which can delay getting to retirement. And the other issue is that it often requires a high allocation to equities which can be a huge challenge psychologically to many investors during market crashes.

But really it just depends on the nature of each individual and their level of wealth as to which approach is the best fit. Fortunately we're in a position where even in a Great Depression scenario we would still live quite well.

This is probably why there never seems to be a winner in the never ending living off capital vs dividend debate. It depends on so factors, financially and psychologically, for a given investor that there is no right or wrong answer.

Hopefully I'm not coming across as being argumentative. I'm newer here and don't want to come across the wrong way.

I don't think it has to be a choice of either, you can do both.

e.g. have a portfolio of some companies that pay out a high ratio of earnings as dividends, while also not avoiding some companies that pay a smaller pay out ratio, but where larger capital gains are expected.

You can shield your self from market volatility, but holding a years wages as cash, during a big down turn, this cash pool will still get topped up a bit by dividends, so you might not have to make any sales for 18months.

Also, Big down turns normally come after big up ticks, so big gains made on sales during the big up tick offset the poor returns on the sales made during the down turn

Not mention that in my portfolio the companies that I have bought because of their growth prospects have since become my biggest dividend earners, while also seeing significant capital gains.

two of them paying more than 25% dividend based on my entry price.

 

[austini]

I don't think it has to be a choice of either, you can do both.

e.g. have a portfolio of some companies that pay out a high ratio of earnings as dividends, while also not avoiding some companies that pay a smaller pay out ratio, but where larger capital gains are expected.

You can shield your self from market volatility, but holding a years wages as cash, during a big down turn, this cash pool will still get topped up a bit by dividends, so you might not have to make any sales for 18months.

Also, Big down turns normally come after big up ticks, so big gains made on sales during the big up tick offset the poor returns on the sales made during the down turn

Not mention that in my portfolio the companies that I have bought because of their growth prospects have since become my biggest dividend earners, while also seeing significant capital gains.

two of them paying more than 25% dividend based on my entry price.

All valid comments thanks.

Nowadays as a retiree I only invest in LICs mostly and a couple of ETFs. To lazy and have different priorities nowadays rather than spending my time analysing company reports etc. But I do hold some growth oriented LICs focused outside the ASX top 20 / 50. Dividend payers for higher yield now are fine but lower yielding dividend growers are what generally offer the most reward over the medium / long term. I aim to hold funds that provide both.

I'm quite conservative so hold a noticeably higher cash buffer than one year's living expenses. I also allow for a worst case (Great Depression) dividend scenario where overall it could be cut by 50% and take time to recover.

As for boom times rather than sell I just tend to reduce / stop buying, accumulate cash then average in when the inevitable period of gloom eventuates. Been through a few crashes over my lifetime, very much the contrarian. What's that quote of Buffet: be fearful when others are greedy and greedy when others are fearful.

 

[Sir Burr]

I don't think it has to be a choice of either, you can do both.

Yes. A bunch of franked dividends and a simple long term system.

Not difficult to track, number of trades are low.
Cut out middleman (LIC management).
Possibly better capital gains compared to LICs.
Protect capital in downturns.

 

[Value Hunter]

At the end of the day I tend not to worry about dividends per say. I just pick companies that I think are undervalued and meet my criteria. Some have high dividend payout ratios, while others have low dividend payout ratios (and low dividend yields). I think this is the approach people should take.

If you do this in the Australian stock market almost by default you will end up with a reasonable dividend stream over time. The nature of our market and our tax system means that most decent sized companies that are profitable will pay a dividend anyway (even though in some cases they should not). The U.S. market is a different story. Lots of profitable, high growth companies there prefer share buybacks, reinvestment or acquisitions over paying dividends.