Retirement Stocks 2019

[Belli]

We are of a same mind, I haven't sold anything and am buying more, are you still sticking to the LIC's and ETF's
Or have you decided to punt on some individual stocks, with the current wreckage.

I stick to LICs and ETFs. I don't know anything about individual shares and have zero ability in that regard.

I cannot do any further purchases until VAS and VGS pake a distribution late next month.

I fully expect these distribution levels won't be repeated for quite a while and that also applies to the LICs I hold. I notice SOL will give me some dosh in May so that will be handy.

Done a "What if" assuming an income reduction of 60% and worked out at that level I'll be OK. That takes into account a reduction in the account-based pension as I am sure you know if $1.6m goes to $0.8m so does the amount of minimum draw down. However, there is also a bloody big swag in accumulation phase and if push comes to shove I can take a tax free lump sum (make sure you check your Trust Deed to ensure this is permitted as some Deeds only allow payment of a pension) which I will do if necessary.

Many, many people both retirees and others are going to be seriously hurt financially including those who are primarily invested in property. Have already seen one family near me who is on the edge. Over committed and using home as a credit card for toys and holidays which comes with Keeping up with the Jones'. Both out of work now. I feel they won't survive. When I have seen them they are looking shattered.

Those of us who get through this in a reasonable but not flash position should expect an increase in taxes and other charges. It will have to be done I think and I for one won't be whining about it.

 

[Belli]

Been placing personal spare funds into MIR, WHF, VAS and VGS. Majority of the money went into VGS which puts my international now at around 30%. At that level I'm pretty much where I want my international exposure to be so I'll keep placing any additional money with that allocation in mind.

Yep, dividends will be crunched but I can cope with that. I don't spend much on non-essentials.

 

[Belli]

Bumping this thread to provide an update on income for first half of this FY compared with the previous year. This is relating to personal holdings and cash only not franking.

As I expected, the distribution from VAS was hammered. That from VGS not so much. Both ARG and MLT reduced their dividends while MIR and WHF remained substantially the same. SOL was a slight increase. ALI was a new addition to the holdings.

As there were further purchases during the second half of last FY as well as the first half of this FY those had the impact of mitigating the reduction of dividends and distributions.

There were no sales of any of my holdings.

End result is my cash income actually increased. I have to acknowledge I am more fortunate than many others in that regard.

 

[qldfrog]

Bumping this thread to provide an update on income for first half of this FY compared with the previous year. This is relating to personal holdings and cash only not franking.

As I expected, the distribution from VAS was hammered. That from VGS not so much. Both ARG and MLT reduced their dividends while MIR and WHF remained substantially the same. SOL was a slight increase. ALI was a new addition to the holdings.

As there were further purchases during the second half of last FY as well as the first half of this FY those had the impact of mitigating the reduction of dividends and distributions.

There were no sales of any of my holdings.

End result is my cash income actually increased. I have to acknowledge I am more fortunate than many others in that regard.

May i ask: if happy with your mix, what is it currently in term of percentage?
Sol %
Vgs %
Etc
I am toying with the idea if creating a small passive portfolio for a purpose similar to yours

 

[Belli]

May i ask: if happy with your mix, what is it currently in term of percentage?
Sol %
Vgs %
Etc
I am toying with the idea if creating a small passive portfolio for a purpose similar to yours

Yes, I am. For my purposes and approach, the LICs are my relatively low-cost active management component and the ETFs the passive part. As you know, as companies LICs have a profit reserve which can at times support a dividend, even a reduced one, while ETFs are not in that position.

In the Mirrabooka thread I mentioned it was about 7% of my holdings but I now believe that was overstated. I took the number from a portfolio report for the end of last FY provided to me by the financial firm I use and it seems incorrect. I'll probably take it up with the firm later in the week although it isn't an issue for me really as I'm not overly fussed about such matters. I don't use spreadsheets or investment software. Purged all of that so long ago I've forgotten when. Found it tedious, boring and unnecessary.

At a rough guess, I think my international exposure is somewhere in the vicinity of 30% but given the focus of ALI is international that guess could be out but probably not by much. Or I could be out by a long way. It doesn't matter really.

As for SOL, it isn't a large holding by any means: 2,000 @ $3.51 27 May 2000, 3,000 @ $4.49 28 January 2002 and 2,000 @ $6.08 15 September 2003 which will give you an indication of how absorbingly active I am. It's a steady payer which is what I want but as I've not kept the dividend statements before 2007 (I recently scanned all paper documents I had hanging around to PDF on advice of an accountancy firm) I couldn't tell you what the dividend was initially but $4,200 a year for doing SFA is easy money and comes in handy in my opinion.

Possibly one aspect some may overlook about establishing funds for retirement is their savings rate. Someone who can save 50% of their income should be better off than someone who saves 5% assuming the same level of income during their working life. All depends on the person and their wants as opposed to needs I guess. Many variables are involved in both too.

 

[So_Cynical]

My dividends fell by about 28% ~ I have been selling a little but that would only account for maybe 10% of the total fall, the rest is COVID, i hold 35 stocks with 9 of them paying little or no dividend so held more for growth, no ETFs and only 2 LIC's.

 

[Value Collector]

FMG, SYD are two that I like .

this recommendation from page 1 of this thread would have workout out well, you would be down 25% on SYD (I didn’t see COVID coming, but we will recover), but up 250% on your FMG.

not to mention your FMG will be paying a 25% dividend based on the price at time of recommendation, that would have given your retirement a nice upgrade.

 

[Value Collector]

I dont hold a single bank, BHP, RIO, CSL, FMG, SYD, WES or APA - none of them.

Damn, except for SYD that would have been a pretty decent portfolio, good growth and dividends, the stars in the list more than offset the couple of mediocre ones.

 

[Belli]

So far the income from shares has been pretty ordinary this past year to say the least.

However, over the weekend I did a quick review on where I stand regarding income versus expenses and it isn't bad at all. In regard to income from my personal holdings it has reduced by 5% because of the hammering of distributions of VAS but that has been mitigated due to various buys - including some more VAS. I haven't accounted for ARG, which reported today, or any future income from ALI, SOL, WHF, VAS or VGS. I've calculated my expenses are covered for the rest of this financial year.

With the account-based pension from the SMSF, I have reduced it to 3% of assets (rather than 2.5%). I still have to draw down a remaining portion of the pension.

I consider I've come out of the previous 12 months unscathed compared with others. I cannot complain about my situation.

I think it helps if you can keep calm during the whirl of confusion.

 

[Value Collector]

So far the income from shares has been pretty ordinary this past year to say the least.

Compared to what?

when you factor in franking credits, and the potential to offset inflation it’s hard to find many assets classes that can compete.

 

[Belli]

Compared to what?

when you factor in franking credits, and the potential to offset inflation it’s hard to find many assets classes that can compete.

Compare to the pcp. VAS distributions way down for me.

As to franking, I don't concern my self with those until tax time. They are a tax credit and not part of my cash flow. I like them for sure and in any case with any tax refund which may result, it goes straight back into the market so I don't view them as part of my income. Got by easily without them in previous years as part of my cash spend so I can do so again.

As an aside, it'll be interesting in the future with the tax rates for smaller companies (<$50m turnover) being reduced from 27.5% last FY to 26% this FY and 25% next FY. It's also Treasury's intention the lower rate will eventually apply to all companies.

 

[Value Collector]

Compare to the pcp. VAS distributions way down for me.

As to franking, I don't concern my self with those until tax time. They are a tax credit and not part of my cash flow. I like them for sure and in any case with any tax refund which may result, it goes straight back into the market so I don't view them as part of my income. Got by easily without them in previous years as part of my cash spend so I can do so again.

As an aside, it'll be interesting in the future with the tax rates for smaller companies (<$50m turnover) being reduced from 27.5% last FY to 26% this FY and 25% next FY. It's also Treasury's intention the lower rate will eventually apply to all companies.

The reason you have to think about franking credits when comparing different investments is that a 7% franked dividend is equal to a 10% unfranked dividend, interest or rental return etc.

what I mean by that is, if you earn 10% interest on a bank account the government is going to take 30% of that as tax, reducing your actual income down to 7%.

So for fair comparisons across asset classes, you have to include the franking credits, an easy way to do this is to multiply the franked dividend by 1.43

So a 5% franked dividend x 1.43 = 7.15% actual dividend.

So a competing investment has to earn 7.15% to be equal to a franked dividend of 5%.

So yeah the best way to compare things is to always gross them up to their pretax amount so you can compare apples with apples.

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A reduction in tax rate means franking will be lower but the actual dividend will be higher, so the two will cancel them selves out on an after tax basis.

 

[Belli]

Fair enough but there is nothing which requires me to think the way others do.

And I wouldn't bet a reduction in company taxes automatically means an increase in dividends. It didn't occur last time there was a reduction in company tax.

 

[Belli]

And I wouldn't bet a reduction in company taxes automatically means an increase in dividends. It didn't occur last time there was a reduction in company tax.

Memory been jogged. More recent history. MIR

Dividend paid 10 August 2017. $0.65c (same as previous year) plus $0.04 from specials received. Franking rate 27.5%
Dividend paid 15 February 2018. $0.35c (same as previous year). Franking 27.5%
Dividend paid 13 August 2018. $0.65c plus $0.02c from specials. Franking 27.5%

So I don't rely on franking or, if franking reduced, the cash dividend being increased. The last one really pissed me off though as subsequently the darn Government passed legislation in late August which reverted the franking to 30%. I'd already submitted the personal tax return based on the 27.5% rate. It was a couple of hundred dollars involved but I couldn't be bother stuffing around amending the return. The time and effort involved just wasn't worth doing it.

 

[Value Collector]

Fair enough but there is nothing which requires me to think the way others do.

And I wouldn't bet a reduction in company taxes automatically means an increase in dividends. It didn't occur last time there was a reduction in company tax.

I am not trying to make you "think the way others do", just pointing out that the franking credit is just as important as the actual dividend, if you get a $7 dividend that is franked they add $10 to your taxable income, just the same as if you were paid that $10 in cash, and then they work out how much tax you owe based on that taxable income and then subtract the credit, so even they ATO are grossing up your dividend.

The reason I point this out is that some people compare the dividend yield of shares to other asset classes without taking the franking into consideration, which throws off their calculations by a lot, as I said another asset class would have to be earning 10% to match a 7% franked dividend.

You often here people say silly things like "a rental property can earn 4.5% rent, which beats a 4% dividend". that silly person obviously is making the mistake of not adding back they franking credit and all not deducting the costs which have to come out of that rental return.

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If a company earns $100, they pay $30 in Tax leaving $70 from which they can pay dividends with $30 in franking credit meaning the full $100 will be passed along to you (depending on their payout ratio policy.)

If the Tax rates drop to 27.5%, that $100 will be charged $27.50 tax instead of $30 leaving $72.50 from which they can pay a dividend, and the dividend will come with a $27.50 franking credit, either way it still adds up to $100.

Ofcourse different companies have different pay out policy, but if they were paying out 80% or 50% or any other figure before they tax change they will probably on average continue they same pay out policy.

 

[Belli]

I fully understand what you're saying. I was immersed in aspects of it at one stage of my life.

However, over the years having been involved with shares for more than three decades I've morphed into not really caring about the finer points. Having had to deal with various changes to taxation law and financial aspects, when it happens I adjust accordingly.

Now I am only interested whether the cash income is greater or lesser than previously. As long as my cash income is multiples of my yearly expenses (which it is) the franking aspect is a minor consideration to me. I haven't the faintest idea on what the actual yields may be.

To be honest, I find the share market rather disinteresting and rarely look at anything to do with it apart from buying when I have cash and announcements relating to my holdings. Even the latter is not necessary as they tend to send me an email with relevant links.

 

[Value Collector]

However, over the years having been involved with shares for more than three decades I've morphed into not really caring about the finer points.

Your comment that I replied to was discussing the income from shares, and saying that it was "ordinary this past year" I was just pointing out that it is better than most other comparable asset classes when you factor in the franking credits.

Now I am only interested whether the cash income is greater or lesser than previously. As long as my cash income is multiples of my yearly expenses (which it is) the franking aspect is a minor consideration to me. I haven't the faintest idea on what the actual yields may be.

If your income is multiples of your yearly expenses, why worry about even commenting on the year to year fluctuations in your dividends?

To be honest, I find the share market rather disinteresting and rarely look at anything to do with it apart from buying when I have cash.

When you are deciding to buy you are going to want to take franking credits into consideration other wise how can you weigh up the return on the different options you have, the franking credits make a huge difference.

for example if you earn $100K in unfranked vs Franked dividends here is the after tax difference based on Australian tax rates.

$100,000 of unfranked dividends = $77,034 left in your pocket after Tax ( 22.9% effective tax rate)

$100,000 of Franked dividends = $105,023 left in your pocket after Tax ( 26.5% effective tax rate)


So the guy that gets $100K in franked dividends ends up getting $27,989 more "real dollars" in his hand than the guy that chose the unfranked $100K of income, thats 36% more, if that's trivial to you thats fine, all I am saying is that when comparing different sources of potential income just multiply the franked income by 1.43 so you can compare it to the non franked income, no need to argue against me on that point, its just the facts, some income sources are franked, others like bank interest etc aren't, when comparing the different types of income sources, you have to take franking credits into consideration, other wise you are falling into the trap of thinking $100K of dividends is going to be equal to $100K of interest etc.

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This becomes more important as you earn more, this year I will be getting about $540,000 of franked dividends, if they weren't franked I would owe the ATO $213,667 in tax, reducing my cash in hand from $540,000 to $326,333 after tax, however with the franking credit of $232,200 I only have to hand over $85,957 in Tax which only reduces my cash in hand to $454,043. Thats a $127,710 difference so yeah, franking credits matter.