High Yielding Shares Again

redwing said:

Hi Oracle

What would be the retirement strategy and how would this fare in a GFC style event?

Not throwing stones, just interested in the strategy

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Oracle will answer better than me but my thoughts ;

It just ensuring that you have an adequate cash/bond buffer to fund your living expenses without needing to sell stock holdings. From memory, dividends across the ASX200 where down about 30%, but the large LIC's dividends were rock solid.

And on another note, as for the hope and pray sleep deprivation technique - buy and hold types embrace volatility as an opportunity to buy more. I don't think any group of investors would sleep more soundly than the Bogleheads. If a global broad based, low cost index + cash buffer, buy and hold approach sends you broke, then the game is up and its time to start digging a bunker in your back yard. I just hold some direct shares for interest, but in the long run holdings will be heavily towards LIC and ETF with a significant portion ex Oz and unhedged.

Aaron Sice said:

If I was buying and holding as part of a hope and pray strategy like some of these posts, I wouldn't get any sleep.

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everyone has to buy, everyone has to hold, some of us just hold longer than others.

I stopped praying years ago and hope is a pig.

Oscar said:

everyone has to buy, everyone has to hold, some of us just hold longer than others.

I stopped praying years ago and hope is a pig.

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Good response. Buy and hold is fine... just some of the share seleections in this thread raise eyebrows. People buy loss making companies either because they dont check/know or because they think they'll come good.

Buy shares in the same method you'd buy a business. Buying 100% vs 0.01% should have the same criteria.

pierso said:

Good thread.
Will be selling up paid out PPOR and downsizing to one about 25% of current value shortly. Will be looking to place a good portion of the freed up cash into shares gradually over a period of approx 3-5 years.
What I'm interested in from my research so far:

Focus will be on shares with yield from dividends that grow each year and faster than inflation together with expected capital price appreciation. Especially interested in what seems to be termed as Dividend Growth Investing in the US as espoused by the authors David Fish, David Crosetti, Chuck Carnevale (especially), David Van Knapp, Bob Wells, Chowder, Dividend Mantra, Regarded Solutions, Tradevestor, Dividends4Life, Sure Dividend, Tim McAleen Jnr etc on www.seekingalpha.com

There are a number of shares that have grown their dividends each and every year (some for more than 50 years), Dividend Champions (25+ years), Contenders (10+), Challengers (5+) they can be found at www.dripinvesting.org
They include well known global companies such as:
Coca Cola, Pepsi, Wal-Mart, Walgreens, Clorox (think Glad wrap in Aus), McDonalds, General Mills, IBM, Kimberley Clark, Procter & Gamble. 3M, ExxonMobil, Chevron, Altria (Ex Phillip Morris) etc.

I'm interested in international shares from a mix of countries for a number of reasons:
I may wish to retire (12 years or so) to another country , so don't wish to be negatively affected by any single currency. I have seen what the sustained high dollar and suffering pound have meant for my parents who have immigrated from the UK recently.
There are lots of great companies based in different countries, not just Aus or US.
I find Aus companies limiting; we don't seem to have many dividend champions.
Once an Aus company gets to a certain size it seems to be gobbled up by an overseas company.
Apparently Aus companies account for only 2% of the world market.

Here in Aus I will enjoy the higher dividends and the franking benefits and a good portion will be placed into the good old fashioned low fee LICs (Argo,AFIC, AUI., DUI MIR etc).

In UK interested in investment trusts such as this one https://www.henderson.com/ukpi/fund/169/the-city-of-london-investment-trust-plc
Low fees, 45+ years of growing dividends and a who's who list of holdings.

Went to a one day talk by Peter Thornhill of www.motivatedmoney.com.au some years ago and got his book of the same title. It has been mentioned here before and I enjoyed/recommend it.

I would be interested to know if anybody can recommend further research materials based on my interests above.

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Good Stuff Pierso....I too follow Tim McAleenan Jr.'s blog and have Peter Thornhill's book Lots of the consumer staples that McAleelan Jr. favours are available via ASX : IXI which is unhedged, from memory all Ishares are unhedged as are the Vanguard ASX listed broad indexes. so will provide you with the currency exposure you want until you have foreign trading accounts established. You can buy US stocks (and other countries) via Commsec but trade costs about $100 and from memory there is some annual fee.

As for additional research material have you seen this? ;

http://www.bogleheads.org/readbooks.htm

The buy and hold strategy - shares is probably similar to what buy and hold property investors do just a different asset class. Basically riding boom/bust cycles. This is slow and steady and my guess is majority hold blue chip stocks. I don't have a problem with this with regards to shares because it will be cash/long term no borrowed funds and I trade property which provides income/capital.

I don't see the point of trading shares unless one has the skills to make money consistently, from what I have read it is very difficult to become a successful share trader and stats prove this.

I only know one person who successfully trades shares full-time, gave up his day job years ago now. I could be wrong but I expect it is far easier to do this with property. I am not comparing the asset classes as there are pro and cons for both, but just throwing it out there for feedback.

Trading vs holding????

Firstly, trading is not investing.

Nothing wrong with that, if that's what people want to do. Good luck to them, I wish them all the best, but it's not investing.

Secondly, you are absolutely correct, re: being difficult to make money trading. I've only ever come across one person in my life who successfully day traded for a living. But that was during the GFC and I haven't spoken to them in a number of years, so who knows?

Mr. Fabulous said:

Firstly, trading is not investing.

Nothing wrong with that, if that's what people want to do. Good luck to them, I wish them all the best, but it's not investing.

Secondly, you are absolutely correct, re: being difficult to make money trading. I've only ever come across one person in my life who successfully day traded for a living. But that was during the GFC and I haven't spoken to them in a number of years, so who knows?

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Why not have Shares to trade and Shares to hold. You can have a cash injection from a trade if wanted or simply hold for a regular additional income stream from dividend payments.

oracle said:

If you are 100% dependent on the income from the sharemarket to fund your living expenses without any buffers in place, when (not if) the eventual downturn happens you need to re-consider your strategy. If you haven't planned for GFC style downturn you are taking a big risk.

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Of course buffers (cash, bonds, working, aged pension etc.) are required regardless of your approach, but that doesn't mean we want to have to use these.

If your investments can sustain you in a relatively passive manner in the ups and downs of the market cycle and more safely and predictably that is better, for me anyway.

And smaller levels of capital along with longevity risk mean greater risk may have to be taken for some.

I think of it as a spectrum, and the wealthier you get (and the more buffers you have) the less important the dividend component may be, and the more appropriate a total return approach may be - if it suits you.

Also a tilt towards dividends and value does not preclude significant capital growth and thus total returns over the long-term, it is just changing the distribution of the total returns more towards favouring dividends and dividend growth first.

Regarding your quoted/linked compound interest post...

The numbers look impressive but it doesn't take into account the sequence of returns experienced, eg. what if in year 41 you experience a GFC-like event?

oracle said:

Paying tax on your investment returns can be treated as investment costs. Hence, the same argument can be made when discussing Cashflow vs Capital Growth investments. If given the choice always invest for Capital Growth due to it's favourable tax treatment by governments. Over long period you will build wealth much faster since you will have more $$ compounding for you whereas Cashflow investor will be giving away big chunk of their investment returns to the tax man. Berkshire Hathaway has never paid a dividend in 50 years (except once) and the results are there for everyone to see. People should read Buffett's latest letter to shareholders where he justifies his decision of not paying dividend and why shareholders are better off than if he paid a dividend.

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Referring to the above in your linked post... sure if Berkshire Hathaway does not pay dividends we can understand this as Buffet is the one allocating capital and the company's long-term rise in share price is evidence of the prudence of this.

But there are plenty more companies out there that don't pay dividends and also unfortunately don't end up providing any long-term capital growth either.

Further, that Buffet's company Berkshire Hathaway itself does not pays its shareholders dividends does not mean it does not invest in companies that generate earnings and pay dividends which it collects (like an ordinary investor collecting dividends from CBA or TLS) or re-invests back into that company (like an ordinary investor using dividend re-investment plans) or invests into other companies (like an ordinary investor uses to buy new shares in NAB or WOW)... right?

Berkshire Hathaway receives a lot of dividends, and I don't think Buffet would be too fussed about the total return as determined by the share price of the day if earnings and dividends in the companies it is invested in are growing?

You make a good point about the tax treatment of dividends as opposed to capital gains/unrealised capital growth, but this can be minimised by investing in low tax structures like super/SMSFs and discretionary trusts with more than 1 beneficiary, by purchasing stocks that pay franking credits, and by offsetting dividend income with borrowing costs from conservative gearing strategies whilst in the accumulation phase.

Anyway, if you have decided that this total return focus is for you, and have chosen the passive route with index funds/ETFs, how do you determine which fund or combination of funds is going to give you the best total return?

How do you approach asset allocation and will you rebalance and if so how often?

TPI said:

How do you approach asset allocation and will you rebalance and if so how often?

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How about something like VEU, VTS, VAF and VAS

VAF percentage as age in fixed interest and re-balancing quarterly with new cash injections

I'd also re-balance should there be a 15% variation (either way)

redwing said:

Hi Oracle

What would be the retirement strategy and how would this fare in a GFC style event?

Not throwing stones, just interested in the strategy

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Hi Redwing,

It is a very important question. I myself have thought about it on several occasions and have yet to come to some conclusion.

So far the bare minimum I think I need before I even consider pulling the plug from day time job is to make sure income from index/ETF funds are atleast 25% higher than my target retirement income goal. So for eg. if my target is $100K I would aim to have atleast $125K coming from dividends. Each year the additional $25K keeps getting re-invested unless ofcourse dividends are cut.

Secondly, as a more solid buffer I would have atleast 2 years worth of living expenses in cash in a bank offset account.

Based on the above you could handle a 50% reduction in dividends for 5 years without affecting your $100K income you need ( I haven't factored in CPI but would be worthwhile to do so). See calculations below

Initial income: $125K

Cash buffers: $200K (2 years @ $100K / year)

Stock market crash happens and dividends are reduced by 50%.

New dividend: $62.5K
Shortfall: $37.5K

$200K cash buffer can fund the shortfall for approx 5 years before you are forced to sell any assets/shares.

The only issue I see that you need to be worried about is as soon as dividends recover you need to re-build that cash buffer for future stockmarket crashes.

Again, I stress this strategy is still not final and I may change as I see fit. Most likely will make it even more conservative. The bottom line is if and when I pull the plug from full time work going back to work is not an option. So things have to be rock solid.

Hope that helps.

Cheers,
Oracle.

great post oracle.

Another "buffer" for me would include the superannuation payout that I would be entitled to by age 60. I do not factor this in to any early retirement decisions but like to keep it as a very conservative and substantial buffer. The only funds that go into this are my employer contributions so to me it's like a free ride.

Your 2 year cash buffer should be seen as a minimum IMO. Many people don't factor enough of this in. I also like your comment on 25% higher than required yield - I think it would give immense piece of mind to know that your overall portfolio is still being invested into and growing, seven while you are "retired".

great stuff...

Also, (and I haven't read through all the posts a second time so I may be off), but regarding a comment made on VHY not having weathered a GFC, the underlying managed fund was established in 2004. Since inception total return has been over 10%, approximately 50/50 growth/yield. I'd say that the underlying fund has weathered the GFC OK and those that stayed invested over the whole time, and dollar cost averaged into it, would have done OK over the last 10 years. I am not saying this is stellar performance, but consistent and steady and conservative and dependable which is what I will need when I pull the plug.

I'm now looking at managed fund / ETF for commercial property exposure (none currently in my portfolio) and thinking to go the indexed vanguard route here as well. I looked at some of the ones mentioned by the OP but I don't like the idea of putting 100K's in *individual* non indexed funds or ETF's. Any comments on this?

TPI said:

Of course buffers (cash, bonds, working, aged pension etc.) are required regardless of your approach, but that doesn't mean we want to have to use these.

If your investments can sustain you in a relatively passive manner in the ups and downs of the market cycle and more safely and predictably that is better, for me anyway.

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The issue I see with trying hard to have that certainty is you lose out on other things. How do you think LIC manage to smooth out dividends for it's shareholders?

1) They keep portion of profits to distribute in future. So you are not getting all the income, and when you are in accumulation stage you want all the income to be re-invested to maximise dollars compounding for you.

2) They use debt to maintain dividends in years when income earned is less. Again nothing wrong with that strategy but point is you are just transferring risk to someone else. Just because LIC are giving you stable income does not mean they are doing it without taking any additional risk. Debt is and can be double edge sword.

3) Some LIC use leverage and deploy small % of portfolio to trading to maximise returns. So higher risk is taken here.

I have invested in the sharemarket buying individual companies for several years have have done OK. But I know how difficult it can be to get everything right to consistently beat the index over the long term.

I just have my doubts whether LIC that provide stable returns are safe long term bets. For me long term is forever....

TPI said:

And smaller levels of capital along with longevity risk mean greater risk may have to be taken for some.

I think of it as a spectrum, and the wealthier you get (and the more buffers you have) the less important the dividend component may be, and the more appropriate a total return approach may be - if it suits you.

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Agree 100%. The only way I know you can get wealthier as fast as possible is if you aim for maximum total returns. Now you know why I keep stressing about this all the time. Get yourself to a position where even if there is a cut in dividends it will hardly affect your living standard.

TPI said:

Also a tilt towards dividends and value does not preclude significant capital growth and thus total returns over the long-term, it is just changing the distribution of the total returns more towards favouring dividends and dividend growth first.

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There are studies done on this but I have yet to see concrete proof established over the long term that clearly demonstrates the above.

TPI said:

Regarding your quoted/linked compound interest post...

The numbers look impressive but it doesn't take into account the sequence of returns experienced, eg. what if in year 41 you experience a GFC-like event?

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Point of that article is both people invested their funds in sharemarket where one was paying 2% commissions to an actively managed fund while the other was paying hardly any due to investing in index fund there by receiving that additional 2% to his/her own total returns. GFC style event in year 41 would have affected both in the same way.

GFC style events are to be expected when you invest in the sharemarket. You just have to plan and be prepared to handle such events. You have 2 options. One is to get someone else to manage it for you for additional management costs (aka LIC or actively managed funds) and hope the fund manager has been prepared for such an event or you can say I will take care of it myself by having buffers and other means. The choice is yours.

TPI said:

Anyway, if you have decided that this total return focus is for you, and have chosen the passive route with index funds/ETFs, how do you determine which fund or combination of funds is going to give you the best total return?

How do you approach asset allocation and will you rebalance and if so how often?

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Currently, only investing in Vanguard ASX 300 ETF. In future will be buying the Vanguard Total US Sharemarket ETF and there is also plan to buy emerging market fund. The end portfolio would look like 50% Australia, 30% US and 20% Emerging market. This may change in future if I change my mind.

Cheers,
Oracle.

oracle said:

Currently, only investing in Vanguard ASX 300 ETF. In future will be buying the Vanguard Total US Sharemarket ETF and there is also plan to buy emerging market fund. The end portfolio would look like 50% Australia, 30% US and 20% Emerging market. This may change in future if I change my mind.

Cheers,
Oracle.

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Hi Oracle

Why are you limiting yourself to such a small market (Australia) currently?

Looking at your other suggested markets would also diversify your holdings and hedge your risk. Looking at the charts there would have been some outperformance of just the ASX300 also

The long term strategy looks good, do you also plan to hold any fixed income for interest and purchasing opportunities?

A safe withdrawal rate in retirement is oft touted at 4% The Trinity Study

Then again, your end figure may need to be higher depending on whether you just live on the dividends/income, a constant dollar amount (adjusted for inflation) or a mixture of dividends/principal, all of which would seem to fluctuate over the years anyway depending on the markets and the eventual end point and whether you aim to sail across the river styx with some gold in your purse or having spent the majority

redwing said:

Hi Oracle
Why are you limiting yourself to such a small market (Australia) currently?

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The reason being since I am using margin loan and investing through Discretionary Family Trust, I need to generate sufficient income so the trust makes a profit and I get to distribute all the franking credits. Australian market seems to offer the best yield of 5% (incl franking credits) and secondly I do not have to worry about currency risk.

But going forward as the portfolio becomes more cashflow positive will definitely be buying international ETFs.

Cheers,
Oracle.

oracle said:

I just have my doubts whether LIC that provide stable returns are safe long term bets. For me long term is forever....

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Most of the Blue chip internally managed LIC outperform the market by a small margin while ETFs underperform their index albeit by a small margin, the likes of AFI and ARG have been listed and paying dividends since the 1930s and 40s.

If your intention is to hold for ever and collect dividends LIC are superior investments more so when the opportunity to purchase below their NTA.

Remember LICs being company structure performance is after they pay tax on realised gains, ETFs being a trust structure performance is not. This has its benifits.
http://www.wamfunds.com.au/WAM/media/WAMMedia/LIC%20Research/LICs-Outperforming-and-Misunderstood---April-2010.pdf?ext=.pdf
Food for thought..

oracle said:

The issue I see with trying hard to have that certainty is you lose out on other things. How do you think LIC manage to smooth out dividends for it's shareholders?

1) They keep portion of profits to distribute in future. So you are not getting all the income, and when you are in accumulation stage you want all the income to be re-invested to maximise dollars compounding for you.

2) They use debt to maintain dividends in years when income earned is less. Again nothing wrong with that strategy but point is you are just transferring risk to someone else. Just because LIC are giving you stable income does not mean they are doing it without taking any additional risk. Debt is and can be double edge sword.

3) Some LIC use leverage and deploy small % of portfolio to trading to maximise returns. So higher risk is taken here.

I have invested in the sharemarket buying individual companies for several years have have done OK. But I know how difficult it can be to get everything right to consistently beat the index over the long term.

I just have my doubts whether LIC that provide stable returns are safe long term bets. For me long term is forever....

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That all sounds fine, though I'm not sure I agree with your overall assessment, but as mentioned to you before I don't invest in LICs anymore anyway so perhaps those that do could comment.

oracle said:

Currently, only investing in Vanguard ASX 300 ETF. In future will be buying the Vanguard Total US Sharemarket ETF and there is also plan to buy emerging market fund. The end portfolio would look like 50% Australia, 30% US and 20% Emerging market. This may change in future if I change my mind.

Cheers,
Oracle.

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If your objective is to achieve the best maximum total return, then I don't think your current asset allocation will necessarily achieve this, but it does gives you a very high chance of achieving the market return of the ASX 300, no better and no worse, which is still pretty good.

equitymate said:

Most of the Blue chip internally managed LIC outperform the market by a small margin while ETFs underperform their index albeit by a small margin, the likes of AFI and ARG have been listed and paying dividends since the 1930s and 40s.

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Have you got any independent research (not research from LIC themselves) to prove the long term returns (20 years+) of LICs have infact been superior to the index itself?

I tried to search myself and best I could find is from AFI website which goes back to early 90s.

I have checked portfolios of few LIC and their top 20 holdings. Most have it heavily tilted towards the big 4 and except BHP hardly much exposure to the resources sector. To me that is a risk. Image if the Big 4 got into some trouble all the LICs would scramble to offload their financial stocks at the same time since they are all overweight that sector.

What if for whatever reason the LIC you invested in starts to lag the index? It could be due to any reason, Change in the fund manager or poor stock selection etc. Are you going to sell your entire portfolio (triggering a CGT) and buy the latest outperforming LIC? What is the backup plan?

Cheers,
Oracle.

oracle said:

I have checked portfolios of few LIC and their top 20 holdings. Most have it heavily tilted towards the big 4 and except BHP hardly much exposure to the resources sector. To me that is a risk. Image if the Big 4 got into some trouble all the LICs would scramble to offload their financial stocks at the same time since they are all overweight that sector.

.

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So has the holdings of your ETF.

The large LICs are an index hug sans specs and property trusts thats where the outperformance comes from.

I will get back to your other points when I get a chance.

oracle said:

$200K cash buffer can fund the shortfall for approx 5 years before you are forced to sell any assets/shares.

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If you take this further I think you have a rock solid foundation without ever touching 200K buffer, this would only comes in a very extreme case.

there is no reason why during GFC or the like your dividend has to drop 25% or 30%

My dividend didnt drop at all during GFC, maybe one or two stocks but then there are other 8-10 stocks dividend is actually increasing or maintain so over all no effect or rising

the reasons companies dropped dividend is due to cash flow issues and heavy gear balance sheet....this ties their hand and or lenders force them to preserve cash...this tend to applied to cynical business

pick companies that has reliable earning stream combine with little debt or no debt it should carry on business as usual....during lean times they can cut cost and since they have little debt so no financial obligations that saving goes straight to your pocket via dividend.

good management may temporary preserve cash to see what in the fog ahead during crisis but it wouldn't be a many years thing, it maybe be 6-12 months.

Having a well picked dozen or two reliable earner with low debt and they all cut dividend by 25% I say is an extremely rare event and I would bet 99.9% of the time it wont happen...it be a mix of some cut, some increase some maintain, or maybe no cut at all to most.

oracle said:

GFC style events are to be expected when you invest in the sharemarket. You just have to plan and be prepared to handle such events. You have 2 options. One is to get someone else to manage it for you for additional management costs (aka LIC or actively managed funds) and hope the fund manager has been prepared for such an event or you can say I will take care of it myself by having buffers and other means. The choice is yours.

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This is why the market scares me especially when trading platforms go down and you can't sell. I don't like either of those options. Oracle, it sounds like you've changed your tune a bit in regards to investing directly? I seem to remember you used to be very active managing a portfolio.