Aussie "Dividend Aristocrats" and How to Find Them

Pty Ltd

 

Hi mate, 10 years starts is pre GFC, near the highs of 07, so measurement time period is important to understand. Run the measure over longer term or shorter term and the numbers are different for TSR (total shareholder return)....ie. 5yr @ 11%, 10yr @ 5%, 15 yr @ 8.6%, this is the all ords accumulation index. Very long run is c.10%.

Rear view is interesting, but I guess the question is do you seeing properties close to CBDs continuing to grow at 10% from here? (no right or wrong on this, the future is undecided and we each spend our money accordingly......)

Anyway, the most important thing is to find your own way and be comfortable with it.

 

I'm happy to comment just to give people another reference point. The takeaway is to dig down beneath the headline numbers that get thrown around and find the real numbers....post tax and all costs. Important no matter what you invest in. Sometimes you will find that your assumptions are a little off and what you thought was the case, isn't. All good and healthy practice.

 

Love those threads. Anyone know how he is travelling now?

 

Thanks @austing

So does that mean capital growth from properties provided the large capital base required to buy lot's of LIC and bit of courage and luck buying during GFC helped turbo boost the portfolio once things recovered? Would that be correct?

How do you advise younger generation to go about investing in LIC to generate passive income to retire on? Do you believe dollar cost averaging regularly for 15-20yrs or do you advise keep saving and buy when market corrects and provides plenty of opportunity. The problem with latter approach is to be able to have patience to wait and secondly to have courage to buy big when market provides opportunity. There is also risk of missing out by trying to wait and wait thinking prices will still drop.

I personally think both approaches have their pros and cons.

Just doing some back of the envelop sums assuming conservative 5% gross yield from investment portfolio looking to generate $100K in passive income would require atleast $2m portfolio. Let's just say you also want your PPOR paid off. and picking random figure of $600K for PPOR. Finally, 2 years worth of living expenses at $100K each year so another $200K

That brings total assets with no debt of around $2.8million.

Let's assume you get total returns of 10% from LIC over long term. Assuming (Lot's of assumptions I know ) you re-invest your dividends and keep investing an additional $60K per annum ($5K per month) starting at $60K initial investment you can build portfolio of $2.1 million portfolio in 15year time. I didn't factor in tax to be paid on your dividend income which would probably slow you down in reach that goal of $2 million portfolio.

Can you find a faster way to build $2 million portfolio in under 15year time without the obvious factors of either saving more money per month or using higher return figure? If you can generate good capital growth from property investments that can speed things up dramatically. I am sure anyone who invested in Sydney property over the last 5 years will attest to it.

Cheers,
Oracle.

 

Good post Oracle. Company structure will take care of the tax leeching compounding (unless low income earners).

The obvious answer is more income...I don't think it realistic for an average wage earner with a couple of blighters and spouse to expect to retire very well in their mid 30s to early 40s unless they make a lot of sacrifices (or live somewhere real cheap) or they apply a lot of leverage and it works for them. That can go either way obviously. Recent history (Sydney as mentioned) suggests it's a no brainer, but the question is could you replicate that performance starting from now? Obviously hindsight bias is a consideration.

That said, for average income earners i can understand the attraction to resi property as it provides the opportunity to dramatically change their situation, be it for the positive or negative. It's a bet on capital growth, just make sure you get it right.... It's all in the stock selection and timing....and macro themes!

 

Hi Falcon - I've actually got a post of yours bookmarked somewhere we you say that a "discretionary trust with a corporate beneficiary" helps with minimising tax paid for dividend investing. I understand its a bit off topic and maybe a bit wonky, but a) have I got the basics right? and b) would you be able to explain briefly why this helps with tax?

Alternatively, if I walk into my accountants office and tell them I want one of those, will they understand what I'm talking about?

Cheers

 

If i can recall @austing posted a thread/comment earlier in property chat lic thread in regards to him speaking of 2 ppl getting incomes from dividends of around 280k and 410k per annum from memory.

Cant recall any info on regards to use of structures, if equity was used etc etc, but that would be a fair portfolio!!! and both ppl were on average wages i think too.

Goes to show the value of starting early and giving compound interest and dividend reinvestment a chance to do their thing!

 

See High income and investment structures

 

Sorry, got visitors here for awhile so haven't got a lot of time to post. And another lot arriving on Tuesday.

Those large retirement incomes @pippen mentioned were due to starting early and not retiring until 65. Caught up with one of them awhile back and what I had forgotten was that there were a couple of inherentances from deceased parents / relative. Not huge sums but thrown into the mix it certainly boosted the compounding effect. As for all the specific detail and structuring etc like most people they usually don't disclose all their financial affairs. But both worked for Govt (federal, state) so have very nice defined benefit indexed pensions in addition to their private investments. This is included in those retirement incomes.

In their's and our case the number one thing we all did was pay off the PPOR ASAP. Then with the mortgage out of the way and redirecting the money into shares it's astounding what the compounding effect on the dividends from shares / LICs can be over a 35 - 40 year period.

Another chance to throw up one of my favourite charts. This one shows a lump sum of $100K invested admittably but other than dividends reinvested there was no further savings added. And importantly franking credits aren't included which would cover a decent amount of tax payable. It illustrates the staggering impact of compounding from dividend paying shares:


In the case of industrial shares it is close to $10.3 Mil!

My case was unusual. I was earning good money from age 14 playing drums in bands with guys 9 years older than me. Sober drummers were hard to find so the other band members would drive me to the gigs.

Started work at 17 and still did gigs a number of nights per week. Although single there were effectively two incomes. My Father a very frugal man and keen saver encouraged me to buy a block of land when I was nearly 18. Paid it off by age 20 then built a PPOR on it. The PPOR was in the burbs and nothing flash. Married at 22 and with the additional income had PPOR paid off by 26. Always tried to get by with a single car also second hand.

With PPOR paid off invested in Managed funds such as Perpetual Industrial Shares and a few unlisted property funds. A consult with Daryl Dixon introduced me to the world of LICs.

Our life suffered quite a bit of financial disruption too long winded to detail here. So I'll try to detail the important things.

The most important piece of advice I ever received was from Daryl Dixon. We went to him to ask advice on buying an investment property. He advised me to avoid property, focus on our careers and keep buying old LICs when at a discount to market and via SPPs, Rights Issues etc. Only use leverage when extreme opportunities arose eg market crash.

Ironically I got off track when I decided to learn more about investing and later on started frequenting forums. This led me astray and got me into stupid things like trading. So be warned that the pursuit of knowledge and listening to others on forums can be a good or a bad thing. I would have been better served if I just stuck with what Dixon advised and never learnt another thing about shares!

Note that Daryl Dixon himself probably near 70 when the following interview was done pretty much followed his own simple, boring advice all his life:

Investment property was a forced situation as we had to sell our shares and couldn't invest in them for a number of years due to my wife's employment. During this time we purchased IPs. Some did well others not. So there was no fantastic end result capital gains wise. The main benefit was forced savings trying to reduce debt which I hated.

The rest I've detailed here previously. After my wife left her job that prevented us from buying shares the IPs were progressively sold to minimise CGT and the proceeds ploughed into shares / LICs. When the GFC subsequently hit and the bear market set in around 2011/12 from memory that's when I borrowed all I could to buy shares / LICs. Debt was paid back ASAP.

So if I had to summarise it would be to progressively buy LICs at a discount, take advantage of SPPs, Rights Issues etc and mostly use debt during periods of extraordinary buying opportunities like GFC etc.

Continuing to buy LICs over a lifetime at a discount on market and through capital raisings gives one the ability to noticeably outperform the index and hence speed up the compounding process.

Add in the smart use of structures such as Disc Trusts, bucket companies and SMSF etc to reduce tax to further turbocharge the compounding effect.

This has been typed up quickly as I need to get back to our visitors but I hope it makes some sense.

PS: I'm a conservative person so the above is a conservative approach. For those willing to take a riskier approach the following from @keithj might be of interest:

How I got from just a PPOR to multi millionaire retiree in 5 years using only OPM.

The keithj Interview

The Interview #11

But it pays to remember that high leverage can work both ways. If it goes wrong it can be a horrible situation.

 

Makes it sound difficult when you word it like that - Saving $60k a year plus mortgage repayments on a $600,000 house on a 15 year term to have it cleared - tough ask on most salaries.

Another quick and dirty calculation - start with $60,000 again and contribute $2,000 pm and end up with your $2m portfolio in 21 years (with the same level of growth). Making one third of the contributions adds just over one third to your time to retire - compounding at its best.

Very important to have realistic expectations, it is my feeling a lot of people expect a little bit of cash tucked away to have a life changing effect in no time at all.

 

Brilliant post @austing ....one of the more valuable I've seen

 

Yep, Terry's post covers the concept but if you go and see any accountant who handles the tax affairs of business owners, high net worth types and the like they will be able to cover it off for you.

Essentially, Trust is first ownership structure, allowing income to be streamed to beneficiaries (lowest tax position first), then providing you don't have a need for further cash out (ie. you want to pay off mortgage or something) you stream the remaining income to the pty ltd. If franking credits are received, the pty ltd will use them to cover its income tax. Obviously with a large asset base the pty ltd ends up being the main vehicle. That Pty Ltd's shares would be held by another trust for streaming from there. Pty Ltd's don't get cgt discount, but their tax rate is lower, (soon 27.5%). So, not much difference between discounted cgt to top bracket individual beneficiary. The pty ltd is good for holding stuff like LICs with FF divs - no top up tax, and that you don't intend to ever sell. The first trust can hold compounders or growthy stuff that pay nil or low divs that you may wish to sell and receive discounted cgt.

Absolutely not licensed to give any advice, and just the thoughts of a punter!

 

Beauty the wife's taken the visitors into town.

I meant to point out Daryl Dixon's choice of LICs. You're probably thinking why would a man with his level of financial expertise mainly invest in inferior looking LICs including CIN, DUI, AUI and not AFI / ARG or direct shares like most. Well most of the older LICs perform similar to each other. The reason was that the less popular older LICs were often trading at a much greater discount including their capital raisings. If year after year, decade after decade one continues to buy these LICs at sizable discounts (discounted income streams = higher yield) it can turbocharge the compounding effect.

One might suggest that given I was earning a second income through the band the story's not useful to others. But I had a number of mates doing similar things including newspaper deliveries etc in addition to their jobs. Others worked at Servo's after hours. This sort of thing with accepting a humble first PPOR in the burbs, a second hand car gets the PPOR debt free ASAP. Then with the PPOR debt free and the cash then directed into shares from an early age as possible astounding results can be achieved. Then if one chooses they can focus on improving your career (I was an office clerk but went to UNI at 27 and got into IT) to increase their disposable income.

This won't get you get you to a multi-millionaire in a few years but it also won't have you bankrupt if things go wrong.

Finally anything's possible. My wife came from as poor a family as you could get. My parents were far from wealthy. We both had to put ourselves through university. There were no inherentances. But we managed to retire young and enjoy a very comfortable retirement. Don't ever let despondency about ones finances get the better of you. With the right goals, motivation and perserverence most of us are capable of achieving more than we ever imagined possible.

Struth I'm starting to sound like some Personal Improvement donkey.

PS: yes I'm also just a punter unliscenced to give advice.

 

Darryl Dixons comments are a corker really. LIC's like AUI are essentially a pass through vehicle for its dividend income received........its long term portfolio (NTA) performance is almost a proxy for the ASX accumulation index. They don't add value, but putting aside buying when the market is "cheap" you can manufacture value in the buying (at levels below long run NTA discount average) and in rights/SPP. I guess you could always leave some limit buy orders in on these illiquid LICs in the hope of jagging some if there is a large holder who dumps stock (deceased estate or something). BKI as an example had a short period of trading at -20% a number of years ago

 

Very funny!!!

 

Yes, exactly.

When you think about it at times you can get a proxy (or better) for the index at a discount, only paying a fee of 0.10% with AUI for example and the LIC company structure enabling 100% franking. And DRP's, SPP's, Rights Issues are generally at a discount. Do this over the long term then the outperformance can be quite significant.

Plus LICs weren't as popular back then so the discounts were quite substantial at times and more frequent.

Yes the illiquidity of the smaller old LICs throws up some bargains now and then. It's a common strategy to leave a resting limit order against these LICs. Every now and then one gets lucky and snags some.

The less liquid LICs tend to fall harder than the likes of ARG / AFI during market crashes offering great opportunity also.

As boring as the old LICs are there's plenty of opportunity to add value with an understanding of NTA discount / premium behaviour and taking advantage of it accordingly.

 

Yes I agree with that. It requires patience and a long term outlook, you will need to wait for the opportunity to come to you, part of an overall strategy.

 

Yep value investing LIC style.

 

Great posts @austing and @The Falcon !