LIC & LIT Beginner's Guide to Investing in Listed Investment Companies

Doing some Googling, I came across this site - Useful Resources - The Australian Dividend Investor

Has anyone read any of the books -

Books:
These are my dividend specific recommendations:

Keeping Your Dividend Edge – my review here.

The Strategic Dividend Investor – my review here.

The Single Best Investment – my review here.

Spin-off to Pay-off – my review here.

(some great reviews at the links),

and these sites -

How to pick the best investment adviser - SmartCompany

Books - The Passive Investor

Adding to this thread about different resources to build our collective knowledge

If you have comments about the above resources, or others, keen to hear!

 

Why you should consider buying a Listed Investment Company

Older article but good for this thread

 

I was having this discussion with a friend and depends on magnitude of factors.. comfort with level of debt, marginal tax rate, outlook on equity returns, dividend yield, franking levels etc..

so if variable interest rates were 4% and assuming a 38% tax rate, the equivalent before-tax return is 4%/(1-38%) = 6.5%, on a 45% bracket this goes up to 7.3%
at 4.5% it's 7.3% and 8.2% before tax respectively etc. Note that this is risk-free and guaranteed. Looking at dividend flows alone, you would compare that with the fully-franked amount.
So at 4% dividend yield and 100% franking, the fully franked yield is 5.7%, at 4.5% it's 6.4% etc.

On a risk adjusted basis, I would add a few extra % for shares...

Obviously there are prospects for capital gains and losses with shares, but there's also the sleep at night factor with a lower mortgage amount.

I'm not an expert so i'm probably missing other key points..

 

The owner of that site occasionally posts here. His forum name is @OscarBravo.

 

Thanks for the link. Using the same calculation shown in the examples, if you are on a tax rate of 30% (same as corporate tax rate), you get the 7.5% yield. You get higher yield if your tax rate is below 30% as the franking credit helps. However, the yield drop if your tax rate is above 30%. In the example from the article, someone on a 45% tax bracket only gets 5.73% yield.

If I use the ARG example of 4.06% yield, then anyone with tax rate above 30%, would end up with a lower than 4.06% yield. So, I'm not sure how franking credits actually help improve the dividend yield for anyone with tax rate > 30%. Maybe I'm missing something.

 

If I am understanding it correctly you are spot on. Franking credits won't improve the dividend yield for someone on a tax rate > 30%.

There is another way to look at it though. Compare $10k of rent to $10k of fully franked dividends for someone on a tax rate > 30%. For the rental income they pay full tax at their marginal tax rate. For the dividend income they only need to pay tax at a rate which represents the difference between 30% and their marginal tax rate. That's where franking is useful for someone over the 30% tax rate.

 

Great link. Thanks for that.

 

Ok a total noob question here - the ATO website doesn't have a tax rate of 30% for individuals, so everyone would receive either more or less franking credits than the base 30% company rate??? (so would any share provide a full 100% franking credits to someone who pays over the 30% company tax rate, which is anyone earning over $37,000?)

What am i missing??

Tax rates 2016–17
The following rates for 2016–17 apply from 1 July 2016.

0 – $18,200 - Nil

$18,201 – $37,000- 19c for each $1 over $18,200

$37,001 – $87,000 - $3,572 plus 32.5c for each $1 over $37,000

$87,001 – $180,000 - $19,822 plus 37c for each $1 over $87,000

$180,001 and over - $54,232 plus 45c for each $1 over $180,000

The above rates do not include the:

• Medicare levy of 2%
• Temporary Budget Repair Levy; this levy is payable at a rate of 2% for taxable incomes over $180,000

 

Yeah, that's a great way to look at it from a different angle. So, perhaps if the property is positively geared, then there might be a case for shifting some money from offset to shares. That's assuming everything else (CG outlook, etc) are roughly the same.

 

Ha, yes, I don't think anyone is really smack right on 30% (unless they got some really great/creative accountants and if so, tell me how ). I was just quoting the example from the article to show franking credits will reduce dividend yield if the person's tax rate > 30%.

Anyway, not wanting to take the discussion off topic, I think LICs are great and very happy to learn about LICs here. Definitely, something I'm keen to keep track off and maybe look to add to my portfolio on the dips.

 

Thanks, and sorry not meaning to add this question amongst the discussion about your posts (purely coincidental).

I have seen comparisons across a range of examples that compare shares/LICs etc that have 100% FCs to other investment options, and while I would look closely at companies with 100% FC as they have taxed the shares as much as they can before passing them to the investors, it doesn't appear clear/transparent to say that all the tax has been paid on the shares - for anyone earning more than $37,000pa, additional tax would have to be paid.

I'm wondering what I am missing?

 

Yep, thanks @Perthguy , that may explain it! and a good comparison between taxing of rent income and FC'ed share income.

 

Franking isn't any more useful or less useful dependent on your tax rate. You just aren't quite grasping exactly how franking credits work.

A franking credit is just a credit for tax already paid. It gets distributed to you as income and you pay tax on it.

A $7 fully franked dividend isn't a $7 dividend. It's a $10 dividend on which $3 of tax has already been paid. That $3 may be more tax than you're meant to pay or may be less, but either way you're getting $10 distributed and paying tax on $10 at your marginal rate.


If you're looking at offsetting a PPOR then it's appropriate to gross up the payments at your MTR and compare this to the yield of the share post-application of your MTR. This is because the PPOR has to be paid after tax, so you have to gross up the cost to get the real return. You then need to apply your MTR to the share yield because there is no tax payable on the return from your PPOR as it is only an imputed return.

If however, you're comparing to an IP you don't gross it up, as any interest payment is deductible and hence paid pre-tax. You still need to apply your MTR to the share's yield to arrive at a comparable number.

 

If income is in a family trust which then distributes the fully franked dividends to a bucket company potentially there would be no more tax payable as the company tax rate is 30%?

 

Not exactly. You pay tax on $10 at your marginal rate minus the $3 tax already paid. This means if your marginal rate is less than 30% you would get a tax credit. If your rate is more than 30% you have to make up the difference.

 

That's technically true, but functionally you get ten dollars and pay the tax on ten dollars that you normally would. The fact that the ATO has three of your ten dollars until you do your tax return and your MTR worth after you do your return is completely immaterial - either way when you get $7 of franked dividends you're just getting $10.

 

It's not really immaterial. If I get $10 income from a rental property, I pay tax on $10 and I don't get a $3 tax credit. If I get $10 of grossed up dividends, I pay tax on $10 but I get a $3 tax credit. That's a very different outcome.

 

You get $10 from a rental property. You pay 32.5% (or whatever), leaving you with $6.75.

You get $7 of fully franked dividends. You gross it up to $10. You owe 32.5%. However, 30% has already been paid, so you owe a further 2.5% of $10, being $0.25. Subtract $0.25 from the $7 you actually received, leaves $6.75.

It's completely immaterial - a $7 franked dividend is like $10 from another source in almost every respect.

 

Thanks @Perthguy and @ACMH16 for the comments. I understood it to be

Meaning, you only pay the difference between your tax rate and the 30% company rate for the full amount (fully franked amount, and the 30% increase), which is in line with Keating's policy that these incomes aren't double taxed.

A slight clarification, wouldn't the 25c tax difference in the shares calculation be $10.00-$0.25 = $9.75 return from the $10 total received (dividend plus tax credit), otherwise the full amount is being taxed again at 32.5c in addition to the 30c the company has already paid.

What confused me is that across a myriad of examples, a tax rate of 30% was used as an example (which could indicate on the surface that there was a personal tax rate of 30%). Only people investing through company structures would be able to take advantage of this 30% tax rate specifically (as @HUGH72 mentions). Anyone who pays tax through personal tax structures would pay additional tax (for a majority) or receive tax benefit.

 

Not different at all. A $10 grossed to div and $10 rental income are the same. Franking seems to be getting over complicated. $10 rental could be thought of as $10 divs with zero franking