Building a Share Portfolio for Income

Sash, it sounds like we aren't too far apart here (minus a lot of zeros for me). Some of this is sucking eggs, but was new to me not long ago.

Get some of the recommended books by @Falcon. A Random Walk on Wall Street and Motivated Money will change your perspective entirely. I started researching the share market from zero knowledge about 4 weeks ago (but I'm obsessive).

My beginners take and some things I've picked up , and may well be an erroneous understanding or few in here.

You are buying individual stocks, and have limited yourself to very few. I did this a month ago with some NAB at 23.90. According to the books above, you need 15-20 stocks to be properly diversified, and that is to also to continue making a gain whilst things are grim. Small successes on individual stocks seem to remain that, small. I think dropping in some cash on some good buys is ok, but a couple of stocks arguably shouldn't be your core portfolio. The top 20 buys a lot of banks - you/I are already pretty heavily staked on the banks with your property.

The next step is consideration of an index fund or ETF. Vanguard's VAS does this, and basically holds the ASX 200. (ASX 200 is the top 200 australian companies - heavy on banks and mining).
Over time, the index (this is passive investing) has outperformed most actively managed funds. Random Walk makes a compelling argument to simply buy the index. VAS is among the lowest management costs. It also has lower capital gains as the turnover is quite low.

The shortfall of VAS is its weighting on banks and mining, and perhaps less industrials. Motivated Money convincingly sells industrials. To better capture these, the guys have mentioned some LICs that focus on it - QVE, WHT, BKI etc (if I'm not confusing these). LICs seem to me the next evolution of index funds - diversified, but within a focussed area. Listed investment companies buy whatever it is that they buy, and again its more diversified than many small scale investors can be. Lots of these exist. They have slightly higher costs. The interesting discussion/buy in points about LICs are the NTAs vs share price. Basically, the NTA refers to the actual value of goods in the basket, where the share price is what you pay for the basket. So, you can buy the shares at a discount or premium to NTA. When things are bad/volatile, the big LICs like AFIC, Argo and Milton are seen as relative safe havens, thus the share price is at a premium to NTA. Thus at a quick glance and with a broad brush stroke, aren't good value when i looked last week. (The index then becomes appealing with prices are a premium to NTA...)

The next consideration is getting out of Oz... Oz is about 3% of the world market and most Aussies are Aussie centric. I haven't delved too much here yet, but ETFs like VGS give you international exposure.

The managed funds are the typical broker buying and selling for you. They can tend to under perform when its booming and perhaps limit losses when its not. But, they are outperformed as a whole by index investing. The challenge therefore is to find a good manager (or multi managed) fund who is going to show some consistency. The index is a benchmark. A couple of % above the index is great. The added downside is the frequent selling increases your capital gains.

 

OK here goes ....based on what the gurus here are saying this is what I am thinking:

Invest 100k in a VHY ..with 25k down. If I fix the Magin loan at 5% and dividend payout is say 6.8%...and loans amount is 75k. That would mean the interest cost would be $3800 odd a year leaving a surplus of 3k to reduce the loan.

Any of the gurus here doing this....I do understand that there is risk of margin call if the market drops...

 

Yep...so am I....hear you on the ETFs did not know about these til today.

Have read up on them and voila and convinced. I like the VHY fund due to its yields...thinking that I might want to get post dividend ..hoping the stock will drop ex dividend.

 

My problem was I read something and thought, 'That's Amazing!', and bought NAB.

Then I read Random Walk and thought, 'That's Amazing!', and bought VAS.

Then I read Motivated Money and thought, 'That's Amazing', and bought some more industrials.

Then I read Propertychat thread on LICs and thought, 'That's Amazing', and you see where this is going.

I wouldn't dismiss some growth targeted prospects alongside your VHY...

 

Yes will do...planning to get a mix.

Any ideas on the ideal ETF portfolio of say 500k....a bit into everything is better than concentration in one area. Kind of like my spreadout property portfolio...

 

Read everything that @The Falcon and @austing have written, read the books, then come back and read them critically again. There is some pure gold opinions in their posts and the compositions fit the books. I can't stress the effect that 'motivated money' had on me. It made me want to sell my property portfolio overnight. (The leverage is the plus side really...)

Another issue with DRP (And I'm not doing this) is the capital gains nightmare when you eventually sell. I'm not doing DRP as I am putting these proceeds into paying down my non-deductible debt, also so the money goes in when I say so, not when the dividends are paid.

 

Regarding ETF's i too hold a vanguard variety

Aside from VAS have a look at VTS, VGE and VEU for a bit of exposure into other markets and not just Australia

 

Vanguard need a product that mixes all their products. You select it by adjusting the proportion of yield vs growth priority, aus proportion and perhaps a few other pointers. Set and forget. Make it reeeeeally easy for the dummies like me

 

Maybe not quite as flexible as you would like but perhaps that's a good thing. Unfortunately (or perhaps fortunately in some circumstances) it is unlisted. Possibly better if you're more prone to tinkering.

https://static.vgcontent.info/crp/intl/auw/docs/funds/factsheets/ret/vlshgf.pdf?20160322|185600

Depending on risk profile there is conservative, balanced and growth options in addition to above.

 

Sash,

By now you're head is probably more confused than ever. With minimal knowledge about shares and asking for an instant portfolio on a forum there is the danger you may make a rash decision you will regret.

Bran nailed it with the: that sounds fantastic I'll do that; oh this sounds even better I'll do this ....

Best to take a deep breath and patiently read through relevant threads in this "Other Assets" forum taking note of different views, recommended books and resources. Then reread the threads again as Bran suggested. By taking the time to do that you with start to identify those strategies that "feel right" for you including not just the usual things like diversification, asset allocation, passive vs active, income vs growth, local vs international, funds vs individual shares but also how much time you want to devote to managing your shares and what's right for your risk tolerance etc.

It sounds like I'm being a party pooper, but it's your hard earned cash at stake. It won't take that long to do this bit of extra research but the outcome is likely to be well worth the effort.

Cheers

 

Thanks austing....already onto that.

I think I am set and forget with dividends paying off the loans.

Like my property strategy I like a mix of income and growth so quality will be important.

I would like diversification...like being passive...happy with a combination of direct shares as well as ETC/MIC (again diversification). Low risk is also important.

I quite like the Vanguard ETC...they seem quite low maintenance and easy to get in and you can take a set and forget on them.

 

If you did this 12 months ago you would have been margin called. 75% leverage is just too high to eliminate volatility risk, which is only a risk if you can't get through it.

Protect capital and play the long game. Playing at 75% it's not if but when you will be margin called.

 

There are ETFs that do equal weighting of the asx200 rather than by market capitalisation like VAS. Don't have the codes off the top of my head but they are on my research list.

 

Nice posts Bran.

Just wanted to address this truism in context. Yes, Oz is what 2-3% of global markets by market cap. This is not a reason to go as heavy on International equities as most Bogleheads do. In doing so, they overlook franking credits which in a high payout market like Oz add a huge advantage to local investors. Remember, Franking credits have zero value to overseas investors, where to us they are a income multiplier by 30%. (bear in mind not all Oz listed stocks dividends are fully franked or franked at all - typically utilities are not (same with Reits) and businesses that predominantly have overseas earnings may be unfranked or partial).

Now, when building a long term industrials focussed income portfolio, the disadvantage Oz has is that "moaty" businesses with sustainable competitive advantage, reliable earnings, strong cash conversion etc. are very heavily weighted (on market cap basis) to the following sectors ;

- Banks
- Financials
- Utilities
- Healthcare
- Consumer staples

Of course, there are other businesses that do meet the criteria but you will typically need to look outside the ASX50 for them, and in order to do so find a small/mid cap manager, or do it yourself.

Personally, I take the free kick available and then look international for businesses (up to 25% portfolio weight) that do not exist on the Oz bourse, super wide moat businesses in old economy industries that can churn out cash year after year....the likes of Nestle, Philip Morris, Unilever, Johnson and Johnson, Altria for example, and Berkshire that although doesn't pay a dividend I see as a future dividend stock.

My view, be selective in international businesses that complement your Australian businesses, filling gaps, and take the free kick offered. This doesn't need to be done with individual stocks either, between ETFs and LICs a portfolio of this type could be constructed.

 

Another simple question to ask is,with all the share traders within this site is,how many down turns have you been through as several seem to have a long cumulative years of experience
in equities markets in this site,and what happened to your holdings during the last 2008"GFC",
did you buy into during the lows,or sell half way down,then buy back in ,in between the exit costs,or just do nothing,and not read the media or anything for several months,survival of the fittest ..

 

I thought some Berkshire might be a good choice to invest in for the kids. No realisable capital gains, no dividends, no tax. What do you think? If they start paying dividends before 18 we might run into trouble...

 

Not necessarily. So long as you can do a basic spreadsheet, it is a simple matter of a few keystrokes twice a year when the dividend is reinvested. The statement tells you the number of shares purchased and the cost of each. Running totals take care of everything.

Yonks ago I bought 100 X CBA shares at $26 each. This $2600 investment has grown to a $30K+ investment without further contribution from me. My part time income meant that dividend imputation neutralised any tax effect to me.

Now I look at it as two return business class fares to Europe for hubby and me! Bargain!!!

I made money on managed funds, but the fund managers made more! If you want diversification and management, I reckon LICs are better value.

Retired now on tax free super, so CGT no longer relevant, or selling can be timed. But interesting to keep the spreadsheet up to date!
Marg

 

Sash,

VHY not a bad option for high yield given that leverage is a key part of your plan. Ideally it is nice if the dividend income covers interest and tax leaving you something left over to reinvest and/or pay down loan. Problem with rule driven enhanced index ETFs is that you can end up with rubbish in the portfolio and turnover resulting in unwanted CGT. For example look at the major holdings in the index used by VHY:

http://www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssue?issueName=GPVAN013

The top 10 holdings make up 80%. The miners have cut their unsustainable high dividends that were partly inflating VHY's yield. With the dividend cuts will these be dropped from index in near future? Index constituents can be potentially changed every six months. If the miners are dropped expect high component of CG in distribution. Rubbish like BHP and RIO shouldn't have been in this fund in the first place. That's the problem with rule driven filters.

Looking at other top 10 holdings do you want to be invested in Duet and Orica? I certainly don't. Now what's left? The 4 banks, Telstra and Wesfarmers!

Personally when using leverage I just mostly buy the better yielding holdings in the ASX Top 20. But do consider quality as well as yield alone. This is superior to VHY. You control quality, value and turnover which will be next to none anyhow with direct holdings avoiding unintended CGT which happens with rule driven ETFs. You get to cherry pick these small number of high yielding large industrial stocks when a particular one or more are being hammered often times unfairly due to short term traders etc. Check out various larger LICs and common index ETFs, most of their income comes from a relatively small number of shares mostly in the top 20. Still a very passive approach requiring bugger all management and time. Don't get me wrong, I love some of the better LICs. But if using leverage you can do better going direct generating much higher income.

With dividends covering interest etc over time you can start to broaden/diversify your portfolio if you choose by adding high quality LICs such as QVE which invest in quality dividend income and growth stuff outside the Top 20. Also the stuff that requires better stock picking skills than most of us are ever likely to have.

For quality International stocks my friend The Falcon has given you the names of some of the highest quality companies out there. If buying direct shares overseas seems too hard there are ETFs such as the often mentioned VGS. Good for very broad overall diversification if that appeals. However the better stuff that The Falcon mentioned is more likely to be found in:

iShares Global Consumer Staples ETF | IXI | SYD
iShares Global Healthcare ETF | IXJ | SYD

But expensive at this time, lower yielding initially but fantastic dividend growth stuff for the future. Maybe better for the tax advantaged environment in Super. For early retirement and use of leverage best to take advantage of Aussie industrial shares with their amazing franked dividends as mentioned above.

In your first post you already had the makings of the start of a good income portfolio with Telstra, Wespac and Wollies. Keep building on that by buying beaten down direct large cap industrials such as NAB etc. Do a search on The Falcon, you will find plenty of other great industrials. Buy the best value on offer now, most likely to be found in the Top 20. If you do get the desire to broaden your portfolio for diversification and higher growth dividend holdings check out shares mentioned by The Falcon at various times. Then be patient and pounce on them when it's their turn to be out of favour.

Hope this helps.

Not liscenced to give advice.

 

@sash i am using barefoot investor for my share portfolio for last 2 years and so far its going very well barefoot subscription is $300 per year which is not bad ...if you need more info let me know

 

Hi Sash,

I'm in the similar situation as you. Learning a lot from reading the posts by falcon, austing and other knowledgeable members in this forum.

Recently, I have been monitoring ALF which, I think, has a good mix of AU and international portfolios and also reasonable returns. Worth checking this out.

A newbie advice but hope it helps,
IBP