Building a Share Portfolio for Income

I know some folks (investing lots) are very happy with them. Rates are low due to (I think) being benchmarked with US rates and not AU. They've been around for a long time.
If you've got a business banking account you've got some leverage (snort) with the bank in terms of negotiating rates, but they won't be able to beat IB's rates.

 

One thing to bear in mind with using IB for margin, make sure you understand their position liquidation policy - its immediate and all done automatically. No "margin call" from your broker. Obviously all users should be aware, but some wont be until its too late!

 

I just checked IB's rates for a 500k margin loan, and its unbelievable at 2.9%. A far cry from the 5.48% interest rate I am paying Commsec after discounts.

 

Yeah bear in mind that you are comparing CHESS vs. Custodial account though.

 

@The Falcon, is it possible to move Commsec margin loan to another lender like IB? Similar to moving home loans from one lender to another?

 

Negative. IB doesn't sponsor CHESS holdings AFAIK (note, I may be wrong).

 

Isn't that like refinancing? You should be able to but may need to sell, deposit funds into IB and rebuy.

You can move your ASX holdings over to IB (I did that earlier this year and was relatively painless), but I'm not sure how comsec would view moving the holdings while the loan is outstanding. Conversely if you have enough funds in the IB account already you can drawdown and repay the comsec loan first.

 

Well i guess that explains why their rates can be so low! I'd imagine the risk of default is pretty much neglible for them, if they hold your security and can liquidate it whenever they want automatically...

 

Commsec essentially holds all my share holding as security for the margin loan. If I were to move my ASX holdings to IB, it will trigger a margin call (as my LVR will go up) and I would have to inject cash to bring down my loan balance with Commsec.

 

I am not sure if going for income is the best strategy (ie dividends). The real money to be made in shares is from capital gains. Also the biggest capital gains come from smaller companies. I'd be doing away with the leverage and including some small and mid cap stocks rather than just sticking to the top 20 companies.

 

@SouthBoy, I was in the same situation as you until June this year (last month). I have transferred all of my securities from CBA to ANZ due to the rate I'm getting from ANZ is much better.

Before the margin loan with CBA, I was getting 5.88% for variable and 5.37% for 12 months fixed (interest paid in advance) with 1k free brokerage fees.
But ANZ offered me 5.33% variable and 4.7% for 12 months fixed with interest paid in advance and they matched the brokerage fees with 15 free transactions. The transfer process was seamless as I had a dedicated portfolio manager from ANZ helping me throughout the process.

It's pity that CBA couldn't match the ANZ offer as all of my banking products was with CBA and I prefer the UI on commsec. It came to my attention that margin loan with CBA was actually managed by Colonial (seperate entity) hence they don't care.

So now, I'm just using Commsec for research, watchlist etc. And when it comes to placing order, I'm doing it on my ANZ account

Return and risk go in parallel.

 

Yes, but I said do away with the leverage. A related point is you don't have to buy as many as you do with the blue chips. It can actually work out less risky. The so called safe blue chips can go down 50% in a crash. The GFC hardly effected me as I only had a small holding of mainly small companies. Even though I lost my job and was out of work for 10 months I wasn't forced to sell and I recovered the losses and then some. Plus I was protected by all the profits I made in previous years and were off market. It would have been a different story if I had a big margin loan and a large holding of the top 20 companies.

 

Picking small caps is not for everyone. Yes when the price goes up by 10c, you could have your portfolio holding jump up by 25%, but if it goes the other way and stays that way for sometime, you could lose all your hair. As a conservative investor I like the certainty of franked dividend income, and also knowing that even if the share price drops by 50%, a top 20 company is not going to go bust overnight. You cannot deny the fact, that a lot of small caps do not make money for a long time and some never do. How do you screen your small caps?

 

Thanks for that, I am also very comfortable with the Commsec trading and researching platform that I haven't thought much about moving away. It appears like Westpac is offering 4.7% fixed rate margin loan as well.

 

Yes, but the original post was suggesting getting a large, $100s of thousands margin loan. It is quite possible to get wiped out by being forced to sell at the worst possible time (margin calls). I'm not suggesting having no blue chips, just not having all blue chips.

With small caps as I suggested you don't have to by that many, this gives you the chance to diversify. The most you can loose is 100%, but they can go up a lot more than that. So with a few multi-baggers the losses become irrelevant. Gains of 10 or 20 or even a hundred times are not unheard of.

I have been using tip sheets for stock picking, as well as using my own judgement and experience.

 

There is a fairly strong argument that dividend payers have outperformed in the long run. There is a lot of junk in the non-dividend paying sector.

As attached.

Sure you could pick stocks and provide examples on both sides of the fence until there's some cows and which go home. However if picking a large bucket of stocks dividend payers are a clear winner IMO. If you are smarter than everyone else maybe you can do well out of non-dividend payers, I am not.

 

The graph is not actually comparing small caps with large caps but dividend paying ones with non dividend payers (plus a few other categories). It is also only of the top 500 companies so it is even less of a comparison. You don't mention leverage and it's potential risks. All I am suggesting is that instead of using leverage to boost returns there is the alternative of including small and mid cap companies. After all small companies have more potential for growth (ie elephants don't sprint).

 

Maybe I should have quoted you more specifically rather than the whole post.

My response was in view of the comment above.

Whatever cap you are looking at, small or large, companies that are actively paying dividends, especially those increasing said dividends, are more likely to provide favourable long term total returns.

 

A cautionary note when increasing exposure to small caps

A cautionary note when increasing exposure to small caps - Clime Asset Management

 

The company might prefer to put the cash into exploration or R&D than pay a dividend. Eg it is not unusual for a mining company not to pay a dividend. Also I said the real money to be made on the share market is from capital gains. That doesn't mean don't buy dividend paying ones but have a strategy to maximise capital gains and not put too much emphasis on the dividend. Eg I would sell a company if I don't think the share price would go up much more even if it pays a good dividend. .