Building a Share Portfolio for Income

Yep, you can shoot the lights out with penny dreadfuls or you can go to the poor house, those that do best are often just at arms length from the businesses they invest in and have specific IP and experience. Then there are the rest.......relying on tips, hotcopper, newsletters etc (and I mean no disrespect at all).

As for small cap vs. large cap outperformance, the long term US studies show that small caps going back many decades outperform by around 1%, But this is not consistent and the majority of the outperformance occurs the minority of the time, ie. long periods of underperformance are common. Now, looking at Australia I would be very interested to see the studies (I haven't seen any). I'd suspect long term underperformance in Australia due to the myriad of capital intensive chancers (explorers / juniors) at the tail end of the bourse.

Anyway, back to the thread ; Dividend growth is the key, not stagnant high initial yield. Dividend growth shows a businesses franchise value, and in the absence of stretched payout ratio or undercooking reinvestment, shows that the business is able to produce returns in excess of its cost of capital over the long term. Where genuine dividend growth is present, share price growth is also present. Funny how that works

 

Investors often just think of dividends as a source of growing income without having to draw on capital. But some lose sight of the fact that each time a dividend is received it is also in effect repaying the capital one has put at risk. It is for these reasons in part and the long historical record of dividends being much less volatile than capital that's lets me sleep very well at night in retirement.

The following article I think does a good job in getting this message across. Read the comments also.

Dividends Are A Return Of Capital And A Return On Capital

 

@sash - thanks for the thread this is great information.

there is an ASX game that ppl like myself who is an amateur to get a feel on the market.

ASX Sharemarket Game

 

Not only in retirement but well before.

Where the dividend is stable enough (e.g. LICs and the like) the investing journey becomes quite enjoyable. You don’t worry much about price fluctuations and just focus on accumulating the number of shares that will give you the passive income you need.

Say you aim for a $100K retirement income through a particular fully franked share paying 20 cents dividend (this is for simplicity, normally you have more than one share). Allowing for franking credits you only need $70K dividend per year i.e. 350,000 shares to generate it.

That’s your target. The quantity of shares is the No 1 thing you’re concerned about. With every DRP, every additional buy you’ll only increase it and get closer to your target. You’ll never go backwards!

Once upon a time I checked share prices and portfolio balance everyday and that stressed me out. Only when I started to focus on the quantity of shares that I relaxed and learned to enjoy the process.

 

Yep, the hardest lesson to learn, well said

 

No worries Austing and Falcon are the experts in Shares and ETFs...

 

Where would one find this recommended book list?

 

On this forum

Stock investment resources

 

Thank you sir!

 

Interesting article, however what about taking into account the opportunity cost of investing your capital elsewhere?

 

Truong - wow, I have never, looked at it like that, but it makes sense!

Great post.

 

Never thought about it like that before. I've been focusing on the capital value derived by target passive income divided by roughly 6% grossed up yield.

Thanks for sharing!

 

Thanks Intrigued, Terry & CatCafe, that’s the beauty of shares with highly stable dividends: you basically free yourself from the tyranny of SP and yield.

Market fluctuations cause SP and yield to continually move in reverse motion but the $ value of the dividend (and therefore your income) stays the same. It’s the only constant in the whole game. Anchor yourself on it and you’ll journey through rough seas with serenity.

 

troung, Excellent posts, do you also have a perchant for home brew

 

LOL Yes I do actually, though not to the same heights as a few posters here.

 

Excellent post @truong,

It appears we have much in common especially now I know that there is an interest in home brew also. Your post certainly offers a fresh perspective in highlighting the wonderful benefits of dividends. Great to see you posting again. Would be wonderful to hear more from you. I also enjoyed your posts on the old Somersoft forum.

Cheers mate.

 

Yep, spot on. What you are essentially doing is constantly increasing your ownership stake in businesses. Movements of the quoted stock price of the business is not material. The earnings of the businesses, a portion of which are paid to you as owner (dividends) and then reinvested to buy more stock are your only concern. Your focus then becomes earnings/dividend/reinvestment and not price....and in doing so, taking an ever bigger piece of the pie

Personally I am guilty of price checking. I made the decision a few days ago to disable watchlists...which encourage casual price checking for this reason

 

Thanks austing, I don’t post much because I have little to say on most things. But yes we certainly share many POVs and in particular I’ve learned quite a few things from you.

Great explaining there Falcon.

 

Also, this is where an 'investment' mindset will help immensely. When the market takes a dive and you have spare cash ready to deploy, you can buy a substantial amount of high quality shares at bargain prices (and thereby increasing the number of shares you will eventually hold).

 

Just curious....

So it looks to be profitable to invest into high yield fund assuming 6% return.
Lets say you put in :
Invest 100,000
Margin loan from IB (or other broker) @30% . additional 30,000 with interest rate of 3.25% (checked from their website)
Total invested 130,000
@ 6% yield = 7,800
less interest on 30k margin = 975
total return $6,825 or 6.825%
==================================================================
Now if we assume that we debt recycle the 100,000 @ 5% (although now it is in low 4%)
borrowed to invest 100,000 @ 5% = 5,000
Margin 30,000 @ 3.25% = 975
Total cost = 5,975
Total return = 7,800
Profit = 1,825
which means the return will be 1.825%

as @truong said just accumulate as many shares as you can, this could have potential to grow to even more over time. Especially if investing in dividend growth shares. Instead of 6% return in couple years you could have 8% or more.

This would mean that you would invest with banks money (although you have the risk) for at least 1.825% return. Although if invested in stable stocks it doesn't seem too bad, as long as those stocks are continually growing their dividend? The only time you would need to be concerned about capital is if you plan to sell, assuming those shares have fallen?

I'm asking all this because like @sash I am starting to build income portfolio too that I would like my children to have benefit from and they will be able to access it in 20 years ....