LIC & LIT Listed Investment Companies (LICs) 2020

I would use it. I am intending on using some of the funds sitting against my PPOR in offset during this downturn. Of course I will do it with a debt recycling strategy to be able to claim interest.

 

I conservatively used IP offset cash to purchase shares during the GFC when the market was down substantially. It’s not without risk of course. Dividends covered interest expense. Perhaps they won’t this time for awhile? As a retiree I no longer use leverage.

 

Can you assure me the prices are low? Sure they maybe less than they were four weeks ago but that isn't the same as being low. Just saying.

I don't use debt to buy shares. Closed the margin loan ages ago. Anyway, the companies held by LICs, and even some LICs themselves, have debt and that is sufficient for me.

As for dividends I think there is general consensus on this forum about where they headed for a time. Whether/when that happens ee'll find out. Got my fingers crossed they keep paying them. I didn't buy the buggers to sell to get a dollar. That's what they do as part of their management of funds. Oh you sell as part of your normal business so I can sell you. Hmm.

 

In case you can’t sleep – lets do some LIC dividend maths to understand dividend indifference.

Assuming one owns 100,000 ARG shares
ARG NTA is 6.72 and that the market price is equal to NTA
ARG pay 33c Fully Franked annual dividend.

Two different tax rates displayed.

The difference in wealth post a dividend being paid is due to difference in receivers tax rate vs company tax rate. If you are a zero % taxpayer you love franked dividends – if you are on top tax bracket, maybe not so much love.



Now let’s suppose ARG receives a lot less franked dividend income from its underlying holdings and doesn’t generate much in the way taxable capital gains itself and hence can only frank its own dividend by 2/3rds but still pays its 33c in dividends. (only changed input is franking rate, highlighted blue)


Change in net income and wealth is less because tax benefit is less.

Now lets suppose ARG pays only 2/3rds of the dividend = 22c Fully Franked and you sell the shares required to obtain the same net income.



Change in wealth is exactly the same for the zero tax payer in this 3rd example as 2nd example above even though some of the cash flow had to be manufactured by selling. The 45% tax payer is advantaged by creating some of their own dividend (though some of the benefit would be reduced if they sold at a higher price than they paid - tax on only the gain and possibly at a discounted rate)

Beyond tax considerations, you should be indifferent to dividends.

 

Hi,

question because i cant figure it out.

How come Sharesight calculation loss shows less then on Westpac investment App?

I cant figure it out, is it the way dividend reinvestment is calculated between the two?!

EDIT

Sorry, From what i understand westpac doesnt take into consideration the dividend payment and subtract it? ahhhhhh

 

I'm not sure how Westpac calculates their returns but from memory, Sharesight calculates it using money weighted return. I'm guessing Westpac uses a different method.

 

Well after a few refreshments, great conversation then a movie I was feeling sleepy. However after working through your post it’s now just after 10 pm and I’m wide awake.

 

In assessing LIC ability to sustain franking – don’t forget that lots of them ran down the balances with special dividends prior to the last election.

So if LIC’s run out of franking credit account balances, why should they maintain dividend payouts if it benefits nobody to distribute unfranked dividends and harms some.

Dividend smoothing adds nothing that you can’t easily do yourself. Let them do the hard part of active investment decisions making with the funds that aren’t favourably taxed in your hands. Especially in times of potential large opportunity.

Speaking of tax treatment driving dividend policy. I see today franking credit refunds back in the news.

If franking refunds go, nobody will have tax advantages from dividend policy as every equity investor effectively will have a min 30% tax rate. That will change dividend policy completely.


This is before and after effect on a zero tax rate investor.



It would seem Covid 19 is going to take its toll on many savers life work. I guess the necessary bailouts (is it just me that feels its moving towards excessive handouts???) need to be paid from somebody's nest egg.

 

Franking credits also appear to be 40-80% priced in (sources). It's only logical the franking benefit would be arbitraged away to some extent.

 

This is starting to concern me. I shudder to think of how much rorting of these handouts will occur. Up here I know that some of the most eager to get hold of handouts are well known permanent dole bludgers.

I also understand that some aren’t in a position to save much yet how is it that such a vast amount of people don’t have enough savings to last a couple of months without work?

 

They are all neighbours of @pippen that's why or close cousins of them. Heaps of them around. Heck, I dress and look as if I am one of them. Maybe that's my Plan B - and Plan C - and Plan D .............. Plan Z

With the rider it is from the Grattan Institute

As the COVID-19 crisis deepens, few Australians have much cash in the bank - Grattan Blog

 

Some of us are natural savers or were forced to save due to poor upbringing hence good money management skills, many never had to go through tough time therefore never learn how to manage their money.

 

It doesn't include those who have made significant extra repayments on home loans and can redraw in a crisis...

 

Permanent dole bludgers shouldn't be entitled to anything. Nothing in their life has changed.

 

Would this be covered in their mandate/prospectus? Or would it be under the discretion of the fund?

I wonder if they have any documented guidelines for such circumstances.

 

There will be a group of people for whom the chips have been heavily stacked against, and they never had a chance of saving - illness, entrenched disadvantage and poverty, other crises various - divorce, legals issues etc. I have a great deal of sympathy for anyone in this bucket.

There will be a much larger group of people who have made deliberate decisions to live right up to their salary, often mortgaged to the hilt, who have earned high salaries for very long periods and have made little or no provision for events like these. But they won't see this as some sort of failure to prepare. A lot of them too, will have their hands out.

But we'll all have to pay for it at the other end.

As I've said elsewhere in this thread, if this had to happen, I'm glad it's happening while I'm still working, rather than when I'm retired, which was - and still may - be next year some time. Assuming continued employment, I can always work longer to offset reductions in dividends and capital if I need to.

In some ways, I've sort of been preparing for this type of financial event all my life - although, obviously, I wish it wasn't happening.

 

I don't think its a deliberate decision. I think people have been brought up to think a big car and house means you have made it and those ideas are hard to displace. I think it takes a certain kind of person to live below your means. Some people will just never get it.

Besides, that is good for us! It is the people who consume with reckless abandon that make our companies profitable.

 

In terms of what LICs do in the climate, I guess we're weeks away from finding out at least via Whitefield, who report on 15 May.

That's one of the frustrations of this timing from my point of view - it started happening such a long way from the EOFY announcements in August. Still, I guess there'll be more clarity around a whole bunch of stuff by then.

Reminder also that WBC, ANZ and NAB will be announcing from early May. Let's hope the RBA doesn't do what the RBNZ just did re. dividends. That really would cut a swathe through the incomes of many self-funded retirees.

 

@dunno as usual thanks so much for your posts. Can you take this one stage further in regard to potential issues with LICs vs ETFs in this current mess?

LICs being a company structure of course are able to maintain reserves which may be able to smooth dividends for a period. However the company structure can also complicate dividend decisions with some LICs choosing not to pay a dividend at all.

A plain vanilla index ETF such as VAS on the other hand albeit with variable distributions should always be paying something unless every company in the ASX 300 stopped paying a dividend or it was only sufficient to cover the small Mgr fee. The ETF trust structure is not hamstrung by company tax issues which can impact selling and distribution decisions.

Thoughts please?

 

Exactly. If everyone was a financially prudent as you guys, it wouldn't work.