LIC & LIT Listed Investment Companies (LICs) Q3 2018

Total return investing is not about capital gains – It’s about looking at the whole picture and building a diversified portfolio accordingly.

Why hold a suitably diversified equity portfolio? For the dividends!

I suspect everybody who holds equities for the long run thinks along the lines of A chicken for its eggs, A cow for it’s milk, Shares for their dividends. Some however ignore yield in their diversification decisions because the problem with focusing on yields when making your diversification decisions is that you end up with poor diversification.

Crickey’s just focusing on dividends some people might end up with something like 30-40% bank stocks in a single country who’s housing is amongst the highest in the world and that country is reliant on cyclic resources for its national income and the country has negative net foreign assets and a current account deficit.

Taking that sort of allocation risk as an active bet is one thing.
Taking on that sort of risk without realising because you are too focused on current yield is another thing altogether.

In the same article you selected your quote from @Nodrog, Boggle also commented on tilting the diversification based on yield.

 

Thanks for the response @dunno.

No no no, “shares for income” NOT just “shares for yield”. A huge difference.

What I was trying to get at is “shares for their income”, a “growing” income stream. Not one purely based on “yield”. Thornhill is always warning of the yield trap. Take low yield, high growth CSL on 2% anyday over low growth, high yield TLS at 6% or whatever it is now.

And of course broad diversification is recommended not just focused on yield but again a growing income stream.

Total return likely means different things to different investors. I was referring to it from a capital viewpoint where investors are drawing down capital so the total focus is on the “capital” value of the portfolio. Often this might have the investor holding bonds in the hope it zigs when equities zag in an attempt to reduce “capital volatility”. Trouble is investors, unless they hold a single diversified fund, tend to focus on each individual asset class in their portfolio rather than the overall value.

And “capital volatility” is the problem and why so many people consider the sharemarket a casino. All they see is highly volatile “price” all over the place. It’s all about capital gains.

All Thornhill, myself, @SatayKing, @troung, @keithj and a few other dividend focused investors here who are retired are trying to do is draw attention to the fact that the sharemarket is not just a casino where most see it only as things that go up and down in price often quite violently. There is this other magnificent dimension of the sharemarket which is it’s income stream. One that is far less volatile than price and once investors can bring bring their focus firmly on this it can can also make for a much less scary ride and perhaps help the investor stay the course when capital values are violently crashing around them.

It’s been awhile since I read that Bogle article in full but I think he was suggesting that investors need to stop looking only at the capital value of the portfolio and focus on its income. Shares for their “dividends”, bonds for their “interest”. I think he did say that if one did focus on “high dividend yields” it came with diversification risk?

Of course it’s just what I do, the focus on “income” lets me sleep well at night. Others of course will have different views and that’s fantastic. Anyone here would be mad to take what I say as the correct and only way to invest. But if it helps someone in some small way find their own path then I”m thrilled.

PS: I have this bad fault in writing which I notice when I reread my posts that it sounds like I’m suggesting this is what investors should do. It should be read it’s what I do and maybe it might be helpful to others, not what is best for them to do. Not advice.

 

@Nodrog, I get where you're coming from. I've only done a quick mental calculation, so the accuracy is within statistical limitations, i.e. + or - 100%, and my income last FY is up over 6% compared with the previous FY. As for the "performance" of the share prices I haven't a schmick.

 

For those interested, BKI’s quarterly report, this time they ponder the topic of disruption.

https://www.asx.com.au/asxpdf/20180731/pdf/43wybpl23wmrwp.pdf

 

For an investor that does not own property directly in Australia, why is listed property usually avoided by Peter Thornhill and most members?

https://www.asx.com.au/documents/research/russell-asx-long-term-investing-report-2016.pdf

 

I think Thornhill covers the reasons here in these videos:





Here’s his comparison chart of Industrials vs AReits:



However like all historical performance data the start date can have a significant impact on the results.

A chart I produced over a lesser but still long period shows AReits doing much better than Peter T’s chart above:



What scares some off Listed Property is volatility and huge concentration in the ASX. Even more fresh in many investors minds is perhaps some recently bias in part where Listed Property crashed 90% in price!

Taxation is another issue as REITs distribute nearly all their earnings.

I’m content to own AReits but no more than it’s weighting in the cap index which from memory I think is around 8%.

Most importantly AReits behave very differently (more like shares) than “residential” property.

 

Another perspective on ASX’s higher yield. This has been discussed here in the past where some academic research suggests higher payouts / dividends can actually drive growth due to more careful allocation of less available capital. Just another view of course but something for others to debate or ponder if they wish:

And this from an older interview with Taylor:

 

Another interesting perspective also on ASX high dividend yield from Ashley Owen posted on Cuffelinks today:

Why dividend yields in Australia are so high - Cuffelinks

 

Microcap Fund Review FY18
Includes LICs:

Microcap Fund Review FY18

https://dpsi7pmz5b6vt.cloudfront.net/uploads/ckeditor/picture/5514/MicroCap_Managed_Funds.pdf

 

Submitted the above quote on “one of the highest rates of real growth in dividends” to a data fact check.

Blue line is data from the Shiller database. It represents “real” dividends ie. adjusted for CPI or in other words dividends stated in purchasing power terms.

Red line is my calculation of Australian dividends on the same basis going back to the first reasonably reliable dividend data that I have. I have had to derive dividend amounts from dividend yield – so Australian series has ‘short term’ noise compared to Shiller dividend data for US.

Both dividend streams have been rebased to 100 starting at my first data for Aus (1974)



US$100 of dividend income from US market in 1974 would now have grown to US$277 in real terms.
A$100 of dividend income from Aus market in 1974 would have now grown to A$185 in real terms.

This is despite, over the period from 1974 payout ratios for US have decreased and payout ratios from AUS have increased.

Australia’s dividend performance seems to eb and flow more than the US – possibly caused by the resource cycle being more volatile than the service/technology cycle.

We are certainly falling behind currently. Australian dividends in real terms still hasn’t re-obtained the previous peak and US is blasting ahead. Price indexes are following dividend performance.

Big question: are we lagging because of cyclical forces or are we starting to lag because of previous underinvestment (yield trap).

 

Survivorship bias.

Example – CTN out, replaced with NAOS small cap opportunity and a fresh slate.

How quickly they forget the dearly departed when remembering would not tell the story they want you to hear.

 

Yep lots of stories here. Dividend imputation is the key reason for Australian markets high payout ratio. Remove that without other changes and you would see very different capital management strategies applied.

 

But I thought all fund Mgrs always spoke the truth. Damn, if you can’t trust a fund Mgr who can you trust?. Politicians maybe.

 

All else shall be subject to scrutiny!



You can drink to that.


Cheers

 

Now we’re talking. Finally something I can trust.

Best post on the forum for a very long time.

 

Isn't US performance relatively good for div growth? Surely we know better than using a single yard stick.

How much did the original $100 divs cost for us and Aus?

I'm just curious more than anything.

 

I couldn’t help but post the Owen’s article. Some of his analysis is interesting but his reasoning for investors demanding high payout ratios was a stretch if ever I’ve seen one.

 

Hi @Hodor

I have yield for the US of 3.4% for 1974 so US$2,941 would have been required to purchase US$100 of yield. That US$2941 would now be worth US$84,284 – giving a nominal capital growth of 7.8%.

US$2941 in 1974 is equivalent to US$15,927 in today’s US$ purchasing power terms (US CPI adjusted) – So real capital growth of 3.8% achieved.


Yield for Australia was 4.6% in 1974 so A$2,174 would have been required to purchase A$100 of yield. That A$2,174 would now be worth A$40,939 – giving nominal capital growth of 6.8%.

A$2,174 in 1974 is equivalent to A$19,497 in today’s A$ purchasing power terms (Aus CPI adjusted) – So real capital growth of 1.7% achieved.

 

Looks like AUD/USD exchange rate was 1.4875 in 1974. (be warned this appears to be a cyclical high for the currency so start timing effects the analysis)

Historical Data | RBA

So investing in US market from an Australian perspective:

A$1,977 would have been required to buy US$2,941
Today’s US$84,284 would convert to A$113,422
Nominal US return in A$ = 9.5%

A$1,977 in 1974 is equivalent to $17,730 in today’s A$ purchasing power terms (Aus CPI adjusted) – So real capital growth of 4.3% achieved by diversifying into US market v's 1.7% real capital gain return from Aus Market.

 

In regards to investing in the US (and the World) is there likely to be much difference between returns from VTS than from VGS? Apologies for going off topic.