LIC & LIT Listed Investment Companies (LICs) Q3 2018

@Snowball does a great job on his LIC reviews. But in relation to your other comment may I suggest you take advantage of the “search” function. There’s not many of the better LICs that haven’t been discussed here in great depth numerous times.

 

Chanced upon this site, with this picture in the archives I'm sensing a theme with Living Off Dividends @Nodrog @SatayKing

I Live Off Dividends

Top 10 ASX ETFs or LICs

 

He he. I’ve seen that blog in the past. Interesting take on things.

Like a broken record I’ll say it for the umpteenth time that being able to live off dividends alone is truely a wonderful situation to be in. Might be hard to get there but my god it’s well worth the effort. Or maybe not as hard as one thinks? Which brings me to this important point posted the other day by @OscarBravo and in part by others in the past including @SatayKing:

With momentum, growth and total return all the rage this is not the popular view. But a very valuable one especially for retirees.

I was discussing this with Peter Thornhill some time ago. If as some suggest post GFC action by central banks have brought future growth forward or if for others reasons growth goes missing for a long period of time then dividends might well be most of the return. Those who have invested accordingly will likely be thankful they did.

But of course the capital vs dividend debate could go on endlessly. For me one of the great things about dividend investing is the huge peace of mind when markets tank. Whilst others are despairingly focusing on their capital disappearing at an alarming rate the dividend investor looks at the more stable cashflow from their shares. Even if dividends are cut watching your income temporarily cut from say $60k to $40k is far less distressing that watching your capital cut from $1Mil to $500k or worse. A modest cash buffer will top up any potential dividend shortfall for many years. Not so if Capital is annialated!

Of course some will say but what if I hold a sizable allocation of Gov’t bonds to smooth capital volatility in troubled times? Yes one could but geez the amount one gives up in capital / income growth and inflation protection over time is substantial. And there’s no guarantee that bonds will always hold their inverse relationship when equities tank.

But these are just personal views which others here will likely disagree with. One really needs to experience a nasty bear market / crash (sometimes more than once) to truely understand the impact of such things on them. Words can’t possibly describe the emotions involved at such times. For me the focus on dividends supported by a modest cash buffer not only gets me through these scary times but also excited at the opportunity to purchase future income streams rediculously cheap!

Nothing to do but enjoy life and watch those dividends hit the bank account:



PS: Rain and storms outside again so ramble time.

 

With the I Live Off Dividends article, it talks about taking all your income (from working), investing the lot, and living of the dividends (to pay daily expenses). The problem that I see with this approach is being taxed on the work income, and then being taxed again on the dividend income - 2 lots of tax - which is unnecessary.

Surely most people don't invest all of their working income - some of it goes into investment, but they'd pay their daily expenses from their work income as well. Am I missing something here?

 

I am not sure about your comments of 2 lots of tax been unnecessary - tax is going to be paid on dividend income if it is used for living or re invested.

If you can invest all your working income and live off dividends, why are you still working? (I couldn't find the specific blog post on this). Is it talking about living within your means? Probably less relevant when starting and becomes important when considering retirement etc.

Some interesting views on the blog, especially regarding ETFs like HVST

 

It seems to me to be able to invest ALL your after-tax salary and live only off dividends would mean you'd need a great whack of money to start with. Could be wrong though.

We were on a very good income at the time but still could only invest a portion and not the lot.

 

Dividends should only be reflected in the cash flow I believe not from capital or change in company value (pricing?)

 

Oh dear, raining again. So I decided to read the latest blog post on the site @Redwing mentioned. I know bonds are important for some but a Great Depression lasting centuries. If that the’s case I don’t think bonds will save you:

Age in bonds is too conservative with longer lifespans. Inflation will likely be an issue.

As for holding two diversified Vanguard ETFs I would have thought a younger investor would select one of the growth ETFs then just add / increase allocation to separate Bond ETFs as they age?

 

This is great @Sbowball! Thanks for the blog!

 

A question on bonds:
I can see that simple 3 fund portfolio idea with rebalancing has you selling equities as they experience capital growth and therefore balancing back into bonds (and vice versa). This means you are forced to “cashing in” on equities and putting into bonds, enhancing your chances to ride out the next correction or crash.
This seems conservative for an accumulator without retirement on the near horizon correct?
I assume this bond concentration means 1/3rd portfolio misses the giddy heights of growth and also misses the rebounds after crash?
Difficult to articulate my question, but it’s along the lines of: this strategy sounds smart as you are forced to “time the market” a bit to get better returns, but it also sounds conservative just because you have bonds in there!?

 

But if you get taxed for all of your employment income when you get it, and put 100% of it into shares (as I read in the article - if I'm understanding it correctly), then you'll be earning a lot of dividends (which you'll then take out, and use to pay for living expenses etc). So, you'd be paying a lot of tax again, (on the big dividends, as well as for employment income).

However, if you keep 70% of your income to pay for living expenses, then only invest 30% (and earn dividends, and pay tax, on this reduced earning), then you're not paying as much tax (overall) as the first scenario.

I hope I'm making sense (my brain feels like it's a bowl of cold porridge at the moment).........

 

@Pleep does balancing need to involve forced selling? Maybe not. For example, I'm increasing my exposure - in dribs and drabs - to OS via holdings which have an international flavour. I haven't sold anything (yet) just directing more funds to OS. It is a way of doing it only slower I guess.

As for bonds, I haven't explore them nor do I don't know what the pundits who write for or appear in the media have to say about these issues because I have switched off.

Having said that, I suppose it depends on a person's attitude, time-frame and available funds.

@KayTea if I follow your argument correctly - and I'm probably not - it ultimately means one shouldn't invest at all; take your after-tax income and spend it as that's the entire amount of tax you will eventually pay.

 

You're buying a goose that's laying eggs. You pay tax on the eggs, ideally the goose grows and lays plenty more eggs that grow also.

Some products (like HVST) slowly kill the goose by squeezing out too many eggs. This is returning some of your capital as income which is I think what you are trying to avoid and where your thinking might be at.

 

More like taking the eggs and slowly cutting the goose limb from limb because eggs from one isn’t enough.

Bottom line: you need a second goose to generate more sustainable food

(wow really ruined that analogy - but I hate HVST)

 

Yep, the whole just reinvest some of the dividends to maintain capital tells a story about HVST.

 

Bit tired tonite so not sure I understand what you’re saying.

Bonds are more about risk management than returns. In theory a younger investor shouldn’t need them as their wage is in effect a Bond. But then again a younger investor may not have discovered their risk tolerance yet unless they’ve experienced their first share market crash / bear market. Hence perhaps some caution is required until one gets to know their “real” not their “perceived” risk tolerance.

As for rebalancing during accumulation years there’s typically no need to sell but simply direct new savings to the underweight asset class ie in this instance equities vs bonds.

Personally I’m not a fan of bonds. Rather than bonds to smooth capital volatility I focus on dividends instead and a simple cash buffer to smooth the much less volatile income component of shares. Throw in a few quality LICs which also smooth the dividend flow for their investors and what are scary sharemarket events for the capital focused investor are much less frightening for the income focused investor!

 

HVST = Yield Trap on Steroids!



{Note from mods - thread continues here: Listed Investment Companies (LICs) Q4 2018}