LIC & LIT Listed Investment Companies (LICs)

Agreed, you shouldn't have to do much paperwork other than record-keeping until you want to sell, but keeping easy to understand records is a must given the time periods most of us are talking about. I don't want to have to sort through a box of papers, emails and who knows what else in 20 years when I am enjoying my retirement (or heaven forbid my estate having to do it).

According to the DSSP rules on the AFIC website:

"Broadly, the tax cost base of the Participating Shares should be allocated across both the Participating and Bonus shares issued in proportion to the market value of those shares when calculating the gain or loss."

So, if I hold 2000 shares acquired at $3.60 and 1000 shares acquired at $5.90 and get 90 bonus shares, I would have to given 60 of the bonus shares a cost base of $3.60 and 30 of the bonus shares a cost base of $5.90. Not so hard to put into a spreadsheet first time around, but as time goes on you will get bonuses on the bonuses and so on. Add a few more purchases along the way and it gets more complex.

One thing to note, the rules of the DSSP say you can chose how many shares you want to participate in the DSSP. So, in my example above I could choose to just have my shares acquired at $5.90 (the higher cost base) participate (or, alternatively, have all my 'large' purchases participate and none of the bonus shares, thus making paperwork easier).

Being picky, Ouga, the tax rate in your spreadsheet should really be 39% (37% + 2% medicare levy). You may also have forgotten to consider that by participating in the DSSP you forgo tax deduction related to any LIC capital gain (capital gain internal to the LIC) declared as part of the dividend. This amount tends to be small for a LIC like AFI which tends to buy and hold, but would become a factor in similar calcs for other LICs like MIR than tend to have larger LIC capital gains.

Another option to consider would be to sell the bonus shares 366 days after acquiring them (to take advantage of the 50% CGT discount). Could result in an advantage if the cost base was ok and as long as the share price did not drop too much. Not sure if it would attract the attention of the tax dept though - the share rules specifically draw attention to anti-avoidance rules for pre-CGT (pre-1985) shares:

"The Explanatory Memorandum introducing the anti-avoidance rules provides that the participants in a Dividend Substitution Share Plan of a listed public company should not be subject to the anti-avoidance rules, “unless the shareholder receiving the bonus shares engages in a course of conduct which provided an equivalent to a cash dividend in a more tax effective form (e.g. if a pre-CGT shareholder consistently sold the bonus shares tax-free after receiving them).”

CatCafe - good question about whether it is worth the hassle doing all the research! I enjoy running numbers and looking for advantages, and would rather do it now and satisfy myself one way or another than kick myself in 20 years when someone posts here about how well they did out of the DSSP. Totally know what you mean though, and that's why the paperwork is also a factor for me. Accentuated by doing my tax myself, I guess!

 

Hi mate, sorry not going to download that file. But, I would say that a DSSP or BSP is really at its most effective at top tax bracket only. Then it starts to make sense......the beauty of holding stocks in a LIC with a DSSP is you can turn on or off as your circumstances change. So you have a good degree of flexibility. As to record keeping, I am not sure what the online brokerages do in this regard, I use 2 full service brokers who take care of all portfolio administration - one of the benefits that is often overlooked.

Yes its the latter i'm afraid.

and this is a fair point too, and goes to why a lot of people don't like DRPs, they want to allocate the dividend income (capital) as best they can at the time its received. This is a matter of preference.
The way I look at it, BSP can be used as part of a long term strategy for a specific set of circumstances, so good to know about, but maybe not useful for most.

 

What range of dividends do these three larger LICs pay? FF I assume?

 

Around about 4% ff atm.

 

Is there a site where I can quickly look up an LIC's share price against their NTA? Or do I have to calculate it myself?

 

They all release NTA at the end/start of the month, then you have to track it against how the index is performing before the next release.

 

check out this link too http://www.asx.com.au/products/managed-funds/market-update.htm

just double check NTA against LIC's report on their site before pushing the button.

 

AFI ARG and BKI websites have them. You'll have to calculate the intramonth NTA yourself though.

 

I'm thinking of using a home equity line of credit to invest in shares. I would be doing it very conservatively over the very long term. Does anyone here do this? If so, what do you invest in?

I am looking primarily Australian equities due to their higher dividend yield and franking. LICs are on my radar. AFIC particularly, as it looks like it's history of dividend stability is exceptional. BKI also appears to have maintained its dividend during the GFC. MLT looks like it cut it's slightly.

If the current trends continue and everything is trading at a premium to NTA, I will either wait for better opportunities or just invest in ETFs.

The plan is to use the dividends to pay for the interest on the loan. At current levels, the franking credits would probably put me slightly in the green. Over the very long term I benefit from the capital growth of the shares.

Over time I either gradually repay the facility and own more of the shares outright, which increases my share of the income, or else not. My main goal with investing is a growing income stream.

Would love to hear anyone's thoughts on this strategy

 

Have a look at keithj's post on this over at the somersoft forum. It's a sticky and covers his implementation of this strategy.

 

Solid plan. I've been executing the same for the past couple of years.

Rather than pay down the debt I'd be looking to purchase additional shares with any spare capital. Unless interest rates are crazy high or market is crazy overvalued.

 

@BingoMaster yes I do this. Our corporate trustee / family trust is a co-borrower on home loan. We transfer equity into the trusts sub account, then into the trusts external brokerage account. We also use conservative margin (currently 40% LVR at 4.10% AUD, I also have USD/CAD/GBP/EUR margin facility in this account)

As the trust has a lot of business income we aren't stretching for yield, so this portfolio is only slightly CF positive because it's also holding non dividend paying stocks.

A vanilla flavored LIC or ETF approach in individual names would work fine as well. I'd just slowly roll into it to reduce timing risk and pick from LICs / ETFs depending on where the value is. Maybe look at strategic beta like QOZ which is a slight yield tilt compared to VHY which is probably a bit overcooked.

Once the home is paid off you then either pay down the LOC or keep it in the market - cheap uncallable debt - and keep adding to the portfolio. No right or wrong on that, whatever you are comfortable with.

 

Thanks for the responses! I will check out the thread on somersoft too.

TheFalcon - that seems like a very good rate for a LOC. I've only briefly searched, but most seemed over 5%

 

Yeah, minimum facility size $1M for that kind of margin rate. I think aroind 5.5% is available for 250k BUT I'd say tread very warily with any margin facility, and absolutely not essential at all for what you intend to do, it's just additional leverage that needs to be treated with respect.

 

I hope I'm right in always assuming that margin loans and lines of credit were two different things. I won't be getting a margin loan, just a LOC. Mostly for the lack of margin calls

Cheers for the info. Seems like you've got yourself a great system set up and judging by the knowledge you've shown here, you'll be using it well! Best of luck

I'll post back here later in the year when I most like will be setting up the LOC and making purchases

 

Yes mate, different things. Rather than an LOC though in your case perhaps just get a sub account set up (same as your home loan rate) and have the bank break off a chunk of your equity and put it in the sub account. Your mortgage broker will be able to assist.
All the best and keep us posted

 

Was reading readings Fin Review today and in one of the articles one was complaining of some capital raising by 2 LICs which diluted the existing shareholders (12% and 7%). THey are risking shareholder revolt it was said. Surely there is not much a shareholder can do ? To ask for a change of management or even better if the share price is at a 15% discount, ask for a liquidation of the LIC is as good as impossible, no ? And why would LICs raise capital anyway (liquidity ?) they need to do it at a discount otherwise if you want to invest in them you would just buy them on the market ? My experience with capital raising has never been good (DUET) but they did it to fund infrastructure.

 

these two perennial dogs (hunter hall and templeton) have done raisings via placement below SP to institutions, thereby diluting shareholder value. Just bear in mind as mentioned previously LIC is just a type of vehicle, you get all types driving them

I don't have a problem with rights issues / share purchase plans, these are an equitable way to raise funds under management (liquidity / fees / bonuses / lower MER for holders) and generally favour small holders as they often have a limit of $20k or so per holder and it's a net positive provided they have capital available to buy. If not, yeah you get very slightly diluted.
In this way, committed long term holders get the advantage.

This is the opposite of what templeton and hunter hall have done. (In a way similar to IAGs capital raising 2 years ago where they screwed retail investors) They deserve their discounts to nta, the market has accurately priced these two.

When these things go to major discounts it's not long before activists get involved and shareholders can have their vote. Fireworks at AGM perhaps? But yeah, stick clear of rubbish like this.

 

Thank you 'The Falcon'. This thread is gold. I appreciate the time you have spent to very clearly explain LICs

 

Argo gets a mention today in Pete Wargent's blog:
http://petewargent.blogspot.com.au/2015/08/argo-delivers.html

Shame that all the large traditional LICs are trading at such ridiculous premiums. Been loading up on index ETFs during the dips instead. Although I would've preferred to accumulate more LICs.