Negative gearing shares calcs

Considering using some mortgage re-draw to put into shares, let's say VAS. Can someone confirm the following logic on gearing. Not quite sure the right numbers for VAS (feel free to correct).

Dividend yield 4%. Franking 70%. Gives grossed up yield 5.2%.
Interest rate 7%.
Net income = 5.2% - 7% = -1.80% (loss).
After tax = -1.80% x (1-0.47) = -0.95% (loss).

Therefore, I am holding at a loss, need capital gain ~1% to break even. Probably 1.33% if you include CGT. Also, is anybody doing this now? It probably made more sense when shares could be held at a positive carry.

 

Yeah agree with the math. Thought franking was higher but you can look that up.

 

Test out your figures with a hyperthetical $100,000 invested

$5,200 income
$7,000 expenses
$1,800 loss
$846 tax saved

The net cost to you is therefore $1800 - $846 = $954

So if the shares increased by $954 in year one you would be breaking even.

But if you actually sold these shares you would be paying CGT on this $954 profit = $224

So they would have to grow by $954 + $224 = $1,178

The growth needed to break even in the case of a sale would need to be 1.178%

 

I think our CGT amounts differ because i assumed 50% CGT discount

 

Numbers are about right but I wouldn’t consider CGT because why would you ever sell VAS? It’s the ultimate long term investment and the lack of transaction costs is part of the key to making it work. Buying and selling index funds makes no sense to me. It’s not a house that will need redevelopment or a reno one day.

It’s also worth noting that this shortfall is much lower than any resi property worth buying, when considering total costs of ownership.

It’s also worth noting the current average dividend payout ratio of AU stocks is around 60-70%. So the asset is increasing in value through retained earnings over and above the dividend yield. Then there is future growth in earnings…

Mentioning all this because this is pretty much what we have done…

 

Anyone worked out how long before the average growth rates causes the dividends, grossed up, to exceed the interest?

 

Wouldnt interest cost only be $3,900 after tax if in 45% tax bracket, for one year, so $1,300 gain so about $ 700 dollars after tax. You could offset CL with CG to break even

 

I had to think about this for a second but you're absolutely right. It doesn't apply to us because we use a trust, so I missed it but this is absolutely what would happen if operating at the top tax bracket.

 

I’d like to do this myself. How would the loan work? I have a ppor mortgage fully offset, would the loan come from that or would I get a separate investment loan?

 

split it, pay it down and redraw. just like debt recycling

 

what about the income?

 

For higher yield lower growth index funds yeah but for higher growth funds like vgs, ivv, ndq etc what’s the point in all that growth if you never realising any of it. That’s their biggest benefit. Same with property investors quoting x% growth but never sell and hold for the rents. I really don’t get it. I guess if your asset base is high enough and you don’t need to, then sure.

 

Ask Warren Buffett?

Every time you sell at the top marginal rate, your net worth goes down by almost 25% of the value of whatever you sell. Not exactly attractive for someone trying to build wealth… particularly when you can only do it in big chunks with properties.

Not selling is a form of tax avoidance.

So you hang on for a low income year but then what if that never comes? First world problems are still problems…

 

Agreed while you are accumulating wealth. I wasn't clear but was referring to post retirement.
For property yes I would sell one per year once I stop working and cop the paper net worth loss in order to achieve something better than the net yield and headaches they provide.
For ETFs I plan on partly creating my own dividend by selling down portions of the high growth funds

 

I’m in similar scenario where I’m about to deploy borrowed funds and have been grappling with which type of ETF. The old growth vs yield argument. I’ll probably end up with a mix of both. Has anyone gone down this path and stuck entirely with higher dividend paying etfs?

 

*Disclaimer I am not an accountant and also may have poor math skills.

VAS distributions are very lumpy, so depending on the period you measure there are different average growth rates. Based an a growth rate of about 6% it would take 8 years for the starting yield of 4% to reach 6% yield (roughly current mortgage rates).

 

Thank you asw1 confirms like what i was guessing

 

Borrowing for Shares Calculator | Noel Whittaker

 

I've done this last year with IVV and NDQ and couldn't be happier despite the low "yield" and zero "franking". I'm a "Total Return" kinda boy.

 

I have been giving some thought about extracting equity and investing in VAS lately, and come across this thread which has been very informative.

I knocked together a quick spreadsheet and just wanted to run it by a few people to see if there is anything obvious that I have missed?

Based on the assumptions in green (personal circumstances and VAS 10 year historical data), does this snapshot look like its in the ball park?

It seems like holding VAS may return a positive result in the fourth year?