Peter Thornhill

Woohoo another thing I remembered I had stored away on Thornhill and it's a very worthwhile read. Here's a summary of one of his seminars held in 2013 kindly written up by a poster on another site (with some reformatting and tidying up by me):

 

thank you so much for sharing your thoughts @austing , it really is fantastic eye opening stuff.

 

Thank you @Ouga.

Get me started on Industrial Share income investing then it's hard to shut me up despite having followed this approach for a very long time. And have plenty of time on hand today as it is raining outside.

I think many more investors would follow this income strategy if the following was put to them.

Anyone reading this thread or who have done their research would know that share dividends are "dramatically" less volatile than capital price movements as shown in the following chart:



Consider the two following approaches to living off ones share investments:

1... Capital drawdown model:

Dividends only provide a minor part of ones income. Most income will come from having to sell your shares. This could result in a capital gain or loss at the time.

This is popular in the US and overseas in general where dividend yields are much lower. Plus they don't have the benefits of our magnificent imputation system.

An example of this type of approach is "Bogleheads".

2... Dividend Growth Income model:

Dividends provide all of ones income. One never has to sell his/her shares. Hence capital price volatility can be ignored.

An example of this is "Thornhill's" approach.

Ok. Now imagine another GFC or worse event hits causing major sharemarket crashes around the world. Your shares fall 60% in value. Prices may not recover for years. Dividends however as has always been the case fall by much much less.

So back to our "Capital Drawdown" vs "Dividend Growth Income" models.

But before answering the following question refer back to the above "Price vs Dividend Return" chart and study carefully.

Now as a retiree in this imagined future GFC type scenario tell me which of these two models are going to allow you to sleep at night, consistently pay the bills and put food on the table?

Once you answer this question you'll know what type of investor you are!

 

Nothing like a thread on Peter Thornhill and dividend income to entice you back to the forum eh austing?

Great posts, thanks for continuing to share your knowledge for all of our benefit

 

Yeah,

Damn forum rehab clinic was a waste of time but home brew therapy most pleasurable.

Been raining most of the weekend up here so not much else to do but ramble away here.

No doubt some are sick to death of me banging on about the same boring topics. But this dividend growth income approach played a significant role in us being able to enjoy a somewhat early blissful retirement. Hence just like Thornhill I never tire of promoting this magnificent approach to investing.

Cheers

 

Not I. Many snippets of wisdom I'm trying to keep in my brain for later use.

 

Yes Austing you have point out some things which are not so obvious to us amateur share investors. The graph showing dividends pretty flat was very interesting. Also the distinction between the bogglehead approach and the Thornhill approach is something I hadn't realised or even thought about.

 

@Terry_w,

As usual things are a little more complex than the information I gave in my previous post. I was trying to keep things simple and concise to get the message across. But my conclusion is the same.

For example, Bogleheads will be up in arms that I've excluded bonds from the examples above. In theory Bond price direction is generally inverse to that of shares. Hence Bonds are suppose to act as a volatility dampener on the overall portfolio (ie bonds/shares) so that those reliant on drawing down their capital for income are in for a somewhat smoother ride.

Given that bond interest rates currently provide woeful income again one is hoping and praying that the capital outcome from a combination of bonds and shares is sufficient to meet ones living expenses in retirement.

Of course whether one takes either approach or a combination of both it is critical to keep a couple of years worth of living expenses in cash to reduce the risk of having to sell assets at the worst possible time.

I could be here all night expanding on this. But it still comes down to whether one chooses to fund their retirement from:

1. Relatively safe and predictable dividend income from Industrial shares and NOT having to sell the assets.
OR
2. Volatile capital growth (you hope) and having to continually sell the assets.

Personally I'm with Thornhill in that Bonds are of no interest. Go back and check out Thornhill's Industrials chart. The income growth and reliability of dividend income leaves all other asset classes for dead, bonds and cash especially.

If you want volatility pity those poor retirees reliant on interest from supposedly "safe" cash/term deposits. Their income has been cut in half in a relatively short period of time and many are having to drawdown their capital which at this stage of their life is unlikely to be able to be replaced. Now that's what I call risky. Give me boring, safe and predicable dividend income anyday.

As per Thornhill it is all very simple:

1... Industrial shares for a relatively boring, safe and predictable growing income stream.

2... Cash for liquidity.

And if possible a LOC on hand for when the next market crash come around.

Cheers

PS: Terry I also consider myself an amateur but I know what has worked for us in the long term and what lets us sleep well at night especially now we're retired.

 

Isn't this 'dogs of the dow' strategy which involves churning the industrial stocks wherein:

• You get a high dividend from the stocks till they are out of favor but still listed in the DJIA.
• Once they find favor, it is usually followed by price increase and you take the profits and buy the dogs again.

 

My God, how did you come to that conclusion? What a terrible insult (only joking).

I can assure you that this is absolutely nothing like the "Dogs of the Dow" strategy.

 

No, not at all.

 

What are your thoughts on international shares for diversification? I currently hold a small parcel of VGS ETF but I haven't settled on a target asset allocation (domestic vs international) as I'm conflicted by the tax effective and higher dividends of aussie shares. I plan to be 100% equities with 2 years spending in cash.

 

Not at all. I'm almost tempted to drive to Maleny to pin you down for a few hours (and the home brew)

 

https://content.markitcdn.com/resea...1Nzk4Ni0xIiwiZmlkIjpudWxsLCJkdCI6bnVsbH0=.pdf

 

Thornhill doesn't subscribe to traditional diversification and asset allocation models. I think except for some UK LICs which he acquired during his time working over there he is 100% Aussie Industrials other than some cash.

BUT please, please don't fall victim to almost religious devotion to a single strategy as I have witnessed with the likes of Index Investors / Bogleheads etc.

I have thrown a lot of convincing stuff at you in relation to the Thornhill approach which may have you conclude I'm a Thornhill fanatic. I needed to do this to highlight the virtues of this approach given the "dominance" of the traditional view of investing. Does this mean to say you need to follow it FULLY? Absolutely NOT. It would be a bad decision to do so if having all your shares in Australia worried you. Or if having nearly all your investment is shares does the same for example.

Here comes the Clanger. I said I have been following the Dividend Growth Investing approach for a very long time BUT it not the only thing I do. As I say, keep an open mind and work out what feels right for you particularly in regards to SANF.

Admitadly the Thornhill approach is the major part of my Investment Strategy but I also use what I consider the better elements of other approaches as follows:

1. Indexing where it works best:
... Large cap shares eg VAS and large cap index proxies such as older LICs.
... International developed markets eg VGS.
... Bonds (I don't hold as explained).
... Listed property (I don't hold as included in VAS by weighting)

2. Active where it works best:
... OZ Small cap shares Eg MIR, QVE.
... Emerging markets eg PMC (also holds developed markets and some absolute return).

3. Dividend income approach:
... Emphasis on OZ industrials for their high yields and franking credits eg selected LICs as proxies, some direct "no brainer" Blue Chip Industrials (eg banks, MQG, TLS, WES, WOW ...).

4. Capital Growth approach:
... International, emerging markets and small/mid cap funds.

5. Periodic buying but some timing:
... Periodic - occasional DCA, SPP and Rights Issues.
... Timing - keep some cash and LOC on hand to take advantage of dips and crashes.

6. Cash for liquidity, capital preservation and opportunity:
... Liquidity to meet pension payments and expenses (expected and unexpected).
... Capital preservation so if dividends are cut I don't have to sell assets to meet living expenses. Same would apply to capital drawdown approach. And Guaranteed to get capital back, $250k per bank Gov't cash deposit guarantee.
... Opportunistic buying eg share dips and crash buying.

7. Other:
... Long term buy and hold.
... Core and satellite approach.
... Minimal time and maintenance required with set and forget the desired goal so can focus on enjoying life rather than trying to analyse reports and pick winners etc.
... Holding correct assets in most tax effective structures.
... Etc etc etc.

But back to @CatCafe's question in regard to Oz / International split. For a passive growing income stream having a larger allocation to Aussie Industrials (with the free kick from franking credits) is very hard to argue against. As a retiree (having already secured a generous dividend income stream) my longer term goal as opportunities present is to have around 15% allocated to International shares.

In regard to International shares note that there are also some excellent overseas dividend growth stocks out there which may be worthwhile looking at particularly if retirement is quite some time away. The Falcon understands this area well and would no doubt love to comment but he is severely under the pump at work lately.

Personally I was much more focused on Industrial shares prior to retirement. I knew Aussie Industrials were the fastest path to an early retirement reliant on passive growing income. But having achieved that goal I have been progressively increasing my allocation to International shares etc for "insurance" and a little additional peace of mind.

Could go on and on but hopfully I have illustrated that no matter how superior any strategy is it has got to be right for you! Often a blend of strategies will be the right fit for many.

 

So much to take in and reflect on! Thanks for the detailed response!

I intend on spending a significant part of my early retirement overseas so I'll need to pay greater importance of international shares to protect my purchasing power. I'm thinking 30% international and 70% domestic.

Otherwise my path to date has been pretty simple, property to grow asset base as quickly as possible, then pivot towards shares for a reliable, tax effective and growing income stream. All new funds are now being directed towards shares via a combination of DCA and timing.

Currently I'm invested in a large cap ETF (VAS), a bunch of large cap index proxies (LICs) and a large cap developed international ETF (VGS). Trying to keep it as simple as possible (80/20 rule).

 

My copy of Motivated Money just showed up in my letterbox 2 days earlier than expected! Movie on for the kids and I'm off to read it!!
Awesome thread by the way.

 

I hold approx 20% portfolio weight overseas listings, the rest Oz industrials listings...but in that 80% are a lot of foreign earnings;

Ansell
Computershare
CSL
Ramsay
Sonic Healthcare
Resmed
Flight Centre
Macquarie
Coca Cola Amatil

That's not considering stuff like Platinum and Magellan that have a link to international markets performance. So something to bear in mind, when you break out of cap weighting, you tend to pick up a lot more international exposure, especially in the industrials.

 

I was looking at something like PMC or MFF for an international active exposure (already have some VGS), fairly minimal as a % of the whole. PMC seems to have a much higher dividend compared to MFF which sits well with me.
Are there any other products that I should be looking at in this area?

 

Most of my International is direct stocks, only LIC I hold is MFF. Haven't looked at PMC.