Peter Thornhill

Current yields are around 3.5-4.5%, but if you choose the older style LICS, those yields would be improving each year as the dividends are raised. (Similar to raising rents each year).
However this return is fully franked, so your actual return is higher.

 

Depends on the yield and the level of franking credits.

See
Tax Tip 147: How to Earn $95,000 pa and pay No Tax https://www.propertychat.com.au/community/threads/tax-tip-147-how-to-earn-95-000-pa-and-pay-no-tax.15496/

 

Would there still be tax savings for someone who is just a 'wage earner' (no company, not a contractor) and either has no one else (no kids, etc) to include as beneficiaries or only has a spouse in the same situation as them (also a wage earner in the same tax bracket)?

 

If you were absolutely on your own with no other family or friends there could still be tax savings if you pay more than 30% tax and this is because you could set the trust up so it could distribute to a bucket company.

Maybe I should write a post on how to structure the ownership of shares.

 

Yes please!

 

Spot yields for the LICs you mentioned are just over 4% fully franked, 4% is about 5.71% grossed up.

Guessing franking credits might be new to you as well, basically you get credit for the tax the company has already paid on the dividend (30%). To calculate the grossed up dividend for fully franked shares (all the LICs you mentioned are fully franked) you divide by 0.7.

 

Absolutely.

I have been trying to understand the advantage of A - a trust with bucket company owned by a further trust VS B - bucket company inside a trust.

B seems much simpler to me, I don't understand the benefit of the initial trust, couldn't you just have a company (for compounding) that then distributes to a trust to stream divs?

 

You could have a company own the shares from the begining - but then no 50% CGT discount.

 

A lot of people would like too know how the best structure as everyone would be different,from who's names are on each holding and just how pOwerfull compounding can be over time with "DR"..

 

see Legal Tip 151: Structuring the Ownership of Shares

 

Ok cool. So at 4% that's 40k with 1million invested (not borrowed funds) or just over with the current lic's I mentioned. So it's the same or similar return as property. with property if you bought 3 places, that also gives you depressiation benefits of say 3k a year per property for many years, that would also give you the additional tax back if you earned a little more.

So am I understanding peters book correctly? Buy these lic's to get a return and then reinvest the return back into the lic's to create a large base which over time compounds to give you a better overall paycheck when you need it?

 

So 5% net profit on your example given.

 

Different from your property example.

With a depreciation schedule you are paying less tax now by writing off the value of the property, you will pay greater capital gains if you ever sell.

With shares that pay 4% fully franked you pocket 4% now and 1.7% has been paid by the company to the ATO, you are given credit when you do your tax return. So it is equivalent to a property that yields 5.7% - just some tax is withheld already with the shares.

Remember with shares there is no risk of vacancy, maintenance or management expenses. There is the risk the company could do poorly which could slash the divs - unlikely an older style LIC will slash divs given they hold lots of different companies and pride themselves on steady divs.

 

Spoke to Peter yesterday as I'm keen to learn more and have 100 questions. His next seminar is gonna be in late feb if anyone is interested.

 

Partner bought me motivated money for xmas! Only problem is that it is sitting under the tree heavily wrapped! Xmas cant come quick enough for this kid!

 

Thanks for all the good points peeps...Half way through Peters book and just read the last few pages of this thread. Might have to start from the start again just to drill it in further. Just wondering if Dollar cost averaging is viable with LIC's.

I liked (still do) ETF's just because it simple and I didn't have to time or watch markets to carefully and was/am planning to DCA into some vanguard ones.

However the with the combined effects of the low fees, good track record's, bucket company set up and fully franked dividends smoothed out over the years from these aforementioned older LIC'S I think i'm sold on this idea.

I'm pretty sure I'm stealing a PC'ers idea from another thread. But would a good strategy be to DCA into LIC's for the most part and whenever they are at crazy premiums just buy VAS/VGS?

Cheers,

Kayne

 

Hi Kayne,

I would thoroughly recommend you read all pages of this thread. The book is very general whereas this thread gets into detailed implementation. Ensure you read the links here to Peter's "My Say" articles. The LIC thread will also answer your questions.

Investing in LICs need not be all that much more difficult than ETFs. There's usually one of Peter's preferred LICs around fair value or at a discount when one has new cash to invest. Discounted dividend reinvestment plans and Share Purchase Plans even things out over time. Treat these opportunities a bit like DCA.

Peter' s not a fan of ETFs but if you like VAS then by all means you can add to that when all LICs are trading at a noticeable premium. No matter what others say you've got to be comfortable with your strategy.

Cheers

 

Still haven't got all the way through the thread, just wanted to get a response on this in case I forgot

Would this be a good guide to buy?

...trying to hash out some rules for my investment planning ( I understand its to each person own preference) but as a good rule of thumb ... when it comes to buy (and lets say I'm just buying AFI,ARG,MLT,WHF,BKI) would you just go for the higher yield? because lower yields may ....

my minds a bit fried from uber-intense forum lurking all day - I hope I remember some of what ive read tomorrow ... but would that make a good buy trigger?

 

Sometimes I wish I'd never mentioned buying LICs at a discount. I try to do this but there have been countless times I've purchased LICs at a premium especially in a gloomy market. There are some of us who find this all very interesting and stuff around trying to eek out a bit of outperformance from our LICs through buying at a discount. And yes ideally I like an LICs yield to be above 4%. But sometimes I have purchased them with a yield less than this. Yield can be deceiving as there can be factors that aren't always obvious.

Peter would have a fit if he saw all this discussion on premium / discount. Here's his view on the issue:

The major weaknesses of LICs and managed funds - Cuffelinks (comments after article at bottom of page)

Peter just likes beginners to get started investing as soon as possible to let the compounding of dividends work their magic.

In a recent telephone discussion with Peter he expanded on why he suggests WHF (Whitefield) as a great beginner's LIC:
1. It's a pure Industrial LIC.
2. Being smaller and not in the media like the large popular LICs (eg AFI, ARG, MLT) there is less likelihood of the beginner investor panicking and selling because they read something negative about it.
3. It often trades at a discount because it is smaller, less liquid an the majority of poorly informed investors seem to think that resources such as BHP and RIO are mandatory in a portfolio.
4. It's been around since 1923, longer than any others.

The yield for WHF looks a bit ordinary and stagnant due to a hangover from the GFC given they didn't cut the dividend and unlike other LICs didn't eat into their capital to maintain it. I expect this will change in the near future. We won't even venture into this discussion as it's irrelevant for beginners.

And as for yield we probably shouldn't even be using this word and focusing on it. Search Peter's view on the the yield trap. That is, higher yield up front can often result in lower income over time. It's income not yield we should be focusing on.

So in summary the most important thing is to just get started. Start slowly then over time you can build your knowledge if you choose. And keep rereading Peter's quote above in relation to premium / discount. If you want to keep it simple and focus on living life than stressing / learning about investing / LICs etc and you believe in Peter's approach then just buy the LICs he recommends (ARG, MLT, BKI and WHF), take advantage of discounted share purchase plans, rights issues, dividend reinvestment plans etc and forget about the whole premium / discount thing. I stress again reread Peter's quote above!!!

Finally remember Peter's approach is a very long term one. Even if you had never heard of premium / discount then did like many and just ignored it, it tends to even itself out over time!

As usual note I'm not liscenced to give advice.

 

Thanks @austing

Is there anything about AFI, DUI, MIR that makes them very different to the 4 LICs mentioned above? I know MIR is mid cap but haven't looked into all the details yet. Thanks