LIC & LIT Reading LIC share value...

@Il Falco you seem to be a big fan of BRK. How much do you hold? What is the plan for your holdings - since there is no dividend payments? Sell and then buy LICs for dividend income - or sell and live off the money?

 

Doesn't a person on the highest tax bracket still get a reduction in tax equivalent to the franking credits? I'm still unsure how someone with only dividend income benefits more once the tax is considered.

I do agree that there is no one size fits all approach but I like the fact that PT sells a book and a course for advice that most people could apply reasonably successfully to a major part of their portfolio. I consider the approach low risk and if followed consistently one that should work except for a Black Swan event, in which almost everyone will be in the same boat. This versus fund managers / financial advisors who charge ongoing exorbitant fees to the unwary.

People need to properly understand risk, I think that is the fundamental knowledge required to manage their investments.

 

For top bracket holders the question is do you want your capital returned to you each year so you need to pay top up tax of 18% post franking or do you want to let it compound with no additional tax.

I would not consider any approach that preaches Australian industrial stocks only low risk, but thats just me.

 

Yes I like BRK. I no longer hold it, all of our capital is in private companies. But this isnt really about BRK..........BRK was used in Ashley Owens article. Its really about total return vs. dividend investing, i am taking a position that needs to be taken as there is a religious fervour around dividends which is frankly irrational.

Lets think about creating "dividend" income from a business that doesnt pay dividends ;

1. At year one, 10,000 shares are acquired at $1/share.
2. Over 10 years, earnings and share price compound at 8% pa for end value $2.16/share
3. Holder decides to take "dividends" by selling some stock as he wants some cash. Say 5% of holdings.
4. The tax effect looks like this ;
a) $1/per share is capital return - no tax.
b) $1.16/per share is taxed at 24% after long term CGT discount. (this is 48% bracket payer).
c) the net tax on this distribution (total) is less than 13%

Meanwhile, same guy taking franked dividends is topping up tax to 18% each year, whether he needs the income or not.

The point is that there are many roads to Dublin. Its not even about "compounders", it is about total return vs. dividends, and one could substitute low payout ETFs, markets, companies and get similar results.

 

Yeah I get your point. So it's pretty rubbish comparison since once comprises of large taxable income and the other none. Franking should prob only be included when comparing to ASX 300 returns or something.

I guess some ppl are maybe mislead by thinking they're going to have that return plus all franking in their pocket over the 20 years and best BRK. I feel this is what you have issue which is fair. It should be noted everyone's return would differ depending on their tax bracket. But to assume a 48% tax rate is probably unfair.

The investment was compared using a 30% tax rate which I think is fair since it's not 0% but it's not 48% but somewhere in the middle.

If u got the 4% div with no franking on top tax bracket you'd wish it was there. It is real cash even for top tax payers.

 

I agree that the chart is fine, its the then supplementary one way leading rubbish which i take issue with.....it is in no way even handed.

 

Your example is a good one.
I'm not sure dividends are completely irrational.
Who's to say your capital is going to be 2.16. Your future income is entirely dependant on the whims of market sentiment.

You could hold the LIC via company or low income spouse or reinvest tax free via BSP and take the div 10 years later.

I think everyone's in agreement now there is many options and we have to consider things properly for our own circumstances and not take someone's word for gospel.

 

I'd say a religious fervour is irrational . Well yes, change in PE. Voting machine - Weighing machine etc. All washes out in the end. I'd advise all who have swallowed the dividend gospel just to take a look outside, it may well help you long run, on a risk adjusted basis.

I'm not against dividends at all.....they are an important component of total return.

 

Sounds like you haven't had your Cocktails today. Perhaps palm the kids off to Hotel kiddy care then head for the bar. As for me the boss is away for three weeks so I'm stuck here with the chickens. Fortunately the home bar is well stocked.

 

It's probably fair to say most are attracted to dividends mainly for the behavioural/psychological advantage. What do you think?

 

I'm not @Il Falco (just his evil twin) but I'd suggest an even greater reason dividends are more popular here is because of imputation. That unfortunately has morphed into yield hungry investors demanding a higher payout ratio. Good in the short term but not so good in the long term.

 

Haha yes, franking turns the innocent quiet religion of dividends turns into an all out cult here in Oz!

 

• PT espouses big LICs that include more than just the industrials, although industrials is his focus.
• We have discussed Australia vs International asset allocation and there is an argument that overweighting Australia is similar risk to overweight in International for Australians.
• Anyone who understands the diversification that LICs provide should understand international diversification.

Therefore, with some thought I think it can be part of a low risk strategy.

I don't know if PT talks about structures but discretionary trusts and bucket companies can help with tax and franking. People paying significant tax should see tax professionals. What the investing world needs is the choice to reinvest without paying capital gains whilst having the option for dividends. Reducing brokerage to zero may be the alternative.

 

Good points.

Owning just Industrials I think is ok. After all it's everything except Resources which are highly cyclical and volatile. Big markets like the US are nearly all Industrials anyway as the resource sector is tiny.

The problem with ASX is not so much about owning just Industrials but concentration in general. I don't care all that much for Resource exposure. With it or without it there is only minor difference in long term total return with potential for some outperformance with an all industrial portfolio. What's possibly more important is getting some diversification outside the Top 20.

Anyhow see what Snidely has to say after a few cocktails.

 

Snidely is flat out juggling naughty kids who hate the nanny. So, i've nothing more to add

 

This will solve the problem with the nanny:

Mawhawhawhahahaha

 

I think dividends seem like a free lunch. i.e. You get to keep all the capital and get free money. Of course we know that is not what's happening, or at least some of us do. This is very old school "don't spend the principal", treating dividends as interest on capital...which it ain't.

At first blush, it seems like the higher yield the better....but investing is more complex than that, if one has the interest to dig into things of course. Not required, one may do just as well not knowing....

 

Yep. Everyone piling into the same trade and figurative handful of companies on the ASX for franking credits.

 

Don't get me wrong, large LICs can absolutely be a component of a sensible, diversified portfolio. I'll come back to this after fewer mojitos!

 

Yes it's all very interesting and problematic when one takes currency into consideration. 40% unhedged total portfolio would be about as high as I'd want to go.

Ok here is a contrarian view I've been considering recently. The issue when we add industrials only focus on our AU holdings is taking a large bet on banks and some other bits and pieces. We take a concentrated position in an already concentrated market. I am totally down with the cyclical nature (and historical procyclical investments) of resource stocks...but I can't help think about Robert Lucas and the rational expectations hypothesis. (In short ; Howard Marks "who doesn't know that") The physical nature of resources may well provide a moat that cannot be destroyed by our woeful underinvestment and overtaxing, supported by consolidation in that industry we've seen in recent years. If any sector is widely disregarded, then it is likely to provide value in the future (flip side to bid up small/mid cap asx industrial stocks now)