The Mystery of Dividend Preference

US tax on dividends ; provided held for more than 60 days are treated as “qualified” and are taxed at the long term capital gains tax rate. I.e. 15% for dividends on income up to $500k for example. Let’s look at this from high income earner perspective;

US federal company tax is 21%. Add 15% personal tax, effective 36%.

Australian large company tax 30%. Add top up 17%. Effective 47%.

USA is the dividend investors paradise

 

@dunno / @The Falcon and others seeking your thoughts please.

Might be a bit off topic but if drawing on capital is part of the retirement plan than it likely has some relevance.

@dunno above you mention investing in REITs (assuming Global as well) for income as a mistake in that it decreases diversification. Perhaps you’re suggesting excessive allocation to it rather than modest overweighting in a more broadly diversified portfolio.

In theory the likes of REITs / Infrastructure although higher income assets attractive to income focused investors can at times offer correlation benefit which could be useful for investors drawing on capital. The usual one zigs while others zag etc so that there’s a greater chance of an asset class having growth to draw on when required.

However assuming an equity focused investor (minimal cash / bonds) I’m still struggling with this in that when one really needs the benefit of correlation (bear markets, crashes etc) all these asset classes generally converge (1 for all, all for 1). Then of course there’s the high cost of even index product at around 50 bps!

So do the likes of REITs / Infrastructure really offer the best of both worlds being income for dividend investors and correlation benefit for capital drawdown investors or are they just a high fee unnecessary
addition to the portfolio?

Given numerous other issues and distractions of late I can certainly see why some are content to simplify it right down to a very low cost bare bones portfolio of just VAS, VGS and some cash.

 

If you are in risk assets you will get hammered in a GFC scenario. Your only protection is cash.
I dont expect levered assets to offer protection when credit is in short supply. Across market cycles these assets do perform differently however, DJRE shows correlation of around 0.6 over the long term.

 

Thanks mate. In more normal market situations there’s no doubt that REITs / Infrastructure can do their correlation thing. Sixpark’s portfolio over the last 12 months shows this clearly.

Personally I’m more conservative in that I like a sizable allocation to near risk free cash / TDS. However I know that @dunno is nearly all equities with a small cash allocation.

I suppose that although I like GReits / Infrastructure if one has a decent allocation to cash / bonds to see it through times of any unrealised capital drawdowns whether in more normal or extreme times is it worth paying around 50 bps to overweight asset classes already held very cheaply in VAS (14 bps) and VGS (18 bps)?

 

That is a decision for each investor. Whatever helps SANF and ability to stay the course.
Probably anything more than a 3 fund portfolio is a total waste of time, but we still do it

 

Hi @The Falcon , do you get concerned about tax consequences due to high payout ratio of GREITS and Infrastructure during accumulation?

 

Not really, I give up about 40bps "tax burn" vs. ASX300. Don't mind that.

 

LOL. Nailed it perhaps. Probably why I haven’t acted on investing in these asset classes yet, my subconscious has been possessed by Taylor Larimore and stops me from doing it.

 

What about the additional 36 bps in fees as well vs VAS?

 

Hi @Nodrog

You and @The Falcon have pretty much covered everything my response will contain.

Yes, I am only referring to diversification issues if you have excessive allocations.

I have no problem with a little extra exposure to Property, Infrastructure, Factors, Alt’s whatever takes your fancy to try and harvest some rebalancing benefits. Whilst the benefit I seek works on non-correlation during “normal” times I do not expect any risk asset to work in a “hedge” type fashion in a down turn. When the **** hits the fan all risk asset correlations tend to go to 1.

If people overweight Property or Infrastructure because they think it will reduce their draw down or provide income in an economic downturn, they will probably have thunk wrong which can tend to lead to panic at a bad time when they realise. But some non-correlation benefits in normal times can justify a small overweight. It’s fiddling around the edges thought, limited upsdie, limited downside. But we like to fiddle!!!

I am fully exposed to risk assets – I do nothing to protect my down side – I will take 50%+ drawdowns a couple more times over my life time for sure, it’s part of my plan. If I ever change my sensitivity to drawdown, I would hold cash or heaven forbid gold to dampen the volatility. My risk exposure is very much a personal choice, I'm more fearful of the relentless destruction of cash than the volatility of equity and 50% of current is still plenty.

 

May be @dunno and Buffett think alike

Buffett reckons someone retired with house paid off, kids grown up and have a portfolio of $1million bucks generating $30K in dividends don't need much cash at all

Long video start either 4:50 min mark or 6min mark



Cheers,
Oracle.

 

Right, so across the portfolio (AU Index, Global Dev Index, EM Index, Global Prop Index, Global Infra Index, AU Bond Index) gives up 11bps in fees and 37bps Tax over a straight VAS portfolio.

 

I think @dunno would want an extra zero on those numbers.

 

Looking at it across the entire portfolio given the lower allocation to higher fee funds that’s still a good outcome.

 

Thanks for your response @dunno.

Yes understand the reasoning behind that and know that you hold VVLU for that reason. It’s fee is still on the lower side. I suppose I wonder when the fee is 50 bps (or higher) and likely greater CGT depending on what structure they’re held in, is the rebalancing benefit negated by additional cost?

 

Without a time, machine there is no definitive answer to that question.

But you would probably relate to one of the following more than the other which could help make the decision without knowing the outcome.

• I am attracted to simplicity, I don’t need above market returns, there is no definitive benefit, so I won’t bother.

• I like tinkering and despite no proven definitive benefit, the downside is limited so what the hell. Buy the ticket take the ride.

 

Excellent response and one I think would help many investors decide which path they want to take.

As time goes on I’ve been slowly progressing toward the first one. The tinkering urge in me is still there a bit but the desire for simplicity seems to be overriding it more and more. I see that as a good thing given my nature. You’d think simple would be easy but for the “interested” investor it’s not that easy at all. Looking back, for me investing simplicity is the ultimate goal. Shame it’s taking me decades to get there.

I think this from Rick Ferri is one of the best I’ve seen relating to the education of many successful investors:

A successful index fund investor goes through four phases:

1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds

 

Nodrog: which fund would you chose if you start all over from now ? Thanks.

 

first 70 seconds.... dunno munger? or charlie dunno?

 

I'm going to go out on a limb here and say something from the Geoff Wilson stable?

@Nodrog ???