Why Property is Better Than Shares

Newbie question - if you are plugging away putting money into LICs for early retirement from the outset, as opposed to building a capital base then converting across, arent you missing out on capital growth opportunity? Ok you reinvest FF divs, nice, but (unless i am missing something, which i may well be) you're not exploiting any CG of the shares. Would you not be better to grow portfolio (property or shares) then sell / equity transfer or whatever suits, and then put the proceeds into LIC as you were approaching early retirement phase?

 

You don’t miss out on capital growth with dividend paying shares.

The broad basket of companies that the LICs hold will grow their earnings over time.

This means they’ll be able to increase their dividends over time too. And, because the companies are earning more, they’re more valuable - meaning they grow in value (price).

So while share prices zig and zag around in the short term, they are inextricably linked to earnings over the long term - which we can expect to grow with the economy.

I’m sure there’s some experienced dividend focused investors here, that can confirm they definitely haven’t missed out on capital growth.

Take a look at a chart of the aussie stock market over the last 50-100 years. Although it’s a relatively high yielding asset class (especially with franking), it still has good growth over the long term too.

But the thing is, it’s the earnings and dividends that drives everything, that’s why so much focus is put on it here.

Even if our shares grow in value massively it doesn’t do much (directly) to our income stream.

So the share prices are more or less just a sideshow, not the main attraction

 

I suppose building a share portfolio while working requires discipline and dedication, you need to commit to it. If you need money quickly you must make sure you still don't touch the shares unless you really have to, and you need to stick to a plan to add to it in some regular way. Perhaps this is where the regular person gets unstuck unless they read a forum like this or get very good advice. It's very tempting for people to not commit to, it's just like exercise. You can have good intentions but you might quietly give it up.

Whereas with a propery portfolio you simply buy property A, B and C etc. It's really complicated and costly to sell so you don't sell unless you mean to do so. Once you make the decision to buy and you have the borrowing capacity to go ahead, people are usually very committed to the purchase.

Both share portfolios and property investing requires patience and time.

There are ways to make money quickly with property if you are active, and you can have a gamble/short term speculate on shares but that's a different kettle of fish.

What percentage of the population would build a share portfolio if it wasn't mandated? I think only wealthy people would. Not an average Jack or Jill. In that regard, super helps because it's forced savings but I don't think most people have that much in super if they only have the employer contributions invested.

 

No capital growth? Maybe a picture will help. Included in the following chart (dividends reinvested) are more Industrial shares focused LICs ARG, MLT and WHF. Note that franking credits aren’t included which would significantly improve the performance even further as per comment below:



Accumulators Anonymous rejoice.

 

My wife was also fearful when I suggested we should convert all our remaining IPs into LICs. But she clicked when we had a close look at our past cash flow. The only time when dividends went down was during the GFC but we found there was a surprisingly high number of years when our IP income dipped by even more. It was weird realising that our property income had GFC-like events of their own without us even noticing!

With Anna still wanting to hold on to some property for SANF reasons we came up with this 5-step fund allocation plan:

• First, determine our level of basic income – stuff that we can’t live without – and hold enough fully owned IPs to produce that income net of all costs. This is to cover the unthinkable where all else is lost and we have to survive on that income alone (in our case, 50K pa = 3 IPs)
• Second, put aside a cash buffer to allow us to recover from dividend/rent shortfalls without ever being forced to sell (in our case, 3 years of emergency expenses = 150K)
• Contribute as much as is allowed into super to be fully invested in LICs (we were already doing it)
• Use any left over funds to hold more IPs, leveraged to still supercharge the portfolio but only at neutral CF (in our case this would mean LVR around 55% – but my wife luckily agreed to skip this step because such properties would have a ROI no better than ungeared LICs)
• Sell all unallocated property to hold more LICs in a trust outside of super (she’s happy with that)

With the above approach we came up with what we thought was the best compromise between long term income, growth, risk, tax effectiveness, SANF and PITA factor.

Not saying you should follow the same recipe, and your circumstances could be completely different, but we were able to deal as rationally as we could with some very irrational stuff – fear, desire, hope and everything that has to do with the inscrutable future.

 

Great post!

May I ask where the IPs you hold and sold were? Were they in good suburbs in major cities...units/houses etc?

 

Thanks @Lacrim. Houses of good quality construction, simple maintenance and relatively recent build in middle ring suburbs.

 

Very sensible plan. Always enjoy your posts @truong! and learn something from you.

Totally agree with you about lower cashflow from IPs. Less capital required to invest in LICs to generate the same cashflow as IPs.

 

Thanks snowball. Above is what i was getting at i think. If i buy a share for div to hold 'forever' during a build up to early 'retirement' i dont believe i benefit from that growth as much as if i had a focus on income and growth together (prop or shares or both), then when portfolio is large enough convert over to holding 'forever' div paying shares? I am on board for the benefits of LICs, reinvesting divs, compound growth over medium to long term etc, just trying to get my head around best way to 'build'. Particularly seeing good results through a Super portfolio combined return about double the 4 - 4.5% FF div rate.

 

Thanks Nodrog. Have tried to clarify my thoughts in response to snowball's post.

 

Thanks for sharing @truong. Where abouts were your properties that experienced GFC-like events?

 

Less to do with location and more with tenancy and legal risk, maintenance/repair and bad management. I described these events as “GFC-like” because they were largely unexpected and they affected IP income to a greater extent than the GFC did our dividends.

Eg. IP damaged in the QLD flood, or left vacant for months on end due to a botched sale settlement, or thrashed by back-to-back tenants, etc… Although these issues could have been managed better it remains that they are inherent to the PI business model.

 

Are you thinking something like the US market which has great growth of recent times then selling/converting to Aussie LIC's?

 

Buy a place for $800k, undertake $400k in renos/repairs, then sell it for $1m due to the market. As far as the buyer knows it must be a good location as the capital gain is 25%; at least that's what the agent said. One of the aspects of property. The buyer sometimes doesn't know how much has been spent on the property just the original purchase price and what they are going to fork out to get it.

 

Not sure yet Redwing. Lots more research for me competently answer that one. Just trying to get some concepts aligned in my mind at this stage.

 

#4-does the serviceability still come in play if ine wants to borrow against equity to buy shares?

 

Yes

 

Thanks @Terry_w

 

I agree with @Terry_w, the answer is yes. Howevr, some lenders may take some of the expected earnings from the equities you purchase as income for servicing purposes. You would need to speak to a broker about this.

 

Thanks @Perthguy .

I was actually reading @Terry_w comments on one of the other thread I was involved in.