Your survival guide for investing in 2019

This is an area I am struggling with, with respect to investing in US ETFs - either 100% US such as IVV or predominantly US such as VGS.

I’m lazy so using my iPhone stocks app, it tells me IVV has a yield of 1.3%. Now I understand US stocks have a lower payout ratio as they reinvest in their companies which should lead to higher capital growth. my goal is to grow dividend income to fund an early retirement. If all other things remained the same, wouldn’t IVVs capital growth need to be c. 4% higher annually than VAS to provide me with the same income level, assuming 1% IVV yield compared to 4% VAS yield and that remains the same? (I know it won’t but this is the current landscape)

Note, I’m keeping diversification and home country risk to one side, which is a different conversation.

 

I put this together not too long ago to compare income from VAS vs VGS, assuming dividends reinvested. The numbers for yield and earnings growth rate were from the PDS of each product. The Yield is gross (includes franking credits). Over time I would expect that price growth would follow earnings. (assumption is that PE ratio doesn't change dramatically):


Eventually the VGS income would overtake VAS, but not for a long time. And that is without reinvesting the dividends. If you do DRP, then VGS would never overtake VAS if the total return is lower:

 

C’mon @dunno ya gotta comment on the above post.

 

Meant grow 4x higher not 4% p.a

 

Cheers @Sticky interesting

 

I did a very basic comparison in a blog post for this question.

With the numbers I used which I think were pretty reasonable and timeframes like 10-20 years generally the higher yield VAS results in higher income (diversification argument aside).

Even assuming higher total returns for VGS it still takes quite a long time for the income to catch up.

I’m not allowed to post it here so if you google ‘should you invest for income or growth’ it should come up. Unless someone else here wants to link it.

 

Should You Invest For Income Or Growth? - Strong Money Australia

I’m still waiting for commission for referrals to this site given I’m just a struggling pensioner but cruely none have been been received as yet.

 

Great, thanks for that. Will definitely check it out.

 

Would be interested to see at 30% tax rate and 47% as well.

Then there is the problem of it being an extrapolated backtest only. There is nothing to suggest that those earnings growth rates / div yield will continue. Backtesting is notoriously unreliable, but we humans love it as it gives the illusion of control. We try to get the future to fit our desires....doesn’t work like that.

Personally I think this kind of stuff is misleading - Get the asset exposure right and the income will take care of itself. Too much focus on income leads to increased risk.

2c only and not a having a go at you as it is an interesting exercise anyway.

 

Haha thanks @Nodrog, I was gonna say the cheque’s in the but I heard you don’t do cheques

In simple terms, it a 2% yield which is growing at 7% per annum means the income roughly doubles in a decade. (9% total return)

So after 20 years the investment is earning 8% yield on cost because income has doubled twice.

For a 4% yield growing at 3.5% per annum, after 20 years that income also roughly doubles and results in 8% yield on cost. (7.5% total return)

So it’d take a good 20 years even based on a higher total return and twice the growth rate.

Yield matters I think. But so does tax. I did account for tax in the comparison on my blog and even excluded franking entirely, and the results didn’t change all that much.

But then there’s other factors to consider of course.

 

Agree 100%. Dividends taxed now vs growth taxed later with 50% CGT discount will alter the numbers considerably. It was purely an exercise.

I have also run a lot of RNG return scenarios and I always seem to end up back around the ideal as a 50/50 bias over the long term.

Currency is also a major part that not many consider as it does even out over time, but can be used to advantage. The currency gain on my US shares has been very kind to me since 2011. Who knows where the dollar will go from here, but if we do get up to parity with US again I will be increasing US exposure. If it falls towards 50c, then I plan to increase local exposure.

 

Here are the scenarios with DRP at 47% and 30% tax rates:
The income figure is before tax though.
In both cases, the final portfolio is larger for VGS, even with a lower total return.

 

Hi All,
I may well be missing something here but.... If we are all seeking income at some point (but not right now, as we are still working) it seems that based on the above that VGS will give the greater captial base result at whatever point we do need the income in the future. So if this approach is adopted, can we not sell up VGS, cop the resulting CGT and invest in VAS and get the greater income at the point where we need the income in the future? Like I said, I could well be missing something fairly obvious here

 

The difference in end value between VGS and VAS probably isn’t big enough to cover the tax liability and make it worthwhile. Not to mention your result, exit date and therefore your retirement/freedom will be dictated by market prices.

6 months ago you might be creeping up on your goal but now it’s been pushed back until further notice, simply because the market has gone down. That’s the problem with aiming for a certain portfolio value to reach your goals in my opinion.

 

Snowball - got it.

Thank you

 

Hi Tony are you thinking...Sell portions of VGS when retired or your income is low (early retired) to lower any CGT obligations (with 50% CGT discount also) ?

 

Redwing - yes. I was think a combination of these to make use of the higher capital growth during the period when you are working and then converting this to better producing dividends when you start to wind down and/or stop work completely. I believe Snowball is saying that the difference would most likely be negligible and not worth the trouble

 

@Tony that 50% CGT discount will soon become 25% discount....makes the active game even more difficult.

The answer doesn't have to be (shouldn't be?) all VAS or all VGS. You want to balance your market and currency exposures. Even add some REITs and / or Infrastructure, maybe some Emerging markets and cash/bonds of your choice. Its possible to put together a properly diversified portfolio that has a starting yield around 4% that you will never need to sell. The way things are going I'd be strongly considering that and avoiding anything that is going to create tax events.