June 23, 2018
By now it’s well known that my philosophy is to invest for growing income. And when I review various LICs, I take a look at their performance figures. But the most important figure, to me, is how much the company has been able to grow its dividend.
Mostly, I’ll use the figures I can find to make a 20 year chart. Ideally, we could look back longer than that, but the data isn’t always available. However, I did manage to find a 60 year example while working on the Milton review.
In the case of AFIC and Argo, I managed to find 25 year and 30 year figures, respectively. Unfortunately, or fortunately (depending on how much you enjoy it), it required some extra number crunching! Apologies now for the non-number oriented folks.
You can find the dividend history for each company on their websites. The figures are relatively straightforward in recent times, but back further it’s a little trickier.
These days the company just pays a cash dividend. But each company used to also issue extra shares – known as a ‘Bonus Issue’ – paid to shareholders along with the dividend.
In a way, this is a form of ‘special’ dividend. And these Bonus Issues meant the shareholder received more income the following year, even if the official dividend-per-share remained the same.
So the dividend figures actually understate the cashflow shareholders have received over that time.
What to do?
Well, to find the real figure, I’ve gone back to 1986 (in the case of Argo), and pretended someone bought shares at that point and simply forgot about them.
Let’s see how the investor fared…
In 1987, an investor could spend $1000 and acquire 400 shares of Argo, at roughly $2.50 each. The dividend paid in 1987 was 11.5 cents per-share, giving the investor annual dividend income of $46.
Roll forward to today. Over the years, there has been 6 Bonus Issues by Argo. Each resulted in this investor being given additional shares by the company, in addition to his dividend. So after starting out with 400 shares, he now owns 813 shares.
Also, its important to note, this is without ever purchasing shares again and without reinvesting any dividends.
His 813 Argo shares paid him 31 cents per-share in 2017, giving the investor an annual dividend income of $252.
This means, when adjusted for bonus issues (which it should be), dividend growth over 30 years was 5.83% per annum. And our old friend, the RBA Calculator, says inflation over that time was 3% per annum.
As a side note – with shares in Argo now priced at just over $8 per-share (at the time of writing), we can also see capital growth over that time was 4% per annum.
Now let’s repeat the exercise for AFIC. Unfortunately, AFIC only has data available going back to 1993 for dividends. Here is the dividend history, and the history of shares issued for those of you playing at home (anyone?).
Our investor buys $1000 worth of shares at the start of 1993. He acquires 568 shares at a price of $1.76. So you know, I’m using the DRP price for this exercise as it’s usually very close to the actual share price.
AFIC were then paying a dividend of 10 cents per-share. In the first year, his investment would have produced an income of $56.
Over the years that followed, AFIC had 2 Bonus Issues, where our investor would have ended up with more shares and a higher future income, without doing anything. So after starting out with 568 shares, he now owns 687 shares.
Again, this is without ever purchasing shares again and without reinvesting any dividends.
The investor’s 687 AFIC shares paid him a dividend of 24 cents per-share in 2017, and it appears likely to stay at that level in 2018. Now his parcel of shares produces annual dividend income of around $165.
This means, when adjusted for bonus issues, dividend growth over 25 years was 4.42% per annum. The RBA Calculator shows inflation over that time was 2.5% per annum.
In addition, the value of AFIC shares has increased from $1.76, to $6.16 (at the time of writing). So this means capital growth over this 25 year period, was 5.14% per annum.
Around the time I was taking notes for this blog post, I stumbled upon some other data, purely by accident.
While I can’t find the precise article it came from now, Pete Wargent was discussing rental growth over time. And he kindly posted this chart of Sydney rents versus inflation, since 1986.
Note – this is not in dollar form, but indexed to a starting value of 100.
As we can see, from a starting base of 100, the price of Sydney rents has gone up to around 355. This means rents have grown at a rate of 4.31% per annum since 1986. And remember, inflation was around 3% per annum, over the same 30 years.
That’s pretty good. But not quite as good as Argo’s dividend, which grew by 5.83% per annum.
Or, if we compare it to AFIC over 25 years…
Sydney rents were at around 155 points on the chart, in 1993. And in 2017, sit at around 355. This gives us a rental growth figure of 3.37% per annum, over the 25 years.
AFIC’s dividend growth was 4.42% per annum.
Not to mention the franking credits along the way. And the maintenance and repairs required to keep the Sydney property habitable. This part is often forgotten. It’s definitely not optional.
While rents and prices may grow solidly over time (prices more-so), there’s a certain amount of upkeep or ‘reinvestment’ that is required, just to keep the property in a liveable condition, without adding value.
So, either you spend additional money on repairs and upkeep to maintain market rent, or your property will become completely undesirable to tenants and eventually you’ll be getting no rent at all.
What would the rental growth be if you didn’t reinvest some rent to maintain your property? Probably not much.
This means the difference in income growth over time is quite a bit larger, as the property owner has to cover these costs, naturally resulting in lower growth in free cashflow.
In contrast, the dividend investor is free to spend their entire investment income on whatever they see fit.
We’ll save the capital growth conversation for another day. I have little doubt that Sydney property prices have grown at a faster pace than Argo and AFIC shares over that time, for a number of reasons.
But what concerns me these days, is an asset’s ability to provide an increasing income stream over time. Ultimately, this underpins its value anyway and leads to capital growth, as the intrinsic value of the asset has increased.
What does the future hold? I don’t know. But I’ll take the hassle-free, and likely stronger growing income from the likes of AFIC and Argo.
Not long ago, we spoke about the market crash that is inevitably coming at some point. Since then, I’ve been doing a bit of extra reading on the topic.
I found the following articles helpful in learning how to think about downturns, what to expect, and putting it all in context…
Each article is from a blog I highly recommend, A Wealth Of Common Sense. It’s US based, but the writer, Ben Carlson, does a great job of sharing lessons from the history of markets and investor behaviour, among other things.
And here’s a couple of other articles I thought were pretty cool…
Originally, this article was just to share the adjusted dividend growth figures for AFIC and Argo. But when I stumbled across the Sydney rents example, I thought meshing it together would be interesting. Especially since the time-frame was exactly the same.
This isn’t an either/or debate. Nor is it a beat-up on property investing. I just thought it was interesting and figured you might too!
Both asset classes can be excellent and each will likely provide an income that grows a little quicker than inflation over the long term.
In any case, we need to find our own investment strategy that we feel comfortable with. And importantly, one that meets our personal goals.
At the end of the day, people who continually save and accumulate quality investments over their lifetimes will have little to worry about, except what to do with all the proceeds!