Well, it’s been a long time between drinks as far as portfolio updates go. In fact, the last one was back in September 2017!
Not for any special reason, other than it slipped my mind and there was plenty of other stuff to write about. But in the interest of transparency and also entertainment, I’ll aim to post a portfolio update at least twice a year.
This way you can see where our cash is going, and maybe even cheer from the sidelines at (hopefully) the progress.
As I’ve said before, the idea isn’t to copy this yourself, because what feels right for me, may not be right for you. It’s about sharing and following along. So let’s get started…
Here’s a breakdown of where our money is invested right now. These figures are excluding Super and are percentages rather than numbers, for privacy reasons.
Regular readers will know we hit Financial Independence with our savings mostly in property, along with some shares. While the shares provide income, the property doesn’t. In fact, they cost us a bit in negative cashflow.
So to create the income stream we need to live on, we’re slowly selling these off and investing the proceeds in cash producing investments. A couple have been sold so far and here we are!
The end goal is a portfolio that generates a solid level of cashflow which covers our household spending. That portfolio will be mostly shares, with some smaller investments in peer-to-peer lending and real estate investment trusts (REITs) – which are still technically shares.
Why not sell all the property now?
A fair question. And we thought about that. But we decided against it for the following reasons…
— The tax on our capital gains would be much higher if we sold multiple properties in the same year.
— We wanted the option to decide when to sell, to optimise the outcome a bit and try to avoid selling during property market weakness.
— We were (and still are) learning more about shares and designing our portfolio, so we didn’t feel comfortable having to invest such a large sum all at once. Essentially, it’s less stressful this way because of our initial lower experience with the asset class.
— We wanted to dollar cost average into shares over time as we transition, in case the market fell and we missed the opportunity to buy more at lower prices.
How we manage our cash
While all this is hardly ideal and a bit messy, our monthly cashflow works like this…
We have a decent sized lump in the bank which is used to cover personal and property expenses. Investment income and any part-time work income rolls into the bank and can be used for this also. And from the balance, we invest each month (usually $2-3k) into shares.
The cash balance declines over time, until every few years we need to sell another property and continue the process.
After 10 years (say), we’ll then have zero properties and a decent sized share portfolio which produces income higher than our spending.
Got a headache yet?
There’s a reason I say just to focus solely on building dividend income quickly from shares. Rather than trying to build equity, either through growth shares or leveraged property and then switching strategy later to focus on cashflow.
Everyone’s different, but that’s what I’d do starting from scratch today. With a strong savings rate, you don’t need high growth or leverage!
So how is our portfolio going?
Well, by my estimates, in the last few years our Perth properties have actually gone down by almost $200k. So on that front, not great!
But luckily, we left work with more equity than we needed, due to my partner’s home equity when we met. There’s less cushion than before, but things are still on track.
If there’s a positive, we have no vacant properties, most loans are now fixed at decent rates and setup as Principal & Interest. That wasn’t our initial plan, but the rates on variable interest only loans were becoming extortionate!
While it means cash is going towards paying down debt instead of shares, at least there’s hopefully some equity building and we’ll get that cash back eventually when we sell.
Our peer-to-peer lending with Ratesetter keeps delivering a very reliable source of relatively high yield monthly income with no hiccups thus far. This suits us nicely being in a very low tax situation. Hopefully the loans, defaults and provision fund continue to be well managed into the future.
As for shares, the portfolio value bounces around as usual. Well, I assume it does (we have two accounts so I rarely bother adding them up to find the total ‘value’).
Importantly, we’ve had another year of dividend increases across most of our holdings. Of course, regular top ups mean the income we’re paid continues to grow regardless.
In addition, we recently received a decent special dividend from BKI which was nice, with both BKI and Milton suggesting there may be another special dividend later in the year.
Share portfolio changes
We’ve done enough shuffling (with our portfolio) in the last 12 months to make Pat the Shuffler look like a couch potato!
Well, maybe not that much, but there have been some changes.
One idea that kept slamming me in the face until I could no longer ignore it, was that of simplicity. The benefits of simplicity are many and this deserves its own post!
For some reason, I have this weird tendency to over-complicate things. Not because I think it’s better, but maybe I just get so enthusiastic with what I’m doing that I inadvertently create more work for myself.
Anyway, that’s what I did with our share portfolio. But I’ve since realised that while I love dividend focused investing, I don’t want to spend tons of time on it, especially if there’s no value added for the extra time spent.
Instead, I’ve decided I’d rather spend that time on other fun stuff – like helping in the garden, reading books, playing with the dog or writing blog posts for you!
What were the changes?
After building a big messy portfolio of individual dividend stocks and LICs, I’ve since sold and re-bought the individual stocks into our super fund accounts, as part of an ongoing stock-picking experiment (mixed results so far, in case you were wondering).
As for the LICs, we’ve reduced these down to 3 main LICs (Argo, Milton and BKI), and one smaller holding which focuses on mid-sized and small companies (QVE for those playing at home).
So we’ve been mostly topping up these core holdings over the last 12 months. And I have to say, the smaller portfolio is heavenly. I joked recently that I’m enjoying simplicity so much that soon there’ll be no holdings left!
We also added the Vanguard Australian shares (VAS) index fund to our portfolio late last year, as mentioned a few times on this blog.
Why the index?
My feelings towards the index have changed in the last couple of years, for a few reasons which I’ll get to in another post (very soon I promise!).
One big reason I decided to add VAS to our portfolio is to add greater opportunity to buy shares when the market is down.
Wait, can’t you do this with LICs too? Well, yes and no.
You may remember the market falling towards the end of last year. As I was licking my lips and looking to put some money to work, I noticed that AFIC and some other funds hadn’t moved much at all, while the index was down around 10%.
Certainly not ideal when you’re looking to buy. So by buying the index instead, I was able to take full advantage of the market drop, buying more shares at lower prices. Yippee!
This is normal by the way, it happens quite often. But it also occurs when the market goes back up. Like recently, the market has rebounded a good 10% and many LICs again haven’t moved quite as much, so they’re currently trading at discounts to NTA.
LIC share prices are generally less volatile and slow moving, causing them to regularly trade at premiums and discounts.
What did we sell and why?
Firstly, I don’t like the following holdings any less than before. But for the sake of simplicity we had to choose something!
Here’s how it went down.
AFIC. Late last year when the market was down, AFIC was trading at around a 7% premium. At the time, our cash balance had taken a hit due to some property expenses, and since I wanted more simplicity, I decided to sell AFIC and use the cash to top up some other holdings that were more attractively priced.
AUI. Australian United Investment Company has a fantastic dividend history, but one of its negatives is low liquidity. This means when putting in a buy order you could be waiting quite a long while for it to fill, a day or more. Not a big deal, but still a little annoying.
Soul Pattinson. Not a traditional LIC. More like an investment conglomerate – owning large stakes in a handful of businesses, along with a small property and share portfolio. An incredible company with a great history. But after purchasing around 18 months ago, it returned around 100% on my investment (for valid reasons, but still unusual for a reliable investment company), so the desire for simplicity and being able to sell tax-free were the main reasons for its removal.
Just to be clear, I could also argue to keep these and get rid of our other holdings, so don’t read too much into this. After all, these three companies have all had stable and increasing dividends for the last 19+ years!
Current share portfolio
After mulling this over for a while, I’ve decided to share my portfolio breakdown as well.
That way you can follow along as I build this income focused portfolio and continue to evolve my thinking on the topic. At this rate of sharing, soon you’ll know what colour undies I wear too!
There it is. What a number of you have been wondering for ages! Pretty basic and unscientific, right?
That’s partly the idea. 80% of the holdings are relatively boring, diversified and low cost. And the portfolio has a clear focus on reliable income streams.
The portfolio will very likely change over time, as most people’s do. But I’m happy with it at the moment.
Depending on who you are, you’ll either think this portfolio is borderline loopy or perfectly reasonable. That’s okay. We each have to invest according to what feels right for us and our own situation.
Our own goal is dependable and steadily growing dividends. Speaking of which…
As you probably know, I enjoy tracking our annual dividend income. It’s the key measure of progress in my eyes.
Here’s how our portfolio income has grown over the last few years since we started investing in shares.
This is including franking credits. As I’ve written about before, the real progress is made through regular investing, not high investment returns.
I’m looking forward to plugging in this year’s total, which so far looks to be a decent bit higher than last year.
After that, income growth will be slower because we did invest some small lump sums (from our cash balance) during the last two years which probably won’t be repeated.
It’s very satisfying to keep score this way. Honestly, I can’t even remember what the market did during this time. Up, down and sideways, most likely.
Income vs Expenses
For dividend investors, I think it’s also useful to regularly compare your annual dividend income, with your household spending.
What you’re looking for here, is your coverage ratio.
Which means, how much of your spending is covered by your investment income?
Let’s say you spend $40,000 per year, and your annual dividends are $2,000. Your coverage ratio is 5%. So at this moment, you’re 5% of the way to being financially independent.
But as you continue purchasing shares regularly, reinvesting your dividends, and your holdings increase their dividends, your income and therefore your ‘coverage ratio’ will grow quite quickly.
Just a few years down the track, your annual dividend income is likely closer to $10,000. Now your coverage ratio is 25%.
Use this as your yardstick to measure progress. Forget fluctuating market prices!
As you can see, last financial year, our investment income was around $15,000. Our spending in 2018 was around $45,000. So a third (33%) of our spending was covered by investments. This year, it’ll be well over 40%. And as we proceed to slowly move our savings from property to shares, our coverage ratio will keep increasing.
At this point it’s pretty much steady as she goes.
Our plan is to continue to walk the talk. That is, maintain our moderate spending, and keep adding to our portfolio regularly, regardless of what the market does.
We’ve also started the process to sell the next property, so we’ll see how that goes.
Hopefully you got something out of this post, or at the very least, it satisfied some curiosity. While it might not be the cleanest of FI situations, we’re making it work!
How’s your portfolio going? Let me know in the comments!