Also a huge fan of AFIC here. Look forward to your future LIC reviews!
November 23, 2017
Welcome to a new series, called LIC reviews!
Since I bang on about LICs, I thought it best that I go through a few and review them for you guys. And in doing so, explain my thinking and why I find them attractive for our portfolio.
So from time to time, I’ll review various Listed Investment Companies. These are often LICs I own personally. And I’m happy to rely on these vehicles to give us the income we require, to sustain our financial independence.
Let’s get started…
AFIC was established around 90 years ago, back in 1928. Today, they’re the largest Listed Investment Company on the Aussie sharemarket.
Investors can buy shares in AFIC just like any other share, through their stockbroker.
AFIC now manages a portfolio of around $7 billion worth of Aussie shares. They have invested through many different cycles and varying market conditions.
Being long-term focused, the company will look past short-term noise about the markets or it’s investments. Instead, AFIC focuses on the long-term potential of the companies they invest in. And the ability of those investments to provide increased earnings and dividends in the years ahead.
Here we go, straight from their website…
Our primary goals are:
— to pay dividends which, over time, grow faster than the rate of inflation; and
— to provide attractive total returns over the medium to long term.
Sounds pretty good to me. In fact, that’s exactly what we desire for our own portfolio!
As a result, this is why these LICs sit so well with me. Our goals are the same. So we’re invested accordingly.
AFIC has a large diversified portfolio of shares – around 100 different companies.
Since they have such a large amount of money to manage, the portfolio is understandably weighted towards the largest companies on the ASX.
Here’s the breakdown of the portfolio by sector:
A good mix of investments there.
Because of this weighting towards large companies, the portfolio is similar to the Aussie market index. But although it’s similar to the ASX 200, there are still some notable differences. See below…
Also, you can see a list of their largest holdings here.
So hopefully, you’ve now got a sense of how AFIC is invested. One point I’d like to make – they manage the portfolio with their main objective in mind (a growing income stream).
Rather than replicating the index or buying what’s popular, they invest for the long-term income stream.
Most importantly, their dividend focus keeps them out of trouble when the next fad comes up. Whether it’s lithium stocks, marijuana stocks, or whatever. AFIC will just keep looking for profitable businesses. And those that can grow earnings and dividends over time.
As a result, the portfolio is satisfyingly boring!
The last 10 years have been rough for Aussie shares. Maybe you’ve seen the headlines screaming “zero returns for a decade!”
While this is true in terms of share price, it (stupidly) ignores dividends.
Truthfully, the starting point of 10 years ago is a little unfair. For one thing, we had that thing called the GFC!
So if one looks at 5 year or 15 year returns, they look much more normal. Give it 18 months or so, and then the 10 year returns will look incredible!
Anyway, let’s look how AFIC has fared over the last 10 years, including dividends, compared to the ASX 200…
So we can see that AFIC has managed to outperform the index nicely over the last 10 years.
Rather than getting zero returns, you would have earned close to an 80% return, over 10 years. And mind you, this is assuming you invested at the worst possible time (right before the GFC).
Being dividend investors, our focus is on the growing income stream. It’s just a bonus if our companies manage to outperform the index – it’s not the main goal.
Speaking of growing income…
Now, let’s look at whether AFIC has met it’s objective of providing growing dividends to shareholders.
Importantly, their goal is to grow dividends faster than inflation (CPI). So let’s check that…
Seems like they’ve solidly ticked this box. And over all periods, including the GFC.
This is an important point. While the GFC must have been painful for many, it wasn’t a disaster for everyone. Many LICs keep some profits in reserve, so they can smooth dividends to shareholders over time.
Because times aren’t always good and companies cut their dividends, the LICs will use their profit reserve to make sure their shareholders receive a relatively steady dividend, where possible.
Here’s their dividend history in chart form…
As we can see, AFIC was one of the companies who kept their dividend stable during the GFC.
So retirees would have received the same level of dividends, even though AFIC received less dividends from their portfolio.
As a shareholder, this is very comforting. It’s quite clear, dividend smoothing is a great feature of LICs.
And as AFIC receives higher dividends from it’s portfolio over the years, they regularly reward shareholders with a pay-rise.
AFIC is also one of the lowest-cost ways to invest in Aussie shares.
Its Management Expense Ratio (MER) is 0.14% In other words, very, very low. AFIC also charge no performance fees. Also, they’re internally managed – meaning no fees are going to an outside manager.
The MER is essentially the costs of managing the company. Things like staff, office rent, equipment etc. It’s an important point. Because as their portfolio increases, their costs stay roughly the same. As a result, the MER tends to drop.
Only this year, their expense ratio dropped from 0.16%, to 0.14%. Essentially, the internal management structure means the savings go to shareholders.
Overall, AFIC is a very low-cost way to access a managed portfolio of Aussie shares.
I really like AFIC’s long history, and track record of dividend growth. Also, it’s large diversified portfolio – around 100 companies from many different sectors.
Since they’ve shown good performance vs the index, that’s also pleasing. But it’s their objective that I find the most appealing:
To pay dividends which grow faster than inflation, and achieve attractive total returns over the medium to long term.
Living solely on investments, it’s critical that our income is relatively stable and keeps up with inflation over the years. So I’m comforted by the fact that increasing dividends is AFIC’s goal too.
For accumulators in higher tax-brackets, they also offer a Bonus Share Plan, or Dividend Substitution Share Plan. This is where you receive bonus shares instead of dividends, and pay no tax. It’s all ATO approved, I swear!
Essentially, this caps the tax rate at 30% (company has paid tax already, you pay none). If I was starting my journey today, and in a high tax-bracket, I’d definitely look to harness this benefit.
In fact, I wrote a lengthy post about using these plans and the tax efficiency of dividends in general here: The Surprising Tax Efficiency of Dividend Investing.
Also, given AFIC is a long-term investment company, the ATO has also allowed them to pass on the Capital Gains Tax discount to shareholders. So every now and then your dividend will come with franking credits, plus a special Capital Gains Tax discount, tax deduction. Win, win!
If anything, I would prefer AFIC had less exposure to resources companies. Primarily, because of the less reliable dividend streams from resource companies generally, given their profits are volatile.
But since they tend to focus on only the largest and strongest dividend-paying resource companies, it may not be a problem.
Also, their portfolio size may become tricky. With $7 billion, it may be hard to make meaningful new investments, without buying large stakes in small companies.
And given their long term ownership of some stocks, there would likely be a large tax bill triggered if they sold. There’s a chance this makes them hold on to companies with less-than-bright futures for too long.
Admittedly, the portfolio is probably still a little heavy on financial shares. But to be fair, they’ve been some of the most profitable companies in Australia. And many financial companies pay great dividends, so for an income investor, they’re hard to ignore.
Overall, I’m a fan of AFIC.
To me, they’re a great low-fuss option for investing in Australian shares. With a portfolio of 100 companies, our dividend income is sourced from many different businesses.
I think that AFIC should have good performance over the longer term. And I’m confident, in 30 years time they’ll be paying much higher dividends to shareholders.
Finally, I’m putting my money where my mouth is – I’ve been buying AFIC shares for our own portfolio.
Currently, it’s on a dividend yield of 4%. Or 5.7% gross yield (including franking credits). That’s a pretty attractive starting point. And an income which should grow steadily over the years.
A low-cost, long-term, dividend-focused and tax-efficient investment vehicle…what’s not to like!
Did you enjoy this LIC review? You can find more like this on the LIC reviews page, which includes my thoughts on Argo, Milton and others.
Also a huge fan of AFIC here. Look forward to your future LIC reviews!
Woohoo. LICs, now you’re talking young fella.
Note that AFI has around 20% more franking than the Index so in your Accumulation (includes dividends) chart above if franking was added the outperformance would be better again. Note also the index doesn’t include fees which even index ETFs charge investors. All this is no doubt nothing new to you.
AFI could be described as being a mostly ASX Top 50 LIC. So what’s the perfect match for AFI? Drum roll …… . MIR, run by the same mob but focuses on the ASX Ex-50 sector of the market. But I’ll wait till your review of MIR before discussing that further.
As for AFI those keen enough can get additional information to the above excellent review from the following Research Report:
Unlike a number of the new breed LICs that have listed in recent years old school LICs like AFI certainly won’t cause you any heartburn.
Keep up the great work.
Great review! Really looking forward to the next one! I’m a happy holder of both AFI and MIR. Not a mention of NTA anywhere (well done)!!
Unwillingness, just for you:
NNNNNNN TTTTTTTTT AAAAAAAA????.
Shame that these franking and other aspects don’t apply if you’re overseas… which is logic but a shame really, hence me looking and turning US shares
Saying this, all my aussie shares are ARG and AFIC too!
Yes but fully franked dividends are tax free and so are capital gains for overseas retirees (non resident for tax).
Look forward to more of these…..
Fantastic article. Keep them coming.
I’m a believer in AFIC – 20% of my portfolio is with AFIC. I also like how transparent their website is with all the facts and figures that separate growth from dividend return.
Thank you, thank you. 2018 is going to be the year when I start to learn about LICs. Articles like this which are easy to read and come from someone with direct experience are so helpful. Looking forward to more.
I really enjoy the blog article.Really looking forward to read more. Fantastic.
Umm, sorry to contradict but AFI is dead boring and has poor performance to match.
A 7 billion $ market cap means it is too cumbersome and can’t take meaningful positions in
growing companies. It holds on to underperformers like Telstra forever just because of their index weighting.
Here is the 5 year total performance figures( % p.a. ) to end of Nov 2017 comparing AFI to the ASX200 and numerous other well known established LICs.
ASX 200 10.5% p.a
AFI 9.05 % p.a
clearly there are numerous other LICs as listed above which have outperformed AFI over the past 5 years
and AFI has not even kept up with the ASX200.
Comfortably outperform the index over 10 years?? Not true.
As per their own website, over 10yrs the AFI share price + dividends has returned 4.1% per annum. Versus 3.7% for XAOAI.
AFI is no better than an index fund, and at times such as the past 5 yrs can’t even keep pace with the index.
There are plenty of managed funds and LICs that have done far better than 4% pa over the past 10 years. Have a look at WAM for instance. That is why AFI is very overrated. By saying it was boring I meant it is an underperformed.
Personally I use WLE ( WAM Leaders) for my large cap LIC exposure.
It’s still trading slightly below NTA.
Given Wilson funds long term outstanding track record, I expect it to beat the likes of AFI, Argo and Milton hands down.
I also took a large chunk of WMI ( WAM Microcap) at IPO last year. Early days yet, but performance so far has been fantastic, and means I avoided the hefty premium to NTA with WAM and WAX.
WLE and WMI make an excellent pair and I’ll keep them for many years if not decades.
The other LIC I’m keen on is Forager (FOR.). Steve Johnson is an outstanding value investor and his fund has returned 18% per annum for the past 5 yrs if you include the years spent as an unlisted fund. But I’m waiting for the double digit premium to NTA to hopefully shrink.
Actually make that 19.87% per annum over the last 5 yrs for Forager Australian fund, after all fees.
No wonder the LIC is trading at premium to NTA.
Thanks for a great site and great, great information Strong Money Australia. I have seen the stuff on Bogleheads but this is great to see information about LIC’s and an Australian site.
I have been investing since 1999 and haven’t really looked at LIC’s in Australia. I wasn’t aware that the AFIC MER was 0.14, that is amazing that it is about as low as Vanguard Australian index ETF (0.14 – VAS). I might put a small allocation in AFIC and try it out.
I think the income sounds good but I don’t know if the dividend advantage outweighs the mildly discretionary nature of their investing. It sounds like it is conservative and low cost and a 50 plus year track record is very reassuring. Still I am not sure if I like firm specific or management specific risk and that would limit my allocation to it. It sounds better and cheaper than the equivalent Vanguard product VHY (MER 0.25) ?
With AFIC, do you know if it has it traded at below NTA in the the last decade, and to what discount level ?
Thanks again for your site and great information.
If you have a look at their website http://WWW.AFIC.COM.AU
You will find a graph showing that the shareprice oscillates between premium to discount to NTA. Some years at 5 to 7% discount.
I would never buy what is almost an index fund at a premium to NTA.
Sorry made a mistake, the website is http://WWW.AFI.COM.AU
AFIC are part of my portfolio, 4% isnt going to make me a millionaire but they are about as safe as it gets along with their counterparts like ARG, WHF….slow and easy wins the race sometimes. Or you can sit back and watch your capital burn with others promising 11.4%..not mentioning names but you know who I mean…
as safe as it gets ??? gee whiz….
have a look how AFI went during the GFC.
they basically are very similar to an index fund.
if AFI are safe , then so is index investing. yeah, sure….
and AFI NTA growth + dividends hasn’t even kept up the XAOI index over the past 1, 3, and 5 year periods.
over the past 10 years, total shareholder return 4.5% per annum
yep, super safe and gonna get rich slooooooooooowly. EXTREMELY slowly, if ever.
Carlos, Mark Freeman didnt send you a Christmas card? so have a anti AFIC position?. You probably dont like the banks either right?
I want AFIC for its dividends and franking credits as I run an income portfolio, I dont expect it to be the next Bitcoin in terms of growth just give me growing income. GFC?…yep its called riding the bumps of investing, get used to if you buy Forager with SJ’s love for McMahon Holdings and all things contrarian….though I did read he has 26% in cash for FOR so he must be scratching his head where to invest…
Think I’ll stick with my Wilson LIC’s….Forager is a tad too boutique for me….
I am just starting to research into living off dividends and very thankful I came across this site. Really looking forward to you reviewing the other LIC’s and then putting it together to show how they could work in your portfolio. That has been one of my questions as many of the LICs seem to cover the same stocks, so very interested to see how they fit into the one portfolio?
Bought some AFI today at 6.09. Hope it is the right entry point for a long term hold.
Great site. I’ve been tracking my spending (up to 45% savings rate) and buying up LICs with my first purchase into AFIC.
Hi Dave – you mentioned above that you use CMC as your online broker. Have a look at SelfWealth. I’ve been using the platform for over a year now (after leaving the Commsec gouge) and very happy with it. The brokerage is never higher than $9.50 regardless of the trade size. They also have a promo link for members where you and the new person get 5 free trades with a 30-day expiry.
An interesting difference I just discovered with AFIC is the Dividend Share Subsitution Plan (DSSP). This can be used instead of the DRP. These are all clearly outlined on their informative website.
Just to make clear the differences:
DRP: dividends can be received as new shares at the given price possibly with a discount. The dividend is reported as a taxable income. Franking credits are received in addition. (So there will be an income tax discount accordingly – except of course if the proposed Labour changes ever eventuate.
DSSP: dividends are received as new shares in lieu of cash. The share price I believe is the same as the DRP price. Hoewever – from a tax perspective, this is NOT declared as taxable income. There is an ATO tax ruling on the website plus more indepth information. The other difference is that because a dividend is not paid, franking credits are not received by the shareholder.
So what does this mean. If you are on a higher marginal income tax rate ( >30%, though potentially less with company tax rate changes) then this seems to be a tax effective choice.
Assuming a marginal rate of 45%, through a DRP the effective tax rate is 15% (45% -30% franking credits. With the DSSP, the net tax is 0% , a 15% tax benefit. (ignoring medicare levy which probably adds another 2%) Even if you are on the 32.5% marginal rate, there is a small benefit of 2.5%
Presumably this means that if you are a 100% reinvestor and on a higher marginal tax rate than this is a winner.
I don’t see such a plan with any other LIC, and not that I think AFIC should be the only LIC you choose, but this is something that should be considered. Even if AFIC is boring 🙂
hi, only just discovered your site and not even sure how I got here. LOL Anyway, there seems to be a lot of material to read here so it will take a long time to get through it all. But anyway, on the subject of AFIC i may be asking a silly question here. On reading some of the info on AFIC you mention about fees?
I was under the assumption if i purchased shares eg through Comsec i only pay the brokerage fees? So not sure when you were saying fees, what you actually meant? Finally when going on the website of AFIC there is a NTA price and then you have the stock price. So when is it best to buy shares then?
Sorry for asking a question here that is not related to afic as i was not sure where to ask a new question.
Do you have anywhere on your website or links for a cheat excel sheet to keep records of buy and sell trades.
Could you explain the share substitution plan and taxation a bit to me please? I’ve been reading the ruling from the AFIC website and it says something about how the bonus shares are valued like the original shares for capital gains purposes/are dated from the original shares for CGT purposes. I’m not sure how that works in terms of tax records keeping when you’re doing ongoing investing?
Like just as an example say I buy 100 shares, then get 4 bonus shares. Then the next year I buy another 100 shares and get 8 bonus shares. Am I supposed to allocate the 8 shares across the first and second lot of shares I bought when calculating capital gains?
I’m a little confused with the DRP v’s DSSP. I’m in my mid 50’s…so if I was looking to buy into AFIC, and over time accumulate more AFIC shares…would I be better going down the DRP path, and then, once I want to “live off” the dividends (retirement), switch to DSSP…or, is it the other way around? I take on board that ones’ earning capacity comes into play, but I’m asking in a “generally speaking” term.
I recently started reading your blog, and it’s great. I’ve been DRPing in individual shares for a while now, but will move towards LICs and gradually out of most of the individual stocks.
Just a couple of questions about AFIC’s DSSP – if the yield is 4% and 5.7% with franking credits (I understand it’s a bit lower at the moment, but for argument’s sake I’ll use those numbers as they’re quoted elsewhere) – if the DSSP is only equivalent to a 4% payment, is it really fair to say it grows tax-free? If the DSSP grew/issued at 5.7% I’d happily say tax free, but at 4%, isn’t it more a case of ‘grows without any additional tax paid’?
Also, isn’t participating the DSSP a form of speculating on future tax policy? While I think franking credits are here to stay (even if Labor continues to push its opposition to the refunds as it did in the 2019 election), if the CGT discount were to be abolished (eg going back to indexation) or reduced (eg a discount of only 25%), doesn’t that mean that future tax liabilities will be higher for all taxpayers – even those at the lower end of the income spectrum – that sell shares that were accumulated through a DSSP?
I find the DSSP an interesting concept, but – like investment bonds – it’s just too hard to believe that the ATO will let structures pass that will disadvantage it unless it’s a macro govt policy like super.
Thanks & keep up the good work.
Addendum – if the DSSP is only equivalent to a 4% payment, is it really fair to say it grows tax-free, as the company pays 30% tax on profits?
Thanks Dave. I love the idea that you and Peter teach about LICs for growing income streams… but wonder if times have changed… eg. ARGO grew divs each year from 2014 (28c per share) to 2019 (33c) … but has since reduced to 28c in 2021. Whitefield seems to be the only LIC I’ve found that has managed its income to increase dividends each: 17c p share in 2014 to 20.5c in 2022. I know that this is only a 9 year time frame…. AFIC’s dividend per share has been fairly flat: 22c in 2014 to 24c in 2016… and stayed at 24c to the current year … except for a spike to 32c in 2019… which which might have been managed better to provide a growing dividend stream to today???
Hi Dave, was just wondering if your views on afic have changed much since this article was written?
It always seems to be way above Nta, and with no increase in dividends dosnt it kind of mean that they aren’t meeting their goals of paying dividends that keep ahead of inflation?
Yeah definitely makes sense thanks. Like you I’m starting to favour etfs over lics.
Great to have you back by the way 😀