September 15, 2017
Strong Money Australia has been M.I.A for the last couple of weeks.
Don’t worry, I haven’t given up retirement. Not yet anyway 😉
So what’s my excuse?
Well recently, I flew over to Victoria to spend some time with family, which was great.
It was so nice catching up with my family there and looking around a few places where I grew up. Not far from Phillip Island, for those familiar with country Victoria.
Anyway, blogging was not top of the priority list for that week. But last week I have to admit, was just pure laziness!
Here I am though, back in the saddle. So let’s get on with it…
Regular readers and people who know me, will be aware of our investing situation.
We started off investing heavily in property for capital growth. A couple of years ago we learned about shares and dividend investing, so we began buying shares for income.
We then realised we actually had enough savings/equity to retire, if it was all in strong income producing shares, such as Listed Investment Companies (LICs). So we decided to begin converting our property equity into dividend-paying shares, rather than continue working to chase more wealth.
Here’s where it gets messy…
Since we’ve now retired, but the dividend-focused portfolio isn’t fully built yet, we are living on the proceeds from property sales.
At the same time, we are also using this money to build up our holdings in shares and LICs.
As we continue this process, our dividend income grows larger and larger. And each time we sell a cash hungry investment property, our expenses get lower and lower. (The properties are negative-cashflow)
Eventually, we end up with no properties and all shares, with the dividend income easily exceeding our expenses. This may take quite a while, depending how soon we decide to sell the remaining properties.
Importantly, our level of equity is more than enough for us, should things not work out quite as smoothly as expected.
Recently, we completed the sale of another property. It was an apartment in Sydney, and we ended up getting a higher price than we expected. Those following the property markets will know that Sydney and Melbourne have been absolutely flying for the last few years and prices have increased quite a bit.
Originally, our plan was to systematically sell-off an investment property every couple of years or so, instead of all at once. This helps to minimise Capital Gains Tax, and also allows us to build up our share portfolio steadily, rather than all at once.
An approach like this might help reduce any ‘beginner’ mistakes I make. I still consider myself quite the amateur investor. I’m still under 30, after all. There is a gazillion things I don’t know, but I constantly try to keep learning.
As time rolls on, the more investing experience I have, the less likely it is that I’ll make poor decisions… well I sure hope that’s true anyway!
Another reason we decided on this approach, is to take advantage of Dollar Cost Averaging when buying our shares. If we invested a massive amount of equity all at once, and the market took a large dive, I would regret it.
Not because I would panic, but I would be pissed off that we purchased so much and then shares became cheaper!
Imagine for some strange reason, you buy a whole years worth of groceries. Then Woolies/Coles announced they are offering 30% off everything next week. You would be pretty damn annoyed at that I’m sure!
What we have settled on doing instead, is selling off the remaining properties at opportune times, so we can take advantage of strong markets and favourable selling conditions. Such as right now in Sydney and Melbourne.
At this stage, we will most likely sell our remaining Melbourne property in the next 12 months. Selling conditions are very good and the market has had such a strong run, which will inevitably slow at some stage.
I won’t go into specific numbers here, but just give an outline of what we’re doing.
We took a chunk of this money and bought more shares in our preferred LICs. Some of it went into Argo Investments (ARG), MIlton Corportation (MLT) and Australian Foundation Investment Co. (AFI) among others.
All of these conservatively managed investment companies have a great history of increasing dividends over decades. They invest for the long term in a large portfolio of shares, around 100 different companies, with a focus on providing shareholders with a regular and reliable income stream.
They are run at very low cost (around 0.15%) and many of the portfolio managers/investment committee own shares in the company too.
We are keeping a fair bit of the proceeds in the bank for now, sitting in an offset account. This is to cover the shortfall on the remaining properties and to cover future living expenses.
We still have plenty of capital left over from our first property sale last year, but we wanted to take advantage of the Sydney market’s strong selling conditions.
I recently got an email from a reader who wants to begin educating themselves about the sharemarket.
Sadly, there is not much good information out there regarding sensible long-term share investment.
This is where I pointed our dear reader, and where I recommend everybody start their education on investing in shares…
— Read ‘Motivated Money’ by Peter Thornhill. Pick it up from your local library, or you can get it on his website at www.motivatedmoney.com.au
— While you’re there, read his articles and most importantly, watch his videos! The videos are incredibly eye-opening and a breath of fresh air, in an industry that thrives on being complex and confusing. Peter also has an excellent interview on youtube where he shares his strategy and experience being fully invested in shares during the GFC. Fascinating stuff!
— Go back to step 1. Seriously, this stuff really helped me. Peter is great at explaining the simple yet powerful approach of investing in shares for income.
I’m a slow learner so I completed these steps a few times until the message sunk in 😉
It costs nothing, but it’s likely to save/make you a shipload of money, through better decision-making and a simple strategy to follow.
Peter Thornhill’s philosophy is to invest for the long-term in dividend-paying Industrial shares.
This generally just means all industries, excluding resources companies. Reason being, they are typically unreliable dividend payers. This is due to their cash-intensive mining projects and their profits are reliant on volatile commodity prices.
Resources companies as a group, also tend to have poor long-term performance, when compared to Industrials. Peter outlines this in an article here, and also has many great examples in his book.
The easiest way to follow this investment philosophy is to buy shares in good quality Listed Investment Companies (LICs).
These investment companies tend to invest with a focus on income, and heavily weight their portfolio to more reliable dividend-paying companies. They do often own shares in some of our largest dividend-paying mining companies, but in general, they favour Industrials and are underweight Resources companies.
Although I’ve never been, Peter Thornhill also sometimes runs a one-day course on investing in shares. This usually takes place in Sydney, and I’ve heard good things about it. If you’re a Sydney-sider, consider checking it out. Details are usually on his website if one is coming up.
If not, the videos and book will easily do the trick!
Update: Read my in-depth interview with Peter Thornhill here, where I grill him on all the most frequently asked questions about dividend investing and gain insights from his experience.
Just because I follow this investment strategy, doesn’t mean it’s the right fit for you.
Indeed, many people may just prefer investing in index funds. And that’s absolutely fine. It’s a great approach and can work fantastically well.
But for me, I’ve decided to follow a dividend investing strategy. I don’t want to sell off shares in my portfolio for income during retirement. Although this is the standard plan for many early retirees following the global indexing approach, it’s just not for me.
I’ll go into this in more detail in a future post.
But for now, just do the homework I’ve set 🙂
So there it is. A bit more about our strategy, where we’re at and where we are heading.
Definitely take a look at the material I’ve outlined above. It really helped me learn about how to approach the sharemarket in a sensible way. I’ve found an investment strategy for shares that suits me, and is simple to follow.
Importantly, it’s a strategy that provides an excellent income-producing portfolio for early retirement.
I believe other people would be well suited to this dividend investing approach too, so I wanted to share it.
Take a look and see what you think. Happy learning!