January 12, 2019
Welcome to a new series!
Where I take some recent reader questions, and do my best to answer them.
Basically, I’m stealing this idea from fellow blogger Aussie Firebug, because it’s genius! (I’ve already asked and he said it’s okay!) 😉
Since I’m replying to reader’s emails and helping where I can, instead of replying one-on-one, why not share that with everyone for maximum efficiency?!
Especially since many similar questions keep popping up, so now many more people can benefit.
Disclaimer: This is not financial advice, it’s for general information only and you’re solely responsible for your own choices. As always, do your own research before making financial decisions.
Hope you had a great Xmas and Happy New Year.
We have been busy buying LICs with the market being down. I have also been looking at A-REITS as some of them have good yields.
What are your ideas on this?
Thanks very much, happy new year to you too!
Firstly, nice job with your continued buying while the market is down.
Real Estate Investment Trusts (REITs) are an interesting question. We do own a couple of REITs in our own portfolio, but I don’t necessarily recommend it for everyone for a few reasons.
For one, it’s taking individual stock risk. By choosing a couple of companies to put money into, is obviously higher risk than choosing a diversified fund like an index fund or LIC.
REITs tend to carry a modest level of debt. If management get a bit carried away or a bit sloppy in terms of managing this risk, it can have a dramatic effect on the company and on the income paid.
Many REITs struggled to get through the GFC. Some didn’t make it. And a number had to severely cut dividends. In fact, the REIT index was down by something like 80% because so many were over-leveraged, couldn’t get more credit and had to dump assets at low prices to meet loans that were coming due.
Since then, they seem to have cleaned up their act a bit, with more modest levels of debt and more sustainable dividends.
But we do already own some REITs inside the LICs we invest in. And REITs also make up around 8% of the ASX300, so there’s a fair bit of exposure already for those who own an Aussie index fund like VAS.
That said, some of the yields are quite attractive and many have been providing growing income streams for a while now, which is why we own a couple. But one issue is, unless you make them a large part of your portfolio the extra yield isn’t going to do much for your overall portfolio yield and income.
Let’s say you have 10% of your portfolio in REITs paying a 7% yield. And the rest of your portfolio is paying a 5% yield. This means you’re only getting an extra 2% yield on 10% of your portfolio.
This increases your portfolio yield by 0.2%. Not bad, but maybe not worth the increased risk. Plus the portfolio becomes less simple to manage and creates more mental clutter. Maybe I’ve just talked myself out of owning individual REITs? Haha!
Basically, if you really want to follow the companies closely and keep it as a small part of the portfolio, it’s probably fine for a bit of extra yield. But most people are likely better off sticking to the simple diversified funds that already pay very healthy dividends.
Hope that helps Lennie!
Hi. My investment strategy is now income/dividend focused.
Do you have a post on your exact portfolio? Or general advice on what percentage to
invest into each LIC?
Thanks for the great content.
Kind regards, Jason
Glad you like the blog!
I don’t have a post on my portfolio, but I’m considering doing one soon. Not because it’s the best portfolio, but just to share my thinking as it grows and as I learn more, and maybe that’ll be useful for people.
I’ve actually made some small changes recently, and likely will continue to do so, mostly to make it simpler and more enjoyable to manage.
There’s no magic formula. Basically, I think it works well if one chooses a few funds they like and dedicates a certain percentage to each.
It really depends what one is comfortable with. Some have no issue putting everything into one or two LICs. But I’m not one of those people. For whatever reason, I prefer to have more than that – it’s just what I’m more comfortable with.
If sticking with large LICs or an index fund, I think it’s fine to put a hefty percentage in each, and doing it equal weight is the simplest way. There’s a ‘portfolio building’ post coming soon, because I think that might be useful, so stay tuned for that!
Don’t worry too much about the breakdown. Basically, you want to get exposure to a large portfolio of Aussie shares. Whether you choose an index fund or a couple of LICs, and in what proportions, it doesn’t matter too much.
If including other things like a small/mid cap LIC, then a smaller percentage in that would be sensible I think, due to higher fees. And if you want overseas shares, then that’s pretty simple – I’d just go for Vanguard’s VGS in that case, in whatever amount you desire.
Hope that helps a bit for now. And I’ll get working on those posts!
Last time VAS dividends were approx 112c per share (for the quarter), this time 71c.
I’m not at the stage where I’m relying on dividends for survival, but I’m wondering whether this is usual and / or consistent across dividend payers this quarter (e.g. such as the LICs you talk about) or due to something else?
I’m new to this so happy to be pointed in the general direction of an answer to read up on myself if this is a stupid question…
Hi Craig, Happy New Year!
That’s not a stupid question at all! Took me a while to get around the index dividends as well.
But we have to look at it on a year by year basis. And how I measure it is in financial years, as that’s how companies operate.
Looking at these figures, in the Financial Year 2016-17, VAS paid distributions of 294 cents per-unit. And during the 2017-18, it paid dividends of 337 cents per-unit.
Maybe think of it this way…
In any 3 month period, VAS will pay every dollar of dividends it receives from the companies in the ASX 300. Since most companies pay dividends every 6 months, and many pay during different months from each other, these dividends fall in different 3 month periods.
And from year to year, the same company will pay the dividend on a different week or maybe even month. That sometimes causes it to fall in a different quarter than last year. That’s why the quarter-to-quarter payments move around a bit.
Bottom line: every 3 months, we’re just getting whatever the largest 300 Aussie companies paid in dividends during that time. Over the 12 months it all evens out and VAS passes through everything it receives.
Here’s how it looks on an annual basis, for each financial year since VAS was created…
The difference with LICs is, they collect all the dividends over a 6 month period (from approx 100 holdings) and decide on a dividend to pay shareholders after that.
This gives more of a smoothing effect with dividends remaining very consistent over time. Not that it’s necessarily better, just different. Some people like this feature, and some don’t.
Hope that helps Craig, and thanks for reading the blog!
Just want to start of by saying you are really doing great by blogging
My financial status in few lines is as below:
Our total income is less than $180k. We are recent immigrants to this country. We bought a house a year back in suburban Victoria, within our means. Also have an offset account.
After mortgage and other expenses, we still end up saving around $2k per month. We allocate it to things like emergency account, house maintenance funds, baby fund – expecting our first born in April 🙂
We have no other debt (credit card, car loans etc.) I’ve managed to save $2k just for investing into something.
From different blogs, it seems quite good to get into ETF or LICs, so my question to you would be – is $2k good enough to start investing in an ETF, considering the fees etc. I can allocate around $100 per month to this fund. Do you have any suggestions?
I will take any suggestion only as a general advice, and will not hold you accountable for any losses. Good luck with your blog. I’ll definitely recommend your blog to my friends.
Thanks a lot. Ally
Congratulations on getting yourself setup well already. You’re off to a good start, and by learning more about this stuff your future will be even better!
As for fees, they’re based on a percentage of your investment.
So, with a fee of 0.14% for example – like for Vanguard’s Aussie index fund, or a low-cost investment company like AFIC – your $2k investment would be charged $2.80 per year in fees.
And if you had $20k invested, your fees would be $28 per year. So it’s all relative to how much you have invested.
You could definitely start with $2k and buy a parcel of whichever ETF or LIC you like. But after that I would only buy in minimum parcels of at least $1k or $2k because you’re paying around $10 brokerage each time. So get started and then work on building at least $1k for the next parcel.
Hope that helps. All the best with your plans, and thanks so much for sharing the blog with your friends!
Great blog and have been going through the backlog of posts. I’m also from Perth!
Quick question – whats your portfolio now? Do you provide info on allocation across LICs and the numbers out of interest? And do you still own any property?
Cheers mate. Tristan
Thanks for going back through all the posts, nice work!
Yep still living in Perth – in Wanneroo. Moved here from Scarborough last year.
Our situation is very messy right now unfortunately, so I don’t think it’d be much help. A fair bit (35-40% of net worth) is still in property. We’re slowly selling these down over time as mentioned before on the blog.
Then we have a fair bit (20%) in cash. This is for us to live on, to fund the remaining properties, and to invest monthly into shares. This gives us flexibility on when to sell properties, while dollar-cost-averaging into shares.
Also, we have some (10%) in RateSetter. I like it because it’s something different and enjoy the high yield monthly payments. For those interested, I wrote about RateSetter and Peer-to-Peer lending here.
And the rest is in shares (30%), which will eventually grow to become the majority of the portfolio in time.
I don’t provide specific guidance as I don’t think it’s really needed (but I can’t anyway!).
The LICs I discuss are mostly ones we’ve personally invested in and which I think are a solid choice for someone looking to setup an investment income stream for financial independence.
I feel that either a couple of LICs, an index fund, or a combination of both is all that’s really needed to meet our goals. So I’d suggest others at least consider something similar. In my view, specific amounts in each don’t matter much, as they’re all similar in some ways.
As for numbers, I don’t provide the exact numbers just out of privacy reasons, but you can get an idea from the story of my journey on the About page.
Cheers, and thanks for reading!
Hopefully you enjoyed this post and some of you found it helpful. Reader’s names have been changed to protect their privacy 🙂
Remember, the point isn’t to follow my advice. It’s simply to share more of my thinking, to hopefully clear up common queries and allow readers to evaluate things for themselves.
As always, you can send me a question through my Contact Page, and I’ll do my best to answer it. Thanks for reading!
Now it’s your turn… how would you answer these questions? Have you got any additional insights to share?