We’ve got some great questions today! So hopefully you find this informative and it explains my thinking in more detail.
By doing these posts, my aim is to share my responses with all of you, rather than just one person.
But remember: This is not financial advice, it’s general information only. You’re solely responsible for your own choices. As always, do your own research before making investment decisions. OK? 🙂
My question is in relation to VHY (Vanguard High Yield Fund) and your reasoning for preferring the VAS (Vanguard ASX300 Index) to VHY?
VHY in the past has given a much better yield than VAS. I am considering purchasing more VHY, however am also unsure whether I should be purchasing VAS in preference. Your comments would be appreciated.
Strong Money’s Answer:
VHY was actually the first fund I invested in. I liked the idea of owning just high yield, blue chip companies. But I ended up selling and am not really a fan anymore. While I like it in theory, in practice… not so much. Here’s my reply to a recent commenter…
It’s more concentrated than most older LICs or the index. It has less holdings and more sector concentration. Holdings are bought and sold based on future yield, meaning it’s less tax efficient and sometimes results in large capital gains paid out. I experienced this.
As an example, last 12 months turnover in the fund was 37%, which is huge. Turnover with VAS is less than 5%. Essentially VHY is more buy & sell, VAS is more buy & hold.
Stocks are bought solely on forecast yield, seemingly without regard to sustainability or growth. For example, years ago (when I invested) the fund owned BHP because it was on a massive forecast yield, but the dividend was becoming quite obviously unsustainable.
Later, the dividend was cut and BHP was removed from the fund. Compare this to the index or old LICs which hold a more diverse group of stocks, some high yield/low growth and some low yield/high growth. This gives the portfolio better balance and ensures income continues to grow into the future – a higher future yield, essentially.
And with VHY, if you look at the distributions, they fluctuate more year-to-year than VAS and the LICs, so that’s not ideal either.
Personally, I feel more comfortable with the larger more diversified portfolios of the index and older LICs, the lower turnover and the generally more reliable, growing income stream.
Don’t get too hooked up on the yield. VAS (the index) still has a solid yield and that income should grow nicely over time. VHY might have high payouts but generally less reliable, less tax efficient, less dividend growth over time and higher risk.
More thoughts here on yield vs growth when taking a dividend focused approach.
I’ve invested in an index fund recently and also Argo.
Quick question, how do you keep track of when your dividends get paid and what do you do at tax time?
I haven’t really found much information on this topic elsewhere… Cheers. Mick.
Strong Money’s Answer:
Good question. I used to simply keep track of the company announcements – you can do this via the ASX website or your broker – and then keep the dividend statements when the payments are made, and use those for tax time.
But then the portfolio got bigger and it became more time consuming. So for a good while now I’ve been using Sharesight, which automatically records your dividend payments once a trade is entered.
Now at tax time, I simply click a button to run a tax report for the total income received for the year, including franking credits. Heaven!
This saved me a major headache recently when we made some changes to our portfolio. Luckily I didn’t have to do the dreaded job of calculating the capital gains/losses myself. I just simply ran another report!
Anyway, Sharesight is completely free up to 10 holdings, so get onto it. It’s perfect for someone with a smaller portfolio – you can sign up here.
And for those with a bigger portfolio (or multiple portfolios), you can get 2 months free using my referral link to sign up (full disclosure: if you choose a paid plan this blog will receive a commission at no extra cost to you – thanks in advance!).
I note that some of the replies and your comments regarding Labor’s likely changes to franking credits could change the playing field a bit.
Also, I recently sold many of the shares in stand-alone companies, with the plan that I would put that money back into the market in LICs and some ETFs.
Because of possibility losing some of the income from franking credits I am also considering putting 10 to 15% into REITs. I am in the process of researching some of the ‘likely suspects’. Do you have any suggestions I could include in that research?
I am not overly worried about the changes that may occur. However if it were to happen do you think that would cause a selloff of LICs, pushing their market price down? And if there was a move to reinvest that money into REITs would that be likely to push their price up?
The reason for my questions is that it may be better to look at REITs now and bide my time on the LICs.
Strong Money’s Answer:
As for a sell-off in LICs or fully franked dividend payers in general – definitely possible, but who knows.
And same goes for the increasing popularity of REITs (real estate investment trusts) – also possible, but one can never be certain.
Everyone dumping diversified LICs for a couple of property trusts doesn’t seem like a smart move from a diversification standpoint, if that’s what they were to do. But LICs could fall out of favour and trade at large discounts (possibly already happening to some extent).
I wouldn’t expect anything drastic to happen, but again I have no idea.
We do own a couple of REITs and I briefly look at others from time to time. Some that seem half decent to me are below.
Beware, a number of them are currently trading at large premiums to their net asset value and yields are not all that attractive. And to be clear, these are in no way recommendations or endorsements!
Shopping Centres Australasia – SCP
Centuria Metropolitan Office REIT – CMA
National Storage REIT – NSR
Aventus Retail Property Fund – AVN
Growthpoint Properties – GOZ
APN Convenience Retail REIT – AQR
Hotel Property Investments – HPI
I would only look into this if you’re happy having them as part of your long term portfolio. Not as a short term play because you have a hunch about REITs going up and LICs going down. I’m sure you know that’s just speculating!
And I would not buy most of those today as they don’t seem great value as alluded to before. But I’m not a stock picker and this isn’t a stock picking site, so make of that what you will.
Hi, I recently rolled my super to a company with zero investment fees based on the fact I can invest 100% on the Australian and International Index.
What caught my attention the other day was that I can invest my entire super (currently around 90k) into AFIC by using a SMSF. I’m trying to weigh up what would likely be the best return when it comes time to retire of both options in 30 years?
I know you have studied AFIC in great detail but nothing has seemed to be mentioned about Super investments and how they differentiate? If you had any advice that would be great.
Strong Money’s Answer:
G’day Simon. Is that REST Super by any chance? I was actually looking at this recently.
To be honest, I would not expect AFIC to outperform the index by much, if at all. They may even lag the index as more competition all the time means beating the index is very hard.
I’d be happy with the indexed options you’ve mentioned. Most managers won’t be able to beat those returns and a reliable income stream isn’t needed inside super since we’re leaving it there for the next 30 years or so.
And considering the costs involved with an SMSF I wouldn’t go that route either – especially with a balance of $100k or so. Higher costs mean lower net returns for your super. Not to mention the hassle and extra admin involved.
Hope that helps mate.
My wife (aged 64 now) left the workforce in November 2012 with $53,000 in super.
Since that time this amount has been sitting in QSuper’s Balanced Investment Option with no further contributions. The balance at the end of the last financial year was $82,000. She paid $770 in fees and charges in that year.
I’m 64 and intend to work until around 68-70 years of age. Therefore the money in my wife’s Super account won’t be touched for the next 5 years or so. Then we intend to combine our funds for optimum benefit.
The question is: Should she leave the funds in QSuper, or should she consider an alternative strategy (and if so, what?) to grow this little nest egg. I suppose the same question is relevant for my funds in my Super Accumulation Account…
At June 2018 I had $521,000 in Super. We have no significant assets other than the family home valued at about $850,000. The balance on the mortgage is $83,000, which will be paid off around 2023, by the time I retire.
Strong Money’s Answer:
I’m not a super expert by any means, but here’s some thoughts.
Your super accounts may not be optimal but there’s likely real costs like tax implications if you were to move to a fund with lower fees right now. QSuper is not bad for fees overall, but the Balanced fund is quite expensive – list of fees here.
What I would do personally, is wait until you’re completely retired, so in a zero tax environment, then I’d look at switching to a lower cost fund if possible (like SunSuper, Hostplus etc). Your wife may be able to withdraw her super or switch now with no tax payable if she has declared herself retired, given she’s over 60.
And since you’re only 5 years away from using this money, I wouldn’t be trying to speed up the growth of your portfolio, the time-frame is just too short and anything could happen.
If you just keep plugging away your house will be paid off and you’ll have a very healthy Super balance (likely over $700k). Combine that with any part-pension you may be entitled to and you should be looking pretty comfortable 🙂
Can you please do a blog or article – in layman’s terms for Labor Govt proposed changes to LIC dividends?
Does it affect newbies about to dive in? Or just retirees only?
I am confused after reading few news articles on it.
Strong Money’s Answer:
Thanks for the suggestion. Since getting this question, I’ve now written a pretty in-depth article about this very topic!
Basically if you are paying 30% tax or more (which is most people working) your dividend income will remain the same. You get the cash dividend but will have to pay top-up tax as the franking credit doesn’t quite cover the entire tax owing.
In ‘retirement’, the proposal means we’re still allowed to use franking credits to offset tax owing on our dividends, but would no longer receive a refund for unused franking credits. This currently takes the after-tax yield from 4% to 5.7% (if paying zero tax).
Not exactly great! But considering the other options out there, I’m still happy with a 4%+ yield for a reasonably diversified and hassle free income stream which grows over time (whether LIC or index fund).
I know I should only be interested in the dividends and not the share price. But I am getting a little nervous that the banks are going to come in for a hammering when the Royal Commission report is released on Friday and the 3 LICs above all have around 20% + in banking shares. (Note: this is clearly a very old question!)
AFIC have granted a special dividend of 8 cents as well as the half yearly 10 cent dividend but that may not cover a big drop in the share price
Do you have any thoughts on the matter? Rudy
Strong Money’s Answer:
First off, I’m not giving advice! I’m sharing what I’m doing and why it makes sense to me. Others are free to choose whether they think it makes sense too or it’s complete rubbish!
I understand your concerns, but nobody really knows what the Royal Commission will bring.
But the thing is, the banks have already been hammered by this (and other worries) in recent years. All are well down from their highs. Remember CBA was nearly $100 a few years ago?
Despite this and the other banks falling share prices, those LICs you mention have paid stable or increasing dividends over that time. And that’s what matters to me.
Don’t bet on the prices, bet on the income stream.
The market isn’t stupid. It’s likely that much of the negativity is priced into the market already. That’s not to say they can’t fall further, of course they could. But that could happen anyway with a housing downturn etc, as is always a possibility.
The other way side of the coin is those LICs have around 75-80% of their investments outside the banks – so I don’t believe there will be any long term dramatic consequences if banks fall.
The only way to avoid banks is to start picking stocks or avoid those LICs and go for LICs or ETFs which focus on smaller companies. But those have higher expenses, usually lower dividends and no guarantee of better long term performance.
There is always something to worry about. We can choose to keep investing anyway, let it paralyse us into doing nothing. Or worse, scare us into selling. I’m doing the first one.
If you have a genuine fear that Australia is a poor place to invest for the foreseeable future, then by all means look at something else like an international index fund.
But if you believe Australia will work through it’s problems and the economy and population will continue to grow over the next few decades, then company earnings and dividends will be much higher in the future and there’s no reason to be worried by short term issues.
So if that’s the case, we want a broad exposure to Australian shares in a low cost way, and the two main ways to do that are by buying an index fund or old LICs.
Bottom line: I don’t care about bank share prices. I care about earning dividends from a broad group of Australian companies over the next 50 years. The banks may become smaller or larger over that time, who knows. Either way, I’ll still own lots of other companies from a range of sectors that are bound to be doing just fine.
Hope that helps Rudy! And of course, these are just my thoughts and what makes sense to me 🙂
(Turns out bank share prices didn’t move much after the Royal Commission report. In fact, they’ve gone up! Should teach all of us not to jump at shadows or try to be too clever about this stuff, by thinking we know what’s going to happen!)
Hi Dave, I was wondering if I could please get your thoughts on debt recycling when there is a decent balance in an offset account, and does this make it more advantageous?
We have a mortgage of $470k, with $440k cash currently offsetting the mortgage (recently received inheritance). We have an investment portfolio of $75k.
My wife is not comfortable investing large amounts, hence the guaranteed return we are getting from the cash in our offset. If we were to take out a line of credit, would we still get the same benefits considering we currently only pay about $100 per month in interest on the mortgage?
I get all of the benefits of debt recycling, just can’t get my head around how the cash in the offset impacts this and would appreciate your thoughts. I totally get this is not financial advice.
Thanks in advance. Pete
Strong Money’s Answer:
Interesting question Pete. Debt recycling is mainly for people who have mortgage debt they want to pay off sooner and turn into tax deductible debt.
In your case, you effectively have no mortgage if you were to pay off the home loan within the next 6-12 months.
At that point it becomes a choice of whether you want to take out all that equity to put into shares, or stay debt free and use your savings to buy shares each month.
Given your wife’s hesitation, dumping the equity into shares is probably not a good idea, unless you feel 100% comfortable with it and you can get her on board somehow.
To be honest, it sounds like the best option for you would be to pay off that mortgage completely, which will solidify your position and permanently reduce your expenses. And that’s an incredible position to be in by the way!
Then simply invest whatever you can each month into the market. And as you see the dividends coming in, maybe your wife will come around to having a bigger portfolio and you can look at using debt again later if you really want to.
Borrowing for shares is not a slam dunk, due to the emotions involved and how the volatility can affect our decision making. And no real need to make your finances more complex than they need to be.
All the best with it. Thanks heaps for reading the blog!
Hey SMA. A stupid question perhaps…
Given how all established LICs are very similar to each other in terms of their investment portfolio, what exactly is the benefit in spreading our investment in choosing multiple of them? Aren’t we giving ourselves very limited exposure?
Thanks a lot for the new blogs, they are quite interesting. Kathy
Strong Money’s Answer:
Good question Kathy. If choosing to invest in LICs, the main benefit of purchasing more than one is to reduce manager risk – the rare chance that something funny gets into the water at Argo for example and they start making crazy investment decisions (bitcoin anyone?).
Also, it gives us more opportunity to buy shares trading at a discount to NTA. It perhaps also adds a smidgen more diversification in that those LICs will own different stocks in their portfolios, even though many holdings are similar.
This gives exposure to around 100-150 companies in total. If you want more than that you can go for an Aussie index fund like A200 which is the top 200 stocks, or VAS which is the top 300 stocks.
You can also diversify internationally with an index fund like VGS which is global developed countries outside Australia and holds about 1500 stocks.
Totally up to you how diversified you want to be!
Firstly I just want to say I love your articles. They are detailed and best of all easy to read and understand. So thank you.
I am contacting you to ask your opinion on what you believe are the best funds to put superannuation into to boost retirement balance.
I am 32 years old and currently have $50,000 in my super account with Hostplus (Indexed Balanced Fund). Whilst this is a low cost fund which performs well, I know that if I use the Choiceplus option I can
improve my returns and retire with a bigger balance. Also, I don’t like my money sitting in Cash and Term Deposits in the indexed balanced fund.
Outside of super I have started to invest my savings in AFIC and I will continue to do so in the aim of receiving good dividends in the future, and to hopefully allow me to retire earlier by getting some good dividend cheques.
Do you have any favourite ETFs that you like for inside superannuation investing?
I understand you probably cannot give direct advice, but I am interested to know if you have some favourites for me to look into. There are so many and it’s proving difficult for me to decide where to put my superannuation.
Strong Money’s Answer:
Glad you like the blog Reynold. And I appreciate your kind words, thanks!
Super is on my mind lately as we have been doing a bit of a stock picking experiment in there for the last few years.
I’ve pretty much lost interest and thinking of moving it back to a regular low fee super fund and just choosing a 100% shares option and leaving it alone!
Firstly, you want to keep it simple. You don’t get higher returns from complexity. In fact, I think you get it from simplicity. That way there seems to be less desire to fiddle with your portfolio or second guess what you’re doing.
To try and improve your long term returns, you don’t necessarily have to build your own portfolio. But instead, you can switch to an option which lets you have more ‘risky’ growth assets and less ‘safe’ cash assets.
Personally, I’d aim for a fund which allows 100% shares at low cost, but I know that’s not for everyone.
Most of the big names offer this option – Hostplus, REST, Australian Super, Sun Super etc.
As for choosing your own ETFs to get higher returns again, well, then we’re trying to beat the market. And honestly, the likelihood of that is not good. So I’d be satisfied simply having 100% indexed shares or whatever ‘high growth’ option is available at low cost.
Simply thinking out loud, I’d probably set mine up as 100% international shares if possible. This would give us higher growth and more diversification overall, since outside super we’re 100% Aussie shares for higher income.
But that’s a personal choice that you’ll have to think about. Hope that helps mate, thanks again for reading the blog!
Hopefully you enjoyed this post and found it interesting or helpful.
Remember, the point isn’t to blindly follow my words. It’s simply to share more behind-the-scenes thinking, clear up common queries and give readers extra info 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 so much for reading!
How about you? Do you have any additional thoughts for our readers?