Crankys Nest Egg

Share Portfolio With Dividend Yield Over 7%

Sun, 06 Mar 2016 20:06:36 +1100

I don’t always talk about investing at social events. Really - I don’t. But the other night the topic came up and, well, I couldn’t help myself.

You see, an old friend of mine (let’s call him Eric) was telling me about how he uses a managed fund to juice up his investment returns. Eric said the managed fund paid a dividend yield of over 5%.

I’m not really a fan of the cost structures of managed funds so I asked him how much of that 5% the manager was taking in fees. After a little further discussion, he admitted that he wasn’t sure what management fee he was paying to the fund manager.

Anyway, as Eric knows I prefer buying shares directly he lay down the challenge as to what dividend yield I was able to achieve on my portfolio. I explained that I wasn’t a dividend investor per se (and I had no idea off-hand what the dividend yield of my portfolio was) but that I thought I could put together a list of companies which in aggregate yield over 5%.

So today I had some time to kill and decided to see what I could find. What follows is a list of companies which in aggregate would yield over 7%.

ASX Code	Company Name	Price	Franked	Dividend Coverage	Forecast Yield
ACR	Acrux	0.655	Yes	1.42	9.2%
CSR	CSR	3.1		1.16	7.1%
CWP	Cedar Woods Prop	4.02	Yes	2.35	7.0%
IFL	IOOF Hldgs	8.96	Yes	1.22	6.3%
MND	Monadelphous Grp	7.47	Yes	1.2	7.7%
PPT	Perpetual	43.25	Yes	1.14	5.8%
SMX	SMS Management	2.05	Yes	1.36	7.3%
	Average Yield				7.2%

The list only contains 7 shares, which is not quite as diversified as I would like, but it’s good enough for our purposes.

How to find high dividend shares

What is more important than the actual shares on the list is the process used to select them.

I was looking for shares which:

were in the ASX300 index
had a yield over 5%
were profitable
had a sustainable dividend
had low debt
were from a diverse group of industries

In the ASX300

This criteria was meant to leave us with larger, more established companies. In theory these companies should have more stable earnings. In practice this may not always be true, so we will apply a number of other criteria.

A dividend yield over 5%

5% is somewhat arbitrary, but came from the satifaction which Eric expressed as a result of receiving an income yield of over 5%.

There are a number of other shares which could have made it onto this list based on yield alone. Telstra and the big four banks all would have made the list on this criteria alone, however they were knocked out by their debt.

Low debt

All of the companies must have low debt. This was measured by a debt/equity ratio of less than 20%.

Profitability

All of the candidates had to have positive earnings in the most recent reporting period.

A sustainable dividend

I wanted to make sure the dividend had a reasonable chance of being maintained in the years to come. This was measured using a dividend coverage ratio of over 1. This means they were making at least enough money in profits each year to pay out the dividend.

Diverse industries

The ASX300 is particularly weighted towards financials. I wanted to get away from that. However, I still ended up with 2 financial services companies.

ASX Code	Company Name	Industry
ACR	Acrux	Pharmaceuticals & Biotechnology
CSR	CSR	Materials
CWP	Cedar Woods Prop	Real Estate
IFL	IOOF Hldgs	Diversified Financials
MND	Monadelphous Grp	Capital Goods
PPT	Perpetual	Diversified Financials
SMX	SMS Management	Information Technology

I don’t actually own any of the shares on this list. However, I’m looking forward to seeing how they perform when compared to the ASX300.

And now the disclaimer. While I made every effort to make sure the data included in this post is correct, do your own research. Also didn’t do any qualitative research on any of the shares on the list. Please don’t treat any of this as a recommendation.

Finally, over to you eric. What do you think?

How Property Investors Should Think About Buying Shares

Tue, 26 Jan 2016 11:09:44 +1100

Discussions about share investing vs real estate investing can be emotional and divisive. Having owned shares in varying quantities for around twenty years now, I was surprised at the reaction of a former colleague I ran into recently when the conversation turned to investing.

(I should say up front that he is a really smart guy, despite how our conversation developed.)

It turns out that this guy has recently sold an investment property and has a fair sum of cash burning a hole in his pocket. He was lamenting the low interest rates on offer at the moment for savings accounts or term deposits and was looking for a better return.

“So what would you do with the money?” he asked me.

“Depends” I said. “Will you need the money for anything soon, or this this a long term investment?”

“This is long term mate. This is so I can escape the rate race one day.”

“In that case, I would consider investing in shares. Might help to diversify if anything ever happens to the Australian property market” I suggested.

“What??” he almost choked. “That’s pretty risky isn’t it?”

“If you’re not keen on buying shares in individual companies, you could just buy something that essentially tracks the entire market. There are some large listed investment companies - like Argo or Australian Foundation Investment Company - who hold a broad selection of Australian shares, or maybe an ETF which tracks one of the Australian equity indexes.”

He was now looking at me warily - as though I had sprouted another head or something.

“But what if the price goes down? I don’t won’t to lose my money.”

It was at this point that I first began to understand the chasm between his perspective and mine when it comes to the stock market.

I tried different tack - “What if you had just bought an investment property and someone approached you and said they would take it off your hands for 20% less than you paid for it?”

“I’d tell him to get lost.”

“What if for the next 3 months someone comes up to you and offers prices which are 30%, 40% or even 50% less than what you paid for it?”

“I’d just ignore it.”

“So, what if you treated the stock market the same way? If you’re investing for the long term, just forget about the day to day noise. Just consider that in ten years time your investment should be worth considerably more - even though there will be ups and downs along the way - and you will get a steadily growing stream of dividend income along the way.”

The look on his face was still doubtful, but I think I had at least given him another way to think about investing in shares.

I haven’t caught up with him since then so I don’t know what he decided.

3 Ways To Invest In Gold

Fri, 22 Jan 2016 18:02:47 +1100

I first became interested in how to buy gold after reading about the Permanent Portfolio. It is an asset allocation which has historically had very low volatility and a reasonable return and of which, 25% of the allocation is invested in gold.

I was curious what the easiest way to gain exposure to gold is in Australia.

Physical Gold

Some investors are most comfortable when they can actually see and touch their gold. When that is the case, a gold dealer is the best option.

The Perth Mint is one of the more well known options here. You can order online from the Perth Mint Bullion website and they will ship your order to you.

Options for storing your physical gold include:

at home
in a safety deposit box at a bank
with a third party who specializes in gold storage (the Perth Mint mentioned above is one such provider)

Because of the relatively high transaction costs, physically holding the precious metal is probably not your best option if you plan on trading on a regular basis. ETFs would normally be a more cost effective option.

Gold Exchange Traded Funds

In my opinion, this is the most convenient method.

A gold ETF is traded on the stock exchange in the same way as a listed company like BHP or Telstra. The ETF normally owns physical gold bullion. As the underlying price of the metal moves, so does the price of the ETF.

There are a number of ETFs currently available. The main points of difference seem to be the management fee and whether the ETF is hedged (ie. whether you are exposed to movements in the currency exchange rate).

Gold Mining Shares

Another option is buying companies which operate at the various stages of the gold production cycle. They could be explorers or producers (or at various points in between).

Explorers are very speculative as most of them don’t make any money yet. You are betting on their exploration attempts being successful and on them discovering a reasonable sized deposit. In my experience, only a very few are successful. The rest end up returning to the market on a regular basis to raise more capital - an extremely effective way to reduce the value of existing shareholders’ stakes.

At the other end of the spectrum, gold producers have reserves in the ground and existing mine and processing infrastruction in place already. As such they are less speculative than the explorers.

All things being equal, the profits and therefore the price of these companies should rise with the gold price. However all things are very rarely equal. Depending on the hedging employed by the company, they may or may not benefit from movements in the gold price. There is also the chance of unforseen operational mishaps.

So there are the options. They each have advantages and disadvantages. In the end, I never ended up investing in gold - I couldn’t justify the fact that it doesn’t produce any income.

How Much Money Will You Spend In Retirement?

Sat, 16 Jan 2016 22:27:47 +1100

With the prospect of early retirement becoming a real possibility for me, I have turned my mind to what our spending will look like in retirement.

While doing my research I came across some great information on the Association of Superannuation Funds of Australia (ASFA) website. ASFA publish a benchmark called The ASFA retirement standard. The benchmark tracks the annual budget required by Australians to maintain different levels lifestyle in retirement.

The lifestyle levels are called modest and comfortable and are defined as follows:

A modest retirement lifestyle is considered better than the Age Pension, but still only able to afford fairly basic activities.

A comfortable retirement lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.

Ok, Give Me Some Numbers

So according to the ASFA Retirement Standard Calculator, the following levels of spending would apply for a couple living in my home state of Victoria. (Note, these figures assume the retirees own their own home and are relatively healthy.)

	Monthly	Annual
Modest	$2,868	$34,413
Comfortable	$4,933	$59,153

Naturally I was curious to see how my comrades in other states fared. These are the comfortable figures.

State	Annual Budget
Northern Territory	$57,846
Tasmania	$57,915
ACT	$58,324
NSW	$58,610
Western Australia	$58,866
South Australia	$58,713
Queensland	$59,029
Victoria	$59,153

What - last place? Ah well, at least we have the penguin parade at Phillip Island. As you can see there’s not a lot between them, but Victoria is the most expensive place to live in retirement. Of course common sense tells us that there will be large differences in cost depending on where abouts the the state you live, but I think these figures should give us a good baseline to work from.

What Happens When We Get Older?

Ah, now I can hear you asking - “What happens when we get older? It doesn’t cost much to stay at home watching re-runs of The Golden Girls.”

Of course you’re onto something here. However, the budget only reduces for those with the comfortable lifestyle. For those of us who have chosen modest, expenses actually increase slightly as we age.

	Modest	Comfortable
At age 65	$34,090	$58,915
At age 85	$34,257	$53,937

I guess that makes sense because the comfortable lifestyle includes more travel and recreational activities and our participation in such activities would decrease as we age.

So What Have We Learned From All Of This

For me, I have confirmed that my planned early retirement budget seems quite reasonable in light of the figures above.

However, we all need to keep in mind that these figures are averages. Each of our spending profiles probably fall somewhere between the modest and comfortable lifestyle levels, but there will be some outliers outside that range.

The other thing to consider is unplanned expenses. Whether they are one-off expenses like a knee reconstruction after that bizarre hip hop dance competition incident, or ongoing expenses like when junior arrives home with his wife and two kids and says he needs to stay with you for a while (for reasons which he will explain another time).

That’s it - go forth and budget!