[Australia] Portfolio Shift from Growth to Income Stream

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Topic Author
Paravox3
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Joined: Fri May 29, 2020 12:52 pm

[Australia] Portfolio Shift from Growth to Income Stream

Post by Paravox3 »

Greetings :)

I'm currently heavily invested in index funds. I'd like to retire early and am looking to shift my portfolio from growth investments to an income stream. However, index funds are easy. Open a brokerage account, find S&P 500, throw money at it regularly. You don't need to know a lot to grow wealth this way.

Unfortunately, I'm finding when want to change from growth to an income stream... what got me here won't get me there, so some help with a few questions would be simply amazing:

1) What vehicles are best known to support income streams?
I'm aware of dividend stocks, bond coupons, rental property, and REITs. I'm not sure if Australian A-REITs follow the same characteristics as US REITs, and any comment on that would be deeply appreciated.

2) How does one find, research, and evaluate investments for dividend income, particularly dividend stocks?
I understand from reading that there are also dividend investment funds.
Any thoughts on the ins and outs of those or links to good sources on those?

3) In Australia, if I were to start shifting massive amounts of index fund investments to other investments, what kind of troubles might I encounter?

4) Has anyone successfully or unsuccessfully made this shift? What was your experience like, and were there any surprises along the way?

A big thank you to anyone willing to donate a bit of time and expertise to my questions.
Also, very happy to simply be pointed to resources on the subject if answering these questions is complicated/burdensome.
AlohaJoe
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Re: [Australia] Portfolio Shift from Growth to Income Stream

Post by AlohaJoe »

Paravox3 wrote: Sun Jun 13, 2021 7:34 pm Unfortunately, I'm finding when want to change from growth to an income stream... what got me here won't get me there, so some help with a few questions would be simply amazing:

1) What vehicles are best known to support income streams?
Most Bogleheads don't subscribe to investing for income; they believe in investing for total return and then generating income by selling assets as needed.

https://investornews.vanguard/total-ret ... investors/

There have been about a bazillion threads on this over the years. Here are a few I randomly found by searching; there are several thousand others. They should show you the general terms of the argument.

viewtopic.php?t=170720
viewtopic.php?t=169520
viewtopic.php?t=245558
viewtopic.php?t=269298
viewtopic.php?t=166971

I'm an Australian and retired and didn't feel any need to shift my portfolio to an "income stream".
Topic Author
Paravox3
Posts: 5
Joined: Fri May 29, 2020 12:52 pm

Re: [Australia] Portfolio Shift from Growth to Income Stream

Post by Paravox3 »

I am reading some of those links - thank you, they're great food for thought. I'll continue reading them as I work out my strategy, but I'd still love some input on my actual questions if anyone's game to assist.

I understand that this is a Bogleheads forum, so of course people subscribe to the Boglehead philosophy. However, I had also hoped to find like-minded individuals excited about financial discussion. I've read the Bogle philosophy, but I've also read many others over the years. My sense for which financial theories link up to which wealth guru have blurred together a bit, so patience on that front would be appreciated.

I am guessing the idea of maintaining a growth portfolio and drawing down in retirement is a reference to the 4% rule. I have physical and legal barriers in my personal portfolio that also prevent me from working with that effectively. Thus, I have reasons for wanting to investigate income stream investing to my satisfaction before discarding the possibilities. I do, however, appreciate the reminder.
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andrew99999
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Re: [Australia] Portfolio Shift from Growth to Income Stream

Post by andrew99999 »

Dividends are simply a forced withdrawal. Consequently, you can "make your own dividend" by selling some shares.

There are 2 common misunderstandings about shares:
1. Dividends are safe and more reliable — no, they aren't.
2. By selling shares, you are depleting your portfolio, but by taking dividends, you aren't — again, no.

By using higher dividend stocks and not reinvesting the excess, you are depleting your portfolio the same way. Dividends are not free money. They also aren't like rent or interest. The equivalent to those is company earnings, not dividends. They are not the same thing.

Additionally, concentrating your portfolio on high yielding investments will lead to concentration risk. If those sectors with high yield stocks take a hit, your whole portfolio takes a big hit, as opposed to where you were properly diversified.

"income investing" is a term made up by companies trying to sell you on their special high-income funds, which they sell at an inflated expense ratio. They know that most people mistakenly believe that dividends are safer, and they take advantage of those people.
Topic Author
Paravox3
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Re: [Australia] Portfolio Shift from Growth to Income Stream

Post by Paravox3 »

Interesting. Thank you for the information and links, I'll take them into consideration.

In Australia, there are a few complications to attempting to retire early, even when your portfolio is large. For example, superannuation is a major tax advantaged investment vehicle, but people who use it cannot access investments within it until they reach a specific age. I am 41 years old looking to retire early, so that's one of the complications of my personal circumstances.

Australia also has franking credits which the US does not. They make investing for dividends mathematically more attractive than in the US as per this thread: https://www.reddit.com/r/fiaustralia/co ... nt_income/

As for myself, I'm also a dual citizen and high income earner with substantial investments in multiple legal jurisdictions. This means I can trigger double taxation by selling off parts of my portfolio, so I can't just 4% rule or dollar plus safely. So, whereas I get some of these things are 'generally true', they may not be specifically true to me and my circumstances. Still, I acknowledge that the philosophies and points are excellent for consideration.
Last edited by Paravox3 on Mon Jun 14, 2021 5:49 am, edited 1 time in total.
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Schlabba
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Re: [Australia] Portfolio Shift from Growth to Income Stream

Post by Schlabba »

Paravox3 wrote: Mon Jun 14, 2021 5:29 am 1) What vehicles are best known to support income streams?
I'm aware of dividend stocks, bond coupons, rental property, and REITs. I'm not sure if Australian A-REITs follow the same characteristics as US REITs, and any comment on that would be deeply appreciated.
I like dividend etf's. Bonds have nearly no yield (well except for emerging market and junk bonds, but I chose not to use those), rental properties can be great or can also be a lot of work and risk and REITS are only a tiny subset of the market.

2) How does one find, research, and evaluate investments for dividend income, particularly dividend stocks?
I understand from reading that there are also dividend investment funds.
Any thoughts on the ins and outs of those or links to good sources on those?
Don't pick individual stocks, pick a fund or etf instead. You can use the same criteria as buying a total market fund: Many positions, very low TER, wordwide diversification. Personally I use the Vanguard FTSE All-World High Dividend Yield UCITS ETF (1500 position, TER of 0.29%, includes both developed and emerging markets), listed on the Amsterdam Stock exchange. The yield is usually about 3.5 to 4%, which is sustainable. Don't go for 6% or higher percentages, that just means your portfolio value will shrink unless you reinvest. Perhaps for your tax situation a different option is better.

3) In Australia, if I were to start shifting massive amounts of index fund investments to other investments, what kind of troubles might I encounter?

4) Has anyone successfully or unsuccessfully made this shift? What was your experience like, and were there any surprises along the way?
I'm actually building up my position in that fund as I am still working.
My answers in blue!
Paravox3 wrote: Mon Jun 14, 2021 5:29 am but I'd be lying if I said I wasn't a bit disappointed in the tone of the replies. :(
I agree there, I believe there are many ways in which you can retire. Living off dividends is one of them.
Topic Author
Paravox3
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Joined: Fri May 29, 2020 12:52 pm

Re: [Australia] Portfolio Shift from Growth to Income Stream

Post by Paravox3 »

Thank you! You caught me deleting my comment on the disappointing tone of the advice provided. *cough*

I'm not really sold on whether I want to go this route - I'm trying to educate myself enough to make a decision. The information provided thus far has definitely been useful.

I also have a rental property, but as you say - it's a bit of work, and it's not returning income in line with the value of the property. There's a temptation to sell it and go REIT, but I'm analysing that potential decision.

Deeply, deeply appreciate the comments on approach and constraints you use to determine if you want to invest in dividend income. Thank you again! :)
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andrew99999
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Re: [Australia] Portfolio Shift from Growth to Income Stream

Post by andrew99999 »

Paravox3 wrote: Mon Jun 14, 2021 5:29 am Interesting. Thank you for the information and links, I'll take them into consideration.

In Australia, there are a few complications to attempting to retire early, even when your portfolio is large. For example, superannuation is a major tax advantaged investment vehicle, but people who use it cannot access investments within it until they reach a specific age. I am 41 years old looking to retire early, so that's one of the complications of my personal circumstances.

Australia also has franking credits which the US does not. They make investing for dividends mathematically more attractive than in the US as per this thread: https://www.reddit.com/r/fiaustralia/co ... nt_income/

As for myself, I'm also a dual citizen and high income earner with substantial investments in multiple legal jurisdictions. This means I can trigger double taxation by selling off parts of my portfolio, so I can't just 4% rule or dollar plus safely. So, whereas I get some of these things are 'generally true', they may not be specifically true to me and my circumstances. Still, I acknowledge that the philosophies and points are excellent for consideration.
I'm also Australian, and while you can not access super before a certain age, there's no rule that says you must only invest either inside or outside super. You can invest in both.
Here is a simple example of someone wanting to save up 750k in super and live on 50k/yr from early retirement until 60, and see how early they might be able to retire.

Most of the cash you get from franking credits is priced-in. What little remains is debatable if it is worth the concentration risk (if you ask me, not remotely worth it — with figures in that page).

Do you not have a double taxation treaty? Australia has a DTA with many, many countries.

If you really have to pay capital gains tax in both countries, but somehow not for dividends (both of which sound odd to me), then at least remain diversified by using a global high yield fund like WDIV so that you get some diversification (which is seriously lacking in Australian-heavy portfolio).
AlohaJoe
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Re: [Australia] Portfolio Shift from Growth to Income Stream

Post by AlohaJoe »

andrew99999 wrote: Mon Jun 14, 2021 6:42 am
Do you not have a double taxation treaty? Australia has a DTA with many, many countries.
You don't need a double taxation treaty. Australia, like most countries, allows foreign tax offset with basically any tax paid in any country on the planet. You don't even have to provide any proof. Well, I suppose if you get audited they'll ask for proof. But I've never had the US or Australia ask for proof of foreign tax paid in over 20 years of living abroad.

From the ATO:

"If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation."

The only thing I've ever been double taxed on is the US net investment income tax (NIIT) which was (probably inadvertently) structured in a way that makes it not eligible for a foreign tax offset.
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