New Investor - Australia

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Topic Author
Matildonza
Posts: 4
Joined: Wed Jan 05, 2022 3:39 am

New Investor - Australia

Post by Matildonza »

Hello everyone,

First post for a long time reader to-be


I am finally into the process of building my portfolio, I’ve recently open my nabtrade account (I hold a few stocks with Stake too but I will keep that on hold and build my Australian one).

I earn 67K a year and managing to save 650/month towards investing (my annual tax return will also go in, usually around 4K)

I would love to build a high dividend portfolio so that I can live off them eventually. I originally thought my portfolio could look something like 60% stocks and 40% ETFs. Now, from reading just a few conversations lots of people recommended 95% ETFs and 5% stocks. I was wondering why is that, other than diversification?

My plan is to re-assess and re-balance my portfolio every 6 months by this following criteria (for individual companies)

1. There has to be company growth - I usually check the last 5-10 years
2. There has to be dividend stability (consistent or growing)
3. The company has to be established (1b market cap) and around 5%dividend yield
4. Debt to equity has to be less than 80%

To give you a general idea, and I don’t mind doing this kind of research twice a year. Will also diversify and hold around 10 stocks, 2 ETFs and balance it with 10% bond.

So, why should I re balance with having more money into ETFs? For how I see it, even if you go for a Vanguard which is usually low on fees, you still have to pay them (fees) and dividends are usually lower.

Please give me your thoughts on this and help me get my head around it. Want to invest long term and in an intelligent way.


Also, as I mentioned before, I am currently using both Stake (for us stocks) and Nab for australian stocks. Is there a better broker? Just started building my portfolio, I have a few thousands everywhere, so the fees are killing me, and I would like to keep everything all together. I also tried a robo-advisor called six park, but planning on managing myself to keep the costs down.

Lots of infos, appreciate the help
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andrew99999
Posts: 913
Joined: Fri Jul 13, 2018 8:14 pm

Re: New Investor - Australia

Post by andrew99999 »

Welcome.
Matildonza wrote: Wed Jan 05, 2022 4:05 am I would love to build a high dividend portfolio so that I can live off them eventually. I originally thought my portfolio could look something like 60% stocks and 40% ETFs. Now, from reading just a few conversations lots of people recommended 95% ETFs and 5% stocks. I was wondering why is that, other than diversification?
Individual stocks have a lot of unsystematic risk, which is a risk you don't get rewarded for. When you diversify, you remove unsystematic risk and are left with only systematic risk, which is the risk you get paid for.

By this, I mean if the broad stock market has an expected return of 10% p.a. then an average stock has the same expected return, but with a much wider range of possible outcomes than investing in the whole stock market. The same expected return means you are not rewarded, and the wider range of possible outcomes means you are taking on more risk (for that lack of extra reward).

In addition, the market is efficient, meaning all information is priced-in. To have a chance to outperform, you need to know something the rest of the market doesn't know. What exactly is it that you know?

Matildonza wrote: Wed Jan 05, 2022 4:05 am My plan is to re-assess and re-balance my portfolio every 6 months by this following criteria (for individual companies)

1. There has to be company growth - I usually check the last 5-10 years
2. There has to be dividend stability (consistent or growing)
3. The company has to be established (1b market cap) and around 5%dividend yield
4. Debt to equity has to be less than 80%
Shouldn't you be looking at earnings stability rather than dividend stability? Dividends can (and often are) manipulated by companies to trick inexperienced investors into thinking all is well so that their share price does not fall. And if there is a fateful day when their house of cards comes crashing own, you are well and truly stuffed.
Matildonza wrote: Wed Jan 05, 2022 4:05 am I am currently using both Stake (for us stocks) and Nab for australian stocks. Is there a better broker?
For US stocks, IBKR is miles ahead. The FX fees in stake are ridiculous. The FX fees in IBKR are about 1/500th the cost.

For Aus shares, Stake is now offering $3 brokerage with individual HIN numbers, so that seems like the best option right now.
Matildonza wrote: Wed Jan 05, 2022 4:05 am Just started building my portfolio, I have a few thousands everywhere, so the fees are killing me, and I would like to keep everything all together. I also tried a robo-advisor called six park, but planning on managing myself to keep the costs down.
SixPark seem ok but I can't remember their fees (and too lazy to look).
You can get cheaper with Vanguard's all-in-one range, or BetaShares DHHF. Both good options.
Topic Author
Matildonza
Posts: 4
Joined: Wed Jan 05, 2022 3:39 am

Re: New Investor - Australia

Post by Matildonza »

Yes, I am learning so I will look at earnings stability like you suggest, thanks for that.


Six park fees are currently 9.95 per month which is not a small amount I reckon.
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andrew99999
Posts: 913
Joined: Fri Jul 13, 2018 8:14 pm

Re: New Investor - Australia

Post by andrew99999 »

Matildonza wrote: Thu Jan 06, 2022 1:11 am Six park fees are currently 9.95 per month which is not a small amount I reckon.
Yes, just looked, and that fee does not include the ETF fee.
So for 5k-20k, including the ETF fee, it comes to:

5k => 2.45% p.a. fee
20k => 0.85% p.a. fee

Vanguard's range of diversified funds will be about the cost of the ETFs minus the SixPark management fee and accomplish the same thing, and you will have no need to attempt to pick individual stocks.
Topic Author
Matildonza
Posts: 4
Joined: Wed Jan 05, 2022 3:39 am

Re: New Investor - Australia

Post by Matildonza »

Thanks for that, it’s definitely cheaper to self manage. I thought they had a good strategy but I guess you get the same results if you diversify with a few ETFs and do it yourself.

How does it work with ETFs, does the management fee already comes out when they pay you the dividend? So all I have to do in terms of “management” is paying the capital gain on that?

Is there a section on this blog where I can read more about self-managing a portfolio, because I have never done that but I would like to create good habits now and keep everything in a spreadsheet


Much appreciated


Matilde
User avatar
andrew99999
Posts: 913
Joined: Fri Jul 13, 2018 8:14 pm

Re: New Investor - Australia

Post by andrew99999 »

Matildonza wrote: Thu Jan 13, 2022 4:59 pm Thanks for that, it's definitely cheaper to self manage. I thought they had a good strategy but I guess you get the same results if you diversify with a few ETFs and do it yourself.

How does it work with ETFs, does the management fee already comes out when they pay you the dividend? So all I have to do in terms of "management" is paying the capital gain on that?

Is there a section on this blog where I can read more about self-managing a portfolio, because I have never done that but I would like to create good habits now and keep everything in a spreadsheet
SixPark's asset allocation seems fine/good, but I don't see an advantage over plain vanilla Vanguard diversified funds.

With the underlying ETFs and managed funds, the fund takes out 1/365th of the management fee every day before it gets to you, so you never see it. Also, note that you still pay this with SixPark since you pay the fee for the ETFs they invest in, but you just pay their additional management feel.

You have to pay tax on:
- distributions, which includes dividends as well as any internal capital gains realised
- remaining capital gains when you sell


It is very easy to set up and manage your own portfolio.

The three fund portfolio
https://www.bogleheads.org/wiki/Three-fund_portfolio

For Australian's this is:
- VAS (Australian broad market index)
- VGS (international developed countries broad market index)
- VAF (bond index)

Unfortunately, we don't have a total international, so along with VGS, often emerging markets is added.
- VGE (international emerging countries broad market index)

The majority of both SixPark's and Vanguard's all-in-one funds are made up of these.
They both use a little bit of the AUD-hedged version of VGS (which is VGAD), and with those 5 funds, you basically have the same portfolio.

More resources:

Getting started
https://www.bogleheads.org/wiki/Getting ... _investors

Bogleheads® investing start-up kit
https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

The Australian wiki ideally should be updated but is worth a read.
https://www.bogleheads.org/wiki/Investi ... _Australia
Valuethinker
Posts: 43617
Joined: Fri May 11, 2007 11:07 am

Re: New Investor - Australia

Post by Valuethinker »

Matildonza wrote: Thu Jan 06, 2022 1:11 am Yes, I am learning so I will look at earnings stability like you suggest, thanks for that.


Six park fees are currently 9.95 per month which is not a small amount I reckon.
I would argue it the other way.

The evidence is that companies manipulate earnings. Under the predominant accounting standard (ex USA) which is International Financial Reporting Standard, there are lots of ways to manipulate earnings and Earnings Per Share (EPS). They manipulate earnings to show stability of earnings and earnings progression. They do so via provisions on the balance sheet (which can then be released in future years), overestimates of recovery of items like Accounts Receivable & other methods (for example longer asset lives thus lowering depreciation).

There's quite a strong evidence for companies with high accruals on their balance sheets subsequently being found to have manipulated earnings. Sites like ? Behind the numbers? and Steve Clapham's stock analysis stuff show this. Also Terry Smith (classic book was "Accounting for Growth" - that's out of date now; however his Fundsmith funds, with a quality large cap bias, have hugely outperformed in recent years (available to UK investors, I don't think Australian). Anything Terry Smith writes is worth reading.

By contrast a dividend is a cold, hard cash amount. When a Board approves a dividend it is a cash flow out of the company to its shareholders. They have to believe they have the actual cash flow in the company to do that.

The academic literature has quite a lot about dividends as a strong signal of earnings quality. An exchange of information between those who have inside access to information v those who do not. The insiders (the Board) are telling the outside shareholders that "we really believe in our numbers". If a dividend cut in the future is likely, the market will discount quite efficiently - that's why you see companies with 8, 9% dividend yields - the market is discounting future cuts in dividends.

That is why you see funds like "Dividend Achievers". The record is somewhat mixed in terms of performance, but generally this is a tilt towards "quality" stocks - companies with high quality of earnings. Or in other terms, towards Growth stocks.

By contrast a high dividend yield fund usually includes a lot of companies that are not growing or are likely to cut their dividend in the near future.

A big problem is that the other way of distributing cash to shareholders, via share buybacks, is better for managers who are incentivized with stock options. Now in the case of Warren Buffett and Berkshire Hathaway, he is the largest shareholder. It would be tax inefficient for him to pay a dividend (there is no tax imputation system in USA as there is in Australia, where you get a credit for the tax company has already paid on your behalf)-- he has written to shareholders explaining why they are no worse off if he distributes cash via share buybacks.

So there's no real conflict of interest there between the internal manager (Buffett) and the external investors. But in companies where managers own relatively few shares, but have substantial stock options there may be. Indeed Microsoft led the way in granting Restricted Stock Units (RSUs) to employees rather than options to try to align interests better - this is not a perfect solution.

The evidence from the study of "dividend achiever" type companies is of long term outperformance (but not so much in recent years, I don't believe -- many of the leading tech companies (Amazon, Google, Tesla, Facebook) don't pay dividends (Apple & Microsoft do)).

The evidence of high dividend yield stocks is that it is a poor "value screen" - you don't capture the value factor as well as ratios like low price to book value (high book to market value in finance professor speak).
Valuethinker
Posts: 43617
Joined: Fri May 11, 2007 11:07 am

Re: New Investor - Australia

Post by Valuethinker »

I should add that I eventually concluded that if one was not a professional investor with access to the same analytical tools and information that those equity analysts and fund managers have, that my chances of outperforming were very slim indeed.

Thus I moved to an indexing strategy. Global indexation is preferred because one doesn't know what sectors will be favoured. For example Australia, UK, Canada have a lot of natural resources stocks in their indices. These have been doing poorly v US tech stocks.

Conversely, Canada has a lot of bank stocks. Canada has been undergoing an enormous housing boom. This started in Vancouver and Toronto over 10 years ago but has now spread to much smaller cities. Halifax, Nova Scotia (east coast), is in The Economist last week I think as having the highest housing price increase recorded of any city in the world (where this is kept track of) - over 50% last year. As a result, bank stocks have been doing very well*- 10x-20x in the last 30 years plus sizeable dividends. If Canada is in a housing bubble, then when it ends, it won't be good for the financial services sector.

* consumers are borrowing lots and lots of money on their housing equity. Sometimes to help their kids get their feet on the ladder as a downpayment for their first house. There's lots of businesses that have been doing well like real estate agents, insurance companies, home renovators -- all of these businesses need banking services as well. Banks make money when people borrow money.

Given the Canadian index is so heavily weighted to financials and natural resources, a Canadian investor has definitely been better off with a global indexation strategy.
Topic Author
Matildonza
Posts: 4
Joined: Wed Jan 05, 2022 3:39 am

Re: New Investor - Australia

Post by Matildonza »

andrew99999 wrote: Thu Jan 13, 2022 9:00 pm
Matildonza wrote: Thu Jan 13, 2022 4:59 pm Thanks for that, it's definitely cheaper to self manage. I thought they had a good strategy but I guess you get the same results if you diversify with a few ETFs and do it yourself.

How does it work with ETFs, does the management fee already comes out when they pay you the dividend? So all I have to do in terms of "management" is paying the capital gain on that?

Is there a section on this blog where I can read more about self-managing a portfolio, because I have never done that but I would like to create good habits now and keep everything in a spreadsheet
SixPark's asset allocation seems fine/good, but I don't see an advantage over plain vanilla Vanguard diversified funds.

With the underlying ETFs and managed funds, the fund takes out 1/365th of the management fee every day before it gets to you, so you never see it. Also, note that you still pay this with SixPark since you pay the fee for the ETFs they invest in, but you just pay their additional management feel.

You have to pay tax on:
- distributions, which includes dividends as well as any internal capital gains realised
- remaining capital gains when you sell


It is very easy to set up and manage your own portfolio.

The three fund portfolio
https://www.bogleheads.org/wiki/Three-fund_portfolio

For Australian's this is:
- VAS (Australian broad market index)
- VGS (international developed countries broad market index)
- VAF (bond index)

Unfortunately, we don't have a total international, so along with VGS, often emerging markets is added.
- VGE (international emerging countries broad market index)

The majority of both SixPark's and Vanguard's all-in-one funds are made up of these.
They both use a little bit of the AUD-hedged version of VGS (which is VGAD), and with those 5 funds, you basically have the same portfolio.

More resources:

Getting started
https://www.bogleheads.org/wiki/Getting ... _investors

Bogleheads® investing start-up kit
https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

The Australian wiki ideally should be updated but is worth a read.
https://www.bogleheads.org/wiki/Investi ... _Australia
Thanks for that!

And what happens at tax time? Do you get a document from computer share or linkmarket that show you how many dividends you received? I have done that only with stake and raiz and don’t know what I am supposed to do at this stage. Currently using NAB
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