long term investment portfolio

[voltage]

Friends want advice on a retirement portfolio, age 50 with 100000 with more funds becoming available in the future. My idea is direct investment and see if they like it, bulk in NZ only blue chip shares MFT, RYM, AIA, POT, FBU plus 1 property trust, from ASX, BHP and a bank. Should one go further and add Templeton emerging and a Global investment trust? advice appreciated.

[percy]

Friends want advice on a retirement portfolio, age 50 with 100000 with more funds becoming available in the future. My idea is direct investment and see if they like it, bulk in NZ only blue chip shares MFT, RYM, AIA, POT, FBU plus 1 property trust, from ASX, BHP and a bank. Should one go further and add Templeton emerging and a Global investment trust? advice appreciated.

I would consider VHP Vital Healthcare Property Trust,This would give them exposure to australian commercial property,while enjoying NZ dividends.
The other NZ companies are excellent.I would consider adding EBO rather than Templeton or Global.Again australian growth with NZ dividend.
The NZ tax paid dividends make NZ companies much more attractive than Aussie,because we do not enjoy franking benifits.Big difference in 5% tax paid divie than a 3%gross dividend that you have to pay NZ tax on.

[voltage]

Thanks Percy good advice. EBO was next on my list a great performer over the last 10 years. I was thinking about diversification to aussie and global. My own portfolio has a large global focus but I have had a hefty tax bill from this and with the volatility in exchange rates has knocked performance for some time. You just need to look at WINZ. Should aussie direct stocks be there? Also what is forgotten it the higher dividends paid on NZ stock. With imputation credits it is hard to beat.

[percy]

Thanks Percy good advice. EBO was next on my list a great performer over the last 10 years. I was thinking about diversification to aussie and global. My own portfolio has a large global focus but I have had a hefty tax bill from this and with the volatility in exchange rates has knocked performance for some time. You just need to look at WINZ. Should aussie direct stocks be there? Also what is forgotten it the higher dividends paid on NZ stock. With imputation credits it is hard to beat.

I went to a broker's presentation with a hot shot aussie analysis,a few years ago.This Aussie company is great,etc,etc,paying fully imputated divie returning a nett 3% yield. Did not mention a NZ company.So at the end I asked him why I should buy an Aussie company,as I was a NZder and the 3%nett would become 3% gross.Would I not be better to buy NZ shares where I could get over 5% tax paid.Well you can imagine what a sour note the presentation ended on.Fast talking Aussie went very quiet.Great fun.He had a plane to catch.!!! lol. EBO's growth will be in aussie.

[voltage]

thanks sauce, the exchange rate is certainly pounding my overseas investments, another reason to keep income funds in nz

[voltage]

sorry percy acknowledged the wrong person

[percy]

sorry percy acknowledged the wrong person

I am honoured.

[shasta]

Friends want advice on a retirement portfolio, age 50 with 100000 with more funds becoming available in the future. My idea is direct investment and see if they like it, bulk in NZ only blue chip shares MFT, RYM, AIA, POT, FBU plus 1 property trust, from ASX, BHP and a bank. Should one go further and add Templeton emerging and a Global investment trust? advice appreciated.

One company i like on the NZX (& theres not many) is IFT, maybe look at half in shares & half in IFT Bonds?

[modandm]

SKC and WHS are kiwi blue chips investors like you describe should hold. No insult to RYM EBO etc, but they are more risky with lower dividends than these two companies.

[ENP]

SKC and WHS are kiwi blue chips investors like you describe should hold. No insult to RYM EBO etc, but they are more risky with lower dividends than these two companies.

WHS vs RYM is no comparison.

RYM is a fantastic business with increasing earnings, development and a staggering return on it's retained equity. The reason it pays lower dividends is because it uses it's retained funds to create a 20-30% return in it's own business.

The Warehouse has had decreasing sales, profits, earnings and returns on it's retained equity, thus is pays out dividends because it can't make any better use of the funds.

So before you say a business is more or less risky because of the dividends it pays, please look into the balance sheet and income statement.

[CJ]

WHS vs RYM is no comparison.Agree. WHS pays dividends as it cant expand anymore. It is at saturation in NZ for Red sheds. It tried and failed in Australia and it tried and failed in Nz with grocery.

Ryman on the other hand can use its funds to build more villages (no where near saturation in NZ) where it earns fantastic returns. It is also feeling out Australia but is doing it right and if it fails, wont face big right offs like WHS did, but if it succeeds, will fuel further growth, and interest from Australian institutions.

[POSSUM THE CAT]

CJ it can only keep building villages if there are people that can afford to live in them or are you expecting Govt subsidies most elderly people could not afford to live in them.

[CJ]

CJ it can only keep building villages if there are people that can afford to live in them or are you expecting Govt subsidies most elderly people could not afford to live in them.Plenty of baby boomers with cash.

Eventually they (and other village operators) will reach saturation, but I dont think we are there yet.

[ENP]

CJ it can only keep building villages if there are people that can afford to live in them or are you expecting Govt subsidies most elderly people could not afford to live in them.

If RYM starts to get decreasing returns on it's equity and assets, starts paying a higher % dividend or uses all spare cash to buy back stock or pay off debt, then you can tell they have run out of ideas to expand.

[voltage]

thanks for all the comments. If you were to extend this portfolio to some global blue chip stock what would you add. I know the list is really endless but with the low USa dollar and pound what an opportunity. I have added google and apple.

[ENP]

I have added google and apple.

Reason being?

[voltage]

a long term investment portfolio should be diversified. Apple and google chosen has long term growth engines. Mainly my brokers recommendation. ENP your thoughts appreciated.

[percy]

Be careful with ownership of US shares.Best to have them in a broker's nominnee holding.The reason being if you die ,your estate will have great difficulties selling the shares.Sorry if my post is unclear, but your broker will explain the problems.Also you pay double brokerege,and divie's are very low,and have to be added to your NZ taxable income.
I am sorry but I cannot see that US investing is worthwhile. The countries driving the world's growth will be Asian,Indian,and Brasil.If you invest in what they want,ie Aussie minerals and NZ food,and stay away from what they produce ie refrigerators your portfolio should be strong.
I agree with previous poster's views on RYM vs WHS.
I would buy BHP.RIO,or KZL before any US stock.

[voltage]

Thanks percy, isn't global consumer brands good growth stocks to get into, egs like coke, mcdonalds yums, proctor and gamble, unilever etc.
Agree about ownership and do use a brokers nominee account for all funds outside nz and australia.
I have increased holding to rym. I also own Kingfish which has a high holding in ryman and mainfreight. Two top holdings for a long term portfolio

[ENP]

Apple and google chosen has long term growth engines.

Apple keeps needing to bring out new technology every 1-2 years to keep ahead of the competition. If it doesn't make the next best thing all the time, it's products will become obsolete and it's business will suffer. A lot of the growth that Apple has had over the last wee while has been from Ipod, Ipad, Iphone, etc. Who knows what people will be using 5-10-15 years from now.

Compare to something such as Coca Cola, Colgate Palmolive, etc. People have been drinking coke and brushing their teeth and washing themselves in the shower for years. I doubt toothpaste will become an obsolete product in 5-10-15 years time. Same as people will continue to drink the same coke recipe years into the future.

Also the fact that you said "broker recommendation" isn't very re-assuring. You should drill your broker and ask why he is making these decisions, what are his reasoning's behind his recommendations and do they suit your investment ideas. After all, it is your money you are playing with.

Let me know what you think. :)

[percy]

Apple keeps needing to bring out new technology every 1-2 years to keep ahead of the competition. If it doesn't make the next best thing all the time, it's products will become obsolete and it's business will suffer. A lot of the growth that Apple has had over the last wee while has been from Ipod, Ipad, Iphone, etc. Who knows what people will be using 5-10-15 years from now.

Compare to something such as Coca Cola, Colgate Palmolive, etc. People have been drinking coke and brushing their teeth and washing themselves in the shower for years. I doubt toothpaste will become an obsolete product in 5-10-15 years time. Same as people will continue to drink the same coke recipe years into the future.

Also the fact that you said "broker recommendation" isn't very re-assuring. You should drill your broker and ask why he is making these decisions, what are his reasoning's behind his recommendations and do they suit your investment ideas. After all, it is your money you are playing with.

Let me know what you think. :)

Voltage.
Pleased you have the ownership correct.ENP's post about Apple is correct.Steve Jobs's health is also a concern.
Coke,Colgate,ie your global consumer brands I would agree with.
As a matter of interest it will be interesting to see which performs best,Coke or BHP?. Also US dollar or Aussie dollar?.My not very strongly held view is BHP and Aussie dollar.Just feel there are no real new jobs in US and problems have not been cured.Yet Aussie has what rest of the world wants.

[voltage]

Thanks ENP and percy for your comments. Do you both follow a diversified approach globally or more focused on NZX and ASX. I do have a good allocation of BHP. It is very difficult to filter the noise. There are so many ways to construct a portfolio it certainly becomes very confusing. Who really does know. Perhaps it is best to stick with index funds.

[percy]

Voltage. Do not try to do everything,understand everything,be right with every share you buy.I have made and lost money on shares in NZ,Aussie,USA,and UK.I have at times focused on a big holdings in a few companies,and other times a few shares in a large number of companies.At times I have looked to buy great growth companies,while other times I have only brought companies that pay divies.I have followed NZ market for years,even when I had no money to invest.I enjoy the market.It is a profitable hobbie for me. Just take your time with your portfolio.Sometimes the correct answers will come to you when you are gardening.!! WARNING.Do your own thing,manage your own money,do not delegate it to your broker or others.!!
My portfolio is mainly NZ companies for dividends. ie about 71%. I have a large number of small holdings in spec Aussie companies,oil , minning,medical, backdoor listings and small cap companies .This would make up approx 20% of my portfolio. About 9% is in MLN which gives me global shares.

[voltage]

Thats interesting Percy. So NZX is your income portfolio and growth comes from small ASX companies. You see no point in having companies like coke etc. I must say brokers recommendations have never been that great. I wish to be a long term holder and reluctant to sell. I wish to buy right at the beginning.

[percy]

Thats interesting Percy. So NZX is your income portfolio and growth comes from small ASX companies. You see no point in having companies like coke etc. I must say brokers recommendations have never been that great. I wish to be a long term holder and reluctant to sell. I wish to buy right at the beginning.

Less than a year ago a friend asked me to read POT annual report.I had LPC Lyttelton port shares some time ago so knew a bit about the port business.The report was so good I brought some shares at $7.26.
Over 26% increase in SP plus divie.Sauce did great posts on RYM when SP was about $2.07.Made sense to me, so added to my holding.Over 30% increase plus divie.I just feel more comfortable with NZ and Aussie.Dividends I love.Tax paid divies get me really excited.! I used to think you had to have Coke etc but now I am not so sure.Just remember you only need one good idea a year.You do not have to be clever everyday.

[ENP]

You should aim to know a lot about a little rather than a little about a lot.

Meaning, find a few companies you think look like a good long term investments and learn all you can about them.

If I was you, I'd look at the NZX first, since it's local and easier to find info on. Then branch out to the ASX since it's still close and lots of local info on it. Then if you must, branch out into UK, USA. There is simply more info on NZ companies in the local news that you can get a hold of as compared to trying to do your research on companies based in the USA.

I think you really need to figure out what you want out of your investments first, before you just choose any company because it is "blue chip"

[percy]

You should aim to know a lot about a little rather than a little about a lot.

Meaning, find a few companies you think look like a good long term investments and learn all you can about them.

If I was you, I'd look at the NZX first, since it's local and easier to find info on. Then branch out to the ASX since it's still close and lots of local info on it. Then if you must, branch out into UK, USA. There is simply more info on NZ companies in the local news that you can get a hold of as compared to trying to do your research on companies based in the USA.

I think you really need to figure out what you want out of your investments first, before you just choose any company because it is "blue chip"

voltage. I think you will not get better advice than this.

[voltage]

thanks for the advice. So you are also saying do not focus too much on complete diversification, ignore funds and concentrate on a small number of good companies in NZ and Aussie. Obviously one is after long term growth with growing dividends.

[Lizard]

Voltage started this thread with the words "friends want advice"....

"Friends want advice" is one of those frustrations that strike a lot of professions, and the financial arena is one of the trickiest. Some issues:

there are rarely 100% "right answers"

you probably don't have all the information and may not feel able to probe their finances in full

odds are they won't tell you what they choose to invest in, but will at some stage feel aggrieved when an investment loses money.

the more money your initial advice makes for them, the more advice they will expect you to provide and the more money they will bet on it - until the inevitable bad investment.


What your options are:

Send them to an Authorised Financial Adviser - Unfortunately, most of us don't know of any we would be happy to leave our funds with, or we might be doing so (if anyone knows of any that have actually made them or their friends returns that are greater than term deposit over 10 years or more, then it would be good to know!). However, if the friends are more like acquaintances who are just looking for a free lunch, then it pays to have an advisers name up your sleeve for them.

Educate them - if you have friends who are genuinely interested in making good investments and show a bit of interest, then the best place to start might be loaning them some investment books and helping them to understand how they can apply what they're learning to their own situation. Even here, there are a few choices - do you loan them Martin Hawes or Alex Elder? Personally, unless you know your friends well and they already have some knowledge and are determined to invest in high-risk, spec shares, I would steer them towards a very conservative starting point with Martin Hawes or Mary Holm or some such.

Help them - if you are really in so deep that you feel obliged to help them with specific investment recommendations, then be very careful. Professional advisers are now required to "Know Your Client" and anyone giving more than the most basic advice should try to meet this standard. I don't think there are any legal constraints on giving well-meaning advice to a friend (might be wrong), but it still doesn't hurt to try and give professional-quality advice. I would say, in general, that if dealing with with someone who needs specific advice, then they are probably not ready for high risk-return investment. So despite what you yourself might choose to do with that amount of funds, it pays to remember that you will not be able to exercise control. Therefore it is probably best to take a low-risk balanced/diversified approach. This may mean keeping a portion in liquid fixed-interest/cash investments or using a suitable mix of managed funds for those who want to set and forget. No matter how much they want to set and forget, I would encourage them to review their investments either quarterly, six-monthly or at least annually and make some suggestions as to how they might go about doing this - maybe help them to draw up a form they can use for review and decision-making


In the end, the goal with friends is not to choose them the best tickets out of a raffle book, but to lead them towards the tools they need to manage their long-term financial situation with as little help from you as possible!

[BIRMANBOY]

Wise words Lizard!!!!!
Voltage started this thread with the words "friends want advice"....

"Friends want advice" is one of those frustrations that strike a lot of professions, and the financial arena is one of the trickiest. Some issues:

there are rarely 100% "right answers"

you probably don't have all the information and may not feel able to probe their finances in full

odds are they won't tell you what they choose to invest in, but will at some stage feel aggrieved when an investment loses money.

the more money your initial advice makes for them, the more advice they will expect you to provide and the more money they will bet on it - until the inevitable bad investment.


What your options are:

Send them to an Authorised Financial Adviser - Unfortunately, most of us don't know of any we would be happy to leave our funds with, or we might be doing so (if anyone knows of any that have actually made them or their friends returns that are greater than term deposit over 10 years or more, then it would be good to know!). However, if the friends are more like acquaintances who are just looking for a free lunch, then it pays to have an advisers name up your sleeve for them.

Educate them - if you have friends who are genuinely interested in making good investments and show a bit of interest, then the best place to start might be loaning them some investment books and helping them to understand how they can apply what they're learning to their own situation. Even here, there are a few choices - do you loan them Martin Hawes or Alex Elder? Personally, unless you know your friends well and they already have some knowledge and are determined to invest in high-risk, spec shares, I would steer them towards a very conservative starting point with Martin Hawes or Mary Holm or some such.

Help them - if you are really in so deep that you feel obliged to help them with specific investment recommendations, then be very careful. Professional advisers are now required to "Know Your Client" and anyone giving more than the most basic advice should try to meet this standard. I don't think there are any legal constraints on giving well-meaning advice to a friend (might be wrong), but it still doesn't hurt to try and give professional-quality advice. I would say, in general, that if dealing with with someone who needs specific advice, then they are probably not ready for high risk-return investment. So despite what you yourself might choose to do with that amount of funds, it pays to remember that you will not be able to exercise control. Therefore it is probably best to take a low-risk balanced/diversified approach. This may mean keeping a portion in liquid fixed-interest/cash investments or using a suitable mix of managed funds for those who want to set and forget. No matter how much they want to set and forget, I would encourage them to review their investments either quarterly, six-monthly or at least annually and make some suggestions as to how they might go about doing this - maybe help them to draw up a form they can use for review and decision-making


In the end, the goal with friends is not to choose them the best tickets out of a raffle book, but to lead them towards the tools they need to manage their long-term financial situation with as little help from you as possible!

[Snoopy]

Be careful with ownership of US shares. Best to have them in a broker's nominnee holding. The reason being if you die ,your estate will have great difficulties selling the shares. Also you pay double brokerage,and divie's are very low,and have to be added to your NZ taxable income.


Percy is right about the difficulties of selling shares in your own name. I was told that if I wanted to sell I would have to transfer my shares to a nominee company in the USA first (takes a few weeks) and then sell. This is a real issue if you might die or are a trader.

However as an investor, I have my NYSE: YUM shares in my own name. YUM have a contribution scheme where you can forward them money and buy shares while paying only one set of brokerage (in the US). There are also no ongoing monitoring fees that would shave my returns if I had them in an NZ broker nominee company. So for me, this arrangement is working well.

While dividends do tend to be lower in the USA, growth prospects tend to be better. So I don't think you can rule out investment in the USA just because of lower dividends.

Saying dividends have to be added to your NZ income is generally correct. But since all income worldwide has to be declared in NZ and not only from shares I do not see why Percy made this comment. In fact if you are in the FIF taxation regime (total overseas investment portfolio $NZ50,000 plus), US dividends are specifically not added to your NZ taxable income, so Percy is quite wrong in this instance.

SNOOPY

[percy]

Percy is right about the difficulties of selling shares in your own name. I was told that if I wanted to sell I would have to transfer my shares to a nominee company in the USA first (takes a few weeks) and then sell. This is a real issue if you might die or are a trader.

However as an investor, I have my NYSE: YUM shares in my own name. YUM have a contribution scheme where you can forward them money and buy shares while paying only one set of brokerage (in the US). There are also no ongoing monitoring fees that would shave my returns if I had them in an NZ broker nominee company. So for me, this arrangement is working well.

While dividends do tend to be lower in the USA, growth prospects tend to be better. So I don't think you can rule out investment in the USA just because of lower dividends.

Saying dividends have to be added to your NZ income is generally correct. But since all income worldwide has to be declared in NZ and not only from shares I do not see why Percy made this comment. In fact if you are in the FIF taxation regime (total overseas investment portfolio $NZ50,000 plus), US dividends are specifically not added to your NZ taxable income, so Percy is quite wrong in this instance.

SNOOPY

My concern is death.I sold my US stocks a number of years ago so would pay to get up to dated information.I was told by my broker it was just as well I had not died while I owned them,as my estate may "never" been able to sell them,because of US paper work.I held shares in my name.One time when exercising options I had to send head shares certificate with cheque.Head shares were cancelled by mistake.Phone calls 8am Kiwi time,and I finally received cert back,with cancelled stamp still on it.Broker transfered into their name before selling.Work out but hassel.
Note.Ask broker what happens if you die.Snoopy check your position out. All that KFC must not be doing your health any good.!!! Only joking.

[voltage]

Thanks for all the comments.
Lizard, yes giving advice to people you need to take the conservative line of a diversified portfolio. Some ETFs would be sufficient.
Also Percy you are quite right, custodial is essential, I get charged $50 per stock per year to do this. there are cheaper options like www.alliancetrustsavings who have no charge for custodial. However I am interested in the comments not to follow a diversified approach and just focus on a selection of ASX and NZX shares. I like to keep things simple. The idea is to out perform the average. Would this approach be too risky. lets say you have $500000. Would you have 100000 in BHP?

[percy]

Thanks for all the comments.
Lizard, yes giving advice to people you need to take the conservative line of a diversified portfolio. Some ETFs would be sufficient.
Also Percy you are quite right, custodial is essential, I get charged $50 per stock per year to do this. there are cheaper options like www.alliancetrustsavings who have no charge for custodial. However I am interested in the comments not to follow a diversified approach and just focus on a selection of ASX and NZX shares. I like to keep things simple. The idea is to out perform the average. Would this approach be too risky. lets say you have $500000. Would you have 100000 in BHP?

No. 15% of portfolio would be $75,000.,which would be more than enough.However the trouble comes in a few years time.A friend of mine put $60,000 into EBO .with dividend reinvested and taking up issues his holding was close to $800,000.Now his estate has the horrible job of selling down this holding as it was close to 40% of his portfolio.

[OldRider]

Voltage:
I would suggest if you have that amount of funds, or greater, you have a look at the top 20 investments of Lic's such as AFI or ARG, they are
easily available over the net, and could give guidance to the proportions you could hold. As a portfolio grows larger it becomes increasingly more difficult to
beat averages by much. From the top of my head I think the larger conservative ASX listed Lic's hold between 10 and 14% in BHP

[shasta]

Voltage:
I would suggest if you have that amount of funds, or greater, you have a look at the top 20 investments of Lic's such as AFI or ARG, they are
easily available over the net, and could give guidance to the proportions you could hold. As a portfolio grows larger it becomes increasingly more difficult to
beat averages by much. From the top of my head I think the larger conservative ASX listed Lic's hold between 10 and 14% in BHP

Voltage

Check my thread for GMI on the ASX threads, it has shares in all the mining majors, BHP, RIO, Vale, Xstrata etc, & pays a dividend, its a stock for those wanting exposure to resources but not wanting to pick say just gold stocks etc.

I personally wouldnt invest in more than 5 companies at a time, in the past i've held 10 + stocks, & also at times 75%+ in 1 or 2 stocks, & both methods were either too risky, or too defensive, so for me 5 stocks is a balance for my risk tolerance.

[percy]

I have posted that I can see no really good reason to hold US or UK shares.I feel the costs,currency risks,market risks,makes the going too tough.
There is an article which I think is a must read where Bill English states US,UK {and Europe] are stuffed for the next 10 to 15 years.I agree.I have stated growth will come from Asia,India,and Brazil.The article is at www.stuff.co.nz then go to travel and article "Kiwi tourism must change:English."

[shasta]

I have posted that I can see no really good reason to hold US or UK shares.I feel the costs,currency risks,market risks,makes the going too tough.
There is an article which I think is a must read where Bill English states US,UK {and Europe] are stuffed for the next 10 to 15 years.I agree.I have stated growth will come from Asia,India,and Brazil.The article is at www.stuff.co.nz then go to travel and article "Kiwi tourism must change:English."

Percy, you're referring to BRIC (Brazil, Russia, India & China) thats where the world growth is coming from, the Western countries all carry too much debt!

[percy]

Percy, you're referring to BRIC (Brazil, Russia, India & China) thats where the world growth is coming from, the Western countries all carry too much debt!

Yes exactly.Thank you shasta as always.! Sorry I missed the Russians.!!

[BIRMANBOY]

Growth and RISK .....original post didnt imply risk was to be a desired criteria.
Percy, you're referring to BRIC (Brazil, Russia, India & China) thats where the world growth is coming from, the Western countries all carry too much debt!

[shasta]

Growth and RISK .....original post didnt imply risk was to be a desired criteria.

Yes, you are quite right, there is risk associated with these countries, but there growth prospects appear better than the US, Asia & EU in the short/mid term

[voltage]

However you can access global companies that invest in emerging countries, most of these are in USA like YUMS, McDonalds, Coke. Interesting I used google finance and compared share growth comparisons over 10 years. A company like Coke outperformed any NZ company.

[BIRMANBOY]

ok but dont forget the exchange rate...Its good at the moment to buy US stocks but whats it going to be like when you (they) want to cash them in??? Any growth could conceivably wiped out by adverse currency movements. It just adds an another unknown factor into the equation.
However you can access global companies that invest in emerging countriesmost of these are in USA like YUMS, McDonalds, Coke. Interesting I used google finance and compared share growth comparisons over 10 years. A company like Coke outperformed any NZ company.

[ENP]

However you can access global companies that invest in emerging countries, most of these are in USA like YUMS, McDonalds, Coke. Interesting I used google finance and compared share growth comparisons over 10 years. A company like Coke outperformed any NZ company.

Err yea but the exchange rate 10 years ago was around 40 cents but now it's up around 80 cents...

The original poster still hasn't told us what he wants out of his investments. So how can anyone suggest anything? You are better off learning more about what you want, what your style of investment is, how long your time frame is, what risk you are willing to take (can you sleep at night) and what your investment criteria is.

For example, if I was to invest today mine would be a 15% return, value invest in large cap stocks in NZ or AUS, time frame 10+ years, not too much risk, so therefore stick to excellent companies and buy with a margin of safety. Investment criteria is high gross/net returns compared to competitors, high return on equity, paying dividends, increasing EPS each year and a stock I believe to be 20% under my estimated value.

Therefore, if this is my criteria, it filters out 95% of stocks.

You have told us nothing at all even close to this. So how do you expect to get reasonable advice if we don't know the first thing about you?

[voltage]

Thanks ENP for refocusing the discussion. Mt situation is I wish to live off my shares in 5 years time. This will be a combination of dividend and selling capital. I am 57 and goal is to have a million in shares. I am two thirds the way there. Exchange rate has not been kind. I split shares approx 3 ways nzx ( AIA, fbu, kfl, LPTs, SKC, CEN, RYM, FRE) , asx ( the banks, RIO, BHP, AGL, CPU, QBE) and global ( 5 ITs, BP, APPLE, Google, QQQ). I prefer to accumulate and hold for ever but do get influenced by brokers of what is hot and sell, eg sold Delegats recently because of wine glut and rising dollar.
Have had some risky small companies but often come to grief with these. I will borrow to buy shares. My portfolio would be a lot higher but overseas component has been hammered by continual rising dollar over the last 10 years. UK from 27 to 52 now. one would think this is the time to load up on overseas shares since the dollar is so high. i believe the market is usually efficient and do not have the knowledge to analyse balance sheets. Brokers have professionals to do this. Am I missing something, on the right track or am i making this too complicated.

[OldRider]

Voltage:
Your plan is about the same as ours, except we are now well into living off our investments.
For us it has worked. We do keep bonds and term deposits now though, to have sufficient regular income from these, together with
the pension to pay for all day to day living expenses. Extras - new cars, Holidays etc come from investment income, so far capital
has been maintained, and I think you expectation to do this from $1m is not unreasonable


You seem to be suggesting you put some thought into the balance you hold between NZ, ASX, and Foreign and are willing to vary this, I have done the same
and have been happy with results. Over tha last 10 years NZX has dropped by half, ASX and Foreign increasing.

We make our own decisions without broker advice, indeed when we listened to a broker many years ago he proved to be less effective than ourselves.
You company choices are quite similar to our own.

It is a moot point the holding of small companies, good ones grow faster, but we have only been willing to put small amounts into them compared to the entire portfolio, so the effect on the portfolio has been small. Nevertheless I can recall several 10 baggers and more which have useful contributions.

We now own no Foreign shares directly using Lic's totally, eg RIT, PCT and WWHS which incidentally has been our greatest growth investment this year.
Recently we have purchased Lic's on ASX and reduced direct holdings to make life easier. eg: GMI,AFX,MIR

Good luck with your ideas, I believe you are on a path which has more than a good chance to succeed notwithstanding GFC's.

[ENP]

i believe the market is usually efficient and do not have the knowledge to analyse balance sheets.

It's not overly complicated to know the basics.

I learnt all I need to know on how to read a balance sheet from 5th form accounting at school and the following two books.

The New Buffettology
Warren Buffett and the Interpretation of Financial Statements

It only takes 1-2 weeks to learn. I'd rather invest 2 weeks of my time than let a "broker" tell me what to do with my million dollars.

[Lizard]

So, as I read that, you want a strategy that stands a good chance of delivering an 8.4% net return per annum or equivalent to about 12.0% if it was all in the form of taxable income at an average 30% tax rate. Probably realistic to look at a portfolio that produces about 5% gross from interest/dividends and 5% capital gain (presumed untaxed).

I have had management of a portfolio that was structured to achieve this exact return since 2002. The initial split requested by the 70 yr old investor was, 15% cash/term deposits, 20% debentures, 10% mortgages, 15% property trusts, 15% other NZ shares, 15% Australian shares and 10% overseas shares. The "mortgages" part pretty quickly morphed into bonds and grew to 15%, while debentures were eventually mostly replaced with term deposits (though still took a few hits). The portfolio gets rebalanced on a 3 month cycle. The individual categories are split into 6-9 individual holdings.

Over the 8 years, the fund has ended up about $9k short of the capital gain target and about $70k up on the income target. This is despite some heavy losses in individual investments on some occasions - a few failed debentures and one 100% loss on a shareholding.

In my view, given the portfolio strategy survived a market cycle, it seems to have worked quite well for the targeted returns using a fairly low risk approach that hasn't disturbed my sleep. However, having observed the losses in fixed interest, I would say that for myself, I would probably prefer to split between straight out cash/rolling term deposits and in shares - focussing mostly on dividend payers. This is because I feel that using a rebalancing approach, it is possible to bounce back from most sharemarket meltdowns, whereas it is rather hard to make large capital gains on bonds. I also have a reasonable amount of confidence in my stock-picking abilities after this many years.

I would also probably prefer to work with fewer holdings just to minimise the paper shuffling.

If you don't feel you have too many clues about picking shares, then there needs to be a minimum basic strategy - e.g. use a subscription or broker service for buy/sell recommendations, maybe use some basic freebie charting when reviewing. A rebalancing strategy between individual stocks can work okay, but I'd only suggest using it if you've first acquired some basic education about how to spot stocks that are at risk of going bust (or requiring substantial new capital in the current market). In general, I operate so that I reduce or sell holdings if they are twice the size of the intended average holding and either sell or add to stocks that are less than half the intended average value.

I'm expecting this post to be followed by a torrent of posts explaining how you could make much, much better returns using other strategies. They may well be correct. However, I just thought it might be of interest to demonstrate a fairly mechanical, low risk strategy that has achieved the returns you're looking for.

[percy]

voltage.
I can not add any better advice than Oldrider,ENP,or Lizard. Why retire at 62 ? With good income you may live until you are 95.With income saved by stay in in the work force until you are 65 or older will certainly give your portfolio 3 or more years of extra compond growth.
You are well on the way,and as others have advised it is more a matter of learning and trusting yourself.You have done well to be in the position you are in,so you must take the credit for that yourself.Steady as it goes,and grows.

[RRR]

Good article from Diana Clement about overseas investing http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=10738730
Diana reads sharetrader!

[voltage]

Thanks for all the replies, very helpful advice. ENP off to the library to get your recommended books. But ENP there are full time analysts out there, how could I have more insight than them. Oldrider and percy thanks for the vote of confidence. Lizard your comments are useful. RRR I have read the article. Retire is the wrong word, we get to a stage or age where we can make lifestyle choices. Go part time or try something else and if it fails there is no great loss. Without savings one has few options. My father just finished working full time at 85. He lived to work and now is very restless. Coming back to portfolio construction the exchange rate has now given us a great opportunity to diversify overseas with a lot less exchange risk.

[ENP]

But ENP there are full time analysts out there, how could I have more insight than them.

Know a lot about a little.

Your competitive advantage over these guys is that they have to monitor thousands of companies to find places to put their millions of their clients funds. You on the other hand, can act quickly if one of the several companies you are watching very closely has some beneficial improvements to their business that no one else has picked up on until it's too late.

I wouldn't have the faintest clue what the entire NZX 50 companies are doing. However, I have a pretty good idea, more than most about what is happening in my 3 favorite companies. That is my competitive advantage over the fund managers. I look at 3 companies very very closely, they look at 50+ with a quick glance.

[Joshuatree]

Voltage i think The Pie fund may be a good fit . Australasian companies with great returns ,but maybe not conservative enough for you, have a look ,cheers.

[voltage]

Thanks Joshuatree, their performance has been good, not a fan of unit trusts, prefer listed trusts. Maybe good to have a small part of portfolio in this area.

[Snoopy]

So, as I read that, you want a strategy that stands a good chance of delivering an 8.4% net return per annum or equivalent to about 12.0% if it was all in the form of taxable income at an average 30% tax rate.


Snap. This pretty much mirrors the kind of returns I set out to achieve.



Probably realistic to look at a portfolio that produces about 5% gross from interest/dividends and 5% capital gain (presumed untaxed).


I am not sure if it is just an aberration. But I have found that investing for a high dividend yield over the last business cycle on the NZX has also provided superior capital growth to the sub set of shares that I had ostensibly ring fenced as high growth/ low income shares.



I have had management of a portfolio that was structured to achieve this exact return since 2002. The initial split requested by the 70 yr old investor was, 15% cash/term deposits, 20% debentures, 10% mortgages, 15% property trusts, 15% other NZ shares, 15% Australian shares and 10% overseas shares. The "mortgages" part pretty quickly morphed into bonds and grew to 15%, while debentures were eventually mostly replaced with term deposits (though still took a few hits). The portfolio gets rebalanced on a 3 month cycle.


That sounds like a fairly sophisticated 70 year old investor to me. If all 70 year old investors were that sophisticated there would have been a lot less hardship over the last investment business cycle.

If you take 'conventional investment theory', 'the average investor' should have 1/3 of their wealth in property, 1/3 of their wealth in fixed interest and 1/3 in the sharemarket. You didn't mention it Lizard, but presumably this 70 year old had some equity in their own house? Although not strictly an 'investment', because everyone needs to live somewhere, I would argue that leaving your own property out of your investment portfolio will cause you to underestimate the property effect on your wealth.

For this reason my own investment in property over the years (outside of my own house) has been minimal, and is currently nil.

When reorganizing my own financial affairs a few years ago, along an equal property/fixed interest/shares split, I was struck by my ability to buy both 'leading shares' and 'bonds in leading share companies' at very similar yields. The theory was that buying say Contact Energy Bonds yielding 5% and Contact Energy shares yielding 5% at the same time would be diversifying my portfolio. This seemed to me to be a ridiculous assessment. Because if Contact Energy got into trouble, clearly both the shares and the security of the bonds would be affected. So I made the decision to close down all of my bond and finance company investments and put all that money into equivalent high yielding shares. That way I maintained my income and had some possibility of capital gain. The alternative of maintaining my fixed interest portfolio was that I retained the downside risk of losing my capital but gave away any counter upside capital risk from my investments. As a consequence of that decision the almost complete collapse of the non bank finance company sector had no effect on my investment portfolio.

I do still have a (smaller than conventionally suggested) fixed interest portfolio, made up of both term and cash deposits. But it is now entirely with significant banks.



The individual categories are split into 6-9 individual holdings.


And here lies the rub. Nine holdings in the NZX, when the NZX represents 15% of a portfolio means that that each holding represents about 2% of the total portfolio. You may sleep well in your bed Lizard. But you could also be be dead in your bed for quite a few years before your overall managed portfolio would even notice. Even if you have a windfall with one of your NZX shares goes up by 100%, your overall portfolio return for one year goes up by a one off 2%. Whoopy do! Would it make that much of a difference if you just threw the whole lot into something like TENZ, and cut out the management worry?

Having said that my own NZX shareholding management is not so different. I currently have nine NZX holdings. These are nominally equal, although not in practice. I use the same reapportioning rules as you. I sell down when a share reaches 'double weighting', and buy more when one declines to 'half weighting'. But because I axed my debenture/fixed interest/bond portfolio my NZX shares make up a far greater slice of my wealth than before. So any return outperformance I make is significant (as is any loss, but I have a different strategy to minimise that).



I would also probably prefer to work with fewer holdings just to minimise the paper shuffling.


I would agree, because of the situation I have outlined above.



I'm expecting this post to be followed by a torrent of posts explaining how you could make much, much better returns using other strategies. They may well be correct. However, I just thought it might be of interest to demonstrate a fairly mechanical, low risk strategy that has achieved the returns you're looking for.


There are all sorts of strategies that make far better returns than yours Lizard, as long as the market keeps going up. Long term, because of the multiplicative effect of cumulative earnings in subsequent years, almost none of these 'superior methods' are even survivable in portfolio terms. I think you are on the right track.

SNOOPY

[Lizard]

Thanks Snoopy. I found your comments interesting.

Yes, it did occur to me that if I wasn't interested at all in following the sharemarket, I would probably choose to split the shareholdings across a selection of managed funds. Then again, I got into sharemarket investing because I was grumpy at the returns on various funds I'd invested in, so I am not that sure I would go back to them easily for myself and therefore just as easy to invest other people's money there too.

[OldRider]

I have found the posts of Lizard and Snoopy interesting, got me enthused
enough to look at my own figures for comparisons.Some of their thoughts
echo my own as portfolio shows I think.

I retired in my 60's over 10 year ago so am roughly the same age as Lizards investor.
Breakdown of present portfolio:
Cash: 2.00%
Term Deposits: 7.25%
Bonds: 4.00%
NZ Shares: 6.75%
Aust Shares 38.00%
Foreign Shares: 14.00%
NZ Property: 25.50% includes our residence
Foreign Property 2.50%

Average dividend return 4.61% after removing value of house
Highest 5.66% 2006 Lowest 4.06% 2005
Average growth 9.23% after removing value of house
Highest 32.24% 2004 Lowest -32.34 2009

All data in NZ dollars. All told not too far distant from target others have though exchange gains have helped
over the last year or two but are going the other way now.

[voltage]

Snoopy out of interest have you compared your portfolio to TENZ to see if you have outperformed? Your focus on dividend yield is interesting, is it dividend growth that has driven your portfolio. I get these emails from http://www.early-retirement-investor.com/index.html and they focus on the dividend players for their portfolio. They use the high yielders like VOD, AV SSE, TESCO, PSON, NG, BAT

[Snoopy]

Snoopy out of interest have you compared your portfolio to TENZ to see if you have outperformed?


I mentioned TENZ as a proxy for a low cost NZX fund that roughly follows the index. I don't have an historical record of the dividend payments for TENZ, because I do not hold. However, the NZX50 which does have dividend payments included is a statistic that is readily available. Prior to this financial year (I calculate my returns on the tax year ended 31st March) I had outperformed the NZX50 by eight percentage points per year over the last five years. I suspect the NZX50 has outperformed TENZ over that time. So I am fairly sure my outperformance of TENZ has been significant over that period.

The five years before that I think I underperformed the NZX50 by a point or two per year during the best years of the new century bull market. However I was not disappointed by that because I was using a value investment type approach. And this is what the textbooks lead me to expect would happen if I didn't go out chasing growth. Finally underperforming during the bull market run by a point or two equated to still quite a respectable net return by historical average standards.



Your focus on dividend yield is interesting, is it dividend growth that has driven your portfolio.


Because my NZX investment portfolio is not what I consider well diversified (only nine shares), I would have to say that it is the capital performance of one share, Restaurant Brands that has driven my portfolio with Turner's Auctions bumper dividends playing a mentionable supporting role. Plus not having any real investment disasters to drag down my good work was useful!

SNOOPY

[h2so4]

Hi SD
So over the last 10 years what percentage of your portfolio's performance has come from dividends with and without RBD?

[Lizard]

Looking at the Smartshares and AMP WiNZ funds as proxies for shareholdings suggests that they are unlikely to provide a portfolio on their own that would meet the required return on a buy-and-hold basis, since only the OZZY and MOZY have achieved returns over 8.5% pa on a long-term basis (and that appears to be skewed by good results soon after inception). It is possible that they might meet the requirement if a re-balancing strategy was used that included fixed interest and perhaps property trust assets, as it seems Snoopy, myself and (presumably) Old Rider have been doing. It would take some considerable calculation to test this theory though and I am still rather dubious that they could achieve it, since annualised 5 year returns for TENZ, OZZY and WiNZ are -2.47%, 6.21% and -1.61% respectively. (Also note that WiNZ reports on a gross return basis and the other two are after tax but pre-management fee and presume dividends are reinvested)

One point I've found is that extra caution is needed to keep a fairly generous cash portion for an investor who is reliant on income from a portfolio. For an investor with a $500k portfolio and 20% of it in cash, spending $30k per year can really hinder the effectiveness of a re-balancing strategy. Not sure there are any really good mechanical strategies to get around this, but having insufficient cash to reinvest near the bottom can destroy the hard work of many years. For example, if the $400k was in shares and the market crashed 40% in a year, then (assuming a steady downtrend), the client would end the year with about $62k in cash and $248k in shares, but would have only transferred about $8k across into shares through re-balancing, with just $2k going in at the bottom i.e there is not much ability for re-balancing to recover funds for them, other than to throw caution to the winds and plough the remaining cash into shares at the bottom. Anyone in this position would either need to be prepared to hold a lot more cash or put the time and effort in to a much more active strategy rather than a mechanical re-balancing system.

[percy]

Plus not having any real investment disasters to drag down my good work was useful!

SNOOPY

I think this statement is very important.I note when talking to my friends about how their year in the market has been it is so often;" I would have had a great year if it hadn't been for xxxxxxxx which fell out of bed and brought down my whole year's return."
So for a long term portfolio avoiding disasters would appear to be more important than big winners.
Yield stocks rather than growth stocks ,however, one must be very confident the yield is substainable.

[voltage]

rebalancing portfolios between cash and shares must become a lot more difficult if you have a collection of individual shares due to selling and buying small amounts. Using a fund this is a lot easier to rebalance

[Lizard]

rebalancing portfolios between cash and shares must become a lot more difficult if you have a collection of individual shares due to selling and buying small amounts. Using a fund this is a lot easier to rebalance

I would say just don't get too pedantic about it or re-balance too frequently. Have a fairly wide range for individual holdings - e.g. if your average holding is $8000, you don't have to take action unless it falls below $4,000 or rises above $16,000. And even then, if the portfolio is growing, the size of an average holding can creep up as well.

Using a fund might be simpler, but unlisted ones may have higher entry/exit fees/spreads which make re-balancing more expensive.

[OldRider]

Lizard:

Until I read your last post I was thinking you did mechanically rebalance at certain times, and that I was
rather different to this.I see this is not so.

The proportions we use as posted earlier are for when the market is operating "normally"
If one follows the pattern too rigidly then due to the stability of cash,
a shift from cash to shares is needed when the market has fallen,
just the opposite to the pattern I would follow, and as you pointed out there is not enough cash for this.

We do have an overall policy of reducing the share portfolio 5% downwards after a each 5% drop in the market and allowing this
to collect in our cash account, presently this is rather higher than the 2% guide sp quite unbalanced!. This was another part of our
thoughts in having some LIC holdings, as a reduction in a LIC holding mostly covers the market and makes the
choice over which companies to reduce easier.

Moving cash to a term deposit or bonds from profits is a rather easier decision.

To repurchase shares we have criteria as well, only rebuying when the market is trending up and
the 20 day ma over the 150 day ma

[Snoopy]

Hi SD
So over the last 10 years what percentage of your portfolio's performance has come from dividends with and without RBD?

SSD, I need to back track your question a bit before I answer. I have done quite a lot of portfolio reorganization over the last 10 years. So while I have held seven of my nine NZX shares for 10 years (the two exceptions being TUA and NZS), I certainly haven't held them all in 'target quantities' (that I have now achieved) for 10 years. I am saying this because it is probably unrepresentative of me to report my 10 year portfolio investment return when technically I haven't held that portfolio for 10 years.

Secondly although Restaurant Brands has been my star NZX performer, and I always had faith that my 'buying when prices were low' would pay off, I didn't expect RBD to do as well as it has done. Conversely there are other shares that I have purchased where my expected share price recovery has not occurred, well not yet anyway. While my selection of RBD looks good now, it didn't look quite so clever at the time I was buying it. Conversely again I haven't written off some of my other buying decisions as 'not so good', just because they have not done so well yet.

My quick answer to your question SSD is that with the RBD share price at around $2.30, then I am up about 90% on my average purchase price in capital terms. If I assume a constant number of shares held over ten years (not accurate in my case), then dividends received would add up to about 80% of my average share price purchase. With my prudent purchasing I am looking at a +170% total return over that 10 year period.

The rest of my NZX portfolio has not performed like this. TUA for instance is sitting at my average purchase price. But the dividends over the last five or so years that I have held these TUA shares have been huge, something like 10-12% per year. That is one extreme case.

In another extreme, NZS I am holding at a loss, although not as big a loss as many investors (I paid an average of 80c a share for mine, SP now 71c). NZS are yet to declare or pay a dividend. Nevertheless in portfolio terms such losses wipe out some of my RBD gains.

Without doing a specific '10 year calculation' on my current 9 holdings, which I have explained wouldn't really mirror how I have done anyway, I would estimate my net contribution from dividends in portfolio is around 60-65%, with unrealised capital gain of 35-40% over 10 years sitting ready to harvest if I so choose. Take RBD out of the equation and I am probably looking at 70-75% of my NZX portfolio return being from dividends, maybe even more!

This is possibly a higher proportion from dividends than the average investor. Then again I have set out to invest in high dividend paying shares! However if you consider that I have no company 'bonds' or debentures (which generally have no capital gain if you hold from inception to maturity) my combined NZX shares and bonds portfolio return is probably closer to what the mythical average investor might anticipate.

SNOOPY

[Lizard]

Thanks Old Rider! I am finding your comments really useful.

Thinking about it, I guess investment performance is the combined product of investment/stock selection, investment timing, portfolio construction and portfolio management. We talk a lot about the first two on ST, but not so much about the second two. Probably that's partly because the "right" answers are going to be a lot more personal, since they depend a lot on the % cash inflow/outflow occurring. Interestingly, perhaps the best construction and management could be determined by how good an investor is at investment selection and timing. Yet, in general, most advice on portfolio construction is based on an investor making average or market-equivalent decisions. An investor with random stock-picking and investment timing skills is probably best with a straight re-balancing scenario, but one that has greater skill in stock-picking can let individual stocks run, while an investor confident about their market timing can take a less balanced approach between investment types and geographies.

My own methods were originally based on having little confidence in my own stock-picking and timing. However, in thinking about it, over time the flexibility that is evolving is gradually reflecting increased faith in my investment skills and the re-balancing aspect has been watered down somewhat. It is difficult to say whether this has improved results - since the past few years have been more difficult ones than earlier years, so I can't see an obvious increase in returns at this point. (Also not helped by having had less time of late to put those investment skills to use - which tends to put timing out the window.)

[Lizard]

Sort of set me off now... researching more ideas on portfolio construction...

Tim Farrelly seems to be something of an Aussie guru in portfolio contruction. His philosophies make good sense - forgive the dull formatting and read them on his web-site or quoted below:
http://www.farrelly.com.au/philosophies.html


Portfolio Construction Principles

Long-term return forecasts can be a vastly superior guide to the future than historical returns.


Breaking returns into the three components income, income growth, and the effect of changing valuation ratios can provide clear insights into future returns

Long term forecasts of asset class performance are generally far more reliable than short term forecasts, and infinitely more reliable than historical extrapolations

Using past sector performance as a guide to the future is worse than meaningless. It is generally a counter indicator.

Risk, like beauty, is in the eye of the beholder. It is best assessed with the investor in mind.


All risks that are relevant to the investor must be considered.

Most risks faced by private investors can be grouped as affecting long term real returns, liquidity or peace of mind.

The key risk faced by most investors is having insufficient long-term, real returns to satisfy their cash flow needs

The most important risk to any investor is rarely associated with a Greek letter

The one risk that investors should not have to worry about is someone else’s business risk


Portfolio’s should be built to meet investor cash flow needs


The main driver of portfolio construction should be meeting investors cash flow needs with an acceptable level of certainty

Portfolios don’t have to be theoretically perfect, highly efficient and robust will do.

Taxes, transaction costs and fees can represent over 50% of returns, they must be factored in to all decisions.

Business risk should never be the key driver of portfolio construction.

[h2so4]

SSD, I need to back track your question a bit before I answer. I have done quite a lot of portfolio reorganization over the last 10 years. So while I have held seven of my nine NZX shares for 10 years (the two exceptions being TUA and NZS), I certainly haven't held them all in 'target quantities' (that I have now achieved) for 10 years. I am saying this because it is probably unrepresentative of me to report my 10 year portfolio investment return when technically I haven't held that portfolio for 10 years.

Secondly although Restaurant Brands has been my star NZX performer, and I always had faith that my 'buying when prices were low' would pay off, I didn't expect RBD to do as well as it has done. Conversely there are other shares that I have purchased where my expected share price recovery has not occurred, well not yet anyway. While my selection of RBD looks good now, it didn't look quite so clever at the time I was buying it. Conversely again I haven't written off some of my other buying decisions as 'not so good', just because they have not done so well yet.

My quick answer to your question SSD is that with the RBD share price at around $2.30, then I am up about 90% on my average purchase price in capital terms. If I assume a constant number of shares held over ten years (not accurate in my case), then dividends received would add up to about 80% of my average share price purchase. With my prudent purchasing I am looking at a +170% total return over that 10 year period.

The rest of my NZX portfolio has not performed like this. TUA for instance is sitting at my average purchase price. But the dividends over the last five or so years that I have held these TUA shares have been huge, something like 10-12% per year. That is one extreme case.

In another extreme, NZS I am holding at a loss, although not as big a loss as many investors (I paid an average of 80c a share for mine, SP now 71c). NZS are yet to declare or pay a dividend. Nevertheless in portfolio terms such losses wipe out some of my RBD gains.

Without doing a specific '10 year calculation' on my current 9 holdings, which I have explained wouldn't really mirror how I have done anyway, I would estimate my net contribution from dividends in portfolio is around 60-65%, with unrealised capital gain of 35-40% over 10 years sitting ready to harvest if I so choose. Take RBD out of the equation and I am probably looking at 70-75% of my NZX portfolio return being from dividends, maybe even more!

This is possibly a higher proportion from dividends than the average investor. Then again I have set out to invest in high dividend paying shares! However if you consider that I have no company 'bonds' or debentures (which generally have no capital gain if you hold from inception to maturity) my combined NZX shares and bonds portfolio return is probably closer to what the mythical average investor might anticipate.

SNOOPY

SD really interesting and thanks for sharing.

The high dividend return as a percentage of your returns ties in well with some data I uncovered on returns in range-bound/bear markets in the US.

% of total returns from dividends
1906-1924 97%
1937-1950 106%
1966-1982 65%

Markets punished growth stocks in these markets. However holders of dividend stocks were rewarded by receiving dividends while waiting for the next business cycle.

Of course this doesn't mean that growth should be ignored but it certainly does mean any growth has to be almost guranteed to be recognised in these types of markets.

PE ratios were interesting, where low PE stocks were also rewarded. Of course there are other things to consider when choosing a low PE stock for your portfolio like quality, growth and valuation.

[OldRider]

We have a spreadsheet that calculates proportion of income from dividends and growth for our holdings
This figure varies wildly from year to year.
For the last 10 years it has been 49.95% dividends and 50.05% growth (includes this year)
Last year it was 31.72% dividends and 68.28% growth
For nine years prior to this year 39.84% dividends and 60.16% growth

[OldRider]

I had some other trivia as well that I had meant to add to previous post,
but left off, we also have a sheet that calculates dividend return on cost
best performer is DTL @ 24.76%, there are now several over 15%
AGK for example @18.04% Dividend growth is something we take notice of.

[Snoopy]

One point I've found is that extra caution is needed to keep a fairly generous cash portion for an investor who is reliant on income from a portfolio. For an investor with a $500k portfolio and 20% of it in cash, spending $30k per year can really hinder the effectiveness of a re-balancing strategy. Not sure there are any really good mechanical strategies to get around this, but having insufficient cash to reinvest near the bottom can destroy the hard work of many years. For example, if the $400k was in shares and the market crashed 40% in a year, then (assuming a steady downtrend), the client would end the year with about $62k in cash and $248k in shares, but would have only transferred about $8k across into shares through re-balancing, with just $2k going in at the bottom i.e there is not much ability for re-balancing to recover funds for them, other than to throw caution to the winds and plough the remaining cash into shares at the bottom. Anyone in this position would either need to be prepared to hold a lot more cash or put the time and effort in to a much more active strategy rather than a mechanical re-balancing system.


There are a few underlying assumptions in Lizard's post here that I think are worth questioning.

Looked at 'in total', spending $30,000 from a total investment portfolio of $500,000 is spending your portfolio proceeds at a rate of 6% per year. That requires a 'gross' income yield of somewhere just north of 8%. Not unreasonable. But over the business cycle getting a portfolio to achieve that without undue capital risk would be a challenge.

'Cash' is agnostic about where it comes from. Interest from a term deposit, or a sudden 'cash' windfall from an unexpected company takeover, can both be equally adept at paying the grocery bill or one of life's little treats. So IMO what our $500,000 nest egg owner needs to focus on is certainty of cashflow.

The last couple of business cycles in New Zealand have seen term deposit interest rates cycle between something like 7.5% and 3.9%. With $500,000 in capital that equates to a gross income fluctuation of between $19,500 and $37,500. I believe this kind of fluctuation would be barely acceptable. And that means people looking for 'steady income' need a far more sophisticated strategy than just 'term deposits', which is as Lizard suggests.

One option could be to go for very long dated company bonds. But these are only as sound as the underlying company that creates them. In New Zealand you can offer to get a similar gross yield if you buy the underlying company's share on the NZX directly. Or you could try long dated bank term deposits. But the problem here is the break fee should you suddenly decide you need your capital back.

IME the fluctuations from dividends throughout the business cycle are far less than the fluctuations from term deposits. That's because many directors are loathe to cut dividends through a business downturn they perceive as temporary. Having a solid dividend paying portfolio is usually less volatile from an income perspective rolling over term deposit investments. It is possible to decrease this volatility still further by:

1/ Investing in modestly geared utilities,
2/ Having paired concurrent investments like 'a good exporter' and 'a good importer'
3/ Investing in companies that are geograhically spread.
4/ Investing in companies that have a well run yet diversified product or service mix.

Such a portfolio will tend to not mimic the business cycle, an advantage to the fixed capital investor.

Finally the need for a steady income can be to some extent mitigated by investing in a company that allows you to 'living expense hedge'. For example owning power company shares may take some of the worry out of potential high power bills in day to day living.

With a portfolio of shares structered as above , I have found that there is no 'cash pinch' at the bottom of the business cycle, of the kind Lizard hints is inevitable.

SNOOPY

[Lizard]

With a portfolio of shares structured as above , I have found that there is no 'cash pinch' at the bottom of the business cycle, of the kind Lizard hints is inevitable.

SNOOPY

Below is a small summary of dividends (cps) paid on what seem to be Snoopy's favourite shares at FY2007 (before crisis) and FY2009 (post-crisis).

http://img.villagephotos.com/p/2006-8/1204598/Snoopys%20dividends.gif.jpg

i.e. If Snoopy had been able to get $30k in cash income off a $500k portfolio before the crisis, he would have been getting $15k in cash income from those same shares 2 years later. To make up the difference, he would have had to sell $15k worth of shares. If his shares had fallen in line with the yield, they may by then have been worth only $250k less the $15k sold or $235k (I've ignored the fact he might also have had to top up income with share sales in 2008).

Now he has a portfolio of $235k with no cash to buy more shares for the recovery or participate in discounted and dilutionary capital raisings. He is unlikely to get $30k in income again until his share portfolio returns to $500k, but with each passing year that doesn't happen, he has to sell further shares to top up his income...

[Snoopy]

Below is a small summary of dividends (cps) paid on what seem to be Snoopy's favourite shares at FY2007 (before crisis) and FY2009 (post-crisis).


Lizard the attempt to bring facts into this debate is out step with general internet message board protocol. Wild accusations and gross exaggerations are de rigeur here. But since you insist on such desperate tactics I can only play your game...

I have at last had time to dig into my archives to find out if what I thought I had achieved by ditching my fixed interest portfolio and instead investing in high yielding shares has been achieved. My records are in tax years (ending 31st March) rather than calendar years. The study period I have used is the last 5 financial years as the global financial crisis has played itself out is FY2007 (ending 31st March 2007) to FY2011.

Over the years my 'income strategy' has rested on holding eight NZX shares:
Contact Energy (CEN), Lyttelton Port of Christchurch (LPC), PGG Wrightson (PGW), Restaurant Brands (RBD), Scott Technology (SCT), Sky City Entertainment (SKC), Telecom (TEL) and Turner’s Auctions (TUA). For the purpose of this exercise I shall assume all of these shares were bought on 31st March 2006.

We shall assume that on 31/03/2006 an equal amount of money was invested in each share, approximately $50,000 in each share. This gives a $400,000 share portfolio, with $100,000 still available to be invested in cash and bank term deposits for our $500,000 investor. If you round out the number of shares to be acquired to the nearest hundred, our hypothetical portfolio on acquisition looks like this:

6,400 CEN @ $7.76; 22,500 LPC @ $2.22; 27,300 PGW @ $1.83; 38,500 RBD @$1.30, 20,400 SCT @ $2.45; 9,300 SKC @ $5.36, 9,000 TEL @$5.54, 22,700 TUA @ $2.20

The dividends per share in each of the five financial years under consideration are as follows:

Financial Year: 2007, 2008, 2009, 2010, 2011
CEN: 26cps, 28cps, 28cps, 28cps, 25cps
LPC: 6.3cps, 4.2cps, 5.1cps, 4.9cps, 2.9cps
PGW: 6.0cps, 12.0cps, 16.0cps, 5.0cps, 0cps
RBD: 8.0cps, 6.0cps, 6.5cps, 8.5cps, 15.0cps
SCT: 3.0cps, 9.0cps, 0cps, 2.25cps, 4.0cps
SKC: 26.0cps, 21.0cps, 30.5cps, 6.5cps, 17.25cps
TEL: 35.5cps, 35.5cps, 23.4cps, 16.8cps, 15.4cps
TUA: 14.0cps, 13.0cps, 7.2cps, 17.0cps, 5.0cps

When calculating the portfolio cash return I have reduced the fraction of the Telecom dividend not imputed by 30% over the last few years. I have not included capital returns and the effects of cash issues on the income I have calculated, because these are not 'income'.

I calculate the total income received and the annual gross return on the original capital of this portfolio over the study period as follows:

Financial Year: 2007, 2008, 2009, 2010, 2011
$17,202.50, $18,258.00, $16, 386.90, $13,966.50, $12, 968.75
6.1%, 6.5%, 6.1%, 5.0%, 4.6%

These returns make an interesting comparison with bank term deposit rates available at the time

7.6%, 8.6%, 3.9%, 4.6%, 4.5%

The outperformance dividend payout of high yielding share portfolio, based on the original capital invested, is as follows:

-1.5%, -2.1%, +2.2%, +0.4%, +0.1%

Note that as the global financial crisis unfolds, the comparative performance of the high yielding share portfolio gets relatively better. The income is also steadier from the income shares compared to the bank fixed interest rates available. This supports my view that if shares are selected appropriately, then steadier income returns are available from high yielding shares compared to the alternative of being invested in the fixed interest market.

SNOOPY

[Lizard]

Thanks for the insights, Snoopy. Looks like you did pretty well. Interesting to see also how much the term deposit rates varied over that period, although the reality should be that staggered term deposits would smooth the returns somewhat (and provide more predictable income).

The only part of the debate your answer doesn't address is what happens when you have to realise capital to make up for reduced income. With shares, you are forced to realise that capital at what is likely to also be a low point in the share price, locking in capital losses, whereas with term deposits, the full amount should come back to you when the deposit matures. With staggered deposits and predictable future income flows, it should be possible to put aside the necessary capital from maturing investments to keep income levels stable. Taking income out of capital will hurt, no matter where it is invested, but being forced to sell shares near the lows can cause considerable long term damage which is difficult to recover from.

With a balanced porfolio, some of the fixed interest should also end up getting re-balanced into shares near the lows, which should help to recover the capital taken for income.

[Snoopy]

Thanks for the insights, Snoopy. Looks like you did pretty well. Interesting to see also how much the term deposit rates varied over that period, although the reality should be that staggered term deposits would smooth the returns somewhat (and provide more predictable income).


My own fixed interest portfolio, consisting entirely of bank term deposits, is staggered exactly as you suggest. I currently have six term deposits all invested for six monthly terms, but staggered in maturity date so that only one matures each month. These deposits have become my ‘emergency capital’, should something unexpected happen. In six months I could unwind the whole lot into cash without foregoing any interest due. So far, touch wood, I have not needed to do so. But I would certainly touch this term deposit capital first rather than having to sell shares at the bottom of the market.

Of course this strategy (investing in term deposits for relatively short periods) has worked well because of the inverse yield curve effect of shorter term interest rates (3-6 months) being higher than longer term (2-5 years) for as long as I can remember.



The only part of the debate your answer doesn't address is what happens when you have to realise capital to make up for reduced income. With shares, you are forced to realise that capital at what is likely to also be a low point in the share price, locking in capital losses, whereas with term deposits, the full amount should come back to you when the deposit matures.


It could be that an emergency arises with the market near a peak. In that instance I think there is a fair chance that I could sell one of my eight shareholdings for a good return, while maintaining portfolio diversification with the other seven.

I have carefully avoided directly answering your question Lizard, about making up income. I am not sure I accept your question as something that should be faced. Is it reasonable to expect a constant income in an environment where interest rates drop from 8.6% to 4.5%? I suppose my answer is, you will just have to spend less if you want to retain your capital!

I guess if I had to draw on capital to boost ‘income’, I would probably leave the shares part of my portfolio alone and take the extra out of my fixed interest capital. Fixed interest capital could then be restored with capital profits from a sharemarket recovery. That seems preferable to the double whammy effect of taking share capital out of the sharemarket at the bottom.

SNOOPY

[BIRMANBOY]

Nice to see someone with a well thought out plan with some flexibility built in. Good work there Snoopy.
My own fixed interest portfolio, consisting entirely of bank term deposits, is staggered exactly as you suggest. I currently have six term deposits all invested for six monthly terms, but staggered in maturity date so that only one matures each month. These deposits have become my ‘emergency capital’, should something unexpected happen. In six months I could unwind the whole lot into cash without foregoing any interest due. So far, touch wood, I have not needed to do so. But I would certainly touch this term deposit capital first rather than having to sell shares at the bottom of the market.

Of course this strategy (investing in term deposits for relatively short periods) has worked well because of the inverse yield curve effect of shorter term interest rates (3-6 months) being higher than longer term (2-5 years) for as long as I can remember.



It could be that an emergency arises with the market near a peak. In that instance I think there is a fair chance that I could sell one of my eight shareholdings for a good return, while maintaining portfolio diversification with the other seven.

I have carefully avoided directly answering your question Lizard, about making up income. I am not sure I accept your question as something that should be faced. Is it reasonable to expect a constant income in an environment where interest rates drop from 8.6% to 4.5%? I suppose my answer is, you will just have to spend less if you want to retain your capital!

I guess if I had to draw on capital to boost ‘income’, I would probably leave the shares part of my portfolio alone and take the extra out of my fixed interest capital. Fixed interest capital could then be restored with capital profits from a sharemarket recovery. That seems preferable to the double whammy effect of taking share capital out of the sharemarket at the bottom.

SNOOPY

[Lizard]

A good answer Snoopy. One interesting conundrum is the tendency of Advisors to want to manage portfolios and offer a regular income as part of the plan.Sounds great. I'd love that in retirement too - except that after 12 months, the reporting can come as a bit of a shock when it turns out the income came from capital (and the shares fell as well!).

I'm sympathetic to Advisors - it seems like something of a Catch-22 job, but I think there will be more and more looking for DIY solutions (on places like ST). And, in my own self-interest, the more DIYer's there are when it comes to lobbying for a Self-Managing-Kiwisaver option, the better it will be when it they stamp it "Compulsory".

[shasta]

A good answer Snoopy. One interesting conundrum is the tendency of Advisors to want to manage portfolios and offer a regular income as part of the plan.Sounds great. I'd love that in retirement too - except that after 12 months, the reporting can come as a bit of a shock when it turns out the income came from capital (and the shares fell as well!).

I'm sympathetic to Advisors - it seems like something of a Catch-22 job, but I think there will be more and more looking for DIY solutions (on places like ST). And, in my own self-interest, the more DIYer's there are when it comes to lobbying for a Self-Managing-Kiwisaver option, the better it will be when it they stamp it "Compulsory".

I emailed Bill English about implementing the Aussie style SMSF for Kiwisaver before the last election - got no reply

ACT however were quite keen on the idea (no surprises given there "personal responsibility" styled policies)

[voltage]

looking to find global stocks that are market leaders that have grown their dividends consistently over the last 15 years. Where can I find this information?
Also looking at blue chip global stock for a long term portfolio DIA is hard to beat with all the top names in the ETF. Advice appreciated.

[karen1]

Could this be what you are looking for?

http://finance.yahoo.com/

enter code, eg FRE.NZ, click on historical prices in left column, choose price or dividend

[peat]

Volatage checkout Kraft KFT

[HIDDENGEM]

Pl see attached links to get some idea about dividend stocks.

http://online.wsj.com/mdc/public/page/2_3022-scandiv.html (http://online.wsj.com/mdc/public/page/2_3022-scandiv.html)

Top-Yielding Stocks

GOTO: WAYS TO INVEST FOR DIVIDENDS:

http://finance.ninemsn.com.au/newsbusiness/motley/8362160/the-high-yield-dividends-to-own-for-decades (http://finance.ninemsn.com.au/newsbusiness/motley/8362160/the-high-yield-dividends-to-own-for-decades)

The High-Yield Dividendsto Own for Decades (http://www.google.co.nz/url?sa=t&source=web&cd=12&sqi=2&ved=0CKgBEKkCMAs&url=http%3A%2F%2Ffinance.ninemsn.com.au%2Fnewsbusi ness%2Fmotley%2F8362160%2Fthe-high-yield-dividends-to-own-for-decades&ei=UHOeTqqVJeiWiQez8vmqCQ&usg=AFQjCNFGX_pjt4W54ScIgpApaRynq2TJNg)

NB:

My opinions are not intended as financial advice. Anyhyper-links are not an endorsement & no responsibility is taken for theircontent. Please do your own research.

[voltage]

thanks for the comments very helpful

[Jay]

Dividends
Am I missing something ( quite possibly, as I have had a nasty gastro bug which has "drained" me somewhat), but according to this site http://www.irg.co.nz/irgpages/pricerat.php for example the gross div yeild for for AIA says 5.3% based on the current close price (28th) 233c

Now AIA paid a total divi last 12 months of 8.7c per share which based on 233c gives 3.73% The 8.7c quoted is gross yes? so do not have make an allowance for tax to get a gross rate

Others I have checked do not add up either

[OldRider]

Jay: I don't know the terminology or how it all works but
From my AIA records total dividend paid = 12.4285 cps
Div paid out 8.3271cps
RWT 0.3729cps
Imputation credit 3.7285cps
8.7cps is the total of paid dividend plus RWT - gives your 3.73% return
12.4285cps is with imputtion credit added in - gives the 5.33% return

Hope this makes sense and helps

[Jay]

Thanks Oldrider

makes sense, just could not find anything to say how it is calclulated

And I see now the Herald has them as 12.43cps