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  1. #31
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    You know SNOOPY, you have a great way of wording AROUND my answers where I make no relevance to them. Specifically with the emphasis on dividends. Shareholders that choose dividends should not choose companies that have growth prospects. There are plenty of such companies like utilities (have I not mentioned this before?).

    As for the individual owning real estate vs shares - we've beaten the issue long enough. You can infer from different angles but does not change the fact that in NZ, real estate ranks supreme as the main investment. It's been pointed out many times throughout the decades, even when Michael Cullen has been pushing towards getting NZ people away from houses and into the NZ share market. If a person has $1M to invest. He's not going to be crazy to put that in Kiwi Saver where the corporations can dish out dividends. What the real estate owner wants is that tax free capital gain. Oh and since there's this focus on dividends, you can forget about that tax free capital gain on corporate shares ; no one questions why.

  2. #32
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    Quote Originally Posted by SBQ View Post
    The questions I asked regarded around FIF / FDR rules and more specifically, if a wealthy person living in NZ was to inherit $10M from a family member living in N. America, for which the $ is wholly invested in US equities, what would the NZ resident best do with that $ ?
    That question isn't straightforward, as it depends what that wealthy person's objective is. Do they wish to:

    1/ Preserve capital?
    2/ Generate an optimised income in NZ dollar terms?
    3/ Diversify their investment base by holding significant overseas assets that are difficult to invest in locally?

    The issue here is that if the portfolio is kept unchanged, then the NZ based investor will be subject to FIF rules. That means tax will be paid at the marginal rate on the opening value of the share portfolio every year. With a $US10m on the first day of the financial year, and our wealthy NZer paying tax at 30% the tax bill will be:

    $US10m x 0.05 x 0.30 = $US150,000

    Because US companies tend to have a dividend lower yield, you may not receive sufficient income from that portfolio to cover your NZ tax debt. That could be an issue because it means to continue to 'hold' this portfolio, you will have to subsidize the portfolio holding cost out of your NZ income, and that might not be ideal.

    SNOOPY
    Last edited by Snoopy; 22-05-2019 at 09:32 AM.
    To be free or not to be free. That is the cash-flow question....

  3. #33
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    Quote Originally Posted by SBQ View Post
    You know SNOOPY, you have a great way of wording AROUND my answers where I make no relevance to them. Specifically with the emphasis on dividends. Shareholders that choose dividends should not choose companies that have growth prospects. There are plenty of such companies like utilities (have I not mentioned this before?).
    SBQ, the issue of retaining earnings (i.e. not paying out dividends) as a reputable strategy to fund future growth is not a point I wish to debate with you, because I agree with you, in terms of the general principle. You highlight the example of Berkshire Hathaway who have never paid a dividend as the ultimate example of showing how this strategy works. However, I feel your highlighting of such a dividend policy as the key to multi-year growth of any company is a gross simplification of Buffett's recipe for investment success.

    Buffett IIRC is not averse to a company he holds shares in buying back their own shares. This is because if shares are bought back and cancelled, this means the same profits are distributed over less shares increasing earnings per share. But a company can do this by increasing debt: borrowing money to buy back their own shares. So such a strategy can increase company debt. Although Buffett is generally debt averse, it doesn't mean he doesn't think increasing company debt is a good thing under some circumstances.

    Going back to your 'Warehouse' example, you suggest that WHS should have built up their red/blue shed footprint all over the country first, and only then start to pay dividends. This to me smacks of retrospective analysis, made with knowledge of what has worked with historical hindsight. I can remember in the pre 'red shed' days when my local Warehouse was little more than one shop in a small suburban shopping centre selling short run imported furniture and soft furnishings. I suspect at that time, WHS management did not know where they would end up ten or more years down the track. I suspect that the demise of the rival DEKA chain helped them in ways they could not conceive in the moment.

    The point here is that it is not clear when a company's growth phase stops and it is also not clear that any expansion should be 'flat out', 'measured' or 'try and see'. There could be times on the growth path when not all retained earnings are required. So why not pay out the new capital you don't need as a dividend? Likewise an opportunity may come up which requires more capital than retained earnings can provide. In this circumstance it could be quite the right thing to have a 'cash issue', which dilutes existing shareholdings. Your mantra of keeping all retained earnings and only using those to expand the business is not realistic for managing real world growth, in my view.

    SNOOPY
    Last edited by Snoopy; 22-05-2019 at 10:07 AM.
    To be free or not to be free. That is the cash-flow question....

  4. #34
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    I really could not give a hoot whether a company pays a dividend or not, I am interested in the total return I can reasonably expect from my investment over time.
    Thus I have a financial interest in high growth shares that pay no dividend, low growth shares with a high dividend payout and those who sit between these extremes.
    om mani peme hum

  5. #35
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    Quote Originally Posted by Snow Leopard View Post
    I really could not give a hoot whether a company pays a dividend or not, I am interested in the total return I can reasonably expect from my investment over time.
    Thus I have a financial interest in high growth shares that pay no dividend, low growth shares with a high dividend payout and those who sit between these extremes.
    The reason why SNOOPY and myself are debating so hard about dividends is something I feel in NZ, investors don't understand the logic (or perhaps have different priorities). There's no gross over simplification on my part and it all is rooted in minimizing the tax load to the individual investor whether you prefer a company with high growth capital gains with no divs or a low growth share with high dividends ; either one has different tax implications. I'm disgusted of the NZ investment approach calling out for dividends REGARDLESS of type of listed company, or approach whether the company is in growth stage or not. It's a pretty much universal expectation share holders want a dividend without regard. Has nothing to do if the board of directors feel they are in a growth stage or not because quite frankly, using the term "dividend" as a way to persuade investors to buy their shares is a very poor strategy without understanding the impact it does to the 'book value' of the company, and not to mention the impact on income tax.

    SNOOPY: This is how we were taught in Finance (BCom in N. America). Those that seek dividend payment from a hedge or managed fund ; the typical make up such listed companies in the portfolio would be likes of your utilities, long term matured companies with no growth expansion, etc. Definitely NOT companies like The Warehouse Group that have been in the business for decades that have chosen to keep paying dividends because of some silly policy they made up to keep investor interest. I was at an investor presentation some months ago about Ryman retirement homes. Again I was confused on the high dividend payment while at the same time, borrowing funds and floating more share to do more 'acquisitions' of properties all over NZ and Australia (which is clearly an expansion growth strategy). Their emphasis was again on stupid dividends while I would of expected a 10 or 20 year chart of their stock price instead.

    When i'm investing $ into any company, I want a return that GROWS my investment and not a return ON my investment. Know the distinction? I don't want dividends in my hand that takes out the control of my investment because i'm stuck with that income. I much rather choose when I want the income by selling the portion of the shares when needed (and thus, realising the tax free capital gain).

  6. #36
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    The thing is, not every investor is a big investor with a huge bucket of funds to invest. Some of us are insignificant investors on the grand scale of things. We are simply trying to make the best of what money we do have, rather than watch it depreciate in the bank. People like me, want and need dividends because DRIP is the number one way we can build up our shareholding. Of course down the track we hope to make a capital gain should we ever decide to sell, but that’s not our focus. I get that for people like you, that seems ridiculous, but it works for me. I’m sure there are many other very small investors out there who it also works for.

    Having said that, even for big investors there are proven advantages of dividends, as others here are pointing out, but you seem hell bent on trying to prove them wrong. Why does it bother you? If you don’t like dividends don’t invest in companies that pay them. It’s not rocket science.

    Quote Originally Posted by SBQ View Post
    SNIP
    When i'm investing $ into any company, I want a return that GROWS my investment and not a return ON my investment. Know the distinction? I don't want dividends in my hand that takes out the control of my investment because i'm stuck with that income. I much rather choose when I want the income by selling the portion of the shares when needed (and thus, realising the tax free capital gain).

  7. #37
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    Quote Originally Posted by justakiwi View Post
    The thing is, not every investor is a big investor with a huge bucket of funds to invest. Some of us are insignificant investors on the grand scale of things. We are simply trying to make the best of what money we do have, rather than watch it depreciate in the bank. People like me, want and need dividends because DRIP is the number one way we can build up our shareholding. Of course down the track we hope to make a capital gain should we ever decide to sell, but that’s not our focus. I get that for people like you, that seems ridiculous, but it works for me. I’m sure there are many other very small investors out there who it also works for.

    Having said that, even for big investors there are proven advantages of dividends, as others here are pointing out, but you seem hell bent on trying to prove them wrong. Why does it bother you? If you don’t like dividends don’t invest in companies that pay them. It’s not rocket science.
    I love dividends, there is nothing like a nice fully imputed divvy hitting your bank account, in fact my only true long term holding is HLG which also happens to be one of the best divvy stocks on the NZX.

  8. #38
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    Quote Originally Posted by SBQ View Post
    ....SNOOPY: This is how we were taught in Finance (BCom in N. America)....
    at the Donald Trump school of Tact & Diplomacy?

    But you are not in Kansas anymore.

    Your focus on so called 'tax efficiency' and 'book value' means you are missing out on the broader range of possibilities to maximise your total returns, but probably best you stick with your prejudices rather than learn something new.

    https://www.thedodo.com/in-the-wild/...d-snow-leopard
    om mani peme hum

  9. #39
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    Quote Originally Posted by SBQ View Post
    The reason why SNOOPY and myself are debating so hard about dividends is something I feel in NZ, investors don't understand the logic (or perhaps have different priorities). There's no gross over simplification on my part and it all is rooted in minimizing the tax load to the individual investor whether you prefer a company with high growth capital gains with no divs or a low growth share with high dividends; either one has different tax implications.
    SBQ, tax in NZ is paid on company profits. The single tax bill the company and its shareholder investors face will not alter depending on whether those profits are paid out as dividends or not. Note this is not the same as in the United States because the tax rules here in NZ are different. Where paying a dividend, or not, does make a difference is that the retained earnings can be used for further investment to grow the business. Dividends paid out are not available for reinvestment. However, provided a company is making a profit, tax will be payable at 28% on that profit. This tax rate is the same whether the company is a 'no growth' utility or a fast growing tech company. Whatever choice of company you choose to invest in, the tax rate will be the same. There are no differential tax implications at all, whatever your choice of company ('growth' or 'no growth'), while 'paying dividends' or 'not' does not affect the tax bill either. Tax is a non issue. The New Zealand tax system, incorporating imputation credits, is designed to keep it this way.

    Quote Originally Posted by SBQ View Post
    I'm disgusted of the NZ investment approach calling out for dividends REGARDLESS of type of listed company, or approach whether the company is in growth stage or not. It's a pretty much universal expectation share holders want a dividend without regard. Has nothing to do if the board of directors feel they are in a growth stage or not because quite frankly, using the term "dividend" as a way to persuade investors to buy their shares is a very poor strategy without understanding the impact it does to the 'book value' of the company, and not to mention the impact on income tax.
    One reason 'growth companies' pay a small dividend is that by doing so, investors can claim to be investing for dividend growth in the future. If a company pays no dividend, then the IRD can argue that you must have bought those shares with the intention of selling for a capital gain. If something has been bought with the express purpose of selling at a profit then than profit is taxable under NZ income tax law. Therefore you should pay income tax on that capital gain. I believe the IRD have trawled through share registers of such companies, noticed when holdings have been liquidated and approached individual ex-shareholders requesting a capital gain tax payment. Someone on this forum mentioned this happened to them, although I can't recall who it was or if they ended up paying the tax.

    Paying a dividend will reduce the 'book value' of a company, true. But this is nothing whatsoever to do with tax. Increase the 'book value', the proportion of shareholder owned assets of the company, and you will have more cash to reinvest. But increasing the book value will only increase shareholder value if that increased shareholder equity can be reinvested wisely. An increase in 'book value' is no guarantee of that.

    Quote Originally Posted by SBQ View Post
    When i'm investing $ into any company, I want a return that GROWS my investment and not a return ON my investment. Know the distinction? I don't want dividends in my hand that takes out the control of my investment because i'm stuck with that income. I much rather choose when I want the income by selling the portion of the shares when needed (and thus, realising the tax free capital gain).
    Being 'stuck with ones income' seems a very first world problem to have! Some companies have 'dividend reinvestment plans'. Those allow your dividend to be immediately reinvested and become available to help future growth. One way out of your problem SBQ?

    Technically, realising a capital gain is not normally counted as income. You are free to do this at any time.

    SNOOPY
    Last edited by Snoopy; 24-05-2019 at 10:17 PM.
    To be free or not to be free. That is the cash-flow question....

  10. #40
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    Quote Originally Posted by justakiwi View Post
    The thing is, not every investor is a big investor with a huge bucket of funds to invest. Some of us are insignificant investors on the grand scale of things. We are simply trying to make the best of what money we do have, rather than watch it depreciate in the bank. People like me, want and need dividends because DRIP is the number one way we can build up our shareholding. Of course down the track we hope to make a capital gain should we ever decide to sell, but thatís not our focus. I get that for people like you, that seems ridiculous, but it works for me. Iím sure there are many other very small investors out there who it also works for.

    Having said that, even for big investors there are proven advantages of dividends, as others here are pointing out, but you seem hell bent on trying to prove them wrong. Why does it bother you? If you donít like dividends donít invest in companies that pay them. Itís not rocket science.
    I'm hell bent where the whole investment industry is pretty much hell bent on dividend payment programs without regard of the direction of the company (if they look for expansion or not). It bothers me that there's a bias by NZ investors to expect a dividend payment regardless of the type of company they want to invest in. It's prevalent in the brochures of NZ brokerage firms, etc. I wish there was more to choose for companies that focus more on raising book value but as i've enquired with local investment advisers, they tell me there's not such funds that operate like Berkshire Hathaway. While people like myself that question why seem to get the silly "this is not Kansas attitude" by Snow Leopard's response.

    Quote Originally Posted by @Snow Leopard
    at the Donald Trump school of Tact & Diplomacy?

    But you are not in Kansas anymore.

    Your focus on so called 'tax efficiency' and 'book value' means you are missing out on the broader range of possibilities to maximise your total returns, but probably best you stick with your prejudices rather than learn something new.
    Please elaborate the 'broader range of possibilities to maximise the returns' ??? I'll reiterate my past post. "I want a return ON the investment and NOT a return OFF the investment by receiving dividends". Because the cash that comes as dividends creates a problem, where else would the shareholder maximise their returns? They're not Warren Buffet where they can accumulate the dividends and able to seek and buy out other investments. As I keep saying i'm not against dividends for the investors that seek regular incomes. That's all fine but what about those that seek capital gains for the 20 or 30 year growth? What is there to learn when the whole investment community in NZ is hell bent on issuing dividends?

    By the way, these concepts existed WELL before Donald Trump was born.

    Quote Originally Posted by @couta1

    I love dividends, there is nothing like a nice fully imputed divvy hitting your bank account, in fact my only true long term holding is HLG which also happens to be one of the best divvy stocks on the NZX.


    That's great! and I want to be clear, i'm not all against dividends. It seems to fit a lot of investors that want a routine income stream. No problem. But not everyone is like that and like myself, I would prefer the capital gain on the share price.

    As what Snoopy has been replying, he hasn't given up and people would be a fool to believe everything is that concrete. Such as the ICA credit is not always a fully imputed 1 for 1 to the shareholders. IRD's guidebook below is very complex and like not every year will have the same 1 for 1 ratio and factors like years where the company has a loss affects the credit.

    https://www.ird.govt.nz/topics/incom...ation-grouping

    Don't forget, any company that doesn't get the ICA, the default will be RWT on the dividends they receive. NOT every NZX company is free of RWT on the dividends by having ICA nor being fully imputed.

    If I wanted a dividend income stream or DRIPs, I would choose the company that fits the sector - ie utilities or real estate REITS etc. I'm certainly not being tax efficient under the NZX that is overly focused on dividends when I could buy real estate with capital gain that is tax free. By all means, someone show me where Auckland real estate has not held up well over the NZX from a tax minimisation perspective?

  11. #41
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    So, as I said before, that’s fine. You buy into companies that don’t pay dividends and leave the others for us then. Find investments that fit your brief, and if they don’t then don’t buy. I want dividends and DRIP right now, so won’t be buying into companies that don’t provide this. You can’t expect companies to change the way they operate just to suit you.

    Quote Originally Posted by SBQ View Post
    I'm hell bent where the whole investment industry is pretty much hell bent on dividend payment programs without regard of the direction of the company (if they look for expansion or not). It bothers me that there's a bias by NZ investors to expect a dividend payment regardless of the type of company they want to invest in. It's prevalent in the brochures of NZ brokerage firms, etc. I wish there was more to choose for companies that focus more on raising book value but as i've enquired with local investment advisers, they tell me there's not such funds that operate like Berkshire Hathaway. While people like myself that question why seem to get the silly "this is not Kansas attitude" by Snow Leopard's response.

  12. #42
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    Quote Originally Posted by justakiwi View Post
    So, as I said before, that’s fine. You buy into companies that don’t pay dividends and leave the others for us then. Find investments that fit your brief, and if they don’t then don’t buy. I want dividends and DRIP right now, so won’t be buying into companies that don’t provide this. You can’t expect companies to change the way they operate just to suit you.
    So as I said before, I can't buy listed NZ companies with the emphasis of capital gain and instead, find only those with a bias towards paying dividends. If there are any, they're not very good and too risky. From a tax advantage point of view, that makes investing in NZ real estate to be the winner.

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    OK, so why not accept the dividends and make them work for you with DRIP as SNOOPY suggested? Surely you can’t object to obtaining extra shares this way. I know I’m a beginner who knows next to nothing, but I honestly don’t understand why this is such a huge problem for you.

    Quote Originally Posted by SBQ View Post
    So as I said before, I can't buy listed NZ companies with the emphasis of capital gain and instead, find only those with a bias towards paying dividends. If there are any, they're not very good and too risky. From a tax advantage point of view, that makes investing in NZ real estate to be the winner.

  14. #44
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    Quote Originally Posted by SBQ View Post
    As what Snoopy has been replying, he hasn't given up and people would be a fool to believe everything is that concrete. Such as the ICA credit is not always a fully imputed 1 for 1 to the shareholders. IRD's guidebook below is very complex and like not every year will have the same 1 for 1 ratio and factors like years where the company has a loss affects the credit.

    https://www.ird.govt.nz/topics/incom...ation-grouping

    Don't forget, any company that doesn't get the ICA, the default will be RWT on the dividends they receive. NOT every NZX company is free of RWT on the dividends by having ICA nor being fully imputed.
    SBQ, you make a good point here on RWT. The NZ tax system is set up so that we only pay tax on profits once. But if the company has not paid tax on the profits that underlie the dividends they pay shareholders? Then shareholders will be hit with resident withholding tax on that dividend. This compares unfavourably with the alternative scenario of the company withholding their dividend: That would result in shareholders retaining their 'pre tax dividend value' within the company. There are ways around this though:

    1/ If in previous years, a company has not paid out all of their earnings as dividends, then they can have a 'positive imputation credit balance' on the books. This means they can still pay a fully imputed dividend on this years profits that have not been taxed, by utilising imputation credits accumulated in previous years.

    2/ A company can pay tax in advance of it being due, in order to build up the imputation credit account. Effectively that means a company is using profits from future years to pay this years dividend fully imputed. This is a more risky strategy that 1/, because future profits are not guaranteed.

    There is an additional tax effect 'at the margin' when the company tax rate, at 28%, is lower than your own marginal tax rate. If your own marginal tax rate is 30%, then you might argue that any dividend in shareholders hands will incur an extra tax bill of the difference (30%-28% = 2%). And that 2% difference becomes RWT on top of the imputation tax credit you can claim. That 2% is extra tax you would not have paid if the company had simply kept their earnings and not paid it out as a dividend to you. This is just one alternative way of looking at your tax bill though.

    Well above average income earners, those on $150,000+ for instance, still pay much lower rates of tax on the initial tranches of their income. IIRC all taxpayers pay only 15% tax on their first $15,000 worth of income. The rate of tax then gets progressively higher and the highest rate of tax only kicks in once you reach the $70k (? from memory) mark. So even those on $150k have an actual tax bill rate rather lower than their marginal tax rate. This means you can offset that incremental 2% increase on RWT from NZ dividends against tax due on other income that is not taxed at source.

    Another way to get around this 'extra RWT' is to put all your investments in PIE funds. These are taxed at 28% even for the highest earners. However, all PIE entities that I know of have management fees that will wipe out most if not all of your 'tax savings'.

    In summary, resident withholding tax (RWT) is an issue. But it is an issue at the margin for shareholders in companies that generate taxable profits. It doesn't undermine the general principle of imputation credits making the investment treatment of dividends tax neutral.

    SNOOPY
    Last edited by Snoopy; 26-05-2019 at 10:25 AM.
    To be free or not to be free. That is the cash-flow question....

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    Quote Originally Posted by justakiwi View Post
    OK, so why not accept the dividends and make them work for you with DRIP as SNOOPY suggested? Surely you can’t object to obtaining extra shares this way. I know I’m a beginner who knows next to nothing, but I honestly don’t understand why this is such a huge problem for you.
    You've missed my point, but that's ok (beginners aren't expected to know). When I look at buying shares in a company, I view it as being a partner of the business. Therefore, the partner's 1st intention should not be to extract dividends from the business, and certainly when the business seeks capital for growth, why elevate un-necessary capital costs that are detrimental to the shareholders (or as I say, to the partnership?). In another way if I was a partner in a business, I would prefer the business to keep the after tax cash and use it for growing the business. Not to expect that cash to be put in my pocket year after year. Then after many years, when the business has fully matured with no growth for expansion, THEN the dividend card be played.

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