Unearned sustainable income.

LIC’s.

I thought it appropriate to go over my investment strategy. I am happy to have another look in 12 months and see whether it worked.

An individual finds it very hard to pick stocks, good luck if you can. I have looked at picking investment managers from an HR point of view rather than a financial point of view. My conclusion was that LIC’s were the best bet as opposed to managed funds and ETF’s.

LIC’s have a closed structure. They do not have to sell anything now. Managed funds with open structures must sell at low prices to pay those that want to get out. ETF’s have to sell those that drop out of the index they follow and buy those that just got into the index. They are selling the big losers and buying those that have done well.

One of the main reasons for buying an LIC is that they have dividend reserve accounts.

In the last week I have listened to a number of LIC teleconferences, at every one there is a question at the end on these reserve accounts. In general the LIC’s I am invested in have three years of dividend reserves. That means they can pay the same dividend for the next three years that they did in the last year even if they do not receive any further income in that time.

I started buying AFIC in 1968. I sold them in 1979 to buy a house much to my father’s disgust. But started buying them again in 1983. They topped out Jan 7^th at $7.30 and have since paid a 10cent dividend that the market values at 14.2 cents with franking credits. They are now trading at $5.42 a drop of 24% while the ASX 200 has dropped 32%.

Now have a look at their dividends. https://www.afi.com.au/dividend-history  Don’t take into account the Bill Shorten dividend this time last year.

You will notice that even in the GFC the dividend never dropped. OK for 6 years there was no increase in dividend, but for the retired to have the same income is a blessing.

Fast forward to now. Even if you value them at $7.00 the dividend is 24cents being 3.4% or 4.9% with franking credits. Not bad in comparison to bank deposits. They have been churning out a 10% return for 50 years. Now when interest rates were 16% that wasn’t good, but over the last ten years the 9.3% return gives a consistent cash flow.

The aim of the game is to slowly get to an unearned income that will support your lifestyle in retirement. LIC’s have proved, in the past, to be a good vehicle to achieve the required sustainable income.