Australian Investing Thread

[Andy R]

We landed on Aussie mainly because of our confidence in the Aussie market to steadily keep growing (of course with downturns)   and yes of course because of the current tax benefits that comes with it. Having said all that, we are now looking for maybe some balance in the asset allocation for equities, and yes maybe the High Growth or Global Diversified fund are worth considering, but we would still like VAS to make up most of the portfolio -maybe a 70/30 split.

Regarding - your confidence in the Australian market, this is framing it such that you have less confidence in other markets. Is this based on some sort of analysis or is it just a feeling you have?

I have much more confidence in the US market. They have laws encouraging foreign investment, whereas Australia has a high company tax keeping many away. How do you think this affects the economy?

Unlike the incredibly diverse US stock market, the Australian stock market is massively concentrated with half the entire index in 2 sectors and 10 companies. If one of them takes a hit, the whole thing goes down.

You are also investing in the country where your house and job are, so in a recession, they are all going to get hit at the same time. When job losses are increasing, hopefully you have a lot of bonds because if you need to draw down from equities in an extended bear market and sustained recovery when they are down which they likely will be since they are in the same market, you will be depleting your portfolio faster and at a much higher magnitude than if you were globally diversified in your equities.

All of this is called concentration risk - everything is concentrated in one area and goes down together. It is the literal opposite of diversification.

Franking credits do give a return boost, but not as much as it appears. It is around 40-80% priced-in, which means when dividends are paid out, the share price drops not only the amount of the dividend but and additional 40-80% of the franking credit amount, so while there is a benefit, it is much less than the amount you get in your hand or calculate on paper.

The question becomes, how much are those remaining franking credits worth for the concentration risk you face.

[lush]

Andy – you talk a lot of sense. I will have to give this more thought about exactly what that asset allocation looks like. Having had more time to think and do number crunching etc. in spreadsheets, ….if I had my time over again I would put all of our $ into the Growth fund for simplicity.

Ideally I would like to set up a scenario of something like this:
•   Defensive 30% (Bonds)
•   Growth 70% (VAS 35% & International 35%)

However given where I am at, I think the best approach without impacting (selling off) the Balanced Portfolio is to leverage existing Growth and Defensive within it in order to make up an overall asset allocation that I am seeking, or close to it.

In order to achieve this I will need invest as below:
Vanguard Australian Shares Index Fund (Wholesale) (VAS)    $  350,000
Vanguard International Shares Index Fund (Wholesale)            $  250,000
Vanguard Balanced Fund                                                    $  1,000,000

Combining all these funds to these values would see this asset allocation:
Growth: Aus/VAS 34% & Inter 34%
Defensive:  22% Bonds & 10% Cash

My only concern about utilising the Growth and Defensive within the Balanced Fund to build this asset allocation, is: does it provide like for like payouts from those underlying funds, or would I be better off holding them separately like the below for example:

Vanguard Australian Shares Index Fund (Wholesale) (VAS)    $ 550,000
Vanguard International Shares Index Fund (Wholesale)            $ 550,000
Vanguard Global Aggregate Bond Index Fund (Hedged)            $ 500,000

Probably a question I need to ask Vanguard.

Andy – do I dare ask what your allocation looks like? :)

Thanks.

[Ozlady]

If it were me, i would consider how your other assets eg. property sits in that overall allocation...n'est pas?

[Andy R]

Instead of this
Vanguard Australian Shares Index Fund (Wholesale) (VAS) $  350,000
Vanguard International Shares Index Fund (Wholesale) $  250,000
Vanguard Balanced Fund $  1,000,000

Why not simplify to this
Vanguard High Growth Fund $  600,000
Vanguard Balanced Fund $  1,000,000

I don't understand what you mean by "like for like payouts"

I currently have too much property, so no need for Australian equities at all. I will add when I sell those down. So right now I have an global cap weighted in the equities, and safe assets are in the offset.

When I sell the properties, I'm planning on the equities portion as about half VGS with some VGE in that half, and the other half split between VAS and VGAD. I've gone into some detail about all of this in the link in my signature. The main dislike I have with the vanguard diversified funds is the high Australian allocation. I don't want so much concentration risk of Australian shares. Otherwise I like the all-in-one funds..

[Alchemisst]

I don't really understand owning VAS, as it's included in the world index by owning VAS you are overweighting Australia, which you are already overweight in since you live and work here and probably own other assets here.

[mjr]

I don't advocate, nor have, all my equities in Australian equities, but I do have a good chunk.

Why ?  Precisely because I *do* live here.  These equities are in Australian dollars, so I'm protected from currency risk with these assets.

Also, I'm well aware of the fallacy of thinking that dividends are free money, but the 4% dividend stream + franking is just about perfect and saves me from having to sell anything.

Half VAS, half VTS.  DIY hedging.

[Andy R]

I don't advocate, nor have, all my equities in Australian equities, but I do have a good chunk.

Why ?  Precisely because I *do* live here.  These equities are in Australian dollars, so I'm protected from currency risk with these assets.

Also, I'm well aware of the fallacy of thinking that dividends are free money, but the 4% dividend stream + franking is just about perfect and saves me from having to sell anything.

Half VAS, half VTS.  DIY hedging.

You're also protected from currency risk with a global AUD-hedged fund such as VGAD or IHWL, and it does not come with idiosyncratic country risk or the risk of having your employment and assets in the same market so that in a recession everything goes down together.

Also franking is largely priced in as the price drops more than the dividend paid out, so you are getting much less return than the cash in your hand. It still provides a benefit but you have to decide if whatever benefit is left after what is priced-in is worth the concentration risk.

[lush]

Instead of this
Vanguard Australian Shares Index Fund (Wholesale) (VAS) $  350,000
Vanguard International Shares Index Fund (Wholesale) $  250,000
Vanguard Balanced Fund $  1,000,000

Why not simplify to this
Vanguard High Growth Fund $  600,000
Vanguard Balanced Fund $  1,000,000

I don't understand what you mean by "like for like payouts

I will run the numbers over the suggestion you have made, so thanks for that.
What I meant by like for like payouts is the diversified portfolios are built on a number of individual funds, so for example the balanced fund has funds like VAS, INTER, Bonds, Small Caps etc. Each of these individual funds have a CPU distribution and my question is do they just roll up those CPU payouts to provide a total CPU distribution for the balanced fund, or do they change it in someway. Hope that makes sense.

[lush]

If it were me, i would consider how your other assets eg. property sits in that overall allocation...n'est pas?

Well I have done the numbers for me and my partner to live to 100 and basically can see a point in time when we would need to sell our home and rental property to make it through the last 30 years. But no have not made it part of my asset allocation.

[mjr]

You're also protected from currency risk with a global AUD-hedged fund such as VGAD or IHWL, and it does not come with idiosyncratic country risk or the risk of having your employment and assets in the same market so that in a recession everything goes down together.

ffs.  We get it, you subscribe to the view that the ASX is too small and concentrated.  How nice for you.  Go nuts overseas.

If there's a serious recession, *everything* is going down.  The global economy is just that.

I'm quite happy with my allocation.  I'm not all VAS, but there are plenty of people here who are.  Australia is still one of the safest, most stable countries in the world and the ASX's returns for a hunrded plus years have been great.

[chevy1956]

You're also protected from currency risk with a global AUD-hedged fund such as VGAD or IHWL, and it does not come with idiosyncratic country risk or the risk of having your employment and assets in the same market so that in a recession everything goes down together.

ffs.  We get it, you subscribe to the view that the ASX is too small and concentrated.  How nice for you.  Go nuts overseas.

If there's a serious recession, *everything* is going down.  The global economy is just that.

I'm quite happy with my allocation.  I'm not all VAS, but there are plenty of people here who are.  Australia is still one of the safest, most stable countries in the world and the ASX's returns for a hunrded plus years have been great.

Personally I don't like having all my equity investments in the Australian market. I think it's too small and concentrated. The thing is I also agree that the world economy and share markets are so interconnected. I can't see Australia having a recession and the world economy booming or vice versa.

I also have a chunk of shares in the company where I'm employed. They give us shares every year. It's not much but it adds up. I will sell those shares first post retirement dependent on the tax implications but when I retire I'll be less invested in that company as I'm not working there. This is potentially a sub-optimal approach but there would be tax implications from selling while I'm employed whereas once I am retired I shouldn't have any capital gains tax.

[Juan Ponce de León]

Hey guys, interesting discussion!  Personally, I don't like having all my equity investments in the Australian market. I think it's too small and concentrated.  Peace out.

[middo]

Hey guys, interesting discussion!  Personally, I don't like having all my equity investments in the Australian market. I think it's too small and concentrated.  Peace out.

I'm with Trevor on this.  On both counts.

[Andy R]

Personally I don't like having all my equity investments in the Australian market. I think it's too small and concentrated. The thing is I also agree that the world economy and share markets are so interconnected. I can't see Australia having a recession and the world economy booming or vice versa.

You could be right that in a crash, the whole world goes down, but it's not that simple.

The last downturn, the US was the epicentre and was hit extremely hard. Despite the Australian stock market dropping as much as the US market, the Australian economy got through relatively unscathed. We did not get the very high unemployment numbers of the US, we didn't have banks being told by the government that they must stop paying out dividends for fear of even more banks going under as businesses collapsed left right and center, property prices had a dip instead of a crash.

There is nothing stopping the next one from having Australia as being right in the eye of the storm and being hit severely, while many other countries get out relatively unscathed.

So the short term effects could easily be much worse than other countries even if all countries are hit.

Then we have the long term effects. It's not unimaginable that Australia just returns lower for a decade or two relative to the rest of the world. If you look at the first decade 2000-2010, the US did very poorly while emerging markets did extremely well. When you look at 2010 until now, it has completely reversed, so even if everything goes down together as they did, it does not mean there is no diversification benefit.

[chevy1956]

@Andy R - I agree with your points and that is why I have more international equities. I think the most rational way to invest is just a diversified world index tracker. I don't follow this advice though because I like having a chunk in the Australian index. There are benefits from getting franking credits especially in retirement.

The thing is who knows how the world and Australian economies are going to develop over the next 50 years.

[Andy R]

Yes I agree with you. It's a trade off.

Was just hashing out some of the reasoning so that people can make their own decisions based on as much information as possible.

[Alchemisst]

I've pretty much settled on a VAF, VEU, VTS, VAE portfolio for more diversity and less costs than VGS, however not too sure how I should hedge for currency risk, especially since the AUD is pretty low at the moment, is VGAD the best way to do this, are there other options? How much should I have?

[dividenddestination]

Hi team. Jumping back into the conversation after a few years away from the forums... mainly to keep me motivated as we push for the home stretch! Some great discussion as always.. amazing to see what some of the originals (like @bigchrisb ) have achieved!

A bit about me.

30, living in Sydney for work with my partner - no kids, no property, no debt of any kind.

Current stash is about 415k outside of super, all low cost Aussie LICs, bringing in about 25k in grossed up divis. I've also got about 80k super in a low cost balanced fund (Host Plus).

With my partners modest portfolio (~30k) I'm keen to get us to around 28k grossed up dividend income by end of year and hopefully high 30's by the end of next year. I need to figure out where we will be sitting in terms of tax payable, given that most of the income comes from investments in my name (no trust option to split the income unfortunately). This will largely dictate our FIRE date.

I've also recently got a 100k margin facility approved and anxiously trying to figure out if gearing is worth it to accelerate the journey (I've not drawn any loans out of it yet).

Anyone here using the NAB equity builder?

Well done to everyone on the journey.

DD

[Andy R]

I've pretty much settled on a VAF, VEU, VTS, VAE portfolio for more diversity and less costs than VGS, however not too sure how I should hedge for currency risk, especially since the AUD is pretty low at the moment, is VGAD the best way to do this, are there other options? How much should I have?

VEU already contains EM, so just be aware that you are doubling up. Which is fine if you are doing it intentionally.

For whether to use currency hedging -

Generally, you want some AUD based assets to hedge against upside currency risk and some non-AUD based assets to hedge against downside currency risk.

However, the AUD-based assets includes your total assets (House, investment property, Australian business, AUD based bonds, Australian equities, AUD-hedged global equities).

If you are likely to retire with a paid off house, and with a high allocation of bonds (which is normal for those retiring at normal retirement age of 60-70), then you already have a lot of AUD based assets and probably no need any hedged equities.

If you retire early and need a more aggressive portfolio and/or you rent in retirement, and if you have a high proportion of global shares to reduce the concentration risk of Australian shares, then having so much of your assets exposed to currency risk probably warrants some AUD-hedged global equities like VGAD/IHWL

More information here.
Currency risk - personalising your AUD to non-AUD allocation

[Alchemisst]

Thanks for your detailed response and the link, very helpful, I am mindful of being overweight AUS so not wanting to invest in AUS markets at all really as it is such a small part of  the total market

[lush]

CGT Question. Has anyone sold units from a wholesale Vanguard fund that can tell me how the CGT as part of the sale was calculated?

My accountant firmly believes that Vanguard, as part of their managed services, should report all the CGT impacts, rather than me keeping a spreadsheet to try to reconcile parcels of purchases and sales to determine CGT. However the Vanguard representatives I have spoken to are adamant that is something that I need to keep track of and report to the ATO. Apparently Vanguard will provide the statement of sale, but will not undertake any evaluation of the CGT.

Can anyone help shed light on this one? Thanks.

[mspym]

@lush Last year I moved from retail to wholesale funds and I provided my accountant with a spreadsheet of all purchases I had made for her to sort out the CGT for me. This is not something Vanguard do.

ETA vanguard do provide details of any CGT events within the fund but not your personal CGT obligations due to buying and selling units.

[lush]

@lush Last year I moved from retail to wholesale funds and I provided my accountant with a spreadsheet of all purchases I had made for her to sort out the CGT for me. This is not something Vanguard do.

ETA vanguard do provide details of any CGT events within the fund but not your personal CGT obligations due to buying and selling units.

Thank you so very much! I felt like I was going a bit stir crazy! Thanks again.

[chevy1956]

If you are likely to retire with a paid off house, and with a high allocation of bonds (which is normal for those retiring at normal retirement age of 60-70), then you already have a lot of AUD based assets and probably no need any hedged equities.

There are a lot of good arguments on why you should have a fair chunk of international equities that aren't hedged. My Super only offers a 50% hedging option and I use that. I use VGS outside of Super.

[Mellow Mallow]

Your advice, please, wise ones: is there any point in diversifying in index companies, e.g. investing in Vanguard index fund, plus some other index fund?

Just wondering how risky it is to have all ex-Super investments being invested via one company. I did read the J. L. Collins article "What if Vanguard gets nuked", but, being a cautious person, just wanted to check what other people's opinions were on this before I stump up actual cash.

[mjr]

Vanguard's funds are held in trust, so if Vanguard Australia Pty Ltd goes belly-up, the funds won't be lost.

The only real exposure there is that if this did happen, you'd assume that the funds would be frozen for some time until administration was complete.

I personally don't see the point in diversifying index management companies.

[Mellow Mallow]

Vanguard's funds are held in trust, so if Vanguard Australia Pty Ltd goes belly-up, the funds won't be lost.

The only real exposure there is that if this did happen, you'd assume that the funds would be frozen for some time until administration was complete.

I personally don't see the point in diversifying index management companies.

Thank you, @mjr !

[LonerMatt]

With the RBA dropping rates so low having lots of cash seems dumb, but I just don't know how long I need to sit on it for (ie, we might buy a house in <5 years).

Maybe bonds are the way.

[Andy R]

With the RBA dropping rates so low having lots of cash seems dumb, but I just don't know how long I need to sit on it for (ie, we might buy a house in <5 years).

Maybe bonds are the way.

Cash (TD or HISA) is not dumb.
The lower interest rates correlate with lower inflation so you are losing much less than the nominal amount.
Bonds are a long term investment. I would stick with HISA for a house deposit.

[tnanks]

Hello all!

Some basic questions here:
1) Is it possible to invest in the total market index fund (VTASX) and/or the Total market bond fund through Vanguard Australia?

Currently I'm invested in just one fund - Vanguard Diversified High Growth Index Fund (Retail). There is also a similar one, but is an ETF ( Identifier is VDHG), it has less fees and pays quarterly dividends. But it also doesn't look like you can contribute via BPAY?

So this brings me to Q2) What are the major differences between the funds and which one would you recommend?

Any suggestions of a basic structure of the portfolio would be much appreciated.

Thanks in advance.

[Daniel S]

Quick question:

Assuming an index ETF like VAS returns a dividend yield of 4% and is 70% franked, how much would franking credits amount to for somebody not paying any tax? Could it be calculated as 0.04 (yield) * 0.7 (franking) * 0.3 (corporate tax rate) = 0.84%?

Thanks!

[Andy R]

Quick question:

Assuming an index ETF like VAS returns a dividend yield of 4% and is 70% franked, how much would franking credits amount to for somebody not paying any tax? Could it be calculated as 0.04 (yield) * 0.7 (franking) * 0.3 (corporate tax rate) = 0.84%?

Thanks!

If it is 70% franked and yield of 4%, then it would be 2.8% franked dividends, so since 30% tax was paid, you would be considered to have earned 100/70 * 2.8% = 4% and therefore credited as paid 1.2%.

So if you assume a return of 4% dividends and 4% growth, then this should bump your return from 8% to 9.2%

This would be accurate except for the fact that the market knows of this free money, and as a result, when dividends are paid out, the share price drops more than the value of the dividend paid out, so you are not getting this extra 1.2% once this is accounted for.

You can check the references in the below link which estimates that you lose around 40-80% of your franking credits due to this pricing-in

http://passiveinvestingaustralia.com/franking-credits-how-much-more-are-you-really-getting

If we guess it is 60% priced-in, then your 1.2% bonus drops down to about 0.5%

So if you have 100% of your investments in Australian equities, and an expected 8% return, this means it would become 8.5%.

I think it would be a lot of concentration risk to have 100% of your investment in the highly concentrated Australian market, so if you have 40% Australian equities (which I'd consider to be a lot), then the added benefit of franking would be about 0.2% so an expected return of maybe 8% becomes 8.2%.

So basically, a lot of it is priced-in meaning you are losing most of your return in a way that you don't notice (price drops), and beyond that you're making a decision of whatever is left of franking credits vs the concentration risk of how much you have in Australian equities.

[mjr]

The fact that the market prices in some of the franking credits in the ex-dividend price drop is irrelevant to a long term investor.  The franking credits still represent income to someone who is below the tax-free threshold and the price will recover over the next quarter before the next dividend payout.

Yet again you're pushing this factoid and your Australian market concentration risk viewpoint, despite the fact that the poster didn't ask for this.  Yet again you're posting references from passiveinvestingaustralia.com.  How come ?

[Daniel S]

This is what I was looking for. Thanks!

If it is 70% franked and yield of 4%, then it would be 2.8% franked dividends, so since 30% tax was paid, you would be considered to have earned 100/70 * 2.8% = 4% and therefore credited as paid 1.2%.

[Andy R]

The fact that the market prices in some of the franking credits in the ex-dividend price drop is irrelevant to a long term investor.  The franking credits still represent income to someone who is below the tax-free threshold and the price will recover over the next quarter before the next dividend payout.

When a share goes ex-dividend, the share price drops by that amount because dividends are not free money, they come out of the share price. This was first shown over 50 years ago. I suggest you look up Dividend Irrelevance Theory for more information.

In the same way, if you get a dividends of $4,000 from Australian shares and franking credits of $1,200, and the share price drops not just the $4,000 from the dividends, but another $720 more due to the market pricing in franking credits, even though you have got $1,200 paid out to you in cash, you can't just conveniently say the loss in value of shares of $720 doesn't matter.

Saying that the price will recover is no different from saying that dividends do not come out of the price of the shares, which is nonsense.

Yet again you're pushing this factoid and your Australian market concentration risk viewpoint, despite the fact that the poster didn't ask for this.  Yet again you're posting references from passiveinvestingaustralia.com.  How come ?

The website is not monetised and I crated it so that I don't have to write out long posts each time.
By framing it to say that I gain something from it and therefore am biased, you're trying to "win" you point by way of discrediting me rather than arguing the facts.

[mjr]

When a share goes ex-dividend, the share price drops by that amount because dividends are not free money, they come out of the share price. This was first shown over 50 years ago. I suggest you look up Dividend Irrelevance Theory for more information.

Maybe you can point out to me where I said that dividends are free money.  I said that franking credits for those who are below the tax-free threshold are income - that's it.

In the same way, if you get a dividends of $4,000 from Australian shares and franking credits of $1,200, and the share price drops not just the $4,000 from the dividends, but another $720 more due to the market pricing in franking credits, even though you have got $1,200 paid out to you in cash, you can't just conveniently say the loss in value of shares of $720 doesn't matter.

Sure I can.  Thought experiment:  Let's say that the dividend is 90% of the share price.  Every quarter, it drops by 90+%.  Every quarter, it recovers.  The dividend payout plus the franking credits are income and it's a lot more income than if it is paying 4% p.a.   Obvously this would dramatically impact the growth potential of the share, but that's not the argument.  I'm sayng that the fact the share price drops by more than the dividend and recovers makes it the "extra" drop due to the franking credits irrelevant.  No one here bar you said anything about free money.

Yet again you're pushing this factoid and your Australian market concentration risk viewpoint, despite the fact that the poster didn't ask for this.  Yet again you're posting references from passiveinvestingaustralia.com.  How come ?

The website is not monetised and I crated it so that I don't have to write out long posts each time.
By framing it to say that I gain something from it and therefore am biased, you're trying to "win" you point by way of discrediting me rather than arguing the facts.

Hey, I worked out by how much you refer to it that you probably owned it, but I didn't claim that, nor that you were trying to gain something from it.  I asked "How come" ?  Nothing more.

Speaking of deflections, you haven't answered my question.  Why do you keep bringing your viewpoint on this up even when it's not part of the question being asked ?

[Andy R]

1. Your entire point is based on your idea that "Every quarter, it recovers.".
Do you really not see how fallacious this argument is?
If you set alight $500 and go and earn $500 more, it does not mean that the original $500 was never lost.

2. You are also saying that the price drop when shares go ex-dividend can be ignored for franking credits but not for dividends.

3. I'm not "pushing" a "factoid". And through this use of language, you are not merely asking "how come".
I'm pointing out the concentration risk because it is a risk that people should be aware of.
If it bothers you, don't read it.
If you disagree with it, then disagree with the logic of the argument, don't try and censor me by use of accusing language.

[mjr]

I haven't mentioned the share price drop as an issue at all, neither for dividends nor franking credits.  You're doing that.  If you're a speculator buying and selling, yeah it would matter.  That's why I qualified my statements with for the long term investor.  The dividend and franking credits wiggles do not matter.

I did respond to your comments, some posts ago.  I'm not even disagreeing with you that concentration risk exists, I've already stated that I am not 100% Australian equities.

I'd like to ignore you, but you keep banging that drum.  My question was "why" ?  You pointed it out less than a week ago and unbidden you bring it out again.  As I said a few days ago, "ffs.  We get it".

[Juan Ponce de León]

Great debate going.  I guess all that needs to be agreed on, the ASX200 or 300 or the Australian market in general is great for investors who PREFER to receive their returns in the form of dividends and franking credits.  No it's not free money, it never was, and yes all it is is your shares or ETFs spewing out their share value as dividends, with the value coming off its share price in the process.  If they didn't post the dividends, you'd have higher capital gains returns instead.  Some people prefer to get their returns this way, others don't.

[marty998]

I tend to agree with mjr on this one, with a slightly different take on it...

1. Your entire point is based on your idea that "Every quarter, it recovers.".
Do you really not see how fallacious this argument is?
If you set alight $500 and go and earn $500 more, it does not mean that the original $500 was never lost.

2. You are also saying that the price drop when shares go ex-dividend can be ignored for franking credits but not for dividends.

Well yeah, for most equities it does recover, because that's how equities are valued - future expectations. Only for ETFs and other funds traded at NAV does the academic theory on share price valuations perfectly hold. For every other business, it's based on expectations.

By the time a dividend is declared in respect of a previous half or quarter's results, the market is already looking forward to the next period's results.

Put up a graph of CBA's share price (down) against it's book value (up) and you'll see the difference, especially over the last five years.

[Andy R]

I tend to agree with mjr on this one, with a slightly different take on it...

1. Your entire point is based on your idea that "Every quarter, it recovers.".
Do you really not see how fallacious this argument is?
If you set alight $500 and go and earn $500 more, it does not mean that the original $500 was never lost.

2. You are also saying that the price drop when shares go ex-dividend can be ignored for franking credits but not for dividends.

Well yeah, for most equities it does recover, because that's how equities are valued - future expectations. Only for ETFs and other funds traded at NAV does the academic theory on share price valuations perfectly hold. For every other business, it's based on expectations.

By the time a dividend is declared in respect of a previous half or quarter's results, the market is already looking forward to the next period's results.

Put up a graph of CBA's share price (down) against it's book value (up) and you'll see the difference, especially over the last five years.

I'm not really sure what your point is.

The future expectations were priced in the day before a dividend is paid out also. What changes on the day a share goes ex-dividend is based on
- all the usual expectation changes that have occurred in that 1 day; and
- the fact that a withdrawal has been made from the company to the owners (shareholders)

For the share price to "recover" back to the pre-withdrawal amounts, the future expectations of growth are going to have to be priced-in, meaning a recovery is based on (expected) new earnings, not on some idea that the drop in price when dividends are paid out is temporary and therefore irrelevant.

The point is that the price drop is definitely relevant and represents a value of your shares being removed from the company.
Similarly, when the share price drops more than the dividend amount due to franking credits being priced-in, the fact that the price eventually goes back up does not mean that a portion of your franking credits has not been eaten away.

[deborah]

I don’t see how franking credits has anything to do with price changes ex dividend. The business pays tax on its profits, and has to pay that tax whether or not anyone gets it back as a franking credit. In a purely rational world, the share price would go down by the cost to the company of the dividend (not necessarily the same as the amount the shareholder receives from the dividend). In such a world, taxes the company needs to pay would also be reflected in the share price on the date the company actually pays those.

But although franking credits are generally related to company taxes, they’re not the same thing.

[Andy R]

I don’t see how franking credits has anything to do with price changes ex dividend.

It is essentially free money, so people arbitrage it away (in part).

Vanguard's research

Investors place a higher value on dividends paid by
companies that have imputation credits attached.
This is evident in the domestic market place.
Usually after a company’s dividend is paid, the
share price drops further than the cash payment of
the dividend due to the added value placed on the
imputation credit. Our analysis of the dividend
payments from one of the largest companies by
market cap in the Australian market, National
Australia Bank (ASX Code: NAB), found that out of
64 dividend payments since 1987, when dividend
imputation was introduced, the ex-dividend price
fell by more than the cash dividend 69% of the
time. Of the declines, nearly half were of an
amount greater than the grossed-up dividend, the
other half being an amount slightly less than the
grossed-up amount. Similar results were obtained
from analysis of other major Australian companies
paying dividends that have an imputation component.

Other research found the same thing.
The Financial Implications of the Dividend Imputation System
Dividend imputation – its rationale and its impact on superannuation outcomes
Estimating The Market Value Of Franking Credits

[deborah]

It’s interesting that some of the papers you quote say that the research has found mixed results, rather than showing definitive results. It suggests that the research isn’t as black and white as you claim.

[Andy R]

It’s interesting that some of the papers you quote say that the research has found mixed results, rather than showing definitive results. It suggests that the research isn’t as black and white as you claim.

I didn't claim the full amount was priced in. I said that it is partially priced-in, which is what the research shows, and is likely due to the fact that international investors don't receive the franking credits.

If over decades 40-80% is priced in, is the fact that it is not an exact number somehow saying that franking credits are not being priced in?

If you look at non-Australian share prices, they doesn't fall by exactly the amount of the dividend paid out when they go ex-dividend, sometimes it's more and sometimes it's less. This is because the rest of the time when dividends are not paid out, the share price moves up and down. The market is reacting to new information about the company, sector, or market it is in. When a share goes ex-dividend, these forces are still in play, and therefore the share price doesn't drop by exactly the price of the dividend. This doesn't mean it's somehow not "black and white" that dividends are priced into by a drop in share price. In the same way, just because it doesn't drop by an exact amount each time doesn't mean that franking credits are not priced in.

This amount (however much it is), means that for the franking credits you get in your hand, part this amount is lost due to a drop in share price.

If you mean that it is not black and white how much it is priced in, then yes, by the nature of not all of it being priced-in due to international shareholders who don't get franking credits, and with all the other information being priced in and changing constantly, it is impossible to tell exactly how much.

[mjr]

This amount (however much it is), means that for the franking credits you get in your hand, part this amount is lost due to a drop in share price.

Golly, so all the income I receive from dividends that I get in my hand, 100% is "lost" due to a drop in the share price.

Silly me, I thought that that money was worth something.  Guess I'll completely ignore dividends from now on, they're worthless.

[flaky]

I would like to thank all participants for the constructive discussions over the last few pages.

Can I run this general plan past you? I plan on buying both VEU/VTS in roughly equal measure to approximate the total world market until I approach retirement, how far away I am from retirement is still an entirely open question. I currently have low expenses. Over the last year, which is my first managing any investments, I invested roughly 25k which is above 50% of my after tax income. I make only the mandatory contributions to super, which is all invested in low-cost international equities (AUD hedged) too. I have submitted my W8-BENs on time and am happy to continue keeping it up to date.

My question relates to tax. I understand I should be approaching my tax agent to claim a tax credit, but I don't fully understand for what, how much I might get back based on my income or what documents to give them. Should I consider making pre-tax super contributions given my relatively low taxable income? If my income increases when should I start considering this?

[mjr]

If you want VTS and VEU, why wouldn't you just buy VGS and be done with it.  No W8-BEN and no foreign tax credits.

If VTS/VEU, you'll be paying 15% withholding tax which you can claim as a foeign tax credit, subject to some restrictions/conditions if you try and claim more than $1000 a year.  Dividend payment advices will show the amounts.

Regarding super contributions, there are plenty of articles around.  We don't know your age, income, wealth inside and outside of super, housing situation, etc.

Big picture, you need housing and living expenses to cover to you until super preservation age age at least, assuming you want to retire early.  So you'll want some tidy amount out of super.  How you get there is up to you.

Personally, I got most of that sorted first and then started maxing out my concessional contributions and making non-concessional as well.  But what worked for me may not be right for you.

You may want to look here as well http://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333550/#msg1333550

[retiremefast]

Good day fellow Mustachians,

I have joined the Aussi investing culture with a FIRE plan in mind. It is a semi-RE as I am not excluding work 100% .. just part-time / project based consultancy instead of 9-5 daily enforcement.

My case is presented here: https://forum.mrmoneymustache.com/ask-a-mustachian/fire-in-australia
Q1: anyway to contact an Admin to move it from "ask-a-mustachian" to "case studies" category?

Gross Salary/Wages:
me (IT Consultant): AU$92k / year (9.5% Australian Super included)
her (Internal Auditor): AU$109k / year (10% Sun Super included)
Take-home total income (after taxes and Super): AU$ 138k
- no additional source of income outside salaries

Current expenses: AU$ 61k / year
1. Fixed expenses: AU$48.5k / year
Rent: AU$2.2k / month (AU$26.1k / year)
Utilities: AU$0.4k / month (AU$4.8k / year)
Transport: AU$0.3k / month (AU$3.6k / year)
Supermarket basket: AU$1k / month (AU$12k / year)
Romanian household): AU$0.2k / month
2. Casual / Temporary expenses: AU$12k / year
Mortgage (Romanian apartment): AU$0.5k / month. It is planned to be fully paid by July’20
Fun & Extras (Australian lifestyle): AU$@1k / month

Assets:
1. 3-bedroom apartment in Bucharest (capital of Romania). When it will be fully paid, we think on put it on the market for rent. Possible income would be AU$0.6k / month (AU$7.2k / year)
2. Romanian Savings Account (EURO) of EUR5.5k = AU$9k with no interest at the moment. Will be converted to RON to benefit from the 4% Bonus interest in the first 4 months after which, most likely, will be used to advance repay the mortgage.
3. Romanian Savings Account (RON) of RON28k = AU$10k with 1% annual interest (compound monthly) at the moment. Will be merged with EURO savings into 1 single account to benefit from the 4% Bonus interest in the first 4 months after which, most likely, will be used to advance repay the mortgage.
4. Australian Savings Account (AUD) of AU$19k with 1.95% annual interest (compound monthly)

Desired Asset Allocation:
Ideally, my aim is for a Vanguard Australia Growth ETF Portfolio with 80% Growth / 20% Income, that will be adapted every 5 years (Income will grow up and Growth will shrink down). Until reaching the CASH cap will be hit (AU$100k), no BONDS will be included. After that, only BONDS will cover the 10% of Income. We will start with AU$5k which will be adjusted as long as family income will go up with time
•     80% Growth
     o     40% VAS (Vanguard Australian Shares Index ETF – Fact sheets) - AU$2k
             Management Fee: 0.10%
             Performance (since inceptions): 9.88% (4.68% distribution + 5.20% growth)
             Equity yield (dividend): 4.1%[/li][/list]
     o     40% VGS (Vanguard MSCI World ex-Australia Index International Shares ETF – Fact sheets) - AU$2k
             Management Fee: 0.18%
             Performance (since inceptions): 13.04% (3.49% distribution + 9.55% growth)
             Equity yield (dividend): 2.4%
•     20% Income
     o     10% VBND (Vanguard Global Aggregate Bond Index (Hedged) ETF – Fact sheets) - AU$0.5k
             Management Fee: 0.20%
             Performance (since inceptions): 5.3% (1.81% distribution + 3.49% growth)
             Yield to maturity (dividend): 1.34%
     o     10% CASH = ING Savings Maximizer 1.95% / year (max AU$ 100k) - AU$0.5k

Above plan being shared with you guys, I know that improvements can be made. Shoot .. but be gentile:
Q1: what are the flows that you can easily spot in the above plan?
Q2: most likely will use SelfWealth when I will go live with the plan. Will I be able to find VBND when I will decide to invest into BONDS? (currently playing around with SaxoTrader and VBND is not available. Will there be a better alternative?
Q3: as my current CASH savings will go on closing the mortgage, is it OK to just focus on CASH safetynet and put BONDS aside in the beginning? For sleeping better everynight, I was planning on raising AU$ 100k in our ING Savings Account and only after that to switch to BONDS and focus more on investing plan above. What do you think about this?
Q4: my income will most likely increase starting Feb.20 to around AU$110k / year which will bust our yearly NET income (after TAX and SUPER) to AU% 150k. That is the time when I will consider applying Salary Sacrifice to match our employers 10% paid into Super. This will lower our Tax Margins as well as will increase the Super allocation. Is there a better way to make our income tax-efficient?

[marty998]

Are you staying here long term @retiremefast? Or are you ever going back to Romania? Are you a tax resident here? If not, then you will get slaughtered with tax on your superannuation when leaving the country

I don't understand what you need $100k cash for if you are not buying a house here.

Where in Australia are you located? Where do you want to live after you FIRE? You are looking at all the sexy investing stuff without planning your endgame, which is more important IMO. Once you know that, then you can figure out a roadmap for how to get there.