Aussie Firebug

Financial Independence Retire Early

Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.

 

 

Question (2:19)


Hi AFB,

Wondering if you could explain your thoughts re: dividend approach to investing.

My understanding is that when a dividend is paid to investors, the company’s assets are reduced by the same amount. This in turn reduces the share price by the same amount as the dividend.

If this is correct, what is the value of focusing on dividends? The only logic I can see is that once one hits FIRE, they can receive an income without the need to sell shares. Seems ok, but not a particularly compelling reason to concentrate assets to a particular market – in this case, Australia.

Love your website and podcast, and hope to hear your thoughts on this.

Cheers,

Clinton

Firebug’s Answer


Hi Clinton,

Your understanding of dividends and their relation to share prices are somewhat correct. In simplistic term, if a company makes $100 from their asset their share price should reflect this cash asset. If they pass on this cash to the shareholders in the form of a dividend then you would think the share price would drop accordingly. This does happen after most ex-dividend dates. But share prices are always affected (good and bad) from human emotion.

Our switch to strategy 3 was mainly due to the nature of dividends and their link to intrinsic value.

The thing is… when you are relying on selling any part of your portfolio in retirement to survive, you are at the mercy of the market.

The main reason that strategy 3 ultimately won us over was the fundamentals of a business is less affected in a crash than the share price.

A business and its share price are largely tied to its ability to produce a growing income. There were many businesses back in 2008 that were not affected greatly by the GFC in terms of the bottom line. But the ass fell out of the share price because human emotion got involved. Sure the dividends may have dipped, but nowhere near the same level (in terms of percentages) as the share price. This is because the dividends are tied back to fundamentals and how much income the company is able to produce, not based on how many inexperienced and ill-informed investors are rushing for the exits after reading a doom and gloom article in the Herald Sun.

I feel a lot more confident that Strategy 3 will hold up through thick and thin vs Strategy 2 even though Strategy 3 could delay our fire date. This is because even in a recession, good income producing companies will still do just that, produce an income. And seeing those dividends hit the account each quarter will help immensely.

-AFB

 

Question (11:34)


Hi Aussie Firebug,

I’m in my 30’s, and I’m looking to begin investing my money for future long-term growth.

I’ve read on the internet about ‘ready-made portfolio’s’ (my super company BT offers this).

Do you know how they differ from managed funds? Both appear to invest in assets like eft’s, shares etc, but just a bit unsure how they differ.
If you know of any information that you can share, please let me know.

From Matt, an Aussie Firebug follower, and FIRE aspirant.

Firebug’s Answer


Hi Matt,

While there’s no real definition of a ‘ready-made’ portfolio, they usually are a managed and diversified portfolio that has levels of risk that the investor can choose depending on their needs and risk profile.

They are basically managed funds within your Super.

The ‘managed’ part usually refers to the fund managers ability to balance the portfolio how they see fit depending on what the goals of the portfolio. If you invest in a globally diversified ETF portfolio yourself such as A200, VEU and VTS. You would, of course, be in charge of the weighting and rebalancing.

A management portfolio takes care of this for you and your only job is to pick which fund is right for you.

It’s not a bad option, but like most things, the devil is in the detail. Your Super Fund BT charges a management fee of 0.42% on top of the underlying fund’s management fee. They also charge 0.22% in transactional and operational costs. So you’re looking at a management fee of around 0.64% plus the underlying fund’s fee.

Vanguard offers a diversified index ETF for a management fee of just 0.27%. This includes professional management of a diversified portfolio and rebalancing is taken care for you.

Vanguard Diversified ETFs

But you’re always going to have to pay a bit extra because it costs money to run a Superfund.

My question to you would be when are you planning to stop working? Super is the most tax efficient vehicle in Australia but it comes at the cost of not being able to access it until later in life and thus ruling out early retirement.

-AFB

 

Question (20:17)


Hi AFB,

Thanks for your informative blogs and podcast. I’ve been following you for a year now and you’ve been such an inspiration! Keep up your content!

I’ve just recently purchased my first investment property and was just wondering although it’s too late but what are some of the key points that you look for when purchasing a property and which suburbs are your properties located in?

Thank you!

Edmund

Firebug’s Answer


Hi Edmund,

It depends on what sort of property investor you are. I have been to many property seminars and met countless investors. But a trend I continually see is that most successful property investors have a niche that they are really good at and get better over time.

The most common investor is a buy and hold investor. They are hoping that the market will outperform inflation and through the power of leverage amplify their gains.

Other types of property investing include:

  • Subdivision
  • Development
  • Renovation
  • Commercial
  • Vendor Financing
  • Flipping

Each has their own pros and cons and we could be here for hours explaining what is needed for each to be successful.

The most important things to look out for when it comes to investing in real estate IMO are:

  • Getting a bargain when you buy. Super important because it gives you an instant buffer and equity straight away
  • Cash flow. The lifeblood of the investment.
  • Economy around the area. Where are the jobs coming from and is this industry growing or shrinking? Population is also part of this equation
  • Opportunity for growth. Are there upcoming projects scheduled? Is the population forecasted to increase, decrease or stay the same? Why?
  • What is your exit plan? Who are you going to sell to in the end and why are they going to want to buy your investment

Those were the basic things I looked at when buying to invest.

Our two properties are located in SE Queensland.

-AFB

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