Summary
Huge Pod to start 2019!
I have the man, the myth, the legend, Peter Thornhill himself. Author of bestseller Motivated Money, Peter is famous in the FIRE community for his teachings on dividend investing and why it’s the best strategy for Australians to retire comfortably. And for someone who is currently receiving over $400K a year in passive income via dividends… when he talks, we should listen!
In today’s episode we chat about:
– Peter’s background in investing
– ETFs vs LICs
– How Peter invests
– Capital gains vs Dividends
– International diversification
– Labor removing the franking credit refund
– Why Peter uses a financial advisor
– Debt recycling
and much more
Very interesting podcast, I like his outlook on dividends but I am still planning on Aus and World equities with a growth focus.
Great to have you back FB, great talk about the franking credits, definitely something to think about
Cheers. Glad you enjoyed it
Really enjoyed this talk.
Peter’s link to study not working.
Cheers Deka. I have now updated the link 👍
Great episode to start the year – really enjoyed this one. Scrambling to write down those LICs as he rambled them off (they were AFIC, Milton, Argo, Whitefield, Australian United Investments and Diversified United Investments) for others looking for it.
PS, is this the paper that he was talking about?(http://www.fmaconferences.org/Boston/market-accessibility-corporate-bond-etf-liqudity.pdf) link above 404s.
I don’t think that’s the link. I’m working on finding another copy.
Hi FB great podcast! I’m interested in your thoughts on PT’s comments about ETF’s being problematic where they may return your invested capital back to you with tax. Is this something you’re concerned about with your strategy 2.5 (I.e shift from mostly LICs to ETFs)? I assume this issue can occur where an ETF (such as VAS) sells off shares that, say, fall out of the ASX 200 and the capital is returned to shareholders along with the ‘dividends’. Thanks!
Hi Dan,
There is a bit of capital gains tax for the ETFs like Peter mentions because of that buying and selling that has to occur to hug the index.
It’s just so minuscule that I don’t think about it at all.
The further down this FIRE journey I go, the less I care about the investing side. LICs and ETFs are great tools to reach FI but the community focuses on them way too much.
I was guilty of this before but nowadays, I spend my time and energy on optimising my health, hobbies & interests, relationships and experiences.
Hope that helps 🙂
Great show – in curious – we have just sold our ppr and will not be building amour few years. With no loans – is there anyway we can do a debt recycling strategy with a home loan?
Mmm not that I’m aware of. The whole benefit is turning non tax deductible debt into deductible debt. You could possibly do it with a margin loan, but the major draw back is that in a crash, you cant take advantage of cheap stocks as you’ll be more worried about margin calls…
Aussieeee, so much awkwardness in this interview. Were you nervous?
Haha hell yeah I was! It’s the Thornhill after all!
Hopefully, it wasn’t too bad 😔
Not at all. It was a great listen.
Thanks – so fantastic to be able to find FIRE strategies specific the Aussie conditions!! Just finished Thornhills book last week – interview is a good summary of his ideas.
Great great interview Aussie fire bug. Love your work. I’m not sure how you could top having Peter on your show. Thanks for that and keep it up.
Thanks. Yeah big name in the FIRE scene. I may have peaked 19 eposides in lol
Great podcast, I really enjoyed it, great job!
Thanks Greg 🙂
Great episode! The first of your podcast I’ve listened to. Awesome to hear more from Thornhill on his experience and perspective.
Hello good interview but I have a couple of questions:
1. Can someone explain to me why it is such a great idea to take a loan to buy LICs?
My workings don’t make it seem too attractive.
Example Loan $100,000 Interest rate 5.01%
Total Interest $5010 but assume you get 30% back as a tax deduction, so the cost of the interest is $3507.
You can buy 64935 BKI shares for $1.54 today which last paid a 7.3 cent per share fully franked dividend which works out to $4740.
So dividend $4740 subtract interest cost of $3507 equals a profit of $1233. A $100,000 loan seems like a lot of risk for $1233 return. That’s only a 1.233% return.
Are my calculations correct?
2. at 1:19:00 “You’re getting a dividend on dividends you haven’t even received yet” What has he been smoking? Can someone explain this to me?
Mate couldn’t agree more And be very interested to try and get my head around this debt recycling stuff too – complicated fir my pin brain
Don’t mean to hijack the comments here, but I wrote an article about debt recycling (and generally using debt to invest in shares) that might help… https://www.strongmoneyaustralia.com/debt-recycling-ultimate-guide/
😂 little self promo! But at least it is super relevant content
Mick, send me you email address and I will send you the diagram. Both Dave and I have tried to put it up in this discussion but it won’t work.
Hi Peter, would you mind sending me the diagram as well please. I am trying to work out whether to take out a small loan or just invest with the capital i have saved up. The diagram may help me to come to a decision.
Success, I just figured out how to upload it – here’s the link (hope it works). All the best.
https://i2.wp.com/www.strongmoneyaustralia.com/wp-content/uploads/2018/10/Debt-Recycling.jpg?w=617&ssl=1
Sorry! This is the one!
https://www.strongmoneyaustralia.com/wp-content/uploads/2018/10/DIVIDEND-RECYCLING.pdf
You’re forgetting growth over time, to make your total return. Your example shows positive cashflow from the example but then remember to include earnings/dividend/capital growth of say 3-4% per annum.
Also it should be possible to get interest rates closer to 4% if using home equity.
I did include earnings/DIVIDEND of 4740/capital growth. It just turns out my example BKI doesnt seem to have capital growth. What other earnings are there?
5% is what ANZ have told me their line of credit rate is.
Your article seems to say how good it is but I think you’re glossing over the part of your article where through your suggested savings plan you save/bank $10-20k a year. So using debt recycling and having a savings plan you generate in your example $11-21k a year, however if you were just to use your savings plan as per the figures in your blog you would be saving $10-20k per year. Seems like a big risk (that 100k with risk of interest rate rise and stock market crashes) for maybe 1k of profit.
Your blog would be better with a case study.
Actually I don’t using debt for shares suits many people at all! And I made a point to go over the issues and risks with it in the article.
Well if you assume your investments are going to have no growth over time then it’s not going to work. But if that’s the case, then investing in the first place doesn’t make sense.
The main factor is the dividend grows over time so while your interest cost might stay the same, your dividends will steadily increase, meaning more cashflow. This is why looking at year 1 only, misses the point.
And there is an example in the article under ‘interest cost vs investing’ and also ‘compound effects of leverage’ it shows that after you subtract debt costs the return is not that large – only a few k per 100k of debt used.
Also you don’t need a line of credit – you can get a regular interest only home loan that is far cheaper than 5%.
Hi Dave, I don’t know if English is your first language but “Actually I don’t using debt for shares suits many people” is not normal English.
and then “And I made a point to go over the issues and risks with it in the article.” is also not normal English.
“Well if you assume your investments are going to have no growth over time then it’s not going to work. ” This is the basis of Peter’s investment approach, if you paid attention his approach is all about the solid steady dividends, rather than capital growth from my understanding?
“The main factor is the dividend grows over time so while your interest cost might stay the same, your dividends will steadily increase, meaning more cash flow. This is why looking at year 1 only, misses the point.” Look if it’s going south for 1 year and you have no capital growth, guess what? it’s going to be bad forever 🙂 Sinking ship.
your next paragraph – only a few k per 100k – risk/reward not worth it. Give me $1 million and I will give you a few $k lol, this is something.
Do you even own anything at all? I don’t think you should be running a blog about investment advice.
Attention Firebug, I think we have a troll 😉
What other explanation is there for someone who is unnecessarily rude to those who are only trying to help…
That’s a very good question Dave. Who the hell knows!
Hi Dave,
I just want to say a big thank you for all the effort you put into your work. I always find your articles very helpful and informative. I can appreciate how much time goes into preparing your resources.
Thanks again.
Hello James I don’t smoke but then you don’t know me.
Lets start with the one that is taxing your mind. For simplicity sake let’s take a notional example: I have a $100 investment which is producing $10.00 in income so I go out and borrow $10 and invest it giving me $110 invested. Assuming no change in the dividend, my next dividend will be $11 because I have invested the next dividend before I even receive it. I actually prefer taking the next 10 years and dropping them in now.
This leaves your first query, why would I invest for such a pathetic return in year one. Simple answer is I am not investing for one year. I now have a non super portfolio, built up over time, with a $300K debt. I pay 4.8% interest so roughly $14,000 (tax deductible) a year. My current dividends are around $36,000 (plus franking credits of just under $7000).
I’d like you thoughts on why people borrow hundreds of thousands to buy a property that loses money year after year so they can get a tax deduction?
Hey Peter thanks your reply.
Sorry I didnt mean any offence about “what is he smoking” it just seems like a circular argument if that makes sense.
Where are you getting a 10% return? That’s about double what BKI my example give.
So you are investing for long term I get that. I understand that a lot of LIC’s have increased dividends per year for a long time running and that is a very good thing.
I am not sure what your reference to the $300k debt is or the other numbers. I’m assuming this is just an example?
Why do people borrow big $ to invest on property which loses money year after year? Well, they buy the idea that historically property has doubled in value every 10 years. I’m from planet Perth though so we have been left out of this for awhile now, I hope we’re at 6 o’clock on the property clock though. My Dad is always talking about how good a deduction things are, but to me that just means if you’re not getting a positive income, you’re losing money. I was speaking with my wife today about our last home. Do we continue to rent it out or do we sell it and buy a LIC? To rent, with all of the agents fees, maintenance, rates etc, I think the net profit is about $25k. If we invested the money in BKI that we have tied up there I think the income would be $39k with no stress, no agents and no tenants….
I’m getting 10.1% p.a. from Whitefield, 9.9% p.a. from Milton, 8.3% p.a. from Argo, etc.
The reference to $300K is the simply the remnants of a line of credit I have had for decades. I have used the debt recycling strategy to demolish 3 mortgages as I moved with my job. Now, at 72 and semi retired I feel the need to utilise it again. In our self managed super fund, which is in pension phase, we are required by the government to withdraw a pension every year at a government mandated minimum level. This presently equates to roughly the total dividend stream from the shares we hold.
To ensure we never have to sell shares to meet these mandated withdrawals I now hold two in cash in the fund; which bugs me as our target was, is and always will be 100% equities.
To counteract this I have started redrawing the line of credit, at 4.8% interest, and buying shares in my own name to the value of roughly what we are holding cash in the fund.
This means that net-net the debt equates to the cash holding and we remain, in total, 100% invested in shares.
Hey Peter,
Whitefield price is 4.33 the dividend is 0.17 cents per share doesn’t that equal a 3.92% return?
Milton price is 4.44 the dividend is either 10.2 or 19c a share, not sure how to read it, doesn’t that equal a 4.29% return at best case?
Argo price is $7.80 the dividend .is 16c per share (fully franked) doesn’t that equal a 2% return?
Hi James,
You are using dividend yields based on current market price. I would suggest that the yields Peter is obtaining are based on HIS purchase price.
Steve
Wow fantastic, I don’t have time to listen just yet but will most definitely listen to Peter Thornhill. How awesome, if this is a start to 2019, what a year you will have. Cheers
Love to hear more about the last bit of the conversation regarding gearing in small amounts and perhaps a dedicated blog about it explaining the best way to go about it. Loans, interest rates etc.
I know you or perhaps it was Dave @ SMA touched on this with the property side of debt recycling but would like to hear more on gearing without the property.
Great guest Aussie! A difficult person to interview as they have just so much knowledge and want to cut to the chase! Still you handled it with grace. I have to admit I haven’t read his book or followed him but you have sparked my interest. Its fascinating he had no uni degree but seemed to follow his common sense. Many thanks
Thanks Belinda 🙂
It was great to have him on the show.
Aussie thanks for a great interview. Please pass on our thanks to Peter great to hear him talk. Thanks mate your doing a great job and keeping me focused on fire!
Thanks Simon.
Peter emailed me a few days back and apparently, this podcast has been a hit with his audience. He is starting to discover the FIRE scene and realize he is very popular within it!
Was awesome having him come on the show.
Wonderful interview. Already a Peter Thornhill fan, but loved your line of questioning, especially with the recent proposed changes with franked dividends. That allayed some fears for me.
Thanks Anthea 🙂
Good job on this one mate! Nice of Peter to spend so much time answering all our questions!
Thanks Dave.
Such a good sport to come on the show. Really enjoyed it.
Great interview! Thanks Firebug.
Peter’s link has gone down for some reason. I found the same study available (free registration was required) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2183251
Thanks Jimi!!
I have uploaded the link now.
Legend.
Great job & interview AFB,
The wife & I are probably in a different position than most of your followers as we now own our house (discharged mortgage) & find Peter Thornhills Debt recycling to build your share/LIC portfolio totally fascinating/enticing. Are you able to give us a better understanding of setting up a line of credit or at least how to calculate the “2-3 years of dividends loan size” as per Peters suggestions?
Check this out Darren https://www.strongmoneyaustralia.com/debt-recycling-ultimate-guide/
Thanks so much Aussie! I’ve been a fan of Peter for a couple of years so was brilliant to hear his thoughts. LIC’s are the way to go it seems! Thanks again and keep up the awesome work mate loving your podcasts.
No worries Marc,
LICs are great. ETFs are also great. There’s a lot of ways to skin a cat. The most important thing is to educate yourself and have confidence when you invest.
I’m not convinced Peter understands how Vanguard / index ETFs work. He was very quick to dismiss ETFs all in the same bucket due to capital gains issues with the trust structure but this issue doesn’t uccur with index funds….
Also what if you want to live off the franking credits after FIRE and have low expenditure (income under $30k each). There goes up to 30% of your retirement income! Suppose we have to just suck it up like Peter says
Great show by the way!
I don’t personally agree with Peter’s stance on ETFs. I’m still a big fan of them but it’s interesting to listen to his thoughts on the matter.
Didn’t expect Peter to use a prostitution analogy.
the unworthy or corrupt use of one’s talents for personal or financial gain.
lol
He seems like he’s a bit of a creepy old, grumpy man at times.
AFB. Great podcast.
Peter, any chance you will be speaking in Brisbane?
Great episode to kick off the year mate!
I particularly liked the idea of “Don’t buy the lifestyle, rent the lifestyle”. That definitely struck a chord.
Also I applaud the fact that he mentioned his charity contributions, most FIRE blogs steer clear from that aspect. I’d love to hear your thoughts on giving to charity and how it fits into your long term plan. (Right now I set aside 5%)
Cheers
If I’m being 100/ honest. I don’t think too much about it at the moment. We donate a little each year whenever my mates or family are doing a fun raiser.
It’s probably something I’ll look into once over hit FIRE.
I’ve listened to a bit of the podcast and agree with previous comments that Peter Thornhill is not not quite up to speed with ETFs and lumps them together with unlisted actively managed funds but there are stark differences between them.
The redemption risk of ETFs compared to unlisted actively managed funds is as different as day and night to the extent that unlisted actively managed funds would often have to freeze redemptions if there was a run of withdrawals.
Also, other ETF unit holders depend little on what other ETF unit holders are doing. Thornhill implied that there were ramifications. It’s again more unlisted managed fund holders that may be left stuck in an old fund, closed to new investment due to underperformance and loss of manager interest. ETF unit holdings will simply reflect the actual market and every shareholder of common stock is affected in the same way, so it’s got nothing to do with being an ETF unit holder.
It’s also interesting that he argues that individual companies should distribute as much of their income as possible to shareholders yet LICs should retain income, rather that distribute it all like ETFs have to do. I agree somewhat that a benefit of individual companies distributing income to shareholders is that then they can decide where best to invest those earnings for the future. Of course a company is best positioned to know how to reinvest in their business, but it doesn’t have to be all their earnings.
Also, if anyone can find me a true large mainstream ETF that has been able to distribute 20% per annum of its capital value two years in a row, I’d be extremely interested. Many of us understand that ETFs realise very little capital gains due to their structure. I suspect that Thornhill was referring to an actively managed fund (which tends to realise a lot of capital gains, especially if it’s a hedge fund). ETFs by current definition are never actively managed. Thornhill hasn’t named this fund though, as far as I know.
Thornhill does present himself as switched on and capable, but it’s a pity that there does appear to be something missing in his understanding of ETFs. I’m sure that when I’m older, there will be something that I don’t understand that’s new, but hopefully, there will be people pointing these things out for my benefit if I try to keep an open mind.
Hi Andre300, Simple fact of the matter is that ETFs operate in a trust structure and LICs operate in a corporate structure. Understanding the ramifications of the structure is very important to this investor. Furthermore, ETFs that track broad indices do so on market cap. If you objective is income, then why would you want to track companies by market cap. For a long time the #1 stock by market cap in the XJO was NCP – a stock whose dividend payout was smaller than my thumb.
Hi AFB,
I had to write and say WOW what a fantastic interview. There is not too much Peter Thornhill content out there. The odd interview, his videos on YouTube inc SWITZER’S interview and his book of course.
So to kick off 2019 with a 1 hr 22 min interview with Mr Thornhill is amazing. (i’m so pleased this didn’t end up being a quick 30 min pod)
Thanks for covering the questions that I would have liked to ask him myself. I’ve listened to this twice now, and am rereading his book too.
Both you and Peter cut through the complexities and keep it relatively simple, so rare when talking about finances.
Well done!
Thanks so much Paul.
I’m really glad you enjoyed it mate! Was a pleasure to speak with Peter.
Love and respect to Peter. A great man and a great educator.
I agree with Peter’s philosophy on innovating businesses as being the true source of new wealth…….
One thing that I don’t hear much about in Peter’s story though, is… he notes he used dividend recycling to pay off several mortgages…Melbourne, Sydney, Melbourne… but doesn’t say how much capital growth he got through the property market during his time. For most of his working career, Australian house prices were on a tear.. and buying and selling property led to enormous capital gains without doing much, but being in the right place at the right time.
Peter is very negative towards the Australian housing market… and rightly so… but does he have a blind spot for its benefits to him?
I wonder if Peter’s strategy is sound… but a large part of his wealth came from the the ‘lucky’ capital growth in Australian property prices. If we deduct the housing price appreciation, is the story still so attractive.
Again.. I love Peter, love the strategy and genuinely value his vast experience. Thoughts?
Could someone please explain to me what he meant by ” borrow 3 years worth of dividends”… You get dividends based on how many shares you have…Currently I don’t own any LICs, how do I suppose to calculate the 3 years. Sorry if it is very simply and I am just not getting it.
I am thinking of using NAB Equity Builder, anyone using it?
Cheers
Hi Swifteagle,
I believe that the phrase “borrow 3 years worth of dividends” is simply an arbitrary benchmark for determining the maximum amount of borrowed funds that should be used to purchase the share. You don’t have to own the share to work out the borrowing capacity using this method. What the investor needs to work out is the debt:equity ratio they wish to employ. Once this ratio is established, you can work out the number of shares you should acquire by dividing the desired debt level (based on debt:equity ratio) by the current dividend rate x 3.
My experience tells me that most people, for whatever reason, think 50:50 is a good starting point for debt:equity. If you are starting out, I would say 20:80 is a better proposal. Having been around markets and investments for a long time, the emotional bank account needs to be expanded before the financial bank account can grow.
Stephen, Thank you for taking the time to help me out!
Dudeee! What a pod! I just finished reading Peters book and did not put his personality to his writing story. Very insightful from both of you about investing and thinking longterm. I just invested my first funds into a LIC (ARGO) and plan on contributing every month for the future. Keep up the solid work!
Thanks Lewis. Glad you enjoyed it mate 🙂
Hey man just listened and found great value!
You are learning the ropes as an interviewer and doing a great job mate!! Got heaps out of this. PT has always been someone I have thought highly of!
Cheers Angelo!
I’m glad you enjoyed it 🙂
PT was great wasn’t he.
Cheers
Nice work AFB, this pod was awesome.
Thoroughly enjoyed Peters brutality and his precision in his choice of words, obviously a lifetime of knowledge through a wealth of experience.
True that!
You can tell this man is not bullshitting. I need to get him back on one day for sure. Everyone loved this pod.
Great work AFB!
I saw Peter live a few months ago so I completly get his sense of humour through the podcast. i think he’s hilarious and could listen to him all day!
Also a number of people their who were on a FIRE and a big fan of your work.
What I love about his strategy is the facts/graphs that back his certainty.
Thanks Kieran,
It was a pleasure having him on the pod. I should get him back on soon as a lot of people loved this one 🙂
Hey AFB
Stumbled onto your blog a little while ago and am consuming the content. Loved this podcast and now have purchased the motivated money book tonight. Although heading towards 47 never too late to start towards FI. Even if it turns out FI is just before 60. Massive motivation, thanks for everything you are doing. Good to see a young bloke with direction and desire!
That’s awesome to hear mate 🙂
Peter was a great guest and I’m glad this podcast had such a great reception within the community.
Gday mate.
Thanks for your hard work on this topic in general and especially landing the big fish that is Peter!
Quick question: do you know the name of the international European LIC Peter kept referring to?
Hi Sergio,
I’m glad you’re enjoying the content mate.
I don’t unfortunately. You can flick Peter an email though through his website (https://motivatedmoney.com.au/).
He should be able to answer your question 🙂
Cheers
Wheres your march 20 update??
Jesus christ mate, the month literally ended hours ago lol. Working in that post 😁
Awesome interview – the first one I’ve listened to and it was well worth it.
We have recently started our FI journey by investing in a couple of LICs. Our next move was going to be VAS.
I’m a little spooked by Peter’s gripes about ETFs though. I’m not academic enough to understand the research paper he referred us to! Can something like that 20% capital refund as dividends occur in an index tracking ETF like VAS, or is that more for fancy managed ETFs?
Hi Firebug and Firebuggies ,
What a wonderful man is Peter . Smart , down to earth and says it how it is !! I especially enjoyed his comments on renting in Australia and how backwards the systems mindset when it comes to long term tenancy and the important link it has to building security and long term wealth for its citizens .
Australia has a housing crisis and we just don’t get it or give a damn …sad !!
Peter mentioned his wife ( I think it was Frida ) numerous times . Just another indication of a warm , funny and loving partner and Dad !!!! …brilliant!!!
All the best
🤗
Great interview.
I seem to come back to it time and time again.
Thanks AFB and Peter.
Great podcast. Thank you.
‘The bigger fool than thou’ – about buying and selling based on price speculation only. I love this quote from Peter.
I think now after a COVID-19 world and on the cusp on the fourth industrial revolution, investing in shares is a smarter way be on the way to FIRE now than any other way I think. The ASX has many tech and mining companies that are geared particularly to the rest of the world and the massive change that is happening now in the world of AI, Quantum Computing etc.
Love that this interview is by an Australian, of another Australian.
Love his answer to the last question about his tip for a young investor. I am presently doing what I love doing (late in life, due to being trapped in oppressive conditions earlier in life), and would do it even if I weren’t paid for it. I would so love to be able to do it pro bono, as my service in mental health is much needed in society and a lot of people who need it can’t pay for it. That’s what’s motivating me to save and invest, so that I won’t need to be paid and can branch out more without worrying how I am going to fund the projects I have in mind.
I’m glad you enjoyed it Erin 🙂
Great interview.
How would you use debt recycling if you have virtually paid your home loan off?
Just wanted to put this comment here as I think it’s a subtle point that Peter is not taking into account re: index fund ETFs.
Not all unit-trust ETFs are created equal. As I understand it, it’s true that unit-trust index fund ETFs have to distribute all *** realized *** earnings (including capital gains). A trust must distribute all ***realised*** gains.
But index fund ETFs will mainly be incurring capital gains as a result of the infrequent rebalancing (e.g. quarterly for ASX 200 index funds).
Contrast this with another type of unit trust that appears to distribute capital gains from sales by sub-groups of investors to other unit-fund-holders who DID NOT sell their units (well, that’s what I’ve understood from my research). E.g. person A sold their units, the capital gain is then spread (to some extent) across the other persons in the unit trust. That’s probably what happened with Peter’s incident where he received the 18k windfall right before tax time.
So, I think, the scenario of receiving a huge chunk of your capital gain as a distribution isn’t something that is likely to happen in an index fund like Black iShares ASX 200 Core, Betashares A200, Vanguard, etc. Unless your sold units, in which case you’d realize a capital gain, or unless the fund had rebalanced (in which case, Capital Gains Tax would be minimal anyway).
Though I take Peter’s point that a LIC can choose to retain after-tax capital gains for the purpose of smoothing dividends or reinvesting.
We probably shouldn’t overthink this: choose an index fund ETF or a LIC, make regular investments, and get on with one’s life 🙂