Author: Mr DDU.
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Choosing what to invest in is one of the hardest things about investing. There are so many different factors to consider: costs & fees, how geographically diverse the investments are, how many different industries the investments cover, the desired income and capital growth – the list goes on. How is an investor meant to know what to do?
Hit many birds with 1 stone
The widely accepted method by the personal finance community is to invest in the S & P 500 index (which is the 500 biggest companies in America). The S & P index buys a small slice of each company, so the investment is diversified into 500 pieces. This is a very simple, low cost, effective strategy. The S & P 500 has been growing over the long term and probably will keep growing over the long term indefinitely.
The S & P 500 index gets big ticks on the capital and dividend yield growth fronts. Not high on the yield side, but if the investment is big enough, it should provide a good growing income source beating inflation.
People tend to have a bias to invest in their home country. So Americans can rest easy knowing their S & P 500 index is a home grown investment. What about for Australians wanting to invest in Australian companies? We’ve written an article about how badly diversified our equivalent Australian index is, heavily weighted to a few, huge, financial companies. The Australian index sadly contradicts an index’s ideal objectives of being diversified with lots of companies in lots of industries.
Is there no way for Australians to be instantly diversified?
Other than buying our own shares in companies and creating our own portfolio with diversification, yes – there is another way.
They’re called Listed Investment Companies (LICs) and they’re listed on the Australian Stock Exchange just like any other company with their own ticker, share price and dividend yield.
A LIC’s sole aim is to invest shareholders’ money and achieve as good investment returns as they can. There are a lot of LICs out there, all with different strategies and sizes.
One of the biggest out there is the Australian Foundation Investment Company (ASX:AFI) which is around $6.4B in size.
AFIC does tend to focus on investing in big ‘blue chips’ but they don’t invest like an index fund. The best long term value for shareholders is AFIC’s aim, so they choose investments that fit this strategy. They list their top 25 holdings here. Just so we can compare it to an index fund, this is their top 10 holdings as a % of their assets:
4.41% BHP Billiton (ASX:BHP)
4.40% Wesfarmers (ASX:WES)
4.26% Telstra (ASX:TLS)
3.24% Transurban (ASX:TCL)
3.04% Amcor (ASX:AMC)
2.94% CSL (ASX:CSL)
And as of today, this is the ASX200 index:
6.40% Westpac Bank (ASX:WBC)
4.15% Telstra (ASX:TLS)
4.13% BHP Billiton (ASX:BHP)
3.18% CSL (ASX:CSL)
3.11% Wesfarmers (ASX:WES)
1.98% Woolworths (ASX:WOW)
As you can see it’s similar in some ways, and different in other ways. It’s true that AFIC’s dividends haven’t been as consistently growing as individual stocks like Ramsay Hospitals (ASX:RHC) or Invocare (ASX:IVC). That’s because Australia’s big businesses generally haven’t been increasing their dividends either. Consequently AFIC is starting to invest in medium sized growing businesses.
AFIC’s current dividend yield is 4.29%, with franking credits it’s 6.13%. Of course there’s more to dividends than just its yield, what about their dividend growth since 2009? Here’s the graph:
Not amazing, but reassuring.
There are also LICs that try to achieve the best return they can by being open to investing in shares on the smaller, faster growing side.
One of the most consistently successful LICs has been WAM Capital (ASX:WAM). WAM’s current yield is 6.30% and with franking credits is 9%. What about their dividend growth since 2009? Here’s the graph:
WAM also release a monthly update detailing their top holdings and how much cash makes up their total assets. Their 31st August 2016 update shows their holdings were:
Portfolio top holdings:
1.9% Vita Group (ASX:VTG)
1.9% Nick Scali (ASX:NCK)
1.7% ALS (ASX:ALQ)
As you can see they have a lot of cash. Their portfolio is completely different to the index and AFIC’s top holdings.
A lot of WAM’s shares aren’t classic long term dividend stocks (in our eyes). They have still outperformed the ASX200 Accumulation index (index plus with dividends re-invested) nearly every year since it was launched. WAM also provides a very nice amount of income with its high yield.
When looking for a single investment that hits multiple birds with one stone, we are wary of options that are overweighted by the financial sector, like the ASX200. It’s possible to get great diversification if we look away from Australian indexes and turn to LICs instead.
We said in our August 2016 Savings Rate that we weren’t going to frivolously spend our tax refund. We wanted to use it to help our future selves, so we decided to put a portion towards a small investment. It may or may not be related to this article, so keep your eyes peeled for that.
Thanks for reading this article about our investing journey Down Under.
Onwards and upwards!