The Bill Shorten threat to franking credits and tax refunds for retirees in self-managed super funds (SMSFs) has led to some ‘experts’ suggesting it’s time to change the way these super trustees invest. But I say: DON’T listen to them unless your current investment strategy is wrong!
And anyway, I’d wait to see if Labor wins first and then let’s see what the Senate thinks of his ‘tough love’ shown to retirees with an SMSF and not getting a sniff of a pension. The Senate might insist that retirees receiving $10,000 in tax refunds be allowed to get their tax refunds.
Sure, I advocate more tweaking to an investment strategy that was a ‘set and forget’ portfolio of income-generating assets created to maximise the tax refund but there’s no need for a wholesale change in approach and a new set of assets to be acquired.
Ironically, Bill Shorten and his proposed changes, while being grossly unfair to retirees who aren’t in receipt of huge tax refunds, will force the investors affected to become more engaged with their investments. And Shorten’s changes will force many to become more diversified into more stable income payers, at a time when volatility is increasing, as we enter the likely final phase of this great stock market bull market.
That said, Bill won’t be making me give up on income-paying stocks. However, he will make me even more committed to finding those companies out there that have been paying great dividends for years but might not be top 100 companies.
After interviewing Gerry Harvey (who pointed out that Harvey Norman (HVN )was paying a dividend of 8% plus before franking credits) last Thursday, it made me think that a lot of retirees could trust Gerry for 5% exposure to their super nest egg, while holding say 20 good income payers. I’m not advising that you should, but it got me thinking that the next time the market has a silly ‘hissy fit’ sell off on the back of a Trump disturbance or any other sideshow, a stock like HVN, which went below $3 on the pre-Christmas share slide, might be worth thinking about.
And this is the kind of thinking that retirees in SMSFs have to embrace as they potentially kiss their tax refund goodbye!
I’ve been asked if I was worried about my Switzer Dividend Growth Fund (SWTZ) in a ‘Bill Shorten as PM’ world. In fact, I think Bill makes my fund and my fund manager Shawn Burns (who thinks about and looks for great dividend-paying stocks 24/7) even more valuable.
We know that too many SMSF trustees were too exposed to the banks and Telstra and that’s why we created SWTZ, to get investors more diversified when they went looking for stocks that pay income. This chart shows how risky it is to only have five stocks, even if they are historically identified as reliable income payers.
The dominant white line shows SWTZ, which has been constructed to give mainly income with a bit of allowance for capital gain. If Shawn sees a stock that might not be great for dividends but it has been a victim of a crazy sell-off, he might try for some extra capital gain, while tolerating a 2-3% dividend. But mainly his brief is to select good dividend-payers and use his market knowledge to harvest dividends. We all could do this but we have to be across the timings for buying stocks at the right time to be Johnny on the spot for those precious dividends.
The chart shows SWTZ versus CBA (green), ANZ (red), WBC (orange), NAB (blue) and TLS (light blue). And while SWTZ suffered from the Royal Commission and the APRA effects on banks, it’s more diversified holdings delivered what diversification should.
Bill’s anti-tax refunds policy should make you think about your income diversification but adding to your portfolio stocks that pay dividends is still a good strategy.
Interestingly, like one last hurrah before the world changes for retiree investors, the AFR told us that “the earnings season just ended looks set to give back to shareholders a record $84 billion in dividends for the financial year.”
However, it’s also time to think about what you can get from fixed income.
And once again, being diversified makes a lot of wise investor sense.
The Shorten threat makes it timely to look at bond funds, floating rate notes and fixed interest style investments. The big problem here is that most investors feel unsure about these assets and don’t like them because they assume their returns are pretty low. And while they do offer less than shares, they can surprise you over time.
Here’s my favourite chart, which shows what happened to $10,000 from 1970 to 2009, just after the stock market had crashed 50% in 2008. If you’d stayed and reinvested your profits in the equivalent of an index fund for the ASX 200, that $10,000 rolled over into $453,542. And that was one year after the GFC! But have a look at what bonds did. They snowballed from $10,000 to a pretty impressive $285,039.
But look closer at the chart and see what happened if you had 25% in US stocks, 25% in Aussie stocks, 25% in bonds and 25% in cash/term deposits.
You would’ve made $150,437 from US shares, $113,292 from local stocks, $77,621 from cash/deposits and $71,260 from bond funds.
So $10,000 distributed into these four investments netted you $412,609, which is only a bit short of being in local stocks. But with Aussie stocks only, you would have had a lot more concentration risk!
I know Bill’s franking credits play is unreasonable for a lot of SMSF retirees and I think the Senate will make him introduce a cap of $10,000 or maybe more but let’s use this threat and turn it into an opportunity. Being more diversified by both being in more stocks that pay dividends, having more overseas stocks and being in other asset classes are all good ideas that financial planners have been recommending for ages.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.