High Yielding Shares for a Retirement Income Stream

JIT

JIT

Hi everyone,

After doing a search on Somersoft I have got list of all the shares forums available, however, before venturing there (and sifting through all the garbage) I thought I would start a thread here first, in more familiar territory. Bear with me as my sharemarket knowledge is very limited.

To date my favoured investment vehicle for generating income has been commercial property (via syndicates, unlisted property trusts, LPT's) as well as various index funds and exchange-traded funds. However, after keithj's recent thread, I have been tempted to re-consider and look at high yielding shares as an alternative or additional investment vehicle to generate an income stream.

My question then is, how do you go about selecting these high yielding shares?

Is it possible to create a simple system that the average and conservative risk person (eg. me) can use? What sorts of 'simple systems' do the share investors here use?

For me this would basically mean a fundamental buy and hold strategy, without the use of trading techniques/technical analysis or options.

From the posts I have read on Somersoft, I thought I would start with the following:

- Select ASX 200 companies only
- Select companies paying fully franked dividends only
- Select high yielding shares of course, eg. > 7% pa yield
- Select companies where you can easily understand how they make money

And...well, that's about as far as my knowledge base takes me at present.

I know there's various ratios that you can use to cut down your list of shares - any suggestions on the most common and useful ones?

Then, is there a website or software that allows you to search for shares based on set criteria/ratios like the above?

After that, there is the issue of timing - timing the property market seems like a piece of cake compared to the sharemarket, so I'm not sure where to start on this.

If this is asking too much, perhaps any suggestions on books that may point me in the right direction. I suspect I would gain more from this then sifting through the rubbish on all those share forums.

Any comments appreciated.

Thanks,

GSJ
 
I'm sorry, but I must ask: Why do you want high yielding shares? Are you about to retire?

To get a handle on high dividend return, google "dogs of the dow".
 
I have a couple of AEU and CWT shares. Dividends are over 10% but you might forfeit any big capital growth.

Its like going for cash flow positive rural ips vrs capital growth inner city ips.
 
HI there
when looking for particular shares I tend to look at the investor site at ninemsn and also use the Commsec site which has a search engine which you can put in that you are looking for high yield shares.
The ninemsn site allows you to put in your preferred search - I prefer to look at the growth at a reasonable price and income shares - to start the enquiries - then look at what comes up - then read about what is being recommended by brokers - and also source other contacts who are interested in shares and who get the various reports such as the Rivkin report, Huntley newsletter, Intelligent investor, Commsec Research insight to make a decision. We also use information from brokers such as ABN AMRO Morgans to make a decision.
 
GSJ said:
To date my favoured investment vehicle for generating income has been commercial property (via syndicates, unlisted property trusts, LPT's) as well as various index funds and exchange-traded funds. However, after keithj's recent thread, I have been tempted to re-consider and look at high yielding shares as an alternative or additional investment vehicle to generate an income stream.

My question then is, how do you go about selecting these high yielding shares?

Is it possible to create a simple system that the average and conservative risk person (eg. me) can use? What sorts of 'simple systems' do the share investors here use?

For me this would basically mean a fundamental buy and hold strategy, without the use of trading techniques/technical analysis or options.

From the posts I have read on Somersoft, I thought I would start with the following:

- Select ASX 200 companies only
- Select companies paying fully franked dividends only
- Select high yielding shares of course, eg. > 7% pa yield
- Select companies where you can easily understand how they make money

And...well, that's about as far as my knowledge base takes me at present.

I know there's various ratios that you can use to cut down your list of shares - any suggestions on the most common and useful ones?

Then, is there a website or software that allows you to search for shares based on set criteria/ratios like the above?

After that, there is the issue of timing - timing the property market seems like a piece of cake compared to the sharemarket, so I'm not sure where to start on this.

If this is asking too much, perhaps any suggestions on books that may point me in the right direction. I suspect I would gain more from this then sifting through the rubbish on all those share forums.
Click to expand...
Hi GSJ,

As mentioned commsec(free) has a search facility. It also has forcast EPS & dividends for the next 2 years - however, remember most analysts are optimists & can't/don't consider left field events.

Regarding timing, you're 4 years to late (or 4? years to early). So now is a good time to start looking & learning what is NOT good value - it's impossible to recognise good value unless you know what poor value is.

I read recently that in 2003, interest rates were 6.5% & bank yields were 7.5%. So the banks were effectively paying you to invest in their own shares. That was good value. Since then divs have increased by 10%+pa.

High yielding ASX200 shares that spring to mind are Tabcorp, Wesfarmers, 5banks, Telstra. The banks are forecast to to have EPS growth of 10%+ for next couple of years (they may benefit from the (soon to improve) housing cycle), the others are currently suffering, hence the high yield.

2nd tier High Yield cpys that pay me good divs are ALS, HIL, GWT (they make Hills hoist, B&D garage doors, Caroma toilets, tapware etc) - they are really boring. I'd expect them to benefit from an improving IP cycle - although there have been good gains over the last 2 yrs.

I feel LPTs are currently expensive - they mostly traded at below NTA a couple of years ago, now they are up to 50%+ over NTA. I blame the BBs retiring & wanting yield.

Look at next yrs forecast divs, not the current div. Last year is history that happend to someone else, next year is what's going to happen to you.

Finally, I'm a value investor - IMO now is not a low risk time to invest in shares.

Cheers Keith
 
Look at next yrs forecast divs, not the current div. Last year is history that happend to someone else, next year is what's going to happen to you.
Click to expand...

Hi Keith

I am a newbie to shares but learning hard atm to take advantage of any possible downturn in the sharemarket in the next few months. I would think it is not easy to forecast next years growth by simply extrapolating the previous year's figures. I was wondering if you use any "discounting" strategies to arrive at conservative forecast divs for the future. Also, do you forecast beyond a 12 month period?

Cheers

Shakil
 
sheiks said:
I am a newbie to shares but learning hard atm to take advantage of any possible downturn in the sharemarket in the next few months. I would think it is not easy to forecast next years growth by simply extrapolating the previous year's figures. I was wondering if you use any "discounting" strategies to arrive at conservative forecast divs for the future. Also, do you forecast beyond a 12 month period?
Click to expand...
Hi Shakil,

I'm not smart enough to work out dividend or EPS forecasts. I just use whatever commsec tells me & add a pinch of salt. Most cpys have dividend policies (eg %age of earnings) - see their annual reports/websites to find out what they are. Some big cpys are embarassed to lower their dividends - they can then say they have never decreased their div for the last X yrs - eg NAB kept it's div steady after the forex debacle. Commsec provides forecasts for the next 2/3 financial yrs. However, I think most people realise they're guessing, or using a v. simple formula like this yrs+ 10%.

Like IP investing - there's risks & unknowns. You've got to assess the risks & play the odds. No-one knows when the next 9/11, SARs, tsunami, IR rise will happen, so diversifying income streams makes sense to me.

Cheers Keith
 
Developing a simple system

Hi everyone,

Thanks for the replies. Will have a look at some of the sites/resources mentioned.

Sunfish, nope not quite yet in a position to retire, but there's nothing wrong with a bit of advanced planning! The simple plan is creating equity via resi. property (which is where my current focus is), then later using that equity to invest in income generating assets that will replace my JOB income.

So in a way keithj I am 4 years early, and want to start the learning process now so I will be ready to act when I do eventually have the necessary equity and market conditions are better.

I spent more than 4 years at University to get my current JOB which provides me with a modest income, so if I plan on retiring from this JOB I figure that I will need to put a bit more effort into learning about the investment vehicle that will provide me with this retirement income stream - and as I mentioned earlier, my plan was always to move over to commercial property in some form to provide this income, but am now re-considering using shares as well (shares have never really 'suited' me, but if I can find a system that works for me then it may be OK).

The idea of buying several resi. properties, then selling a few down the track and living off the rental income from the remainder is most unappealing to me. My view is that resi. property is great for capital growth, but not for income, so it's important to widen your investment comfort zone and consider more effective alternatives as you move towards a phase where you need income more than equity.

Commsec has been mentioned a few times, so I will check this site out too.

keithj, I note your points about looking at forecast figures for EPS and dividends, as opposed to current figures, and will include this in my system for selecting shares.

It is interesting to hear what shares others are investing in, but for me the more important thing is to understand why I would invest in that share and what reasoning I had for making that selection - otherwise, it would be like I was buying shares based on a 'hot tip' from a random taxi driver.

For property, by way of comparison, I have a pretty simple way of establishing where and what to buy that works for well me, so I am hoping to do a similar thing with shares.

GSJ
 
Keithj

Interest post GSJ, as usual!!

Keithj, and others, a question for you which you may be able to answer, regarding structuring.

If one is planning to hold the income generating securities in an individuals name, then there is an easy comparison to be made between high yielding (or other) shares, and LPTs.

Shares will often come with franking benefits, which can be claimed back, effectively increasing the yield on these shares. So if I own 100% franked shares, yield will effectively be = dividend / 0.7.

However, do you (or others) hold your shares/LPTs in an individual name, or within a discretionary trust (or other structure)?

Mine are in my own name now, but am thinking for the future about trust structures.

For example, one DT could hold LPT/Shares, and future -ve IPs can be bought by another DT (or another type of trust, hybrid, for example).

Then the first DT could feed into an individual, trust, or whatever, which is holding -ve IP, as appropriate. This would (in my mind) provide the most flexibility.

With LPTs/managed LPT funds, this is pretty straight forward.

However, has anybody done this with shares? It seems that their are many pitfalls/traps so as not to avoid losing the franking credits?

For example, if (a) one DT holds property with -$10 K pa cashflow, or (b) if an individual were to hold that same property with -10K pa cashflow, I believe (correct me if incorrect) the LPT DT, with +$10k income could distribute to (a) or (b) as the case may be, and it would effectively bolster serviceability and eliminate the -ve cashflow.

However, if instead of holding the LPTs the DT holds shares which pay +7K fully franked dividends a year (with 3K franking credits), it could distribute this to the individual, who would then be able to net off the + 7K against the -10K, and claim back the 3K franking credits, and would be cashflow even. However, if distributing to a DT with -10K pa cashflow the franking credits would be lost. Additionally, once franking > 5k a family trust election would need to be made.

Has anybody considered these issues, and structured the income earning component of a portfolio with a DT? If so, have I missed something, and what were the outcomes of your thinking on this issue? Hopefully I've explained myself properly!
 
Trogdor said:
If one is planning to hold the income generating securities in an individuals name, then there is an easy comparison to be made between high yielding (or other) shares, and LPTs.

Shares will often come with franking benefits, which can be claimed back, effectively increasing the yield on these shares. So if I own 100% franked shares, yield will effectively be = dividend / 0.7.

However, do you (or others) hold your shares/LPTs in an individual name, or within a discretionary trust (or other structure)?
Click to expand...
Hi Trogdor,

A simple DT holds all shares & some IPs. It's all c/f +ve. Franking credits are passed through the trust to the beneficiaries. It holds shares for >45 days & has >$5K franking credits.

Regarding franking pitfalls & traps - that's what accountants are for.

I'm considering getting another trust set up (the existing one is 4yrs old), for 2 reasons - it will have an 4 extra years before it needs dismantling (in 80 yrs time) & it will seperate the existing assets from new assets (for compartentalised asset protection).

Trogdor said:
However, if instead of holding the LPTs the DT holds shares which pay +7K fully franked dividends a year (with 3K franking credits), it could distribute this to the individual, who would then be able to net off the + 7K against the -10K, and claim back the 3K franking credits, and would be cashflow even. However, if distributing to a DT with -10K pa cashflow the franking credits would be lost. Additionally, once franking > 5k a family trust election would need to be made.
Click to expand...
AFAIK LPTs don't have franking credits. They have distributions instead of dividends. And sometimes these some of these distributions are tax deferred - that means you don't pay tax until (unless) you sell.

Cheers Keith
 
Last edited:
keithj said:
I'm considering getting another trust set up (the existing one is 4yrs old), for 2 reasons - it will have an 4 extra years before it needs dismantling (in 80 yrs time)
Click to expand...

Keith that's some hardcore forward planning you've got going on!

Your grandkids will love ya :D
 
GSJ said:
Anyone used this 'dogs of the dow' approach on the ASX? Any thoughts on it?

GSJ
Click to expand...

I would never "use" it because I think I'm smarter than the average bear. LOL But seriously, there is a risk you will be sucked into HIH and the like. Even if it were only 10% of your portfolio (as it must be in DOD theory) that means something else must appreciate 100% to equalise the hit. Think about this and you will understand the maxim: Rule 1: Never lose money!

It is, however, enlightening reading and all investors should know the logic.
 
Last edited:
Thanks keith! I guess moral of the story - speak to the accountant more often, and for planning (rather than just tax return) purposes.

I must do this next time Im in Australia!!
 
I have bought a few dogs of the ASX most have done ok for themselves. I did buy a managed fund in 87 that became a dog and stayed a dog for years after it has been good the last few years though.

If your thinking of retiring later in life smsf is the best way to hold shares.

You may also want to check out LOE threads on here just so you don't have to rely on dividends.
 
Simple Share Selection Systems!

Hi everyone,

As it turns out, I found one (the only one) old book on shares (by Lance Spicer) amongst my pile of books on property.

The following selection criteria were suggested here for a 'Yield Investor':

- Limit to ASX 150
- PE < 15
- Yield > 7.5 % (If this is unfranked, is the equivalent fully franked yield > 5.25% ?)
- Times Covered >1.0
- PA Ratio < 2.5

Does this seem an OK list of criteria to cut down your short list of shares?

I'm guessing that in the current market finding a company that meets the above would be difficult?

GSJ
 
You must log in or register to reply here.

Similar threads

MTR
High Yielding Shares Again
52 53 54
Replies
1K
Views
180K
pinkboy
P
G
Boglehead/Vanguard way to retire
4 5 6
Replies
111
Views
23K
redwing
redwing
D
Release equity and buy facebook shares
2
Replies
39
Views
7K
hobo-jo
hobo-jo
T
Share Trading
2 3 4
Replies
78
Views
12K
charlieandkath
C
C
Property Development Project Management
Replies
17
Views
4K
dboy_tomato
D
Back
Top