First Fund Dividends and Sustainability

If you’re been around since the very beginning, way, way back at the start of 2018, you might be familiar with my investment F’hilosophy by now:

  1. I’m a big Fan of Index Funds – so yes, I respect Indexing Ian for what he does, even though there will be no index investments in the Fully Franked Fund;
  2. I don’t think the market is fully eFFicient, and as a result it’s possible to find great individual stock opportunities where price and value diverge (although this is no easy task); and
  3. Fully-Franked dividends are a Fantastic Foundation.

A core part of my investment strategy is the Focus on Fully Franked dividends – as well as the Fantastic tax benefits they provide (of course, this might be impacted slightly if the Government is successful with its $59 billion tax grab on Franking cash refunds).

I’m just about to pull the trigger on Fund Investment #7, but before I do, let’s look at the Fully Franked dividend potential of the Fund so far…

Upcoming March Dividends

Most Australian shares pay dividends only twice a year – around March / April, and again in September / October.

Of our 6 Investments so far, 5 of them will catch the March / April round of dividends. Woodside Petroleum will have to wait a few months for its maiden dividend contribution to the Fund.

Let’s have a look at what is coming our way in March…

$59 Billion Government Tax Grab? Get your Franking Dirty Hands off my Franking Credits!

Australia’s dividend imputation system, the source of those Fantastic Franking Credits, is a beautiful thing for share investors. In July 1987, Australia introduced this system as a way to reduce the ‘double taxation’ on dividends that happens under a classical tax system – tax on the company profits, then more tax paid by the individual on the dividends they receive.

Plenty of other countries around the world were adopting something similar at the time, but many have since moved to other approaches to eliminating this double-taxation issue.

We’ve had debates over the years on whether this system is still ideal, however the imputation system works very well at ensuring that the total tax paid on any (Franked) dividends reflects the marginal tax rate of the investor. Here’s a refresher on how it works (if you haven’t already seen the Franking Credit page):


And here’s the various tax brackets for individuals in Australia, and the impact of the Franking Credits on dividends which come from the imputation system:

Things have been ticking along pretty nicely for genuine dividend focused investors.

However, over the past couple of days, the Australian Government has announced a proposal to ‘tweak’ the imputation system. They will also just happen to benefit to the tune of around $59 billion! (so say all the emotionally charged headlines on the issue – thought I’d keep up with this strategy for my own post title…)…

Buying ‘the Market’? Which Market? Ian Investigates the Wide World of ETFs

If you’ve been following since Frankie and I launched our respective Funds, you’ll know that I’m investing 100% in ‘Index’ Funds, which basically means I own a little piece of hundreds of different businesses.

Even though it’s a simple decision for me to hold ‘the Market’, unfortunately there isn’t just one single ‘Market’ fund that you can buy. You need to make some choices about which markets you want to own – which can be not so simple.

I’m keeping things very simple to start with by owning only two Market or Index funds (technically, Exchanged Traded Funds or ETF’s – we’ll come back to this terminology later):

  • Vanguard Australian Shares Index ETF (VAS) – tracks the return of the S&P/ASX 300 Index (i.e. the top 300 companies in Australia, weighted by size); and
  • Vanguard MSCI Australian Small Companies Index ETF (VSO) – tracks the MSCI Australian Shares Small Cap Index (around 158 different holdings).

But if you’re new to the Index Investing World, there’s a whole buffet of markets and sub-markets for you to choose from.

Let me try and paint a picture of the ETF landscape from the top down – solely focusing on the asset class of shares.


Fund Investment #6: Woodside Petroleum (WPL)

Yes, that is the share price chart of Investment #6 in the Fund. What sort of crappy company is this? 10 years and it’s been slowly going backwards!

The company is Woodside Petroleum (WPL), which explores, develops, produces and supplies oil and gas. It’s Australia’s biggest independent oil and gas company (primarily Liquified Natural Gas, or ‘LNG’), and represents around 7% of global LNG supply. It’s also one of the biggest companies on the ASX, sitting just outside the Top 10 by size.

For an Aussie company, it also has some fantastic international exposure through assets around the world. (Who says I’m only investing in Australian companies!)

But rather than get into the nitty-gritty of its global oil and gas assets, let’s start with seeing how this fits in with my broader portfolio so far.

There are many ways you can dissect a portfolio – by geography, industry, income versus growth, big versus small – or in the case of my portfolio so far, baby related (65%!) versus non-baby related (35%). Some serious diversification is required here, and fortunately the oil and gas industry is somewhat uncorrelated with the baby goods and assisted reproductive services markets.…

No, No, Know! Do you know you don’t know?

When you’ve spend the majority of your life in a certain field, it’s not unreasonable to assume you know plenty about that topic. Even if you’ve dedicated only a year or two of intense study and interest, you might still classify yourself as an ‘expert’.

I feel like I know plenty about finance and investing, having worked in it my entire career so far and having had a keen interest in the field since my teenage days.

Often I’ll see new books released on the topics of investing and finance, articles in the news, or titles of other blog posts, and automatically think, “Yeah, I already know that stuff! Why waste my time reading more about it?”

Despite this, having launched Fully Franked Finance just over two months ago, I’ve already discovered so many new things I didn’t know that I didn’t know – all thanks to my fellow bloggers and readers.…

Frankie’s First Performance Update – February 2018

The first investment in the Fully Franked Fund was made on 11 January 2018, with the most recent on 16 February 2018. That’s a very short holding period so far, as we’re still essentially in the ‘setup’ phase.

So it’s fair to say that any performance so far is relatively meaningless… which is especially the case when that performance has started in the wrong direction!

Despite this, I’m keen to get the performance review process up and running, and this is as good a time as any for a Pilot Post.

With that in mind, welcome to the First Fund Performance Update For 28 February 2018!

Current Portfolio

We’ve converted half of our initial $50,000 capital to shares so far, and an extra $2,000 in cash has been set aside for the Fund at the end of February, to add to the remaining cash balance of $25,298.


The Tipping Point On Transaction Costs

Most stock investors – including me – spend the vast majority of our energies on identifying good businesses trading at great value prices. Not only does it provide the potential for market-beating returns, but it’s Franking good Fun!

The analysis itself is endlessly fascinating, as every business is different, and watching your investment thesis play out is very rewarding – when it goes the right way. And when it doesn’t, there are always lessons to be learnt.

As we get caught up with our Fancy analysis and measuring our returns, we need to be careful to stay aware of any costs which chip away at those returns.

Transaction costs can be an absolute killer. There is a very strong correlation between high transaction costs and low returns for individual investors, not least of which is the compounding impact those aggregate costs have on your long-term returns.

Indexing Ian inadvertently highlighted this when comparing long-term returns in Australia with the rest of the world. The impact of an extra 1.5% return per annum is F’henomenal!!

Fund Investment #5 – Oh Baby! (Bunting)

OK, so Godfreys didn’t quite cut the mustard for our Fully-Franked Fund. What appears to be a potential bargain basement priced business is also a debt-laden company hanging on for dear life by a thread.

Retail is a dangerous environment these days – not so much for the customers, where discounting and bargains abound – but for investors.

We’ve had a number of well-known retail brands go bust recently:

  • Oroton (November 2017)
  • Live Clothing (November 2017)
  • Topshop Australia (May 2017)
  • Payless Shoes (April 2017)
  • Howards Storage World (December 2016)
  • Pumpkin Patch (October 2016)
  • Dick Smith (January 2016)

A few others look to be on the ropes, including the great department store Myer, having been on a downward slide for years.…

Godfreys (GFY) – Great Investment, Garbage, or pure Gamble?

Back in my earlier days of investing, this is exactly the kind of stock I used to be attracted to. A previously successful business that is on the brink, investors having all but given up hope, but with the potential to offer huge returns if it somehow pulls out of its nosedive.

These days, I prefer to lean towards quality companies – and I’m not sure Godfreys fits the bill. However, my ‘value investor’ ears still prick up when I hear a company suffering so much. I can’t help but be curious to investigate whether the market is over-reacting in the short term, and is overlooking the longer-term potential value, as often happens when bad news appears.

A good company and a good investment can be two completely different things. Let’s see whether you think Godfreys has any potential as either

Ignoring International Investments – Is Ian an Idiot?

Hi everyone, Ian here again!

That title might be a little harsh, but some of you are no doubt asking the question if you read my original post!

I’ve previously explained my strategy for index investing, which involves sticking to my home country of Australia.

You may be wondering, why on earth would I restrict myself to a region that only makes up around 3% of the world equity markets? Am I lazy? Patriotic? Or just plain ignorant?

Fair questions, but I actually have two reasons – and I’ll let you judge whether they’re compelling enough…

1) I’m Not Convinced Global Will Perform Better

History is always a useful starting point to set the scene. How has Australia fared over the years compared with the rest of the world?

I absolutely love this interactive chart from Vanguard. It allows you to compare the growth of $10,000 invested in different asset classes over any historic period since 1970. I’ve focused on shares in three different regions – Australia, US, and International – over a few different periods.

Let’s start with the performance since 2010:

(PS – that little straight line at the bottom is cash)