How to Implement Peter Thornhill’s Investment Strategy in 2020 and Beyond

I realised something recently.  Although Peter Thornhill is well-known and investing for dividend income is not a new concept, there is no official step-by-step guide to implement his method.

So, with Peter’s approval, I decided to create this ‘how-to’ article, for those who want to get started and put the strategy into practice.  And for the regulars, it will reinforce the old fundamentals and certain lessons which are often forgotten. 

By the way, if you haven’t already, check out my earlier interview with Peter Thornhill.

Before we begin, a caring disclaimer:  Nothing here is personal advice.  This strategy may not suit you for a variety of reasons.  Please do your own research before making investment decisions.

 

An Introduction to Investing for Income

To boil the strategy down to a simple core concept, it’s this:  Investing for a growing income stream.

Sounds simple, I know.  But somehow people manage to butcher it and have all sorts of pre-conceived notions about how to do it.

Peter’s strategy is implemented by investing in a diversified portfolio of dividend-paying shares.  The basic premise is that over the long term, a broad group of Australian businesses will earn higher profits, and will pay higher dividends to shareholders over time.

As the investor buys more shares, and the dividends increase over time, this income will grow to the point where the investor can live off the dividends which the portfolio spits out each year.   

Okay, enough intro.  I’ve boiled Peter’s philosophy down to 10 steps.  That seems like a lot, but don’t worry, it’s easy to understand.

 

Step 1:  Spend less than you earn

You’ve heard this before, it’s called saving money.  And it’s a huge fundamental pillar in building wealth over time. 

Saving is like eating your vegetables.  It’s easy to shrug off saving as boring and uninspiring.  But it’s very important.  No matter our income level, we need to focus on saving at least some of our income.  

So, suck it up and eat your damn vegetables.  As we discussed recently, it’s still possible to achieve Financial Independence on a very modest income.

 

Step 2:  Borrow less than you can afford

This sounds simple, but almost nobody does it!  In Australia, we seem to love housing so much that we borrow to our limit to buy the best place we can possibly afford.

By the way, I’m guilty of this one.  In the early days, I leveraged up heavily to buy investment property (too much, in hindsight).  Starting from today, I’d keep it simple and buy shares from the start.

If we really get to the core of this message though, it means buying a moderately priced home to live in.  Or rent.  This keeps your total cost of living down and enables you to save and invest more.  More here:  Rent vs Buy – The Aussie Housing Dilemma.

And if you’re renting and using a margin loan to buy shares, it means use debt sparingly.

 

Step 3:  Invest in a diversified basket of dividend-paying shares

The goal is to own a portfolio of productive businesses which earn plenty of cash and send some of it our way each year in the form of dividend payments. 

Luckily, there are ready-made baskets of companies we can buy in one hit.  One way is to buy all of them, via a low-cost index fund that tracks, say, the top 300 stocks.  But Peter’s preferred option is to buy well-established low-cost Listed Investment Companies (LICs).

Previously, Peter has disclosed he invests in the following LICs:  Argo.  Milton.  BKI.  Whitefield.  You can click the links to read my review of each.

Anyway, these LICs invest in a broad group of Australian companies (often 50-100+), which they expect to do well over time and pay increasing dividends.  The LICs then receive and pay these dividends to shareholders each year, aiming to pay out a predictable and growing income over time.  You’ll find the dividend history for a number of large low-cost LICs on my LIC Reviews page.

These investment companies have been around a very long time – most, more than 50 years.  They’re low cost, long term focused and have very low turnover.  This means they’re tax efficient as they don’t buy and sell often.  

Remember, not all companies pay dividends.  So while they’re not exciting, these old LICs will always manage the portfolio with a strong focus on providing an income stream to shareholders.  And if you’re using dividends to pay the bills in retirement, that’s important.

From here, all investors need to do is open a brokerage account, choose a fund (or a couple) to invest in, and get started.

 

Step 4:  Use your dividends to buy more shares

Once you’ve bought some shares, something fantastic will happen.  Every 6 months or so, you’ll get a lovely cash dividend deposited into your bank account.

This dividend is a portion of the profits from all the companies in the fund you’ve invested in.  As an owner, naturally some of the money is sent to you, while the companies use the rest to further grow their businesses and future profits.

At this point, you can spend it at the pub or your local cafe.  But the best option is to simply put this cash towards buying more shares.  This increases your piece of the pie and means your future dividends will now be larger! 

And you can use that larger dividend to buy even more shares, meaning higher future dividends again.  And then you can use that larger… you get the idea.  This is compound interest at it’s finest.

By the way, I created an easy-to-use spreadsheet to keep tabs on our annual dividend income after every purchase, which you can download here.

 

Step 5:  If you have a mortgage, consider debt recycling

I’ve previously written an in-depth guide to debt recycling.  In short, if you’re investing and also paying off your home, it’s possible to slowly convert your mortgage into an investment loan.  And being an investment loan, the interest is then tax deductible.  

But many people get different parts of this concept confused, so a strong understanding is needed before going down this path. 

If it suits you and your personal situation, then debt recycling can be very tax efficient.  But there’s also a lot to be said for simplicity, and avoiding things that makes your finances more complicated. 

So it really depends on a person’s appetite for being debt free, their ability to manage their cashflow well, and also their willingness to deal with more complexity.

 

Step 6:  Keep building your portfolio until your dividends exceed your spending

Use your monthly savings and your increasing dividends to continue growing the portfolio.  Because dividends naturally increase over time (due to rising company profits) and you’re constantly adding more money, your annual passive income will increase at a healthy rate.

Sure, the markets and dividend payments will take a few steps back once in a while.  But the long term trajectory is overwhelmingly likely to be up, as it has been throughout history.

While it will take many years, eventually this income will grow to be larger than your annual spending.  It mostly depends on how much cash you’re putting in – your savings rate!

Because of the backward steps I mentioned, you’ll also need a pool of ‘safe’ assets, that you can use to top-up your dividend income when times aren’t so good.  This could be money sitting in an offset account, cash in a high interest savings account, term deposits etc.  Peter recommends a couple of year’s worth of expenses.  So if you spend $50k per year, perhaps $100k is a good starting point.  

It’s also prudent to maintain flexible spending and spend less during scary times (which is a natural reaction for most people anyway).  This means you won’t have to dig into your cash buffer as much and makes your financial position more resilient. 

 

Step 7:  Retire and live off your portfolio

Hooray!  You’re officially retired!  If you make it this far, a hearty congratulations are in order!

At this point, you’ve got a healthy-sized portfolio and a decent cash buffer.  You can now live off your passive income.  Your only job is to manage your income and expenses, which you’ve been doing for a long time already.

If dividends fall due to lower company profits from an economic shock of some kind, you can use your cash and spending flexibility to plug the gap comfortably for many years until dividends steadily recover.  Fortunately, LIC dividends also tend to be more resilient than the market as a whole, which is likely to be a good source of comfort during any scary periods.

 

Step 8:  Spend your time wisely

You’re now free to live your life as you see fit.  Use your unlimited free time to spend on the things most important to you. 

Whether it’s quality time with your family, improving your health, enjoying your hobbies, learning new things, starting a part-time job or volunteering, spending time outdoors in nature, or just kicking back with a good book (or reading your favourite website *cough* Strong Money Australia).  

Anyway, you get the idea.  It’s your retirement, so do whatever you like!  Now, that’s typically where the story ends for Peter’s strategy.  But there are two other things that both Peter and I think are extremely important to add.

 

Step 9:  Consider philanthropy if your wealth allows

With any luck, your portfolio will continue to grow over time as you simply live off the income stream.  It’s important to consider that, on average, company profits and therefore dividends increase faster than inflation over the long term.

And if you’re even half-good with your money, your portfolio’s income may be growing a bit faster than your overall spending.  This is fantastic news!

Because if you manage this extra wealth and income well, it allows you to give back to causes that are important to you.  And don’t forget, many readers of this blog are going to retire early, yet will likely continue doing other productive activities that earn further income.

So, many of us will be in a fantastic position to give back and contribute to meaningful things as our wealth continues to grow.

You might’ve seen in my last portfolio update, I’m trying to increase charitable donations each year at a slow and steady pace.  I got this idea from Peter, who not only gifts during his and his wife’s lifetimes, but has planned to put half of their estate into a charitable trust which will donate the increasing dividend income each year to causes important to Peter & his wife.

 

Step 10:  Pass on what you’ve learned

With your experience, free time and ‘proof’ that the sharemarket is not a crazy gambling machine, you’re then in a perfect position to help others see the benefits of long term share investing.

I know a number of people who do this on forums and such, sharing their experiences and lessons learned, while expecting nothing in return.  Shout-out to “Nodrog” from the shares section of the PropertyChat forum, who has used the ‘shares for income’ approach for decades and whose comments I’ve enjoyed learning from.  A number of other savvy long-term sharemarket investors frequent there by the way.

My point is, if you can help one person see that their future doesn’t have to be solely dictated by their workplace and whatever pension is being handed out in 20 year’s time, you can consider that a success!

It’s human nature to want to help others.  But we’ve got to help ourselves first.  Once people can see the progress in your own life, they’ll be more willing to listen (no guarantees though!).

 

What NOT to do…

Now that we’ve got the basic steps covered, there may be some questions, especially from any newbies.

So, I think it’d be helpful if we discuss what to avoid.  As strange as it sounds, this is likely to provide answers to some common questions.

By approaching things from the opposite side, it can often help us see more clearly how to make better decisions.  This is by no means an exhaustive list, but are what I feel is worth mentioning.  So here’s what not to do…

 

— Don’t chase yield.  Rather than focus on high yield today, focus on getting the highest income over time.  This means you can’t just own a bunch of high yield stocks or funds.  You need to own companies that are growing, because that’s what will drive your growing income in the long run. 

Luckily, the LICs mentioned own a diverse portfolio of companies with different levels of growth and yield.  The result is, a decent dividend stream which grows steadily over time.  More on this topic here:  Everything You Need To Know About High Yield Investments.

 

— Don’t try to time the market.  You don’t know what’s going to happen to the markets tomorrow, next month, or next year.  I certainly don’t.  And neither does anybody else. 

So don’t bother trying to guess what’s coming next.  Focus on what you can control – saving money and increasing your ownership of a large group of companies.  That’s where results come from.  

Of course, this doesn’t stop you from trying to invest more, if you notice the market is down -20% or more, for example.  But playing the waiting game and hoping for better prices to come around is rarely a good approach. 

Further reading:  Timing the Market: Silly or Sensible? and Is the Sharemarket Dangerously Overvalued?

Special comment from Peter Thornhill:  A personal experience of mine.  Following the GFC, CBA’s share price fell from around $65 to a low of around $25.  At $50 I thought, “what a bargain” and bought more.  They fell to $40 and I swallowed hard and bought more.  At $26 they offered us new shares.  I gritted my teeth and bought more. 

Whenever I related that story the reaction from most people was, “why didn’t you wait and buy them all at $26?”  My response was, “well, I didn’t have you nearby to tell me the right time!”  Do any of those purchases look silly with the share price now at $84 and 12 years of increased dividends?

 

— Don’t compare your performance to others.  Avoid competing with your peers, or other speculators you see touting their recent performance. 

This will lure you into straying from your strategy, or chasing whatever hot stocks have done well recently – a disaster waiting to happen.  Be satisfied with steady progress and focus on your long term investment strategy.

 

— Don’t make money the focus of your life.  Your investments should be simple, so you can spend time on more important things, like family, friends, work and hobbies.  I’m guilty of breaking this rule and making things complex, but I’m getting much better!

A few diversified funds will likely get the job done just as well as any fancier approach.  Creating a complex portfolio may give you something to do, but it typically won’t make you wealthier.

The best part is, by following a sensible long term investment strategy, work will eventually become optional and you can then devote time however you please.  And it’ll be because you made money work for you… not the other way round!

As Peter says, do not become a slave to your money, make money your slave.

 

— Don’t watch the market constantly.  Yes, it’s exciting to see money coming in and your portfolio growing.  But don’t be sucked into watching every single movement, up and down. 

This delivers no value to your life and typically causes more pain than joy, since unless shares are at an all-time high on the day you’re looking, you’ll be disappointed. 

So log into your brokerage account, buy your shares, and go do something else!  Remember, each dollar is an employee working for you.  But they don’t work harder just because you’re watching them!

 

— Don’t pay attention to the news.  This may seem like a strange tip, but for a long term investor, the news does more harm than good.  You can safely ignore financial news, especially gloomy forecast, which is just about all of them!  More here:  What if Australia Crashes?

The media has no interest in helping you achieve your long term goals.  Their only interest is eyeballs and clicks.  Besides, even if the stories were accurate, they are very short-term in nature.  This means they’re largely irrelevant for people like us who should be thinking in terms of many, many decades.

 

Summary

We’re done!  That’s how to implement Peter Thornhill’s investment strategy, step-by-step.  Of course, if you have other questions, they’ve likely been answered already in my full interview with Peter Thornhill.

It’s all very simple.  Save and invest in a low cost, low turnover, diversified basket of shares, focusing on the growing income stream, rather than the daily share price moves that everyone seems fascinated with.  And think in terms of decades and generations, not months, years or this cycle.

In my view, many of the points mentioned here are important, whether you decide to follow Peter’s investment strategy or not.

It’s critical that we each invest in a way that we’re comfortable.  And for many, that means focusing on the long term dividend income from the sharemarket.  The dividends paid out by companies are a tangible and regular form of positive reinforcement, which can be a huge mental advantage during scary times. 

And at its core, this brings you back to a simple fundamental reminder: every day, companies are working hard to innovate, deliver better products and services, to increase their cash profits and dividends for shareholders. 

Happy investing!  


Do you invest for dividend income?  You might like my easy-to-use Dividend Tracker, which I use to keep a running estimate of our annual passive income after every purchase.  Click here to get it for yourself.

57 comments

  1. Great idea for a post Dave. Really enjoyed it! And it’s great that Peter is sort of part of this blog as a senior consultant/ mentor.

    The one thing that would be good to unpack a little more would be choosing to buy a broad-based solid ETF like VAS versus an LIC — or both. When Peter was accumulating wealth, there’s no question that LICs were the best game play at the time. However, given their recent under performance against the index, and when we take into account just how cheap the index is to own (plus its ability to “self cleanse”), I wonder if Peter would have instead gone with ETFs instead of LICs if he was starting now. I note that you too have changed your views on ETFs over the past 2 years as you acquired more knowledge. Cheers – Scott

    1. My understanding is LICs can withhold some of their profits whereas EFTs must return all profits as dividends to shareholders. This enables LICs to smooth the dividend returns year by year, which can be desirable for people living off them.

    2. Thanks very much Scott 🙂
      Having discussed this with Peter, I think he’d still opt for LICs. I did also ask him about this in our prior interview. He’s simply not interested in ETFs and prefers LICs for a few reasons, including more consistent income, and concerns over liquidity events in a GFC scenario.

      My guess is he’s not concerned with recent underperformance and is happy with how the old LICs invest regardless. LICs also ‘cleanse’ themselves of dying companies and add to growing ones, so that’s probably not much of a factor. At the end of the day, everyone has to choose for themselves how to invest based on what they’re comfortable with, so there’s no one-size fits all.

    3. I used ShareSight to look at the long term (total) returns of LICs vs ETFs, using STW because it is the oldest ETF. Over 20 years STW returns 6.75% per year. AUI gets 8.6, DUI gets 8.79, MLT gets 8.6. ARG 8.1. Or if you’re willing to go smaller cap MIR gets 9.77 and AMH (15 years) gets 9.28. Over the last 5 years most LICs have lagged, but they have higher dividend (less growth) orientated stocks and some value stocks, which have just underperformed recently but may not over the longer time frame. Worth remembering that the LIC’s are less volatile, e.g. during the GFC, STW dropped 55%, AFI only dropped 42% . This in part helps explain their out-performance over very long time periods. They lose less on the down turns so they have less to make up during the bull runs. Recently I went in for the shareholders meeting for BKI, nice food, company, seeing Tom Milner (pretty famous) giving a talk – it was all pretty fun. Another reason I like LICs!

      1. Loved the bit about food at shareholders meetings. I wasn’t aware any companies gave out food these days. In the 80s, I remember attending Westpac shareholders meetings and there was a good buffet spread but in recent times, its just basically tea and coffee. Thanks for your comment and I like LICs too. Just wished they had more capital growth.

  2. This is one of the best articles about shares investing that I’ve read. Short, simple language, and broken down into enough easy-to-follow steps, that a complete beginner should be able to start with just your article and know what to do. I’m forwarding it to some people who have (adult) children who are looking at starting their investing journey (it could save me hours of one-to-one conversations and ‘tuition’ 😉 ). Thanks so much.

      1. Good post Dave…

        As you may know, I am an LIC investor and intend to stay the course.. Every so often my LICs are trashed but as long as they keep spitting dividends (which they have) I am happy!

        Looking forward to your next post!

        Cheers

        The Incompetent Investor

  3. Peter’s charts have always referenced the returns from the S&P/ASX 200 Industrials index (ASX:XNJ), yet the LICs and EFTs often mentioned in Thornhill -style investing strategies typically track the broader ASX 100/200 All Ordinaries (perhaps Whitefield (WHF) being the exception).

    So, is the ASX 200 Industrials superior to the ASX 100 and ASX 200? And if so, what instruments are available to the investor?

    Or are we to understand what Thornhill refers to as Industrials is everything in the ASX (100/200) excluding mining and real estate stocks?

    1. Hey Jay. The data in the chart is from the ASX Industrials index which is the entire ASX 200 excluding resources. These indexes were created in 1979 hence the start date. Not to be confused with the other often mentioned industrials sector which contains 20-odd companies or something.

      I think the main thing is that resources (earnings and dividends) are very volatile so an income-focused investor typically wants reliable year-to-year cashflow, and not reliant on commodity prices. The old LICs typically have some resources in their portfolio since we have some of the better mining companies in the world (and in a diversified portfolio the volatility of dividends is smoothed out), but Whitefield avoids them altogether.

      At the end of the day, the long term income focus is my key takeaway.

  4. Great job yet again Mr Strong Money.

    However I wish to draw attention to that shifty character Nodrog that you mentioned in the article. I’ve heard from a trusted source that the truth is he has little savings and is dependent on the Aged Pension. Hence it would be wise to take anything he posts with a grain of salt.

    Con

    1. Thanks mate. Haha, well Nodrog sure does go to a lot of trouble in crafting his pretend investment experience… 😉 I thank him anyway, and the other posters of pchat for their interesting and insightful commentary over the years

  5. Dave,Nice summary of PT’s investing strategy, speaking of Strategies…interested in your thoughts on AFIC and if you still own it?
    I believe their investing strategy is changing and they are looking more for growth and prepared to sacrifice yield to build a stronger growing portfolio. Did hear an interview with Mark Freeman who suggested they would change tack and look at buying more of companies like CSL and diversify away from Banks etc. Not sure its gone down so well with the rank and file investors who are now looking at 3% only plus franking, a few retiree’s I have spoken too have said they will take their money out of AFIC.
    What are your thoughts?

    1. Hey Mark. I sold AFIC quite a while back now just as part of simplifying our portfolio. Details in a previous portfolio update.

      I don’t really think their strategy has changed, just their outlook on certain companies. If the banks still looked good to them, they wouldn’t have sold down. I don’t see this as a change of strategy, just tweaking the portfolio towards companies offering better prospects/value – it just happens to be lower yielders at this time. Combined with the large run-up in the market is what’s leading to the ‘low’ yield today.

      I think it makes sense overall (Milton and BKI have done similar), it just means portfolio income will take some time to make up for the loss of bank income, so dividends may be flat/grow slowly for a while. I don’t overthink this stuff as that’s the point of leaving it up to other people!

      Curious what these retirees plans are with the proceeds from selling AFIC? Higher yielding LICs or something else?

  6. Hi Dave

    Enjoyed your post. What do you think about the “newer” (about 20 years old) LICs e.g from the Wilson asset management group, WAM, WAX, WLE that offer higher returns 6%? They seem to offer a reliable and growing dividend stream since their inception. Are they too much of a risk in that they may depend on their founder, Mr Wilson to be around?

    1. Hey Ken. Wilson is a good manager and has runs on the board. But the reason I prefer the older LICs is that they’re low fee (Wilson is high fee), low turnover/more tax efficient (Wilson is high turnover), and they simply collect dividends from the companies they invest in, which is more ‘investment’ like. Wilson’s funds need to continually make profitable trades to keep paying high dividends… so the high yield is impressive, but it’s arguably at higher risk of being cut.

      It’s really horses for courses, but I tend to choose the simpler more conservative options these days. (Used to own WAM/WAX by the way)

  7. Hi Dave thanks for an excellent post. I know Thornhill doesn’t bother with international diversification. But are there any international LICs that catch your eye? Vgs 2.4% unfranked yield doesn’t really fit in with the Thornhill approach does it? P.s I love the idea of living of dividends

    1. Cheers Luke. I think any low cost, low turnover, diversified holding that can be expected to pay increasing dividends over time (from the underlying companies) can fit this approach. There aren’t really broad international focused LICs that do this aside from a couple in the UK.

      The main concern for income investors is probably the currency fluctuations that alter distributions from year to year for VGS. But these movements often average out over time, so I personally think indexes like VAS and VGS can be held with a focus on the income they deliver over the long term (though I know Peter doesn’t share the same view). The lower yield is not a concern as VGS should have stronger growth over time to compensate for this. Hope that helps.

    2. At the risk of butting in and answering a question not directed at me, you do have some options, they’re far from perfect and you would have to look into them for your self. Not sure about LICS as I tend to stick with LICS for Australia and use ETFS for global exposure.

      WDIV invests using the following criteria :
      “Dividend Growth – Investing in companies with increased dividends or those who have maintained stable dividends for at least 10 consecutive years.”
      “Global Diversification – Individual stocks capped at 3% and maximum 25% in each GICS sector (at re balancing date).”

      WDIV also has a mer of 0.50% as well as a reasonable market cap of 231.6m and holds 100 companies. There are cons with WDIV being a Smart Beta fund, but overall WDIV is a really well diversified fund. It also invests specifically for dividend growth, not just high yield. I’m sure Thornhill wouldn’t be a fan of this fund, but it might be worth considering.

      IFRA from Vaneck, a hedged global infrastructure ETF with a mer of 0.52% and a market cap of $207.1m, also has a decent steady yield. It’s being hedged could help with the currency fluctuations that Dave talks about. Although long term I wouldn’t really consider hedging good, bad or necessary.

      I’m not recommending either of these two options or saying that you must diversify internationally. I’m just pointing out that some simple, reasonably priced options do exist, whilst still achieving some decent income.

  8. Hi Dave, this is a really helpful post, thank you. I’m wondering about how to implement such a strategy to retire early with an income stream higher than living expenses – but outside of super. I’m not sure how to build both a good amount in super and a good amount outside of super (e.g. in index funds/LICs) such that I could retire early on the investment returns outside of super. My income is not really high enough to do both. In your experience/opinion, how do people structure this or manage to do both? Many thanks.

    1. Hey Kim, glad you enjoyed the post 🙂
      If you’re on a limited income, or have limited ability to save, then it’s likely you’ll have to choose one or the other. People who want to retire early, which is most of my readers, typically devote all their energy and saving towards building a portfolio outside super. But those starting later (say 40+) and who expect to have to work until 60, are typically better off putting most of their efforts towards building their super.

      It’s important to remember that super will grow to be a decent amount for most employees without any additional contributions. So if one builds a half-decent personal portfolio, combined with some part time income, this may be enough to semi-retire early and cruise through until super is available. There are lots of ways of doing it, so it’s really thinking about your own situation and what seems like a sensible approach given your age and circumstances. I wrote a bit more about this stuff in this post: Mortgage, Investing or Super – Where Should You Put Your Money?

  9. Dave your posts are my favorite in the FI community. You focus on great topics like this one, and simplify them so well, and your dedication in responding to readers’ comments and questions is so impressive. Thanks for all that you do and please keep them coming!

    1. Thanks for your kind words Kylie, I really appreciate it, and am glad you’re getting value from the blog!

  10. Fantastic article Dave. For me it brings it back to basics, the old “KISS” saying “Keep It Simple Stupid” which is very true in all aspects of life. I have AFI, ARG & MLT they are my core, I keep topping them up. Currently looking into BKI as there dividends pay a bit more,I’ll wait and see on that though.

    1. Yes absolutely Don. Keeping things simple is about the best possible advice, yet often surprisingly hard to follow and easy to overlook.

  11. Great read, very much in line with my Barefoot principles. I really loved the “What not to do” section, very clever and thoughtful. Thanks.

  12. Hey Dave

    One of my favourite articles too. Plain and simple plan that reinforces what we should be doing when we start thinking of other ideas to try and speed things up (guilty).

    Keep up the great content. Will need to catch up with you one day in Perth for a cuppa.

    By the way I cant seem to open the link to your dividend tracker. Any help with that would be great. I like using other peoples tools since I’m not that savvy on the computer.

    1. Thanks for the positive feedback Ben 🙂

      I think we’re all guilty of being impatient from time to time – I certainly am too!

      Oh perhaps because the link opens a box to fill out your email, maybe you’ve blocked things that ‘pop-up’? If that’s not the case and it plain doesn’t work, let me know and I’ll email it direct to you.

  13. Another fantastic post from Dave! I really enjoy your contents, informative, easy-to-understand language. I think your site tops the list of all the FIRE sites I frequent! I also joined SelfWeath and RateSetter because of your referrals. Fantastic products! Keep up the good work Dave 🙂

    If you don’t mind if I ask your view on debt recycling? I think I have got a scenario which is remotely related to this?

    There are two investment properties I would like to draw equity from. The LVR is currently very low. I would like to cash out to buy LICs/ETFs as opposed to selling them. So that I could collect rents and dividends at the same time, whilst the interest from loan is deductible.

    I am just wondering if there is any catch in my plan? My main concern is if the lender is willing to lend if the funds are used to purchase ASX shares? Also any recommendation on the lenders which are more suited to my case?

    I totally understand your disclaimer Dave haha!

    Thanks and all the best!

    Gordon

    1. Hey Gordon, it’s so great to get feedback like that – thanks heaps!

      Interesting idea borrowing from your equity. I guess the main catch I can think of is you’ll still own the property plus have a decent amount of debt attached, so the positive cashflow possibly won’t be as strong as if you sold, cleared your debt and simply had shares bought with cash. But that may not concern you and on the other hand, you’ll likely get extra capital growth as you’re keeping the properties. So depends on which way you prefer… simpler, debt free and more cashflow, or more assets plus debt, less cashflow and higher capital growth.

      As for lenders, sorry I have no idea. It will really be a case of sourcing a decent mortgage broker to find a lender to accommodate this, which you can likely find on the propertychat forum I linked in the post if you haven’t already got one. Or doing it the hard way talking to the banks yourself. Also keep in mind many banks won’t be all that excited about you buying shares with the funds and may restrict your borrowing lol. It’ll also depend on your serviceability too of course. Hope that’s useful 🙂

  14. Thanks for this article! I recently listened to Aussie Fire Bug’s interview with Peter Thornhill and now I will track down yours!
    This post was really useful to give me a more concrete understanding of some of the more complex aspects of Peter’s investment approach, particularly debt recycling. I feel as though I understand it a little better now!
    Keep it up I love reading your work!

    1. Great stuff Kalli 🙂 If you feel a little more knowledgeable after reading it, then I’d consider that a success, so thanks!

  15. — Don’t compare your performance to others.

    This one in particular is important I think, especially as a dividend income investor. I often feel at odds with the entire investing community on Reddit or elsewhere because the focus is often capital growth and total return.

    You look at an LIC like BKI and see that there’s been negative capital gain in the last 5 year period and start to compare your performance to others, but they have paid out higher and stable dividends over this time-frame and ultimately that’s what you’re investing for.

    I think it’s a mental game I’m still figuring out. I track my net-worth but also started tracking dividends on a separate graph for each year, which I find motivating to see how much income i’m pulling in each year and comparing that with my annual living expenses.

    1. I do the same thing as you, as in track our net worth but then that puts the focus on dividends and capital growth and can easily cause a person to get caught up in market fluctuations, holding back on buying more etc. I like your idea of tracking dividends only in a separate graph. I’m going to set this up.

      1. Hey mate, as you may know, tracking annual income is the approach I take too 🙂 Not sure if you noticed but I put a link to get my own dividend tracker/chart/graph at the bottom of this post, which you might find useful.

    2. Thanks for your thoughts Scott. Regardless of what approach someone is taking, there is going to always be others outperforming you on a regular basis – every portfolio has its day in the sun.

      If focusing on income, tracking Annual Income has been a real game changer for me and also helps ignore the market moves etc. Will likely prove invaluable when we have a downturn at some point too!

  16. hi dave, thanks for running through his strategy.

    it is an interesting strategy to say the least (yield focused).

    i personally don’t have any LICs or focus on yield currently. More focused now on capital growth and reinvesting dividends. My strategy is low cost index funds, buy and forget, DRP and DCA.

    Keen to get your thoughts on dividends vs capital growth
    https://www.vanguardinvestments.com.au/retail/ret/articles/insights/research-commentary/portfolio-construction/total-return-investing.jsp

    LICs
    https://www.vanguardinvestments.com.au/retail/ret/articles/insights/research-commentary/portfolio-construction/total-return-investing.jsp

    I also finished reading ‘Quit Like a Millionaire’ recently and like their take on the ‘cash cushion’. Crucial for years the market takes a turn for the worse.

    Their workshop is also a great reference for anyone on the fire train

    https://www.millennial-revolution.com/investworkshop/

    Thanks,
    Shane

    some interesting articles on LICS and

    1. Hi Shane. My thoughts are in countless articles throughout this blog. I think either approach can work fine – focusing on income or total return – it really depends on the individual which one they feel most comfortable with. The main point is for everyone to invest for the long term in a low cost diversified share portfolio, add as much savings as they can, ignore the market movements, keep it simple and retire on the passive income. But how they’d like to create that portfolio is up to them.

  17. Hi Dave,
    I noticed that a few of these old LICs DPS div per share is way down. Market index website has the graph. This isnt consistent with the ‘growing dividend’ idea. Any ideas?
    Thank you,
    PB

    1. Hey Princeton. That would be because some of them paid large ‘special’ dividends last year on top of their regular payout, due to many ASX companies paying out special dividends in case the changes to franking credits came through.

  18. Hi Dave.

    Always enjoy your posts…keep em’ coming.

    Apologies if I’ve missed these figures somewhere in your posts, but I’m wondering if you have a “bare minimum” figure of funds invested (let’s say into LIC’s) that would be considered the go-to figure of what one should be trying to reach to be able to live off dividends?

    I know this is a “how long is a piece of string” question as everyones situation is different, e.g, for an individual, a couple, lifestyle etc…but is there a figure you work with to say…” yep, that figure will cover it”?

    Hope my question translates.

    1. Glad you enjoy the posts Martyn 🙂

      There is no way to answer that – some households like ours live happily on $40k or less. Others spend their $150k of income and think they’re just getting by. So it’s 100% individual. This post on semi-retirement might give you some ideas. Having 25 times annual spending is a reasonable figure to work off I think (assumes 4% yield).

  19. Brilliant! So simple, and yet so few people do it! (Myself included, until now….)

    “Each dollar is an employee working for you. But they don’t work harder just because you’re watching them!” Love this quote 😀

Leave a Reply

Your email address will not be published. Required fields are marked *