Dividend investor

Question

Hi,
My plan/dream is to live off dividends one day so I can go surfing when I want. I love VAS and the simplicity of it and the great dividends it pays. I know this is an Australian only index.. but it doesn’t excite me to buy an international index fund because of their small dividend payouts and then the extra headache later on of selling.. the whole 4% sell off per year thing. 
Is owning a purely Aust index justifiable? 
Thanks in advance! 
Sam

Answer

Hey Sam.

It’s a fair question.

As for whether an approach is justifiable is a pretty grey area. If someone is happy with their strategy and the possible downsides of it, then it’s really a personal choice at the end of the day.

In that particular scenario, the possible downsides and other things to consider are:

Australian companies lag the world over the next 30 years and the returns + dividends aren’t as good as the would’ve been otherwise.

Aussie index (and especially dividends) is relatively concentrated in banking and mining. Problems in either of those spaces can hurt dividends for many years given the reliance on a small group of companies.

Tax policy changes around franking credits, making Aussie shares less attractive. Companies might choose to pay out less and reinvest more or buy back shares like US companies do.

Global companies (mostly US) have lower payouts but dividends grow faster as a result. This helps an investor’s income keep outpacing inflation. Relying on high payouts from Aus means lower growth and possibly long periods where dividends lag inflation.

Selling later on and trimming a global fund really isn’t any headache. It could be as simple as once per year, or once per quarter.  Which is very minor as far as admin goes. And remember global funds still generally pay 2-3% in dividends, so selling might be less than you think.

Probably more but those are the main things I see.  I was initially planning to live solely off Aussie dividends, but have softened my stance over time as I came to appreciate the importance and usefulness of having more diversification.  Either way, I still currently have most of my portfolio in Aus but it’s slowly reducing over time.

I wrote about this here: https://strongmoneyaustralia.com/my-latest-th...

Some people are fanatical about having a perfectly diversified global portfolio… others aren’t really that bothered even after thinking about some of the risks.  It’s a scale really, I’m somewhere in between but more in the second camp.

Hope that helps.
Dave

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