Hi again folks
OK, so we are up to step two.
The original premise can be found at this short post here
Second Simple Step To Retire
The second step simply read like this: As a conservative, old-fashioned investor of fully franked dividend shares, then how many shares will I need to hold to give me that exact dividend income each year?
This method requires us to commit to an old-fashioned, very boring, repetitive purchasing of fully franked dividend shares, preferably Licensed Investment Companies (LIC's).
Why LIC's? Well actually not just any LIC's, specifically old, wise, stable LIC's like Milton, Argo, AFIC, Whitefield and BKI would be ideal. All these have been around for decades, pay fully franked dividends twice a year, smooth out their dividend payments even in years of gloom and generally grow their dividends year on year. Yawn-worthy, utterly boring and terribly sensible grey-cardigan-and-sandals style holdings.
The beauty of these LIC's is that they are thoroughly reliable and have high integrity. Folk who hold these LIC's in retirement can rely on their dividends to come through twice a year pretty much regardless of what idiocy is occurring on the stock market. GFC? What GFC? Frankly my dears, old LIC holders don't give a damn.
The Scary/Confusing/Weird Part .....
I have had several people ask me "how many shares do I have to buy to earn $X amount per year? Well, as least as possible actually ..... (What the? How is that a helpful answer? Mr HM is avoiding a straight answer. Dodgy. Meh)
Well, if we were daft enough to wait till just before retirement to buy these LIC's to produce a dividend income, then we would have to buy hundreds of thousands more of them than if we had started well in advance. We'd have to purchase the whole bang lot ourselves - not wise. (That would be like buying an investment property after it had appreciated in value and after the tenant's rent had paid the loan off - a really dumb move actually) e.g. You would need about 220,000 Milton shares to give an income of $60,000 a year. If we bought them all today in readiness to retire tomorrow, it would cost us roughly $1,041,000.00 based on current prices ..... yeah right!!! (gulp). What nonsense. We are NOT going to do that.
Here's The Twist
By buying the right LIC's early and over a period of time, we would be getting many of the required LIC's shares for free! The more LIC shares we get for free, the less we have to buy! Smart. (Enter smug smile).
By using conservative compounding calculations we would only need to buy half the amount of shares if we invested 10 years before we needed the income, or, less than a quarter the amount of shares 20 years before we needed the income - in fact, the earlier we start, the less and less we need to personally buy ourselves. (BTW, tell your children, to start today, seriously)
How do we get free LIC shares over time?
- Dividend Reinvestment Plans (DRP) twice a year.
- Dividend Substitution Share Plans (DSSP) as they are offered.
- Buying up big in share market crashes (stockpiling LIC shares very cheaply when silly fools are selling them)
- Yearly dividend growth means that every time DRP happens, we get more for free each time.
- Compounding snowballs dividends - which means more and more and more free shares.
- Buy inside superannuation which has reduced tax and thus more available money to reinvest.
- Holding these LIC shares forever and letting dividends compound over and over and over ..... all for free.
Why on earth would we be so silly as to pay for all the LIC shares we need when we can get so many for free in the above ways simply by just waiting. It takes time. Time is going to pass anyway - thus start today.
So, certainly work out (using very simple primary school math) how many shares are needed to earn the dividend income we require in retirement, BUT, don't buy them all ourselves, let time and compounding buy the lions share of them for us. The earlier we start buying LIC shares, the less we will personally have to buy.
Grab the calculator, sharpen the pencil, be frugal and work it all out on the back of an old envelope ;-)
Take care folks and stay nice
Mr HM (Phil)