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Australian Stock Market
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Australia Sucks Offline
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Post: #29
RE: Australian Stock Market
I think in the current market Australian investors should consider using some leverage/borrowings to turbocharge their portfolio (not for beginners though). Here is why:

-I think the medium to longer-term outlook for the Australian market is bullish so borrowing will turbocharge your returns assuming you pick the right investments. See this thread regarding market bullsihness: https://www.rooshvforum.com/thread-63841.html

-Low interest rates and attractive dividend yields make it affordable (often even profitable) to finance the borrowings. In general Australian companies have a bias (partly due to the tax system and partly due to low earnings growth in the past decade) towards paying high dividends (world leading in fact), with the dividend payout ratio (percentage of earnings paid as a dividend) of the market being between 70 and 75% on average currently, and the average yield being well over 4%, see this article: http://www.afr.com/business/australian-c...825-gr0ono

-In Australia a large proportion of established profitable companies pay a dividend. Not all dividend paying companies pay a fully franked dividend (the ones with a lot of foreign earnings tend to pay partially franked dividends) but most of them do. So let's assume the company you invest in pays a fully franked dividend yield. Sound dividend paying companies usually pay a yield of between 3 and 5% (can be more or less though but that is the typical range). People should think about borrowing against their house or investment properties (assuming they are experienced share market investors) to invest in shares. Margin loans can be used but they are less than ideal.

Below I will do a hypothetical scenario analysis of what it might look like for someone on a modest wage to borrow against property and invest in shares (figures below are in AUD). Please bear in mind that different loan types e.g. home owner principal and interest vs home owner interest only vs investor principal and interest, vs investor interest only loans all have different interest rates:

John is 30 years old and has a job in IT earning $85,000 salary before tax per annum (median full time wage in Australia is around $83,000 pre-tax). He owns a one bedroom apartment that he currently lives in that he bought 5 years ago in Sydney. The apartment is now worth $700,000 and he has a loan of $350,000 against it. He goes to the bank and gets the loan facility increased and now can borrow up to $560,000 (80%) against the property. This means he can now borrow an extra $210,000 which he decides to invest in shares. The extra $210,000 he borrows is interest only 5 year fixed rate. We assume his salary remains flat for the next 5 years.

For the purpose of this example we assume John is an experienced stock picker and knows how to pick stocks well. He invests the $210,000 split evenly into three stocks each paying a fully franked dividend and holds the stocks for at least 5 years. The average yield on the three stocks is 3.5% fully franked. That means he receives $7350 in dividends plus $3150 in franking credits. His interest on the $210,000 5 year fixed interest only loan is 4.6% (You can see the rate is realistic, just check out this website https://www.canstar.com.au). His interest costs are therefore is $9660.

$9660 minus $7350 in dividends means he has lost $2310 during the year. However when he does his tax return his taxable salary of $85,000 is reduced to $82690. His top marginal tax rate is 34.5% (32.5% + 2% medicare levy). Therefore he saved $797 in tax. Also when he does his tax return he is refunded the $3150 in franking credits (he made a loss so the whole amount is refunded to offset his salary income). Therefore his after tax position is loss of $2310 + $797 tax refund + $3150 franking credit refund. Therefore his net after tax cash flow is positive $1637. Remember he borrowed 100% and the investment put after tax cash in his pocket. Let us assume because John picked sound/growing stocks/companies they increase their earnings per share and dividends per share by 6% per annum. Let us also assume the share prices rise at 6% per annum in line with earnings growth. At the end of the first year his share are worth $222,600 (up 6%).

The next year his shares go up 6% and he receives $7791 in dividends (up 6%) and $3339 in franking credits. He pays $9660 in interest. $9660 minus $7791 is a loss of $1869 pre-tax. His annual tax bill is reduced by $645 and he receives a franking credit refund of $3339. Therefore his net after tax cash flow from the investment is $2115. Next year (year 3) using the same 6% growth his after tax cash flow from the investment is $2621. Next year (year 4) using same 6% growth assumptions his after tax cash flow is $3158. Next year (year 5) using the same 6% growth assumptions his portfolio value is $281,027 at year end and his after-tax cash flow is $3727.

Therefore at the end of the 5 year period he received total after tax cash flow of $13,258 and his share portfolio equity increased from $0 to $71,027. Not bad considering he did not invest a single dollar of his own money (100% borrowed money).

Now imagine if at the beginning scenario instead of being able to borrow $210,000 his borrowing capacity was $350,000 and imagine if he was in a higher tax bracket (equals more tax savings) and instead of picking companies that could grow 6% per annum he was skilled enough to pick companies that compounded earnings and dividends at 10% per annum, the returns in such a scenario would be truly massive.

-All of the above being said dividend yields should not be a criteria for selecting stocks. Buy a stock because its a good business that is undervalued, however given the nature of the market in Australia that company will often pay a healthy dividend anyway.

Conclusion:
In the current environment in Australia borrowing against property to buy (the right) dividend paying shares can give you after tax positive cash flow and capital gains. Borrowing to buy Blue Chip properties in Australia today will generally give you negative after tax cash flow possibly plus capital gains. However you can generally leverage more with property so assuming the same capital growth rates property will give you higher capital gains but the downside is your annual cash flow and your liquidity are worse with property so you have to decide which option makes sense for your lifestyle and financial situation.

When I say you can leverage more with property that is because the hypothetical $210,000 borrowings in John's example could have been used as the 20% deposit (down-payment) to purchase a property worth more than $900,000.
(This post was last modified: 08-10-2017 09:09 AM by Australia Sucks.)
08-10-2017 08:56 AM
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Messages In This Thread
Australian Stock Market - Australia Sucks - 09-13-2016, 07:58 PM
RE: Australian Stock Market - Julio - 09-14-2016, 02:30 AM
RE: Australian Stock Market - TheFinalEpic - 09-14-2016, 06:13 PM
RE: Australian Stock Market - Kangaroo - 09-18-2016, 07:08 AM
RE: Australian Stock Market - BB1 - 06-06-2017, 05:23 PM
RE: Australian Stock Market - BB1 - 08-23-2017, 02:29 AM
RE: Australian Stock Market - BB1 - 12-22-2017, 12:38 PM
RE: Australian Stock Market - BB1 - 02-09-2019, 05:47 PM
RE: Australian Stock Market - BB1 - 07-15-2017, 12:43 AM
RE: Australian Stock Market - Tail Gunner - 01-01-2018, 10:47 PM
RE: Australian Stock Market - Justinian - 07-28-2017, 12:55 AM
RE: Australian Stock Market - Atticus - 01-01-2018, 07:07 AM
RE: Australian Stock Market - Australia Sucks - 08-10-2017 08:56 AM
RE: Australian Stock Market - PK1098 - 01-01-2018, 05:11 AM
RE: Australian Stock Market - Tail Gunner - 01-01-2018, 10:21 PM
RE: Australian Stock Market - Cane Toad - 01-01-2018, 10:29 PM
RE: Australian Stock Market - Tail Gunner - 01-01-2018, 10:38 PM
RE: Australian Stock Market - Cane Toad - 01-01-2018, 11:00 PM
RE: Australian Stock Market - Tail Gunner - 01-02-2018, 12:02 AM
RE: Australian Stock Market - Cane Toad - 01-02-2018, 05:48 PM
RE: Australian Stock Market - Tail Gunner - 01-02-2018, 06:13 PM
RE: Australian Stock Market - Tail Gunner - 01-03-2018, 03:39 PM
RE: Australian Stock Market - Cane Toad - 01-03-2018, 07:38 PM
RE: Australian Stock Market - Tail Gunner - 01-03-2018, 07:50 PM
RE: Australian Stock Market - Roardog - 01-10-2018, 09:40 AM
RE: Australian Stock Market - Tail Gunner - 01-10-2018, 11:07 AM
RE: Australian Stock Market - Roardog - 01-10-2018, 09:04 PM
RE: Australian Stock Market - Tail Gunner - 01-10-2018, 11:12 PM
RE: Australian Stock Market - Cane Toad - 01-12-2018, 06:26 AM
RE: Australian Stock Market - Tail Gunner - 01-12-2018, 11:25 AM
RE: Australian Stock Market - Tail Gunner - 01-12-2018, 11:38 AM
RE: Australian Stock Market - PK1098 - 01-01-2018, 03:22 PM
RE: Australian Stock Market - Cane Toad - 01-02-2018, 12:36 AM
RE: Australian Stock Market - Tail Gunner - 01-02-2018, 01:37 AM
RE: Australian Stock Market - Cane Toad - 01-02-2018, 02:45 AM
RE: Australian Stock Market - Tail Gunner - 01-02-2018, 12:45 PM
RE: Australian Stock Market - Mig Picante - 01-03-2018, 11:33 PM
RE: Australian Stock Market - Bucephalus - 12-10-2018, 06:47 AM
RE: Australian Stock Market - Blue Streak - 11-19-2018, 07:12 AM
RE: Australian Stock Market - Mig Picante - 12-10-2018, 08:19 AM
RE: Australian Stock Market - Mig Picante - 12-10-2018, 06:35 PM
RE: Australian Stock Market - Blue Streak - 01-15-2019, 06:15 AM
RE: Australian Stock Market - Mig Picante - 02-11-2019, 08:47 AM
RE: Australian Stock Market - Mig Picante - 02-19-2019, 08:54 AM
RE: Australian Stock Market - BigTedSven - 02-21-2019, 02:33 AM
RE: Australian Stock Market - Mig Picante - 04-14-2019, 06:30 AM
RE: Australian Stock Market - TDevil - 04-14-2019, 07:29 AM
RE: Australian Stock Market - Tail Gunner - 04-19-2019, 12:24 AM
RE: Australian Stock Market - Mig Picante - 04-20-2019, 03:11 AM
RE: Australian Stock Market - Mig Picante - 04-21-2019, 04:06 AM
RE: Australian Stock Market - BigTedSven - 05-21-2019, 09:47 PM
RE: Australian Stock Market - BigTedSven - 05-21-2019, 09:48 PM
RE: Australian Stock Market - Tail Gunner - 05-21-2019, 10:00 PM
RE: Australian Stock Market - Bogart - 05-22-2019, 10:54 PM
RE: Australian Stock Market - Mig Picante - 05-24-2019, 07:16 AM
RE: Australian Stock Market - BB1 - 05-25-2019, 02:31 AM
RE: Australian Stock Market - outback - 05-25-2019, 02:33 AM
RE: Australian Stock Market - Mig Picante - 05-25-2019, 03:51 AM
RE: Australian Stock Market - BB1 - 05-27-2019, 06:38 AM
RE: Australian Stock Market - BB1 - 06-10-2019, 06:54 AM
RE: Australian Stock Market - UnW - 05-27-2019, 07:16 AM
RE: Australian Stock Market - Mig Picante - 06-04-2019, 08:36 AM
RE: Australian Stock Market - BalanceLife - 09-08-2019, 06:18 AM
RE: Australian Stock Market - Mig Picante - 09-24-2019, 07:05 AM

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