This month: Marcus Padley

Retiree investors don’t stress about money so long as those juicy franked dividends keep filling the jam jar

Did you know that many investors simply don’t care about the share price? Let me say that again: in Australia there is a very large chunk of retiree investors who simply don’t care about the capital value of the shares they hold, because they are entirely focused on living off the income and the franking.

Here are the traits of the income investor that allow them to ignore share prices:

Income investors are generally not interested in the stockmarket, beyond milking it for income. It might provide some intellectual stimulation once a weekend when they read the newspaper or chat about it at a dinner party but they do not wish to be watching the stockmarket, making decisions about the stockmarket or worrying about the stockmarket. There is tremendous value in avoiding stress and this pocket of investors has worked that out.

Income investors are genuine investors, not traders. They are long term, not short term. They genuinely “set and forget” and are disciples of the “it’ll be all right in the end” mantra which, despite relentless criticism for its head-in-thesand approach, can work. There is something to be said for identifying long-term quality stocks and sticking with them through thick and thin. It is a lot less stress. And there are some fantastic examples but only with the benefit of hindsight. Those income stocks that are not all right in the end are conveniently forgotten.

Income investors are rich. To turn a blind eye to the stockmarket and the share prices of the stocks they hold, income investors have to be rich. They have to have enough money invested in stocks like the banks or hybrids to be able to live off the income alone and not care about the share price. If you don’t need the capital to fund your lifestyle you don’t have to worry about share prices, just so long as the dividends are not cut and continue to be paid. The trick is to buy stocks that will keep paying in the long term. If you can find those, who cares what the share price is today or tomorrow or on the day you die. Your kids can worry about that.

Income investors assume that the banks are bulletproof in the long term. It’s not a bad assumption. While the Australian banks remain an oligopoly, they are. Until the banks get disrupted, retirees can stay on the golf course and ignore the market. Until the disruption arrives, if it ever does, Australian retiree income investors are betting that the big banks will remain highly profitable for their lifetime and on that basis they need not worry about the share prices. If you have faith in that, the royal commission, tighter lending standards and a cooling property market are just blips in the long-term share price trajectory and not something you need to react to. They could even be welcomed as creating a long-term buying opportunity.

Income investors are generally holding stocks in super in a tax-free environment. They have no capital gains tax but they also get no benefit from capital losses. So there is no pressure/benefit in selling loss-making stocks to offset capital gains. They get the full benefit of any capital gain and any income and franking.

Income investors focus on franking credits. Retiree investors living off stockmarket income are very interested in the cash refund of franking credits. If Bill Shorten does change the rules to remove the cash refund of franking credits, then things will change. Retiree investors will be looking to replace that income somehow. My humble advice, should a Labor

government happen, would not involve taking more risk in low-yield stocks to replace franking income but to accept the loss and carry on as you are with less income. There is no easy way to replace franking if it goes – not without more volatility, which means paying more attention and suffering more stress in the process, which you don’t want to do. If happiness is expectations met, then the way to be happy, after a Labor government screws it all up for you, is to lower your income expectations.

Some income investors write calls. The very wealthy income investors improve their yield by selling out-of-themoney call options over their shareholdings. Rolling written call options every few months takes advantage of time decay. Most options users are a victim of time decay. This small edge has turned into an industry of charlatans promising rivers of effortless gold if you write calls over naked positions. Good luck with that. This is not for poor people; it is for people holding big chunks of big option stocks, and it only incrementally improves the income from the stock – it doesn’t revolutionise it.

It is your choice whether to become an income investor. But it is a privilege of the wealthy and is not for people behind the eight ball who are trying to grow their capital and cannot afford to lose any. It is for people who are financially comfortable, have enough capital to generate an income that meets their annual requirements and want to have a life. In order to get to that stage, there are two options: get rich or live off less. Lower your income expectations and you, too, can become an investor who doesn’t care about share prices.