When ignorance is bliss for income investors
Retirees who live off dividends and franking credits can afford to ignore share prices
Many investors 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 their shares because they are entirely focused on living off the income and the franking. “The kids will get the shares,” they will tell you, “and I don’t care what the share price is when I’m dead.”
Is that you? Cue the seven traits of an income investor. See if you qualify.
Income investors are generally not interested in the stockmarket
Their focus is milking it for income. It might provide some intellectual stimulation on a weekend when they read the newspaper or chat about it at dinner, but they do not wish to be watching the stockmarket, making decisions about the stockmarket, worrying about the stockmarket. There is tremendous value in avoiding stress. These investors have worked that out. Income investors value their state of mind over money.
Income investors are genuine investors, not traders
Income investors 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 (from me) for its head-in-the-sand approach, can work. There is something to be said for identifying long-term quality stocks – there are many great examples (in hindsight!) – and sticking with them through thick and thin works if you get the right ones. I feel their results could be improved significantly, not by stock picking but by stock culling. The stocks you don’t hold are as important as the stocks you do. But most income investors have a weakness, or is it a strength? They never sell.
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. That’s why Warren Buffett is such a good preacher. Because he doesn’t really need the money. Income investors have to have enough money invested so they can 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 as long as the dividends are not cut and continue to be paid. You need to be rich.
Income investors assume that the banks are bulletproof in the long term
It’s not a bad assumption. While the Australian banks retain an oligopoly, they are. Until the banks get disrupted, retirees can stay on the golf course and ignore the market. I play with one who has made the “banks are OK forever” assumption. He has his whole super (millions) in Commonwealth Bank and he lives off the 5%-7% yield plus franking. Until the disruption arrives, if it ever does, 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. For them, issues like the royal commission are just a blip in the long-term share price trajectory. In fact, they welcomed it as a longterm buying opportunity. Income investors trust the banks.
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 to sell loss-making stocks to offset capital gains. They have no capital gains and they get their franking credits returned as cash. Income investors live tax free.
Income investors focus on franking credits
Retiree investors living off stockmarket income are very interested in the cash refund of franking credits. Labor’s unexpected loss in the last federal election is testament to how much income investors value their franking. Bill Shorten underestimated the importance of franking.
No politician will ever try to remove the cash refund of franking credits again.
Some income investors write call options
One thing I can tell you as a broker who has handled very large clients, the very wealthy income investors improve their yield by selling out-of-the-money 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 not for million-dollar portfolios; it is for portfolios worth tens of millions. It is for people holding big chunks of big optionable 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 and stop worrying about share prices, but understand this: it is a privilege of the wealthy and the retired not to care about the stockmarket, to live off franking credit refunds, to live tax free, to gamble everything on the banks, and to write options against their holdings.
It is for people who are looking after money, for people who are financially comfortable already, have enough capital to generate an income that meets their annual requirements, and want to have a life. It is not for people who are trying to make money, are behind the eight ball and cannot afford to lose capital.
The good news is that there is one very easy way to transition from a retiree with not enough to a rich income investor. And it is this: learn to live off less, because as any income investor will tell you, rich is a state of mind, not a sum of money.