I'm an investor newb, with money to spend, gulp.

Hi I'd love some ideas on my next financial move. My wife just retired while I'm still working. I'm 46 debt free and despite working crappy jobs my whole life, have some property that I would like to now sell, to invest in shares. I will have around 700,000 - 750,000 and would like to retire at 50, living off dividends until super kicks in at 65. My tentative plan at the moment is to either buy into a LIC like AFIC or buy 3 major blue chip shares like Nab, Telstra, Wesfarmers. I would reinvest any profit for the next 3 years and would hope to have enough to live off dividends alone after that. Is it enough? Is it risky? Do bluechips generally pay more in dividends than a basic index fund does? Any help or flaws highlighted would be appreciated. Thanks.

 

Well done on getting yourself in such a great position.

How much income do you need?

Using an investment in AFI as an example
AFI paid 24c fully franked last year or about 34 cents grossed up
Currently it is trading at $6.07, so you can purchase 115321-123558 shares
so an income of $27,677-$29,653 ($39,209-$42,009 grossed up)

I wouldn't be comfortable with a portfolio of just NAB, TLS, WES (or similar)

Depends. Larger developed companies tend to have higher dividends, it is not a rule however. The blue chips will make up the lions share of a cap weighted index fund so the returns will be a weighted return of the blue chips and lesser constituents

A couple of things to think about.

You should be aware of the "yield trap" where the spot yield looks good today yet the prospects of it improving aren't great.

Dividend growth is important and you generally pay a premium for companies that grow their dividends consistently (hence low spot yield)
CSL paid a dividend of $0.46 in 2008 and $1.75 in 2017 (380%) (unfranked dividends)
CBA paid a dividend of $2.66 in 2008 and $4.29 in 2017 (161%)
AFI paid $0.21 in 2008 and $0.24 in 2017 (114%)
TLS paid a dividend of $0.28 in 2008 and $0.31 in 2017 (111%)

The past has no impact on the future so careful looking back to when thinking about the future.

Think about a plan B if dividends get cut substantially in a crash type scenario. Can you return to work part time? It doesn't sound like you will have a large cash reserve to draw on until the dust settles. How long worth of living expenses do you want/need on call

Do you want international diversification? The yields tend to be lower and aren't franked. Yet something to think about. Some say you don't need it some you do. Either World or Aussie will perform better yet no one knows which.

I don't mind AFI as it is a low cost, solid and consistent performance. Index funds are another low cost diversified option worth thinking about (STW, VAS, IOZ for Australia and VGS, IWLD for international as a start)

Hope that gets you thinking and not confused.

 

Also how will you be entering the market? Lump sum, dollar cost averaging (DCA) or something else?

 

Thanks Hodor you've given me some stuff to consider. It's early days for me and a lot of it is over my head still. I like the grossed up figue but don't know what grossed up means. before tax? I will also look into "yield trap", and try to learn how to spot it. Also I looked at AFI and from what I could gather they were only paying around a 5 % dividend, my research could be off though. As for plan B in case of a crash, I'm considering staying in part time work after retiring so might have to do that. How would I purchase. I'd most likely purchase through commsec which from memory charges 0.18 per dollar. Just realized AFI is AFIC hehe.

 

Grossed up includes the value of the franking credits (pre paid company taxes). Grossing up dividends allows a fairer comparison with companies that pay unfranked or partially franked dividends.

I was more referring the methodology of entering the market. such as lump sum (all at once). DCA (a little each period for a set number of periods) etc.

Take your time and don't get sucked in by hype or the need to make things overly complex.

 

Red or black isn't an option?