Source
r/fiaustralia•
FoxBox1988

Invest for growth VS income (debt recycling to pay off house)

I'm interested to hear some other perspectives regarding whether to focus on income or growth when debt recycling. I am hoping to use debt recycling to pay off my mortgage faster.

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My first thought was to focus on dividend paying LIC shares. Use the dividends to pay down the mortgage faster etc.

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However, I recently read this article: https://www.cnbc.com/2016/12/08/dont-buy-in-to-the-dividend-fallacy-new-academic-paper-warns.html

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...which lead me to to question the strategy. I know that the compounding effects of holding a growth portfolio lead to larger returns over the long run and that gains are somewhat like a free loan from the ATO since you don't pay tax until you sell. Therefore, maybe it will be possible to hold a growth focused portfolio (Maybe IVV and some others), sell it after 5 years or so and use the gains to pay out the mortgage.

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Or should I just split the difference and go 50/50 income/growth? Thoughts? What is your strategy?

Posted Feb 10, 2019, 7:46 AM UTC

29
VetFIRE•

I do it, and focus towards income producing LICs (and a little ratesetter). I like knowing that the investment is positively geared, and once paying the interest pre tax, and franking credits are accounted for, it is quite a tax efficient strategy. I also like the idea of never selling shares if possible, so am heading towards a buy and hold forever Thornhill approach for that reason too.

Using debt to invest in lower yielding “growth” shares (eg. U.S) would make me more nervous regarding future cashflow (although I still hold 25% VGS from when I started down a boglehead approach) especially when my wife takes maternity leave. Message me if you have any specific questions.

3
ETHIFAIRVEFI•

Gearing into low yield assets is extremely risky because you're assuming the capital gains are permanent and there will always be capital gains when in reality you can be wiped out near retirement.

2
skinner1984•

I'm about to do a similar thing to you but unsure how to diversify with LICs. I find there's a heap of crossover with the likes of Argo, AFI etc. How are you balancing your portfolio with the constraint of requiring high yield?

1
snrubovic•

Basic financial theory tells us that investors ought to be indifferent between seeing a company offer a dividend and seeing capital returned in other ways, such as through a buyback.

The point is not to try to get growth vs dividends, but to consider the total return and ignore dividends because they are no indication of the total return.

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2
FoxBox1988OP•

Agreed. However, the tax treatment of capital gains VS dividends does make a difference to individuals as does having a regular income stream as opposed to holding on for growth. I am thinking now that I will lean towards more of an income focus as the regular income can cover the interest on the investment loan and also dividends are much less volatile than share price.

1
Tony-Sydney•

Just food for thought.

I can see the lure of using debt recycling on such a low-interest environment, just bear in mind the guaranteed return of offset account (which depending on your interest rate with the bank) may actually better.

One other thing to consider is that we are in a declining property cycle for our major cities Sydney, Melbourne (depends where you live) I would imagine I don't want to be caught in the situation both my property and investment portfolio is in decline.

Good luck!

1
Juvv•

Agreed on the offset here. its 0 risk, and instantly will save you whatever your interest rate is PA.

There is also another method of paying it down faster which is switch to interest only with an offset account. Whatever you were putting in monthly as principle, put it in the offset. this will mean that every month, the interest paid will go down, freeing up your cashflow even more, which means more into the offset every month and the cycle just keeps going till the balance in the offset, is the same amount as the actual loan.

You need to be disciplined to do this, and to not dip into your offset money, especially when it gets large.

Personally I think this is the best way to pay down a mortgage, the numbers speak for themselves.

1
scottahm•

While going interest only will keep your equity in a more accessible liquid structure (in the offset). It won't reduce the amount of interest you pay.

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Juvv•

the % doesnt change but the monthly amount does, as long as you keep putting your savings into it.

1
ETHIFAIRVEFI•

One bird in hand is better than two in the bush.

Likewise, one dollar in dividends is better then two in capital gains.

1