Latest / Money Grows on Trees / #352 - How Much Do Australians Need Invested To Live Off Dividends?

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#352 - How Much Do Australians Need Invested To Live Off Dividends? · Money Grows on Trees

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  Living off passive income from dividends is possible, but most Australians just have no idea
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  how close they actually are. Most people think you need to be ultra wealthy to live off your
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  investments. But the reality is, once you understand dividend yields and assets and how to
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  build a portfolio the right way, the number you need is far more achievable than you think.
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  Australia's franking credit system makes it even better, so I'm excited to jump into this episode.
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  My name is Lloyd J. Ross, seven figure investor and entrepreneur, and I've helped thousands of
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  everyday Australians, Americans, New Zealanders, Canadians get out of debt and build real wealth.
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  And in this video, I'm going to show you exactly what dividends are shares that produce dividends,
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  ETFs, and the formula to calculate how much you need to have invested to never work
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  again with passive income. So buckle up. Let's go. So everyone's panicking right now about the stock
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  market. But most people are wrong about it. And most people approach investing the wrong way.
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  They're all banking for capital growth, whether it be in the real estate market or the stock market.
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  It's all about capital growth. The thing is that Robert Kiyosaki mentioned this in one of his
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  earlier books. I believe it might have even been Rich dad, Poor Dad that he wrote with Sharon
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  Lector that always invest for cashflow. And I just that's such a good lesson. So love him or hate
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  him, but that's a very important lesson because when it comes to living, like earning cash
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  from investment, it just is so much more sustainable to stay the course long term when
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  you're getting paid actual cash from your investments. Does that make sense? This episode is
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  designed to show you just how possible and achievable it is with real numbers
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  to live off your investment portfolio from dividends specifically. So
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  let's go to the very beginning here, which is to understand what dividends are. Okay. When a
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  business or a company listed on the stock exchange, you can buy shares in it, be it
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  Commonwealth Bank, BHP, Google, whatever company you know, you can get access to buy their shares. Now,
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  when you own the shares, you own a piece of the company legally and then they are required to pay
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  you a share of the profits in dividends if they pay a dividend. Not all companies pay dividends,
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  but particularly in America, because in America the tax system there is different. So if you get
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  paid a dividend in North America, it's fully taxable. In Australia it's different. I'll come to
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  that in a second. When we talk about franking credits. So most companies in America because of
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  the tax rulings, they don't pay high dividends. Instead they buy back shares. It's still a payment
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  to the shareholder, but it's done through share buybacks, which makes the value of their shares
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  more valuable. And they see the buyback yield instead of the dividend yield. So that's how they
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  give they share the profits with their shareholders in America. More so through buybacks
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  in Australia it's more so dividends. But they still do pay dividends in America. But what I want
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  to showcase today is leveraging shares that pay dividends in Australia, specifically an ETF. An
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  example that pays strong dividends and to what amount you need invested in that to live off the
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  dividends and be financially free. What a cool episode, right? Because when I was younger, my
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  objective was to do just that. I thought, I don't want to work in this job that I hated. I wish I
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  just had a money tree that just I could go downstairs and pick $100 bill off and go back
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  inside. Now it turns out that those trees exist. They're called share portfolios, and the ones that
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  pay high dividends are exceptional at giving you those hundred dollar bills. And I remember my very
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  first investment way back, maybe 14, 15 years ago. I was a long time ago. I bought Westpac bank shares
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  because I thought, you know, Westpac Bank, 200 year old bank, but we're not going to go anywhere.
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  People need banks, blah, blah blah. But it was paying a 6.5% dividend yield pretty high, fully
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  franked, which I come to in a second. So what that means is under a 30% tax rate that I was on,
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  anytime I got that money, I didn't pay any tax on it. So I was getting tax free, 6.5% yield but no
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  operating costs. That's why no one can really tell me that property is the best way to produce
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  cashflow, because it's just not. When you buy a company like Westpac Bank at 69% yields tax free
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  with no operating costs, the whole 69% goes into your skyrocket. So very good for cashflow. Now when
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  I bought the shares I think I spent two grand, bought my first tranche and I believe it was like
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  a $90 dividend. I was just I remember going downstairs, open up the postbox downstairs, and I
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  pulled out this envelope and in those days they would send a cheque in the post. And I picked it
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  up from Westpac Bank. And I opened this envelope up and I pull out this beautiful, crisp cheque and
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  it's from Westpac Bank and it says dividend $90. And I was just like, oh my God, money grows on
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  trees. I just been planning the wrong ones. That's why I wrote that very first book called Money
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  Grows on Trees. And that's when I discovered that it did. So in my mind, I'm thinking, well, what if I
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  had like 100 grand of Westpac bank shares? What would I get then? And I'm like, oh my God, I'd make
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  6500 dollars a year. And in my mind, the way I justified how cool that was was, I was like, well,
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  that's one really cool tile end holiday per year paid for. So I always measure things in Thailand
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  holidays because I love Thailand, Aleesha and I love Thailand, I love it, I just got back, I was
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  there for a month. I just got back and I just want to go there again. If you've never been go, it's
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  not that bad. It's just so much better. It's a great place. It's anyway, that's a whole nother
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  episode. But I love it. So I'm like, so I measure things sometimes in how many cool Thailand trips
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  I can do, because money's there to buy you happiness, right? Not to enslave you or buy you
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  sadness. Most people by money use their money to buy self sadness. It's misery. It's fascinating. So,
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  um, my mind starts to go, okay, well, if I had 100, it's six and a half K if I had a million,
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  $65,000 a year. That's interesting. What if I was making 65,000 a year of
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  untaxed passive income? And so that's when I started to really get serious about investing in
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  shares, because I thought, well, if I have a $3 million portfolio as an example or a 2 million, if
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  I had a $2 million portfolio and a 5% dividend yield, I'm pulling in a 100 K six figure passive
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  income. How many of you would love that? And if it's three mil, it's 150 grand passive income,
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  right. And so if your rent is 1000 bucks a week, it's 50. You still got 100 left. That's a fair few
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  Thailand holidays, wouldn't you say? So this is where I was. You know, it's life changing, isn't it?
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  So how? What's the number? As I mentioned, if you buy shares in Australian companies
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  that happen to have what's called fully franked dividends. And if I look at some companies like
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  BHP, Fortescue Metals, Rio Tinto, these are the mining companies that pay pretty strong dividends
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  because they have no place to put the money. They generally aren't building new mines all the time,
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  so they're like, where do we put this extra cash? Let's just pay to our shareholders. So that's why
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  they tend to pay higher dividends. The banks are the same. So. Whether it be Commonwealth Bank, ANZ,
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  Westpac or NAB, these banks are stalwarts. They're so old they're like. You can't just put money.
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  There's not many places to invest in a bank business. To grow more earnings. You can build your
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  business bank, you can build your retail bank, you can invest in the you know it and systems and so
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  forth, but you can't. They had to dissolve their financial planning collaborative businesses and
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  they had to get out of them. There's just not anything they can do with the money. So when they
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  have all this excess cash, if the shares are also really bad, they can't do buybacks because it's
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  value creative. So they've got to pay dividends. That's why. And you look at a bank and 80% of
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  their earnings are paid out as dividends. So a lot of the profits of the banks are paid to you the
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  shareholder and same as mine mining companies. So you're going to see that in Australia. By and
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  large, most of the big companies here pay out their profits as dividends, which is
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  not a bad thing. It's cool, but it's also not a good thing for the market because they have no
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  innovative places to invest their money, which is why we don't have very innovative companies in
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  Australia necessarily, and why our stock market stocks for capital growth, that is. But it's a good
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  stock market for getting a return of cash on your investment. So that's why Australian companies
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  generally pay more dividends, because the companies don't have the companies that lead the
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  country. They don't have a lot of places to reinvest them to grow their businesses. But also
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  there's this tax ruling in Australia where once the company has paid the government the tax on
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  earnings and it pays out the dividends, it's paying the dividends with after tax dollars. And
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  then when it comes to you, the investor, they don't tax you again. So there's no double taxation.
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  Now if the dividends are franked it means that they are not going to be taxed when they go to
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  the investor. Some companies can have 50% Frank. Like if you go to Macquarie Bank for example, it's
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  dividends are 40%. Frank I believe because a lot of their earnings come from America, they can't
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  apply franking credits to that part of the dividend. So that's why it's half half. But for
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  most that generate the earnings from the country, they can. Which means it's tax free up to the same
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  rate at which they pay tax. So if the company's paying a 30% tax rate as a company, your marginal
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  rate up to 30%, it's tax free. So if you get paid a fully franked frank dividend from, say,
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  Commonwealth Bank, and it comes to you and your your average tax rate is 30%, you will not pay any
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  tax on that income. So in Australia it is possible to earn tax free
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  income. If you own shares in a company like CBA with a 100% rate, and if your
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  tax average tax rate is 30%. So that's cool. If you also own the shares in a company and it's got a
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  base rate of 25% or a holding rate of 30%. You also the company can earn tax free income from
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  those shares. So that's cool. That's what makes investing in dividends in Australia very
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  interesting and very popular, of course. So if you wanted to generate
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  $100,000 a year of untaxed income, non-taxable income,
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  which is equivalent to 150 when you think about it, you need just quickly if you're ready to take
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  control of your finances but feel stuck on where to start. I have a solution. My book, Money Buys
• 10:06
  Happiness Simplifies Investing and Wealth Building with practical steps to help you achieve
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  financial peace. Get your copy via the link in the show notes and let's get your money working for
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  you. Now back to the episode. Now, how do you calculate how much you need to invest? It's all
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  dictated by the dividend yield, which is the rate at which the dividends are paid to you based on
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  the investment. Now you can do it in shares. And shares pay dividends in Australia twice a year by
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  annual payments. But if you buy an ETF, an exchange traded fund or an index fund, that's a high yield
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  index fund. And there are a couple on the Australian exchange, I'm not going to name them,
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  but there is one in particular, for example, that presently pays about a 5.5% dividend
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  yield. Now that means if you invested $1 million in that particular ETF and the
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  companies in that ETF, they're all high dividend payers. That's why they can pay that high dividend.
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  An ETF or an index fund can only do what its companies are doing. It can't do anything more.
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  It's not magic. So if it's got companies in it and they're not paying high dividends, it can't pay
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  high dividends. So does that make sense. So there's this ETFs and index funds that are built for
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  specific objectives. Now that means you're not gonna get a lot of capital growth. But you are
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  going to pay nice dividends. So if it's going to pay a 5.5% dividend yield and it's pretty
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  consistent, you've got to go look and see how consistent that's been in this particular one I'm
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  thinking of has paid up to 7% and 8% before as well, but not always sustainable. The higher the
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  dividend yield, the less sustainable it is. So 5 to 5 and a half sounds pretty sustainable. In an ETF
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  you typically get paid dividends quarterly. Not all of them, but quite often it's quarterly
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  dividend distribution. Um, which is cool. So if you want to make
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  $100,000 of passive income, then you take 100 K and
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  you divide it by the dividend yield point. So on this 1.055 like that. And it tells you
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  boom. So you would need to invest in that particular ETF $1.8 million to have it pay you
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  100 grand. Now if you can survive off 50 grand, remember this is after tax. This particular index
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  one I'm thinking of is it's like 80% franked. So not fully tax free like some of the shares you
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  can buy. But it's up. It's up there if you could live off if you want to live off 50. Remember 50 K
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  is a $1,000 a week divided by 0.055. You only need 900,000. So if you could invest 900,000 in this
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  ETF, you'd have 50 grand a year. Passive income, almost tax free. Not quite for the rest of your
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  life. Plus, the 900 K would probably grow by about 3% a year. So you make it another 30 in the cap of
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  growth. So your value of your value, your money in the shares is growing. The value of the shares in
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  the ETF are growing to the position you have is growing. Plus you're getting paid passive income.
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  Plus you're getting it at an almost tax free rate. Pretty damn good, wouldn't you say? So
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  when you understand these things exist, that's why it can be difficult to just go, well, I'm just
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  going to put in a term deposit or I'm going to buy a property because you just don't see any of
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  the cash flow after that, because the tax rulings on term deposit income is like fully taxable. So
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  you lose 30%. So if you're getting 5% right now and a ten deposit take off 1.5, you're getting
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  three and a half because 30% is gone from tax. So you now have three and a half. And the underlying
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  cash in the term deposit is not growing because it's the inflation is wiping away. So you don't
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  get any capital growth. So it's just inferior in terms of long term performance. Same as property.
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  If you look at property one you've got operating costs of the property like the property manager,
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  the rates, the insurance, the upkeep, blah, blah, blah. That's a real cash outflow. And call it 1%. So if
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  you're getting 5% for property, minus one you're at for minus the tax. You're at flipping two and a
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  half. So your net yields from property investment in cash is two and a half. So if you had a million
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  bucks in property, you'd end up with net after tax 20 and cost 25 grand. In an ETF like
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  that, you end up with 55 grand pretty much almost maybe 50. So double. So cash
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  flow from shares specific shares or ETFs with imputation credits or franking credits applied
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  plus high dividend yields that are sustainable. You can see why people are drawn to investing in
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  shares over and above property and turn deposits. You can see now what are the risks to that. There
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  is a risk that when you deploy that cash, that 900 K or whatever, or you build it up that the market
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  can fall, it can collapse 20, 30, 40, 50%. And if you don't know that, go and read some history. So yes,
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  your 900 K. If the market collapse it could fall down to 700 K or 600. But the reality is because
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  it's in businesses that are going to survive, the test of time is still be here in 100 years. It
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  means that if you're just patient and you don't freak out and panic, sell at the bottom like an
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  idiot, then you're going to do okay. And while you're waiting for it to recover, you're getting
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  these beautiful dividend checks right to your door in your bank account. I should say not to
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  your door. They don't deliver checks anymore, but write into your bank account. Bank. In fact, we got
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  some dividends. We get 28 dividend checks a year. Great stuff. A lot of fun. But if you just had that
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  particular ETF, a million bucks, you'd have 55 grand a year almost after tax. It's pretty
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  good. And anytime one lands in your bank, no tenants to pay. No, no product manager to pay, no
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  rates, no insurance. I pay a little bit of tax because the franking credits dictator got to pay
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  a little bit, but not much. That's a lot of Thailand holidays. I think that's the drawcard and
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  it's a genuine it's a genuine get out of your job card. It's a real can leave your job and
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  retire card. It's just that one. I think people aren't aware of assets like this, that aren't
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  aware of franking credits. They're not aware of the exact number they need to invest because they
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  can't do that simple formula, which is the amount you want to live off divided by the yield equals
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  the amount you got to invest. It's a pretty simple formula. They don't know that. So they think it's
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  pie in the sky stuff. But I knew that and that's what compelled me to get into it. I'm like, if I
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  just got a million, I'm good. That's why your first million is such a good goal, right? In fact, we're
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  cobbling together some work at the moment about your first million. It's going to be a lot of fun.
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  So that's why it's compelling, because you're either getting dividends and some growth or
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  you're getting full growth. Either which way it's awesome. And I think that if people understood
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  this more, they'd do more of it. So yeah, if you happen to have a house paid off, $1 million
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  portfolio, and that was your goal in life for a financial goals in life, it's pretty good. Like
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  it's hard to mess that up. Yeah, people still do it and it can be done. So you have to be very
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  careful of other behaviour traits as you're doing that. Liquor ladies and leverage. Charlie Munger
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  used to say, I hope you've enjoyed this episode. It's very simple stuff, isn't it? But now hopefully
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  you understand dividend yields. You understand? Franking credits. You understand why Australian
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  companies pay them higher than American companies, and you understand the exact amount you need to
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  have invested to literally live off your dividends happily ever after in Thailand or
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  wherever it is you want to go more in this world. So if you enjoyed this episode, hit the subscribe
• 16:50
  button and subscribe to our channel where you get financial education just like this. Unbiased,
• 16:54
  unfiltered, and hopefully entertaining at the same time. And of course, pop me a comment below. What do
• 16:59
  you think about in the comments? What are your questions? What is your position or opinion on
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  this? And of course, share this with a friend and I appreciate you. Thanks for tuning in and I'll see
• 17:07
  you in the next episode. Thanks for listening. To Money Grows on Trees. If you enjoyed the episode,
• 17:13
  leave a five star review on Apple Podcasts and Spotify, and subscribe to us on YouTube so you
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  never miss an episode. And if you're serious about building wealth, make sure to check out the links
• 17:22
  in the show notes and follow me on all social media platforms at Lloyd James Ross for more. See
• 17:29
  you in the next episode.