Retirement/Passive Income: Dividend Shares vs Growth Shares vs PIE Funds

[entrep]

Was listening to this today https://www.nzherald.co.nz/business/cooking-the-books-podcast-the-truth-behind-building-passive-income-through-the-sharemarket/OJWXXGDXNRDUJOY5DPEXUQNBNY/ and the guy made an interesting point I would love to get feedback on from here.

He is from Kernel Wealth so obviously biased towards funds, but was saying that instead of owning a dividend stock where your capital might go more or less nowhere (thinking of something like SPK here), and you get your 5% or so yield each year fairly safely, why not invest in a PIE managed fund and (this next part is the key for me that I hadn't considered) withdraw 5% of that every year as your dividend.

That way, your "pseudo dividends" are untaxed (as capital gains) and also any dividends that get paid into the fund will be 28%.

Of course, the big thing is that your fund needs to return 5% or more each year, however that seems reasonably achievable, on average of course.

Anyway, it got me thinking, especially with reference to the likes of SPK, GNE, etc... you may get your 5-7% yield pretty comfortably, but your capital is going nowhere, and you're paying tax.

Instead, if you can invest in a PIE fund that returns at least 5% each year (on average) then you should be able to outperform a dividend stock very easily on the tax savings alone (no tax on capital gains) by withdrawing 5% out of the fund every year.

Or, you could also invest in something like IFT, instead of a PIE fund, and do the same thing very easily.

I guess, for me personally, looking at how retirement might look, I was only really considering dividend shares where I can get my safe 5% dividend payout each year. The above kind of opened my eyes though quite a bit, especially the 5% annual withdrawal tax free as a pseudo dividend.

Anyway, would love to hear other's opinions. Maybe everyone else knew this?

Cheers

[Raven]

I seem to recall Warren Buffet saying something along the lines of never invest for dividend, invest for capital growth and sell some shares regularly (tax free capital gain) to get the income you need.

[entrep]

I seem to recall Warren Buffet saying something along the lines of never invest for dividend, invest for capital growth and sell some shares regularly (tax free capital gain) to get the income you need.

To me it makes SO MUCH sense... the tax benefits alone are 30% plus - that's huge!

[Basil]

A few thoughts.  I listened in the other day and thought it was as a good investment of my time, (albeit I had time to burn that day) and certainly provided an interesting perspective.

Investors like Fiordland Moose advocate investment in funds through ultra efficient channels but they are not portfolio investment entities and that's fine if you have a very large portfolio of overseas investments but for most people the complexities and cost of dealing with the FIF regime mean one of the listed or unlisted PIE's here are probably more cost efficient way to go with zero compliance cost or time, (notwithstanding their higher annual changes).  Smartshares have a lot to choose from and to the best of my knowledge they are all PIE's https://smartshares.co.nz/

Points worth noting are that PIE's have only been around since 2007 so are there to be taken advantage of in terms of keeping your tax and compliance costs down and do provide excellent diversification.  The imputation system is not common overseas, and we are fortunate to have it here but it only applies to N.Z. dividends.

Points not covered in the interview were many but what was notable was a certain bias towards PIE funds v direct investment.  Little thought was given to investing in companies that grow dividends, such as Turners that has a superb track record over the years.  Dividends were portrayed in a somewhat biased, (in my opinion), way as being "risky".  No insight was provided in terms of derisking this or assessing the sustainability of dividends.  (I am a huge advocate for looking at the ten-year history of a company's dividends to see if they are sustainable or not or growing or not).

Also he omitted to mention the FIF regime de-minimus level is $100,000 for joint investors and this is important for a lot of couples in retirement.

A very good discussion on the FIRE regime and the 4% sustainable level of withdrawal.  That was definitely something that piqued my interest.  I think a higher level is quite suitable for those in their 60's or later who are not overtly concerned about how much their kids inherit.  Overall, this was well worth listening too. 

[Azz]

the complexities and cost of dealing with the FIF regime 

The government could always abolish FIF. Or provide another exemption (in addition to Aussie stocks) for, say, international stock investment via brokers with an "NZ presence".

[Azz]

FIF was introduced to tax investments held overseas, often undeclared investments. I suggest a very high proportion of FIF tax gathered today is via NZ-based institutions and with IRD numbers of individuals given. In other words, the original reason for the tax no longer exists.

[entrep]

Isn't FIF because most overseas companies don't pay out dividends like NZ does, and so FIF is the way the Govt captures the tax on a "5% dividend" from overseas companies that would otherwise be lost to tax-free capital gains.

[Azz]

Isn't FIF because most overseas companies don't pay out dividends like NZ does, and so FIF is the way the Govt captures the tax on a "5% dividend" from overseas companies that would otherwise be lost to tax-free capital gains.

If that's the case it's an extremely strange tax: Australian non-dividend paying stocks are exempt; dividend paying US stocks are not exempt.

[Basil]

I think they really need to review the de-minimus level.  $50,000 in 2007 when the rules were introduced is not the same as $50,000 now with inflation in the last 17 years.  I think $100K per person, $200K for a couple is a more reasonable level.

[Azz]

Smartshares have a lot to choose from and to the best of my knowledge they are all PIE's

This one gets you into Nvidia with 8.88% of fund:

https://smartshares.co.nz/types-of-funds/us-shares/us-large-growth/

[ValueNZ]

I think they really need to review the de-minimus level.  $50,000 in 2007 when the rules were introduced is not the same as $50,000 now with inflation in the last 17 years.  I think $100K per person, $200K for a couple is a more reasonable level.

Absolutely. Should be adjusted to match the CPI change each year.

[0verdose]

Slightly off topic but related to the FIF conversation. Can one have total holdings with Sharesies for example lets say $48K NZD in US Shares/ETFs and $100K in PIE Fund and not have to file a FIF tax return? Is it based on the individuals holdings under their own name or total funds sitting outside of NZ that was purchased.

[Raven]

Slightly off topic but related to the FIF conversation. Can one have total holdings with Sharesies for example lets say $48K NZD in US Shares/ETFs and $100K in PIE Fund and not have to file a FIF tax return? Is it based on the individuals holdings under their own name or total funds sitting outside of NZ that was purchased.

The $50k exemption is based on the total cost you paid for the combined assets that are FIF liable. NZ PIE funds are all FIF exempt, as are all NZ domiciled companies, and most ASX listed Australian companies, although not all of them.
https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/types-of-business-income/foreign-investment-funds-fifs/foreign-investment-fund-rules-exemptions/foreign-investment-fund-australian-listed-share-exemption-tool

[Red Baron]

The $50k exemption is based on the total cost you paid for the combined assets that are FIF liable. NZ PIE funds are all FIF exempt,

NZ PIE overseas investment vunds are 'Exempt' in ze sense zhat an individual tax payer does not have to complete an FIF declaration - yes.  But not exempt een zhat an NZ PIE fund investing overseas does not pay FIF itself.  Eet is just done behind ze scenes zo zhat NZ unitholders een zhese PIEs don't have to vorry about eet.

RB

[Raven]

NZ PIE overseas investment vunds are 'Exempt' in ze sense zhat an individual tax payer does not have to complete an FIF declaration - yes.  But not exempt een zhat an NZ PIE fund investing overseas does not pay FIF itself.  Eet is just done behind ze scenes zo zhat NZ unitholders een zhese PIEs don't have to vorry about eet.

RB

Yes indeed you are correct, but the OP question was about having to file a personal FIF tax return.