Do equities perform in a flat market?

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Borrowing to invest makes more sense for higher income earners, right?

Well, whilst investors on a higher marginal tax rate receive a larger deduction for the interest expense incurred, you also need to take account of the income received on the underlying investment.  Accordingly, borrowing to invest can often be more beneficial for investors such as SMSF’s – who only pay 15% tax on income prior to retirement.

Recognising this, over the past few years many SMSF investors have used limited recourse borrowing arrangements to invest in property.  A growing number of SMSF investors are now using similar arrangements to invest in equities.

Notwithstanding any continuing growth from a recovery in equity markets, the attractive yields from dividends, coupled with the generous franking credits available, mean an SMSF investor can potentially benefit even more than individual investors.  Let’s look at an example which illustrates this;

According to Macquarie Research Equities* the forecast dividend (12 months) is,

  • Telstra             7.27%,
  • NAB                 7.46%
  • Westpac          6.74%
  • CBA                 6.21%

So, if an SMSF investor was to utilise 50% gearing to acquire a $100,000, equally weighted portfolio in each of these four stocks, the forecast dividends received on the portfolio over one year would be $6,920, with additional franking credits of $2,966.

With borrowing rates on SMSF equity gearing facilities currently around 8.90%pa – the portfolio would be positively geared from year one – and we haven’t even considered any capital growth.

After tax, the benefit to the SMSF investor is even more pronounced;

Investor Type

SMSF   Investor

Individual Investor

Marginal Tax Rate

15%

46.5%

Interest Cost

($4,450)

($4,450)

Dividends

$6,920

$6,920

Franking Credits

$2,966

$2,966

Tax  (Payable)/Refund

$2,072

$194

Net  portfolio return after tax

$4,542

$2,664

Contact Chan & Naylor Financial Planning on 1300 99 77 34 to find out more.


Disclaimer: The advice provided on this document is General Advice Only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. 

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