Listed investment companies (LICs) are a major part of my passive investment strategy, which is simply an investment approach that accumulates holdings in LICs with a view to holding them for the income in preparation for retirement.
I find LICs are easy to understand and they:
some have lower management expense ratios than managed funds- most are well established - they are not likely to fail easily
- are easy to value because they regularly publish their net tangible asset (NTA) backing
- have reasonable dividends with franking credits - while they are not as good dividend payers as banks they are certainly less volatile
For me, LICs are an easy and inexpensive ways to capture the long term total performance of the share market over an extended period of time while still taking advantage of a fully franked income stream.
My buying criteria ensures that I buy at prices that are under value (compared to NTA) and that I receive a reasonable dividend yield above a set benchmark.
The idea is that in time we will have an income stream outside of super that will give us even greater freedom of choice around how and when we work. The income stream will come from assets that I don't have to actively manage and the money can supplement our pensions when we do eventually retire.
I have been criticised for my approach and I do understand the criticism. However, for me the positives of my plan, outweigh the negatives - limited capital growth being the main negative. Being mindful that I still need growth, I am not putting all my eggs in the LIC basket. I still have the majority of my share portfolios devoted to growth assets which I actively manage, however, the percentage of LICs held will gradually increase leading up to retirement and the portfolio will not have to be actively managed leaving us free to enjoy retirement.
In the meantime my passive portfolio grows as I add regular small parcels to the holdings and each year the dividend yield increases relative to my buy price.
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