The Australian Foundation Investment Company (AFIC) is one of Australia’s oldest Listed Investment Companies, being established in 1928. It’s mission of providing low management fees and focus on producing its shareholders an increasing stream of franked dividends over time has led to its success. AFIC is now the largest Aussie LIC managing an almost $8B portfolio for its shareholders. AFIC (ASX:AFI) was the very first stock I ever bought, and it has been a great, rock solid investment which I have enjoyed having it as part of my portfolio since day one.
How I bought AFIC
How I bought into Australian foundation investment company is a funny story actually. When I first heard of AFIC it was through Scott Pape and the Barefoot Investor. After some research I was convinced and willing to buy some – I was prepared to purchase the hefty sum of $1000 worth! You can imagine my suprise when I logged into my (old) stockbroking app and tried to find it. On the ComSec app, it was coming up as something like ‘the Australian foundation company’. Here I was thinking I was being told to go out and buy some kind of concreting business – I was so bloody confused, that wasn’t in the brochure! I even tried to ring Scott Pape but his receptionist wasn’t very helpful, neither was the ComSec desk. I finally got on the phone to AFIC and their receptionist was lovely. She thought the whole thing was very funny and even despite my tiny little investment even went out of her way to explain how to set up the DRP in time for the next dividend payout.
I learned a valuable lesson there, which is make sure you know what your bloody well investing in. I also learned a second valuable lesson – don’t buy into market hype. The ‘Barefoot’ effect would be in full swing post recommendation from Scott Pape, as the hoardes of Barefooters and the Motley Fool crew would piggy back off each others stock tips and inflate the market. I bought at the peak of one of these swings, only to find after it cooled down I was 5% or so down. Good thing I never plan to sell, and purely bought this for its franked dividend stream which increases over time.
The details of the Australian foundation investment company
The Australian foundation investment company invests for the long term in quality Australian companies, and has a portfolio spanning 80 to 100 companies across a range of industries . It looks at their long term potential, performance through economic cycles and their ability to provide increased earnings, which translates to an increasing dividend yield for AFIC shareholders.
AFIC’s mission: “Pay dividends which over time grow faster than the rate of inflation” and “to provide attractive total returns over the medium to long term”
AFIC is one of the cheapest LICs in terms of Management Expense Ratios. With a MER of .13%, it costs investors just $13 to have $10,000 managed by AFIC, per year. This MER has just decreased, previously being .14%, showing that AFIC is committed to its goals and is able to lower costs.
Performance of The Australian foundation investment company
AFICs performance is generally bench marked against the Standards and Poors (S&P) ASX 200 accumulation index. This is the top 200 Australian shares by market capital. This is what AFIC publish as their portfolio and share price performance – ending 31 July 2019
You can see that AFIC has performed well, with the net asset share price growth plus dividends performing well over the long term.
It is important to realise too that when shareholders receive their franked dividend twice a year from AFIC (February and August), it means they are entitled to the rebate on the tax already paid by the companies that it holds. Franking credits or imputation credits attached to the dividend mean that a shareholders return should be ‘grossed up’ by 30% when comparing non franked dividends.
I have received around 4.5% in fully franked dividends, or about a 6% (grossed up) dividend yield from AFIC since I have held them. AFIC publishes a comprehensive list of their dividend history here.
I bought into the Australian foundation investment company when I didn’t know much about the share market. I was acting on what sounded like good advice at the time, and I also bought a bunch of other shares in companies directly. Its only now that I realise just how good the advice to buy low management fee LICs (and ETFs) was, and I have over time bought more and more AFIC shares, whilst I have moved out of direct shares in companies. They have reliably paid me dividends, as well as delivered capital growth and I don’t plan to ever sell my holdings.
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Addendum: In May 2020 I noticed my AFI shares were trading at a significant premium to their NTA / NAV, so I decided to sell my holdings and roll this over into an ETF which holds a very similar core holding of stocks. I believe this is because in a slowing / falling economy stocks tend to pay less dividends, but LICs will then gradually dole out their cash reserves during this period.
Although ‘the good’ LICs and ETFs have similar returns, the ETFs have lower management fees and should have overall better performance than the LIC. The LIC can provide more stable income for retirees to use as their income stream to cover their cost of living; potentially why the LICs start trading at a premium after a market crash or falling economy.
Either way, I do not need a stable dividend income for some time, so I am cashing in on the fact that they are trading at a premium and have sold mine and immediately bought into ETFs. Even though I have ‘sold’ in a down market, I have also ‘bought’ in a down market so one does not lose out on the deal. If and when the LICs begin trading at a discount again I will likely start to buy them back.