Australian Foundation Investment Company AFIC (ASX:AFI) LIC review

Australian Foundation Investment Company (ASX:AFI) LIC review from an experienced and long term investor.

The Good

  • Higher than average dividend pay-out
  • Fully franked dividend
  • Great track record of increasing dividends
  • Low management fees of 0.13% compared to other active funds
  • Well diversified

The Bad

  • Less total returns than a passive index ETF equivalent
  • Some degree of active stock picking
  • Higher fees (MER) than a passive index ETF

Verdict: AFIC is a great listed investment company with a long term focus of increasing dividends to its shareholders and makes it an attractive income source for early retirement.

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 after it was recommended by the Barefoot Investor, and I learnt a lot about investing through this stock.

Sale
The Barefoot Investor
  • Pape, Scott (Author)
  • English (Publication Language)
  • 296 Pages - 11/14/2016 (Publication Date) - Wiley (Publisher)

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Australian Foundation Investment Company (ASX:AFI) LIC review

Australian Foundation Investment Company review

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 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.

Australian Foundation Investment Company (ASX:AFI) LIC review



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”

https://www.afi.com.au/new-investors#WhyInvestinAFIC

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

Australian Foundation Investment Company (ASX:AFI) LIC review

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 had 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.

Frequently Asked Questions about the Australian Foundation Investment Company (ASX:AFI)

Answers to frequently asked questions about AFIC

Is AFI a good investment?

This depends on your financial situation and timeframe, however for someone like myself then yes, AFI was a good investment.

AFIC performance

Over the past twenty years, the AFIC performance has been 5.23% in capital gains, and 6.18% in fully franked dividends.

What is the AFI management fee

The AFI management fee is 0.13% or 13 basis points, this is $13 per $10,000 invested per year.

What dividends does AFIC pay?

Over the past 20 years, AFIC has paid out 6.18% in fully franked dividends, which gross up to 8.82% (i.e. grossed up before tax estimate). In 2020, due to the COVID-19 market crash, AFIC had a lower dividend yield of only 3.9%, or a grossed up yield 5.57%

Does AFI have a dividend reinvestment plan?

Yes, AFI has a dividend reinvestment plan (DRP). You can sign up to participate in the DRP through the shares registry which allows you to reinvest all or part of your dividends back into new AFI shares. This is often done at a discount. Note you will still be liable to pay tax on these dividends even if reinvested.

What is the AFIC DSSP or BSP

The Dividend Substitution Share Plan (DSSP) is another word for Bonus Share Plan (BSP). It is like a Dividend Reinvestment Plan however the difference from the DRP is that no income tax is payable at the time of receipt of the dividend.

Instead, with the DSSP (BSP) your cost base per share is lowered. This is a way of deferring your tax liability until you ever sell the shares instead of paying tax on your dividends immediately. However, be warned, if you select the DSSP you will not receive any franking credits (losing the 30% tax credit they come with).

You should speak to a financial advisor about whether using the DSSP is the right move and profitable for your personal circumstance and income/tax levels. Generally speaking, it might be suitable for those on the highest income tax brackets who plan to retire on lower income streams.

What companies to AFIC invest in?

AFIC invests in companies in a similar manner to a total market cap index of the top 80 to 100 companies, which is modified by active investing by fund managers. Currently, the top 5 investments AFIC hold are: Commonwealth bank of Australia (8.3%), BHP group (7.6%), CSL (7.4%), Wesfarmers (5%) and Westpac Banking Corporation (4.1%). AFIC

Is AFIC ethical?

AFIC is committed to the highest standards of ethical behaviour, and have set a strong policy of ethical corporate governance, policy and principles.

How do I invest in AFIC?

You can invest in AFIC through any full service broker such as Pearler, Commsec or Selfwealth. Simply search ASX:AFI (ticker code ‘AFI’) and place a buy order.

Is AFIC a managed fund?

Yes, AFIC is a managed fund with extremely low fees – AFICs fees are more than 90% cheaper than most managed funds available to investors.

When does AFIC pay dividends?

Typically, AFIC pays dividends twice per year – one interim dividend in February and the final dividend in Ausut.

Is AFIC dividends fully franked?

Yes, Dividends from AFIC are fully franked

Summary

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.

Addendum to Australian Foundation Investment Company (ASX:AFI) LIC review

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 – which is why there was such a rally and over positive investor sentiment towards AFIC.

Although ‘the good’ LICs and ETFs have similar returns, the ETFs have lower management fees and over the three years of investing in both these asset classes, the ETFs have out performed the LICs. 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, and currently dividends are not tax efficient to me due to my income level pre-retirement in the accumulation phase (noting that you could opt to use the DSSP to defer tax liability on dividends by reinvesting them) – 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 may start to buy them back.

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