Thornhill and Boglehead investing strategies

Consider the case of someone earning up to $18,200 from their FIRE portfolio. Person A receives this from fully franked high dividend yield LICs. Person B receives this by selling some of their ETFs which rose in capital value (and because they are tax savvy, they only ever sell parcels which they have held for over 12 months for The CGT 50% discount).

The dividends are essentially taken out of the companies total capital pool, so in theory according to a rational market theory spending dividends vs selling off shares should make no difference – however taxation and brokerage are two factors to consider. Using SelfWealth with the flat $9.50 fee trades eliminates one of the costly variables, so tax advantages/minimisation is going to be the major driver of which strategy to use.

At the moment, my current Aussie LIC and ETF holdings on average are returning around 4.7% in fully franked dividends (6.7% grossed up dividends), and the remaining growth in capital value of the share (share price increase) of around 3-5%. The LICs tend to have more dividend yield, and the ETFs more capital growth. If you chose to spend all of those dividends, you would be exceeding the 4% rule, so you’d still want to reinvest some of them. If you spend them all, you’d potentially over time start chewing down on your portfolio – which is not an issue if you have superannuation and low living costs in early retirement. I calculated I could draw down my Get FIRE’d! Portfolio quite conservatively by around 8% for it to last me the 25 years until I reach preservation age.

Thornhill and Boglehead

Dividend yield investing – Thornhill method

Person A using a Thornhill approach has amassed a FIRE portfolio of about $492k of an Aussie LIC and receives $18,200 in fully franked dividends (3.7%). Those dividends have already been taxed at the company rate of 30% so $5460 of tax has been paid on them. This means twice a year, they have had $9100 hit their account (most LICs distribute biannually) to live on. When they file their tax return at the end of the financial year, because of the franking credit their total taxable salary was actually $18200 + $5460 or $23,660 (thanks to the 5.2% grossed up dividend yield), but they’ve effectively already paid $5460 in tax.

As per Australia’s marginal income tax rates they must pay 19c for every $1 they earn over the tax free threshold of $18,200, meaning their adjusted tax bill is only $1482. Since the companies already paid $5460 in tax on their behalf, person A is entitled to a franking credit tax refund of $3978 – a tidy amount, which boosts their effective after tax / net dividend yield to $22,178. Person A has also got some capital growth on that portfolio (the average performance of ETF and LICs is a total return of 10%), but you can’t spend capital growth as easily and we already have 5.4% in grossed up dividends.

Since we know that the 4% rule is a pretty safe bet, if you wanted to stick to drawing on your portfolio according that rule, you’d actually want to reinvest most of that sweet tax return for future years when the dividend isn’t as strong. If the future dividend was lower and your bills needed paying, you could just sell down a small portion of that portfolio so that your total expenditure is in line with the 4% rule. Obviously a strong cash buffer of around 2 years expenses could also help to absorb some of the system shocks and iron out volatility.

To put numbers to the case above, the simplest tactic is to just reinvest ALL of the tax refund, which means you would be living off the ‘3.7% rule’ which is more conservative than the 4% rule, and so your portfolio should be ‘safer’. But if you wanted to adjust your spending in line with the 4% rule after your tax return for the purposes of figuring out how much investments you need to reach financial independence, you could spend some of the tax return on living costs. For example, 4% of person A’s portfolio is $19,680 – the difference ($19680-$18200) being $1480. So the remaining $2500 of the tax return should be invested back into the portfolio.

You can use this argument to work backwards to see how franking credits can reduce the amount of capital you need invested to reach financial independence. It all depends on your cost of living, and the lower you can get this, the more lucrative franking credits will be. That’s because anything under $18,200 is currently tax free income, so your franked dividend will be boosted by 30%.

Say in the example above that you only needed an after tax income of $18,200 during retirement (for example you have a fully paid off apartment so your living costs are lower). You could therefore live off a fully franked dividend of $12,740 from an LIC. The LIC has already paid 30% tax on its earnings of $18,200, and passed on the fully taxed $12,740 franked dividend. You get the tax paid at the corporate tax rate (30%) back, thanks to the franking credit refund when you do your annual tax return. The $5460 tax refund each year would bring your total income up to $18,200, which of course you pay no personal income tax on because it is below the $18,200 tax free threshold.

This means that in this situation, the number to work off is ($12,740/4%) or $318.5K of investments in the franked Australian LIC – rather than ($18,200/4%) or 455K worth of an unfranked income source or dividend. The difference is $136.5K and this could represent years of saving for even the most frugal FIREstarter!

The Thornhill method is SUPER passive, and extremely easy. There is no need to sell shares (unless the dividends stop flowing) so there isn’t a need to find a ‘good time’ to sell (no need to agonise over the movements and price of the market or the costs of brokerage). You just watch your fully franked dividends roll in consistently, use them to fund your cost of living and then reinvest the surplus back into the portfolio.

You have a simple tax return at the end of the year which will generally put money back into your pocket until you exceed a gross income that puts you in a tax tier above 30%. For example once you reach $37,000 per year you will begin paying a 2.5% ‘top up tax’ on any higher earnings (32.5% personal rate vs 30% corporate rate), which increases according to the marginal tax scale. This ‘top us tax’ is deducted from the franking credit refund you receive, however it takes some ridiculously high earnings of $126K of franked dividends ($2.68M portfolio) before you start having to actually pay the difference out of your pocket – by this stage, your obviously earning enough to comfortably pay it. However, this tax burden can be reduced when shared between a married couple or income distributed through a discretionary (family) trust as opposed to in one persons name.

Thornhill and Boglehead
Franking credit refund estimate spreadsheet

Capital Growth investing – boglehead method

There are tax advantages using the Boglehead method too; if you hold a stock for over 12 months (or a house, cryptocurrency etc) then you will receive a 50% Capital Gains Tax exemption. You simply minus the sale cost from your purchase cost (or average cost base), half your profit, and then add that to your income for which you are liable for paying personal income tax on according to the marginal tax rate scales.

Person B is focused on a Boglehead style investing approach and has focused on building a portfolio which pays out little if any dividends but instead has consistent capital growth. We know that again, we want to stick to a 4% withdrawal rate for sustainability, so for the income of $18,200 we need a portfolio of around $455K of shares. The portfolio should grow much higher than that (on average 10%) but we only ever want to harvest 4% so that the remaining growth (6%) will offset the erosive effects of inflation (2-3%) and the inevitable bad years when the share markets go down (corrections).

Every year you can sell up a parcel of shares from your portfolio according to the 4% rule, and as long as your profits from the sales (current price minus cost base) doesn’t exceed $18200, you won’t pay any tax since your personal income tax is below the tax free threshold. However once you start needing more than this, you’ll run into the requirement of having to pay tax. This isn’t so bad, since if you’ve held the parcel of shares for more than 12 months, the capital gains loading is only halved.

If you held the shares for over 12 months and made a profit of $40K, you would only be charged half of $20K worth of capital gains tax. If that was your only transaction for the year, your personal income is only considered to be $20,000. Since that’s above the tax free threshold, you would have to pay tax according to the marginal income tax brackets – essentially your just paying 19% on $1800, or $342 of total personal tax liability. To get this profit, you’d need a portfolio of a cool $1M according to the 4% rule

In the case of franked dividend producing LIC shares, to make $40,000 you would need a franked dividend of around $33,250. This equates to a portfolio worth around $832K (again, using the 4% rule and reinvesting surplus dividends).


From what I can see, a modified approach to Franked dividend yield investing (Thornhill approach) in Aussie ETF/LICs is probably the quickest way for Australian FI/RE chasers to get a passive and tax effective income stream, due to our unique tax laws and franking credits. If the dividends stop (which historically they don’t, they usually just slow down) you can then benefit from the 12 month holding 50% CGT discount to sell some of your shares to fund your cost of living.

Personally I also hedge this bet on just Aussie stocks by including ETFs which track the US market and total world minus US markets. Even though it will produce lower returns, I like the idea that I am diversified and not fully reliant on franking credit refunds which are a bit of a political hot topic at the moment. I don’t know how to quantify this level of risk or diversification yet, but to be honest I don’t expect global (or Aussie) markets to catastrophically collapse in on themselves anyway.

What strategy do you aim for in retirement? Do you think there are any important factors I have missed or left out? Let me know what you think.


eBusiness Institute

eBusiness Institute

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2 thoughts on “Thornhill and Boglehead investing strategies

  1. I’ve been firmly in the Thornhill camp for a while. Not worrying about the capital ups and downs is very appealing.
    Like you, I have a % of the portfolio in global ETF’s. I’ve been trying to read a bit more lately on the growth versus income strategies if only to challenge my views and my confirmation bias. And it has been worthwhile.
    When my son asked how he should allocate his super, I suggested 50/50 (AUS equity / global equity) with the logic being that he has many years to go until retirement. And even though we are approaching retirement, I’m wondering if I shouldn’t be heeding my own advice. We could be looking at 20 – 30 years in retirement after all.
    I know there is no “right” answer and no “perfect” portfolio. I am thinking about upping the % of global equity.

    1. G’day Bob, I reckon you cant go wrong with either. I have certainly jumped around a bit between LIC and ETF, but I have worked out a strategy that works for me – buying undervalued LICs and then benefiting from their awesome returns and 100% franking credits, and then when they are trading at a premium selling them and investing into ETFs. I have major concentration bias in Australian shares – but then again they provide juicy franking credits and it all works so well. Because the Aussie dollar is a bit low at the moment I’m not *too* focused on buying overseas shares, but I would certainly prefer to see a split with more of them than I have now… I would like a target of my shares breakdown to be around 50% aussie, 25% US and 25% global (sans US), and then supplemented by a couple (2-3) of Australian investment properties with around $5000 cash buffer on each investment property, and a $5000 emergency fund for personal stuff (total around ~$20k cash)

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