An idiot income portfolio

An obsession with franked dividends means Aussie investors miss out on the big returns

- Marcus Padley

Ultimately, the rules of income investing are unpretentious: keep it simple, buy reliable yield, not high yield, share prices are more important than dividends, go large on the banks, add some hybrids if you’re a chicken, and don’t forget the golden rule of income investing: only buy for income if the share price is going up. It’s called the “idiot income portfolio”. It’s the same as the “idiot portfolio” but slightly different.

The idiot portfolio is the portfolio financial professionals buy you so they can’t be sued. They distill it by listing all the shares in the S&P/ASX 200 index on Excel, sorting them in market cap order, and then, starting at the top, crossing out any stocks they can’t spell, don’t understand, and wouldn’t be able to defend if ASIC asked them “Why did you buy that?”.

The stocks that are left make up the idiot portfolio. In Australia, it’s not actually a bad portfolio, even if it is a bit boring.

For income investors, the idiot income portfolio is created slightly differently, but it’s still a pretty easy exercise. All you do is take the S&P/ASX 200 and, using consensus numbers, sort them in order of forecast gross dividend yield (the gross yield includes franking) with the highest yielding stock at the top. Now you work the same process of elimination, but with a couple of caveats for income, including the golden rules of income investing: anything that appears to yield over 10% probably doesn’t, and avoid anything paying a one-off big dividend. For a stock to be an income stock, the dividend has to be sustainable.