Diversification using instalments

Building a share portfolio?

Instalments can be used to achieve a range of investment goals; leveraged exposure to shares; generate a regular income stream or help achieve a diversified share portfolio. Given a fixed amount of funds, you are able to purchase an equivalent number of instalments (as you would invest in shares), resulting in a lower capital outlay.

Example

You have $40,000 to set up a diversified portfolio. You select four stocks that you expect to provide a capital appreciation and income stream, allocating $10,000 in each share.

Before buying these shares you decide to evaluate the result of substituting shares for instalments, achieving a $10,000 exposure in each individual share: 

Shares/Price No. of shares Instalments/Price No. of instalments
BHP - $12.26 816 BHPIOC - $6.83 816
CBA - $33.30 300 CBAIWE - $16.58 300
QAN - $3.41 2933 QANIZO - $1.62 2933
WOW - $11.85 844 WOWIZO - $6.00 844
Amount invested $40,000    $20,363 
Share exposure $40,000   $40,000

The diversified approach allows you to gain the same exposure as purchasing $40,000 worth of shares, except investing $20,363 instead. For the equivalent exposure in shares, the instalment investment will result in $19,637 in excess cash, giving you the opportunity to further diversify into other asset classes (such as exchange traded funds, debt securities or listed property trusts etc.). 

Purchasing instalments as opposed to shares will also impact your income stream. As instalments entitle you to the equivalent dividends and franking credits to ordinary shareholders. Your income return is enhanced as a result of a lower cost per share exposure. The dividend yield is 7.68% pa for the instalment investment portfolio compared to 3.83% pa for the share portfolio. In addition, the income received from the remaining funds ($19,500) would add to the income stream. 

Shares/Price          Dividend Yield Fully franked Instalments/Price Yield Fully franked
BHP - $12.26 $0.227 1.85% 2.65% BHPIOC - $6.83 3.32% 4.75%
CBA - $33.30 $1.64 4.92% 7.04% CBAIWE - $16.58 9.89% 14.13%
QAN - $3.41 $0.17 4.99% 7.12% QANIZO - $1.62 10.49% 14.99%
WOW - $11.85       $0.42    3.54% 5.06%   WOWIZO - $6.00 7.00%   10.00% 
Avg Yield   3.83% pa 5.47% pa  

7.68% pa

 10.97% pa

Main benefits of the strategy

  • Ability to gain equivalent exposure to shares, with funds remaining to reinvest in other assets - diversification
  • Exposure to accelerated capital growth
  • Exposure to enhanced income stream (dividends and franking credits)

Main risks of the strategy

  • Due to the leveraged nature of the instalment, a small negative movement in the share price will lead to a greater percentage loss on the instalment

Disclaimer
The information is for educational purposes only and does not constitute financial product advice. ASX does not represent or warrant that the information is complete or accurate. You should consider obtaining independent advice before making any financial decisions. To the extent permitted by law, no responsibility for any loss arising in any way (including by way of negligence) from anyone acting or refraining from acting as a result of this material is accepted by ASX.