miner1000 wrote:Fair enough comment from Gengulphus, although I bought Diageo many years ago at 1800p and it has consistently returned cash and sometimes in the intervening period has been on 4% yield. Total return however has been outstanding, and although I am generally a HYPer, I believe that shares like Diageo, Unilever and Reckitt B just have to be in the HYP to give it the stability one wants to see during some of the more turbulent times that we have experienced over the past 15 years.
But what I care about for a new purchase is not the returns and stability it has given
you over the
last 15 years, but those it will give
me over the
next 15 years (*). A company's past record gives some indication of how skilled its management is at delivering those returns and stability, but only
some indication, because managements can change, resulting in skills being lost to the company, and even if that doesn't happen, external changes can mean that particular skills cease to be as relevant to the company and others that haven't been particularly relevant and may not be present become important. The history of HYPing (and more generally of the stockmarket) is littered with examples of companies with excellent-looking returns and stability which subsequently went wrong. As just one example, I can remember exactly the same sort of argument being made about Tesco around 2007: a historical dividend of 9.64p and a share price in the rough range 400-500p gave it a yield in the rough range 1.9-2.4%, but it had an excellent record of returns and stability over many years (at least back to 1994, probably further). Unfortunately, it only kept the record of dividend growth going until 2011, then slowed down considerably in 2012, ground to a halt in 2013 and 2014, then cut completely. It's resumed dividend payments since, but at 9.15p, they're not yet back to the 2007 level - and the share price is currently about half of its 2007 level...
The net result is that when combined with not seeing any reason why it shouldn't continue, I regard a company's good record of returns and stability as being highly likely to continue for the next few years, but increasingly less likely to do so as the number of years increases. That basically means that at the time of purchase, there's only a certain amount of shortfall in dividend yield even a truly excellent company record can compensate for - and a 2.2% yield in current conditions is just too great a shortfall. That's on a statistical basis - i.e. if I make a habit of allowing such a record to compensate for a 2.2% yield, in 15 years' time I may well find I've some 'Diageo's for which I'm heartily glad I made that decision, but equally, I may well find I've got some 'Tesco' for which I bitterly regret having made it, and overall, I doubt that I'd be better off other than by blind luck.
At higher yields, my verdict on Diageo would accordingly be very different. At 4% (which I agree it has been on very occasionally historically, though not in the last decade as far as historical yield is concerned according to
https://dividenddata.co.uk/dividend-yield.py?epic=DGE with "Max" timeframe selected), I would snap it up (**). At 3.5%, I would very likely buy it, even if it was below the FTSE100 yield at the time (that just means I would be unlikely to post about doing so!). At 3%, I would still think about buying it, though probably end up not doing so. At 2.5% and below, I wouldn't think about it for a new HYP purchase any longer than I needed to establish that its yield was that low.
(*) Or more accurately, the next N years, where the unknown N depends on how much longer I live - but as it happens, N's statistically-expected value for me is probably not all that far from 15!
(**) Provided it still had the good record, I had the money available and I was paying attention at the time!
Gengulphus