SIPP Strategy for 30 year old

[BrummieDave]

Note also how many times he will speak of Return On Capital (not Return Of Capital!). It doesn't come as any surprise that Berkshire Hathaway doesn't pay dividends to its investors.

American companies are influenced (like others) by their tax system in deciding how much to pay as a dividend. For many years, a lot of them have found it more tax-efficient to use profits to buy back shares and hike the share price, rather than assigning them as dividends.

And 'hiking the share price' helps the senior execs get their bonus related pay too as this is often linked to that particular metric, especially in the US as you say.

[dealtn]

Buffett is just waiting for someone else to pay to take the profits.

Not sure I understand what you mean. He is 89, and has had majority control Of Berkshire Hathaway since 1964. That's a long time to wait, for whatever it is you mean by "someone else to pay to take the profits".

[JohnB]

Buffet has been offloading Berkshire Hathaway shares onto the Bill and Melinda Gates Foundation for 15 years, at about $2bn a year. Presumably Bill sells shares as he fights malaria, and is very pleased with their Total Return.

If you think you have Buffet's skill buy individual shares, if not buy trackers.

https://en.wikipedia.org/wiki/Bill_%26_ ... t_donation

[EthicsGradient]

Buffett is just waiting for someone else to pay to take the profits.

Not sure I understand what you mean. He is 89, and has had majority control Of Berkshire Hathaway since 1964. That's a long time to wait, for whatever it is you mean by "someone else to pay to take the profits".

What I mean is that to get money out of a company that doesn't pay a dividend, it has to sell an asset - which means finding someone willing to pay for the asset, because they think they can run it and take profits out of it. If everyone had the policy of "never pay a dividend", there would be no point in owning a company, rather than, say, bitcoin. You'd just be betting on what someone might be willing to pay, because they reckon someone else would be willing to pay more, and so on.

[SoBo65]

As others have said, I would be very wary of chasing high yeald, some mae sense such as utilities, infrastructure funds or Realts, but trading companies can be a fools paradise, particularly if the dividend is not covered by profits, cashflow or is being paid for by borrowed money. Much better to focus on total return, you can always sell some shares to generate income if there has been good capital growth will often be better off..

[JohnB]

What luck, the Monevator people have posted a what-if calculation for a 30 year old!

https://monevator.com/financial-indepen ... -pensions/

[dealtn]

Buffett is just waiting for someone else to pay to take the profits.

Not sure I understand what you mean. He is 89, and has had majority control Of Berkshire Hathaway since 1964. That's a long time to wait, for whatever it is you mean by "someone else to pay to take the profits".

What I mean is that to get money out of a company that doesn't pay a dividend, it has to sell an asset - which means finding someone willing to pay for the asset, because they think they can run it and take profits out of it. If everyone had the policy of "never pay a dividend", there would be no point in owning a company, rather than, say, bitcoin. You'd just be betting on what someone might be willing to pay, because they reckon someone else would be willing to pay more, and so on.

Either I don't get what you are trying to say, or you don't understand retained earnings, I'm not sure which.

Berkshire Hathaway holds numerous equity stakes, in addition to companies it owns outright. The stockmarket is open for several hours each and every day. It (I assume you mean Berkshire Hathaway) doesn't have to sell any assets, and even if it did it could do so in the manner and time of its choosing, not "finding someone willing to pay..."

Similarly owners of Berkshire Hathaway can sell at the time of their choosing, and all the while never having received a dividend.

This isn't Berkshire Hathaway specific, but applies to Investment Strategies generally, but I introduced Berkshire Hathaway specifically because of the latest annual letter which explains things succinctly. I suggest you read it if you haven't already as it explains very clearly why there is no need for companies to pay dividends, although many choose to do so, and more relevantly why investors needn't seek them in the pursuit of increasing wealth.

[EthicsGradient]

there is no need for companies to pay dividends, although many choose to do so, and more relevantly why investors needn't seek them in the pursuit of increasing wealth.

If no company paid a dividend, why would anyone put any value on owning stock in a company? It would just be an entry in an electronic list. What Buffett does is hold on to companies, and eventually sell the companies to other people. If he seriously thinks that capitalism would work without anyone ever taking profits, then he doesn't understand it.

I suspect he's just saying that Berkshire Hathaway can function just fine without paying dividends, because it's happy to own subsidiaries for a long time and build them up before selling them, and the shareholders are happy that there will be a ready market for its assets when the time comes to break the holding company up - or that they will eventually decide to pay dividends.

[JohnB]

Share value is traditionally seen as the integrated value of its dividends in perpetuity, but it can also be seen as the value of the company when its wound up. A company with lots of assets, whether they be buildings, shares in other companies or cash in the bank clearly has value even if does not pay dividends. Like an investment trust, it has a book value and can trade above and below that. I guess BH trades above its book value.

[Itsallaguess]

Similarly owners of Berkshire Hathaway can sell at the time of their choosing, and all the while never having received a dividend.

This isn't Berkshire Hathaway specific, but applies to Investment Strategies generally, but I introduced Berkshire Hathaway specifically because of the latest annual letter which explains things succinctly.

I suggest you read it if you haven't already as it explains very clearly why there is no need for companies to pay dividends, although many choose to do so, and more relevantly why investors needn't seek them in the pursuit of increasing wealth.

Isn't it perhaps a bit odd to use Berkshire as an example of why companies don't need to pay dividends, whilst they themselves are earning 3.8 Billion dollars of dividends from ten of their long-term holdings?



(Source - https://berkshirehathaway.com/letters/2019ltr.pdf)

Many of Berkshire's holdings would be considered 'High Yield' in the US market....

The 9 Highest-Yielding Warren Buffett Dividend Stocks - https://www.kiplinger.com/slideshow/investing/T052-S001-9-highest-yielding-warren-buffett-dividend-stocks/index.html

Whilst some investors might be put off by a company paying out earnings in the form of dividends, Buffett clearly isn't one of them.....

Cheers,

Itsallaguess

[1nvest]

Isn't it perhaps a bit odd to use Berkshire as an example of why companies don't need to pay dividends, whilst they themselves are earning 3.8 Billion dollars of dividends from ten of their long-term holdings?

Isn't it a case of Berkshire Hathaway (BRK) is a major shareholder of many businesses and as such can tax efficiently redivert dividends (specific rules that apply to major shareholdings (or outright ownership) that differ when compared to small holdings). Which builds up (massive in the case of BRK) deferred tax liabilities. Which in the US can be zeroed by investors upon death/inheritance. Which is more tax efficient all round, and enables investors to specifically set the amount and date of their own dividends (sell shares). Only beneficial to retain dividends if the company can invest those amounts productively. Many are mature businesses that only need to retain enough to upgrade their assets and outside of that return the surplus (can't redeploy the surplus amounts productively themselves).

A common misconception is that higher yield comes with comparable capital appreciation. It (broadly) doesn't. Total returns can be either a higher dividend and lower capital appreciation or lower dividend and higher capital appreciation. Dividends can confuse comparisons, better to just tally up total returns and compare (perhaps with the same amount of dividend values being removed, which may involve some shares being sold or in BRK's case all of dividends are via selling some shares).

[kempiejon]

A common misconception is that higher yield comes with comparable capital appreciation. It (broadly) doesn't. Total returns can be either a higher dividend and lower capital appreciation or lower dividend and higher capital appreciation

Sometime higher yield becomes low yield as capital appreciation outstrips dividend growth, sometimes a company cuts a dividend and capital growth romps away and there are other permutations, medium capital appreciation and low yield but high dividend growth or zero dividend and high capital appreciation, there are plenty of ways to turn a pound but I don't know there are hard rules that apply specifically relating to the yield sometimes it's an indicator or value sometimes not.

[dealtn]

Isn't it perhaps a bit odd to use Berkshire as an example of why companies don't need to pay dividends, whilst they themselves are earning 3.8 Billion dollars of dividends from ten of their long-term holdings?



(Source - https://berkshirehathaway.com/letters/2019ltr.pdf)

The point is more that Warren and Charlie would be very happy for the companies they invest in not to pay a dividend, but for them to retain earnings, and reinvest them at high rates of return on that (new) capital. As it is, using your table, those top 10 companies do just that with about 2/3 of those earnings, only paying out 1/3. Rather than focus on the "large" $3,798 number, look at the "larger" $8,332.

He puts it better than me, of course, so look at the section in the shareholder's letter on the energy company he owns (and its competitor).

[hiriskpaul]

Might be worthwhile pointing out that BRK does buy back its own shares. If you hold shares in a company that buys in more shares than it issues, such as BRK, your proportion of company ownership rises. To keep it the same you need to sell shares - there is your dividend.

[Rajput1962]

I don't think you can control returns, just costs and taxes, so trickle the money into a world index tracker at the lowest cost using a capped fee broker, and research salary sacrifice and the like. When you get a promotion, don't change your lifestyle, boost your savings, and you'll be surprised how quickly they pull away.

Use company pensions, but suck the money out into your SIPP when changing jobs, and once a year or so if they allow partial transfers.

I have a pension with a company i used to work for several years ago which i invested in a passive fund, and it's done well. In the event of my demise, the trustees will pay my nominated beneficiary 100% of value which a SIPP would also allow me to do. I don't think i'm likely to draw on this particular pension in the future as i can get by on other income. However, a part of me thinks that i ought to move it from the company pension scheme and into a SIPP if nothing else other than to consolidate with one investment platform so there'll be 'one less institution to deal with' when i pop my clogs. But, why did you suggest '...suck money out into your SIPP ...'? Are there some other good reasons?

[JohnB]

Check the fund charges. You can get index tracker ETFs that cost 0.07 to 0.2% a year to run, which brokers will hold for free. Your pension provider might charge a lot more.