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The Income Addiction

General discussions about equity high-yield income strategies
Newroad
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The Income Addiction

#474321

Postby Newroad » January 19th, 2022, 9:25 am

Hi All.

There was an interesting article in the Sunday Times this week, p8 in the Business (and Money) section: "The Income Addiction"

https://www.thetimes.co.uk/article/divi ... -9h3wkvwxw (alas, behind a paywall)

It piqued my interest as (to attempt to papaphrase) it said that the desire for (high) dividend yields from the UK Equity market was in essence cultural - not just for individual investors, but for institutional ones as well. It then suggested this led to under investment by companies in themselves, lowering longer term (total) returns.

If this is even moderately accurate, it might mean the underperformance of the UK relative to (say) the US has a structural component to it - hence any sense of mean reversion over time may be weaker or even non existent. It would also perhaps undermine a frequent defence that the UK has many companies with global exposure - as the opportunity cost of paying dividends in lieu of good global reinvestment opportunities (assuming they have them) would presumably lead to the lower returns alluded to above.

Finally, such a regime also leads to fewer growth companies wishing to list in the UK (and some home grown ones choosing to list elsewhere) - though that is less relevant to this board.

However, feel free to read and draw your own conclusions.

Regards, Newroad

88V8
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Re: The Income Addiction

#474370

Postby 88V8 » January 19th, 2022, 10:53 am

Newroad wrote:....It then suggested this led to under investment by companies in themselves, lowering longer term (total) returns.

That sounds logical.
As an income investor I am quite happy with the yield from the UK market, but I take the central thesis that a high divi leaves less available to invest.

This assumes that BoDs would have invested well and wisely, but Unilever's reported tilt at GSK is, to me, just another example of corporate daftness. An r&d-heavy business requiring a large increase in debt, what are they thinking of...

In terms of 'growth', we had waves of corporate diversification and acquisition, followed by waves of spinning off and focusing on 'the core'.
On the whole I tend to prefer the pound in my own pocket rather than the BoD's but if I were younger and looking to grow my pot I might feel differently of course.

V8

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Re: The Income Addiction

#474391

Postby Newroad » January 19th, 2022, 11:39 am

Indeed 88V8.

There are perhaps times in the cycle where a high dividend policy might prove a handbrake to less promising corporate activity. However, I'm not sure that actually stops most BoD's and similar if they get that sort of idea in their head, e.g. Fred Goodwin back in the day.

Regards, Newroad

Lootman
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Re: The Income Addiction

#474472

Postby Lootman » January 19th, 2022, 3:07 pm

Newroad wrote: the desire for (high) dividend yields from the UK Equity market was in essence cultural - not just for individual investors, but for institutional ones as well. It then suggested this led to under investment by companies in themselves, lowering longer term (total) returns.

If this is even moderately accurate, it might mean the underperformance of the UK relative to (say) the US has a structural component to it - hence any sense of mean reversion over time may be weaker or even non existent.

I have long thought exactly the same thing. I find it rather perplexing that UK investors, including some here, see a high dividend yield as a good thing. Whereas I see it as a warning sign.

A key to liberating oneself from the addiction/obsession with yield is to come to the realisation that the income versus growth distinction is somewhat arbitrary. What investing really is about, or at least in my view should be about, is cashflows. That is easier to see with bonds than with shares, but the principle is the same either way.

Once one is freed from the notion that you need income then one can invest less emotionally. And there are various instruments and devices for converting gains into income and vice versa anyway, so the distinction between growth and income is fuzzy at best.

These days I look for shares that yield 3% or less, as that indicates to me a company that is not straining to give a big payout just because investors like that. I am never seduced by a high headline yield. An anti-HYP approach if you like.

scrumpyjack
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Re: The Income Addiction

#474474

Postby scrumpyjack » January 19th, 2022, 3:18 pm

In general I agree that UK companies have overdistributed, partly because it has become a virility symbol for directors not to cut (sorry – rebase) the dividend and partly because directors are addicted to fiddling the figures and presenting a phoney EPS figure (core or adjusted or whatever the latest euphemism is) and then pretending that EPS is available for paying dividends. It isn’t because it is not the real bottom line so they over distribute and gradually run up ever higher borrowings to pay it.

But there is another side to this. It sometimes happens that companies have a run of good trading generating exceptional real profits. They use this for ill judged expansion causing havoc. This is what happened to the big mining companies. They invested heavily in greater production as mining was so profitable. Of course all that extra output collapsed prices and the profits vanished! So this time round they are sensibly paying huge divis rather than over expanding.

So paying the dividend is a good discipline for directors but I sell if I think they are distributing too much and it is unsustainable.

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Re: The Income Addiction

#474493

Postby Charlottesquare » January 19th, 2022, 4:33 pm

scrumpyjack wrote:In general I agree that UK companies have overdistributed, partly because it has become a virility symbol for directors not to cut (sorry – rebase) the dividend and partly because directors are addicted to fiddling the figures and presenting a phoney EPS figure (core or adjusted or whatever the latest euphemism is) and then pretending that EPS is available for paying dividends. It isn’t because it is not the real bottom line so they over distribute and gradually run up ever higher borrowings to pay it.

But there is another side to this. It sometimes happens that companies have a run of good trading generating exceptional real profits. They use this for ill judged expansion causing havoc. This is what happened to the big mining companies. They invested heavily in greater production as mining was so profitable. Of course all that extra output collapsed prices and the profits vanished! So this time round they are sensibly paying huge divis rather than over expanding.

So paying the dividend is a good discipline for directors but I sell if I think they are distributing too much and it is unsustainable.


It may also be selection bias, FTSE100 holding far more "old" business entities where growth is never going to be exciting whereas in say USA more growth based shares seek an initial listing there and feed through to the top index.

Maybe our indices are in effect stuffy and the USA's are more sexy?

Dod101
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Re: The Income Addiction

#474509

Postby Dod101 » January 19th, 2022, 5:03 pm

88V8 wrote:This assumes that BoDs would have invested well and wisely, but Unilever's reported tilt at GSK is, to me, just another example of corporate daftness. An r&d-heavy business requiring a large increase in debt, what are they thinking of...V8


Unilever was not attempting to buy GSK, only the healthcare bit of it. The really big R & D component is of course the drugs part.

Dod

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Re: The Income Addiction

#474511

Postby Lootman » January 19th, 2022, 5:06 pm

Charlottesquare wrote:
scrumpyjack wrote:In general I agree that UK companies have overdistributed, partly because it has become a virility symbol for directors not to cut (sorry – rebase) the dividend and partly because directors are addicted to fiddling the figures and presenting a phoney EPS figure (core or adjusted or whatever the latest euphemism is) and then pretending that EPS is available for paying dividends. It isn’t because it is not the real bottom line so they over distribute and gradually run up ever higher borrowings to pay it.

But there is another side to this. It sometimes happens that companies have a run of good trading generating exceptional real profits. They use this for ill judged expansion causing havoc. This is what happened to the big mining companies. They invested heavily in greater production as mining was so profitable. Of course all that extra output collapsed prices and the profits vanished! So this time round they are sensibly paying huge divis rather than over expanding.

So paying the dividend is a good discipline for directors but I sell if I think they are distributing too much and it is unsustainable.

It may also be selection bias, FTSE100 holding far more "old" business entities where growth is never going to be exciting whereas in say USA more growth based shares seek an initial listing there and feed through to the top index.

Maybe our indices are in effect stuffy and the USA's are more sexy?

Although the S&P 500 does have some odd rules as well. Berkshire was never in for a long time because of the high nominal share price, and still isn't in the DJIA for that reason. Tesla was only recently admitted despite having a market cap in the hundreds of millions of dollars because of issues with a lack of earnings. Other shares have been withheld because of an insufficient free float.

vand
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Re: The Income Addiction

#474554

Postby vand » January 19th, 2022, 7:33 pm

I think that the US hs always been and remains an outstanding country in terms of startups, innovation, and entrepreneurship, which is what gives it its edge over the rest of the world, as the largest firms in the S&P are continually changing as new companies grow quickly to dominate.

That said, in terms of what that is worth to the country's stock market returns, probably not as much as you might imagine. The very long term real return of US stocks is only about 1% higher than global, and that is probably a fair reflection of their edge over everyone else.

On the UK, I do think that our longrunning unhealthy obsession with property is probably a large reason why we've gradually become more and more uncompetitive and uninspiring. Property is essentially a non-productive asset that. Houses do little to spur innovation, bring new products to the market, or change the way we do business, but we seem obsessed with them in this country, where the automatic path to building wealth for many people is through real estate, rather than taking on the risk of starting a business.

That said, the UK is not a bad place to do business, and I believe we do have our share of quality businesses here. The FTSE250 has just about matched the returns of the S&P over the last cycle, and it hasn't needed Tesla, Amazon or even ridiculous valuations to do it. The FTSE100 is handicapped with a lot of financials and commodity plays that have found the last macro cycle difficult.

Lootman
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Re: The Income Addiction

#474555

Postby Lootman » January 19th, 2022, 7:42 pm

vand wrote:On the UK, I do think that our longrunning unhealthy obsession with property is probably a large reason why we've gradually become more and more uncompetitive and uninspiring. Property is essentially a non-productive asset that. Houses do little to spur innovation, bring new products to the market, or change the way we do business, but we seem obsessed with them in this country, where the automatic path to building wealth for many people is through real estate, rather than taking on the risk of starting a business.

It can make a lot of sense to invest in UK property. We are a small crowded country that (at least in the south of England) is one of the wealthiest regions on the planet PLUS it is attractive to foreign capital. So there will always be a premium to prime UK property beyond its inherent value as real estate.

I am also not sure I agree that residential property is non-productive. It provides shelter and housing which is a basic human need in much the same way as water, food, healthcare, energy, transportation and other sectors that are investable. We see this most clearly in REITs which are the securitised form of housing and property provision.

Speaking personally I was investing in property and being a landlord before I started playing in the stock market, albeit only by a few years. That was partly because it was and is easier to borrow to buy property than it is to borrow to invest in securities. I attribute what financial success and security I have had as much to property as to securities, and I am grateful that the UK has been a fertile location for both to be profitable.

88V8
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Re: The Income Addiction

#474690

Postby 88V8 » January 20th, 2022, 10:53 am

Dod101 wrote:
88V8 wrote:This assumes that BoDs would have invested well and wisely, but Unilever's reported tilt at GSK is, to me, just another example of corporate daftness. An r&d-heavy business requiring a large increase in debt, what are they thinking of...V8


Unilever was not attempting to buy GSK, only the healthcare bit of it. The really big R & D component is of course the drugs part.

Quite so, but where my wife worked for GSK in Weybridge there is a substantial Oral Care R&D operation. One would think that toothpaste and mouthwash formulations were done and dusted years ago, but it ain't so.

V8

Dod101
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Re: The Income Addiction

#474700

Postby Dod101 » January 20th, 2022, 11:18 am

88V8 wrote:
Dod101 wrote:
88V8 wrote:This assumes that BoDs would have invested well and wisely, but Unilever's reported tilt at GSK is, to me, just another example of corporate daftness. An r&d-heavy business requiring a large increase in debt, what are they thinking of...V8


Unilever was not attempting to buy GSK, only the healthcare bit of it. The really big R & D component is of course the drugs part.

Quite so, but where my wife worked for GSK in Weybridge there is a substantial Oral Care R&D operation. One would think that toothpaste and mouthwash formulations were done and dusted years ago, but it ain't so.

V8


Well yes of course, these things do not make themselves but I cannot believe that it is an R & D heavy business in the way that the drug side is. After all, I daresay to introduce a new Knorr stock cube must require some R & D as well.

Dod

stevensfo
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Re: The Income Addiction

#474750

Postby stevensfo » January 20th, 2022, 2:01 pm

Dod101 wrote:
88V8 wrote:
Dod101 wrote:
88V8 wrote:This assumes that BoDs would have invested well and wisely, but Unilever's reported tilt at GSK is, to me, just another example of corporate daftness. An r&d-heavy business requiring a large increase in debt, what are they thinking of...V8


Unilever was not attempting to buy GSK, only the healthcare bit of it. The really big R & D component is of course the drugs part.

Quite so, but where my wife worked for GSK in Weybridge there is a substantial Oral Care R&D operation. One would think that toothpaste and mouthwash formulations were done and dusted years ago, but it ain't so.

V8


Well yes of course, these things do not make themselves but I cannot believe that it is an R & D heavy business in the way that the drug side is. After all, I daresay to introduce a new Knorr stock cube must require some R & D as well.

Dod


I tend to agree. Probably not so much R&D as research into ways of advertising. 8-)

One of my first 'real' jobs in science was in the Periodontal Diseases unit of the MRC in London, and all the very highly experienced dentists agreed that the real effects of cleaning the teeth were due to the physical action of scrubbing the teeth, with the addition of fluoride an important factor as well.

Some even advocated, rather than toothpaste containing artificial sweeteners and other foreign compounds, just using salt to kill off bacteria and/or bicarbonate to increase the pH.

Today I use a cheap toothpaste but a good electric toothbrush.

...which doubles as a good substitute for a spoon if I have to stir my tea. ;)

Steve

Dod101
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Re: The Income Addiction

#474763

Postby Dod101 » January 20th, 2022, 2:49 pm

stevensfo wrote:
Dod101 wrote:
88V8 wrote:
Dod101 wrote:
88V8 wrote:This assumes that BoDs would have invested well and wisely, but Unilever's reported tilt at GSK is, to me, just another example of corporate daftness. An r&d-heavy business requiring a large increase in debt, what are they thinking of...V8


Unilever was not attempting to buy GSK, only the healthcare bit of it. The really big R & D component is of course the drugs part.

Quite so, but where my wife worked for GSK in Weybridge there is a substantial Oral Care R&D operation. One would think that toothpaste and mouthwash formulations were done and dusted years ago, but it ain't so.

V8


Well yes of course, these things do not make themselves but I cannot believe that it is an R & D heavy business in the way that the drug side is. After all, I daresay to introduce a new Knorr stock cube must require some R & D as well.

Dod


I tend to agree. Probably not so much R&D as research into ways of advertising. 8-)

One of my first 'real' jobs in science was in the Periodontal Diseases unit of the MRC in London, and all the very highly experienced dentists agreed that the real effects of cleaning the teeth were due to the physical action of scrubbing the teeth, with the addition of fluoride an important factor as well.

Some even advocated, rather than toothpaste containing artificial sweeteners and other foreign compounds, just using salt to kill off bacteria and/or bicarbonate to increase the pH.

Today I use a cheap toothpaste but a good electric toothbrush.

...which doubles as a good substitute for a spoon if I have to stir my tea. ;)

Steve


Funnily enough I use McLeans toothpaste, part of the Glaxo healthcare company. I do not know whether that entails R & D, heavy or otherwise, but just to pursue that theme, Unilever is bound to have labs as well researching the latest fads, I almost called them, in food technology.

Dod

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Re: The Income Addiction

#475307

Postby bungeejumper » January 22nd, 2022, 12:24 pm

88V8 wrote:Quite so, but where my wife worked for GSK in Weybridge there is a substantial Oral Care R&D operation. One would think that toothpaste and mouthwash formulations were done and dusted years ago, but it ain't so.

Which reminds me. Way back in the 1950s, the American marketing psychologist Vance Packard told the story of a leading US toothpaste manufacturer which tried a succession of ad pitches in its attempts to boost demand.

The first pitch focused on the health aspects. If you didn't buy the company's toothpaste, all your teeth would drop out. It had almost no impact on sales.

The second pitch was that if you didn't buy the toothpaste, your breath would smell and all your friends would desert you. (This was a real problem in the up-market department store where I worked on saturdays. The wealthier the customers, the bigger the likelihood that you'd need to open all the doors after they'd sallied in and out with their retinues of bag-carriers.) But as a sales pitch, it failed utterly. Not even a twitch on the chart.

The third pitch was that if you bought the toothpaste, your mouth would feel zingy and fresh all day. Sales promptly soared. :lol:

BJ

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Re: The Income Addiction

#476420

Postby AndyPandy » January 26th, 2022, 10:55 pm

bungeejumper wrote:
88V8 wrote:Quite so, but where my wife worked for GSK in Weybridge there is a substantial Oral Care R&D operation. One would think that toothpaste and mouthwash formulations were done and dusted years ago, but it ain't so.

Which reminds me. Way back in the 1950s, the American marketing psychologist Vance Packard told the story of a leading US toothpaste manufacturer which tried a succession of ad pitches in its attempts to boost demand.

The first pitch focused on the health aspects. If you didn't buy the company's toothpaste, all your teeth would drop out. It had almost no impact on sales.

The second pitch was that if you didn't buy the toothpaste, your breath would smell and all your friends would desert you. (This was a real problem in the up-market department store where I worked on saturdays. The wealthier the customers, the bigger the likelihood that you'd need to open all the doors after they'd sallied in and out with their retinues of bag-carriers.) But as a sales pitch, it failed utterly. Not even a twitch on the chart.

The third pitch was that if you bought the toothpaste, your mouth would feel zingy and fresh all day. Sales promptly soared. :lol:

BJ


The fourth pitch was to make the hole bigger. Possibly.


https://openwebsolutions.in/blog/myth-f ... e-company/

Arborbridge
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Re: The Income Addiction

#481557

Postby Arborbridge » February 19th, 2022, 6:18 pm

"Once one is freed from the notion that you need income then one can invest less emotionally", says Lootman.

I could turn that round as say that once I was freed from worrying about capital values, I could invest less emotionally and look to income.

In fact I do both. It just so happens that I needed a given yield to produce the income needed and was not willing to go down the road of harvesting assets. For some years, I have also had a lower yield side since as one reaches the point of receiving enough income, one then has the luxury of looking at lower yield investments.

Arb.

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Re: The Income Addiction

#481560

Postby BullDog » February 19th, 2022, 6:38 pm

AndyPandy wrote:
bungeejumper wrote:
88V8 wrote:Quite so, but where my wife worked for GSK in Weybridge there is a substantial Oral Care R&D operation. One would think that toothpaste and mouthwash formulations were done and dusted years ago, but it ain't so.

Which reminds me. Way back in the 1950s, the American marketing psychologist Vance Packard told the story of a leading US toothpaste manufacturer which tried a succession of ad pitches in its attempts to boost demand.

The first pitch focused on the health aspects. If you didn't buy the company's toothpaste, all your teeth would drop out. It had almost no impact on sales.

The second pitch was that if you didn't buy the toothpaste, your breath would smell and all your friends would desert you. (This was a real problem in the up-market department store where I worked on saturdays. The wealthier the customers, the bigger the likelihood that you'd need to open all the doors after they'd sallied in and out with their retinues of bag-carriers.) But as a sales pitch, it failed utterly. Not even a twitch on the chart.

The third pitch was that if you bought the toothpaste, your mouth would feel zingy and fresh all day. Sales promptly soared. :lol:

BJ


The fourth pitch was to make the hole bigger. Possibly.


https://openwebsolutions.in/blog/myth-f ... e-company/

Fact is, today the tube that contains 100ml of tooth paste is the same size as it was when the tube held 150ml. First the contents were reduced to 125ml and then to 100ml. Do the toothpaste companies really think I don't notice?


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