The Lemon Fool

BBLSP1 wrote:A lot of ‘complexification’ here, to use a Luni’ism.

Bottom line, what is so good about dividend investing is that you do not run out of shares.

The dividends are the profit which a company makes that are passed on to the owners of the company, i.e. the shareholders. It is real cash that can be spent, without having to sell shares until none are left.

Of course the dividend must come from underlying profits; if that is not the case, stay away.

You may have the same number of shares, but your shares are worth less.

BBLSP1 wrote:Of course the dividend must come from underlying profits; if that is not the case, stay away.

The failure of Carillion and others suggests that Accounting standards are not sufficiently rigorous to prevent Companies announcing profits which in cash terms are years in the future, if at all. They also don't stop distribution of this unearned balance as dividend until the Company completely runs out of borrowing powers and is forced to close.

As yet, nobody has actually answered the question.

5p in dividend comes from 5p of the share capital that you owned before XD day. It's 5p of your own money.

All that's happened is that the share's value has fallen by 5p and you have 95p of share and 5 p in cash.

What's the difference if that 5p is held within the share or as cash that you then reinvest?

You still own one share, it's just worth 5% less than it was before.
It's the same outcome as selling 5% of your shares and taking the income that way.

All this applies equally in a market that is rising, falling or doing the Hokey Cokey!

Fundamentally, I think the wrong question is being asked, at least I think we need to know why the investor is investing in the first place. My answer was based on my need for income. If others are simply building capital (like the HYP builders) then income investing is certainly questionable to my mind anyway.. They should be looking at total return. It is absolutely useless as a HYP builder to buy and hold a share like Imperial Brands and in fact many of the very shares that they do buy. High yield shares are high yield either because of a sustained fall in the share price or in compensation for the fact that the share is seen by the market as ex growth, or worse, that they are heading for a dividend cut.

Dod

absolutezero wrote:

Itsallaguess wrote:

absolutezero wrote:
So why take the dividends?

Because it's a method of gaining confidence in an income stream, even during the period where you don't necessarily need to use it as income.

When you want to use it as income, nothing at all changes, apart from diverting dividends from re-investment to 'income-taking'.

It's a single-strategy solution that some investors are happy to take advantage of *even if* there's some level of comparable performance detriment, as the long term confidence in the underlying income stream sometimes plays a higher importance than pure capital appreciation.

For some investors, they perhaps lack the confidence and/or ability that simply being told to 'keep to a growth strategy and then just sell some shares' isn't enough for them, and they'd prefer to have longer-term visibility of low-effort income-delivery over both 'phases'...

To be clear - I'm not sure anyone in that category ever seriously thinks it's a better method of accumulating capital - it's the long-term visibility of the underlying income-stream that is often key to their particular strategical preference...

So you're basically saying its psychological rather than financial?

Not necessarily 'psychological rather than financial' - I wouldn't put it like that myself - but perhaps rather I'm just trying to highlight that some people really value some particular investment 'processes', and perhaps gaining long-term confidence in them, over and above a stricter focus on *just* capital gain...

Cheers,

Itsallaguess

Dod101 wrote:Fundamentally, I think the wrong question is being asked, at least I think we need to know why the investor is investing in the first place. My answer was based on my need for income. If others are simply building capital (like the HYP builders) then income investing is certainly questionable to my mind anyway.. They should be looking at total return. It is absolutely useless as a HYP builder to buy and hold a share like Imperial Brands and in fact many of the very shares that they do buy. High yield shares are high yield either because of a sustained fall in the share price or in compensation for the fact that the share is seen by the market as ex growth, or worse, that they are heading for a dividend cut.

Dod

But again. £1 of income is £1 whether it comes from a dividend distribution or a capital sale.
There is no financial difference.

Itsallaguess wrote:

absolutezero wrote:

Itsallaguess wrote:


Because it's a method of gaining confidence in an income stream, even during the period where you don't necessarily need to use it as income.

When you want to use it as income, nothing at all changes, apart from diverting dividends from re-investment to 'income-taking'.

It's a single-strategy solution that some investors are happy to take advantage of *even if* there's some level of comparable performance detriment, as the long term confidence in the underlying income stream sometimes plays a higher importance than pure capital appreciation.

For some investors, they perhaps lack the confidence and/or ability that simply being told to 'keep to a growth strategy and then just sell some shares' isn't enough for them, and they'd prefer to have longer-term visibility of low-effort income-delivery over both 'phases'...

To be clear - I'm not sure anyone in that category ever seriously thinks it's a better method of accumulating capital - it's the long-term visibility of the underlying income-stream that is often key to their particular strategical preference...

So you're basically saying its psychological rather than financial?

Not necessarily 'psychological rather than financial' - I wouldn't put it like that myself - but perhaps rather I'm just trying to highlight that some people really value some particular investment 'processes', and perhaps gaining long-term confidence in them, over and above a stricter focus on *just* capital gain...

Cheers,

Itsallaguess

But again. £1 is £1. Money is fungible.

If people value one form of acquiring that £1 over another, then that ceases to be finance and start to be psychology.

absolutezero wrote:
As yet, nobody has actually answered the question.

5p in dividend comes from 5p of the share capital that you owned before XD day. It's 5p of your own money.

All that's happened is that the share's value has fallen by 5p and you have 95p of share and 5 p in cash.

What's the difference if that 5p is held within the share or as cash that you then reinvest?

Because by doing nothing, a granular income-stream has been developed, which can be measured and tracked, and then over the long term, and along with all the other 'do nothing' granular income streams, the overall portfolio income can ultimately be judged against any underlying, and eventual, income requirements over a long period, and often covering a number of market cycles, thus delivering confidence in it...

That cannot be done in the same way if it's not originally delivered 'task free', and stays within the company capital.

There might well be some level of re-investment process required whilst not needing to take that income stream, but those tasks are often used for portfolio management opportunities anyway, during that phase of investment, and can be opportunities for things like diversifying into other investments, or managing developing portfolio imbalances over longer periods...

Cheers,

Itsallaguess

There is also the point that the directors have made a (hopefully) considered decision as to how much can be paid out in dividend whilst leaving sufficient resources for the company to prosper. The shareholder can then spend it as income.

There’s an argument to be made that the (expected) requirement to deliver shareholders with dividends focuses management to follow business strategies that earn profits and generate cash to be distributed. Isn’t that the fundamental purpose of any business, I.e. to deliver its owners with an income?

Here’s a couple of other reasons why I’m a dividend income investor, in my case using Investment Trusts

1. Once a dividend is paid, it can’t be taken back. Capital gains can vanish
2. More confidence in a reasonably steady flow of income. My own dividend flow remained intact through last years crash
3. Capital is not surrendered c/f an annuity
4. No effort required, no decisions to be made, other than occasional review that the portfolio continues to meet requirements
5. It’s really nice to see cash being delivered into your bank account!

Thx

MP

mickeypops wrote:There’s an argument to be made that the (expected) requirement to deliver shareholders with dividends focuses management to follow business strategies that earn profits and generate cash to be distributed. Isn’t that the fundamental purpose of any business, I.e. to deliver its owners with an income?

Yes one needs to distinguish between the real life financial performance of the company and the share price the market assigns to the company. The share price tends to reflect the market view of what may happen in the future, not how the business has actually performed so far. A high value can be attached to a business even though it has never made any profits or paid any dividends. I think Buffet said 'in the short term the stock market is a voting machine', so there is a fundamental difference between a company making a profit and paying some of that out in dividend as compared to paying no dividends and the shareholder sells part of his/her holding.

absolutezero wrote:

Dod101 wrote:Wait a minute. What are you actually questioning Why not buy a tracker. or Why dividend investing.

I suspect that you must know that both questions have been done to death on these Boards quite recently.

Dod

I am aware of that, hence starting a discussion as to WHY people invest for dividend income over total return.
£1 is £1 whether it comes from income or selling capital given the effect of XD day on share prices.

Well, the answer is in Dod's post. He and I like dividend investing for precisely the same reasons.
Read his post again! If you don't agree, it's your prerogative to do something different - no one is forcing you to agree.

Arb.

mickeypops wrote:There’s an argument to be made that the (expected) requirement to deliver shareholders with dividends focuses management to follow business strategies that earn profits and generate cash to be distributed.

Although most shareholders will have purchased on a secondary market, payment of a dividend could be regarded as a rental payment for use of the original capital. That's like a corporate bond only with the advantage of ownership and the disadvantage of increased risk. But like a corporate bond, evaluation of the investment should use redemption yield concepts, so ignoring the eventual capital value on disposal in the longer term is just wrong.

Where Companies pay dividends that increase every year by much more than inflation, the shares of these Companies can be in demand and thus show below average running yields. That's not a good reason for dividend seeing investors to pass them over. Professional managers of "Income" funds usually seem to have decent holdings of Diageo and Unilever, these being prominent examples where a likely return is the sum of the dividend yield and dividend growth rate.

Dod101 wrote:
It is absolutely useless as a HYP builder to buy and hold a share like Imperial Brands and in fact many of the very shares that they do buy.

I think we need to be careful not to perhaps condemn what could in reality be a quite broad number of income-investment strategies by using one particular example of one particular 'ultra-high-yield' approach.

Whilst you might be quite right with the above view, that isn't to say that lower-yielding income-strategies, covering a potentially much broader investment landscape than that specifically covered by the HYP strategy, can't be more successful in avoiding some of the issues sometimes seen whilst 'chasing higher and higher yields'....

Let's please not again condemn *every* income-investment strategy by using what can be really quite granular 'worst case' examples in some instances...

Cheers,

Itsallaguess

absolutezero wrote:As yet, nobody has actually answered the question.

5p in dividend comes from 5p of the share capital that you owned before XD day. It's 5p of your own money.

All that's happened is that the share's value has fallen by 5p and you have 95p of share and 5 p in cash.

What's the difference if that 5p is held within the share or as cash that you then reinvest?

Does the amount of (future) dividends you are to receive depend on the number of shares held, or the value of one's holding of those shares?
I suspect the former. But I'm inexperienced, so I'm probably wrong.

Does that mean that one should prioritise the number of shares held, by taking the dividends and re-investing to increase the number of shares held?
Or is there no difference?

Dividends are good for many (taxman, brokers, market makers, banks ...etc.), but less so for investors. What's good for many can be considered by looking at what's not good about dividends for investors ....

Dividends are paid out by the companies, in contrast selling shares has other investors paying that 'dividend' perhaps at a 2 to 1 price to book-value. From each firms perspective not paying a dividend has more capital in their pockets to invest/deploy and all else being equal their share price will be higher/grow-faster than if dividends had been paid.

FT All Share dividends amount to around £70Bn/year, that between the ex-dividend and pay dates amounts to the equivalent of around £4Bn/year free cost money for someone, at investors expense. With DIY dividends, selling some shares to generate a 'dividend' involves T+3 delay, and can be tuned to match the times and amounts each investor individually requires.

Dividends may be taxed, and/or provide brokers with FX conversion fees, and/or reinvestment costs if those dividends are being reinvested. Market makers also make money out of the spreads. The capital from reinvestment of dividends doesn't go into the firms pockets, instead into other investors pockets.

Dividends fluctuate, historically have seen large declines, of the order 80% lower dividends and share prices, and likely don't provide a income that matches the timing and amounts that each individual might prefer.

Dividends can provide a indicator of the actual health of a company, but that can be smoke and mirrors, some firms even borrow to cover payment of dividends.

Dividend Yield can be used as a relative measure of 'Value', however high yield reflects higher risk, a low share price relative to the past dividend payment amount in reflection of anticipated bad times to come. Sometimes that fades and share prices rebound/dividend yields decline, sometimes the fears come to fruition.

In some cases, older established economy activities, firms have no other choice than to pay dividends as they don't know where else that money might otherwise be invested so they leave it to the investors. Directing much or all of ones capital into such firms can lack growth prospects.

stacker512 wrote:Does the amount of (future) dividends you are to receive depend on the number of shares held

Current Dividend is number of shares multiplied by the declared rate.

If you take the dividend cash and spend it, the number of shares doesn't change. You might get a bigger payment the following year if the Company chooses to declare a higher dividend rate.

You could also reinvest the dividend in some other Company. This may give you extra dividends in future years, depending on the decisions of the second Company.

Also the dividend can be reinvested in the original Company. This too will increase your next dividend provided the dividend rate remains at least constant.

ReallyVeryFoolish wrote:I refer the OP to listen to what Terry Smith has to say about investing for dividends. I think the OP would benefit greatly from doing so. Read his articles, listen to his interviews. The answers sought are given in plain English. Of course, some folks think he is wrong. His track record speaks for itself.

RVF

His track record certainly does speak for itself*. As to the wider question, there is no right or wrong: only what is most suited to the purpose you have in mind. The failure to allow for this is at the heart of so many pointless and repetitive discussions down the years.

We seem to love re-inventing the wheel almost every month

*I have a big chunk invested with him, I'd find it impossible to live on that investment without continually selling bits of it to create an income. That immediately sets up a second set of decisions to make about when and if to sell a proportion. Like Dod, I just don't wish to operate in that way.

Arb.

absolutezero wrote:As yet, nobody has actually answered the question.

5p in dividend comes from 5p of the share capital that you owned before XD day. It's 5p of your own money.

All that's happened is that the share's value has fallen by 5p and you have 95p of share and 5 p in cash.

What's the difference if that 5p is held within the share or as cash that you then reinvest?

You still own one share, it's just worth 5% less than it was before.
It's the same outcome as selling 5% of your shares and taking the income that way.

All this applies equally in a market that is rising, falling or doing the Hokey Cokey!

You are asking the wrong question. Why do some people let dividends accumulate and others draw them out? Why do some people buy accumulation units and others income units in funds?

The answer is that people invest to receive dividends to be part of their income stream. Dividends are far less volatile than share prices, so relying on selling accumulation units or non-dividend-paying shares is hostage to adverse market movements at the time that you wish to draw money. If you invest to provide a flow of dividend income, but reinvest it until such time as you wish to draw it, you have an instant indication of how much income your portfolio is generating. That can tell you when it is possible to retire and live on the dividends. Do it by selling capital and, if your timing is wrong, the result could be disastrous. There have been long bear markets.

TJH