What's so good about dividend investing?

[Alaric]

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.

True, but suppose you had made the decision to retire in 2019. Unless invested in ITs or managing your assets to have realisable reserves, there would have been a considerable shortfall in the delivered income in 2020 and 2021. Taking a percentage of the market value wouldn't have looked too desirable in March or April 2020, but share prices seemed to recover more rapidly than dividends.

[Charlottesquare]

And again, a tracker holds many thousands of companies thereby removing most of the company specific/sector risk.

The experience of the last eighteen months is that dividend income from trackers can nosedive in a crisis as Companies suspend or cancel dividends. That creates a problem if relying on distributions for living expenses.

Admittedly it's also to do with their accounting and borrowing powers, but income orientated Investment Trusts were able to maintain their dividend levels. That may also be because their investment managers tilted stock selection towards more reliable dividend payers, something that some direct investors were also able to do.

But again, all these companies/ITs are doing when paying a dividend is paying you back some of your own money. You are no better off before and after XD day.
Plus my chart shows that the outperformance of the lower yielding index started before the Covid crash in share prices.

That really depends on the ROCE within the company paying you the dividend and any alternative investment you might choose and its ROCE.

Taking dividends forces an investment choice on the shareholder which otherwise might not come into focus. It also may simplify portfolio imbalances by giving cash to tweak percentage holdings.

Frankly most of this does not concern me, I run a mixed bag of ITs with only one individual company, Berkshire, and not everything even paying a dividend, but either buying something new or topping up is my choice not the market's choice, maybe only twice a year and in addition it is one of my favourite bits.

In advance I forecast the cashflow, work out months in advance roughly what will be available and start planning, this December (next time) will likely either be a Chinese or USA focused IT, either China or USA, but maybe more into logistics warehouses might sway me, and will it be new or top up, who knows, that is the fun, the only thing I do know is I will not rest in cash.

[hiriskpaul]

Volatility matters when drawing an income from a portfolio. The outcome is path dependant and for a given long term rate of return, the internal rate of return can be expected to decrease with increasing volatility. However, the volatility of dividend payments from a diversified portfolio is typically considerably lower (in the region of 60-80% lower) than that of the volatility of the capital value. So all else being equal, drawing an income of say 4% from a diversified portfolio yielding 4% can be expected to give a better outcome than drawing from a portfolio yielding 2%.

IMHO the importance of this volatility aspect is overemphasized as all else frequently ends up not being equal. Over the last 10 years drawing a 4% income from the low yielding S&P 500 would have produced a much better outcome than drawing from the higher yielding FTSE 100, or indeed VWRL would have been better than VHYL. Despite that, it is not entirely irrational for an investor seeking income to put some money into say VHYL instead of all-in VWRL. Other than slightly higher charges and rebalancing costs, there are no valid reasons why a well diversified ETF such as VHYL should significantly underperform VWRL. It might underperform, as has happened, or it might outperform. It is certainly not predictable in advance and if VWRL and VHYL do produce similar future returns the higher yielding VHYL can be expected to produce less portfolio volatility drag because more of the income will be coming from dividends.

Psychology plays the biggest part in this. Many investors dislike the thought of being a "forced seller" and don't consider spending a dividend as being the same thing and to a certain extent it isn't. Even though this preference may appear like mental accounting, there is still the underlying volatility issue.

If all dividends are being reinvested, then there are no path dependancy issues as there are when drawing an income. There might be other reasons to favour dividend investing though, such as its association with value, but on the whole I think you need to look to psychology for explanations as to why investors who are reinvesting dividends might prefer dividend investing.

[tjh290633]

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.

True, but suppose you had made the decision to retire in 2019. Unless invested in ITs or managing your assets to have realisable reserves, there would have been a considerable shortfall in the delivered income in 2020 and 2021. Taking a percentage of the market value wouldn't have looked too desirable in March or April 2020, but share prices seemed to recover more rapidly than dividends.

There is a time delay to take into account here. The market fell sharply before dividends began to be cut. The FTSE peaked in May 2018, and had fallen back from 7,877 to the region of 7,200 in January 2020. There was then a bit of a roller-coaster, with a minimum on 30th Oct 2020 of 5,577, since when it has risen. Dividends began to fall in May 2020,reaching a minimum in January this year and have since recovered above the previous levels by May this year. The FTSE has just about recovered to its Jan 2020 level now. So actually dividends have been more resilient than prices, thanks in part to special dividends.

TJH

[Arborbridge]

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.

True, but suppose you had made the decision to retire in 2019. Unless invested in ITs or managing your assets to have realisable reserves, there would have been a considerable shortfall in the delivered income in 2020 and 2021. Taking a percentage of the market value wouldn't have looked too desirable in March or April 2020, but share prices seemed to recover more rapidly than dividends.

I don't believe you can generalise from the particular, but let's look at it...

Even though there's no doubt that 2019 would have been a discouraging year to retire, the new retiree would not have been in any different position to me in 2019. Given that he was retiring with a suitable pot with an income reserve and safety margin, he would have been fine in all liklihood. I managed from 2019 until now without a problem, and without having to draw on any cash reserves - so would the theoretical newly retired person.

Arb.

[Lootman]

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.

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.

Funnily enough....... At risk of being off topic but I think it is worth sharing - Fundsmith might be unique in that if you invest directly with them, they have a facility where you can set up a drawdown each month from FS to your bank account. That's about as hands off total return "pseudo income" as you can get. With hindsight, anyone could have drawn down a 10% pseudo monthly yield every year for a decade and still have more capital than they started with. Seriously, that's food for thought. It would have involved zero effort and provided probably >2x the income from a basket of FTSE100 shares.

Not something I would do myself either, but if anyone chooses to, the option is there. It's perhaps something that other fund houses or retail platforms could offer?

RVF, Personal Assets used to have a similar facility whereby you could withdraw a pre-determined percentage or amount on a regular basis, quarterly if memory serves. This was for those investors in the PAT savings scheme. So the idea is out there and can be helpful for those who genuinely do not care where the money derives from, as long as it is an adequate amount for their needs. There are of course also ITs that pay dividends out of capital which is another variation on the same theme.

My question to Arb and Dod is this. If you consciously avoid making sales and are in the fortunate position of being able to live solely from the dividends, then do you avoid realising gains even if they would sit within your annual CGT-free allowance? I always think it is a shame to not fully utilise that, since it cannot be carried forward. For that reason alone, my "income" is always a blend of dividends and realised gains.

[MrFoolish]

Historically, a lot a high yielders sat in the value territory, with low P/Es. This often translated to better returns over the long term.

But things have possibly changed. A lot of the high yielders these days are from companies in declining industries (e.g. oils, tobaccos) where the share prices have stagnated or declined. How much do you enjoy playing musical chairs?

[Arborbridge]

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.

Funnily enough....... At risk of being off topic but I think it is worth sharing - Fundsmith might be unique in that if you invest directly with them, they have a facility where you can set up a drawdown each month from FS to your bank account. That's about as hands off total return "pseudo income" as you can get. With hindsight, anyone could have drawn down a 10% pseudo monthly yield every year for a decade and still have more capital than they started with. Seriously, that's food for thought. It would have involved zero effort and provided probably >2x the income from a basket of FTSE100 shares.

Not something I would do myself either, but if anyone chooses to, the option is there. It's perhaps something that other fund houses or retail platforms could offer?

RVF, Personal Assets used to have a similar facility whereby you could withdraw a pre-determined percentage or amount on a regular basis, quarterly if memory serves. This was for those investors in the PAT savings scheme. So the idea is out there and can be helpful for those who genuinely do not care where the money derives from, as long as it is an adequate amount for their needs. There are of course also ITs that pay dividends out of capital which is another variation on the same theme.

My question to Arb and Dod is this. If you consciously avoid making sales and are in the fortunate position of being able to live solely from the dividends, then do you avoid realising gains even if they would sit within your annual CGT-free allowance? I always think it is a shame to not fully utilise that, since it cannot be carried forward. For that reason alone, my "income" is always a blend of dividends and realised gains.

All my income providers are either in ISAs or my SIPP. I have realised gain to use my CGT allowance outside those, but as they are pretty minor investments it isn't material.

[Arborbridge]

Historically, a lot a high yielders sat in the value territory, with low P/Es. This often translated to better returns over the long term.

But things have possibly changed. A lot of the high yielders these days are from companies in declining industries (e.g. oils, tobaccos) where the share prices have stagnated or declined. How much do you enjoy playing musical chairs?

It was ever thus - some will be in declining industries. Others will be in relatively stable industries which have gone ex-growth so they pay dividends instead of re-investing.
One is not likely to get over priced stocks on high multiples, which might crash when growth stops, that's for sure. But provided my portfolio is throwing off enough income, and provided there are enough stocks to choose from, I am fairly certain this technique will see me though retirement. The resilience comes from having a safe number of stocks, and other waiting in the wings if required. It's worked so far

Arb.

[Alaric]

. If you consciously avoid making sales and are in the fortunate position of being able to live solely from the dividends, then do you avoid realising gains even if they would sit within your annual CGT-free allowance? I always think it is a shame to not fully utilise that, since it cannot be carried forward.

There's always the annual ISA contribution of £ 20,000 to be financed as well as the SIPP contribution of £ 2880. My preference would be to sell close to the end of old tax year, hold cash overnight and transfer to the ISA at the start of the new year,

[Allitnil]

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

There is an, admittedly small, financial difference - assuming the shares are in a tax efficient wrapper the investor gets every penny of the dividend whereas the capital sale attracts fees.

For older investors, dividends may have a couple of quite significant advantages. First off, if they don't want to be involved in making decisions, dividends are a passive income stream (especially if invested in long standing ITs rather than individual shares) whereas selling shares requires an active decision - not just the extra hassle but the worry that can come with not timing things well.

Secondly, dividends are classed by HMRC as income whereas share sales are capital. This can be a crucial difference since excess income can be given away without incurring any inheritance tax liabilities. If you receive £10k in dividends it can be given away without worrying about IHT (*) but selling £10k of shares and giving away the cash only avoids all IHT if the giftor lives another 7 years.

* - not quite zero worry in practice as it requires documenting that it was income surplus to requirements and requires some form of regular gifting but those are easier to establish than a guarantee that you will live 7 years!

[dealtn]

I run a portfolio of high yield shares, though not an "HYP", but I am starting to question why.

All that happens with dividends is that the company pays you some of your own money.
You are no better off.

Take two share classes in the same company. A and B. Both worth 100p.
A pays a dividend of 5p. On XD day the share price falls by 5p (plus other market movements). You now have 95p in shares and 5p in cash. You still have 100p.
B pays no dividend. There is no XD day. You still have 100p (plus the same market movements that affected share A)

There is no actual difference between selling 5% of the shares and taking a 5% dividend.
Assuming you don't just hold something ridiculous like 1 share to make dealing costs prohibitive.
Add in the tax inefficiency if the shares are not held in an ISA or pension and income isn't as efficient as capital.

Add in the fact that on a total return basis over the last 5 years, the Vanguard tracker VWRL has had an 80% TR and the high yield version VHYL a 40% return...
Surely £1 is £1 no matter where it comes from. I'd rather have the 80%.

Then if the market falls, high yield shares are affected just as much (or often more than) lower yielding shares.

Why not just shove all your money in a tracker?

There are 2 things to consider here.

Firstly money is fungible and exactly as you describe it matters not a jot (outside of frictional costs such as dealing charges and tax) whether "income" comes via dividends or changes in the price of capital, or whether reinvested dividends in the same entity are different to the dividend never having been paid, so long as you are comparing identical underlying investments.

Secondly comparing different investments, which may be a high yield one(s) with a low yield one(s). There will be differences in outcomes with these alternatives as these are non-identical. Sometimes one will outperform, sometimes the other.

In talking about the first scenario (again outside of frictional costs) the only differences are either psychological as it has been labelled, or for non financial reasons such as postulated by those such as IAAG.

Those that don't get the first point will argue (as you have encountered) by introducing non-identical elements, or by mistaken thinking such as having to sell in a falling market. The "maths" is the same regardless of time, and market direction, but intuitively not obvious to many.

You can try and introduce simple models where there are no capital gains and just income. Such as a savings account that pays 5% where you have the ability to decide the level of "income" and reinvestment into a current account or the savings account, and the ability to frictionlessly transfer between the two. Your "wealth" will always be determined by the 5%, and the withdrawal from the system as consumption. Regardless of the savings interest amount paid to the current account that is automatically reinvested back to the savings account, the wealth is the same. Some won't get it. Some will (effectively) argue a savings account that pays 4% entirely as income is better than one that earns 5% but only distributes 3%. The focus is on the "income" and not the "earnings". The same applies to companies.

[Itsallaguess]

Dividends may be taxed, and/or provide brokers with FX conversion fees, and/or reinvestment costs if those dividends are being reinvested.

Maybe income-investors don't always pay any re-investment costs, and they take advantage of the types of 'free' trades we sometimes hear about round here....

The method I use is to draw SWR monthly, login a week or so before end of month and sell enough shares from the highest valued holding to cover that months 'wage' and then T+3 login again to transfer the sale proceeds to my spending/regular account.

I'm with ii so that monthly sell trade is 'free'.

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=30984&p=438139#p438139

What a great approach to this type of discussion - you're income-strategy is poor because you're often paying broker costs for re-investment - whilst my share-selling-strategy is better because my trades are 'free'......

Cheers,

Itsallaguess

[pje16]

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!

That assumes you are buying it close to XD day
Buy it for 100 on Jan 1 and xd is 31 March and 30 June
it's increase in value is like getting pregnant, the value of the share gradually increases until 31 March, them it drops and and gets pregnant again until 30 June, repeat, repeat
just before XD it is now worth 105, not 100, so when it goes XD it goes back to 100
If you reinvest it you have 1 share plus 1/20th of a share and then 1 share plus 2/20th and so on
All of this assumes no dealing costs or any other market movements
getting pregnant is a good analogy for this purpose, well that's how it was explained to me years ago

[hiriskpaul]

I often find the operation of some ITs with respect to their smoothed out dividend payments in conflict with the wishes of investors who do not want to draw income from capital. The investor seeks regular dividends, but the IT manager chooses to take charges out of capital (ie sell shares) so as to "enhance" the yield, pay dividends out of capital gains (ie sell shares), or pay dividends from the revenue reserve account (sell shares previously purchased with retained dividends).

[absolutezero]

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.

Didn't say that anybody was.
I was asking for what the difference is between taking income as dividends and taking income from capital.

[absolutezero]

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?

The dividends are just taken from the share capital anyway on XD day.
This is my entire point. There is no discernible difference between the two methods of taking an income from shares.

[absolutezero]

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

I already have! That's part of what prompted me to look into Total Return vs High Yield.
The graphs I posted from Hargreaves Lansdown's charting section are making me think high yield is a fool's errand.

I am still unconvinced by the responses on here about high yield shares.
Nobody has (yet) managed to convince me that taking 5p in dividends is in some way superior to leaving 5p in the company's share price.

[absolutezero]

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!

That assumes you are buying it close to XD day
Buy it for 100 on Jan 1 and xd is 31 March and 30 June
it's increase in value is like getting pregnant, the value of the share gradually increases until 31 March, them it drops and and gets pregnant again until 30 June, repeat, repeat
just before XD it is now worth 105, not 100, so when it goes XD it goes back to 100
If you reinvest it you have 1 share plus 1/20th of a share and then 1 share plus 2/20th and so on
All of this assumes no dealing costs or any other market movements
getting pregnant is a good analogy for this purpose, well that's how it was explained to me years ago

Or alternatively, leave the dividend in the share price and that drop on 31st March doesn't happen and it continues growing.

[Lootman]

I often find the operation of some ITs with respect to their smoothed out dividend payments in conflict with the wishes of investors who do not want to draw income from capital. The investor seeks regular dividends, but the IT manager chooses to take charges out of capital (ie sell shares) so as to "enhance" the yield, pay dividends out of capital gains (ie sell shares), or pay dividends from the revenue reserve account (sell shares previously purchased with retained dividends).

My career led me to work for fund managers in both the UK and the US. There is a fundamental difference in attitude in that UK managers feel a need to cater to the average UK investor (whether individual or institutional) who often are (for want of a better word) obsessed with dividends and yield.

US fund managers are aware that many of their clients want to avoid taxable events like dividends, and even tax-free investors still prefer growth and are suspicious of high yields. As of today, of the US companies with the largest market caps, most pay no dividend not least because their investors do not want them (Amazon, Google, Facebook, Berkshire, Tesla) whilst the two that do (Apple and MicroSoft) pay modest dividends, at least in terms of yield. There are US yield hogs, like AT&T and Exxon, but nobody wants them.

Take a look at TMF UK articles which endlessly fetishise dividends. Then look at TMF US articles, that are all about the growth.