What's so good about dividend investing?

[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

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.

So again, it's psychological rather than financial?

[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!

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

But again, you are no better off. Let's work on a 5% dividend on a share that pays once per year.
If you sell in a bear market to release the 5% then you take 5% in cash. Your holding value drops by 5% plus the drop caused by market movements.
If you take 5% as a dividend in bear market then the share price drops by 5% on XD day plus the drop caused by market movements.
It's exactly the same!

[Itsallaguess]

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).

The income-IT investor seeks regular dividends, and to a large degree that's exactly what he gets.

I don't think there's a 'conflict' in the way you might describe - it's simply the case that those known underlying processes are not something the investor wants to action themselves to actually deliver what they're looking for, which is regular dividends....

If I ask my window-cleaner to clean my windows, because I'm perhaps too old to be going up ladders, there's no 'conflict' in knowing that he has to go up ladders himself to clean them....

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

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

The theoretical price drops no matter what YOU decide to do, you can't control the price

[Itsallaguess]

Let's work on a 5% dividend on a share that pays once per year.

If you sell in a bear market to release the 5% then you take 5% in cash. Share price drops by 5% plus the drop caused by market movements.

If you take 5% as a dividend in bear market then the share price drops by 5% on XD day plus the drop caused my market movements.

It's exactly the same!

I tell you what though - there's a hell of a fuss regularly generated over something that's 'exactly the same', wouldn't you agree?

And always from only one side of the argument too!

:O)

Cheers,

Itsallaguess

[absolutezero]

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.

I think this sums it up.
Some can see that mathematically there is no difference but they don't want to admit it.
I was the same but the penny dropped for me this weekend.
It still 'feels wrong' to sell shares to generate an income, but mathematically it is exactly the same.
All that's happened is by sticking to HYP principles, I have missed out on a lot of capital gains from the S&P 500 tracker.

Some say I am comparing HYP apples with total return oranges, but the orange fan has a lot more oranges than the apple people have apples.

[absolutezero]

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.

The theoretical price drops no matter what YOU decide to do, you can't control the price

But the company does by marking in a 5% drop on XD day.

[absolutezero]

I tell you what though - there's a hell of a fuss regularly generated over something that's 'exactly the same', wouldn't you agree?

And always from only one side of the argument too!

:O)

Cheers,

Itsallaguess

So what?
Does that somehow make the mathematics wrong or the point not worth discussing?

[Itsallaguess]

Some can see that mathematically there is no difference but they don't want to admit it.

And some are absolutely happy to accept that mathematically there is no difference, and so personal-preferences sometimes come into play in terms of one particular delivery-process being preferred over another.

And then some other people come along and demand to know why one delivery-process is preferred over another, if there's no mathematical difference in the end result.

And as the great man often said..........'So it goes'....

Cheers,

Itsallaguess

[absolutezero]

There we are TR of VHYL and VWRL.

Moderator Message:
Please provide moderators with the source of this image, so that we can amend your post in line with site rules. Otherwise this post will be deleted. --MDW1954

It's generated from Hargreaves Lansdowns chart section.

[stacker512]

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?

But again, you are no better off. Let's work on a 5% dividend on a share that pays once per year.
If you sell in a bear market to release the 5% then you take 5% in cash. Your holding value drops by 5% plus the drop caused by market movements.
If you take 5% as a dividend in bear market then the share price drops by 5% on XD day plus the drop caused by market movements.
It's exactly the same!

I'm so confused. Is this a contradiction?

[Itsallaguess]

I tell you what though - there's a hell of a fuss regularly generated over something that's 'exactly the same', wouldn't you agree?

So what?

Does that somehow make the mathematics wrong or the point not worth discussing?

It makes the mathematics disappear as a point worth arguing about, which then leaves everyone able to say -

'Right then, we've shown that it really doesn't matter mathematically how you do things, so let's all just do what we want, however we want to do it, because there's really no point in arguing too much about either approach....'

So, why is it that one side of the discussion is happy to take the above view, and yet the other side remains committed to demanding to know why, if nothing really matters, why doesn't everyone just take the same single approach....

Are you able to answer that specific question?

Cheers,

Itsallaguess

[absolutezero]

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?

But again, you are no better off. Let's work on a 5% dividend on a share that pays once per year.
If you sell in a bear market to release the 5% then you take 5% in cash. Your holding value drops by 5% plus the drop caused by market movements.
If you take 5% as a dividend in bear market then the share price drops by 5% on XD day plus the drop caused by market movements.
It's exactly the same!

I'm so confused. Is this a contradiction?

No
The first is a comment about a basket of higher yield shares underperforming in total return terms.
The second is basic arithmetic.

[absolutezero]

I tell you what though - there's a hell of a fuss regularly generated over something that's 'exactly the same', wouldn't you agree?

So what?

Does that somehow make the mathematics wrong or the point not worth discussing?

It makes the mathematics disappear as a point worth arguing about, which then leaves everyone able to say -

'Right then, we've shown that it really doesn't matter mathematically how you do things, so let's all just do what we want, however we want to do it, because there's really no point in arguing too much about either approach....'

So, why is it that one side of the discussion is happy to take the above view, and yet the other side remains committed to demanding to know why, if nothing really matters, why doesn't everyone just take the same single approach....

Are you able to answer that specific question?

Cheers,

Itsallaguess

Can you point to where I have directed anyone to take a single approach because my way is better?
I haven't said that one way is better. I asked the question 'What's so good about dividend investing?"
My entire point has been that they are the same. Which then made me pose a question about shoving everything in a tracker and selling parts of it for income rather than waiting for dividends.

It's called discussion. People kick ideas about and everyone learns something as a result.
It seems to me that those who are ideologically pure about dividends are being rather defensive on this discussion.

I have no dog in this fight. In fact I have a portfolio of higher yielding shares but am disappointed with its progress compared to a tracker.

But that's all it is. Discussion. What could anyone possibly have against discussion on a DISCUSSION forum?

[Itsallaguess]

It makes the mathematics disappear as a point worth arguing about, which then leaves everyone able to say -

'Right then, we've shown that it really doesn't matter mathematically how you do things, so let's all just do what we want, however we want to do it, because there's really no point in arguing too much about either approach....'

So, why is it that one side of the discussion is happy to take the above view, and yet the other side remains committed to demanding to know why, if nothing really matters, why doesn't everyone just take the same single approach....

Are you able to answer that specific question?

Can you point to where I have directed anyone to take a single approach because my way is better?

I haven't said that one way is better. I asked the question 'What's so good about dividend investing?"

But on your opening post, you said this -

All that happens with dividends is that the company pays you some of your own money.

You are no better off.

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=31019#p438862

Which sets the whole premise for your thread on a platform of someone, somewhere ever saying you *are* 'better off'

Where are these people?

The whole thread is based on a strawman argument...

Cheers,

Itsallaguess

[absolutezero]

It makes the mathematics disappear as a point worth arguing about, which then leaves everyone able to say -

'Right then, we've shown that it really doesn't matter mathematically how you do things, so let's all just do what we want, however we want to do it, because there's really no point in arguing too much about either approach....'

So, why is it that one side of the discussion is happy to take the above view, and yet the other side remains committed to demanding to know why, if nothing really matters, why doesn't everyone just take the same single approach....

Are you able to answer that specific question?

Can you point to where I have directed anyone to take a single approach because my way is better?

I haven't said that one way is better. I asked the question 'What's so good about dividend investing?"

But on your opening post, you said this -

All that happens with dividends is that the company pays you some of your own money.

You are no better off.

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=31019#p438862

Which sets the whole premise for your thread on a platform of someone, somewhere ever saying you *are* 'better off'

Where are these people?

The whole thread is based on a strawman argument...

Cheers,

Itsallaguess

But it's not based on a straw man, is it?
They ARE paying you some of your share capital as a cash dividend. You ARE no better off either way.
Where have I said one is better than the other? That's something that you have read in to it but isn't actually there.

I've raised a point for discussion, made a mathematical argument to prove my point, mentioned in passing that of two ETFs, one lower yield and one high yield, the higher yielding one has a smaller total return and invited comment and debate.
What exactly is your issue with that? On a discussion forum...

[CryptoPlankton]

Some can see that mathematically there is no difference but they don't want to admit it.
I was the same but the penny dropped for me this weekend.
It still 'feels wrong' to sell shares to generate an income, but mathematically it is exactly the same.

Mathematically, it is the same, so it is really just a matter of choice.

All that's happened is by sticking to HYP principles, I have missed out on a lot of capital gains from the S&P 500 tracker.

Over the past ten years, yes, but the S&P 500 made a gain of absolutezero (sorry!) over the previous ten years. What does your crystal ball tell you about the next ten?

Some say I am comparing HYP apples with total return oranges, but the orange fan has a lot more oranges than the apple people have apples.

Being a fan of both fruit, I am happy to munch the steady supply of apples (not strictly of the HYP variety) from my low-maintenance orchard while spending more time nurturing my orange grove in the hope of enjoying more fruit in the future.

At the end of the day, as long as we are all fed, why worry about what other people choose to eat?

[absolutezero]

At the end of the day, as long as we are all fed, why worry about what other people choose to eat?

I don't.
Why is any discussion of yield investing always seen as a criticism?

[Itsallaguess]

You ARE no better off either way.

You're not getting it.

Absolutely no-one is saying that you ARE better off by income-investing...

That's the straw-man that you've raised from the outset of the thread...

Cheers,

Itsallaguess

[absolutezero]

You ARE no better off either way.

You're not getting it.

Absolutely no-one is saying that you ARE better off by income-investing...

That's the straw-man that you've raised from the outset of the thread...

Cheers,

Itsallaguess

No. You created a straw man. I merely posed the original question about the differences between the two.
Several posters have actually tried to say that dividend investing is superior.
I, as I said, have no dog in the fight. As far as I can see there is no mathematical difference.