This from TMF - Is investing in dividend stocks a good idea?

[idpickering]

In the current low-interest-rate environment, in which savings accounts are paying minimal interest, many people are looking for new ways to boost their wealth. Dividend stocks, which often offer yields of 5% or higher, have become popular.

Is investing in dividend stocks a good idea though? Let’s take a look at some of the advantages and disadvantages of investing for dividends.

https://www.fool.co.uk/investing/2020/0 ... good-idea/

I have a soft spot for TMF, and learnt a lot from them over the years. For me, as a HYPer, I'm very keen on dividend paying shares, and this item is of interest to me, but it may well be to other income investors too.

Ian.

[fca2019]

I agree, except the article does not say that divi stocks can have lower price appreciation than growth stocks, and a may miss out from reinvesting dividends. If someone is investing in divi stocks and drawing down the divis they would be missing out on the snowball effect. I like the idea of having 2 portfolios, one for growth and one for income.

[1nvest]

Had you invested in a FTSE 250 tracker total return, and drawn the same amount of income as HYP1 each year - then you'd have had the same income and a larger capital gain. Taking your own dividends out of total returns provides dividend timing and amounts better aligned to your needs. For more consistent dividends (spending provided dividends tends to see volatility in dividend amounts) using a Safe Withdrawal Rate (SWR) is much more consistent/stable (initial percentage of portfolio value set as the SWR where that £ amount is uplifted by inflation each year as the amount drawn as income in subsequent years).

[IanTHughes]

Had you invested in a FTSE 250 tracker total return, and drawn the same amount of income as HYP1 each year - then you'd have had the same income and a larger capital gain.

If only I had a time machine!


Ian

[moorfield]

Be cautious with companies that have really high dividend yields (7%+). This can be a sign that the company is in trouble.

That tip caught my eye. I have written here before I now avoid buying/topping up shares yielding greater than twice that of City of London IT. An automatic smell test, if you like.

[Itsallaguess]

Be cautious with companies that have really high dividend yields (7%+). This can be a sign that the company is in trouble.

That tip caught my eye. I have written here before I now avoid buying/topping up shares yielding greater than twice that of City of London IT.

An automatic smell test, if you like.

I think yours is a much improved culling process moorfield, given that it's likely to flow with general market yields over many market cycles.

Whilst the TMF tip is worth some real consideration in today's market environment, I don't think having a fixed figure in mind is likely to be too helpful over a number of years.

As well as your cull of (2 x CTY yield), which given the current City yield of 4.2% (https://tinyurl.com/yx3qo5vk) would render any HYP share 'yielding' over 8.4% automatically ruled out, I think the general FTSE100 yield could be used too if anyone is looking for something to track over many years that's not particularly stock-specific.

The FTSE 100 is currently showing a yield of 4.32% (https://tinyurl.com/tezbbrw) so a two-times multiple of that major UK index yield is also likely to be 'usefully variable' over many years in a way that the original fixed-yield tip from TMF clearly fails to do so.

I would personally use a cut-off point a little less than the 8% level that the above variable processes would currently deliver, but the beauty about simple 'variable trigger-points' like this is that we can easily use them to cater for our individual levels of risk-tolerances...

Cheers,

Itsallaguess

[TUK020]

Following on from the Carillion debacle, the other early warning system I keep an eye on is the short tracker.
I have set an arbitrary level of 5% and will unload of anything that breaches this level. Again, this is a fixed and arbitrary level - anyone have a more useful variable pointer for this?

[monabri]

I would also suggest looking at

Gross and Operating margins ( especially the latter)...companies with poor operating margins struggle to dig themselves out of problems. Certainly construction companies with operating margins of a few percent are very vulnerable.

Free cash flow per share compared to the dividend - I like to see the fcfps higher than the divi bring paid.

Trends in the "numbers"...are margins stable, improving, declining.

Debt levels.

All this info is available for free ( on Morningstar, for example) and tabulated.

[pyad]

Following on from the Carillion debacle, the other early warning system I keep an eye on is the short tracker.
I have set an arbitrary level of 5% and will unload of anything that breaches this level. Again, this is a fixed and arbitrary level - anyone have a more useful variable pointer for this?

Yes. The whole idea of selling an HYP share that in such circumstances seems less than sensible to me because it assumes one example of a bust company is of general application in the HYP strategy. In my view a classic case of the investor's psych weakness of Recent Events Syndrome where people prioritise recent events, wrongly, over long term trends. There are probably examples of HYP selections which were on the short tracker for a while but proved to be perfectly good shares for the strategy over time. Why haven't you considered those?

Tracking shorts may have application in a trading strategy but not I'd say in a very long term hold, income approach like HYPs. It is likely that repeatedly selling shares in such circumstances will damage the long term income prospects of an HYP. HYPs are all about income but I'd guess that this would likely mar their capital prospects too.

[Dod101]

An over high yield is of course something to avoid when buying. Once you hold a share it is a bit different because by that stage you probably know a bit more about the company and have a better idea of why the yield is so high. Very often of course it is because the market expects a dividend cut. There are usually other signs to help you with that.

I would be hard pressed to buy a share yielding much more than 50% over the FTSE100 yield. Maybe the City of London yield is a good proxy for that but I do not understand why anyone would use the yield of a single IT when the market yield is readily available.

As for following shorts, there were plenty of signs that Carillion was in trouble without searching out short positions just as there were for RBS and others.

Dod

[IanTHughes]

An over high yield is of course something to avoid when buying.

Even those shares where the dividend is considered sustainable? Why ignore such shares simply because the yield is greater than some arbitrarily chosen maximum?

I would be hard pressed to buy a share yielding much more than 50% over the FTSE100 yield.

Why? Is this an evidence-based filter or have you simply plucked the 50% level out of the air? Why not 40% or 60%?

As for following shorts, there were plenty of signs that Carillion was in trouble without searching out short positions just as there were for RBS and others.

People keep on claiming this, although never seem to back up this statement with any evidence. Not you of course. No, as the experienced investor that you undoubtedly are, can you please provide the evidence that you must have unearthed to make such a statement together with the date upon which it was originally available?


Ian

[Dod101]

As for following shorts, there were plenty of signs that Carillion was in trouble without searching out short positions just as there were for RBS and others.

People keep on claiming this, although never seem to back up this statement with any evidence. Not you of course. No, as the experienced investor that you undoubtedly are, can you please provide the evidence that you must have unearthed to make such a statement together with the date upon which it was originally available?

Well for a start Carillion was in the wrong sector for me. I do not but contractors or support service companies because their trading record is so poor. The culture was all wrong and they spent their last couple of years scrabbling around looking for money wherever they could find it. The evidence was in the soft factors more than the actual numbers and there was plenty of that.

Strangely enough, Roger Lawson who founded ShareSoc has recently published a book in which he claims to eschew company accounts mainly because they can say what the directors want them to say in favour of the 'soft' factors which I lay great store on. The apparent integrity or otherwise of the Directors, the long term or otherwise nature of the outlook of the Directors, the pay and so on. he must have been rerading my posts.

These are the factors that I use to try to keep me out of trouble. They do not always work but more often than not they do.

Dod

[IanTHughes]

As for following shorts, there were plenty of signs that Carillion was in trouble without searching out short positions just as there were for RBS and others.

People keep on claiming this, although never seem to back up this statement with any evidence. Not you of course. No, as the experienced investor that you undoubtedly are, can you please provide the evidence that you must have unearthed to make such a statement together with the date upon which it was originally available?

Well for a start Carillion was in the wrong sector for me. I do not but contractors or support service companies because their trading record is so poor. The culture was all wrong and they spent their last couple of years scrabbling around looking for money wherever they could find it. The evidence was in the soft factors more than the actual numbers and there was plenty of that.

Yes? So what was the "soft factor" evidence?

These are the factors that I use to try to keep me out of trouble. They do not always work but more often than not they do.

And your evidence for that statement is what exactly? Can you provide the details of where it worked and where it did not? Or is it just a feeling that you have?


Ian

[Itsallaguess]

I think it would be a real shame if every thread where experienced investors gave their views had to be turned into a formal-investigation with witnesses and 'evidence'....

Would we really like to create a discussion board where experienced investors might be put off posting about their experiences, if they've not got 'the evidence at hand' to 'prove' that their position is valid 100% of the time?

I don't think many rule-sets exist that will rule out every single investment-mistake that we might encounter, but if I can discover some that are right more often than they are wrong then I'm usually open to consider someone's experience in that area...

Cheers,

Itsallaguess

[Dod101]

People keep on claiming this, although never seem to back up this statement with any evidence. Not you of course. No, as the experienced investor that you undoubtedly are, can you please provide the evidence that you must have unearthed to make such a statement together with the date upon which it was originally available?

Well for a start Carillion was in the wrong sector for me. I do not but contractors or support service companies because their trading record is so poor. The culture was all wrong and they spent their last couple of years scrabbling around looking for money wherever they could find it. The evidence was in the soft factors more than the actual numbers and there was plenty of that.

Yes? So what was the "soft factor" evidence?

These are the factors that I use to try to keep me out of trouble. They do not always work but more often than not they do.

And your evidence for that statement is what exactly? Can you provide the details of where it worked and where it did not? Or is it just a feeling that you have?

For a start it kept me well away from Carillion and for that matter RBS much earlier in the decade. It is a while since I had my last problem and I think it may have been Centrica which I sold after their initial cut rather than before. In December 2015 I sold at £2.123 and considering that they have had at least one more dividend cut since then and the shares are currently quoted around 90p, it was probably the right decision.

I agree with IAAG and do not intend to add anything further to this particular argument. I am content that what I am saying reflects my feelings on the matter of culture against 'harder' evidence, which I think is overblown in making investment decisions. I grant you that making judgements based on culture needs some experience I guess not just of investing but of life itself but that is why I enjoy the investment process so much.

Dod

[IanTHughes]

I think it would be a real shame if every thread where experienced investors gave their views had to be turned into a formal-investigation with witnesses and 'evidence'....

Dod101 has suggested that there are "soft factors" that he uses as being more successful pointers than audited accounts. As an investor that always hopes to learn from other more experienced investors like Dod101, I am simply asking how he uses those "soft factors".

For example, when he says that the "culture was all wrong" what does he mean? What does he "see" that indicates a culture that is all wrong? He also mentioned the "apparent integrity or otherwise of the Directors". How does that integrity or otherwise manifest itself?

Surely, anyone using such "soft factors" should be able to explain them more fully and, on a board like this is, such an explanation might be a real benefit to others. Now that would be a real contribution, if of course Dod101 wants to make it.


Ian

[Itsallaguess]

Surely, anyone using such "soft factors" should be able to explain them more fully and, on a board like this is, such an explanation might be a real benefit to others.

Which is all very laudable Ian, but then perhaps the environment where we might discover such interesting explanations might be better looking something like this -

https://tinyurl.com/tj98lk4

rather than this -

https://tinyurl.com/s3wvjch

Cheers,

Itsallaguess

* Image sources - https://tinyurl.com/wjkco3w / https://tinyurl.com/s9d3wl4

[IanTHughes]

Surely, anyone using such "soft factors" should be able to explain them more fully and, on a board like this is, such an explanation might be a real benefit to others.

Which is all very laudable Ian, but then perhaps the environment where we might discover such interesting explanations might be better looking something like this -

https://tinyurl.com/tj98lk4

rather than this -

https://tinyurl.com/s3wvjch

Oh please! I asked very politely for some evidence and further explanation to back up Dod101's otherwise unsubstantiated claims. His continued inability to do so speaks volumes in my view


Ian

[moorfield]

rather than this -

https://tinyurl.com/s3wvjch

Are those two the new moderators here?

[TUK020]

As for following shorts, there were plenty of signs that Carillion was in trouble without searching out short positions just as there were for RBS and others.

People keep on claiming this, although never seem to back up this statement with any evidence. Not you of course. No, as the experienced investor that you undoubtedly are, can you please provide the evidence that you must have unearthed to make such a statement together with the date upon which it was originally available?

Well for a start Carillion was in the wrong sector for me. I do not but contractors or support service companies because their trading record is so poor. The culture was all wrong and they spent their last couple of years scrabbling around looking for money wherever they could find it. The evidence was in the soft factors more than the actual numbers and there was plenty of that.

Strangely enough, Roger Lawson who founded ShareSoc has recently published a book in which he claims to eschew company accounts mainly because they can say what the directors want them to say in favour of the 'soft' factors which I lay great store on. The apparent integrity or otherwise of the Directors, the long term or otherwise nature of the outlook of the Directors, the pay and so on. he must have been rerading my posts.

These are the factors that I use to try to keep me out of trouble. They do not always work but more often than not they do.

Dod

Dod's concept sounds plausible and attractive. I get Ian's point - to really understand it, you need to be able to have a worked example to see if you can reproduce it yourself.
Can I pursue an alternative and perhaps less confrontational approach of examining this point in more detail?
Dod, I have posted a snapshot of my portfolio below. Please can you highlight those shares that you would avoid on 'soft' factors, and give a brief outline of your reasoning?

                                                                                 Value     Div    Fcst 
Share                           Epic    Sector                                  %Total  %Total   Yield
AstraZeneca                     AZN     Pharmaceuticals & Biotechnology          1.91%   1.05%   2.80%
Aviva                           AV      Life Insurance                           2.36%   3.61%   7.80%
BAE Systems                     BA      Aerospace & Defence                      2.50%   1.97%   4.00%
BHP Group                       BHP     Mining                                   2.43%   2.78%   5.80%
Bodycote                        BOY     Industrial Engineering                   1.60%   0.72%   2.30%
BP                              BP      Oil & Gas Producers                      2.72%   3.42%   6.40%
British American Tobacco        BATS    Tobacco                                  3.17%   3.99%   6.40%
BT Group                        BT-A    Fixed Line Telecommunications            2.42%   3.00%   6.30%
City of London Inv Trust        CTY     Equity Investment Instruments            4.41%   3.64%   4.20%
Diageo                          DGE     Beverages                                2.54%   1.10%   2.20%
ETFS Metals Securities Ltd ETF  PHAU    Equity Investment Instruments            4.16%   0.00%   0.00%
F and C Investment Trust        FCIT    Equity Investment Instruments            2.11%   0.58%   1.40%
Galliford Try                   GFRD    Construction & Materials                 0.48%   3.96%  42.20%
GlaxoSmithKline                 GSK     Pharmaceuticals & Biotechnology          2.27%   1.97%   4.40%
Henderson Far East Income Ltd.  HFEL    Equity Investment Instruments            2.78%   3.34%   6.10%
HICL Infrastructure Company Lt  HICL    Equity Investment Instruments            2.90%   2.68%   4.70%
HSBC Holdings                   HSBA    Banks                                    2.45%   3.23%   6.70%
Imperial Brands                 IMB     Tobacco                                  2.73%   5.69%  10.60%
ITV                             ITV     Media                                    2.60%   2.76%   5.40%
Land Securities Group           LAND    Industrial & Office REITs                2.36%   2.32%   5.00%
Law Debenture Corp.             LWDB    Equity Investment Instruments            1.85%   1.09%   3.00%
Legal and General Group         LGEN    Life Insurance                           2.68%   3.21%   6.10%
Marston's                       MARS    Travel & Leisure                         2.29%   2.79%   6.20%
Merchants Trust                 MRCH    Equity Investment Instruments            2.55%   2.31%   4.60%
Morgan Advanced Materials       MGAM    Electronic & Electrical Equipment        2.12%   1.54%   3.70%
Murray International Trust      MYI     Equity Investment Instruments            3.01%   2.42%   4.10%
National Grid                   NG      Multiutilities                           3.20%   3.33%   5.30%
Pennon Group                    PNN     Gas, Water & Multiutilities              2.83%   2.50%   4.50%
Persimmon                       PSN     Household Goods & Home Construction      2.78%   4.75%   8.70%
Reckitt Benckiser Group         RB      Household Goods & Home Construction      1.92%   1.06%   2.80%
Rio Tinto                       RIO     Mining                                   2.89%   3.36%   5.90%
River And Mercantile UK Micro   RMMC    Equity Investment Instruments            1.39%   0.00%   0.00%
Rotork                          ROR     Industrial Engineering                   1.25%   0.57%   2.30%
Royal Dutch Shell 'B'           RDSB    Oil & Gas Producers                      2.77%   3.48%   6.40%
Schroders (Non-Voting)          SDRC    Financial Services                       2.86%   2.64%   4.70%
SEGRO                           SGRO    Industrial & Office REITs                1.32%   0.65%   2.50%
Smith (DS)                      SMDS    General Industrials                      0.87%   0.80%   4.70%
Temple Bar Inv Trust            TMPL    Equity Investment Instruments            1.38%   0.90%   3.30%
Vesuvius                        VSVS    General Industrials                      0.86%   0.78%   4.60%
Vodafone Group                  VOD     Mobile Telecommunications                2.60%   2.65%   5.20%
WPP                             WPP     Media                                    2.87%   3.16%   5.60%
Vistry Group                    VTY     Household Goods & Home Construction      2.47%   3.94%   8.10%
JPMorgan European Inv Trust In  JETI    Equity Investment Instruments            0.33%   0.24%   3.80%

Portfolio Running Yield = 5.09%

                                                  Value      Div
Sector                                           %Total   %Total
Pharmaceuticals & Biotechnology                   4.18%    3.02%
Life Insurance                                    5.04%    6.82%
Aerospace & Defence                               2.50%    1.97%
Mining                                            5.32%    6.14%
Industrial Engineering                            2.85%    1.29%
Oil & Gas Producers                               5.49%    6.90%
Tobacco                                           5.90%    9.68%
Fixed Line Telecommunications                     2.42%    3.00%
Equity Investment Instruments                    26.87%   17.20%
Beverages                                         2.54%    1.10%
Construction & Materials                          0.48%    3.96%
Banks                                             2.45%    3.23%
Media                                             5.47%    5.92%
Industrial & Office REITs                         3.68%    2.97%
Travel & Leisure                                  2.29%    2.79%
Electronic & Electrical Equipment                 2.12%    1.54%
Multiutilities                                    3.20%    3.33%
Gas, Water & Multiutilities                       2.83%    2.50%
Household Goods & Home Construction               7.17%    9.75%
Financial Services                                2.86%    2.64%
General Industrials                               1.73%    1.58%
Mobile Telecommunications                         2.60%    2.65%
Total                                           100.00%  100.00%

Note: 1...'Value %Total' is the portfolio value of the share as a % of the total portfolio
      2...'Div %Total' is the expected dividend of the share based on forecast yield
                       as a % of the total portfolio expected dividend