What's so good about dividend investing?

[pje16]

Fix this in your OP
=================================================================================================================
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.
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It's nonsense

Why?

You are not comparing like with like
Which has more value
The one about to pay a dividend would be worth more than 100 before XD day
or the one not paying one

[hiriskpaul]

Fix this in your OP
=================================================================================================================
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.
=========================================================================
It's nonsense

Why?

You are not comparing like with like
Which has more value
The one about to pay a dividend would be worth more than 100 before XD day
or the one not paying one

Again, why?

[pje16]

I give up
A share about to pay a dividend is worth more than one that isn't
You would not pay the same for both

[Dod101]

I get the impression that some people posting think a company's capital is fixed. Could this belief help explain their reluctance to sell shares for consumption?

Capital varies all the time. In particular retaining earnings increases capital. In contrast, losses, share buy backs and the payment of dividends depletes capital. The value of a shareholder's share (for want of a better word) of that capital can rise even if the shareholder occasionally sells shares.

I think it is important to know what is meant by capital in this context. A company's share capital is fixed unless it chooses to raise more by way of subscription or it chooses to capitalise some its reserves. The poster is referring of course to the assets in the business and in particular what is usually called its working capital.

Early on in this now long thread I gave my reasons for preferring dividends to selling shares 'for consumption' as he puts it. Dividends land painlessly and without cost in my bank account on a regular basis (usually anyway). If I sell some shares to get the same cash, I could be selling into a weak market, never a good idea, and of course I end up with fewer shares. I prefer to leave my shares where they are, invested, since, over time stockmarkets tend to rise rather than fall.

Dod

[Dod101]

I can of course see your argument and it does not at the end of the day matter how we view it.....

It may not matter to some how they view it, but to others (less well off) it may be crucial. Adopting a HYP approach because you "believe" you can "have your cake and eat it" may cost some dear if it causes them to misjudge the risk/reward of the various approaches to trying to fund a respectable retirement.....

I do not understand the rather cryptic comments here. Can you explain what you mean please?

Dod

[hiriskpaul]

I give up
A share about to pay a dividend is worth more than one that isn't
You would not pay the same for both

Now that really is nonsense.

[pje16]

I feel sorry for you

[Dod101]

I have never been into 'growth'. Unpredictable and precarious. An unwelcome complexification. My one essay in that direction, a mining portfolio, produced growth of red ink.

Fortunately I do not have to do anything, I am not short of income. I can continue drawing divis and leave complexification to others.

V8

I am not sure what V8 means when he says what he does that about growth investing. That is a very important part of the investment process but I do not want to open the 'capital does not matter' argument again, but it sure does!. In fact without it you may end up with the results I got from 3 years of investing in Henderson Far East Income, a result which almost certainly, despite a big income, gave me a negative total return in real terms.

Dod

[NotSure]

I can of course see your argument and it does not at the end of the day matter how we view it.....

It may not matter to some how they view it, but to others (less well off) it may be crucial. Adopting a HYP approach because you "believe" you can "have your cake and eat it" may cost some dear if it causes them to misjudge the risk/reward of the various approaches to trying to fund a respectable retirement.....

I do not understand the rather cryptic comments here. Can you explain what you mean please?

Dod

I simply mean that if you believe that a companies worth ('NAV') is unaffected by the distribution of dividends, then HYP looks like a no-brainer. It's like 'free money'. However, if you accept that a company is worth less the day after it pays out than the day before, then valuing that investment is more nuanced.

Not saying I know one way or the other, but it definitely affects the equation - an IT paying 4% where 2% is from selling down shares (reduction in NAV) clearly "looks" worse than a company paying 4% from it's cash reserves. But if the reality is that the companies 'NAV' has reduced by 4% as a consequence of paying out a dividend, then which is 'worse' then?

[xeny]

I give up
A share about to pay a dividend is worth more than one that isn't
You would not pay the same for both

Now that really is nonsense.

Can you elaborate on this please?

Simplistically you seem to be

share price pre dividend = share price post dividend, and the value of the dividend is spontaneously created.

pje 16 is saying

share price pre dividend = share price post dividend + dividend, rather like an atom decaying by spitting out a neutron.

[Arborbridge]

It may not matter to some how they view it, but to others (less well off) it may be crucial. Adopting a HYP approach because you "believe" you can "have your cake and eat it" may cost some dear if it causes them to misjudge the risk/reward of the various approaches to trying to fund a respectable retirement.....

I do not understand the rather cryptic comments here. Can you explain what you mean please?

Dod

I simply mean that if you believe that a companies worth ('NAV') is unaffected by the distribution of dividends, then HYP looks like a no-brainer. It's like 'free money'. However, if you accept that a company is worth less the day after it pays out than the day before, then valuing that investment is more nuanced.

Not saying I know one way or the other, but it definitely affects the equation - an IT paying 4% where 2% is from selling down shares (reduction in NAV) clearly "looks" worse than a company paying 4% from it's cash reserves. But if the reality is that the companies 'NAV' has reduced by 4% as a consequence of paying out a dividend, then which is 'worse' then?

I'm not sure if Dod is clear about your cryptic comment now, but it has really helped me to understand what you were driving at.

Whether I am well off or less well off doesn't seem to come into it. In fact, the less well off wouldn't have money to invest anyway - those that do, all have excess income to invest by definition.

I'm not particularly bothered about the mechanism, and neither is Dod or any one else living off dividend income. The value of the company - given that it is not being run into the ground, but preferably trading on an even keel - isn't of much consequence. A dividend investor does not want his cake and eat it - I prefer to think of seed corn. The seed corn, or capital, is only there to as a mechanism for producing dividends. Provided it carries on producing, I am not to bothered (within limits) what someone thinks my stock of seed corn is worth. Its worth is its income producing power.

As Dod said right in the beginning: we like dividends seemlessly popping into our accounts without having to think about selling bits of a shareholding, with all the extra decision making that entails.


Arb.

[pje16]

pje 16 is saying
share price pre dividend = share price post dividend + dividend, rather like an atom decaying by spitting out a neutron.

No
share price pre ex div date = share price post dividend + dividend

[Dod101]

It may not matter to some how they view it, but to others (less well off) it may be crucial. Adopting a HYP approach because you "believe" you can "have your cake and eat it" may cost some dear if it causes them to misjudge the risk/reward of the various approaches to trying to fund a respectable retirement.....

I do not understand the rather cryptic comments here. Can you explain what you mean please?

Dod

I simply mean that if you believe that a companies worth ('NAV') is unaffected by the distribution of dividends, then HYP looks like a no-brainer. It's like 'free money'. However, if you accept that a company is worth less the day after it pays out than the day before, then valuing that investment is more nuanced.

Not saying I know one way or the other, but it definitely affects the equation - an IT paying 4% where 2% is from selling down shares (reduction in NAV) clearly "looks" worse than a company paying 4% from it's cash reserves. But if the reality is that the companies 'NAV' has reduced by 4% as a consequence of paying out a dividend, then which is 'worse' then?

Thanks. I am firmly in the camp of those who believe that a company's net worth is reduced by the amount of the dividend; how could it be otherwise? Paying dividends whether from revenue or distributable reserves is not a 'free lunch'. However many companies believe paying a dividend should be the first call on earnings or at least on part of them, others, probably less mature ones, tend to believe that they can find better uses for the money by reinvesting. The trouble is, and this is what the entire thread is about or I think should be about, can the directors make better use of the cash within the business than the shareholders? Sometimes they can and sometimes not but we only know post the event so I at least prefer to hedge my bets and get some of the earnings in my pocket by way of a cash dividend. In any case, since I live off my investments I need a reasonably reliable cash flow and it has always seemed to me that dividends are likely to be more dependable than having to sell some shares. Would you have fancied selling some shares in March 2020 for instance? Whereas most of my dividends kept flowing in.

Arb has covered any other points that I might have made. Thanks due to Arb

Dod

[xeny]

pje 16 is saying
share price pre dividend = share price post dividend + dividend, rather like an atom decaying by spitting out a neutron.

No
share price pre ex div date = share price post dividend + dividend

What is the difference between "share price pre ex div date" and "share price pre dividend" ? I'm trying to say the share price just before it goes ex div.

[pje16]

What is the difference between "share price pre ex div date" and "share price pre dividend" ? I'm trying to say the share price just before it goes ex div.

If you sell your stock before the ex-div date, you also are selling away your right to the stock dividend.
It typically takes place a week or two before the pay date
sounds almost the same thing to me
but share price pre dividend is not a term I am familar with

[hiriskpaul]

pje 16 is saying
share price pre dividend = share price post dividend + dividend, rather like an atom decaying by spitting out a neutron.

No
share price pre ex div date = share price post dividend + dividend

No argument from me about that statement.

[xeny]

What is the difference between "share price pre ex div date" and "share price pre dividend" ? I'm trying to say the share price just before it goes ex div.

If you sell your stock before the ex-div date, you also are selling away your right to the stock dividend.
It typically takes place a week or two before the pay date
sounds almost the same thing to me
but share price pre dividend is not a term I am familar with

Apologies for not using appropriate terminology when trying to present your position. I'd say as a reasonable approximation this would be expected:

share price pre ex-div date = share price post ex-div date + dividend

[Arborbridge]

What is the difference between "share price pre ex div date" and "share price pre dividend" ? I'm trying to say the share price just before it goes ex div.

If you sell your stock before the ex-div date, you also are selling away your right to the stock dividend.
It typically takes place a week or two before the pay date
sounds almost the same thing to me
but share price pre dividend is not a term I am familar with

Apologies for not using appropriate terminology when trying to present your position. I'd say as a reasonable approximation this would be expected:

share price pre ex-div date = share price post ex-div date + dividend

And the company isn't worth any less because its the earnings, or a fraction of them which create the dividend.

[xeny]

share price pre ex-div date = share price post ex-div date + dividend

And the company isn't worth any less because its the earnings, or a fraction of them which create the dividend.

If the company is worth

no of shares in issue x share price

and the share price falls by the value of the dividend, how can the company not be worth less after paying the dividend?

[dealtn]

I give up
A share about to pay a dividend is worth more than one that isn't
You would not pay the same for both

Why?

Start of period 2 identical companies both have assets of 100p and a share price of 100p. Throughout let's assume stock market pricing is 100% rational.

The assets of the companies earn a 5% return over the period, so both are worth 105p at the end of the period. The market price remains the same for both, and at this point 105p.

One (instantaneously) declares and pays a 5p dividend. One declares no dividend.

One has turned 105p share price into 100p share price and 5p cash.

The other has retained a 105p share price.

At what point, and why, does the price of the one paying a dividend exceed the other, and what rational person would pay that extra price?