What's so good about dividend investing?

[pje16]

I am talking about the longer term not the day or two before
so from one div to the next
and the above has moved the goalposts slightly
We would reinvest the div, get more shares and a better div next time (assuming a rising market)

[dealtn]

I am talking about the longer term not the day or two before
so from one div to the next
and the above has moved the goalposts slightly
We would reinvest the div, get more shares and a better div next time (assuming a rising market)

You will have to explain the longer term then please.

Of the 2 identical companies how does the one paying the dividend ever catch up let alone overtake the one that doesn't?

In period 1 the dividend payer has reduced from 105p to 100p. The non-dividend payer stays at 105p. Now if both own identical assets, and grow again, lets say by 10% this time, what happens?

The dividend payer grows from 100p to 110p, the non-dividend payer from 105p to 115.5p - the gap has grown wider, not narrowed, and certainly not made any catch up.

Can you explain how/why you expect this not to be the case please?

Presumably the dividend payer now reduces again as it pays out some cash, lets assume its 5p again, but it can be whatever you like. It drops from 110p to 105p. The non-dividend payer stays at 115.5p. The gap just got bigger again!

So please, again, can you explain how the dividend payer of this identical pair of investments manages to be worth more, and who is the rational investor that would be paying more for it?

[pje16]

This whole thread has gone way off the title, so picking small fragment to discuss does not make a lot of sense
https://www.investopedia.com/articles/i ... ng-run.asp
I am truly fed up with it now, so will do my best not to post to it anymore

[dealtn]

This whole thread has gone way off the title, so picking small fragment to discuss does not make a lot of sense
https://www.investopedia.com/articles/i ... ng-run.asp
I am truly fed up with it now, so will do my best not to post to it anymore

Your link describes the difference between 2 investors in a company that pays a dividend. One reinvests that dividend back into the company by purchasing more shares in it. The other doesn't reinvest, preferring to boost consumption with that cash.

That isn't the same situation as comparing the 2 companies, one of which pays out a dividend and one doesn't preferring to keep the cash in the business. The investor in the company that doesn't pay out, and reinvests the cash itself, doesn't need to reinvest that dividend payout, as it never happens.

So reverting to the OP. If a company never paid a dividend, deciding to retain the cash, an investor in it could if it chose to sell some shares in it (almost the opposite but equivalent as in your link) and be in the same position as having invested in (an identical) company that did pay out a dividend.

Outside of frictional costs and taxes, money is fungible. Investors can decide their income/reinvestment regardless of the dividend decision of the Directors of (identical) companies.

[pje16]

Ok can't resist
The link I used explains that dividend reinvestment is better on the whole
after all isn't at what investing is primarily done for?
The OP post says
All that happens with dividends is that the company pays you some of your own money.
You are no better off.

and that is the point I do not agree with

[Arborbridge]

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?

Yes it is worth less, but only because the dividend increased the value. If you used your house to create an income by running and B and B, you wouldn't moan because the house value hadn't increased after you had taken the income. You take the income and you still have a house to generate more income - so it is with a company. You have shares that generate an income - who cares what it's worth as long as it keeps generating the income you need?
The price of the shares is dependent on the whim of the market to a large extent - what people will pay as a multiplier to eps can vary, just like house prices.

Arb.

[dealtn]

Ok can't resist
The link I used explains that dividend reinvestment is better on the whole
after all isn't at what investing is primarily done for?
The OP post says
All that happens with dividends is that the company pays you some of your own money.
You are no better off.

and that is the point I do not agree with

Not sure how you can disagree with it, so please explain.

Now if having received that cash you decide to reinvest it, or chose to spend it, you will introduce different outcomes, of course.

You appear to be conflating "dividend reinvestment" (as opposed to not), and receiving a dividend (and a company choosing not to pay you one). They are different discussions.

[dealtn]

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?

Yes it is worth less, but only because the dividend increased the value. If you used your house to create an income by running and B and B, you wouldn't moan because the house value hadn't increased after you had taken the income. You take the income and you still have a house to generate more income - so it is with a company. You have shares that generate an income - who cares what it's worth as long as it keeps generating the income you need?
The price of the shares is dependent on the whim of the market to a large extent - what people will pay as a multiplier to eps can vary, just like house prices.

Arb.

No the dividend didn't increase the value. The earnings and cash flows of the company increase (potentially decrease!) the value. The Dividend reduces the value because it removes the cash asset that pays it from the ownership of the company, to its owners.

[pje16]

My final opinion and VERY last post on this thread
Dividend reinvestment beats taking dividends as cash
No-one has to agree but there are plenty of articles that back that up

[xeny]

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

and that is the point I do not agree with

Where does the money come from if the act of the company giving some to you means there is more money overall?

[Dod101]

My final opinion and VERY last post on this thread
Dividend reinvestment beats taking dividends as cash
No-one has to agree but there are plenty of articles that back that up

I doubt that anyone could disagree with that but you are introducing a new element. You are buying more shares but then you do not have the benefit of the cash.

Dod

[Lootman]

An elephant we are all ignoring... tax.

In the glory days of HYP, dividends were untaxed, and capital gains were taxed at 40%.

We tend to ignore tax when posting on here, we speak of yields as if there were no tax and capital gains as if they were untaxed.
But I pay 32.5% on divis, and 20% on gains and I'm sure that many other Lemons do too.
So in terms of the pound in my pocket, capital liquidation could be more effective than divis.
I concede that I should pay more attention to that irritating fact.

Logical follow-through would require a slant towards 'growth' stocks that can be trimmed - selling divi stocks to generate an income is self-defeating, like burning the boat to keep warm.

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.

But one should think about tax.

If you take full advantage of the available tax shelters, ISAs or SIPPs, according to your situation, and having "His and Hers" accounts if possible, one does not need to consider tax, except for IHT.

True but that also depends on how and when you derived the money to invest in the first place.

If it is gradually over a working lifetime then it is entirely possible to shelter 100% of your investments from tax. But if instead you came by your wealth in a "lumpy" form then that is much harder to achieve. Examples of lumpy income might be an inheritance, the sale of a property or business, exercise of employee stock options, pension lump sum payouts and so on.

In my case although I had a regular income for 25 or so years, the bulk of my net worth came from such lumpy windfalls and, as such, I have only been able to shelter some of it from tax. And given the number of discussions about capital gains tax I read on TLF, I am far from alone in that regard.

[absolutezero]

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

I would pay exactly the same.
100p and no dividend = 95p + 5p dividend.

[hiriskpaul]

My final opinion and VERY last post on this thread
Dividend reinvestment beats taking dividends as cash
No-one has to agree but there are plenty of articles that back that up

It is not relevant to the thread. However, reinvesting dividends can work out well, often/usually does, but it really depends where and when they are reinvested. Reinvesting Carillion dividends back into more Carillion shares would not have beaten putting the dividends into a piggy bank.

[Arborbridge]

No the dividend didn't increase the value. The earnings and cash flows of the company increase (potentially decrease!) the value. The Dividend reduces the value because it removes the cash asset that pays it from the ownership of the company, to its owners.

Indeed, I mentioned earnings earlier as the driver - dividends are just the lesser part which are returned to shreholders. The balance will be reinvested by the company to help it grow, in most cases, or leak into higher pay next year for self congrtulatory executives

I guess "what's good about dividends" is really about "what's so good about dividends from my POV?" and as someone not wanting to re-invest totally but wanting to draw an income, I have a different perspective. That's not the same as asking what dividends do for the company. Purely from the company point of view, it is better to re-invest in developing the business - but eventually there has to be a pay off otherwise what would be the point of all that delayed gratification?

In short, we can only answer from our own personal perspective.
Arb.

[1nvest]

Consider a company with £100M capital/value that earns a 5% interest/reward and pays out that £5M in dividends. It's capital value having risen to £105M falls back to £100M again following the ex-div date. If 100M shares in issue, £1.05 share price drops to £1.00. If you reinvest the dividend then that money doesn't go into the companies value, you are just paying someone else to buy some of their shares. There's also a delay between the stock going ex-dividend and pay date, perhaps a month, so instead of benefiting from the full 5% profits your share is 4.574% ((1.05^(1/12))^11), someone else had the capital for a month between the ex-div and pay dates. The broker might levy a FX conversion fee, and another fee to buy more shares (reinvest the dividend), the market maker also takes a slice, as might the taxman.

Contrast that with another firm also initially with £100M capital that earns 5% interest/earnings but that retains those earnings and compounds the rewards.

Being generous and ignoring all of the FX, brokers fees, market makers spread, taxman's cut and after a decade with dividends reinvested the investor will hold 56.4% more shares at a £1.00 share price, compared to the non-dividend stock holding the same number of shares as at the start but with each share worth £1.629 (62.9% gain), over 6% richer. Potentially significantly more after the other costs/taxes are also factored in.

Jack Bogle likened such costs using 6% and 8% differences, suggesting that compounded over a 50 year lifetime of accumulating/drawdown as compounding to 18.4 and 46.9 differences, comparable to investors taking on 100% of the risk for 39% of the reward. He also suggested that average private investor lost around 2% of annualised rewards due to bad behaviour such as chasing profits and/or buying-high/selling-low or other factors, a large chunk of PI's would have been better served by investing in cash-deposit accounts. The financial sector is well apt at extracting such value as a means to pay high wages and work out of expensive real estate locations.

[MDW1954]

My final opinion and VERY last post on this thread
Dividend reinvestment beats taking dividends as cash
No-one has to agree but there are plenty of articles that back that up

It is not relevant to the thread. However, reinvesting dividends can work out well, often/usually does, but it really depends where and when they are reinvested. Reinvesting Carillion dividends back into more Carillion shares would not have beaten putting the dividends into a piggy bank.

Moderator Message:
Am I alone in thinking that this thread has staggered to the point where nothing more can be said? Say the word, and we'll gladly close it. --MDW1954

[AshleyW]

Alaric wrote:

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.

Very true - dividend payouts form income ETYfs and funds can be pretty volatile but pretty well all of the income Investment Trusts maintained their payouts post March 2020 and post the 2008 financial crisis.

[Dod101]

I for one would agree that this thread should be put down and laid to rest.

Dod

[Charlottesquare]

May I add one point, this thread appears to suppose the market is valuing a company based on its net assets, such that paying out a dividend reduces said assets . But markets do not tend to value companies this way, they value often looking at P/E with expected P/E growth factored in, if the company earned 70p a share in the year without having that 70p to hand, the 70p was obviously not needed to produce those earnings, the company can ceteris paribus earn the 70p next year without the 70p being invested. The 70p may enhance next year's earnings if the company say uses it to reduce debt (reduced interest cost) or if it can expand and invest profitably using all the 70p divs not paid, but it may not, in reality it all depends what the directors have indicated to the analysts may happen and what the analysts and the market believe is possible from the company. Valuation is rarely a substitution where the 70p div moves the price 70p, it may do, it may not, it may move it 35p, it may move it 90p.

ITs quoted with NAV figures are maybe an exception but for trading companies earnings and earnings growth are far more significant valuation factors than assets, especially given that company accounts often do not reflect accurate values re assets and liabilities anyway, they generally feature accounting convention valuations ,e. g if a compay owes £1,000,000 at say 6% interest it is very unlikely the liability in the accounts will be £1,000,000 anyway( measurement of financial instruments per accounting standards))