Dividend stocks appeal to older investors

[TUK020]

From Schroders economics insights site
https://www.schroders.com/en/insights/e ... g-in-asia/

What is of note is that our older clients are also increasingly demanding more dividends from their investments. This is perhaps not surprising.

Behavioural economists Hersh Shefrin and Richard Thaler have long theorised that individuals do not see all money equally. Instead they mentally break down their wealth into three separate, non-fungible baskets, namely current income, current assets and future income.

For them, the propensity to spend out of current income is always the greatest while the temptation to do the same out of future income is the least. And because dividends are viewed as current income, people are happy to spend them. Capital gains, on the other hand, are largely viewed as future income and “jam tomorrow”. The tendency to spend out of them is therefore much lower.

For older customers facing retirement, this distinction is important because they will increasingly prefer to receive dividends from their stocks in order to fund their consumption. This should also see them rotating more into stocks paying high dividends.

In a world that is rapidly ageing, the demand for dividends from the growing cohorts of retirees and soon-to-retire will underpin demand for dividend payers, making these stocks attractive investments on a longer-term basis.

I think this is at the root of any of the interminable arguments about Total Return vs Dividend Yield investing. I hadn't realised that it had been covered by Behavioural Economists.
I am well aware that for me personally, selling assets involves uncomfortable decisions, whereas harvesting dividends doesn't.

[NotSure]

....In a world that is rapidly ageing, the demand for dividends from the growing cohorts of retirees and soon-to-retire will underpin demand for dividend payers, making these stocks attractive investments on a longer-term basis.....

Not sure I follow this. If there is excess demand for dividend paying shares, surely it would simply increase their price and hence depress the dividend in terms of percentage yield?

[88V8]

From Schroders economics insights site...
I think this is at the root of any of the interminable arguments about Total Return vs Dividend Yield investing. I hadn't realised that it had been covered by Behavioural Economists.
I am well aware that for me personally, selling assets involves uncomfortable decisions, whereas harvesting dividends doesn't.

Likewise.

I suppose there would be exceptions, if someone has been a long-term TR investor or an investment hobbyist, then that will probably continue into later years, but for most people the (apparent) reliability of divis will trump the vague notion that one might be routinely able to harvest capital gains, and in later years one may have to be more financially cautious anyway.

I sold six figures in late October for CGT purposes, but I can't say I found it an easy decision and with China suddenly 'opening up' it turned out to have been a masterful piece of mistiming....

V8

[kempiejon]

From Schroders economics insights site...
I think this is at the root of any of the interminable arguments about Total Return vs Dividend Yield investing. I hadn't realised that it had been covered by Behavioural Economists.
I am well aware that for me personally, selling assets involves uncomfortable decisions, whereas harvesting dividends doesn't.

Is it total return verses dividend yield though?
Capital gains hopefully come in the future, income from dividends begins predictable flowing in from purchase with a known timetable. I've had periods of slanting my purchases towards those with a high current yield, those that look undervalued which will come good later and growthy stocks in an upward trend now. All can be judged on their total return, some deliver this with growth, some with income and most a bit of both.

The psychology of delayed gratification vrs birds in hands and jam today/tomorrow etc. Selling has been difficult for me too, so dividends are more attractive. I can always find something I think looks worth buying. I do try and remember other examples of behavioural biases. https://www.investopedia.com/terms/b/be ... inance.asp. One of those, Self-attribution I remind myself of. It's the tendency to make choices based on overconfidence in one's own knowledge or skill. These days a global tracker seems as good a place as any for many investors.

[NotSure]

.....These days a global tracker seems as good a place as any for many investors.

Indeed! They do tend to have a rather low yield, but no dilemma about what to sell!

Then there's VHYL, best (or worst?) of both worlds.

The psychology of the OP is interesting. I am aware of the broad demographic of TLF. I'm currently mid-50s and do not find yield tempting (other than its contribution to TR, and the defensive nature of many HY shares), but maybe that will change in the coming years (and hopefully decades)?

[kempiejon]

.....These days a global tracker seems as good a place as any for many investors.

Indeed! They do tend to have a rather low yield, but no dilemma about what to sell!

Then there's VHYL, best (or worst?) of both worlds.

The psychology of the OP is interesting. I am aware of the broad demographic of TLF. I'm currently mid-50s and do not find yield tempting (other than its contribution to TR, and the defensive nature of many HY shares), but maybe that will change in the coming years (and hopefully decades)?

I cast an eye over VHYL, bought it even but I think I'll chop it in eventually. Perhaps not the worst of both but in my experience not the best. I hadn't thought about "no dilemma about what to sell!" Though obvious now I hear it. I'm still accumulating and I do have a yieldy portfolio such that I'll have a measurable income flow post employment.

[OhNoNotimAgain]

Older investors also tend to be a little bit suspicious of "the growth stock " story. They have lived through the nickel boom, the tech bubble, the goldilocks economy, end of boom and bust cycles.

They have the scars from Poseidon, Marconi, Rentokil, Slater Walker, Polly Peck, Enron, Nokia, Blackberry and many more supposed growth stories.

Instead, they know and recognise large multi-nationals that have survived recessions, wars, socialist governments and still keep chucking out cash.

Unfortunately, new investors never learn the tale of the Hare and the Tortoise from older investors. They have to learn it first hand for themselves.

[ignotus20]

I am in my late 40s but recently sold a business which generated a significant (for me) amount of cash. I would prefer not to start another one, nor work. As such, I find myself in the same position as many older retirees. I have additional complexity because a substantial proportion of my funds are not within tax-sheltered accounts - and it will take a good few years before I can transition it all.

The issue with harvesting capital gains vs dividends is that if there are none of the former in a given year then it places me in a 'burn the furniture to keep warm' situation. There is the sequence of returns risk also, which I confess I don't understand as well as I should do.

On the other hand, I see the logic of Total Return and why it makes a lot of sense as compared to relying exclusively on natural yield. The only way I've thought of to deal with this currently is to effectively hedge my bets using a combination of dividend yield (ITs, prefs, subordinated bonds, ETFs like VHYL etc.) and capital gain (mainly through trackers such as VWRL, gold and other low or non-yielding assets).

I'd be interested to hear anyone else who is similarly conflicted - and how they are currently managing this dilemma.

[Lootman]

Older investors also tend to be a little bit suspicious of "the growth stock " story. They have lived through the nickel boom, the tech bubble, the goldilocks economy, end of boom and bust cycles.

It is ridiculous to tar all growth investing with a handful of cherry-picked bubble examples.

As you well know, there are many multi-decade growth successes like MicroSoft, Apple etc. that have given far greater returns than the pedestrian UK usual suspects that you obsess over.

[scrumpyjack]

Dividends are cash, real money in the bank. Capital gains (until realised) are the market voting on what they think your shares are worth at any point in time - no cash involved. I don't really concern myself with dividends and do endorse the total return concept, but there is a difference between the receipt of cash and the daily market opinion poll on your shares' value, which is what share prices are. It is quite understandable that older investors need cash flow and so do want to have a good income cash stream.

[tacpot12]

I am in my late 40s but recently sold a business which generated a significant (for me) amount of cash. I would prefer not to start another one, nor work. As such, I find myself in the same position as many older retirees. I have additional complexity because a substantial proportion of my funds are not within tax-sheltered accounts - and it will take a good few years before I can transition it all.

The issue with harvesting capital gains vs dividends is that if there are none of the former in a given year then it places me in a 'burn the furniture to keep warm' situation. There is the sequence of returns risk also, which I confess I don't understand as well as I should do.

On the other hand, I see the logic of Total Return and why it makes a lot of sense as compared to relying exclusively on natural yield. The only way I've thought of to deal with this currently is to effectively hedge my bets using a combination of dividend yield (ITs, prefs, subordinated bonds, ETFs like VHYL etc.) and capital gain (mainly through trackers such as VWRL, gold and other low or non-yielding assets).

I'd be interested to hear anyone else who is similarly conflicted - and how they are currently managing this dilemma.

Hi ignotus20, I am wrestling with this dilemma. I retired at 53 five years ago, and have been drawing down from my pension for the last 3.5 years. I manage my portfolio myself. I too took the view that the best way to hedge the various risks was to use a combination of 'income' assets and 'growth' assets. I chose a split that was 80% income assets and 20% growth assets, with the intention of moving to more of a 50/50 split in 2031 when I can claim my state pension and my income needs from the portfolio drop substantially. I'm currently able to live off the dividend income alone, but with the rise in inflation, I'm having to consider selling assets. If I sell income-producing assets I face the dilemma of "selling the furniture" as you put it. I could sell growth assets, and then buy them back after 2031, and I think this is probably the way I will go, although I also have the option of using the proceeds to buy more income-producing assets, which seems attractive if any prices/discounts are low.

Of course, once all the growth assets have been sold, there is no option but to sell income-producing assets, but any selling decision would be based on what I can get for the asset vs. what income I lose if I sell - I hold a relatively broad portfolio of ITs and EFTs and each fund will have its own 'figure of merit' when deciding what to sell that will have to be computed when I need to make a change.

You shouldn't worry about the fact that your money isn't currently tax sheltered - this shouldn't change your investment strategy. It just makes the paperwork at tax time a bit more involved.

[absolutezero]

.....These days a global tracker seems as good a place as any for many investors.

Indeed! They do tend to have a rather low yield, but no dilemma about what to sell!

Then there's VHYL, best (or worst?) of both worlds.

The psychology of the OP is interesting. I am aware of the broad demographic of TLF. I'm currently mid-50s and do not find yield tempting (other than its contribution to TR, and the defensive nature of many HY shares), but maybe that will change in the coming years (and hopefully decades)?

I cast an eye over VHYL, bought it even but I think I'll chop it in eventually. Perhaps not the worst of both but in my experience not the best. I hadn't thought about "no dilemma about what to sell!" Though obvious now I hear it. I'm still accumulating and I do have a yieldy portfolio such that I'll have a measurable income flow post employment.

If someone wanted a basket of Uk dividend shares without bothering with the HYP bit then just track a high yielding index.

BlackRock have an ETF for that.
https://www.ishares.com/uk/individual/en/products/251807/ishares-uk-dividend-ucits-etf?switchLocale=y&siteEntryPassthrough=true
I hold the remnants of my HYP in this and City of London.

[tjh290633]

Dividends are cash, real money in the bank. Capital gains (until realised) are the market voting on what they think your shares are worth at any point in time - no cash involved. I don't really concern myself with dividends and do endorse the total return concept, but there is a difference between the receipt of cash and the daily market opinion poll on your shares' value, which is what share prices are. It is quite understandable that older investors need cash flow and so do want to have a good income cash stream.

Think about it this way. Dividends are cash which you are free to dispose of or spend as you wish. On the other hand capital gains may lead to your estate suffering 40% IHT on that gain. Even if they are sheltered from CGT or Income Tax in an ISA, that shelter is lost on your demise.

Nothing wrong with Capital Gains, but the ease of dealing with dividends makes them much more attractive. I am just waiting for my latest cruise to set sail, thanks to cash from an ISA.

THH

[NotSure]

If someone wanted a basket of Uk dividend shares without bothering with the HYP bit then just track a high yielding index.

BlackRock have an ETF for that.
https://www.ishares.com/uk/individual/en/products/251807/ishares-uk-dividend-ucits-etf?switchLocale=y&siteEntryPassthrough=true
I hold the remnants of my HYP in this and City of London.

I hold a similar offering from Vanguard which has performed very satisfactority:

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-uk-equity-income-index-fund-gbp-acc/overview

That plus their (cheap) active global version constitute the HY part of my portfolio.

https://www.vanguardinvestor.co.uk/investments/vanguard-global-equity-income-gbp-accumulation-shares/overview

Both are accumulating, but that's fine by me.

[ignotus20]

You shouldn't worry about the fact that your money isn't currently tax sheltered - this shouldn't change your investment strategy. It just makes the paperwork at tax time a bit more involved.

Hi tacpot. I take your point with this, although I'm a basic rate tax payer so the CGT rate is 10% vs 28.5% for dividends (20% income + 8.5% dividend tax, after allowances). I can see CGT rates heading to parity with income tax at some point (whether it's a labour or conservative government) so I guess this is more marginal, but it's a factor to add into the mix.

Your approach of mixing 20%/80% capital/income and then switching 50%/50% is an interesting one. The state pension is 18 years away for me right now, but I suspect it will become longer before I'm 67. I'm also caught out by the increase from 55 to 57 for access to my SIPP (and by less than a month).

My thought with this was a bit like yours though and the intention was to have enough income in the early years (via dividends) to not need to sell loss-making assets while they (hopefully) accrue some capital gains which can be harvested later. This stuff is a bit of a sliding puzzle, for sure.

[kempiejon]

Hi tacpot. I take your point with this, although I'm a basic rate tax payer so the CGT rate is 10% vs 28.5% for dividends (20% income + 8.5% dividend tax, after allowances). I can see CGT rates heading to parity with income tax at some point (whether it's a labour or conservative government) so I guess this is more marginal, but it's a factor to add into the mix.

Nah, income from dividends after the £1k allowance is only 8.75 for BR tax payers. There are worse tax rates to be subject to. Capital gains has £6k 23/24 allowance before tax is due, then only 10%. £3k allowance next year.

[Wuffle]

Is this a story about recency bias?
Customers increasingly don't want the sort of stocks that have just spent 18 months going down (because behavioural science tells us this is how people think).
Then layer on top of that the natural inclination to risk aversion with age.

W.

[Dod101]

My thought with this was a bit like yours though and the intention was to have enough income in the early years (via dividends) to not need to sell loss-making assets while they (hopefully) accrue some capital gains which can be harvested later. This stuff is a bit of a sliding puzzle, for sure.

Loss making assets do not accrue capital gains.

Dod

[Dod101]

Older investors also tend to be a little bit suspicious of "the growth stock " story. They have lived through the nickel boom, the tech bubble, the goldilocks economy, end of boom and bust cycles.

They have the scars from Poseidon, Marconi, Rentokil, Slater Walker, Polly Peck, Enron, Nokia, Blackberry and many more supposed growth stories.

Instead, they know and recognise large multi-nationals that have survived recessions, wars, socialist governments and still keep chucking out cash.

Unfortunately, new investors never learn the tale of the Hare and the Tortoise from older investors. They have to learn it first hand for themselves.

You could have added Cable & Wireless to that list. My scars were mostly from C & W. I was not into investing at the time of Poseidon and almost by chance, sold Marconi in time to reap a good profit. Was not involved in any of the others.

I am definitely an 'older investor' but am not in the least suspicious of the growth stock story. I have about 80% of my shares in income /growth shares and the other 20% in growth shares. The trouble with 'growth' shares is if they have no growth (like mine in 2022) then they are giving you nothing. Income oriented shares tend to provide some sort of income return. Dividends are often 'rebased' but not that often suspended.

I am totally reliant on my investments for my income (except for the State Pension) and find that dividend oriented shares provide what I need. The income drops into my accounts without my having to do anything and I have not had to sell a growth share to provide income for many years which, given the interesting times we live in, is just as well.

Dod

[Wuffle]

Dod101,

Given that you sold some SMT when it was comically over valued, I would suggest that you have presented yourself with the option to do either, live of dividends or capital gain.

W.