The Lemon Fool

GoSeigen wrote:

OhNoNotimAgain wrote:The data is out there to contradict you.

You're welcome to present it.

We all know how he fiddles the data to get the answer he prefers. He counts the capital gains that derive from reinvested dividends as actual dividends. He is adding more money to his pool and than comes to the totally unstartling conclusion that his pool is bigger.

The simplest way to see what comprises equity returns is to look at the long-term annualised returns from shares (somewhere between 8% and 10%) and compare that to the average dividend yield (in the UK that is between 3% and 4.5%)

It's quite obvious from those numbers that the return from dividends is a half or less. The rest of his point is that if you save more you will end up with more, which is true but trivial.

Lootman wrote:

GoSeigen wrote:

OhNoNotimAgain wrote:The data is out there to contradict you.

You're welcome to present it.

We all know [...]

I was just trying to show I wasn't scared


GS

I am not a chartist myself, but market psychology is a key element and momentum cannot be ignored. Charts will bring some of this out

Anthony Bolton once said that at the start of his fund management career he relied on fundamental analysis alone but later he learn't technical analysis because so many other fund managers were using it that it became like a self fulfilling prophecy, i guess that means if enough people believe it then in the short term at least it works, and all you need is a string of short term successes to add up to long term out performance.

Lootman wrote:

GoSeigen wrote:

OhNoNotimAgain wrote:The data is out there to contradict you.

You're welcome to present it.

We all know how he fiddles the data to get the answer he prefers. He counts the capital gains that derive from reinvested dividends as actual dividends. He is adding more money to his pool and than comes to the totally unstartling conclusion that his pool is bigger.

The simplest way to see what comprises equity returns is to look at the long-term annualised returns from shares (somewhere between 8% and 10%) and compare that to the average dividend yield (in the UK that is between 3% and 4.5%)

It's quite obvious from those numbers that the return from dividends is a half or less. The rest of his point is that if you save more you will end up with more, which is true but trivial.

So how is a reinvested dividend different from an "actual" dividend?

These are not my calculations but Barclays, LBS, Wharton and many others.

OhNoNotimAgain wrote:
So how is a reinvested dividend different from an "actual" dividend?

These are not my calculations but Barclays, LBS, Wharton and many others.

Well, do post a link or two then -- to calculations showing dividends are increasingly important over time [or if something else, please state what exactly the figures show]. I'd certainly be very interested in seeing their calculations.

GS

OhNoNotimAgain wrote:So how is a reinvested dividend different from an "actual" dividend?

Once a dividend is paid, it is cash. If you choose to use that cash to buy more shares then, over time, you will have more money than someone who spends them. However that does not prove that the majority of returns comes from dividends. It comes from investing cash.

Lootman wrote:

OhNoNotimAgain wrote:So how is a reinvested dividend different from an "actual" dividend?

Once a dividend is paid, it is cash. If you choose to use that cash to buy more shares then, over time, you will have more money than someone who spends them. However that does not prove that the majority of returns comes from dividends. It comes from investing cash.

In my view that is cash from the original investment, you are not reaching into your back pocket to commit fresh capital. It is cash that is only available because of the dividend paid by that company and would not be available from a company that did not pay dividends, or paid out less.

OhNoNotimAgain wrote:

Lootman wrote:

OhNoNotimAgain wrote:So how is a reinvested dividend different from an "actual" dividend?

Once a dividend is paid, it is cash. If you choose to use that cash to buy more shares then, over time, you will have more money than someone who spends them. However that does not prove that the majority of returns comes from dividends. It comes from investing cash.

In my view that is cash from the original investment, you are not reaching into your back pocket to commit fresh capital. It is cash that is only available because of the dividend paid by that company and would not be available from a company that did not pay dividends, or paid out less.

Some companies choose to give more of their returns as dividends. Others choose to give it more in terms of capital gains. You have not demonstrated the former is superior. You have only reiterated what everyone knows about compounding. And gains compound just like dividends do.

About 40% of returns derive from dividends versus 60% from capital gains. That is obvious from the fact the dividend yield on the index is less than half the long-term annualised rate of total return.

OhNoNotimAgain wrote:
These are not my calculations but Barclays, LBS, Wharton and many others.

Do post your data when you're ready.

GS

Lootman wrote:Some companies choose to give more of their returns as dividends. Others choose to give it more in terms of capital gains. You have not demonstrated the former is superior. You have only reiterated what everyone knows about compounding. And gains compound just like dividends do.

About 40% of returns derive from dividends versus 60% from capital gains. That is obvious from the fact the dividend yield on the index is less than half the long-term annualised rate of total return.

But do gains compound? Surely it all depends on what the companies do with their retained earnings.

There are lots of examples where they have spent it on a take-over which has destroyed value. Do buy-backs increase value? I cannot see how they do.

TJH

tjh290633 wrote:But do gains compound? Surely it all depends on what the companies do with their retained earnings.

There are lots of examples where they have spent it on a take-over which has destroyed value. Do buy-backs increase value? I cannot see how they do.

My point was more technical. Insofar as a company makes profits then they decide what proportion to pay out as a dividend, what proportion to reinvest in the business and what proportion (if any) to engage in financial engineering.

In general it is better for you as an investor to forego dividends if the enterprise can get a better rate of return than you could by investing the cash. Historically that has been the case for companies like Google and Amazon but not for, say, utilities.

As for whether takeovers are good or bad, it totally depends. But the ability to grow successfully is surely one of the most important judgments that any investor makes anyway?

The classic example I would offer of a no-dividend company doing better than you could is Berkshire Hathaway. "Ohno" quite simply has no explanation as to why it would have been wise to avoid BRK simply for the reason that it doesn't pay dividends, when it has been out-performing the index for decades, while imposing no taxable event (dividends) on its shareholders.

Any one-dimensional approach like Ohno's "only dividends matter" approach is over-simplifying. There are great investments that pay no dividends and horrible investments that do.

The problem with the original Berkshire Hathaway was that you could not sell shares for income, just because of the weight. The B shares helped in that respect.

Years ago, the idea of buying a share valued at much over £1 was anathema. In fact Marks and Spencer regularly had scrip issues to keep the price down. Now buying shares valued at over £50 is commonplace.

I prefer to make my own decisions on when, where and how I reinvest my accumulated cash. I'm less happy when a Board of Directors does it for me, because their agenda differs from mine.

TJH

tjh290633 wrote:The problem with the original Berkshire Hathaway was that you could not sell shares for income, just because of the weight. The B shares helped in that respect.

Years ago, the idea of buying a share valued at much over £1 was anathema. In fact Marks and Spencer regularly had scrip issues to keep the price down. Now buying shares valued at over £50 is commonplace.

Yes, I take your point if you wish to sell BRK shares for income, although generally speaking it has been better to just let them grow and take your income elsewhere.

It's interesting that in the UK a low nominal share price is deemed desirable, whereas in the US a high nominal share price confers a sense of status and success. In reality of course it doesn't matter at all, except if you use options.

Even BRK's B shares used to be unaffordable until they did a stock split a few years ago which, from memory, finally enabled BRK to join the S&P 500 from which it has formerly been barred on liquidity grounds,

tjh290633 wrote:I prefer to make my own decisions on when, where and how I reinvest my accumulated cash. I'm less happy when a Board of Directors does it for me, because their agenda differs from mine.

I can understand that although for me there are occasions where I'd rather the company invest my cash, most obviously those enterprises that are racking up double-digit earnings growth year after year. Isn't that just another factor that drives whether you invest in that share in the first place, i.e. whether you like their strategy?

The holy grail of a high yielding share with double digit earnings growth is fairly rare.

Lootman wrote:

OhNoNotimAgain wrote:

Lootman wrote:Once a dividend is paid, it is cash. If you choose to use that cash to buy more shares then, over time, you will have more money than someone who spends them. However that does not prove that the majority of returns comes from dividends. It comes from investing cash.

In my view that is cash from the original investment, you are not reaching into your back pocket to commit fresh capital. It is cash that is only available because of the dividend paid by that company and would not be available from a company that did not pay dividends, or paid out less.

Some companies choose to give more of their returns as dividends. Others choose to give it more in terms of capital gains. You have not demonstrated the former is superior. You have only reiterated what everyone knows about compounding. And gains compound just like dividends do.

About 40% of returns derive from dividends versus 60% from capital gains. That is obvious from the fact the dividend yield on the index is less than half the long-term annualised rate of total return.

I think that logic is too simplistic but accepting it the current best yield on a UK passive fund is 4.2% while the 2016 Credit Suisse Global Investment Returns Yearbook quotes a figure of 5.4% for annualised real returns from UK equities between 1900 and 2015. On your logic it therefore suggests that about three quarters of the returns from UK equities comes from dividends.

Weighting a portfolio towards dividends does not mean of course that you forego capital growth.

Lootman wrote:

tjh290633 wrote:But do gains compound? Surely it all depends on what the companies do with their retained earnings.

There are lots of examples where they have spent it on a take-over which has destroyed value. Do buy-backs increase value? I cannot see how they do.

My point was more technical. Insofar as a company makes profits then they decide what proportion to pay out as a dividend, what proportion to reinvest in the business and what proportion (if any) to engage in financial engineering.

In general it is better for you as an investor to forego dividends if the enterprise can get a better rate of return than you could by investing the cash. Historically that has been the case for companies like Google and Amazon but not for, say, utilities.

As for whether takeovers are good or bad, it totally depends. But the ability to grow successfully is surely one of the most important judgments that any investor makes anyway?

The classic example I would offer of a no-dividend company doing better than you could is Berkshire Hathaway. "Ohno" quite simply has no explanation as to why it would have been wise to avoid BRK simply for the reason that it doesn't pay dividends, when it has been out-performing the index for decades, while imposing no taxable event (dividends) on its shareholders.

Any one-dimensional approach like Ohno's "only dividends matter" approach is over-simplifying. There are great investments that pay no dividends and horrible investments that do.

Your examples are of course biased by survivorship.

You could have chosen Nokia, Blackberry, Hewlett Packard, Ferranti, Marconi, Polly Peck and a host of others.

Lootman wrote:

tjh290633 wrote:But do gains compound? Surely it all depends on what the companies do with their retained earnings.

There are lots of examples where they have spent it on a take-over which has destroyed value. Do buy-backs increase value? I cannot see how they do.

My point was more technical. Insofar as a company makes profits then they decide what proportion to pay out as a dividend, what proportion to reinvest in the business and what proportion (if any) to engage in financial engineering.

In general it is better for you as an investor to forego dividends if the enterprise can get a better rate of return than you could by investing the cash. Historically that has been the case for companies like Google and Amazon but not for, say, utilities.

As for whether takeovers are good or bad, it totally depends. But the ability to grow successfully is surely one of the most important judgments that any investor makes anyway?

The classic example I would offer of a no-dividend company doing better than you could is Berkshire Hathaway. "Ohno" quite simply has no explanation as to why it would have been wise to avoid BRK simply for the reason that it doesn't pay dividends, when it has been out-performing the index for decades, while imposing no taxable event (dividends) on its shareholders.

Any one-dimensional approach like Ohno's "only dividends matter" approach is over-simplifying. There are great investments that pay no dividends and horrible investments that do.

The success of BRK is surely the best demonstration there is of the importance of dividends to shareholders. There is only one that counts in BRK and he doesn't need the cash and makes sure that no one else gets his money, unless it it a charity. But the majority of its investments are highly cash generative and throw off lots of dividends.

Rememeber Buffet only has a listed vehicle for his investments because of an acquisition that went wrong. BRK is essentially a private fund that happens to be listed.

OhNoNotimAgain wrote:a figure of 5.4% for annualised real returns from UK equities between 1900 and 2015.

Real returns, perhaps. But of course the more important number is the nominal returns which, as cited, vary between 8% and 10% pa. As such it is clear that dividends give you less than half of that. QED.

OhNoNotimAgain wrote:Your examples are of course biased by survivorship.

No, my point was restricted to noting that a dividend-only approach would have missed the biggest share winner of the last 40 years. The gains on that would have dwarfed the losses on many others.

OhNoNotimAgain wrote:The success of BRK is surely the best demonstration there is of the importance of dividends to shareholders.

No, because your approach would never have selected BRK because it doesn't pay a dividend. So all the wonders that BRK has achieved would almost ensure that a fund like yours will under-perform its benchmark, which of course we all know it has done, since it is typically a third quartile performer.

Not to mention annual expenses over 1% on a passive fund.

Lootman wrote:

OhNoNotimAgain wrote:a figure of 5.4% for annualised real returns from UK equities between 1900 and 2015.

Real returns, perhaps. But of course the more important number is the nominal returns which, as cited, vary between 8% and 10% pa. As such it is clear that dividends give you less than half of that. QED.

OhNoNotimAgain wrote:Your examples are of course biased by survivorship.

No, my point was restricted to noting that a dividend-only approach would have missed the biggest share winner of the last 40 years. The gains on that would have dwarfed the losses on many others.

OhNoNotimAgain wrote:The success of BRK is surely the best demonstration there is of the importance of dividends to shareholders.

No, because your approach would never have selected BRK because it doesn't pay a dividend. So all the wonders that BRK has achieved would almost ensure that a fund like yours will under-perform its benchmark, which of course we all know it has done, since it is typically a third quartile performer.

Not to mention annual expenses over 1% on a passive fund.

You are the first person I have ever come across who thinks nominal returns are more important than real returns. If you really believe that I assume you have a large exposure to the Caracas stock exchange.

BRK is an outlier I grant you and not included in most indices because of lack of liquidity.

And past performance is no guide to future returns, except in long-term asset class studies as we have both quoted.

OhNoNotimAgain wrote:You are the first person I have ever come across who thinks nominal returns are more important than real returns. If you really believe that I assume you have a large exposure to the Caracas stock exchange.

Except that we were talking about total returns. And as noted, less than half of total return comes from dividends.

The sleight of hand you have performed there is to deflate the returns by inflation. But then you apply ALL of that deflation to capital gains and none to dividends, Which conveniently and self-servingly makes your argument look less flawed.

So let's assume this. Average annualised total return is 9%. Inflation is 3.5% and dividends are 3.5%

Your argument seems to be that inflation is taken 100% from capital gains, meaning just 2% capital gains and 3.5% dividends

But I could just as easily argue that inflation be taken from dividends, meaning dividends are zero and capital gain is 5.5%

Both versions are totally one-sided. So let's be fair and allocate 50/50. The gives dividends of 1.75% and capital gains of 3.75%.

Lootman wrote:

OhNoNotimAgain wrote:You are the first person I have ever come across who thinks nominal returns are more important than real returns. If you really believe that I assume you have a large exposure to the Caracas stock exchange.

Except that we were talking about total returns. And as noted, less than half of total return comes from dividends.

The sleight of hand you have performed there is to deflate the returns by inflation. But then you apply ALL of that deflation to capital gains and none to dividends, Which conveniently and self-servingly makes your argument look less flawed.

So let's assume this. Average annualised total return is 9%. Inflation is 3.5% and dividends are 3.5%

Your argument seems to be that inflation is taken 100% from capital gains, meaning just 2% capital gains and 3.5% dividends

But I could just as easily argue that inflation be taken from dividends, meaning dividends are zero and capital gain is 5.5%

Both versions are totally one-sided. So let's be fair and allocate 50/50. The gives dividends of 1.75% and capital gains of 3.75%.

Dividends are inflation proofed as company's product prices, and usually profits and dividends, rise with inflation.