QE and index funds have deformed the stock market as predicted by Goodhart’s Law.

[hiriskpaul]

Terry, please help and explain operating cash flow to this board.

The thing that seems to be missed is that both dividends and capital growth contribute to the total return of a share. Here is a little example based on IGG, showing 3 buys of a single share and the dividends which would have accrued:

IGG                                                      IRR    
Date         Event    Price £   Dividend p   No Shares     1.01%
29/12/2020   Bought   9.0208                     1.00    -9.0208
25/02/2021   H1       8.5550        12.96                 0.1296
14/06/2021   Bought   8.7051                     2.00    -8.7051
21/10/2021   FY       8.5750        30.24                 0.6048
14/01/2022   Bought   8.0450                     3.00    -8.0450
04/03/2022   H1       8.5000        12.96                 0.3888
20/10/2022   FY       7.5200        31.24                 0.9372
27/09/2022   Sold     8.0100                     0.00    24.0300

As you can see, quite a lot of capital loss, but some dividends accrued. The IRR is just positive, because the cash flow in the right hand column is just positive. In this case the dividends have added to the cash flow to make its total just positive to the extent of 32p.

TJH

Not sure why you think that anyone has missed the fact that both dividends and capital growth contribute to total returns. I cannot see where anyone has claimed this was not the case. You will get a different outcome if you reinvest dividends than if you don't (except in particularly rare cases), but no-one is disputing that dividends should not be included in TR/IRR calculations.

[dealtn]

To take another view I could argue that dividends contribute absolutely nothing to long term returns. The reason is that on average with each dividend you get an equal and opposite drop in the share price. Reinvest that dividend at the reduced share price and your total holding value is identical to that had the dividend never been paid. In other words, you are back where you started before the dividend was paid. More shares, but at a lower price per share. Before anyone objects, I suggest they do the calculation. If you don't get back to where you started you have done it wrong!

Taking your argument to its logical conclusion a share would therefore fall every time a dividend was paid until it reached zero.

Only in the extreme example of a company that couldn't generate any cash (or profits if you prefer) from its operating assets. Everytime it paid out a dividend it would be equivalent to "selling the family silver" until there was nothing left, and a zero share price. In normal cases the underlying assets of the company are utilised to generate profits (and cash) such that the share price rises.

How much the former drops through dividends and the latter rises through earnings will (broadly) determine whether the share price rises or falls over time.

[NotSure]

To take another view I could argue that dividends contribute absolutely nothing to long term returns. The reason is that on average with each dividend you get an equal and opposite drop in the share price. Reinvest that dividend at the reduced share price and your total holding value is identical to that had the dividend never been paid. In other words, you are back where you started before the dividend was paid. More shares, but at a lower price per share. Before anyone objects, I suggest they do the calculation. If you don't get back to where you started you have done it wrong!

Taking your argument to its logical conclusion a share would therefore fall every time a dividend was paid until it reached zero.

Indeed - if the company was totally unprofitable yet continued to pay a dividend.

[tjh290633]

Not sure why you think that anyone has missed the fact that both dividends and capital growth contribute to total returns. I cannot see where anyone has claimed this was not the case. You will get a different outcome if you reinvest dividends than if you don't (except in particularly rare cases), but no-one is disputing that dividends should not be included in TR/IRR calculations.

I was looking at this comment of yours.

To take another view I could argue that dividends contribute absolutely nothing to long term returns. The reason is that on average with each dividend you get an equal and opposite drop in the share price. Reinvest that dividend at the reduced share price and your total holding value is identical to that had the dividend never been paid. In other words, you are back where you started before the dividend was paid. More shares, but at a lower price per share. Before anyone objects, I suggest they do the calculation. If you don't get back to where you started you have done it wrong!

TJH

[GoSeigen]

Not sure why you think that anyone has missed the fact that both dividends and capital growth contribute to total returns. I cannot see where anyone has claimed this was not the case. You will get a different outcome if you reinvest dividends than if you don't (except in particularly rare cases), but no-one is disputing that dividends should not be included in TR/IRR calculations.

I was looking at this comment of yours.

To take another view I could argue that dividends contribute absolutely nothing to long term returns. The reason is that on average with each dividend you get an equal and opposite drop in the share price. Reinvest that dividend at the reduced share price and your total holding value is identical to that had the dividend never been paid. In other words, you are back where you started before the dividend was paid. More shares, but at a lower price per share. Before anyone objects, I suggest they do the calculation. If you don't get back to where you started you have done it wrong!

TJH

Good grief, TJH Paul had his tongue firmly in his cheek, surely it was obvious? On the surface it looks credible but is as fallacious as Rob's attempts. Next you'll be arguing that the movie "Airplane" was in fact a commercial pilot training video...

GS

[hiriskpaul]

Not sure why you think that anyone has missed the fact that both dividends and capital growth contribute to total returns. I cannot see where anyone has claimed this was not the case. You will get a different outcome if you reinvest dividends than if you don't (except in particularly rare cases), but no-one is disputing that dividends should not be included in TR/IRR calculations.

I was looking at this comment of yours.

To take another view I could argue that dividends contribute absolutely nothing to long term returns. The reason is that on average with each dividend you get an equal and opposite drop in the share price. Reinvest that dividend at the reduced share price and your total holding value is identical to that had the dividend never been paid. In other words, you are back where you started before the dividend was paid. More shares, but at a lower price per share. Before anyone objects, I suggest they do the calculation. If you don't get back to where you started you have done it wrong!

TJH

Good grief, TJH Paul had his tongue firmly in his cheek, surely it was obvious? On the surface it looks credible but is as fallacious as Rob's attempts. Next you'll be arguing that the movie "Airplane" was in fact a commercial pilot training video...

GS

Yes, it was not meant to be entirely serious. but here is a thought experiment, costs ignored. I have 96 shares worth £1 each, total value £96. They pay 4p per share dividend and the share price drops to 96p. The value of the holding is now £92.16, add the £3.84 dividend and I am back to £96, no worse off than before the dividend. Now I reinvest the £3.84 on more shares, exactly 4 shares at 96p each. I now have 100 shares worth 96p each, total £96. Exactly the same value as before the dividend payment. Completely obvious really.

But hang on, I thought reinvesting dividends was supposed to compound my wealth? That's common knowledge, but if that is the case, reinvesting dividends compounds wealth, why have I gained nothing from reinvesting my £3.84? I have 4 more shares, but they are worth less, so I am no better off than I would have been had the dividend not been paid, or if 2p had been paid instead of 4p.

Perhaps the compounding of wealth occurs because of something else? Share price growth maybe?

[PianSom]

Yes, it was not meant to be entirely serious. but here is a thought experiment, costs ignored. I have 96 shares worth £1 each, total value £96. They pay 4p per share dividend and the share price drops to 96p. The value of the holding is now £92.16, add the £3.84 dividend and I am back to £96, no worse off than before the dividend. Now I reinvest the £3.84 on more shares, exactly 4 shares at 96p each. I now have 100 shares worth 96p each, total £96. Exactly the same value as before the dividend payment. Completely obvious really.

But hang on, I thought reinvesting dividends was supposed to compound my wealth? That's common knowledge, but if that is the case, reinvesting dividends compounds wealth, why have I gained nothing from reinvesting my £3.84? I have 4 more shares, but they are worth less, so I am no better off than I would have been had the dividend not been paid, or if 2p had been paid instead of 4p.

Perhaps the compounding of wealth occurs because of something else? Share price growth maybe?

Your analysis overlooks the point that if your shares yield a further 4p dividend you now have 100 (rather than 96) of them, so you get a larger income (£4, rather than £3.84) to reinvest going forward, and so on. Your wealth therefore compounds up exponentially, even with no capital growth

(But maybe you are still not being entirely serious ... ?)

[hiriskpaul]

Yes, it was not meant to be entirely serious. but here is a thought experiment, costs ignored. I have 96 shares worth £1 each, total value £96. They pay 4p per share dividend and the share price drops to 96p. The value of the holding is now £92.16, add the £3.84 dividend and I am back to £96, no worse off than before the dividend. Now I reinvest the £3.84 on more shares, exactly 4 shares at 96p each. I now have 100 shares worth 96p each, total £96. Exactly the same value as before the dividend payment. Completely obvious really.

But hang on, I thought reinvesting dividends was supposed to compound my wealth? That's common knowledge, but if that is the case, reinvesting dividends compounds wealth, why have I gained nothing from reinvesting my £3.84? I have 4 more shares, but they are worth less, so I am no better off than I would have been had the dividend not been paid, or if 2p had been paid instead of 4p.

Perhaps the compounding of wealth occurs because of something else? Share price growth maybe?

Your analysis overlooks the point that if your shares yield a further 4p dividend you now have 100 (rather than 96) of them, so you get a larger income (£4, rather than £3.84) to reinvest going forward, and so on. Your wealth therefore compounds up exponentially, even with no capital growth

(But maybe you are still not being entirely serious ... ?)

The next time a 4p dividend is paid, the share price would again fall 4p. Run the calculation again and you end up with more shares, but of lower value and the total value of the holding would be unchanged.

Unless of course the share price increased, or did not fall the full 4p. Then the total value would rise.

[mc2fool]

But hang on, I thought reinvesting dividends was supposed to compound my wealth? That's common knowledge, but if that is the case, reinvesting dividends compounds wealth, why have I gained nothing from reinvesting my £3.84? I have 4 more shares, but they are worth less, so I am no better off than I would have been had the dividend not been paid, or if 2p had been paid instead of 4p.

Perhaps the compounding of wealth occurs because of something else? Share price growth maybe?

Reinvesting dividends compounds your wealth over not reinvesting dividends and spending them down the pub instead. Simples! Why? Who cares? Honestly, you guys remind me of...

"Besides, our Histories of six thousand Moons make no mention of any other Regions, than the great Empires of Lilliput and Blefuscu. Which two mighty Powers have, as I was going to tell you, been engaged in a most obstinate War for six and thirty Moons past, It begun upon on the following Occasion. It is allowed on all Hands, that the primitive Way or breaking Eggs before we eat then, was upon the larger End..."

https://books.google.co.uk/books?id=jAU ... &q&f=false (rather yellowed 1743 edition!)

[PianSom]

Yes, it was not meant to be entirely serious. but here is a thought experiment, costs ignored. I have 96 shares worth £1 each, total value £96. They pay 4p per share dividend and the share price drops to 96p. The value of the holding is now £92.16, add the £3.84 dividend and I am back to £96, no worse off than before the dividend. Now I reinvest the £3.84 on more shares, exactly 4 shares at 96p each. I now have 100 shares worth 96p each, total £96. Exactly the same value as before the dividend payment. Completely obvious really.

But hang on, I thought reinvesting dividends was supposed to compound my wealth? That's common knowledge, but if that is the case, reinvesting dividends compounds wealth, why have I gained nothing from reinvesting my £3.84? I have 4 more shares, but they are worth less, so I am no better off than I would have been had the dividend not been paid, or if 2p had been paid instead of 4p.

Perhaps the compounding of wealth occurs because of something else? Share price growth maybe?

Your analysis overlooks the point that if your shares yield a further 4p dividend you now have 100 (rather than 96) of them, so you get a larger income (£4, rather than £3.84) to reinvest going forward, and so on. Your wealth therefore compounds up exponentially, even with no capital growth

(But maybe you are still not being entirely serious ... ?)

The next time a 4p dividend is paid, the share price would again fall 4p. Run the calculation again and you end up with more shares, but of lower value and the total value of the holding would be unchanged.

Unless of course the share price increased, or did not fall the full 4p. Then the total value would rise.

If your theoretical company is not generating any post-tax distributable income then yes, the price would eventually fall all the way to zero, and your wealth would only increase to the future value of that £96 you started with

My "cleaner" theoretical company (which is what I had imagined you were considering) would generate income from its corporate activities allowing it to pay a continuing (and fixed) 4p dividend. The share price would fall to 96p when it pays its dividend then rise over the period between dividends back up to £1 before paying its next dividend of 4p and falling back to 96p. I will get richer and richer over time

[hiriskpaul]

Yes, it was not meant to be entirely serious. but here is a thought experiment, costs ignored. I have 96 shares worth £1 each, total value £96. They pay 4p per share dividend and the share price drops to 96p. The value of the holding is now £92.16, add the £3.84 dividend and I am back to £96, no worse off than before the dividend. Now I reinvest the £3.84 on more shares, exactly 4 shares at 96p each. I now have 100 shares worth 96p each, total £96. Exactly the same value as before the dividend payment. Completely obvious really.

But hang on, I thought reinvesting dividends was supposed to compound my wealth? That's common knowledge, but if that is the case, reinvesting dividends compounds wealth, why have I gained nothing from reinvesting my £3.84? I have 4 more shares, but they are worth less, so I am no better off than I would have been had the dividend not been paid, or if 2p had been paid instead of 4p.

Perhaps the compounding of wealth occurs because of something else? Share price growth maybe?

Your analysis overlooks the point that if your shares yield a further 4p dividend you now have 100 (rather than 96) of them, so you get a larger income (£4, rather than £3.84) to reinvest going forward, and so on. Your wealth therefore compounds up exponentially, even with no capital growth

(But maybe you are still not being entirely serious ... ?)

The next time a 4p dividend is paid, the share price would again fall 4p. Run the calculation again and you end up with more shares, but of lower value and the total value of the holding would be unchanged.

Unless of course the share price increased, or did not fall the full 4p. Then the total value would rise.

If your theoretical company is not generating any post-tax distributable income then yes, the price would eventually fall all the way to zero, and your wealth would only increase to the future value of that £96 you started with

My "cleaner" theoretical company (which is what I had imagined you were considering) would generate income from its corporate activities allowing it to pay a continuing (and fixed) 4p dividend. The share price would fall to 96p when it pays its dividend then rise over the period between dividends back up to £1 before paying its next dividend of 4p and falling back to 96p. I will get richer and richer over time

This is the next step. What happens to the company over time. I completely agree with your example and I have hilighted the bits that cause wealth to rise over time? Compounding works through company profits and a rising share price.

[PianSom]

Yes, it was not meant to be entirely serious. but here is a thought experiment, costs ignored. I have 96 shares worth £1 each, total value £96. They pay 4p per share dividend and the share price drops to 96p. The value of the holding is now £92.16, add the £3.84 dividend and I am back to £96, no worse off than before the dividend. Now I reinvest the £3.84 on more shares, exactly 4 shares at 96p each. I now have 100 shares worth 96p each, total £96. Exactly the same value as before the dividend payment. Completely obvious really.

But hang on, I thought reinvesting dividends was supposed to compound my wealth? That's common knowledge, but if that is the case, reinvesting dividends compounds wealth, why have I gained nothing from reinvesting my £3.84? I have 4 more shares, but they are worth less, so I am no better off than I would have been had the dividend not been paid, or if 2p had been paid instead of 4p.

Perhaps the compounding of wealth occurs because of something else? Share price growth maybe?

Your analysis overlooks the point that if your shares yield a further 4p dividend you now have 100 (rather than 96) of them, so you get a larger income (£4, rather than £3.84) to reinvest going forward, and so on. Your wealth therefore compounds up exponentially, even with no capital growth

(But maybe you are still not being entirely serious ... ?)

The next time a 4p dividend is paid, the share price would again fall 4p. Run the calculation again and you end up with more shares, but of lower value and the total value of the holding would be unchanged.

Unless of course the share price increased, or did not fall the full 4p. Then the total value would rise.

If your theoretical company is not generating any post-tax distributable income then yes, the price would eventually fall all the way to zero, and your wealth would only increase to the future value of that £96 you started with

My "cleaner" theoretical company (which is what I had imagined you were considering) would generate income from its corporate activities allowing it to pay a continuing (and fixed) 4p dividend. The share price would fall to 96p when it pays its dividend then rise over the period between dividends back up to £1 before paying its next dividend of 4p and falling back to 96p. I will get richer and richer over time

This is the next step. What happens to the company over time. I completely agree with your example and I have hilighted the bits that cause wealth to rise over time? Compounding works through company profits and a rising share price.

Well, in this example the ex-div share price remains completely constant at 96p, so I personally think it is slightly misleading to suggest wealth is generated by a rising share price. But, yes - wealth is being generated from profitable economic activity

Of course, there is no need for this theoretical company to pay a dividend at all. It could just choose to retain all distributable income and have an ever-rising share price at a compounding rate of 4%. Your wealth at the end of your life would be the same either way. (Though you would have no opportunity to go to the pub and spend your divi's in the latter case.)

[hiriskpaul]

Your analysis overlooks the point that if your shares yield a further 4p dividend you now have 100 (rather than 96) of them, so you get a larger income (£4, rather than £3.84) to reinvest going forward, and so on. Your wealth therefore compounds up exponentially, even with no capital growth

(But maybe you are still not being entirely serious ... ?)

The next time a 4p dividend is paid, the share price would again fall 4p. Run the calculation again and you end up with more shares, but of lower value and the total value of the holding would be unchanged.

Unless of course the share price increased, or did not fall the full 4p. Then the total value would rise.

If your theoretical company is not generating any post-tax distributable income then yes, the price would eventually fall all the way to zero, and your wealth would only increase to the future value of that £96 you started with

My "cleaner" theoretical company (which is what I had imagined you were considering) would generate income from its corporate activities allowing it to pay a continuing (and fixed) 4p dividend. The share price would fall to 96p when it pays its dividend then rise over the period between dividends back up to £1 before paying its next dividend of 4p and falling back to 96p. I will get richer and richer over time

This is the next step. What happens to the company over time. I completely agree with your example and I have hilighted the bits that cause wealth to rise over time? Compounding works through company profits and a rising share price.

Well, in this example the ex-div share price remains completely constant at 96p, so I personally think it is slightly misleading to suggest wealth is generated by a rising share price. But, yes - wealth is being generated from profitable economic activity

The share price rises between dividend payments. You already stated this in your follow on example.

Of course, there is no need for this theoretical company to pay a dividend at all. It could just choose to retain all distributable income and have an ever-rising share price at a compounding rate of 4%. Your wealth at the end of your life would be the same either way. (Though you would have no opportunity to go to the pub and spend your divi's in the latter case.)

True, provided the retained profit can be appropriately reinvested to generate rising earnings, the share price and value of the shares will increase. This is really where compounding is happening. it is the stream of profits that gets reinvested. Reinvesting dividends just puts back the part of the profits that were converted to cash and paid out, to the detriment of share price with each payment.

[GeoffF100]

True, provided the retained profit can be appropriately reinvested to generate rising earnings, the share price and value of the shares will increase. This is really where compounding is happening. it is the stream of profits that gets reinvested. Reinvesting dividends just puts back the part of the profits that were converted to cash and paid out, to the detriment of share price with each payment.

If the company buys back its own shares rather than paying out dividends, the share price does not fall as it would if a dividend had been paid out, but the remaining shareholders are exactly compensated (ignoring costs) by owning a larger share of the company. The situation then is the same as if a dividend had been paid out and reinvested, except that the shareholder owns fewer shares with a proportionately higher value. Share buy backs are preferable to dividend payments because they avoid withholding tax and dividend tax. Nonetheless, if companies did not pay dividends at all, I expect that the tax rules would change.

[dealtn]

But, yes - wealth is being generated from profitable economic activity

So you agree then on the cause of the rise in wealth, and with it the wising wealth of the shareholders. It isn't, unlike the original claim, the reinvestment of the dividends, instead it is the profitable use of and reinvestment of the underlying income stream of the business.

The shareholders' distributed income, and the company's earnings (or income) are different things.

[1nvest]

True, provided the retained profit can be appropriately reinvested to generate rising earnings, the share price and value of the shares will increase. This is really where compounding is happening. it is the stream of profits that gets reinvested. Reinvesting dividends just puts back the part of the profits that were converted to cash and paid out, to the detriment of share price with each payment.

If the company buys back its own shares rather than paying out dividends, the share price does not fall as it would if a dividend had been paid out, but the remaining shareholders are exactly compensated (ignoring costs) by owning a larger share of the company. The situation then is the same as if a dividend had been paid out and reinvested, except that the shareholder owns fewer shares with a proportionately higher value. Share buy backs are preferable to dividend payments because they avoid withholding tax and dividend tax. Nonetheless, if companies did not pay dividends at all, I expect that the tax rules would change.

In addition to tax efficiencies, Warren Buffett suggests there are additional benefits. Buffett's comment, edited to be £ rather that $ ...

Assume that you and I are the equal owners of a business with £2 million of net worth. The business earns 15% on tangible net worth – £300,000 – and can reasonably expect to earn the same 15% on reinvested earnings. Furthermore, there are outsiders who always wish to buy into our business at 150% of net worth. Therefore, the value of what we each own is now £1.5 million. You would like to have the two of us shareholders receive one-third of our company’s annual earnings and have two-thirds be reinvested. So you suggest that we pay out £100,000 of current earnings and retain £200,000 to increase the future earnings of the business. In the first year, your dividend would be £50,000, and as earnings grew and the one- third payout was maintained, so too would your dividend. In total, dividends and stock value would increase 10% each year (15% earned on net worth less 5% of net worth paid out). After ten years our company would have a net worth of £5,187,485 (the original £2 million compounded at 10%) and your dividend in the upcoming year would be £129,687. Each of us would have shares worth £3,890,613 (150% of our half of the company’s net worth). With dividends and the value of our stock continuing to grow at 10% annually.

There is an alternative approach, however, that would leave us even happier. Under this scenario, we would leave all earnings in the company and each sell 3.33% of our shares annually. Since the shares would be sold at 150% of book value, this approach would produce the same £50,000 of cash initially, a sum that would grow annually. Call this option the “sell-off” approach. Under this “sell-off” scenario, the net worth of our company increases to £8,091,115 after ten years (£2 million compounded at 15%). Because we would be selling shares each year, our percentage ownership would have declined, and, after ten years, we would each own 35.6% of the business. Even so, your share of the net worth of the company at that time would be £2,880,437. And every Pound of net worth attributable to each of us can be sold for £1.50. Therefore, the market value of your remaining shares would be £4,320,655, about 11% greater than the value of your shares if we had followed the dividend approach. Moreover, your annual cash receipts from the sell-off policy would now be running 11% more than you would have received under the dividend scenario. Voila! – you would have both more cash to spend annually and more capital value.

And that's on a more conservative 1.5x book value share price, more typically that averages around 2x, so scales even more.

When investors sell shares to create DIY dividends when the share price is 2x book value, other people/investors fund that 'dividend' rather than the dividend coming out of the companies bottom line capital. DIY dividends can also be set to the exact amount and timing that fits with each individual investor.

But yes, the US directed more of earnings to be retained when they changed taxation of dividends that made it more appropriate for companies to do so, back in the 1980's (US prior to 1981 and it was illegal for companies to buy back their own shares) . More recently however and the US does seem to be looking at stock repurchases after they exceeded $1 trillion value or so a year back, so as you say the tax/rules could be changed again.

[Itsallaguess]

Of course, there is no need for this theoretical company to pay a dividend at all.

It could just choose to retain all distributable income and have an ever-rising share price at a compounding rate of 4%.

True, provided the retained profit can be appropriately reinvested to generate rising earnings, the share price and value of the shares will increase.

This is really where compounding is happening. it is the stream of profits that gets reinvested.

Reinvesting dividends just puts back the part of the profits that were converted to cash and paid out, to the detriment of share price with each payment.

I think it's worth at least recognising that a common theme of these fairly regular 'retain cash or pay some out' discussions is that they automatically assume that cash not paid out as dividends but retained to generate further 'in-business' future earnings will be as efficient in doing so as the potentially alternative path of diverting paid out dividends somewhere else that might generate a different level of return on the same capital.

That should at least be recognised as an assumption that is unlikely to be true all of the time, and as we know that companies can squander cash as well as the next man, then I often think it's a little unfair in these regular discussions that things like re-investment trading-costs can be held up as potentially negative 'downsides' of dividend payouts, but there seems to always be some sort of '100% efficiency assumption' automatically given to the alternative of retained-earnings...

Hopefully we might agree that such a '100% efficiency assumption' on retained earnings is likely to be incorrect, at the very least, and is often likely to be quite wide of the mark...

Cheers,

Itsallaguess

[Bubblesofearth]

I think it's worth at least recognising that a common theme of these fairly regular 'retain cash or pay some out' discussions is that they automatically assume that cash not paid out as dividends but retained to generate further 'in-business' future earnings will be as efficient in doing so as the potentially alternative path of diverting paid out dividends somewhere else that might generate a different level of return on the same capital.

That should at least be recognised as an assumption that is unlikely to be true all of the time, and as we know that companies can squander cash as well as the next man, then I often think it's a little unfair in these regular discussions that things like re-investment trading-costs can be held up as potentially negative 'downsides' of dividend payouts, but there seems to always be some sort of '100% efficiency assumption' automatically given to the alternative of retained-earnings...

Hopefully we might agree that such a '100% efficiency assumption' on retained earnings is likely to be incorrect, at the very least, and is often likely to be quite wide of the mark...

Cheers,

Itsallaguess

There is the counter argument that UK companies are under pressure from e.g. pension funds to pay out a high level of dividends and that this has, over time, resulted in poorer corporate performance compared to that seen in some other countries such as the US.

There is of course a balance to be struck.

BoE

[Itsallaguess]

I think it's worth at least recognising that a common theme of these fairly regular 'retain cash or pay some out' discussions is that they automatically assume that cash not paid out as dividends but retained to generate further 'in-business' future earnings will be as efficient in doing so as the potentially alternative path of diverting paid out dividends somewhere else that might generate a different level of return on the same capital.

That should at least be recognised as an assumption that is unlikely to be true all of the time, and as we know that companies can squander cash as well as the next man, then I often think it's a little unfair in these regular discussions that things like re-investment trading-costs can be held up as potentially negative 'downsides' of dividend payouts, but there seems to always be some sort of '100% efficiency assumption' automatically given to the alternative of retained-earnings...

Hopefully we might agree that such a '100% efficiency assumption' on retained earnings is likely to be incorrect, at the very least, and is often likely to be quite wide of the mark...

There is the counter argument that UK companies are under pressure from e.g. pension funds to pay out a high level of dividends and that this has, over time, resulted in poorer corporate performance compared to that seen in some other countries such as the US.

There is of course a balance to be struck.

I totally agree with both of your points, although I hope they don't detract fully from the point I was making about there often being a false premise around some sort of '100% efficiency' around retained capital in these types of broader discussions...

Regarding your first point - as a long-term income-investor, I moved away from a UK-centric focus many years ago with the clear impression that UK companies squeezing the dividend-pips too hard, and for too long, are the dying-stars of the income-investment sphere, and by allowing myself to drop my yield requirements into more moderate areas of the wider global investment market, I was likely to both capture income-investments that retained higher levels of business-enhancing capital, and also remove some of the high-level income and capital volatility that I'd been used to seeing with my earlier UK-centric, higher-yielding investments.

Doing so has been a very good strategic decision over the subsequent years, and in relation to the 'Passive Investing' board topic, I now do own the type of 'hands-off', low-volatility income-portfolio that I initially looked for...

Cheers,

Itsallaguess