Capital

[Wizard]

You are wrong. It is not the market which changes the differentials between shares. It is usually other factors, like stake building or increased profits and dividends.

Had BT.A been above my weight limit, then I would have trimmed it back and reinvested in a share paying a dividend giving it a higher yield. That way I increase the income flow. It doesn't matter what the price of the share you trim is, it is how it stands relative to the rest. It will have got to the top of the midden because its relative price will have risen. It may actually have fallen, but less so than the other shares.

I am just as happy applying my methods on a falling market as on a rising market, simply because the level of the market as a whole is irrelevant.

TJH

You say I am wrong with no caveat, just wrong absolutely and unequivocally. But then go on to say it is in your view it is "usually" other factors that cause changes in relative values. This suggests that even you think that maybe sometimes it is not those factors and could be the market.

You say I am wrong about the market changing the relative values of your shareholdings, that seems to imply you think the market moves broadly in lock step, which is decidedly odd. Looking at your portfolio I see you hold Imperial Brands (IMB) and Aviva (AV.). In the last week I see IMB was down about 1%, in the same time AV. was up 11%. That would seem to have made a meaningful change in the relative size of these two shareholdings. Too short a period? In the last month IMB is down 13% and AV. up 4%, so an even bigger relative movement. In the last three months IMB is down 23%, AV. up 21%. There would have had to have been a pretty big top up to outweight that three month change in relative value. And of course that is only looking at the relative position of two of what I believe is a c.40 share portfolio. Maybe you need to think about this again.

Interestingly back in 2012 you seemed to accept the impact of the market on share values. In a TMF article recently linked to you wrote:

As things developed, it became obvious that some shares had outgrown their usefulness in terms of income generation, because their yields were now well below that of the market. Accordingly, I developed my own criteria for disposing of share holdings completely. The criteria are:

1. The share has grown to such an extent that its yield is now less than about half that of the market, typically less than 2%...

viewtopic.php?p=89919#p89919

That is not a function of top ups, topping up a share in your portfolio will not change its yield, that only happens if the dividend or the price change. You don't mention the dividend changing, so I can only take your comment to be a recognition of market price changes.

Much more recently you wrote:

I explained why I made the changes. Everything is relative. According to market sentiment some shares move up the rankings, while others move down. Just because the market is volatile, that does not mean you sit on your posterior and do nothing. The name of the game is a high and increasing dividend. This is the first occasion I have had cause to trim UU. since I first bought in 2001, although there was a return of capital in 2008. People have criticised UU. for its lack of dividend growth in the past. Now I get criticized for taking advantage of its resilience in a falling market to enhance my income.

viewtopic.php?p=290077#p290077

So as recently as March this year you yourself were saying the market can move shares up (and presumably down) your relative ranking. Again, this seems to be an explicit recognition on your part of the relative value of your shareholdings changing due to market price movements.

If, as you say I am wrong, then presumably you also think your past self was equally misguided

[onthemove]

Total return is also a better means of comparisons.

You use whatever you want mate.

No-one has ever claimed HYP is a superior total return strategy above any other strategy.

HYP is an income focussed strategy for people who are interested in receiving an income from their investments without any major amount of effort on their part.

If you're after a maximum total return strategy, you go right ahead and use total returns, or whatever else you wish, in your evaluations.

Just will you please stop telling others they should be evaluating with a metric when it isn't aligned with their aims.

You're beginning to sound a bit like someone telling a builder looking for a vehicle to get his tools and a large quantity of materials from A to B, that the only metric he should be looking at is the vehicles' top speeds in a drag race.

Though, that said...

I would just add that if markets are efficient (efficient market hypothesis), then it generally shouldn't matter what shares you choose - you could throw a dart at the share list in the FT with your eyes shut - you would still expect the same overall total return.

And some experiments in the past seem to have backed up that idea.

If you aren't convinced in the efficient market hypothesis - if you don't think markets are efficient, and you think that total returns will be lower from higher yielding shares - then perhaps you could detail the factors that you think cause this inefficiency to arise.

If you think low yield shares will provide a better overall total return, what effect do you think is causing that inefficiency?

Why do you think the market is not fully valuing shares with a low yield at their true worth, such that you think you can generate a better overall total return for yourself by buying into this inefficiency?

But isn't there a little flaw in your rationale? I mean, if people valued low yield shares a little more highly, that would lower their yield even further, so wouldn't that make them even better? That therefore someone then buying at that higher price should then expect to make even higher total returns? Sounds more like the 'rationale' of a greater fool / ponzi scheme if you ask me.

Yield is a function of price. The market can set the yield at any level it wants, for any company that is paying a non-zero dividend. Why would doubling the price - which would half the yield - be expected to give someone buying at that higher price a better total return? Surely the investor buying at the lower price (higher yield) would expect a better overall total return?

Perhaps you could elaborate on the basis behind your position? What's causing this market inefficiency that is undervaluing lower yielding shares, such that you could expect a greater overall total return, vs buying lower yielding shares?

On the face of it, when I try to make sense of it, it seems a little contradictory.

[Lootman]

But your theory fails when it comes to growth shares.

If people were to trade and pay a lot of money for such a share, it would be entirely a ponzi scheme - relying solely on a greater fool willing to pay you more for it than you paid.

Well, if you are going to define any share that does not pay a dividend as a ponzi scheme then this is a pointless discussion. Just because you can't value a share that doesn't pay a dividend does not imply that there is no real value there.

The reality is that the value of a share is predicated on more than the discounted present value of putative future dividends, if any. Shares that are not valued in respect of dividends are harder to value, for certain. And I think that explains the suspicion that some investors have about them. But that doesn't mean they do not have value.

In fact not only can capital value not depend on dividends, it can even be inversely proportional to them. Just think about how the high-yielding UK market has a lower capital value now than in 1999. Whereas the lower-yielding US market has more than doubled its capital value since then. By your theory, that should not happen, and the UK market should be more highly-rated because of its higher payouts. But it ain't so.

It is common sense to many investors that a company that pays out its earnings will often grow its capital at a lower rate.

[onthemove]

But your theory fails when it comes to growth shares.

If people were to trade and pay a lot of money for such a share, it would be entirely a ponzi scheme - relying solely on a greater fool willing to pay you more for it than you paid.

Well, if you are going to define any share that does not pay a dividend as a ponzi scheme then this is a pointless discussion. Just because you can't value a share that doesn't pay a dividend does not imply that there is no real value there.

....

Not sure if you're deliberately misquoting / misrepresenting what I said.

On the assumption it was a misunderstanding, I will again clarify for you...

A share which does not and will not ever pay a dividend has no value; the value of the share resides in the value of the future dividends; it is from these future dividends that the capital value derives its fundamental value.

If there is no possibility of future dividends, then the share has no fundamental value beyond a token in a ponzi scheme.

[Lootman]

A share which does not and will not ever pay a dividend has no value; the value of the share resides in the value of the future dividends; it is from these future dividends that the capital value derives its fundamental value.

If there is no possibility of future dividends, then the share has no fundamental value beyond a token in a ponzi scheme.

If you had said "earnings" there rather than "dividends" then you'd be closer, although still no cigar.

The test of any theory is whether in practice it can explain, and indeed accurately predict, the value of a security. Your theory clearly cannot since it ascribes zero value to four of the six biggest companies on the planet.

[onthemove]

A share which does not and will not ever pay a dividend has no value; the value of the share resides in the value of the future dividends; it is from these future dividends that the capital value derives its fundamental value.

If there is no possibility of future dividends, then the share has no fundamental value beyond a token in a ponzi scheme.

If you had said "earnings" there rather than "dividends" then you'd be closer, although still no cigar.

The test of any theory is whether in practice it can explain, and indeed accurately predict, the value of a security. Your theory clearly cannot since it ascribes zero value to four of the six biggest companies on the planet.

You really are going to town on misrepresentation.

Misrepresenting what I said, by cutting out much to make it appear that I was referencing something I wasn't in the part you quoted, and now you are still misrepresenting what a share is.

It really is quite simple

In legal terms a share gives you the rights to the residual profits.

https://www.investopedia.com/terms/s/sh ... d%20shares.

"What are Shares
Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends."

It does not give you the rights to the earnings. There are others in the hierarchy who have rights to the earnings before shareholders. Shareholders are last in the queue and only have rights to the residual profits after everyone else with higher rights has received their cut.

"Your theory clearly cannot since it ascribes zero value to four of the six biggest companies on the planet"

How does my theory ascribe zero value to four of the size biggest companies on the planet? You are now just making that up. A straw man that you're representing as me, so that you can argue against it and appear to be arguing against me.

You are absolutely deliberately misrepresenting what I am writing.

I will repeat it again for you, although I'm beginning to see little point because you'll just read what you want to read, irrespective of what I've actually written, and irrespective of legally what rights being a shareholder actually gives you.

The reasons google, amazon, berkshire hathaway, and co all have value in their shares is because of the rights shareholders have to the residual profits (including in future), and their value stems from an expectation that at some appropriate time in future, shareholders will be able to benefit from those rights.

If the shares did not legally confer the holders such rights, then the shares absolutely would be worthless. And if people are trading them on the presumption that they will never be able to enforce such rights, then absolutely they are just being used (by the 'investors') as tokens in a ponzi scheme.

It really is that simple. No amount of obfuscation can change those basic legal rights on which shareholdings are based. No court, neither in the UK nor in the USA is going to uphold any other rights.

No court is going to award you, as a shareholder of those companies, anything other than your rights to those residual profits. Without those residual profits, your shares confer you no other rights to anything other than typically voting at the AGM.

Without those future residual profits ever being distributed to shareholders, the shares would be worthless.

[Arborbridge]

I think the heat is getting to us all

[Lootman]

The reasons google, amazon, berkshire hathaway, and co all have value in their shares is because of the rights shareholders have to the residual profits (including in future), and their value stems from an expectation that at some appropriate time in future, shareholders will be able to benefit from those rights.

In some academic, technical and legal sense that might have validity. But it is useless as a tool to determine what the true market value is or should be.

In terms of understanding why AMZN, GOOG, FB and BRK have the market value that they do despite there being no prospect of a dividend, you have to ask investors why they are willing to pay up for those names. Their values are derived from the sum total of what market participants perceive as determining the future cashflows that will derive from their operations. This remains true even if a company declares that it will never pay a dividend or won't pay one for at least 10 years. The word "cashflows" is broader then just dividends.

So if you want to value securities then you first need to understand all the factors that drive price performance, and not just a single one of them. If it helps that understanding consider an analogy. Often when a company takes over another company, they pay more than the value of the tangible assets of the acquired company. That excess of price paid over tangible assets value is called "goodwill". It is literally a real value that cannot otherwise be measured or calculated. Goodwill only occurs when an acquisition happens, but the idea that intangibles have value is common place. It represents a source of value that cannot be measured but that is real nonetheless. Brand names are a good example.

If it helps you can consider the value of a share in a similar way. Its value equals the discounted value of future cashflow streams PLUS the intangible value of that business. Determining the former is the easy part and a half decent accountant can do that. The latter is where the real skill happens because it is a qualitative determination. No accountant predicted that Amazon would become the success it has.

[IanTHughes]

It is common sense to many investors that a company that pays out its earnings will often grow its capital at a lower rate.

So what? What do I care about the capital value of any company? Surely what is important is the amount of capital that I own?

So, if I as an investor receive a dividend, then the company has effectively transferred some of its capital value to my direct control. Surely I still have as much capital as before the dividend was received, only some of that value is now in cash. Furthermore, even if I decide to draw that cash, because I need it to pay my bills, I am in no worse a position than, assuming the company had not paid a dividend, in order to raise that cash that I obviously need, I had had to sell part of my holding.


Ian

[tjh290633]

You are wrong. It is not the market which changes the differentials between shares. It is usually other factors, like stake building or increased profits and dividends.

Had BT.A been above my weight limit, then I would have trimmed it back and reinvested in a share paying a dividend giving it a higher yield. That way I increase the income flow. It doesn't matter what the price of the share you trim is, it is how it stands relative to the rest. It will have got to the top of the midden because its relative price will have risen. It may actually have fallen, but less so than the other shares.

I am just as happy applying my methods on a falling market as on a rising market, simply because the level of the market as a whole is irrelevant.

TJH

You say I am wrong with no caveat, just wrong absolutely and unequivocally. But then go on to say it is in your view it is "usually" other factors that cause changes in relative values. This suggests that even you think that maybe sometimes it is not those factors and could be the market.

Your problem is that you do not recognise that "The Market" is an agglomeration of a number of individual shares. The Market as a whole moves up or down. The individual shares move relative to each other due to factors, other than those driving the market as a whole.

You say I am wrong about the market changing the relative values of your shareholdings, that seems to imply you think the market moves broadly in lock step, which is decidedly odd. Looking at your portfolio I see you hold Imperial Brands (IMB) and Aviva (AV.). In the last week I see IMB was down about 1%, in the same time AV. was up 11%. That would seem to have made a meaningful change in the relative size of these two shareholdings. Too short a period? In the last month IMB is down 13% and AV. up 4%, so an even bigger relative movement. In the last three months IMB is down 23%, AV. up 21%. There would have had to have been a pretty big top up to outweight that three month change in relative value. And of course that is only looking at the relative position of two of what I believe is a c.40 share portfolio. Maybe you need to think about this again.

Interestingly back in 2012 you seemed to accept the impact of the market on share values. In a TMF article recently linked to you wrote:

As things developed, it became obvious that some shares had outgrown their usefulness in terms of income generation, because their yields were now well below that of the market. Accordingly, I developed my own criteria for disposing of share holdings completely. The criteria are:

1. The share has grown to such an extent that its yield is now less than about half that of the market, typically less than 2%...

viewtopic.php?p=89919#p89919

That is not a function of top ups, topping up a share in your portfolio will not change its yield, that only happens if the dividend or the price change. You don't mention the dividend changing, so I can only take your comment to be a recognition of market price changes.

Absolute rubbish. The share price has risen faster than the dividend has risen. This has nothing to do with the movement of the market.

Much more recently you wrote:

I explained why I made the changes. Everything is relative. According to market sentiment some shares move up the rankings, while others move down. Just because the market is volatile, that does not mean you sit on your posterior and do nothing. The name of the game is a high and increasing dividend. This is the first occasion I have had cause to trim UU. since I first bought in 2001, although there was a return of capital in 2008. People have criticised UU. for its lack of dividend growth in the past. Now I get criticized for taking advantage of its resilience in a falling market to enhance my income.

viewtopic.php?p=290077#p290077

So as recently as March this year you yourself were saying the market can move shares up (and presumably down) your relative ranking. Again, this seems to be an explicit recognition on your part of the relative value of your shareholdings changing due to market price movements.

If, as you say I am wrong, then presumably you also think your past self was equally misguided

If a share price rises on a falling market, clearly this cannot be the result of the market movement.

TJH

[Lootman]

It is common sense to many investors that a company that pays out its earnings will often grow its capital at a lower rate.

So what? What do I care about the capital value of any company? Surely what is important is the amount of capital that I own?

So, if I as an investor receive a dividend, then the company has effectively transferred some of its capital value to my direct control. Surely I still have as much capital as before the dividend was received, only some of that value is now in cash. Furthermore, even if I decide to draw that cash, because I need it to pay my bills, I am in no worse a position than, assuming the company had not paid a dividend, in order to raise that cash that I obviously need, I had had to sell part of my holding.

This may come as a surprise but I agree with you. I think it is perfectly reasonable for an individual investor to elect a strategy that sees him collecting more running income, at the expense of present or future capital values. You may just need the money to pay the bills and that makes sense. There are other investing styles that have elements of an annuity to them as well, such as buying bonds over par or the income shares of split capital investment trusts.

My issue was with this claim:

"The dividends, or more specifically potential for future dividends, are the driver for capital growth, not vice versa."

That implies rather the opposite to what you were saying i.e. that higher relative dividends means greater capital values. Experience indicates otherwise.

[IanTHughes]

My issue was with this claim:

"The dividends, or more specifically potential for future dividends, are the driver for capital growth, not vice versa."

That implies rather the opposite to what you were saying i.e. that higher relative dividends means greater capital values. Experience indicates otherwise.

What evidence of that experience can you provide? Evidence pointing to the opposite of your experience has already been supplied, earlier in this thread:

It might be instructive for you to follow the fortunes of the total return versions of the FTSE350LY and the FTSE350HY indices. Both started at the same value on the same day. You can find the current values by Googling "World markets at a glance". The HIX TR value is 5439 while the LIX TR value is 4761. I accept that in recent years the differential has narrowed, but they didn't get that way by accident.

viewtopic.php?p=331397#p331397

Well, do you have other evidence proving your opposite experience? Or do you expect us to take it at face value without evidence?


Ian

[Lootman]

My issue was with this claim:

"The dividends, or more specifically potential for future dividends, are the driver for capital growth, not vice versa."

That implies rather the opposite to what you were saying i.e. that higher relative dividends means greater capital values. Experience indicates otherwise.

What evidence of that experience can you provide? Evidence pointing to the opposite of your experience has already been supplied, earlier in this thread:

I gave an example earlier, comparing the capital performance of the high-yielding UK market with the low-yielding US market.

But of course it is not universally true. There will be times when HY out-performs LY in capital terms. Not recently since market gains in recent years have been driven by the no-yielding FAANGs. But value will return at some point and then HY investors will enjoy the double whammy of higher dividends and higher capital gains. After all, higher yields may involve higher risk but also the potential for higher gains.

I think dividends can be useful in valuing shares and deciding how much to pay for them. One of my strategies is based on this principle in fact, although my focus is dividend growth rather than the "highness" of the yield. My point was limited to asserting that present or future dividends are not and cannot be the sole driver of capital values, which was the claim being made by someone else.

[IanTHughes]

My issue was with this claim:

"The dividends, or more specifically potential for future dividends, are the driver for capital growth, not vice versa."

That implies rather the opposite to what you were saying i.e. that higher relative dividends means greater capital values. Experience indicates otherwise.

What evidence of that experience can you provide? Evidence pointing to the opposite of your experience has already been supplied, earlier in this thread:

I gave an example earlier, comparing the capital performance of the high-yielding UK market with the low-yielding US market.

That is no comparison! What about Total Return? Sorry, you will have to do better than that! But in any case, comparing the US Market with the UK Market is surely comparing apples with pears. All you may end up proving is that the US Economy is growing at a better rate, or vice versa of course.

No, the comparison between UK High Yield and UK Low Yield clearly shows the opposite to what you believe is going on!


Ian

[Lootman]

the comparison between UK High Yield and UK Low Yield clearly shows the opposite to what you believe is going on!

That depends entirely on what time period you choose.

But that wasn't even the issue I was discussing. The idea I was debunking was the idea that only dividends drive capital returns. I don't see you agreeing with that claim either.

[IanTHughes]

the comparison between UK High Yield and UK Low Yield clearly shows the opposite to what you believe is going on!

That depends entirely on what time period you choose.

Of course it does, we all know that! And I am not even sure what the start date of the period in question is, I cannot find any history at all. But at least it is some evidence which is, for now, pointing to a possible conclusion. I hope you will accept that!

But that wasn't even the issue I was discussing. The idea I was debunking was the idea that only dividends drive capital returns. I don't see you agreeing with that claim either.

My apologies but when you stated:

That implies rather the opposite to what you were saying i.e. that higher relative dividends means greater capital values. Experience indicates otherwise.

I thought you would be prepared to discuss why you believed that:

Lower relative dividends means greater capital values

I did not realise that all you wanted to do was make an unsubstantiated claim!

How silly of me!


Ian

[onthemove]

The reasons google, amazon, berkshire hathaway, and co all have value in their shares is because of the rights shareholders have to the residual profits (including in future), and their value stems from an expectation that at some appropriate time in future, shareholders will be able to benefit from those rights.

In some academic, technical and legal sense that might have validity. But it is useless as a tool to determine what the true market value is or should be.

I was thinking do I bother responding, or don't I. I mean, when it comes to finance, it's all pinned on what the technical and legal rights are - if you can't enforce it in court, it's worthless.

But then I've just realised if what you say is true, this could be a win win for all of us - HYPers and non-HYPers alike! So let's stop arguing!

Particularly with the pandemic, it seems a number of companies are needing to undertake rights issues to raise new capital.

But here's the win-win

Clearly there are a number of investors who are adamant that dividends aren't important - that companies don't ever need to pay them out and they will still value the shares, still be willing to pay for them, etc.

And there are a number of HYPers who want dividends and don't like the idea of our dividend payments being diluted.

But instead of going round in circles arguing, we have a fantastic opportunity here to keep all parties happy!

All we need is for subsequent rights issues to be for a new class of share that provides for no right to any share in future cash distributions to other shareholders, but is non-callable, so the holder has no rights to take their original investment back out, ever (same as ordinary shares in that respect).

It's a win-win... Lootman and co can subscribe to these new shares, and they'll be happy because they are zero dividend so very low yield, and supporting the growth of the company.

Existing HYPers are happy, because their future dividend payments won't be diluted.

And the company is happy because it has raised the funds it needs to grow (taking us right back to near the start of this thread)

What's not to like!?

[scrumpyjack]

There used to be some investment trusts where one class of share had the right to all the trusts income whilst the other class of share had th eright to all the capital. The intial subscription price for both classes of shares was, say, 100p. The winding up date of the trust was set at a particular point in future and at that time the income investors got back the 100p per share they had originally subscribed whilst the other class of shares got back the rest of the trusts net asset value divided by the number of capital shares issued.

So if say 100 million income and 100 million capital shares were issued and on the wind up date 20 years later the original £200 million had grown to £500 million, the income holders got their 100p (plus the dividends over 20 years), whilst the capital shares got 400p per share (but had not have any divis.

I think that illustrates the sort of concept you have in mind?

Obviously the trust articles defined certain parameters for investment so the managers had to strike a fair balance between seeking immediate income or growing income and growing capital value

[Dod101]

There used to be some investment trusts where one class of share had the right to all the trusts income whilst the other class of share had th eright to all the capital. The intial subscription price for both classes of shares was, say, 100p. The winding up date of the trust was set at a particular point in future and at that time the income investors got back the 100p per share they had originally subscribed whilst the other class of shares got back the rest of the trusts net asset value divided by the number of capital shares issued.

So if say 100 million income and 100 million capital shares were issued and on the wind up date 20 years later the original £200 million had grown to £500 million, the income holders got their 100p (plus the dividends over 20 years), whilst the capital shares got 400p per share (but had not have any divis.

I think that illustrates the sort of concept you have in mind?

Obviously the trust articles defined certain parameters for investment so the managers had to strike a fair balance between seeking immediate income or growing income and growing capital value

Split Capital. There are some still around but they got such a bad name that they have very much gone out of fashion. I used them for a while and bought the capital shares and did quite well with them. Once the income shares were satisfied every thing else was credited to the capital shares. Good stuff for a while and then of course it all fell apart.

Dod

[Lootman]

My apologies but when you stated:

That implies rather the opposite to what you were saying i.e. that higher relative dividends means greater capital values. Experience indicates otherwise.

I thought you would be prepared to discuss why you believed that

Because that has been my experience. I fully accept that you might perceive a different pattern, depending on your start and end dates, and how lucky you were in your picks.

But to the point: Do you believe that only dividends drive capital returns? Yes or no?

Clearly there are a number of investors who are adamant that dividends aren't important - that companies don't ever need to pay them out and they will still value the shares, still be willing to pay for them

I never said dividends aren't important. I said they are not the only thing that is important.