The dividend fallacy

[hiriskpaul]

The key point is that the only differrence between the shares trading cum-div and ex-div the following day is the right to receive the dividend. The value of the business is set by rational people trading, not any magical formula. Any rational buyer will deduct the amount of the dividend from the share price when buying ex-div because they have no right to receive the dividend; any rational seller will also deduct the amount of the dividend from the share price when selling ex-div because they do have the right to receive the dividend. No figures needed to prove or disprove this. It is correct almost by definition.

GS

Absolute rubbish. Once the share has gone XD the dividend is no longer built into the price. It has gone. Nobody buying XD would even think of deducting the cost of a dividend which is no longer there.

You are clutching at straws to prove a non-existent argument.

TJH

Who would pay for a dividend they would not get?

[GoSeigen]

The key point is that the only differrence between the shares trading cum-div and ex-div the following day is the right to receive the dividend. The value of the business is set by rational people trading, not any magical formula. Any rational buyer will deduct the amount of the dividend from the share price when buying ex-div because they have no right to receive the dividend; any rational seller will also deduct the amount of the dividend from the share price when selling ex-div because they do have the right to receive the dividend. No figures needed to prove or disprove this. It is correct almost by definition.

GS

Absolute rubbish. Once the share has gone XD the dividend is no longer built into the price. It has gone. Nobody buying XD would even think of deducting the cost of a dividend which is no longer there.

You are clutching at straws to prove a non-existent argument.

TJH

I think a massive misunderstanding of what I was writing here. The amount of the dividend is deducted from the previous day's "valuation of the share", when it was still cum-dividend.

It appears we are in 100% heated agreement.

GS

[GeoffF100]

Managements with too much cash tend to waste it on buybacks at high prices, acquisitions at the top of a cycle, or branching out into apparently more lucrative areas where they have little expertise and end up with an asset write-down.

If you do not want shares bought back because you think the price is too high, why don't you sell your shares?

[OhNoNotimAgain]

Which of course also explains why the FTSE-100 is barely above its level of 23 years ago. Dividends were pretty much all you got in a generation now.

In capital terms yes, but not in Total Return. You would have roughly doubled your money over that period on a TR basis.

Which makes the point about the importance of dividends extremely well that some are trying to deny. Trading cum or ex is not an issue as TJH points out.

[dealtn]

Which of course also explains why the FTSE-100 is barely above its level of 23 years ago. Dividends were pretty much all you got in a generation now.

In capital terms yes, but not in Total Return. You would have roughly doubled your money over that period on a TR basis.

Which makes the point about the importance of dividends extremely well that some are trying to deny. Trading cum or ex is not an issue as TJH points out.

Who is trying to deny the importance of dividends?

[OhNoNotimAgain]

And those returns come more from dividends than from capital growth.

The free lunch is the steady drip drip drip of compound interest over a long time on those dividends. Which most people are blissfully unaware of.

No, the bulk of returns come from gains. You can see this easily by subtracting the average dividend yield from the average annual total return.

So for example the US market yields about 1.5% and yet it has gained about 10% in total annually over a good number of years now.

And dividend reinvestment is not a "free lunch". If you do it then you have less spending money.

The importance of dividends in total equity returns was reinforced in the 2021 Barclays Equity Gilt Study.
It said that, before costs, £100 invested in the UK stock market in 1945 would now be worth £236 in real terms. But with dividends reinvested that £100 would have grown to £5,799.
Never, never understimate the power of compound interest.

This spin can be put the other way round. Don't take dividends out of the market and you would have got £5,799. Take them out, reducing the capital value each time you did and you would have only got £236.

People dismisss the steady drip drip of dividends and the effect of time in the same way that they dismiss the power of dripping water in limestone caverns over a long period of time. In the short term they are both inconsequential but add time and the effect of accretion the impact is stupendous.
XD dates should be ignored and funds left in to grow. Capital withdrawls, if needed, can be made as when needed.

[hiriskpaul]

And those returns come more from dividends than from capital growth.

The free lunch is the steady drip drip drip of compound interest over a long time on those dividends. Which most people are blissfully unaware of.

No, the bulk of returns come from gains. You can see this easily by subtracting the average dividend yield from the average annual total return.

So for example the US market yields about 1.5% and yet it has gained about 10% in total annually over a good number of years now.

And dividend reinvestment is not a "free lunch". If you do it then you have less spending money.

The importance of dividends in total equity returns was reinforced in the 2021 Barclays Equity Gilt Study.
It said that, before costs, £100 invested in the UK stock market in 1945 would now be worth £236 in real terms. But with dividends reinvested that £100 would have grown to £5,799.
Never, never understimate the power of compound interest.

This spin can be put the other way round. Don't take dividends out of the market and you would have got £5,799. Take them out, reducing the capital value each time you did and you would have only got £236.

People dismisss the steady drip drip of dividends and the effect of time in the same way that they dismiss the power of dripping water in limestone caverns over a long period of time. In the short term they are both inconsequential but add time and the effect of accretion the impact is stupendous.
XD dates should be ignored and funds left in to grow. Capital withdrawls, if needed, can be made as when needed.

Which people are you talking about? As dealtn has said no-one has done that on this thread. The thread is about debunking a false idea that some people have about dividends and some of the things that lead on from that fake idea. It is absolutely not saying that dividends do not matter.

[hiriskpaul]

I have rechecked the results from my ISF dividend spreadsheet and decided to eliminate the dividends before 18 October 2001 (6 of them). This is because there was a very large distribution made on 18 October 2001 of about £3.22 per share and I cannot fully make sense of what this restructuring event was all about. That reduces the sample to 81 dividends, totalling about £4.21 per share, average 5.2p. The average loss in NAV on XD date comes out at 5.7p per share, so not too dissimilar to before.

One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

A did a paired t-test earlier on the differences between each dividend and the share price change to see if there was any statistical significance to what looks like a tendency for there to be a larger share price drop than the dividend on XD date. The t value came out at -0.11, which essentially means this is statistically insignificant. IOW, the observation could very easily be a fluke. The behaviour does not appear on the S&P 500 ETF either, which adds wait to the conclusion.

[Lootman]

Which of course also explains why the FTSE-100 is barely above its level of 23 years ago. Dividends were pretty much all you got in a generation now.

In capital terms yes, but not in Total Return. You would have roughly doubled your money over that period on a TR basis.

Which makes the point about the importance of dividends extremely well that some are trying to deny.

It makes the point badly since a doubling in 23 years is miserable, about 3% annually.

Besides the UK is unusual in having high, often unsustainably high, dividends. Your argument completely fails when you consider other markets. Globally well over half the returns come from growth not dividends.

[hiriskpaul]

Which of course also explains why the FTSE-100 is barely above its level of 23 years ago. Dividends were pretty much all you got in a generation now.

In capital terms yes, but not in Total Return. You would have roughly doubled your money over that period on a TR basis.

Which makes the point about the importance of dividends extremely well that some are trying to deny. Trading cum or ex is not an issue as TJH points out.

The problem with banging on about the importance of dividends is that it can lead to the false impression that the more dividends you have the better your returns will be. The lower yielding S&P 500 is up by a factor of 6 over the last 23 years (over 7 in GBP terms), so that debunks this suggestion.

As others have said (many times), it is not the dividends that are important, it is the reinvesting of the dividends that matters. On average, reinvesting a dividend unwinds the drop in portfolio value due to the payment of that dividend. It makes no difference whether it is a big dividend or a small dividend, the result is the same - the money is put back into the portfolio, cancelling out the drop in value that happened when it was taken out.

[Lootman]

Which of course also explains why the FTSE-100 is barely above its level of 23 years ago. Dividends were pretty much all you got in a generation now.

In capital terms yes, but not in Total Return. You would have roughly doubled your money over that period on a TR basis.

Which makes the point about the importance of dividends extremely well that some are trying to deny. Trading cum or ex is not an issue as TJH points out.

The problem with banging on about the importance of dividends is that it can lead to the false impression that the more dividends you have the better your returns will be. The lower yielding S&P 500 is up by a factor of 6 over the last 23 years (over 7 in GBP terms), so that debunks this suggestion.

As others have said (many times), it is not the dividends that are important, it is the reinvesting of the dividends that matters. On average, reinvesting a dividend unwinds the drop in portfolio value due to the payment of that dividend. It makes no difference whether it is a big dividend or a small dividend, the result is the same - the money is put back into the portfolio, cancelling out the drop in value that happened when it was taken out.

Exactly. With dividend reinvesting you are putting more money in and so of course the portfolio grows faster. That is far from Ohno's claim that the bulk of return comes from dividends. It doesn't and your simple US/UK comparison shows that choosing lower yielding markets is more profitable.

[hiriskpaul]

Which of course also explains why the FTSE-100 is barely above its level of 23 years ago. Dividends were pretty much all you got in a generation now.

In capital terms yes, but not in Total Return. You would have roughly doubled your money over that period on a TR basis.

Which makes the point about the importance of dividends extremely well that some are trying to deny. Trading cum or ex is not an issue as TJH points out.

The problem with banging on about the importance of dividends is that it can lead to the false impression that the more dividends you have the better your returns will be. The lower yielding S&P 500 is up by a factor of 6 over the last 23 years (over 7 in GBP terms), so that debunks this suggestion.

As others have said (many times), it is not the dividends that are important, it is the reinvesting of the dividends that matters. On average, reinvesting a dividend unwinds the drop in portfolio value due to the payment of that dividend. It makes no difference whether it is a big dividend or a small dividend, the result is the same - the money is put back into the portfolio, cancelling out the drop in value that happened when it was taken out.

Exactly. With dividend reinvesting you are putting more money in and so of course the portfolio grows faster. That is far from Ohno's claim that the bulk of return comes from dividends. It doesn't and your simple US/UK comparison shows that choosing lower yielding markets is more profitable.

I would not want to go that far! At least, I would not want to imply that a market that paid lower dividends automatically had an edge. I believe that the actual distributions from the US market is comparable to that of the UK market, but in the US more is spent on buy backs. Might be different now though with the elevated valuations of US companies.

[gryffron]

Surely the issue in the US is a higher withholding tax (for most US citizens). A simple comparison of yield is meaningless. US companies deliberately pay lower dividends so their shareholders pay less tax. That doesn't mean US shares are better or worse. But it does mean that simply comparing yields between the 2 countries is meaningless.

Gryff

[hiriskpaul]

Surely the issue in the US is a higher withholding tax (for most US citizens). A simple comparison of yield is meaningless. US companies deliberately pay lower dividends so their shareholders pay less tax. That doesn't mean US shares are better or worse. But it does mean that simply comparing yields between the 2 countries is meaningless.

Gryff

Agreed. The Japanese market has a much lower dividend yield than that of the UK, but has had very similar 23 year returns, with the Japanese market getting ahead over the last couple of years.

It would be great if high or low yield implied a higher likely return. Investing just isn't that simple.

[csearle]

is it fair to to conclude then that their is nothing gained by favouring dividend paying shares, high yield or not , apart from possible accounting clarity ?

Sometimes when I'm adding to my portfolio and there are two (in my mind) equal candidates, I use the proximity of the next (to me) payable dividend as the decider. In that way I simply get some cash to re-invest a little bit sooner.

Maybe I'm just kidding myself that this is advantageous though.

Chris

[BullDog]

Given that my entire portfolio, ISA + SIPP pays around 2 to 2.5% yield (it's a ragbag mixture of income and growth stocks/funds) then the income that accrues from dividends is less than the noise experienced in the portfolio. The annual accrued cash is drawn out each March and spent on holidays, weekends away and eating out. It's free cash and that's not a fallacy as my credit card statements will demonstrate. Beyond that, I couldn't care less what "theory" says.

[dealtn]

is it fair to to conclude then that their is nothing gained by favouring dividend paying shares, high yield or not , apart from possible accounting clarity ?

Sometimes when I'm adding to my portfolio and there are two (in my mind) equal candidates, I use the proximity of the next (to me) payable dividend as the decider. In that way I simply get some cash to re-invest a little bit sooner.

Maybe I'm just kidding myself that this is advantageous though.

Chris

I would say so yes. What benefit do you think you are getting from getting this back sooner (or at all) simply to reinvest it back into the market? Even ignoring any frictional costs such as taxes or dealing fees, where and what is your benefit?

[csearle]

I would say so yes. What benefit do you think you are getting from getting this back sooner (or at all) simply to reinvest it back into the market? Even ignoring any frictional costs such as taxes or dealing fees, where and what is your benefit?

Well maybe getting a payout a little sooner allows me be to invested a tiny bit earlier in something better? C.

[dealtn]

I would say so yes. What benefit do you think you are getting from getting this back sooner (or at all) simply to reinvest it back into the market? Even ignoring any frictional costs such as taxes or dealing fees, where and what is your benefit?

Well maybe getting a payout a little sooner allows me be to invested a tiny bit earlier in something better? C.

Presumably you mean in some particular alternative rather than the market generally as you can't invested earlier than currently invested?

Regardless you can get invested in anything particular at any time you want and the argument works both ways. Why wait for the arrival of a dividend to invest (partially) elsewhere, when you can do that even earlier via a (partial) sale of something?

This is a fallacy. If you want to invest a portion of your capital in something, and by definition partially divest from something else, dividends don't facilitate that, and reliance on them restricts that flexibility. There may be frictional costs in both routes but for anyone that wants to be invested "in the market" the route of a company paying you back some of your claim on the company as a cash payment, for you to then reinvest it back in the market is nothing but circuitous, and something you can do yourself at any time in adjusting which shares you choose to hold. Particularly when investing it back in the same share it is even more unnecessary (and many companies recognise this in operating DRIP type schemes in parallel to cash dividends).

[hiriskpaul]

Given that my entire portfolio, ISA + SIPP pays around 2 to 2.5% yield (it's a ragbag mixture of income and growth stocks/funds) then the income that accrues from dividends is less than the noise experienced in the portfolio. The annual accrued cash is drawn out each March and spent on holidays, weekends away and eating out. It's free cash and that's not a fallacy as my credit card statements will demonstrate. Beyond that, I couldn't care less what "theory" says.

What do you mean by "Free cash"? Free in what respect? Free to spend?