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The dividend fallacy

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Lootman
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Re: The dividend fallacy

#472451

Postby Lootman » January 12th, 2022, 4:56 pm

gryffron wrote: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.

Actually there is no withholding tax on dividends (or interest) for US citizens. Or more accurately, for US residents. Dividends are paid gross and any tax due is settled via submission of a self-assessment tax return (form 1040) using the dividends recorded on a form 1099, similar to our consolidated tax certificate.

The 30% and 15% withholding rates are for overseas residents.

The federal tax rate on dividends is 15% (possibly higher for very high earners). There may be a state income tax on top. Dividends used to be taxed at a higher rate but that changed in one of Bush Junior's tax measures (2001 and 2003).

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Re: The dividend fallacy

#472455

Postby BullDog » January 12th, 2022, 5:03 pm

hiriskpaul wrote:
BullDog wrote: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?

It simply arrives as if by magic and takes zero effort*** on my part. It's as if someone knocked on the door every March and gave me £20,000 to spend on the year's holidays.

*** I lied, I have to draw it out from the investment platform, that takes a tiny bit of effort.

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Re: The dividend fallacy

#472461

Postby csearle » January 12th, 2022, 5:15 pm

dealtn wrote: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?
Well the context of my input was choosing between two shares (in my case re-investing dividends). The extra dividends from one of my top-ups, even if it was a final, are likely to be abut £60. So no, in my case I am unlikely to say to myself, tell you what, let me sell £60 worth of shares now so that I can get them invested in something better sooner. It wouldn't be economical.

But if I get the £60 sooner just by choosing one of two otherwise (in my eyes) equal shares over the other then I feel that it affords me a miniscule advantage.

Chris

hiriskpaul
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Re: The dividend fallacy

#472476

Postby hiriskpaul » January 12th, 2022, 5:41 pm

BullDog wrote:
hiriskpaul wrote:
BullDog wrote: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?

It simply arrives as if by magic and takes zero effort*** on my part. It's as if someone knocked on the door every March and gave me £20,000 to spend on the year's holidays.

*** I lied, I have to draw it out from the investment platform, that takes a tiny bit of effort.

OK, see what you mean - free of effort. There are some brokers who will deliver you similar or better free of effort income. Many will pay income straight to your account and with a Vanguard SIPP, you can set up a fixed monthly payment and they will sell stock to make the payment free of charge if you have insufficient money in your account.

I thought you might be saying that the income was free of any cost to your portfolio, which it definitely is not and is the point of this thread. No theory required by the way - you can see it in the real life historical data!

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Re: The dividend fallacy

#472478

Postby Alaric » January 12th, 2022, 5:49 pm

tjh290633 wrote:[
It is not unknown for fund managers to artifically increase the income from their fund by switching between shares which are XD and those which are CD. It is an illusory increase because they are buying the income when they switch. I was on the council of an organisation where the advisers proposed such a move for a major fund, resulting from a significant bequest. The advisers were told what to do with their advice.


A reason for doing this might be that they've set rules either self imposed or for taxation considerations requiring certain levels of dividend. If a fund was marketing that it woukd achieve a ceratin level of income, managers mught feel the need to trade for additional distributions regardless of the effect on capital values.

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Re: The dividend fallacy

#472485

Postby dealtn » January 12th, 2022, 6:07 pm

csearle wrote:
dealtn wrote: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?
Well the context of my input was choosing between two shares (in my case re-investing dividends). The extra dividends from one of my top-ups, even if it was a final, are likely to be abut £60. So no, in my case I am unlikely to say to myself, tell you what, let me sell £60 worth of shares now so that I can get them invested in something better sooner. It wouldn't be economical.

But if I get the £60 sooner just by choosing one of two otherwise (in my eyes) equal shares over the other then I feel that it affords me a miniscule advantage.

Chris


Yes I accept the uneconomic argument, but the context of this discussion is around the fallacy of the effect of paying dividends and the impact on share prices and the resulting underlying investment position of investors.

I have no intention, or likely ability, to persuade you to invest differently, and with other preferences in practice. I still see "your" view as a miniscule disadvantage, not advantage though. If there is an acceptance that "market" returns are expected to exceed "cash" returns, and I don't think that is entirely without merit, particularly when interest rates are so low, then 2 otherwise identical (theoretical) investment choices, whose only difference is one pays a dividend earlier (or more frequently) to an investor who by necessity, or choice, has the outcome of the one with that feature results in the investor having a (slightly) higher cash exposure than a market one, and this is minisculely disadvantaged over the other.

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Re: The dividend fallacy

#472493

Postby BullDog » January 12th, 2022, 6:21 pm

hiriskpaul wrote:
BullDog wrote:
hiriskpaul wrote:
BullDog wrote: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?

It simply arrives as if by magic and takes zero effort*** on my part. It's as if someone knocked on the door every March and gave me £20,000 to spend on the year's holidays.

*** I lied, I have to draw it out from the investment platform, that takes a tiny bit of effort.

OK, see what you mean - free of effort. There are some brokers who will deliver you similar or better free of effort income. Many will pay income straight to your account and with a Vanguard SIPP, you can set up a fixed monthly payment and they will sell stock to make the payment free of charge if you have insufficient money in your account.

I thought you might be saying that the income was free of any cost to your portfolio, which it definitely is not and is the point of this thread. No theory required by the way - you can see it in the real life historical data!

Yes, of course. But I am also saying that my yield in a year is actually somewhat less than the background noise in the valuation of my portfolio. It moves more than 2% in an hour or a day. Given that's the case and I am far too lazy to track portfolio value even monthly, then it's free money in more way than one. It's free holidays too 8-)

hiriskpaul
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Re: The dividend fallacy

#472525

Postby hiriskpaul » January 12th, 2022, 7:52 pm

BullDog wrote:
hiriskpaul wrote:
BullDog wrote:
hiriskpaul wrote:
BullDog wrote: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?

It simply arrives as if by magic and takes zero effort*** on my part. It's as if someone knocked on the door every March and gave me £20,000 to spend on the year's holidays.

*** I lied, I have to draw it out from the investment platform, that takes a tiny bit of effort.

OK, see what you mean - free of effort. There are some brokers who will deliver you similar or better free of effort income. Many will pay income straight to your account and with a Vanguard SIPP, you can set up a fixed monthly payment and they will sell stock to make the payment free of charge if you have insufficient money in your account.

I thought you might be saying that the income was free of any cost to your portfolio, which it definitely is not and is the point of this thread. No theory required by the way - you can see it in the real life historical data!

Yes, of course. But I am also saying that my yield in a year is actually somewhat less than the background noise in the valuation of my portfolio. It moves more than 2% in an hour or a day. Given that's the case and I am far too lazy to track portfolio value even monthly, then it's free money in more way than one. It's free holidays too 8-)

Dividends certainly have their uses. If the intention is to draw an income from investments anyway, dividends arrive free of trading friction. Highly questionable whether the holidays are free though. You have paid for them by loss of portfolio value and loss of the future return on the money that was not reinvested. Still, once spent on a holiday, the money is no longer at risk of falling in value or being wasted. ;)

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Re: The dividend fallacy

#472527

Postby BullDog » January 12th, 2022, 7:54 pm

hiriskpaul wrote:
BullDog wrote:
hiriskpaul wrote:
BullDog wrote:
hiriskpaul wrote:What do you mean by "Free cash"? Free in what respect? Free to spend?

It simply arrives as if by magic and takes zero effort*** on my part. It's as if someone knocked on the door every March and gave me £20,000 to spend on the year's holidays.

*** I lied, I have to draw it out from the investment platform, that takes a tiny bit of effort.

OK, see what you mean - free of effort. There are some brokers who will deliver you similar or better free of effort income. Many will pay income straight to your account and with a Vanguard SIPP, you can set up a fixed monthly payment and they will sell stock to make the payment free of charge if you have insufficient money in your account.

I thought you might be saying that the income was free of any cost to your portfolio, which it definitely is not and is the point of this thread. No theory required by the way - you can see it in the real life historical data!

Yes, of course. But I am also saying that my yield in a year is actually somewhat less than the background noise in the valuation of my portfolio. It moves more than 2% in an hour or a day. Given that's the case and I am far too lazy to track portfolio value even monthly, then it's free money in more way than one. It's free holidays too 8-)

Dividends certainly have their uses. If the intention is to draw an income from investments anyway, dividends arrive free of trading friction. Highly questionable whether the holidays are free though. You have paid for them by loss of portfolio value and loss of the future return on the money that was not reinvested. Still, once spent on a holiday, the money is no longer at risk of falling in value or being wasted. ;)

Yeah, I will spend the dividends on holidays, eating out, fine wine..... Any left over I will just waste anyway :lol:

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Re: The dividend fallacy

#472653

Postby Gilgongo » January 13th, 2022, 9:09 am

Just as a footnote to this, there was a thread on the FIRE board that mentioned the psychological difficulty of selling assets in retirement. This is at least partially alleviated by taking dividend cash instead. So - a "price" worth paying?

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Re: The dividend fallacy

#472701

Postby hiriskpaul » January 13th, 2022, 11:20 am

Gilgongo wrote:Just as a footnote to this, there was a thread on the FIRE board that mentioned the psychological difficulty of selling assets in retirement. This is at least partially alleviated by taking dividend cash instead. So - a "price" worth paying?

I am not sure whether it is all purely down to a reluctance to sell.

Taking dividends is psychologically easier because it removes much of the decision making. You don't have to choose what to sell, when to sell or how much to sell as these decisions are taken for you and for free. Making these sorts of decisions is a lot harder than simply accepting what your portfolio hands to you for consumption.

The selling decisions can be made less difficult by doing them systematically. eg by holding a number of funds and regularly selling so as to keep the weights in balance. The how much to sell decision can also be handled systematically, but puts someone on a slippery slope to complexity and doubt.

A price worth paying? Not for me.

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Re: The dividend fallacy

#472721

Postby Gilgongo » January 13th, 2022, 12:15 pm

hiriskpaul wrote:Taking dividends is psychologically easier because it removes much of the decision making.


The point was more about the fact that after a lifetime of accumulation, people report that it's actually very hard to sell down even if you have a plan/system to do so. I think it's part of the idea covered by prospect theory: https://en.wikipedia.org/wiki/Prospect_theory

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Re: The dividend fallacy

#472724

Postby hiriskpaul » January 13th, 2022, 12:25 pm

Gilgongo wrote:
hiriskpaul wrote:Taking dividends is psychologically easier because it removes much of the decision making.


The point was more about the fact that after a lifetime of accumulation, people report that it's actually very hard to sell down even if you have a plan/system to do so. I think it's part of the idea covered by prospect theory: https://en.wikipedia.org/wiki/Prospect_theory

I am sure that's right. Selling can be really hard for many if not most people. I have relatives on the extreme end of it who are essentially hoarders. For such people investment approaches such as ITs with regular dividends may be the best approach as this hides away the selling, making the income appear more like interest payments and leaving capital "untouched".

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Re: The dividend fallacy

#472742

Postby taken2often » January 13th, 2022, 1:23 pm

I o not have much of a problem selling. I sold all my profitable US shares, but kept the losers. I tend to sell part of my winners as I think a Capital Gain is a potential loss. So I sell some and buy some of my losers as long as they are paying a reasonable dividend. I did by some, not paying Dividends such as Northern Rock and Manchester Pibs. Both worked out well. Just recenty flew a kite by buying more Centrica. Dividens keep flowing in have to buy something mostly IT's at the moment

Bob

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Re: The dividend fallacy

#472763

Postby Hariseldon58 » January 13th, 2022, 2:23 pm

taken2often wrote:I o not have much of a problem selling. I sold all my profitable US shares, but kept the losers. I tend to sell part of my winners as I think a Capital Gain is a potential loss. So I sell some and buy some of my losers as long as they are paying a reasonable dividend. I did by some, not paying Dividends such as Northern Rock and Manchester Pibs. Both worked out well. Just recenty flew a kite by buying more Centrica. Dividens keep flowing in have to buy something mostly IT's at the moment

Bob


I understand the psychological benefit of retaining losers, it doesn’t feel like a loss, hope that it will mean revert… more conventional thinking is to run the winners.

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Re: The dividend fallacy

#473022

Postby taken2often » January 14th, 2022, 10:48 am

Thanks for responding. You are right, but keep in mind you only make a real profit or loss when you sell. Depending on the dividend at some point I will pass the point of total return of capital. If the dividend then continues for say another 10/15 years and still has capital value, then it may work. This is the thing about markets and Growth stocks ,your winners can become losers very quickly. You do have to have some confidence in the Trusts.

Also a dropping market is a buying opportunity for me as I have ever growing monthly income available. A bit like Warren Buffet, loves Dividends but will not pay one out. This virtually means annual growth of the fund. The dividends and interest covers any losses, unless a large market shift.

Bob

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Re: The dividend fallacy

#473026

Postby hiriskpaul » January 14th, 2022, 11:09 am

taken2often wrote:Thanks for responding. You are right, but keep in mind you only make a real profit or loss when you sell. Depending on the dividend at some point I will pass the point of total return of capital. If the dividend then continues for say another 10/15 years and still has capital value, then it may work. This is the thing about markets and Growth stocks ,your winners can become losers very quickly. You do have to have some confidence in the Trusts.

Also a dropping market is a buying opportunity for me as I have ever growing monthly income available. A bit like Warren Buffet, loves Dividends but will not pay one out. This virtually means annual growth of the fund. The dividends and interest covers any losses, unless a large market shift.

Bob

Again, every dividend is paid at the expense of capital, so reinvesting dividends does not grow your portfolio any faster than it would had the dividends not been paid in the first place. However, that is an "on average" condition. There is a delay between ex-div date and the payment of a dividend. If the share price of whatever you invest the dividend in falls between ex-div date and the date you reinvest, then you will have made a gain compared with reinvesting on ex-div date. On the whole though, markets rise more than they fall, so I would expect not being able to reinvest on ex-div date to be a drag on long term returns.

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Re: The dividend fallacy

#473061

Postby taken2often » January 14th, 2022, 1:01 pm

Thanks for the response. A little confused I am no longer interested in the capital growth. I am happy if any comes along but it is the income I want to buy for higher yield elsewhere. I feel that in general dividends makes the companies safer so I invest more for income than anything else. When the markets drop I have income to buy more income, so my graph is always upwards on income. I tend to ignore the swings other than as buying opportunities.

Bob

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Re: The dividend fallacy

#473091

Postby 88V8 » January 14th, 2022, 3:11 pm

The key for me is that divis are pretty much assured, but capital growth is not.

hiriskpaul wrote:Taking dividends is psychologically easier because it removes much of the decision making. You don't have to choose what to sell, when to sell or how much to sell as these decisions are taken for you and for free.

So true.... recently should have sold down RIO when they were high, ditto ADM.

Terry's (tjh) balancing system seems to work well for him and removes much of the agonising.

The problem with divis is that they trigger a tax event, whereas capital gain might not or in any case at a lower rate.
Which brings us back to selling one's winners.

I really should make a new year resolution to do something systematic. Logically if I'm going to balance an income portfolio it should be by income, but the market does not rate companies by income, it rates them by value, so it would have to be a value balance which in any case is easier to administer.
Although I'm starting with a portfolio that isn't remotely balanced.

Perhaps I should just resolve to spend less time tinkering and enjoy the income :)

V8

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Re: The dividend fallacy

#473094

Postby scrumpyjack » January 14th, 2022, 3:45 pm

In general I think it is a good discipline for companies to pay their owners a share of the profit, aka a dividend. The directors are best placed to decide how much can prudently be paid without harming the company’s ability to invest and grow. But obviously companies are at different stages of their ‘life cycle’. Mature companies should need to retain less than early stage companies who may need as much cash as possible for their growth. I suspect that most large mature UK companies have been paying too much in dividend as often their EPS is a concocted figure that leaves out all the bad stuff and then pretends that that is the figure available to pay a dividend from. It certainly isn’t as one can see from the accounts of the likes of AstraZeneca!

In theory the share price should go down by the amount of the dividend when it goes XD but in reality the company has only ‘lost’ that amount of value if they were selling at net asset value and if they were able to deploy that cash to earn the same return as on the rest of their asset base. Neither of those is usually the case.

Can’t really see it is worth arguing about much, but I do not like companies paying dividends they haven’t earned or paying out as dividend what is really capital.


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