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What's so good about dividend investing?
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- Lemon Quarter
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What's so good about dividend investing?
I run a portfolio of high yield shares, though not an "HYP", but I am starting to question why.
All that happens with dividends is that the company pays you some of your own money.
You are no better off.
Take two share classes in the same company. A and B. Both worth 100p.
A pays a dividend of 5p. On XD day the share price falls by 5p (plus other market movements). You now have 95p in shares and 5p in cash. You still have 100p.
B pays no dividend. There is no XD day. You still have 100p (plus the same market movements that affected share A)
There is no actual difference between selling 5% of the shares and taking a 5% dividend.
Assuming you don't just hold something ridiculous like 1 share to make dealing costs prohibitive.
Add in the tax inefficiency if the shares are not held in an ISA or pension and income isn't as efficient as capital.
Add in the fact that on a total return basis over the last 5 years, the Vanguard tracker VWRL has had an 80% TR and the high yield version VHYL a 40% return...
Surely £1 is £1 no matter where it comes from. I'd rather have the 80%.
Then if the market falls, high yield shares are affected just as much (or often more than) lower yielding shares.
Why not just shove all your money in a tracker?
All that happens with dividends is that the company pays you some of your own money.
You are no better off.
Take two share classes in the same company. A and B. Both worth 100p.
A pays a dividend of 5p. On XD day the share price falls by 5p (plus other market movements). You now have 95p in shares and 5p in cash. You still have 100p.
B pays no dividend. There is no XD day. You still have 100p (plus the same market movements that affected share A)
There is no actual difference between selling 5% of the shares and taking a 5% dividend.
Assuming you don't just hold something ridiculous like 1 share to make dealing costs prohibitive.
Add in the tax inefficiency if the shares are not held in an ISA or pension and income isn't as efficient as capital.
Add in the fact that on a total return basis over the last 5 years, the Vanguard tracker VWRL has had an 80% TR and the high yield version VHYL a 40% return...
Surely £1 is £1 no matter where it comes from. I'd rather have the 80%.
Then if the market falls, high yield shares are affected just as much (or often more than) lower yielding shares.
Why not just shove all your money in a tracker?
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- The full Lemon
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Re: What's so good about dividend investing?
Wait a minute. What are you actually questioning Why not buy a tracker. or Why dividend investing.
I suspect that you must know that both questions have been done to death on these Boards quite recently.
I am basically an income investor and live off my dividends as I have only the State pension otherwise. As was said I am sure in the last week on another thread, I do so because dividends are paid into my bank account with almost no effort on my part, I do not have to risk selling in to a falling market and there is no frictional cost in collecting the dividends.
I hold some of the usual suspects but these days prefer to go for a lower yield as they seem to provide some growth in the share price; the usual suspects such as Shell, HSBC, and the tobaccos have a very poor recent record for capital growth and the first two for dividends as well. So I try to look at total return and am certainly not an out and out income investor as per the classic HYP.
Dod
I suspect that you must know that both questions have been done to death on these Boards quite recently.
I am basically an income investor and live off my dividends as I have only the State pension otherwise. As was said I am sure in the last week on another thread, I do so because dividends are paid into my bank account with almost no effort on my part, I do not have to risk selling in to a falling market and there is no frictional cost in collecting the dividends.
I hold some of the usual suspects but these days prefer to go for a lower yield as they seem to provide some growth in the share price; the usual suspects such as Shell, HSBC, and the tobaccos have a very poor recent record for capital growth and the first two for dividends as well. So I try to look at total return and am certainly not an out and out income investor as per the classic HYP.
Dod
Last edited by Dod101 on September 1st, 2021, 12:06 pm, edited 2 times in total.
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- Lemon Quarter
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Re: What's so good about dividend investing?
Dod101 wrote:Wait a minute. What are you actually questioning Why not buy a tracker. or Why dividend investing.
I suspect that you must know that both questions have been done to death on these Boards quite recently.
Dod
I am aware of that, hence starting a discussion as to WHY people invest for dividend income over total return.
£1 is £1 whether it comes from income or selling capital given the effect of XD day on share prices.
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- Lemon Quarter
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Re: What's so good about dividend investing?
There are some obvious falacies in your arguments.
IF A and B are the same company, it is impossible for A to have less than B at the end of the distribution. It is possible with a Unit trust that has different share classess, accumulation and income, but it is not possible for normal companies. You would have to be talking about two identical companies.
After we dispose of that, we come to the question of if the "single company" has a use for it's trading profits. Can it for example build more power stations (Yes), will this enable them to profit by selling more electricity (possibly No). Possibly a company can pay software developers to create a new game. Can that increase trading profits (Yes), would they be better not paying those people (probably No). Can a online book seller profit from investing in web services, well Amazon did.
So some companies have a good reason to pay dividends while others have a good reason to retain profits for re-investment.
Why should anyone buy one or the other. Well here we come to personal preference and situation.
I own shares in some companies that pay significant dividends and others that pay very little. I'm taking a mixed approach.
I will however require income. I'd like to think that my growth choices will actually grow, but it's a risk. The companies that pay my income are less risky (IMHO) in terms of returns.
Why not simply invest and sell shares in growing companies to create income if risk is not the issue? Well that also limits what you can actually invest in doesn't it. No windfarms, retailers, food producers or infrastructure companies for example. Electricity, stuff people can afford to buy, food demand, returns on toll roads are all relatively inelastic.
Sure you could just get a tracker, many do. It's an ideal sollution if you have no interest in what companies actually do.
IF A and B are the same company, it is impossible for A to have less than B at the end of the distribution. It is possible with a Unit trust that has different share classess, accumulation and income, but it is not possible for normal companies. You would have to be talking about two identical companies.
After we dispose of that, we come to the question of if the "single company" has a use for it's trading profits. Can it for example build more power stations (Yes), will this enable them to profit by selling more electricity (possibly No). Possibly a company can pay software developers to create a new game. Can that increase trading profits (Yes), would they be better not paying those people (probably No). Can a online book seller profit from investing in web services, well Amazon did.
So some companies have a good reason to pay dividends while others have a good reason to retain profits for re-investment.
Why should anyone buy one or the other. Well here we come to personal preference and situation.
I own shares in some companies that pay significant dividends and others that pay very little. I'm taking a mixed approach.
I will however require income. I'd like to think that my growth choices will actually grow, but it's a risk. The companies that pay my income are less risky (IMHO) in terms of returns.
Why not simply invest and sell shares in growing companies to create income if risk is not the issue? Well that also limits what you can actually invest in doesn't it. No windfarms, retailers, food producers or infrastructure companies for example. Electricity, stuff people can afford to buy, food demand, returns on toll roads are all relatively inelastic.
Sure you could just get a tracker, many do. It's an ideal sollution if you have no interest in what companies actually do.
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- Lemon Quarter
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Re: What's so good about dividend investing?
There we are TR of VHYL and VWRL.
Source: Hargreaves Lansdown
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- Lemon Quarter
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Re: What's so good about dividend investing?
Urbandreamer wrote:So some companies have a good reason to pay dividends while others have a good reason to retain profits for re-investment.
£100million retained by the company in cash would make that company worth £100million more than one that paid it out in cash.
Whether they reinvest it or not is irrelevant,
Why should anyone buy one or the other. Well here we come to personal preference and situation.
I own shares in some companies that pay significant dividends and others that pay very little. I'm taking a mixed approach.
I will however require income. I'd like to think that my growth choices will actually grow, but it's a risk. The companies that pay my income are less risky (IMHO) in terms of returns.
You require income. So why not sell some of the capital from your growth shares? The end result on your total net worth is the same.
That dividend is just part of the share capital that is diverted back to you. Your total value of the share is the same before and after receiving the cash. It's just that it's been split into cash and share rather than just share.
And a tracker is inherently less risky than one single company, surely.
Why not simply invest and sell shares in growing companies to create income if risk is not the issue? Well that also limits what you can actually invest in doesn't it. No windfarms, retailers, food producers or infrastructure companies for example. Electricity, stuff people can afford to buy, food demand, returns on toll roads are all relatively inelastic.
Sure you could just get a tracker, many do. It's an ideal sollution if you have no interest in what companies actually do.
And again, a tracker holds many thousands of companies thereby removing most of the company specific/sector risk.
Back to the graph I posted above, what would you rather have? A 40% return with dividends or an 80% return without?
I'm questioning the concept of investing for income - as £1 is £1 whether it be from capital or dividend.
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- Lemon Half
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Re: What's so good about dividend investing?
absolutezero wrote:I run a portfolio of high yield shares, though not an "HYP", but I am starting to question why.
All that happens with dividends is that the company pays you some of your own money.
You are no better off.
Take two share classes in the same company. A and B. Both worth 100p.
A pays a dividend of 5p. On XD day the share price falls by 5p (plus other market movements). You now have 95p in shares and 5p in cash. You still have 100p.
Why not just shove all your money in a tracker?
You will be MUCH better off by reinvesting
All other thing being equal, Company A's price will gradually increase over time to take account of the expectation of the dividend
It will be worth 105 before going ex div and fall back to 100 the day after
Over time, the number of shares you own and the size of the dividend you receive each time will both gradually increase, without you doing a thing.
This is like compounding, the easiest way to accumulate wealth
btw Accumulation tracker funds will reinvest
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- Lemon Quarter
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Re: What's so good about dividend investing?
If you sell into a falling market then your total worth is still unchanged compared to NOT selling in a falling market. It's just that your dividend paying shares will fall a little bit more than your non-dividend paying shares.Dod101 wrote:Wait a minute. What are you actually questioning Why not buy a tracker. or Why dividend investing.
I suspect that you must know that both questions have been done to death on these Boards quite recently.
I am basically an income investor and live off my dividends as I have only the State pension otherwise. As was said I am sure in the last week on another thread, I do so because dividends are paid into my bank account with almost no effort on my part, I do not have to risk selling in to a falling market and there is no frictional cost in collecting the dividends.
I hold some of the usual suspects but these days prefer to go for a lower yield as they seem to provide some growth in the share price; the usual suspects such as Shell, HSBC, and the tobaccos have a very poor recent record for capital growth and the first two for dividends as well. So I try to look at total return and am certainly not an out and out income investor as per the classic HYP.
Dod
This is roughtly where I am going these days too.
Is income investing a fools' errand given that you are no better off immediately before and after XD day?
You just own a slightly smaller share and a bit of cash rather than a slightly larger share.
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- Lemon Quarter
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Re: What's so good about dividend investing?
I assume reinvestment of the dividend in more shares rather than spending it on living expenses. The accumulation phase, as it were.pje16 wrote:absolutezero wrote:I run a portfolio of high yield shares, though not an "HYP", but I am starting to question why.
All that happens with dividends is that the company pays you some of your own money.
You are no better off.
Take two share classes in the same company. A and B. Both worth 100p.
A pays a dividend of 5p. On XD day the share price falls by 5p (plus other market movements). You now have 95p in shares and 5p in cash. You still have 100p.
Why not just shove all your money in a tracker?
You will be MUCH better off by reinvesting
Company B will also increase in price - see the chart posted upthread!All other thing being equal, Company A's price will gradually increase over time to take account of the expectation of the dividend
It will be worth 105 before going ex div and fall back to 100 the day after
Over time, the number of shares you own and the size of the dividend you receive each time will both gradually increase, without you doing a thing.
This is like compounding, the easiest way to accumulate wealth
btw Accumulation tracker funds will reinvest
Indeed. So why take the dividends?
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- Lemon Half
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Re: What's so good about dividend investing?
absolutezero wrote:
So why take the dividends?
Because it's a method of gaining confidence in an income stream, even during the period where you don't necessarily need to use it as income.
When you want to use it as income, nothing at all changes, apart from diverting dividends from re-investment to 'income-taking'.
It's a single-strategy solution that some investors are happy to take advantage of *even if* there's some level of comparable performance detriment, as the long term confidence in the underlying income stream sometimes plays a higher importance than pure capital appreciation.
For some investors, they perhaps lack the confidence and/or ability that simply being told to 'keep to a growth strategy and then just sell some shares' isn't enough for them, and they'd prefer to have longer-term visibility of low-effort income-delivery over both 'phases'...
To be clear - I'm not sure anyone in that category ever seriously thinks it's a better method of accumulating capital - it's the long-term visibility of the underlying income-stream that is often key to their particular strategical preference...
Cheers,
Itsallaguess
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Re: What's so good about dividend investing?
Company B will also increase in price - see the chart posted upthread! [quote]absolutezero wrote:
Indeed Company B will increase
but next time round you will have the same number of shares in Company B as you had at outset
but more shares in Company A as a result of the reinvestment
and that differential will carry on time and time again
see the section called
How Dividend Reinvestment Boosts Your Returns
here
https://www.forbes.com/advisor/investin ... investing/
===============================================================================================================================
Say you invested in an S&P 500 index fund starting in January 2000 and held your investment until September 2020. Your average annualized return based on stock price gains alone would have been 4.2%, for a cumulative return of 136%. Pretty good, right? But if you’d reinvested all dividend payments back in the fund over the same period, your annualized return would have been 6.2%, for a cumulative return of 247%. Just reinvesting dividends would have nearly doubled your gains.
Last edited by pje16 on September 1st, 2021, 12:44 pm, edited 1 time in total.
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- Lemon Quarter
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Re: What's so good about dividend investing?
pje16 wrote:absolutezero wrote:Company B will also increase in price - see the chart posted upthread!Indeed Company B will increase
but next time round you will have the same number of shares in Company B as you had at outset
but more shares in Company A as a result of the reinvestment
and that differential will carry on time and time again
see the section called
How Dividend Reinvestment Boosts Your Returns
here
https://www.forbes.com/advisor/investin ... investing/
===============================================================================================================================
Say you invested in an S&P 500 index fund starting in January 2000 and held your investment until September 2020. Your average annualized return based on stock price gains alone would have been 4.2%, for a cumulative return of 136%. Pretty good, right? But if you’d reinvested all dividend payments back in the fund over the same period, your annualized return would have been 6.2%, for a cumulative return of 247%. Just reinvesting dividends would have nearly doubled your gains.
This seems to be assuming you spend the dividends rather than reinvesting,
Again, let's assume the dividends are reinvested in some other high yielding share or maybe even the same high yielding share.
Still no better off.
My point is, leave the dividends in the companies by not focussing on yield.
Last edited by absolutezero on September 1st, 2021, 12:44 pm, edited 1 time in total.
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Re: What's so good about dividend investing?
Those total return graphs are based on not cashing in shares. Yes, VHYL pays a yield of 2.9% so you would have to sell down shares to make up any difference between any 'desired' yield and this value. The graphs do not take this into account. So, over say 5 years, one might be selling down 10% in five lots of 2% which is fine if the market is rising ( FTSE tracker, 20 years ) . The 'recent' rise in the US could quite easily stall and remain stalled for years... look at the DOW for the 10 year period after 2000. I've seen comments on forums where folk are advocating "only buy US growth shares" but this is based on recency and there seems to be little concern over the basis of the companies stretched valuation metrics. IMHO, such valuations are unrealistic and subject to reality and a correction when expectations are not met.
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Re: What's so good about dividend investing?
absolutezero wrote:pje16 wrote:absolutezero wrote:Company B will also increase in price - see the chart posted upthread!
This seems to be assuming you spend the dividends rather than reinvesting,
Again, let's assume the dividends are reinvested in some other high yielding share or maybe even the same high yielding share.
Still no better off.
My point is, leave the dividends in the companies by not focussing on yield.
No quite the opposite
I never said that
Always reinvest
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Re: What's so good about dividend investing?
monabri wrote:Those total return graphs are based on not cashing in shares. Yes, VHYL pays a yield of 2.9% so you would have to sell down shares to make up any difference between any 'desired' yield and this value. The graphs do not take this into account. So, over say 5 years, one might be selling down 10% in five lots of 2% which is fine if the market is rising ( FTSE tracker, 20 years ) . The 'recent' rise in the US could quite easily stall and remain stalled for years... look at the DOW for the 10 year period after 2000. I've seen comments on forums where folk are advocating "only buy US growth shares" but this is based on recency and there seems to be little concern over the basis of the companies stretched valuation metrics. IMHO, such valuations are unrealistic and subject to reality and a correction when expectations are not met.
It's a fair point, but HYP style shares could also move sideways for years. None of us know the future.
All that happens in that market is the HYP keeps giving you back some of your capital in the form of a dividend payment so the value of HYP shares will also keep falling in the same falling market - just by the market movements AND the value of the dividends paid out.
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Re: What's so good about dividend investing?
pje16 wrote:absolutezero wrote:pje16 wrote:
This seems to be assuming you spend the dividends rather than reinvesting,
Again, let's assume the dividends are reinvested in some other high yielding share or maybe even the same high yielding share.
Still no better off.
My point is, leave the dividends in the companies by not focussing on yield.
No quite the opposite
I never said that
Always reinvest
My chart above reinvests. Its a comparison of a low yield index and a higher yield index and showing total return.
80% more beats 40% more, surely.
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Re: What's so good about dividend investing?
Itsallaguess wrote:absolutezero wrote:
So why take the dividends?
Because it's a method of gaining confidence in an income stream, even during the period where you don't necessarily need to use it as income.
When you want to use it as income, nothing at all changes, apart from diverting dividends from re-investment to 'income-taking'.
It's a single-strategy solution that some investors are happy to take advantage of *even if* there's some level of comparable performance detriment, as the long term confidence in the underlying income stream sometimes plays a higher importance than pure capital appreciation.
For some investors, they perhaps lack the confidence and/or ability that simply being told to 'keep to a growth strategy and then just sell some shares' isn't enough for them, and they'd prefer to have longer-term visibility of low-effort income-delivery over both 'phases'...
To be clear - I'm not sure anyone in that category ever seriously thinks it's a better method of accumulating capital - it's the long-term visibility of the underlying income-stream that is often key to their particular strategical preference...
Cheers,
Itsallaguess
So you're basically saying its psychological rather than financial?
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- Lemon Half
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Re: What's so good about dividend investing?
absolutezero wrote:And again, a tracker holds many thousands of companies thereby removing most of the company specific/sector risk.
The experience of the last eighteen months is that dividend income from trackers can nosedive in a crisis as Companies suspend or cancel dividends. That creates a problem if relying on distributions for living expenses.
Admittedly it's also to do with their accounting and borrowing powers, but income orientated Investment Trusts were able to maintain their dividend levels. That may also be because their investment managers tilted stock selection towards more reliable dividend payers, something that some direct investors were also able to do.
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Re: What's so good about dividend investing?
A lot of ‘complexification’ here, to use a Luni’ism.
Bottom line, what is so good about dividend investing is that you do not run out of shares.
The dividends are the profit which a company makes that are passed on to the owners of the company, i.e. the shareholders. It is real cash that can be spent, without having to sell shares until none are left.
Of course the dividend must come from underlying profits; if that is not the case, stay away.
Bottom line, what is so good about dividend investing is that you do not run out of shares.
The dividends are the profit which a company makes that are passed on to the owners of the company, i.e. the shareholders. It is real cash that can be spent, without having to sell shares until none are left.
Of course the dividend must come from underlying profits; if that is not the case, stay away.
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Re: What's so good about dividend investing?
Alaric wrote:absolutezero wrote:And again, a tracker holds many thousands of companies thereby removing most of the company specific/sector risk.
The experience of the last eighteen months is that dividend income from trackers can nosedive in a crisis as Companies suspend or cancel dividends. That creates a problem if relying on distributions for living expenses.
Admittedly it's also to do with their accounting and borrowing powers, but income orientated Investment Trusts were able to maintain their dividend levels. That may also be because their investment managers tilted stock selection towards more reliable dividend payers, something that some direct investors were also able to do.
But again, all these companies/ITs are doing when paying a dividend is paying you back some of your own money. You are no better off before and after XD day.
Plus my chart shows that the outperformance of the lower yielding index started before the Covid crash in share prices.
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