scrumpyjack wrote:I have never ever focused on income from my investments, but simply invested in companies that I thought would be a good investment long term. The income was incidental and was sometimes important to help prove the company was actually generating the real profits to pay the dividend.
I was not interested in short term market fluctuations and tended to hold shares for decades or until they were taken over. Probably that attitude started because in my youth dividends were so ludicrously highly taxed (98%), there wasn’t much point in having them, except that they could be offset by mortgage interest.
The result now, 50 years later, is that my dividends now cover my expenditure several times over and I haven’t needed to draw a pension. I can leave that to the kids. I have to say in retrospect that the companies I bought which had a high yield at the time of purchase have often been the worst performers and after 5 or 10 years the growth company dividends overtake them and then carry on growing and in some cases the annual dividend ends up being higher than the cost price of the share.
That's pretty much what I would expect - of the companies that are still in your portfolio. But what about the ones that have fallen by the wayside - ones that although you thought were a good investment long-term, but turned out not to be, or simply couldn't be kept for the long term because they were taken over? If you haven't taken them into account as well, what you say will probably be badly affected by survivorship bias.
If you have taken it into account and the purchased-for-growth-rather-than-yield companies are still coming out ahead, what you've observed can still have multiple explanations. To give a couple, the first can be illustrated by imagining that two companies were bought with £100 each (a small-sounding amount nowadays, but we are talking about 50 years ago!). One had a yield of 9% and annual growth of both capital and dividends of 2%, while the other had a yield of 2% and annual growth of both capital and dividends of 8%. Both have been remarkably good at maintaining those growth rates - in fact, perfect at it (which is of course very unrealistic, but this is just an illustrative example) - and since their capital values and dividends have been growing at the same rate, their yields have remained constant. By now, the first shareholding is worth £100 * (1.02)^50 = £269.16 and is producing annual income of 9% of that, which is £24.22, while the second is worth £100 * (1.08^50) = £4,690.16 and is producing annual income of 2% of that, which is £93.80. So a hands-down victory for the high-growth share over the high-yield share, isn't it, which by the end has approaching 20 times the capital value and 4 times the income, and income nearly equal to the original £100 cost? (And at the current rate, will get to over 4 times the income and income over the original cost in just one more year, and over 20 times the capital value a couple of years after that.)
The answer is that no, it isn't. What it ignores is all the dividends thrown off by the two holdings over the years and what returns they might produce if reinvested - they too are returns earned from the original £100, just by a more complex route. The dividends thrown off by the two holdings are, summarised by decade:
The second holding has produced more in the way of total dividends to reinvest over the years than the first, though by a rather smaller factor of about 1.5 rather than nearly 4. But crucially, it produced a lot less in the way of dividends to reinvest in the early years, when whatever they're reinvested in has the longest to subsequently grow itself. The "Might have grown to" columns show what those dividends would have grown to, assuming a similar 10% rate of total return to those of the two shares. The net result is that the £100 investment in the 9%-yielder/2%-grower has grown to £269.16+£12,903.67 = £13,172.83 and the same-sized investment in the 2%-yielder/8%-grower has grown to £4,690.16+£7,048.92 = £11,739.08.
There is of course no real surprise about that: growing £100 to £13,172.83 over 50 years is a CAGR of 10.25%, which is consistent with having been invested in a mixture of investments with rates of total return of 9%+2% = 11% and of 10%, while growing it to £11,739.08 over 50 years is a CAGR of 10.00%, consistent with having been invested in a mixture of investments with rates of total return of 2%+8% = 10% and of 10%. But my point is that if you only look at the state of the original investments and the income they're producing after 50 years, without also looking at the dividends they've paid over the years and what they have grown to, you get a totally false picture of how the original investment has performed. Basically, the 9%-yielder/2%-grower has passed around 98% of the job of growing the original £100 back to you and only kept about 2% of it for itself by giving you dividends to reinvest, while the 2%-yielder/8%-grower has only passed about 60% of it back to you and kept about 40% of it for itself.
So what that point boils down to is that if you simply compare where the original investments have ended up, you risk getting a totally wrong, biased-against-high-yielders impression of which are the best performers. That problem can be got around by systematically reinvesting each holding's dividends in itself (specifically - just reinvesting them in the portfolio as a whole is not good enough), or by doing a proper rate-of-total-return calculation (e.g. using the XIRR() spreadsheet function) on each holding. So if what you've observed is based on doing either of those, this isn't the explanation - but if it's simply based on looking at the state of the holdings, it's almost certainly at least a big part of it.
The other possible explanation that I said I'd give is much shorter: it may be that you're considerably more skilled and/or talented at picking shares that turn out to produce high rates of growth and total return than I am (*). Shares picked for growth are certainly capable of achieving much higher rates of total return for long periods than ones picked for dividend income, but also more prone to go badly wrong. There are quite a few groups of people for whom I would regard HYP strategies as thoroughly unsuitable. One of them is those who really do have the sort of investment skill and/or talent needed to make a success of growth investing; another is those who want to find out whether they do (or are capable of developing the skill) and who are able and willing to put in the effort needed to find out.
(*) As indicated in my previous posts, I have had one absolutely huge growth share that has set me up for life. But I can't claim that investment skill or talent was involved - it was luck, of the happening-to-be-in-the-right-place-at-the-right-time variety. I've had a few other pretty good successes, but they're much smaller and they're offset by quite a large number of shares picked for growth that turned out not to grow by much (and quite a few of them not at all, or to shrink)...