High Yield vs Dividend Growth

[Alaric]

You would advise an investor needing income to pay bills, that all can be achieved with Capital Value. You would claim that selling part of one’s portfolio each year, possibly during a severe market downturn, was preferable to having had the foresight to invest in Income Generation.

The caution is that if shares are selected purely with regard to the dividend payout with no regard to capital value, then the investor can be conned into paying for their dividend out of capital. I don't have a problem with investors taking dividends of 8% or more if they recognise that they are running down their capital. I do have a problem with assertions that an 8% dividend yield is automatically better than 4% one.

Bur what is the point of an investor looking to reinvest dividends seeking to maximise dividends? Why have an "Income Strategy" when there's no need for income?

[IanTHughes]

You would advise an investor needing income to pay bills, that all can be achieved with Capital Value. You would claim that selling part of one’s portfolio each year, possibly during a severe market downturn, was preferable to having had the foresight to invest in Income Generation.

The caution is that if shares are selected purely with regard to the dividend payout with no regard to capital value, then the investor can be conned into paying for their dividend out of capital.

Maybe you are not aware but companies can only pay dividends from Earnings.

I don't have a problem with investors taking dividends of 8% or more if they recognise that they are running down their capital.

Are you perhaps suggesting that an investor needing income, can sell assets without running down their capital! That is truly a neat trick, how do you manage it?

I do have a problem with assertions that an 8% dividend yield is automatically better than 4% one.

So stop making such assertions! Seriously, no-one but you makes such assertions so, if you stopped, you would have no more problem!

Bur what is the point of an investor looking to reinvest dividends seeking to maximise dividends? Why have an "Income Strategy" when there's no need for income?

Well in my case, although the Investment Aim has been increasing portfolio income, Capital Value has also significantly increased, even without it being an Investment Aim of the strategy!

With greater investing experience under your belt, maybe even you will learn that increasing Income Generation over time, generally leads to Increasing Market Value, over time.

Enjoy!


Ian

[Alaric]

]Maybe you are not aware but companies can only pay dividends from Earnings.

I would hope you are aware that Companies use all sorts of accouting tricks to pay dividends. Earnings can be retained earnings so payment of a dividend is no assurance that a company is profitable.

]
Are you perhaps suggesting that an investor needing income, can sell assets without running down their capital! That is truly a neat trick, how do you manage it?.

You buy shares where the dividend is paid for by running down the Company's assets. You hold the shares without selling but they gradually reduce in value because it's being returned to shareholders in the form of dividends. I could supect tobacco shares now fall into that category.

So stop making such assertions! Seriously, no-one but you makes such assertions so, if you stopped, you would have no more problem!.

Aren't you the one who told off people on the HYP board for choosing shares with lower dividend yields when higher yields were available on comparable companies? Is not sorting by dividend yield a fundamental part of what is sometimes called the HYP strategy?

[IanTHughes]

]Maybe you are not aware but companies can only pay dividends from Earnings.

I would hope you are aware that Companies use all sorts of accouting tricks to pay dividends. Earnings can be retained earnings so payment of a dividend is no assurance that a company is profitable.

Surely even you must recognise that dividends being paid out of "Retained Earnings" are indeed being paid out of Earnings! Or do you believe that "Retained Earnings" are not in fact "Earnings"!

Are you perhaps suggesting that an investor needing income, can sell assets without running down their capital! That is truly a neat trick, how do you manage it?.

You buy shares where the dividend is paid for by running down the Company's assets. You hold the shares without selling but they gradually reduce in value because it's being returned to shareholders in the form of dividends. I could supect tobacco shares now fall into that category.

Nonsense. my portfolio has provided copious dividends and also significantly increased in value! I told you already: creating a growing income stream will usually lead to a growing Market Value over time. Do try to keep up!

So stop making such assertions! Seriously, no-one but you makes such assertions so, if you stopped, you would have no more problem!.

Aren't you the one who told off people on the HYP board for choosing shares with lower dividend yields when higher yields were available on comparable companies? Is not sorting by dividend yield a fundamental part of what is sometimes called the HYP strategy?

No, never!

I have never made the assertion that: "an 8% dividend yield is automatically better than 4% one". I leave that sort of Investment chicanery to the Snake Oil Salesmen and conmen that abound, even on boards like The Lemon Fool (TLF). So far you are the only person to have made that assertion on TLF, that I have seen! Own up to it at least!

Seriously, your abject failure to understand Income Investing in general, and the High Yield Portfolio (HYP) in particular, does not mean anyone else is also that ignorant. Unlike you, many investors understand full well the mechanics and the benefits of Income Investing, especially when the Investment Aim is Income Generation. Why can you not leave them be and spend you time more productively. Taking some lessons in Investing would be my recommendation for an investment newcomer like yourself to become more productive.

Enjoy!


Ian

[vand]

Seriously, Ian - besides not knowing the point you are trying to make, other than to let us know your proficency in Excel, I'd suggest that you lower your tone. Telling someone to "take investing lessons" is wholly inappropriate when engaging in what is meant to be a grown up conversation that involve nuance and shades of grey.

I don't know if mods have had a word, but this is the sort of [expletive deleted] that put me off posting on lemonfool for months - bullying and lack of respect. Someone needs to sort it.

[IanTHughes]

Seriously, Ian - besides not knowing the point you are trying to make, other than to let us know your proficency in Excel, I'd suggest that you lower your tone. Telling someone to "take investing lessons" is wholly inappropriate when engaging in what is meant to be a grown up conversation that involve nuance and shades of grey.

Alaric has freely admitted, and demonstrated, a lack of understanding when it comes to Income Investing. My helpful suggestion of Investing lessons was simply responding to that admitted lack of knowledge.

I don't know if mods have had a word, but this is the sort of [expletive deleted] that put me off posting on lemonfool for months - bullying and lack of respect. Someone needs to sort it.

Taking the time and effort to point out others errors with regard to Investing, or challenging those who make incorrect assertions on the subject, is hardly bullying. But if one does not value one's errors being corrected, as I certainly do, so be it.

I do believe that any further discussion on this criticism of criticism from vand should be on a more appropriate board.

Enjoy!


Ian

[chas49]

Moderator Message:
The tone of the last few posts has departed from what is acceptable on this forum. Mods do not have the time to edit multiple posts, so we have a choice between deleting posts or warning posters. On this occasion I have decided it is better to leave the posts to stand - but to warn all concerned that name-calling and personal criticism is not welcome here. Any further posts which breach this rule will be deleted without further warning. (chas49)

[Arborbridge]

Seriously, Ian - besides not knowing the point you are trying to make, other than to let us know your proficency in Excel, I'd suggest that you lower your tone. Telling someone to "take investing lessons" is wholly inappropriate when engaging in what is meant to be a grown up conversation that involve nuance and shades of grey.

I don't know if mods have had a word, but this is the sort of [expletive deleted] that put me off posting on lemonfool for months - bullying and lack of respect. Someone needs to sort it.

Ian has be known for this rather sarcastic tone of his for years. Most of us have gotten used to it, but I agree it would be really discouraging to anyone new - and I wish he would drop it in favour of something less abrasive.

BTW, with regards to the payment of dividends, I've known companies pay a dividend even though they've borrowed more money in order to do so. (eg Hamleys, was one case). As Alaric says, there are all sorts of tricks companies can play.

Arb.

[IanTHughes]

... with regards to the payment of dividends, I've known companies pay a dividend even though they've borrowed more money in order to do so. (eg Hamleys, was one case). As Alaric says, there are all sorts of tricks companies can play.

All I said was , there must be "Earnings" to cover any dividends.

As someone who welcomes criticism, please feel free to point out how that statement is incorrect.

Enjoy!


Ian.

[Arborbridge]

... with regards to the payment of dividends, I've known companies pay a dividend even though they've borrowed more money in order to do so. (eg Hamleys, was one case). As Alaric says, there are all sorts of tricks companies can play.

All I said was , there must be "Earnings" to cover any dividends.

Enjoy!


Ian.

Well, that's where it gets confusing. There weren't enough earnings to pay for the dividend (no cover), so the gap was plugged by borrowing more.

Company accounts can be a minefield.

[IanTHughes]

All I said was , there must be "Earnings" to cover any dividends.

Well, that's where it gets confusing. There weren't enough earnings to pay for the dividend (no cover), so the gap was plugged by borrowing more.

I can only repeat that, by law, dividends must be paid out of earnings!

https://www.informdirect.co.uk/shares/w ... -dividend/

A company may only make a distribution out of profits available for the purpose. – Companies Act 2006, section 830

Dividends can only be paid from the company’s profits after deducting all expenses and tax liabilities. After payment of the dividend, it is preferable for there to be sufficient retained earnings (see below) to plough back into the company for healthy growth.

I would say more, even suggest that maybe one should do some research into the subject, but do not want to risk upsetting the criticism police.

Enjoy!


Ian

[Alaric]

I can only repeat that, by law, dividends must be paid out of earnings!

https://www.informdirect.co.uk/shares/w ... -dividend/

A company may only make a distribution out of profits available for the purpose. – Companies Act 2006, section 830

The quote actually says "profits". These can be made to appear and disappear by taking money from the future or giving it back. Ask how Carillion managed to pay dividends almost until the bitter end when it had so run out of assets that there was nothing left on liquidation.

In a simplified example, a Company wins a contract to supply something over several years. Its accounting practice is to book all or some of its future profits on this supply of services immediately after the sale.
Does it have profits? Yes.
Does it have cash? No.
How does it pay a dividend? By borrowing or else using retained cash from earlier contracts.

[Gerry557]

Bur what is the point of an investor looking to reinvest dividends seeking to maximise dividends? Why have an "Income Strategy" when there's no need for income?

I can think of several reasons.

To grow your capital wealth.
To provide occasional income, should it be needed. Job loss, roof repair or holiday
To allow capital to buy shares in a down turn.
To test you have the required income for retirement, early or otherwise.
Because its what you are comfortable doing.
IHT planning, gifts from income.

But just because you can do all this doesnt mean its best for everyone. Buffet doesn't care much for dividends but hes not a UK pensioner

[IanTHughes]

I can only repeat that, by law, dividends must be paid out of earnings!

https://www.informdirect.co.uk/shares/w ... -dividend/

The quote actually says "profits".

https://corporatefinanceinstitute.com/r ... gLap_D_BwE

Earnings are the company’s profits. In other words, earnings represent the net income of a company.

To be be more precise, Earnings are the net profits, after deducting expenses an tax liability.

Enjoy!


Ian

[kempiejon]

To test you have the required income for retirement, early or otherwise.

This was the clincher for me. Accumulating a pot big enough to retire early posed me with a hard question to answer. "How big a pot?"
An income strategy hardly ever asks me the question what should I sell and when.
My income strategy generated as much as my employment a while ago so I knew I had enough. A bit extra to cope with hiccups, a cash pot to smooth out lumpiness. But because I wanted an increasing income dividend growth has influenced some of my income share picks. In the olden days back at the turn of the millennium uk indexing was good enough but via value and TMF income became my favourite. Now though most new money is likely to copy the global index with ETFs my high yielders' dividends feedback into the HYP.

In answer to the question. "How big a pot?" well I don't have enough for an index linked annuity at my current dividend income; if I was dedicated to the received wisdom of a 4% SWR I might not have a big enough pot but my high yield picks offer me a fair bit more than 4%.

[Alaric]

To be be more precise, Earnings are the net profits, after deducting expenses an tax liability.

There's no requirement for them to have been in the current year. Accumulated earnings not distributed is the Company's net wealth. It follows then that it can be distributed in future years. I would be inclined when using the term "company capital" to mean not just the formal Companies Act share capital but also all the retained earnings and other stuff that goes into net asset value. You aren't allowed to distribute the formal share capital but anything else is fair game.

It's not so difficult to do a capital reconstruction either, with shareholder approval. That can reduce the formal capital and allow the left over balances to be distributed. You see that from time to time in demergers and similar exercises.

[Charlottesquare]

What is the point of Income Generation when all that it's used for is reinvestment?

If the Investment Aim is Income Generation, Income Generation is entirely the point! After all it is what the investor is hoping to achieve, and how success or failure will be measured.

Do you claim that a portfolio with 8% income and 4% capital loss is more successful than one with 6% income and no capital loss? You could make an outside case if the idea is to remove the income for spending, but surely not if it's just reinvested.

What is the Investment Aim?

If the Investment Aim is Income Generation, then the portfolio with the higher amount of Income Generation is clearly the better.
If the Investment Aim is Total Return, then the portfolio with the higher Total Return is clearly the better.

Is it really a concept which is too difficult for you to understand?

Enjoy!


Ian

How do you establish what is income generation with uncovered dividends, just because it is labelled a dividend is it income? If you ignore valuation movements and only consider dividends received you may in effect be holding an annuity and what you paid to buy the share initially is in part being returned to you by the company.

[Charlottesquare]

I would hope you are aware that Companies use all sorts of accouting tricks to pay dividends. Earnings can be retained earnings so payment of a dividend is no assurance that a company is profitable.

Surely even you must recognise that dividends being paid out of "Retained Earnings" are indeed being paid out of Earnings! Or do you believe that "Retained Earnings" are not in fact "Earnings"!

Are you perhaps suggesting that an investor needing income, can sell assets without running down their capital! That is truly a neat trick, how do you manage it?.

You buy shares where the dividend is paid for by running down the Company's assets. You hold the shares without selling but they gradually reduce in value because it's being returned to shareholders in the form of dividends. I could supect tobacco shares now fall into that category.

Nonsense. my portfolio has provided copious dividends and also significantly increased in value! I told you already: creating a growing income stream will usually lead to a growing Market Value over time. Do try to keep up!

So stop making such assertions! Seriously, no-one but you makes such assertions so, if you stopped, you would have no more problem!.

Aren't you the one who told off people on the HYP board for choosing shares with lower dividend yields when higher yields were available on comparable companies? Is not sorting by dividend yield a fundamental part of what is sometimes called the HYP strategy?

No, never!

I have never made the assertion that: "an 8% dividend yield is automatically better than 4% one". I leave that sort of Investment chicanery to the Snake Oil Salesmen and conmen that abound, even on boards like The Lemon Fool (TLF). So far you are the only person to have made that assertion on TLF, that I have seen! Own up to it at least!

Seriously, your abject failure to understand Income Investing in general, and the High Yield Portfolio (HYP) in particular, does not mean anyone else is also that ignorant. Unlike you, many investors understand full well the mechanics and the benefits of Income Investing, especially when the Investment Aim is Income Generation. Why can you not leave them be and spend you time more productively. Taking some lessons in Investing would be my recommendation for an investment newcomer like yourself to become more productive.

Enjoy!


Ian

Retained earnings might well have existed before you bought the shares and whilst asset valuation models tend to not be used, you may be in part eating your own tail.

For instance I have two companies, each when I bought was earning £1,000 pa, market when I bought valued this at £10,000 (10 x earnings) but Company A had reserves (represented by cash and other assets of £100,000 ) and Company B has reserves of only £20,000. Whilst A may be more efficient re ROCE, B is possibly safer with its deeper pockets and likely costs a little more as a result. (Remember M Cap as a selection criteria re HYP)

I respectfully suggest that market might value A higher because of its reserves (extra assets), part in effect therefore included in the price I paid . Now if over the next 10 years company A distributes £11,000 a year to shareholders all the retained profits, and the assets re same, have been returned to me.

Dividends are not always from earnings arising after I buy

[IanTHughes]

If the Investment Aim is Income Generation, Income Generation is entirely the point! After all it is what the investor is hoping to achieve, and how success or failure will be measured.

What is the Investment Aim?

If the Investment Aim is Income Generation, then the portfolio with the higher amount of Income Generation is clearly the better.
If the Investment Aim is Total Return, then the portfolio with the higher Total Return is clearly the better.

Is it really a concept which is too difficult for you to understand?

How do you establish what is income generation with uncovered dividends, just because it is labelled a dividend is it income? If you ignore valuation movements and only consider dividends received you may in effect be holding an annuity and what you paid to buy the share initially is in part being returned to you by the company.

First of all, with an annuity, the asset value is passed to the annuity provider. With one's own portfolio, the capital is not given away. That is a major difference in my view.

Secondly, all the portfolios under my control where dividends are paid away, have increased in value. You will have to further explain how it is that what was paid to buy the share initially is in part being returned to you by the company when the Market Value of the portfolio increases over time.

Also, for an investor reliant on a portfolio to provide the cash needed to pay the bills, that cash can only come from Company dividends of Asset sales. Dividends make much more sense than asset sales, especially if the market is low - 2019/2020 30% down due to Economy lockdown - when selling may be a seriously bad move.

Enjoy!


Ian

[Charlottesquare]

How do you establish what is income generation with uncovered dividends, just because it is labelled a dividend is it income? If you ignore valuation movements and only consider dividends received you may in effect be holding an annuity and what you paid to buy the share initially is in part being returned to you by the company.

First of all, with an annuity, the asset value is passed to the annuity provider. With one's own portfolio, the capital is not given away. That is a major difference in my view.

Secondly, all the portfolios under my control where dividends are paid away, have increased in value. You will have to further explain how it is that what was paid to buy the share initially is in part being returned to you by the company when the Market Value of the portfolio increases over time.

Also, for an investor in reliant on a portfolio to provide the cash needed to pay the bills, that cash can only come from Company dividends of Asset sales. Dividends make much more sense than asset sales, especially if the market is low - 2019/2020 30% down due to Economy lockdown - when selling may be a seriously bad move.

Enjoy!


Ian

I cannot become relaxed about something being called income (dividends) unless it can be shown to be dividends out of current earnings (odd years excepted) I appreciate HYP sets cover as one of its selection criteria at outset but that cover may well change over a lifetime of ownership. (For one thing business models change- ask M & S )

I am sure your investment portfolios have done fine, as you say, but so have mine using a few different approaches over the years (now mainly ITs with portfolio yield at circa 4.6%), the past performance does not negate my view that where dividends paid erode company value in monetary terms or in lack of future investment, thus restricting future earnings growth, they need careful scrutiny.