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.
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?
There are 2 things to consider here.
Firstly money is fungible and exactly as you describe it matters not a jot (outside of frictional costs such as dealing charges and tax) whether "income" comes via dividends or changes in the price of capital, or whether reinvested dividends in the same entity are different to the dividend never having been paid, so long as you are comparing identical underlying investments.
Secondly comparing different investments, which may be a high yield one(s) with a low yield one(s). There will be differences in outcomes with these alternatives as these are non-identical. Sometimes one will outperform, sometimes the other.
In talking about the first scenario (again outside of frictional costs) the only differences are either psychological as it has been labelled, or for non financial reasons such as postulated by those such as IAAG.
Those that don't get the first point will argue (as you have encountered) by introducing non-identical elements, or by mistaken thinking such as having to sell in a falling market. The "maths" is the same regardless of time, and market direction, but intuitively not obvious to many.
You can try and introduce simple models where there are no capital gains and just income. Such as a savings account that pays 5% where you have the ability to decide the level of "income" and reinvestment into a current account or the savings account, and the ability to frictionlessly transfer between the two. Your "wealth" will always be determined by the 5%, and the withdrawal from the system as consumption. Regardless of the savings interest amount paid to the current account that is automatically reinvested back to the savings account, the wealth is the same. Some won't get it. Some will (effectively) argue a savings account that pays 4% entirely as income is better than one that earns 5% but only distributes 3%. The focus is on the "income" and not the "earnings". The same applies to companies.