Alaric wrote:
The idea I am working on is that the long term return on a share can under some conditions of theory be established from the sum of the dividend yield and the dividend growth rate. That might not give enough immediate income to those wanting income today, but should not be a barrier for those seeking deferred income. You also have to accept that the relevant metric is market value.
I can understand your very interesting logic here, that the CAGR dividend growth rate ought to lead to share price growth, so that the yield of a share stays roughly constant. The total return should then be the sum of the yield and the CAGR. It seems as though this ought work for many 'dividend' shares.
However, I am rather puzzled by the behaviour of some popular investment trusts, with figures taken from the AIC web site.
The method roughly works for the high-yield (on topic
) RECI, which is relatively 'bond-like' with 5*9.3 ~ 43, and suffers from little share price variation. For most of the others, it seems that the total return values over 5 years bear little resemblance to 5 times the Yield + CAGR figure for 1 year (plus a bit of compounding). There seems to be a lot of share price total return that isn't accounted for by just the yield and the dividend growth, especially in the case of SMT.
I don't think closing of NAV discounts can account for this. There must be a lot of underlying share price growth that hasn't been returned to investors by way of dividends. So I think the simple dividend growth model is not sufficient to cope with factors such as share buybacks, which increase the share price but not the dividends.
Tramrider