50 years of "A Random Walk Down Wall Street"

[Lootman]

If mindlessly investing in high dividends brought about superior growth then why has the FTSE-100 done nothing in 23 years, given that its constituents mostly pay out high dividends?

Whilst even if you reinvested those dividends, you would have under-performed a simple global index fund that also reinvested dividends.

Anyone following your approach would have completely missed investing in Berkshire Hathaway, Amazon, Google and (for most of its life) Apple, inevitably leading to significant under-performance versus a global benchmark.

No one is talking "mindlessly investing in high dividends". We are talking about the elements that contribute to the total return.

You quote some high profile examples, and we know what Buffet thinks about dividends because he makes sure he invests in companies that generate them and doesn't pay them out. But you have ignored other formerly stellar stocks like Nokia and Blackberry that are now as much a part of history as Great Western Railways. At the end all you are left with is the cash generated by a business venture.

Wrong on two counts:

1) My point was that you would have failed to invest in BRK because it never pays dividends. The fact that it accumulates dividends is irrelevant because, in your method, you would exclude it on arbitrary grounds.

2) Sure, some growthy shares fall to earth. But you only lose your original bet. Whereas shares like Amazon and Apple are up 1,000 fold since IPO. One winner can make up for many losers. And again you ignored them because of an arbitrary rule. The appreciation of global market cap is inevitably in a few winners that add a trillion or more in capitalization. And you missed them all, from which you cannot recover because you were too busy investing in the dogs of the FTSE.

[OhNoNotimAgain]

Comparing his portfolio, which includes reinvested dividends, to the FTSE 100 capital only index, which doesn't, is simply downright misleading. He has totally ignored the main source of growth in his comparator benchmark.

Whilst I would agree that it is confusing to compare a total return index with a capital-only index, I think you are jumping the gun there by claiming that dividends are the "main source of growth".

Clearly a few of us here are arguing exactly the opposite - that high dividends can often inhibit growth. Else why has the FTSE-100 seen zero growth since 1999, and has lost a lot of value in real terms? Whiist paying out dividends as some kind of substitute for real growth?

Some HY investors like Terry have managed to do well, presumably because of superior share-picking skills. But mindlessly investing in yield via only UK shares has been a bad growth strategy for almost a generation now.

You are wrong and the BEG, Dimson and Siegel have consistently demonstrated that. Dividends, growth in dividends and reinvested dividends are the main source of equity returns over the long run. If you want to deny the truth there are plenty of election campaigns that can use you.

Yes, and further, those 3 distinguished sources all point to the effect of retained earnings, and the growth in earnings, from which those increased dividends come from, as the driver and their biggest effect is on the capital value eg. the share price.

(Growing) Dividends in themselves are not the source of these long term gains. They are the consequence. The higher the dividend as a proportion of those earnings limits the availability of retained earnings, and creates potential tax issues for holders and the frictional costs associated with reinvestment of them, which largely don't exist if that "round-trip" was avoided through higher retained earnings.

I suggest you reaquaint yourself with the works of these distinguished authors before making rash declarations regarding someone being "wrong".

I can prove it and Lootman knows it which is why he is uncaracteristicaly quiet on the evidence.

[dealtn]

You are wrong and the BEG, Dimson and Siegel have consistently demonstrated that. Dividends, growth in dividends and reinvested dividends are the main source of equity returns over the long run. If you want to deny the truth there are plenty of election campaigns that can use you.

Yes, and further, those 3 distinguished sources all point to the effect of retained earnings, and the growth in earnings, from which those increased dividends come from, as the driver and their biggest effect is on the capital value eg. the share price.
:
I suggest you reaquaint yourself with the works of these distinguished authors before making rash declarations regarding someone being "wrong".

The Credit Suisse Global Investment Returns Yearbook 2011 by Dimson, Marsh & Staunton seems relevant here, seeing you are both lobbing Dimson's name around. Start on page 15.

Media release (2 page summary):
https://www.credit-suisse.com/media/assets/corporate/docs/about-us/media/media-release/2011/02/000000022339.pdf

PDF download:
https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/credit-suisse-global-investment-yearbook-2011.pdf

P.S. I'm not interesting in getting into this bun fight ... just thought I'd provide some more buns ...

I have to declare an interest here. Paul Marsh was my personal tutor at the UK's leading Business School. I am not just intimately aware of his published works (including this from 2011) but his private tuition. I have met Elroy Dimson and also Mike Staunton being the 2 other authors of not just this paper but also the highly recommended Triumph of the Optimists - 101 years of Global Investment Returns, which sits within arms reach of the chair in my office.

In essence much of the confusion regarding the role of dividends can be explained by a bath analogy.

A bath is being run, the taps are open, it fills up representing the earnings streams of the company (bath). The water in the bath represents the "value" so with greater volume in the bath, the richer or better, the bath owner is doing.

Turn your focus away from the taps, but look at the plughole and plug. If you only consider the water leaving the bath by this route, and measuring its volume, you might consider the water you catch in a strategically placed bucket, as your income, or dividends from running the bath taps. Some water remains in the bath, topped up by the tap water still entering, of course, but for (some) income investors it is only the plug water caught in the bucket that matters, and a bath with a plug in place is undesirable (despite the ability of that investor to access water at any point and scoop into his bucket from above).

For some, who wish to demonstrate the excellence of maintaining a fuller bath by using the bucket, instead of emptying it elsewhere as it fills from the plughole, they argue the bath is fuller if you empty your bucket back into the bath. By "reinvesting" this water the bath level rises and is unarguably of greater volume than a bath filling up from the taps, with no plug, and no bucket. Dividends (or buckets) are clearly good and better than letting the water go to waste. Dividends (and buckets) are therefore to be worshipped and lauded as "the main source of equity (water) returns over the long run".

A closer analysis reveals the obvious truth that actually it is the taps that are driving the volume of the water, and the long run return of filling the bath over time. Furthermore a bath fills quicker and more efficiently were there to be a plug in that plughole. A bath without a plug, even one where you catch the water and return it, is less efficient. Some of the water will be spilled, and some water missed as you transfer the buckets position from under the plughole to refill the bath. There are frictions in the model - which in the financial world are taxes, costs etc (see your link - top of page 18).

Earnings (taps) drive worth (bath volume) and the larger the retained earnings (water not escaping down the plughole to be captured and returned) the quicker the worth (bath volume) rises. But yes it is undeniable that a man with a bucket and an empty plughole is better placed than the same man, same bath, same absent plug, but no bucket.

[dealtn]

You are wrong and the BEG, Dimson and Siegel have consistently demonstrated that. Dividends, growth in dividends and reinvested dividends are the main source of equity returns over the long run. If you want to deny the truth there are plenty of election campaigns that can use you.

Yes, and further, those 3 distinguished sources all point to the effect of retained earnings, and the growth in earnings, from which those increased dividends come from, as the driver and their biggest effect is on the capital value eg. the share price.
:
I suggest you reaquaint yourself with the works of these distinguished authors before making rash declarations regarding someone being "wrong".

The Credit Suisse Global Investment Returns Yearbook 2011 by Dimson, Marsh & Staunton seems relevant here, seeing you are both lobbing Dimson's name around. Start on page 15.

Media release (2 page summary):
https://www.credit-suisse.com/media/assets/corporate/docs/about-us/media/media-release/2011/02/000000022339.pdf

PDF download:
https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/credit-suisse-global-investment-yearbook-2011.pdf

P.S. I'm not interesting in getting into this bun fight ... just thought I'd provide some more buns ...

From Dimson

In general, the authors highlight that investment strategies favoring
stocks and markets with high dividend yields tend to pay off handsomely over the long run for the patient
investor.

Those words are NOT from Dimson. If you actually read that link those are the words of Giles Keating and Stefano Natella, who jointly pen the Introduction.

[Itsallaguess]

The reason I find it so depressing is that I am talking about clearly intelligent people who are far from ignorant.

On the flip side of that though Si, I always get the impression that you're often happy to simply 'box-up' your little gems of disagreements with various income-investors, and then just assume for the sake of your well-advertised bias against them that they all then subscribe to the whole 'collection' of individual disagreements in your box...

Just for the record, even as a (largely) income-investor who's been very happy with their own approach for many years now (although I don't just look for highest-yields, and I don't just invest in the FTSE, and I don't follow a 'blinkered method', and I don't follow the 'strategic ignorance' approach, although I don't recall you ever actually recognising those aspects that you so dislike being missing from my own income-investment approach...), I have always and will continue to disagree with Rob and his 'Dividends, growth in dividends and reinvested dividends are the main source of equity returns over the long run' statement, that he's repeated many times over the years, both here and back on the Motley Fool boards, and where he's persistently failed to positively convince in any of the conversations where he's raised that proclamation, or at least any of the ones that he's stuck around in long enough to hear the rather more convincing arguments against it...

So I just wanted to perhaps take the opportunity to, again, try to point out that we live in a much more nuanced world than one where someone can simply say 'they're all daft - they all think this, this, and this', and perhaps ask you to give people a little more credit sometimes, no matter which particular investment approach they might take, in terms of them sometimes even being able to align with your own views in some areas...

Complicated, isn't it...

Cheers,

Itsallaguess

[tjh290633]

Better perhaps to compare both indices from a range of start dates and holding to the present time.

Which is exactly what I have done. The first date of the last 23 tax years and held to date (more accurately to the last day of the last complete tax year).

From those 23 selected dates HY has "won" on 5 occasions (6 if you include inception) against 18 for LY.

I published my findings. Why don't you do the same? You have now given a different explanation of what your findings were.

TJH

[Itsallaguess]

Earnings (taps) drive worth (bath volume) and the larger the retained earnings (water not escaping down the plughole to be captured and returned) the quicker the worth (bath volume) rises. But yes it is undeniable that a man with a bucket and an empty plughole is better placed than the same man, same bath, same absent plug, but no bucket.

A completely valid explanation of the issue with Rob's oft-repeated claims.

I don't think I've ever known someone have to repeatedly see the same claim debunked so many times over the years, in so many different and completely valid ways, and yet for some reason still find themselves able to cling to them...

With that said though, I always utterly regret when this type of TR-based argument rears it's head in these 'investment approach' discussions, because it seems to tar those income-investors who do fully understand and appreciate the 'underlying company' argument, but who are still quite content to give up some of those fractional transaction costs where it then enables us to pursue other regular-income-related strategic benefits when compared to an approach that relies on a much more 'manual intervention' process to gain regular access to any underlying funds.

I would like to think that broader acceptance of that specific process-preference might be more acceptable and better appreciated if this really quite unhelpful TR-based argument didn't continue to get in the way of that particular and much more valid, in my view at least, underlying point...

Cheers,

Itsallaguess

[dealtn]

Better perhaps to compare both indices from a range of start dates and holding to the present time.

Which is exactly what I have done. The first date of the last 23 tax years and held to date (more accurately to the last day of the last complete tax year).

From those 23 selected dates HY has "won" on 5 occasions (6 if you include inception) against 18 for LY.

I published my findings. Why don't you do the same? You have now given a different explanation of what your findings were.

TJH

No I haven't. Fromm the very beginning of this exchange I have stated an investor buys the relative index and does nothing but hold the investment.

Low Yield		High Yield
Apr-22	5,499.90		7,950.48
Apr-21	5,406.33		6,829.18
Apr-20	4,375.93		5,400.72
Apr-19	4,836.51		7,068.39
Apr-18	4,605.47		7,015.50
Apr-17	4,313.15		6,420.31
Apr-16	3,600.28		5,337.40
Apr-15	3,761.66		5,777.13
Apr-14	3,354.93		5,589.03
Apr-13	3,027.84		5,080.08
Apr-12	2,663.61		4,200.46
Apr-11	2,816.51		4,149.76
Apr-10	2,442.82		3,729.18
Apr-09	1,692.97		2,912.13
Apr-08	2,348.72		3,963.29
Apr-07	2,326.80		4,309.11
Apr-06	2,005.90		3,937.26
Apr-05	1,464.48		3,058.32
Apr-04	1,379.17		2,659.71
Apr-03	1,161.15		2,138.24
Apr-02	1,482.04		2,774.23
Apr-01	1,954.19		2,721.95
Apr-00	2,565.80		2,191.36
Apr-99	2,307.26		2,453.90

So buying at 2,307 (or 2,453) and holding until 5,4999 (or 7,950). HY "wins" on 5 occasions LY on the other 18.

[dealtn]

Earnings (taps) drive worth (bath volume) and the larger the retained earnings (water not escaping down the plughole to be captured and returned) the quicker the worth (bath volume) rises. But yes it is undeniable that a man with a bucket and an empty plughole is better placed than the same man, same bath, same absent plug, but no bucket.

A completely valid explanation of the issue with Rob's oft-repeated claims.

I don't think I've ever known someone have to repeatedly see the same claim debunked so many times over the years, in so many different and completely valid ways, and yet for some reason still find themselves able to cling to them...

With that said though, I always utterly regret when this type of TR-based argument rears it's head in these 'investment approach' discussions, because it seems to tar those income-investors who do fully understand and appreciate the 'underlying company' argument, but who are still quite content to give up some of those fractional transaction costs where it then enables us to pursue other regular-income-related strategic benefits when compared to an approach that relies on a much more 'manual intervention' process to gain regular access to any underlying funds.

I would like to think that broader acceptance of that specific process-preference might be more acceptable and better appreciated if this really quite unhelpful TR-based argument didn't continue to get in the way of that particular and much more valid, in my view at least, underlying point...

Cheers,

Itsallaguess

And to be clear, I have absolutely no issue with that (or you). In practice companies do pay dividends, and investors do recycle them. and are mostly content with that approach.

Particularly on this Board where being "passive" is the core, investors won't be "active" in picking and choosing, or driving the investment bus themselves. But nonsense, and simply wrong "facts", have to be challenged, which will often require going back to the principles or using analogies. I make no apology for that.

[Itsallaguess]

A completely valid explanation of the issue with Rob's oft-repeated claims.

I don't think I've ever known someone have to repeatedly see the same claim debunked so many times over the years, in so many different and completely valid ways, and yet for some reason still find themselves able to cling to them...

With that said though, I always utterly regret when this type of TR-based argument rears it's head in these 'investment approach' discussions, because it seems to tar those income-investors who do fully understand and appreciate the 'underlying company' argument, but who are still quite content to give up some of those fractional transaction costs where it then enables us to pursue other regular-income-related strategic benefits when compared to an approach that relies on a much more 'manual intervention' process to gain regular access to any underlying funds.

I would like to think that broader acceptance of that specific process-preference might be more acceptable and better appreciated if this really quite unhelpful TR-based argument didn't continue to get in the way of that particular and much more valid, in my view at least, underlying point...

And to be clear, I have absolutely no issue with that (or you). In practice companies do pay dividends, and investors do recycle them. and are mostly content with that approach.

Particularly on this Board where being "passive" is the core, investors won't be "active" in picking and choosing, or driving the investment bus themselves. But nonsense, and simply wrong "facts", have to be challenged, which will often require going back to the principles or using analogies. I make no apology for that.

Thanks, and for clarity my previous post was written in regret of Rob yet again making the unhelpful initial claim, and not in the fact that it then subsequently, and quite rightly, might attract any required logic to clearly debunk it.

I do appreciate, and very much welcome, the fact that there are some TR-based investors on this site who better appreciate the more nuanced nature of this particular debate (notwithstanding Rob's unhelpful side-tracking..), and are able to have a much broader understanding of other people's views on this subject, and some of the reasoning behind them.

Cheers,

Itsallaguess

[OhNoNotimAgain]

..), I have always and will continue to disagree with Rob and his 'Dividends, growth in dividends and reinvested dividends are the main source of equity returns over the long run' statement, that he's repeated many times over the years, both here and back on the Motley Fool boards, and where he's persistently failed to positively convince in any of the conversations where he's raised that proclamation, or at least any of the ones that he's stuck around in long enough to hear the rather more convincing arguments against it...

Itsallaguess

Fine, you can disagree with my opinions but it is harder to argue against the facts. Do you ever look at current data?

[MrFoolish]

I don't disagree with the bath analogy, though I feel it does miss some important details.

To start with, does the bath represent the underlying companies or the end-user's portfolio?

At the company level, if the directors of that company can find no good use for their excess water then why hang on to it? Pass it on to be invested elsewhere. Otherwise they might waste it on big bonuses, jollies and unsafe ventures. Most directors are not as sensible as Buffett.

At the portfolio level, the bath analogy assumes all water from the taps is equally priced. But all companies are not equally priced. Often those high yielding shares sit on a lower P/E ratio. So possibly you fill your tub more cheaply with the high yielders.

I do agree that Total Return is what matters. But the bathtub analogy is too simplistic to explain it.

[simoan]

In essence much of the confusion regarding the role of dividends can be explained by a bath analogy.

A bath is being run, the taps are open, it fills up representing the earnings streams of the company (bath). The water in the bath represents the "value" so with greater volume in the bath, the richer or better, the bath owner is doing.

Turn your focus away from the taps, but look at the plughole and plug. If you only consider the water leaving the bath by this route, and measuring its volume, you might consider the water you catch in a strategically placed bucket, as your income, or dividends from running the bath taps. Some water remains in the bath, topped up by the tap water still entering, of course, but for (some) income investors it is only the plug water caught in the bucket that matters, and a bath with a plug in place is undesirable (despite the ability of that investor to access water at any point and scoop into his bucket from above).

For some, who wish to demonstrate the excellence of maintaining a fuller bath by using the bucket, instead of emptying it elsewhere as it fills from the plughole, they argue the bath is fuller if you empty your bucket back into the bath. By "reinvesting" this water the bath level rises and is unarguably of greater volume than a bath filling up from the taps, with no plug, and no bucket. Dividends (or buckets) are clearly good and better than letting the water go to waste. Dividends (and buckets) are therefore to be worshipped and lauded as "the main source of equity (water) returns over the long run".

A closer analysis reveals the obvious truth that actually it is the taps that are driving the volume of the water, and the long run return of filling the bath over time. Furthermore a bath fills quicker and more efficiently were there to be a plug in that plughole. A bath without a plug, even one where you catch the water and return it, is less efficient. Some of the water will be spilled, and some water missed as you transfer the buckets position from under the plughole to refill the bath. There are frictions in the model - which in the financial world are taxes, costs etc (see your link - top of page 18).

Earnings (taps) drive worth (bath volume) and the larger the retained earnings (water not escaping down the plughole to be captured and returned) the quicker the worth (bath volume) rises. But yes it is undeniable that a man with a bucket and an empty plughole is better placed than the same man, same bath, same absent plug, but no bucket.

dealtn,

That's one of the best analogies I have ever read. Is it your own creation? Genius, if so.

All the best, Si

[OhNoNotimAgain]

In essence much of the confusion regarding the role of dividends can be explained by a bath analogy.

A bath is being run, the taps are open, it fills up representing the earnings streams of the company (bath). The water in the bath represents the "value" so with greater volume in the bath, the richer or better, the bath owner is doing.

Turn your focus away from the taps, but look at the plughole and plug. If you only consider the water leaving the bath by this route, and measuring its volume, you might consider the water you catch in a strategically placed bucket, as your income, or dividends from running the bath taps. Some water remains in the bath, topped up by the tap water still entering, of course, but for (some) income investors it is only the plug water caught in the bucket that matters, and a bath with a plug in place is undesirable (despite the ability of that investor to access water at any point and scoop into his bucket from above).

For some, who wish to demonstrate the excellence of maintaining a fuller bath by using the bucket, instead of emptying it elsewhere as it fills from the plughole, they argue the bath is fuller if you empty your bucket back into the bath. By "reinvesting" this water the bath level rises and is unarguably of greater volume than a bath filling up from the taps, with no plug, and no bucket. Dividends (or buckets) are clearly good and better than letting the water go to waste. Dividends (and buckets) are therefore to be worshipped and lauded as "the main source of equity (water) returns over the long run".

A closer analysis reveals the obvious truth that actually it is the taps that are driving the volume of the water, and the long run return of filling the bath over time. Furthermore a bath fills quicker and more efficiently were there to be a plug in that plughole. A bath without a plug, even one where you catch the water and return it, is less efficient. Some of the water will be spilled, and some water missed as you transfer the buckets position from under the plughole to refill the bath. There are frictions in the model - which in the financial world are taxes, costs etc (see your link - top of page 18).

Earnings (taps) drive worth (bath volume) and the larger the retained earnings (water not escaping down the plughole to be captured and returned) the quicker the worth (bath volume) rises. But yes it is undeniable that a man with a bucket and an empty plughole is better placed than the same man, same bath, same absent plug, but no bucket.

dealtn,

That's one of the best analogies I have ever read. Is it your own creation? Genius, if so.

All the best, Si

Its complete rubbish because so much "wealth" was created in the ZIRP bubble my multiple expansion. Tesla, and other tech stocks did not achieve their valuations through earnings but because of higher valuations. That bubble is now deflating and investors are just left with memories of what the stock used to be worth. Amazon's cash flow is the same as that of decent mining company, but the valuations are vastly different because one is deemed to be bad for the environment and the other not.

[mc2fool]

I don't disagree with the bath analogy, though I feel it does miss some important details.

To start with, does the bath represent the underlying companies or the end-user's portfolio?

At the company level, if the directors of that company can find no good use for their excess water then why hang on to it? Pass it on to be invested elsewhere. Otherwise they might waste it on big bonuses, jollies and unsafe ventures. Most directors are not as sensible as Buffett.

At the portfolio level, the bath analogy assumes all water from the taps is equally priced. But all companies are not equally priced. Often those high yielding shares sit on a lower P/E ratio. So possibly you fill your tub more cheaply with the high yielders.

I do agree that Total Return is what matters. But the bathtub analogy is too simplistic to explain it.

Well done! And let's not also forget that there is a market of "baths"; 100 in the FTSE 100, 500 in the S&P, etc, and there's no requirement to stick with any particular ones.

Up thread a little I gave a link to a bit of research by Dimson, Marsh & Staunton, for Credit Suisse, which I said, somewhat tongue in cheek, was to "provide some more buns" and indeed folks from both sides could find "buns" in it to support their view, but there are also some very important buns that have, as you note, been overlooked so far.

I do suggest that anyone involved or interested in this debate read it (again for those that say they already have. ) The research looks at stock markets over 111 years in 21 countries. (And it's not about either HYP or selecting by amount of dividends!)

[simoan]

The reason I find it so depressing is that I am talking about clearly intelligent people who are far from ignorant.

On the flip side of that though Si, I always get the impression that you're often happy to simply 'box-up' your little gems of disagreements with various income-investors, and then just assume for the sake of your well-advertised bias against them that they all then subscribe to the whole 'collection' of individual disagreements in your box...

Firstly, if you could please just address my points and avoid using my name (which I find a little condescending) it would help.

Secondly, you have accused me of bias and keep overlooking the point I have (IMHO) clearly made already on this thread i.e. there is absolutely nothing wrong with income investing for someone who has built wealth and is reaching their dotage. Nothing at all, its' a very sensible approach in that case. As such I am not biased against income investing at all. However, it is not a good way to build wealth for younger people who are still in full-time employment IMO. I thought I had made this point clear, but obviously failed.

Although, I would still question whether someone in their dotage should be 100% invested in equities of any kind, particularly if they are not aware of the risk involved in holding the very highest yielding shares. This is one of the main issues I have with an approach that only selects large companies that pay big dividends because they are perceived as safe investments because they are big, when in fact, they are not and in reality many have awful balance sheets loaded with debt. HYP is a much riskier approach than many people that practice it appreciate. Yes, large company shares are less volatile than smaller companies, but volatility is not risk. Risk is difficult to measure but is ever present on many company balance sheets.

Just for the record, even as a (largely) income-investor who's been very happy with their own approach for many years now (although I don't just look for highest-yields, and I don't just invest in the FTSE, and I don't follow a 'blinkered method', and I don't follow the 'strategic ignorance' approach, although I don't recall you ever actually recognising those aspects that you so dislike being missing from my own income-investment approach...), I have always and will continue to disagree with Rob and his 'Dividends, growth in dividends and reinvested dividends are the main source of equity returns over the long run' statement, that he's repeated many times over the years, both here and back on the Motley Fool boards, and where he's persistently failed to positively convince in any of the conversations where he's raised that proclamation, or at least any of the ones that he's stuck around in long enough to hear the rather more convincing arguments against it...

Well, I really don't understand why you're arguing for an approach you don't use tbh. Especially given how enamoured you seem to be with the results of TJH? Clearly you do not follow or implement a HYP. Why is that exactly? In fact, I wonder how many "HYPers" actually have anything close to 100% of their portfolio in a HYP strategy? Perhaps, in reality, there are very few even close to that position. In which case, I'd love to know why, if it's such a great strategy, they are not 100% committed?

So I just wanted to perhaps take the opportunity to, again, try to point out that we live in a much more nuanced world than one where someone can simply say 'they're all daft - they all think this, this, and this', and perhaps ask you to give people a little more credit sometimes, no matter which particular investment approach they might take, in terms of them sometimes even being able to align with your own views in some areas...

Complicated, isn't it...

Cheers,

Itsallaguess

Yes, investing is complicated. Much more nuanced, and that is the point I have been making. There is no simple solution, no silver bullet, no one approach, which is why I dislike the concept of the HYP approach so much. This idea that you just buy 15-20 FTSE100 shares in different sectors based only on the highest dividend yield possible, then sit back and hope, makes no sense to me. I even tried it with a small part of my portfolio for a couple of years (many years ago!) but gave up as it dawned on me it was clearly a terrible approach for someone in their late 30's. Just one of many mistakes I made when I started out. It's a lazy, no effort approach, that employs ignorance, and I realised I could do better if I put more effort into selecting shares. Of course, every investor loves receiving dividends, but as I have already made clear on this thread, they should not be the highest priority when choosing investments. It seems that you agree

All the best, Si

[simoan]

In essence much of the confusion regarding the role of dividends can be explained by a bath analogy.

A bath is being run, the taps are open, it fills up representing the earnings streams of the company (bath). The water in the bath represents the "value" so with greater volume in the bath, the richer or better, the bath owner is doing.

Turn your focus away from the taps, but look at the plughole and plug. If you only consider the water leaving the bath by this route, and measuring its volume, you might consider the water you catch in a strategically placed bucket, as your income, or dividends from running the bath taps. Some water remains in the bath, topped up by the tap water still entering, of course, but for (some) income investors it is only the plug water caught in the bucket that matters, and a bath with a plug in place is undesirable (despite the ability of that investor to access water at any point and scoop into his bucket from above).

For some, who wish to demonstrate the excellence of maintaining a fuller bath by using the bucket, instead of emptying it elsewhere as it fills from the plughole, they argue the bath is fuller if you empty your bucket back into the bath. By "reinvesting" this water the bath level rises and is unarguably of greater volume than a bath filling up from the taps, with no plug, and no bucket. Dividends (or buckets) are clearly good and better than letting the water go to waste. Dividends (and buckets) are therefore to be worshipped and lauded as "the main source of equity (water) returns over the long run".

A closer analysis reveals the obvious truth that actually it is the taps that are driving the volume of the water, and the long run return of filling the bath over time. Furthermore a bath fills quicker and more efficiently were there to be a plug in that plughole. A bath without a plug, even one where you catch the water and return it, is less efficient. Some of the water will be spilled, and some water missed as you transfer the buckets position from under the plughole to refill the bath. There are frictions in the model - which in the financial world are taxes, costs etc (see your link - top of page 18).

Earnings (taps) drive worth (bath volume) and the larger the retained earnings (water not escaping down the plughole to be captured and returned) the quicker the worth (bath volume) rises. But yes it is undeniable that a man with a bucket and an empty plughole is better placed than the same man, same bath, same absent plug, but no bucket.

dealtn,

That's one of the best analogies I have ever read. Is it your own creation? Genius, if so.

All the best, Si

Its complete rubbish because so much "wealth" was created in the ZIRP bubble my multiple expansion. Tesla, and other tech stocks did not achieve their valuations through earnings but because of higher valuations. That bubble is now deflating and investors are just left with memories of what the stock used to be worth. Amazon's cash flow is the same as that of decent mining company, but the valuations are vastly different because one is deemed to be bad for the environment and the other not.

I have no idea what you're talking about? Clearly the meaning of the analogy is lost on you. No-one has mentioned rubbish, over hyped, ridiculously overpriced companies like Amazon and Tesla. That's one hell of a big straw man you've built there!! Anyway, I hope you enjoyed your rant...

[Itsallaguess]

Just for the record, even as a (largely) income-investor who's been very happy with their own approach for many years now (although I don't just look for highest-yields, and I don't just invest in the FTSE, and I don't follow a 'blinkered method', and I don't follow the 'strategic ignorance' approach, although I don't recall you ever actually recognising those aspects that you so dislike being missing from my own income-investment approach...), I have always and will continue to disagree with Rob and his 'Dividends, growth in dividends and reinvested dividends are the main source of equity returns over the long run' statement, that he's repeated many times over the years, both here and back on the Motley Fool boards, and where he's persistently failed to positively convince in any of the conversations where he's raised that proclamation, or at least any of the ones that he's stuck around in long enough to hear the rather more convincing arguments against it...

Well, I really don't understand why you're arguing for an approach you don't use tbh.

I think it's worth remembering that I am not arguing for the HYP approach, and I think your statement above again neatly highlights the specific problem you've persistently got...

If you can recall, you said that you didn't know a single high-yield investor who had used the approach to generate wealth. I then pointed out that you'd been metaphorically stood next to one earlier in the thread when you were talking to Terry.

It's interesting that you now see me saying that as me 'arguing for the HYP approach', when I actually did no such thing...

Given the above, I'm happy to leave this particular exchange repeating what I've said earlier, given that we've now got an additional bit of evidence that this is clearly the case -

I always get the impression that you're often happy to simply 'box-up' your little gems of disagreements with various income-investors, and then just assume for the sake of your well-advertised bias against them that they all then subscribe to the whole 'collection' of individual disagreements in your box...

I don't think it's helpful in terms of useful debate for people to persistently look to corral other investors who might take a different approach to them into a big box marked 'HYP', and then use well-rehearsed anti-HYP points against them where such groundless assumptions are clearly not warranted.

Cheers,

Itsallaguess

[OhNoNotimAgain]

I have no idea what you're talking about? Clearly the meaning of the analogy is lost on you. No-one has mentioned rubbish, over hyped, ridiculously overpriced companies like Amazon and Tesla. That's one hell of a big straw man you've built there!! Anyway, I hope you enjoyed your rant...

Sorry, I didn't explain myself very well.

What I was trying to illustrate was that the "bath " of retained value is of no use to the investor until he gets the cash which he can either use or reinvest in a different "bath". Either he sells the bath or gets the dividends. However, if those retained earnings vapourise, and the stock never paid dividends, then he has nothing.

[simoan]

I think it's worth remembering that I am not arguing for the HYP approach, and I think your statement above again neatly highlights the specific problem you've persistently got...

If you can recall, you said that you didn't know a single high-yield investor who had used the approach to generate wealth. I then pointed out that you'd been metaphorically stood next to one earlier in the thread when you were talking to Terry.

Yes, but I made clear I meant someone who has a public record open to verification and scrutiny, such as a well renowned fund manager. With the greatest respect to TJH, not some bloke who puts numbers up on a BB and which are not open to verification. Anyway, we will never know the real source of his wealth, so the point is moot, but I suspect he started out with a rather large pot to start with.

I think we've now established there is no fund manager who uses this approach solely, maybe because he'd likely have been sacked by now I think your use of TJH was poor because he has a system that works for him. However, it's very easy to look like a successful investor by comparing your results in a flawed way against a very low bar such as the the FTSE100 (i.e. he uses an equal weighted approach versus a market cap weighted index for performance comparison). He believes he beats the FTSE100 because he selects the highest yields but he will never know unless he compares his results with an equally-weighted version of the FTSE100, including shares that do not meet his yield threshold. So, I would say the jury is out, and as I have made abundantly clear it is a far riskier way of investing than it looks. Also, TJH chooses to ignore the Jim Bowen issue: "Look what you could've won!". To choose the FTSE100 rather than a World Tracker ETF or the S&P500 to measure his performance against. On a risk adjusted basis, I would suggest the results of a HYP have been really poor in comparison to a World Tracker ETF over the past 10-20 years.

I always get the impression that you're often happy to simply 'box-up' your little gems of disagreements with various income-investors, and then just assume for the sake of your well-advertised bias against them that they all then subscribe to the whole 'collection' of individual disagreements in your box...

Well, your impression is completely wrong. In your scenario I would never own bonds and fixed income, but I do, so I have no general problem with income investing as part of a portfolio. Some distressed situations naturally lead to high yields. I mean, why would I hold 18 shares that yield >7%? The big difference is that my main reason for holding is not for the income - it's just a happy by-product whilst I wait for reversion to the mean to kick in; it's not central to the investment case.

Anyway, I'm bored with this discussion, and I imagine everyone else is bored too. No more from me as I want to spend some time researching some companies this weekend and I'm off to watch the rugby now

All the best, Si