mc2fool wrote:The point OhNoNotimAgain (ex Munroman) was making was that whereas Colin had said he (Munroman) was promoting high yields, what he is actually advancing is high total dividends payouts. It's dividends his fund weights by, not yield.
Ah makes sense now. I had no idea OhNoNotIm was referring to Colin's post.
I believe that his fund actually weights by forecast dividends rather than historical dividends. So right now it is estimates of 2019 dividends that drive weightings and not actual 2018 payouts. That introduces another opportunity for error, since forecasts can turn out to be wrong.
GoSeigen wrote:Okay... then such a strategy would underperform if the market valued dividends above shareholder equity and if company distributions were excessively high. That's most likely occur when yields are low, like now. Conversely, the strategy is presumably flattered by back-testing over the high-yield years of the 60s to 80s... Haven't thought about it too much though...
I think there are a few factors that drive returns with such an approach. Clearly it favours the very largest companies, since they typically pay the biggest dividends. If large-caps under-perform, so will this fund.
Dividends partially correlate to value, so this fund might do well when value is doing well, but lag when growth out-performs.
In terms of risk, it is a UK-only fund, so you have single-country risks like political risk, regulatory risk etc. And there are some important sectors that are hard to find in the UK; the sectoral profile is skewed towards natural resources in particular, pharma and financials.
What would worry me right now is that dividend cover is low and many of these types of company can barely support their dividends out of earnings. The opportunity for dividend growth is therefore muted, and dividend cuts could happen. The strategy takes no account of how much of a struggle it is for a company to pay that dividend. In fact it doesn't look at earnings at all, nor various quality factors that can drive returns.
It's a one-dimensional approach to investing. You have to believe that dividends and only dividends drive returns, and that everything else can be ignored.