Dividend warning

[Clitheroekid]

An interesting article from Citywire - https://citywire.co.uk/funds-insider/ne ... _Factsheet

[simoan]

An interesting article from Citywire - https://citywire.co.uk/funds-insider/ne ... _Factsheet

Do dividends matter a lot?

What really matters is that a company converts profit efficiently into cashflows, and for a quality company (i.e. one which can generate good returns on capital) it is much more efficient for them to re-invest those cashflows back into the business rather than pay them out as dividends. BTW I don't want to get involved in a HYP discussion, and as you can probably tell, I watched the Fundsmith ASM last night

All the best, Si

[Dod101]

Yes but there is nothing new in it. In fact I think the one comment to take note of is right at the foot, that SSE and BT are both income traps, to which one could add Vodafone. And I agree with simoan.

Dod

[BrummieDave]

Dod just got there ahead of me.

Whilst there is nothing new in the article it does pull together in one concise read many other articles out there, multiple posts on here, and other sources of info and data comparing the pros, cons, risks and rewards, of TR and income seeking investment approaches.

Thanks for posting.

[OhNoNotimAgain]

Funny how a journalist from Citywire can say how important dividends and reinvested dividends are in total returns when others get attacked for saying the same thing.

However, the thrust of his piece is wrong because UK dividends overall are growing heathily and forecast to continue doing so. And in fact the biggest dividend payer in the UK has just bought the largest domestic battery maker in Germany and is therefore doing exactly what David said it should.

[GoSeigen]

Funny how a journalist from Citywire can say how important dividends and reinvested dividends are in total returns when others get attacked for saying the same thing.

He doesn't get attacked because he says practically the opposite to that other person!


Look at his chart half way down entitled "A major part of the historical return comes from reinvesting the dividend" [my bold]. He says a major part of the return comes from dividends, not 90% -- and without resorting to ridiculous maths.

If you look at that chart you can see exactly what he means by a "major part": it's just above 50%. Returns without reinvesting dividends are 2.x%pa. Returns with reinvested dividends are 5%pa.

So he is saying dividends contribute about 55% while capital growth supplies c45% of returns. [EDIT: Numbers fixed, reading from first and last bars in the chart.]


Which IMO is perfectly reasonable.

GS

[geoff1309]

Can you please tell me who is the biggest div. payer that is supplying Germany with batteries , many thanks Geoff 1309

[OhNoNotimAgain]

Can you please tell me who is the biggest div. payer that is supplying Germany with batteries , many thanks Geoff 1309

https://www.ft.com/content/12f343d6-310 ... 016697f225

[OZYU]

Funny how a journalist from Citywire can say how important dividends and reinvested dividends are in total returns when others get attacked for saying the same thing.

He doesn't get attacked because he says practically the opposite to that other person!


Look at his chart half way down entitled "A major part of the historical return comes from reinvesting the dividend" [my bold]. He says a major part of the return comes from dividends, not 90% -- and without resorting to ridiculous maths.

If you look at that chart you can see exactly what he means by a "major part": it's just above 50%. Returns without reinvesting dividends are 2.x%pa. Returns with reinvested dividends are 5%pa.

So he is saying dividends contribute about 55% while capital growth supplies c45% of returns. [EDIT: Numbers fixed, reading from first and last bars in the chart.]


Which IMO is perfectly reasonable.

GS

GS,

Do not waste logic on Munroman, alias OthnotHim... Time and time again he has proved extensively on TMF and TLF that he has not got a shred of the ‘substance’ in his veins.

Any portfolio which has returned the vast majority of goodies through just dividends would be a bad portfolio, he will never see that in this lifetime. It is the returns on capital invested which produce divis as a byproduct, not the other way round, thus capital appreciation must come to get divis in the first place in a sustainable way.

For info, looking at all our very diversified as to method, aspects, coverage and cap,portfolios covering more than four decades, the figures are 47% capital, 53% divis. I suppose now he will argue that since my first figure is lower it proves his point!

Regards

Ozyu

[OhNoNotimAgain]

Funny how a journalist from Citywire can say how important dividends and reinvested dividends are in total returns when others get attacked for saying the same thing.

He doesn't get attacked because he says practically the opposite to that other person!


Look at his chart half way down entitled "A major part of the historical return comes from reinvesting the dividend" [my bold]. He says a major part of the return comes from dividends, not 90% -- and without resorting to ridiculous maths.

If you look at that chart you can see exactly what he means by a "major part": it's just above 50%. Returns without reinvesting dividends are 2.x%pa. Returns with reinvested dividends are 5%pa.

So he is saying dividends contribute about 55% while capital growth supplies c45% of returns. [EDIT: Numbers fixed, reading from first and last bars in the chart.]


Which IMO is perfectly reasonable.

GS

And in the graph above does it not indicate that about 4 of the 4.8% total return of the UK stock market from 1970 to the third quarter of 2019 came from dividend yield and about 1.5 came from dividend growth while multiple contraction took away about 0.5%.

Or, to combine the two graphs he is saying 5 of the 4.8% return came from dividends. What percentage would that be?

[GoSeigen]

Do not waste logic on Munroman, alias OthnotHim... Time and time again he has proved extensively on TMF and TLF that he has not got a shred of the ‘substance’ in his veins.

Thanks for you thoughts, but I should defend MM by saying he has always been polite to a fault, never abusive, so I feel the above is unfair. If someone can be a gentleman I am always happy to engage (though at times impatiently, but that's my problem).

Also, I post an opposing view for the benefit other readers more than for MM, since I think his mind is already made up.

Any portfolio which has returned the vast majority of goodies through just dividends would be a bad portfolio, he will never see that in this lifetime.

Sorry, but I don't accept this either. There is nothing wrong with a share which is like a perpetual bond, just paying a regular dividend. The trick is to recognise when it's a good time to hold such a share and when it's not so good.

My quibble is with MM's repeated claims in the past that:
1. over the long term
2. 90% of equity return comes from dividends
3. because if you divide a price index's gain by its equivalent total-return index gain the answer is about 10% [after a long enough period].

It's the entirety of the argument with, crucially, its fallacious dependence on the third mathematical point which I have questioned.

It is the returns on capital invested which produce divis as a byproduct, not the other way round, thus capital appreciation must come to get divis in the first place in a sustainable way.

For info, looking at all our very diversified as to method, aspects, coverage and cap,portfolios covering more than four decades, the figures are 47% capital, 53% divis. I suppose now he will argue that since my first figure is lower it proves his point!

This is a fallacy of composition: the behaviour of the portfolio is not necessarily the same as that of its components and vice versa. What I mean is, within that aggregate result will be some shares whose entire return could be attributed to capital growth (never paid a dividend, e.g. BRK) with others whose entire return (or even >100% of the return) has come from dividends (capital value has failed to rise) and there is a broad spectrum lying between these extremes.

I have no issue in principle with investors targeting either the income-only shares or the growth-only shares. Neither of those strategies will work all of the time though.


GS

[GoSeigen]

And in the graph above does it not indicate that about 4 of the 4.8% total return of the UK stock market from 1970 to the third quarter of 2019 came from dividend yield and about 1.5 came from dividend growth while multiple contraction took away about 0.5%.

Or, to combine the two graphs he is saying 5 of the 4.8% return came from dividends. What percentage would that be?

I confess I do not understand that graph at all. I don't know what "dividend yield", "dividend growth" and "multiple expansion" mean in the graph. If you could point us to the original research with definitions I might have a shot at understanding it -- or feel free to define the terms if you understand them.


GS

[Alaric]

I would have thought that you look at a control period assuming a lump sum investment.

You reinvest the dividends in the original investment. At the end of the period, you have a market value. You can solve for the rate of return.

That's an aggregate "total return". If you want to split it, you know the return on the initial capital derived from the price movement. You also know the aggregate total of dividends paid. The balance is the effect of reinvestment of dividends.

[yorkshirelad1]

An interesting article from Citywire - https://citywire.co.uk/funds-insider/ne ... _Factsheet

Interesting article. What struck me is that the word "cover" only occurs once in the article. Am I alone in thinking that dividends shouldn't be discussed without at least a small nod to cover. "cover" occurs in a table with some stats, the most worrying of which is a dividend cover of 0.7 for SSE. That would worry me. I like to see div cover of 1.5 of greater. Not in isolation mind, but anything below that has my antenna quivering.....

[Avantegarde]

The continuing discussion about the contribution of dividends to total return irks me for one reason: the language used sometimes seems to attribute non-existent magical properties to dividends. In reality, I could spend all my dividends but top up my investments by exactly the same amount purely from my earned income (or indeed any other sort of income). The effect would be precisely the same. This "dividend reinvestment" discussion is really pointing out that enhanced returns can come simply from regularly topping up one's investments. And that, if I may say so, is a statement of the bleeding obvious. From an arithmetical point of view, where that regular top-up comes from is irrelevant to its effect on the calculation of a portfolio's total return.

[mc2fool]

The continuing discussion about the contribution of dividends to total return irks me for one reason: the language used sometimes seems to attribute non-existent magical properties to dividends. In reality, I could spend all my dividends but top up my investments by exactly the same amount purely from my earned income (or indeed any other sort of income). The effect would be precisely the same. This "dividend reinvestment" discussion is really pointing out that enhanced returns can come simply from regularly topping up one's investments. And that, if I may say so, is a statement of the bleeding obvious. From an arithmetical point of view, where that regular top-up comes from is irrelevant to its effect on the calculation of a portfolio's total return.

Errr, yes, and one could say exactly the same of compound interest in a savings account.

In reality, I could spend all my interest but top up my savings account by exactly the same amount purely from my earned income (or indeed any other sort of income). The effect would be precisely the same. The "compound interest" discussion is really pointing out that enhanced returns can come simply from regularly topping up one's savings account. From an arithmetical point of view, where that regular top-up comes from is irrelevant...

Well sorry, but I just don't find that a useful way of looking at either of them. What might be irrelevant from an arithmetic point of view isn't so from a practical one.

[Lootman]

The continuing discussion about the contribution of dividends to total return irks me for one reason: the language used sometimes seems to attribute non-existent magical properties to dividends. In reality, I could spend all my dividends but top up my investments by exactly the same amount purely from my earned income (or indeed any other sort of income). The effect would be precisely the same. This "dividend reinvestment" discussion is really pointing out that enhanced returns can come simply from regularly topping up one's investments. And that, if I may say so, is a statement of the bleeding obvious. From an arithmetical point of view, where that regular top-up comes from is irrelevant to its effect on the calculation of a portfolio's total return.

Errr, yes, and one could say exactly the same of compound interest in a savings account.

In reality, I could spend all my interest but top up my savings account by exactly the same amount purely from my earned income (or indeed any other sort of income). The effect would be precisely the same. The "compound interest" discussion is really pointing out that enhanced returns can come simply from regularly topping up one's savings account. From an arithmetical point of view, where that regular top-up comes from is irrelevant...

Well sorry, but I just don't find that a useful way of looking at either of them. What might be irrelevant from an arithmetic point of view isn't so from a practical one.

The issue to me is simpler. Will an investor get a superior set of future cashflows by skewing his portfolio to ensure that its dividend yield is above the market average?

Ohno seems to believe that skewing towards dividends or yields will boost returns, but I see no evidence for that, and certainly the returns on his fund indicate the exact opposite. And the lower-yielding US market has greatly out-performed the higher-yielding UK markets now for something like 30 years.

There is no free lunch. If you wish to receive more of your returns in the form of "income" and thereby sacrifice future growth in your portfolio value, then that might be the right decision for you. But to argue from there that HY investing is a free lunch seems wide of the mark, and it is certainly not my experience in the markets.

[vrdiver]

The continuing discussion about the contribution of dividends to total return irks me for one reason: the language used sometimes seems to attribute non-existent magical properties to dividends.

"Irk" might be a bit strong, but I would prefer it if investment journalists etc compared like with like. As Lootman pointed out above, if you reinvest the dividends or spend them, then the investment return will be different!

The value of the dividend, to me, is that it saves having to make any decisions about capital; I don't have to trade in order to receive an income. It is simply much easier (lazy) to select companies that pay me a regular dividend, than to have to decide which and how much of any company I should sell off in order to derive an income.

I suspect there is a price to be paid for such convenience; companies throwing off cash may well be growing more slowly than those that can find use for it within the business. However, there are plenty of companies that can burn cash with no significant value add either, so there's a balancing act between best total return, risk and ability to sleep well at night (albeit some HYP-like shares may cause loss of sleep!).

For a young investor with plenty of time ahead before needing the money, I'd recommend looking at both types of company, (or rather ruling neither out) and to learn what sort of investment is psychologically comfortable. There's also no guarantee that the past performance will continue. E.g. just because the FTSE 250 outperformed the FTSE 100 over a 10 year period is no recommendation to ignore the FTSE 100...

VRD

[OhNoNotimAgain]

Funny how a journalist from Citywire can say how important dividends and reinvested dividends are in total returns when others get attacked for saying the same thing.

He doesn't get attacked because he says practically the opposite to that other person!


Look at his chart half way down entitled "A major part of the historical return comes from reinvesting the dividend" [my bold]. He says a major part of the return comes from dividends, not 90% -- and without resorting to ridiculous maths.

If you look at that chart you can see exactly what he means by a "major part": it's just above 50%. Returns without reinvesting dividends are 2.x%pa. Returns with reinvested dividends are 5%pa.

So he is saying dividends contribute about 55% while capital growth supplies c45% of returns. [EDIT: Numbers fixed, reading from first and last bars in the chart.]


Which IMO is perfectly reasonable.

GS

Any portfolio which has returned the vast majority of goodies through just dividends would be a bad portfolio, he will never see that in this lifetime. It is the returns on capital invested which produce divis as a byproduct, not the other way round, thus capital appreciation must come to get divis in the first place in a sustainable way.

Ozyu

Dividends are just one way of quantifying a value bias. But they do have additional benefits.

[OhNoNotimAgain]

Many responses have focussed on the merits or otherwise of dividends and in a way it is a pity that the discussion has gone that way.

In my view dividends are just a way of quantifying a value bias. The other three fundamental measures of a company; book value, revenue and profits are all very subjective as Patissiere Valerie is only the latest in a long line of corporate failures to demonstrate.

The attractions of dividends are twofold.

One is that they are a tangible and verifiable measure that the company is actually generating surplus cash in a way that the other three measure do not. Selecting companies, and biasing a portfolio towards, companies that generate cash is one way of avoiding overhyped and overvalued stocks that can crash and burn. Yes I know lots of dividend payers have crashed and burned but the evidence is that fewer of them do. It is not foolproof, but it is quite an effective filter.

Their second, and to my mind, less important factor is this issue of compounding returns.

If you believe, as I do, that only three things matter when it comes to investing:

Reinvesting income
invest for as long as possible
Minimise costs

Then it makes sense to do everything possible to maximise the first two and mimise the last.

The caveat is that this has to be across the whole market and not just a handful of high yielding stocks because yield is a function of price and price can indicate a seriously wounded stock, a yield trap if you like. But if you invest across the whole market yoyu get the winners, which get bigger, and the losers, which eventually fade away.

A bit like a horse race. Bet on all of them and you are bound to get the winner.

As to the magnitude of the dividend effect I have long ago given up trying to quantify it.