Dividend warning

[Charlottesquare]

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.

There is no tangible and verifiable measure that a company is generating cash if it pays dividends, for one you get scrip divs, secondly company could be borrowing or flogging the family silver to cover the cash element of dividends.

Dividends re future earnings are merely a function of the efficiency of management to make future decisions with the profits earned, for some companies there may be few productive avenues of inward investment so if management retain they may say start doing ill advised purchases and therefore their paying dividends is a good way to partly fetter what they do , for others paying dividends and foregoing future profits on projects/expansion that might have been beneficial could, for the investor, be expensive long term.

It is surely impossible to have a carte blanche dividends good/dividends bad overview, surely each company's needs re its future apital expenditure and growth has to be factored into the equation.

[Lootman]

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

It is surely impossible to have a carte blanche dividends good/dividends bad overview, surely each company's needs re its future apital expenditure and growth has to be factored into the equation.

I agree that a mindless adherence to "dividends uber alles" is not a viable investment strategy. But nonetheless that is what is presented to us in some quarters here.

With HYP the driver is yield. For Ohno/Munro it is dividend amounts. At least with HYP the claim is that it is more like an annuity, implictly accepting the idea that capital may well suffer with such a strategy, and therefore asserts that "capital doesn't matter" just like it clearly does not with an annuity.

But Ohno, if I understand him, is claiming that dividends drive total return. His thesis seems to be that if you (say) bought the 50% of shares with the highest dividends then your total return will exceed a (very very cheap) cap-weighted tracker. And it is fairly easy to see whether that is true by comparing the total return of his fund to something like VUKE.

I use dividends as a factor in one of my strategies, but my focus there is on the quality and growth rate of the dividend, and not just blindly grabbing the biggest distributors. I am very happy to hold a share yielding 1% or 2% if it is solidly growing at 15% a year. Fishing around the dogs of the FTSE is not for me.

I also do not adopt a UK-centric approach. At least not while the return on equity in the US is close to 20%.

[OhNoNotimAgain]

But Ohno, if I understand him, is claiming that dividends drive total return. His thesis seems to be that if you (say) bought the 50% of shares with the highest dividends then your total return will exceed a (very very cheap) cap-weighted tracker. And it is fairly easy to see whether that is true by comparing the total return of his fund to something like VUKE.

.

No, I am not saying that

I did say this:

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.

[SalvorHardin]

I use dividends as a factor in one of my strategies, but my focus there is on the quality and growth rate of the dividend, and not just blindly grabbing the biggest distributors. I am very happy to hold a share yielding 1% or 2% if it is solidly growing at 15% a year. Fishing around the dogs of the FTSE is not for me.

I also do not adopt a UK-centric approach. At least not while the return on equity in the US is close to 20%.

Me too. I've long held the view that the bias towards high yielding shares, and against foreign shares, on TLF is the result of the dominance of the HYP boards.

If a share is yielding well above the market average it almost always has something which should make investors think more than twice about it. Such as a business that is being commoditised whereupon it will become a price-taker (a business with little or no pricing power).

And of course a company which pays out most of its profits in dividends doesn't have much to reinvest, so its future growth prospects can't be very good. Though in the case of some companies it may be much better for them to distribute profits rather than reinvest in low-return projects.

[Lootman]

if you invest across the whole market you get the winners, which get bigger, and the losers, which eventually fade away.[/i]

So your big idea is that you can out-perform the market by buying the market?

[OhNoNotimAgain]

if you invest across the whole market you get the winners, which get bigger, and the losers, which eventually fade away.[/i]

So your big idea is that you can out-perform the market by buying the market?

Depends how you buy it. The traditional way is weighting by mkt cap which gives a momentum and growth bias. Equal weighting gives a bias to small caps but weighting by dividends gives a bias to value.

[Luniversal]

It is often suggested that companies which retain profits rather than distributing them ought to show more capital growth, because their prospects and opportunities for ploughing back earnings are superior. But for the USA-- where there is an aversion to dividends relative to Britain-- this was disputed in a classic research paper:

https://www.researchaffiliates.com/docu ... Growth.pdf

I do not know if this has been refuted since 2003. The fallacy of preferring corporations whose directors hold back earnings is like favouring active investment managers: one assumes they know best and get decisions about allocation right more than randomly. Instead, they may be interested in empire-building for its own sake, to preen among their peers or feather their nests with incentive schemes.

I am the owner; directors are my servants. I want cash rewards asap and plenty of it, steadily and for ever. Nine-tenths of investors around the world, according to a poll last year by Schroders, are primarily or solely in the game for income. People who bet on share prices and flap about 'total return' are weirdos .

David Stevenson at Citywire has drawn on research by Andrew Lapthorne of Societe Generale. It throws light on the age-old argument about how much dividends contribute to overall returns:

https://citywire.co.uk/funds-insider/ne ... e=features

In Britain, France, Germany and Australia 'multiple expansion'- PER linked to share price growth, after retained earnings and/or yield were reappraised- detracted from total returns on average since 1970. Only the size of the initial yield and the rate of growth were positive for TR in these markets-- although it was also important that dividends should be reinvested, not spent or cash substituted for such spending.

The contrast with America and Japan, where multiple expansion revved up TR, is striking. However fiscal policies and a reaction against buybacks are said to be boosting distributed income. Several British funds and trusts launched on that expectation since 2010, when I found a dearth of global equity income ITs and included only Murray International in my 'baskets'.

Stevenson's piece echoes impressions I formed when investigating HYP and other theories at the Motley Fool. For example:

a focus on high yield stocks can be dangerous – the red line shows the expected market dividend yield, the blue line the actual yield. The simple message is that if it looks too good to be true in yield terms, then it probably is. High dividend yields frequently spell investment doom.

Don't chase the yield, or Good enough is better than Even Better.

Stevenson writes: 'you need to positively screen for, say, debt and gearing or earnings growth'. This is a fundamentalist's way of perceiving that for long-term, uninterrupted expansion of real income one should beware of the immediately 'juicy' yields of, say, Henderson High Income or Merchants, as found in my Basket of Eight. Incline to the robust and rising revenues of, say, Lowland or Bankers in the Basket of Seven, despite their lower historic yields.

It seems a statement of the obvious: every fund manager claims to be weeding out the duds and traps, accumulating portfolios full of Buffettesque reliables or 'aristocrats'. But are they?

A table in the article about UK's biggest aggregate divi-dispensers highlights a concern I voiced in the last annual review of 'LuniHYP100'. It is suggested that income hunger in the QE era conditioned directors to overpaying which will end in cuts and tears all over the shop.

Historically this may sound alarmist. Even during the GFC of 2008-10, at worst (2009/08) 55% of the companies in my database of almost 200 larger-cap saints and sinners among the high yielders maintained or raised payouts in real terms from year to year. Overall, that universe showed a real drop of 12% in income in 2009, and no other annual shrinkage during the second decade of the 21st century-- albeit possibly because of the overpayment habits alleged above.

Hard to prophesy, since the last ten years have been unprecedented in markets, but it could go worse. We may face prolonged adjustment to the post-QE epoch: low economic growth, technological disruption, far higher real borrowing costs and so abatement of investor pressure on equities to pay out, as cash and bonds compete anew. We may see weak dividend growth among the trusties, punctuated by upsets: pulling down the combined real growth rate of equity income to zero at best.

My two HYPs, Footsie and midcaps, are racking up dividend growth of ~15% pa. I doubt it will last longer than most fool's paradises. So I build up income reserves against a prolonged stretch of stagnation, if no worse, while monitoring a paper portfolio of alternative quasi-bond stocks such as infrastructure and renewables. Unfortunately they have so far turned out to be less than bomb-proof either.

[BusyBumbleBee]

That was a very well thought out post, Luniversal - thank you. I won't requote you in full but will select a few bits

I am the owner; directors are my servants. I want cash rewards asap and plenty of it, steadily and for ever. Nine-tenths of investors around the world, according to a poll last year by Schroders, are primarily or solely in the game for income.

How right you are and how few directors actually realise that - more often than not running the company for their own benefit. There are precious few companies that have been around fifty years and the biggest today are nearly all new ones in new technologies which haven't been around that long. Some have already re-invented themselves along the way (Microsoft {used to do accounting software} - and Apple {used to do geeky computers} are two examples. Even the foundations of their business are really new: TCP/IP was only adopted in 1983 and - the World Wide Web went live to the world in 1991 with little fanfare. Most of us cannot remember the world before Facebook etc. How long will it be before everything dependent on web technology is replaced by something else and the stocks dependent on it will become like other cutting edge technologies of yesteryear such as the railways, steel production and motor cars. So I also want cash rewards and plenty of them - and I want them well before the technology becomes obsolete when the share prices will collapse. In other words I want dividends and not to be dependent on my wit to get me out of the stock before it collapses when it becomes old technology or indeed just a utility.

...a focus on high yield stocks can be dangerous... The simple message is that if it looks too good to be true in yield terms, then it probably is.

How true. In my naivety - when I first started investing , I bought the highest yielding stock in a sector (about 9% at the time). Really stupid because I had done little research (none in reality) but luck was on my side cos some bigger fool than I made a bid for the whole company at a 30% premium to what I had paid just two days after I bought it. Taught me a couple of things that - not least that the market does not always price things correctly and, of course, to research things better.

High dividend yields frequently spell investment doom... Don't chase the yield, or Good enough is better than Even Better.

or "Perfection is the enemy of the Good".

... a paper portfolio of alternative quasi-bond stocks such as infrastructure and renewables. Unfortunately they have so far turned out to be less than bomb-proof either.

The Green Infrastructure ITs (BSIF, FSFL, JLEN, NESF, TRIG and UKW) have done me really well. Particularly as every so often one or another decides to issue new shares which always knocks the share price. This has enabled me to trade between them (cheap because they are all channel island registered and therefore no stamp duty) as their share prices go walkabout every year. They all yield about 6% so after 16 years I will have my money back and still have an asset because the asset life is about 25 years. Furthermore the gov't RPI linked subsidies mean the dividends rise each year and are due to continue for at least 20 years. Even after that 20 years the grid connection and the site itself have considerable value - unless of course we manage to conquer nuclear fusion!
regards - BBB

[Pastcaring]

What an article said,what a research paper said,how many people agree or disagree on some thing Splitting hairs over the meaning of words or sentences

I find it all very simple and obvious.I bought a business expecting a share of the profits for the rest of my life.

Much like a small business like ,local butcher,local fish and chip shop etc.When I lived in the UK some of these shops had been going for 3 and 4 generations.

I can trace my largest shareholding back to around 1991, and other companies back to 1981.All they have done is pay dividends every year,my share of the profits,bollox to all the weird theories.

In the future I expect them to do exactly the same,give me money every year until I die.

Which is best,very easy to work out.The share bought in 1981 ish is WBC.Round numbers $2 a share.

Average wages then around $10K per annum,perhaps $12K .Spend $10 K then, buy 5000 shares. Reinvest the dividends and you now have around 40,000 shares.Each of those shares is now worth around $27 each .Shall we call it $1,000,000. Each of those shares now produces $1.94 in dividends last year,call it $77,000 shall we.

I wasted an entire decade listening to clowns and their theories,without seeing the sheer simplicity of it.People quoting articles and experts,inventing their little tin gods for themselves,my tin god is in the papers,my tin god is on TV ,my tin god is a genius,to hell with the facts.

I fully expect that company to pay dividends for the rest of my life.Just as that close to 40 years of investing has been people so full of their own importance,when they have been so full of crap, has never changed, I expect what remains of my life to repeat the same.People flatly refusing to see the facts because they don' t fit in with what they want to see.

That company,WBC ( ASX ) has been doing the same thing for 202 years now.
Make a profit,pay it to the owners of the company.Keep a bit back to grow the company.

Next dividend is reported early next month,there will be none stop tears and bullshit how they must be ripping people off.They have made a huge profit,they aren' t paying tax.Why doesn' t the govt make them pay more tax.Why doesn' t the govt do so many things that the crowd tell them to do.

I expect their net profit margin to be around 0.9 %.Nobody owns shares in them,nobody is going to buy shares in them,too risky

If I last another 10 years then this company will have done the same thing for 212 years.

The crowd will have repeated the same bullshit for 212 years.

The human race is so entertaining isn' t it.

[Pastcaring]

I thought I had better check it,last dividend was 94 cents,so annual dividend is $1.88.

As an aside in the early days of the almighty net I would attend spruiking meetings,mainly to take the P and see how bad the sales pitch was.
The days when computers were not very well understood ( which is today for me).Day trading was very fashionable and nobody had to go to work,the dream they sold.All you had to do was buy this wonderful programme,spend 5 mins in front of the computer which was downloading information all night,and it would tell you which shares to buy.Five minutes a day,never work again,make a fortune.Amazing the crap that people want to believe when they are sold dreams.

I started gently and asked,if they have the goose that lays the golden eggs,why do they want to sell it to me.The usual glib answers,the planted people in the crowd making their noises.The highly regarded stockbroker ( I hadn' t heard of,quite normal) making a very convincing speech how he used the software for his clients.They were making a fortune,he couldn' t speak highly enough of the salespeople and would recommend everybody buys the programme.

Then the plant that jumps up,pulling the cheque book out of his pocket,who do I make the cheque out to,this is wonderful .

I cut loose and really started to take the P .I was asked to leave.Told people exactly what I had learnt,just learn how to compound.
Gave the name of a company,told them to watch it for 40 years and keep reinvesting dividends.Spend 12 months average wages on that company and do nothing after that..

Company is ANZ,they have been doing the same thing for 190 years now roughly.I expect them to continue doing the same thing,there is a chance they can go bust,I' m not expecting it in my lifetime .

Of course nobody is ever going to do that.

The only lesson that history teaches us is that people refuse to learn the lessons that history teaches us

Who would be silly enough to believe that?

[Clitheroekid]

Company is ANZ,they have been doing the same thing for 190 years now roughly.I expect them to continue doing the same thing,there is a chance they can go bust,I' m not expecting it in my lifetime .

Of course nobody is ever going to do that.

The only lesson that history teaches us is that people refuse to learn the lessons that history teaches us

Who would be silly enough to believe that?

Unfortunately, many people thought like you, and invested their life savings in similar companies that were thought to be very dull but very safe - companies such as Lloyds Bank (a standard `widows and orphans' share) and RBS - only to see their investments virtually wiped out.

Yes, there are many companies that have been consistent winners for decades, but the problem is we only know this with the benefit of hindsight. The difficulty is selecting companies that will perform like this in the future, and I personally think this is more difficult than it ever was.

Although we have virtually unlimited information available that theoretically helps us in our decision making, the world is changing more quickly and more fundamentally than ever, and just because a company has been doing well for the last 10 years doesn't mean it can't go bust tomorrow.

Look at `safe' shares like the big retailers, who a few years ago were part of every low risk investor's portfolio. There are all too many recent examples of companies that looked to be blue chip one moment but in a frighteningly short time lost half or more of their value.

And I suspect this scenario will become more common as the way we live our lives changes more and more quickly. Generally speaking, the bigger (and the more blue chip) the company the less able it will be to react to changing trends. They're like the supertankers of the stock market, and I can see very serious problems ahead for many such traditionally `safe' companies, tobacco companies being a prime example.

It saddens me to say it, as I've always advocated making your own investment decisions, but I think there are very few companies these days where you can with any real confidence follow the `buy and hold forever' strategy that you (and most HYPers) endorse.

I'm afraid I've come to the conclusion that unless you're prepared to keep a very close eye on what's happening in the world, assess (accurately!) how your investments will be affected and manage your portfolio more actively than has traditionally been thought desirable you're better off entrusting your money to a good investment trust / fund manager.

[SalvorHardin]

It saddens me to say it, as I've always advocated making your own investment decisions, but I think there are very few companies these days where you can with any real confidence follow the `buy and hold forever' strategy that you (and most HYPers) endorse.

I agree. To my mind the operating companies that you can realistically use in "buy and hold forever" (I prefer to add "...but keep an eye on") are shares which meet Warren Buffett's criteria of a "economic moat"; things which make the business resistant to competition and technological change, as well as changing consumer habits. Factors such as strong brands, network effects, geographical defences and other massive barriers to entry (including regulations). Companies like this won't meet the HYP criteria because they don't yield enough and many of them are foreign.

I prefer the sort of company where if I was put into hibernation for 20 years, I would expect it to still exist when I was woken up and to have greater sales and profits than when I went into cold sleep. The vast majority of my portfolio nowadays, asides from investment trusts, consists of companies like this with decent moats (or virtually impenetrable moats in the case of the West Coast North American railroads).

The only two shares which are major holdings for me that get mentioned on the HYP boards are Diageo and Unilever, neither of which meets the HYP criteria because they don't yield enough. Diageo is one of those companies for which I can't come up with a scenario which sees its share price halve overnight. Even if a a large part of the world decided to implement prohibition, there would realistically be a period of several years where the signs were obvious - we've seen this scenario play out with tobacco companies over the past couple of decades.

You still need to keep an eye on these moated companies because of change, particularly technological developments. As Berkshire Hathaway's Charlie Munger says - “The great lesson in microeconomics is to discriminate between when technology is going to help you and when it is going to kill you. And most people do not get this straight in their heads.”.

Most high street retailers have been screwed by the combination of changing customer habits (not just online shopping), the state using them as a cash cow with a rates system that doesn't reflect business reality, local authorities deterring town centre shoppers though excessive car park fees (common in the smaller towns) and high rents (particularly rising only rents). This has a knock-on effect for most property companies whose published NAVs don't reflect the market's perception that their properties are really worth a lot less. Ultimately this means lower dividends.

Warren Buffett on moats
https://www.cnbc.com/2018/05/07/warren- ... iness.html

[BusyBumbleBee]

Most high street retailers have been screwed by the combination of changing customer habits (not just online shopping), the state using them as a cash cow with a rates system that doesn't reflect business reality, local authorities deterring town centre shoppers though excessive car park fees (common in the smaller towns) and high rents (particularly rising only rents)

To this list must be added the sheer greed of the major chains. They buy something for less than a fiver and sell it for a penny less than a twenty pound note. This leads property owners and gov't to take a slice of this by taking more from them. When times were good and they could get away with it, the retailers were happy to pay for what was little more than extortion. BUT they did agree to pay the increased rents with upward only revisions. The second tier retailers (LIDL's is a prime example) only pay half the rent of flagship tenants. So look for the REITS which specialise there.

Some smaller towns - certainly here in Norfolk - recognise the importance of the retail sector and do not charge for parking at all.

Oh and, by the way, SalvorHardin, there was a question on University Challenge last night which made reference to Psycho History