Capital

[Itsallaguess]

To be fair to 1nvest, he doesn't just go on about gold, he almost always mentions it in the context of an asset allocation strategy, and very often the ones he discusses don't involve gold at all.

If he focuses on gold, I think it is to demonstrate why investors shouldn't automatically exclude it from their portfolios.

But when someone tries to demonstrate that 'dividends are a bad idea' because the Sage of Omaha has said something negative about them, then I think it's only fair to then look at what he's also got to say about something they themselves endlessly promote, in terms of that gold-coloured stuff..

With that said, there's clearly a lot of merit in the types of things being discussed in some of those asset-allocation threads, although I do wish there was a big reduction in the amount of repetitiveness that goes on when every other thread nowadays seems to get rapidly turned into yet another 'Talmud-style' discussion, from which point eyes start to glaze over somewhat when the poor OP's original topics get blurred out of existence...

Perhaps a separate, in-depth thread on the topic would be a good idea, which could then be linked to from other threads, without the need for yet more 'Talmud-take-overs'...

Cheers,

Itsallaguess

[Alaric]

A alternative of course is to project the number of life years remaining, say a 70 year old projecting 20 years of life remaining

That's something of a fallacious approach as an expectation of 20 years is equivalent to a probability distribution of remaining life starting from months at the shortest and with a tail extending past the age of 100.

[tjh290633]

A alternative of course is to project the number of life years remaining, say a 70 year old projecting 20 years of life remaining, and draw 1/20th of the total value in year 1, 1/19th in the second year ... etc. Which would likely provide a higher income. A risk is that you outlive that money, but at age 90 it may be more a case of not understanding that and where your home has been sold in order to fund late life care costs.

And when you get to 90, hale and hearty and have maybe 10 or 15 years of life in prospect, what do you do then?

Centenarians are becoming more and more common.

TJH

[Wizard]

Wizard:

As regards my actions concerning BT, I suppose each of us has a different approach in practice. I took the decision to sell - as you say, this was due to the company's action over the dividend.

Having taken that decision, the next practical question was, when to sell?
My individual approach to this is that there is really no point in selling if the share price is increasing. One may as well take what one can before re-deploying, so rather than sitting there thinking about it, I let the market do it for me. If the trend is up and one makes a little extra capital, then the winds of fortune have helped a little: but by setting a stop loss, one has safeguarded against a further loss of the seed corn which produces a dividend return.

That's the reasoning: in my view it's eminently sensible in a practical way, but the picking of the bare bones or theoretical fretting I'll leave to others

Arb.

I agree with you Arb your reasoning was indeed eminently sensible and very practical. But it does seem pretty clear from what you have written that there was an element of consideration of capital included in it, which is all I have been trying to suggest.

[Wizard]

I don't think that the two are connected. The point about capital is not that it doesn't matter, but that you should ignore market movements and concentrate on how the dividend income flow is doing...

...The real point about this is that all share values are relative to one another. This is why I use the median holding value to decide on what I should do. The market goes up and down, and I ignore market movements, just the movements of "my" shares relative to each other. The difference for me is, whether one chooses to ignore market movements and allow holdings to find their own level, regardless of their share of portfolio value, or to set an upper limit on percentage of portfolio value (or the median holding value) and to adjust the portfolio when that limit is breached. Sometimes the market will do it for you, bringing a high flying share back to earth. More often it will not...

I struggle to find much logic in what you are saying. You say you ignore market movements and focus on the relative value of the shares in your own portfolio, by why do you think those relative values move, well blow me down it is because of market movements in the price of the shares you hold. To say you are interested in the value of your shares relative to each other but that you ignore market movements up and down, the very thing that changes the rlative value of your shareholdings is bizarre, at best. But your approach takes it one step further, if a shareholding exceeds a certain value relative to the value of the median shareholding you then trim that shareholding that makes up too much of your portfolio, so your actions are directly driven in this instance by market movements in the capital value of your shareholdings.

Now go back to the example of Arborfield's recent disposal of BT. Now I do agree that relativity is important here, had he been able to sell BT at 200p rather than at closer to 100p he would have been able to buy twice as much income to replace that he lost when BT cancelled its dividend. I would therefore argue that the capital value is important, surely nobody would disagree with that? You may say, ah but the point is you should ignore market movements, but how can that fit with setting up a stop loss and letting the market decide if you sell of not based on the share price movement up or down?

[tjh290633]

I struggle to find much logic in what you are saying. You say you ignore market movements and focus on the relative value of the shares in your own portfolio, by why do you think those relative values move, well blow me down it is because of market movements in the price of the shares you hold. To say you are interested in the value of your shares relative to each other but that you ignore market movements up and down, the very thing that changes the rlative value of your shareholdings is bizarre, at best. But your approach takes it one step further, if a shareholding exceeds a certain value relative to the value of the median shareholding you then trim that shareholding that makes up too much of your portfolio, so your actions are directly driven in this instance by market movements in the capital value of your shareholdings.

Now go back to the example of Arborfield's recent disposal of BT. Now I do agree that relativity is important here, had he been able to sell BT at 200p rather than at closer to 100p he would have been able to buy twice as much income to replace that he lost when BT cancelled its dividend. I would therefore argue that the capital value is important, surely nobody would disagree with that? You may say, ah but the point is you should ignore market movements, but how can that fit with setting up a stop loss and letting the market decide if you sell of not based on the share price movement up or down?

You are wrong. It is not the market which changes the differentials between shares. It is usually other factors, like stake building or increased profits and dividends.

Had BT.A been above my weight limit, then I would have trimmed it back and reinvested in a share paying a dividend giving it a higher yield. That way I increase the income flow. It doesn't matter what the price of the share you trim is, it is how it stands relative to the rest. It will have got to the top of the midden because its relative price will have risen. It may actually have fallen, but less so than the other shares.

I am just as happy applying my methods on a falling market as on a rising market, simply because the level of the market as a whole is irrelevant.

TJH

[1nvest]

A alternative of course is to project the number of life years remaining, say a 70 year old projecting 20 years of life remaining

That's something of a fallacious approach as an expectation of 20 years is equivalent to a probability distribution of remaining life starting from months at the shortest and with a tail extending past the age of 100.

Some say the first person that will to a 1000 has already been born. Who knows what tech/bio-tech advances might bring. Personally I have heirs so drawdown/spent it all and die broke isn't a desired choice.

[1nvest]

But when someone tries to demonstrate that 'dividends are a bad idea' because the Sage of Omaha has said something negative about them, then I think it's only fair to then look at what he's also got to say about something they themselves endlessly promote, in terms of that gold-coloured stuff.

Buffett bought 111 million ounces of silver in 1997. Prior to 1972 the US$ was backed by gold, it however made more sense to hold $'s deposited and earning interest, as that was a form of the state paying you for it to securely store your gold. When that coupling was broken the choices were to stick with money (T-Bills), or gold, or a combination of both, Buffett opted for T-Bills. Given he likes 90/10 was that a good call or not? Not according to Sharpe

Personally not promoting anything. Just discuss a range of assets. Unlike the endlessly promoted HYP to which I don't subscribe as I'm not into heavy concentration into a single factor risk.

[Arborbridge]

Wizard:


I agree with you Arb your reasoning was indeed eminently sensible and very practical. But it does seem pretty clear from what you have written that there was an element of consideration of capital included in it, which is all I have been trying to suggest.

Well thanks I don't think I have ever said capital doesn't matter: it's my seed corn from which the income can grow. Maybe this is sometimes misquoted when thinking about HYP: it's not that it doesn't matter, but just that capital growth is less important. HYP is first and foremost about providing income, but that doesn't mean that capital does not matter - it's essential.
When we stop worrying about the daily fluctuations in capital it can be liberating, I believe that's all that pyad is pointing to. The thought is: look after the income growth and the capital will follow. Now, that may or may not be true - I don't know either way, but it seems reasonable.

Of course, in practical terms, there are always specific occasions when one has to consider what to do about a particular capital event - how to shepherd that capital or protect it. I doubt pyad would disagree.

Arb.

[Itsallaguess]

Personally not promoting anything. Just discuss a range of assets.

Unlike the endlessly promoted HYP to which I don't subscribe as I'm not into heavy concentration into a single factor risk.

I think one of the great shames on these boards is that little credit is given to the many income-investors who have actually recognised some of the higher risk factors associated with the vanilla HYP approach, and choose to walk away from many of the ultra-high-yields sometimes offered by the market, and often at the same time look to broaden their scope away from the more FTSE-focussed HYP-remit, and look to some of the wider geographical markets to supplement their own income-strategies, which often give the added advantage of being accessed by much more diversified collective-investment vehicles at the same time.

Unfortunately, any mention of income-investment instantly seems to get people painted with the HYP 'high-dividends=bad' brush, which is a little unfair to those of us who might sometimes actually agree with some of the points being made against the vanilla HYP approach, but still get slathered round the chops with that big bad HYP brush by the 'anti-dividends' brigade all the same...

Highly polarised discussions like those often seen on these boards do very little to recognise the fact that, for many of us here, income-investing can be a really quite valid and rewarding approach to delivering the long-term results that we're looking for, whilst delivering those results in a way that suits us as individual investors...

Cheers,

Itsallaguess

[onthemove]

I don't think I have ever said capital doesn't matter: it's my seed corn from which the income can grow. Maybe this is sometimes misquoted when thinking about HYP: it's not that it doesn't matter, but just that capital growth is less important.

Look after the dividends and the capital will look after itself.

It is the dividends (or potential for future dividends) which generates the capital value.

Though obviously if you aren't yet a shareholder, then you need the capital to buy the rights to the dividends in the first place.

But once you own those rights, it's the next person who needs the capital to tempt you to hand over your rights to them.

Once you own those rights, it doesn't matter what the share price (capital value) does, it doesn't change your existing ownership rights.

If the company improves its future dividend potential, the capital value will ultimately reflect this.

Apart from bubbles, fraud, misrepresentation, or some such, typically the only fundamental, legal, dependable way of increasing capital value is for the company to increase its potential to deliver future dividends.

The dividends, or more specifically potential for future dividends, are the driver for capital growth, not vice versa.

Look after the dividends and the capital will look after itself.

[1nvest]

Look after the dividends and the capital will look after itself.

The impression I get is that many HYP'ers haven't looked after the dividends recently and are also seeing capital declines as a result? How does one "look after the dividends"?

[Arborbridge]

Look after the dividends and the capital will look after itself.

The impression I get is that many HYP'ers haven't looked after the dividends recently and are also seeing capital declines as a result? How does one "look after the dividends"?

See: TJH

[onthemove]

Look after the dividends and the capital will look after itself.

How does one "look after the dividends"?

Sorry you're right. You can't look after the dividends. Focus on capital. That's all. Capital is the only thing you can control - the only thing you have a say in is the purchase or sale price when you decide whether to click the confirm trade button, so look at this and only this. Completely ignore the dividends because there's nothing you can do about them(*)

There you go. You've converted me.

Happy?

I've got other things to do...

(*) Not strictly true, the share also gives you the right to attend the AGM and vote in the directors, etc. But to be quite honest I see little point prolonging this discussion. We all know where it's going - round and round and round in circles. Me, personally, I'm just going to stick to the basics and look at what owning a share actually gives me. If others wish to treat theirs as simply tokens in a ponzi scheme - looking to find someone who they can sell them to at a higher prices, without any consideration of the fundamentals which might influence someone to pay a higher price - feel free. I've got better things to do than to try to convince them otherwise; their investment strategy is not my concern.

[Alaric]

The thought is: look after the income growth and the capital will follow. Now, that may or may not be true - I don't know either way, but it seems reasonable. .

I suspect their are plenty of investors who agree with this. Evidence of this is the price often required to buy into stocks such as Diageo and Unilever with a track record of increasing dividends. The problem can be identifying such opportunities. Sorting by current dividend yield as sometimes advocated will exclude them. Their popularity can be such that the running dividend yield falls below the market average. Some discussion forums would regarded a discussion of such shares off topic for income seeking investors.

[1nvest]

You can't look after the dividends

Of course not, at least not the dictated dividends, paid out the amount and at the times that others choose - but when you extract your own "dividends" out of capital/total-return then you can look after them. Refined exactly to your own particular circumstances/allowances/timing. That is the approach Buffett suggests. When for instance I looked at how given the same investment amount and the same dividend value was drawn out of FT250 index total return as what Terry's (TJH) HYP provided, then the two portfolios compared relatively closely. Personally however I don't want dividends that potentially jump around, for income I want a progressive/consistent payout - which SWR provides (inflation adjusted consistent income, whether share prices and/or dividends have increased or declined).

A risk with SWR is if it is set too high, but the same also holds for natural dividends. 1960 to mid 1970's for instance and stock total returns with dividends reinvested barely broke even in real (after inflation terms). Not a issue if your were accumulating (reinvesting dividends), but much more of a issue if you were spending some/all of the dividends.

For those reinvesting/accumulating, dividends aren't really desirable, just tax/cost inducing events. For those in drawdown, taking their own dividend out of total value is more refined to each individuals case. Selecting stocks according to their dividend is one form of 'value' measure, but other methods might serve just as equally as well using other metrics of 'value'.

Dividends are not good for investors in general. If for instance I hold US stocks that pay dividends then the Fed takes a automatic 15% cut (that is reduced under UK/US tax treaty down from a otherwise 30% cut), even if my sole intent is to reinvest those dividends back into shares again.

Capital not mattering is highly specific, for instance applies to the pure HYP where money is deployed into a set of stocks as a alternative to buying a annuity and where after purchase all that is considered is how much income that provides. Outside of that and capital of course matters, and even at some times will it also matter to the pure HYP such as in the event of takeovers/mergers. Total return is also a better means of comparisons. None of the pure HYP yearly reviews have ever included total return comparisons. The FT100, a bad choice of benchmark IMO due to comparing cap weighted with equal weighted, did have the Index values recorded, but no income, nor comparative income growth rate (for example up to HYP1 year 18 review, FT100 income had grown more than the HYP1's dividend value growth rate). Yet price appreciation wise that faster FT100's dividend value growth rate didn't translate into a faster/larger share price appreciation rate.

[PinkDalek]

[Dividends are not good for investors in general. If for instance I hold US stocks that pay dividends then the Fed takes a automatic 15% cut (that is reduced under UK/US tax treaty down from a otherwise 30% cut) ...

Noting your ‘in general’ but, to me, with substantially most of my investments unsheltered, the withholding tax makes no difference, other than a negative cash flow effect. I obtain full relief for the WHT against my UK Income Tax liabilities on that dividend income.

Similarly, there is no WHT applied on any dividend paying USA holdings I may hold in my SIPP.

Those with their holdings in an ISA will no doubt suffer but no doubt will be aware of such a cost when assessing their purchase.

[Lootman]

It is the dividends (or potential for future dividends) which generates the capital value.

Though obviously if you aren't yet a shareholder, then you need the capital to buy the rights to the dividends in the first place.

If the company improves its future dividend potential, the capital value will ultimately reflect this.

Apart from bubbles, fraud, misrepresentation, or some such, typically the only fundamental, legal, dependable way of increasing capital value is for the company to increase its potential to deliver future dividends.

The dividends, or more specifically potential for future dividends, are the driver for capital growth, not vice versa.

Shares in Amazon have quadrupled in the last 5 years. No rational investor believes that Amazon will pay a dividend in the forseeab;e future, since the company has a strong commitment to reinvesting in the business and in growth and market share.

So is that a bubble?

Or what about Berkshire Hathaway which as a matter of principle never pays a dividend to avoid creating tax events for its shareholders and to keep powder dry for future investments and acquisitions. Bubble?

Same with Google, Facebook, Tesla, and many others, none of which have ever paid a dividend nor present any reasonable prospect of doing so. Apple yields less than 1% and has a market cap of nearly $2 trillion.

Now, for high yielding shares I think you have a point. The capital value is propped up by the dividend. In that sense they are more like bonds where the income defines the price. If the dividend is abolished the share price can collapse because there is little else to commend the share or support its price.

But your theory fails when it comes to growth shares.

[Itsallaguess]

Dividends are not good for investors in general.

They're good for me, and I can tell you why -

1. They provide a regular stream of funds that, whilst working, I can use to supplement my other regular investment-facing capital that I can save from my wages.

2. Given that they're being lumped in with other wage-related investment capital, and regularly re-invested into the market, dealing costs in terms of that specific dividend-capital is really quite insignificant, given that I'd be paying some portion of those dealing costs on my work-related funds anyway...

3. The regular and largely growing stream of dividends provides me with a fantastically useful yard-stick and ongoing set of very long-term metrics, that enable me to have good visibility of progress towards my ultimate investment-goal, which is to help deliver a stream of largely hands-off investment-income to help enable me to plan for what will hopefully be an early retirement. I have a plan, and I have an income-investment strategy that looks like it might help to deliver that plan, and I feel very fortunate to be in that position without a huge need to learn a whole new set of 'investment skills' to achieve it...

4. I like to have a fairly well-balanced income-portfolio, within a broad framework of geographical and thematic areas providing my dividend-income, and being provided with regular, long-term opportunities to drip-feed dividend-supplemented capital into the market over many years enables me to carry out a good level of pound-cost averaging at the same time as directing that capital at particular areas of my portfolio, to help maintain the broad, long-term balance that I'm trying to achieve. Being able to do that via regular purchases, rather than sales (if required due to potential unbalancing), is a benefit to me personally that was unexpected initially, but one that I'm grateful for in retrospect, because I find that particular process very easy to manage over the long period that I've been carrying it out.

5. Whilst there's no doubt that there are many ways to 'provide ourselves with income' from our investments, I personally get a great deal of confidence and satisfaction from following the steady progress of my dividend-income metrics over the years, and being able to track a hoped-for point in the future where I might one day think that a particular level of income is perhaps eventually sufficient (with appropriate financial safeguards too, of course..) to think about early retirement. This is one of the single biggest benefits from the whole income-investment approach for me as a personal investor. The potential to simply 'switch' at some future point, quickly and easily, and with no other major shift in overall investment strategy, from receiving dividend income and directing it towards re-investment one day, and then the next day switching that dividend-stream towards my normal bank account and using it as a source of income from that point forwards, is perhaps the single biggest benefit to me personally of taking an income-investment approach..



To my knowledge, no-one on these boards, or even back on TMF, has ever held up income-investing as being 'the best way to invest'.

All people often say is that it's an investment strategy that works *for them*...

If there's inefficiencies in taking such an approach, then so what? Such inefficiencies may well be a price that income-investors are quite happy to pay, if the strategy still delivers an acceptable return in a way that suits them as individual investors...

If there's 'better methods', that might achieve 'better returns', then so what? If those 'better methods' are completely alien to a particular investor, and they don't have the desire or ability to learn those 'better methods', whilst being *happy* with the returns being delivered from their current income-investment strategy, then who's to say that they are wrong to take that view?

For me personally, lots of the benefits of income-investment are completely unrelated to the actual returns, and they are much more to do with the above 'comfort factors' related to being able to carry out a long-term investment strategy that I've found to suit me personally in ways where other approaches have failed to do so.

If those 'comfort factors' come at a price, and I'm absolutely *sure* that they do, then I feel quite able to make a personal decision as to whether I am happy to continue paying it, and given the personal benefits that I do gain from taking an income-investment approach to help deliver my long-term goals, then I'm really not sure that it's within someone else's gift to tell me that I'm wrong to do so...

Cheers,

Itsallaguess

[onthemove]

But your theory fails when it comes to growth shares.

No it doesn't.

The only thing a shareholder is entitled to is the residual profits (normally distributed via dividends) and the right to vote at the AGM etc.

If Berkshire Hathaway's shares had no rights to any future dividends (or similar payouts to shareholders) then they would have zero value. It doesn't matter what Buffett might say about dividends at the moment, the value of the shares is derived from the rights shareholders have to future distributions from the company. If the terms of the shares specifically excluded shareholders from receiving such distributions, the shares would be worthless.

Same for all the other companies you mention.

Either those paying the current prices believe the future dividends will be worth it, or it's a ponzi scheme / bubble.

It really is quite simple. You only need to look at legally what a share is and what it gives the holder... a right to share in the distributions from the company (from residual profits) and the right to vote at AGMs.

Admittedly, there may be a teeny tiny non-zero value to be had from being able to vote at a companies AGM even if you weren't to have the right to any profits - for example an environmentalist might be willing to purchase a right to vote on an oil companies AGM even if it gave them no rights to any profits.

But other than that, the only other thing a share buys you is the right to share in the residual profits - e.g. via dividends, etc. If the share terms specifically exclude your shareholding from giving you any such rights to the residual profits, then the shares are worthless.

End of story.

If people were to trade and pay a lot of money for such a share, it would be entirely a ponzi scheme - relying solely on a greater fool willing to pay you more for it than you paid.

It really is quite simple and the very basics of investing / share ownership.