The Lemon Fool

I know this has been discussed before ad nauseum, but on the back of a claim I made on another thread that essentially said that each dividend payment from a share will be paid for by a corresponding drop in price of the share, I thought I would try and find supporting evidence. It is not easy though due to the normal noise of share prices fluctuations. I know it has to be the case though as it would open up arbitrage opportunities - buying cum-div/selling ex-div would be systematically profitable or unprofitable.

Best empirical evidence I have thought of so far is with the iShares FTSE 100 ETF, ISF. This has been trading since April 2000 and has made 87 dividend payments. All the dividend payments and daily NAV values are available for download on the iShares web site.

The total of all the dividend payments per share since launch has been 769p, average 8.8p. The total drop in NAV on XD date from the previous day's NAV has been 822p, average 9.5p. I put the additional 0.7p loss per dividend payment down to noise rather than anything systemic - you are not going to profit by trading around XD date except by pure dumb luck.

Anyway, the dividend fallacy is in treating dividend payments like interest payments on bonds or cash deposits - each dividend payment is made at the expense of capital value.

hiriskpaul wrote:you are not going to profit by trading around XD date except by pure dumb luck.

I don't think many experienced investors would suggest otherwise.

In what way is it a fallacy?

I remember subscribing to a (snail) mailing list about 30 years ago teaching personal finance stuff. It was superbly written and preached pretty much everything that TMF taught us once the WWW became a thing. I often wonder if it actually inspired TMF.

It too explained about how the price of a share had to drop by the dividend each one was paid out.

hiriskpaul wrote:...I thought I would try and find supporting evidence.

Are you looking to prove this yourself, or looking for a source of Academic proof/study, you can use as such proof?

This is fairly standard Corporate Finance stuff and taught at most Business School on Masters in Finance (and occasionally Masters of Business Administration) programmes. Going back to my study at what could be argued was this country's, if not Europe's, leading such school, we would have reference books such as Brearley Myers - Principles of Corporate Finance, or Megginson - Corporate Finance Theory each of which would have chapters on Dividend Theory leading on from basic Modigliani-Miller modelling etc. The good thing about such books (no doubt updated and replaced by others too) is that the text will reference numerous academic studies both in the US and UK (and others) that looked into the practice in addition to the theory and would have "trawled the data". eg the footnotes will specifically quote academic study references.

I'm not inclined to blow the dust of those tomes and go searching through those books for the academic studies, but they exist and it isn't controversial that share prices drop by the extent of the dividend (bar some frictions and taxes). The payment, and valuation of shares cum-div and ex-div, is almost enitely "mechanical". The more controversial Dividend Theories are around the information content of dividend announcements, and the asymmetry of information of insiders (deciding dividends) and outsiders such as investors. These occur at the time of the announcement and the release of that information (eg. not the dividend size itself, but what the news of that size says about the likely future cashflows of the underlying business and thus the worth of the company) not at the time of the payment of it.

Dividends are paid at the expense of capital growth. Capital growth occurs at the expense of dividends. Total return is the only true measure of the performance of a share, but you may prefer one or the other for tax reasons. Hardly a fallacy.

hiriskpaul wrote:Best empirical evidence I have thought of so far is with the iShares FTSE 100 ETF, ISF. This has been trading since April 2000 and has made 87 dividend payments. All the dividend payments and daily NAV values are available for download on the iShares web site.

The total of all the dividend payments per share since launch has been 769p, average 8.8p. The total drop in NAV on XD date from the previous day's NAV has been 822p, average 9.5p. I put the additional 0.7p loss per dividend payment down to noise rather than anything systemic - you are not going to profit by trading around XD date except by pure dumb luck.

You ned to take account of the movement of the market on the XD day to get a true comparison. Even so, the share may rise by comparison with its cum-div price if the market is impressed, and fall if not.

Taken in isolation, the movement on XD day tells you nothing.

TJH

tjh290633 wrote:

hiriskpaul wrote:Best empirical evidence I have thought of so far is with the iShares FTSE 100 ETF, ISF. This has been trading since April 2000 and has made 87 dividend payments. All the dividend payments and daily NAV values are available for download on the iShares web site.

The total of all the dividend payments per share since launch has been 769p, average 8.8p. The total drop in NAV on XD date from the previous day's NAV has been 822p, average 9.5p. I put the additional 0.7p loss per dividend payment down to noise rather than anything systemic - you are not going to profit by trading around XD date except by pure dumb luck.

You ned to take account of the movement of the market on the XD day to get a true comparison. Even so, the share may rise by comparison with its cum-div price if the market is impressed, and fall if not.

Taken in isolation, the movement on XD day tells you nothing.

TJH

Impressed by what? There is no news, or information, on the XD day so any such share should move by the same as the market (adjusted for its beta).

Mike4 wrote:In what way is it a fallacy?

I remember subscribing to a (snail) mailing list about 30 years ago teaching personal finance stuff. It was superbly written and preached pretty much everything that TMF taught us once the WWW became a thing. I often wonder if it actually inspired TMF.

It too explained about how the price of a share had to drop by the dividend each one was paid out.

That is of course not strictly true. The price of a share does not 'have to drop' by the amount of the dividend, in fact often does not. You are confusing price with value. And of course where theory and practice diverge. Often the amount of the dividend has very little effect on the share price because it gets lost in market noise. It will affect the value of the share but that is a different matter.

Dod

dealtn wrote:

hiriskpaul wrote:...I thought I would try and find supporting evidence.

Are you looking to prove this yourself, or looking for a source of Academic proof/study, you can use as such proof?

This is fairly standard Corporate Finance stuff and taught at most Business School on Masters in Finance (and occasionally Masters of Business Administration) programmes. Going back to my study at what could be argued was this country's, if not Europe's, leading such school, we would have reference books such as Brearley Myers - Principles of Corporate Finance, or Megginson - Corporate Finance Theory each of which would have chapters on Dividend Theory leading on from basic Modigliani-Miller modelling etc. The good thing about such books (no doubt updated and replaced by others too) is that the text will reference numerous academic studies both in the US and UK (and others) that looked into the practice in addition to the theory and would have "trawled the data". eg the footnotes will specifically quote academic study references.

I'm not inclined to blow the dust of those tomes and go searching through those books for the academic studies, but they exist and it isn't controversial that share prices drop by the extent of the dividend (bar some frictions and taxes). The payment, and valuation of shares cum-div and ex-div, is almost enitely "mechanical". The more controversial Dividend Theories are around the information content of dividend announcements, and the asymmetry of information of insiders (deciding dividends) and outsiders such as investors. These occur at the time of the announcement and the release of that information (eg. not the dividend size itself, but what the news of that size says about the likely future cashflows of the underlying business and thus the worth of the company) not at the time of the payment of it.

I was looking for up to date, verifiable empirical evidence, or a paper. As you say there is no shortage of theory, but not everyone trusts financial theory. Quite understandable really.

.

from these learned discussions . is it fair to to conclude then that their is nothing gained by favouring dividend paying shares, high yield or not , apart from possible accounting clarity ?

I thought it was common knowledge that the SP was adjusted by the dividend payment.

Yes Mr Market might also play a part or as some call it market noise.

If the company is trading reliably, then it can earn back the lost cash over time otherwise the SP would eventually fall to zero. You can get into the situation whereby you earn more in dividends than you paid in SP. It takes a while and I think some, like Mr Buffet, earn a dividend now that is more than the original outlay.

It's nice to have a rising 50year dividend I suppose.

hiriskpaul wrote:

dealtn wrote:

hiriskpaul wrote:...I thought I would try and find supporting evidence.

Are you looking to prove this yourself, or looking for a source of Academic proof/study, you can use as such proof?

This is fairly standard Corporate Finance stuff and taught at most Business School on Masters in Finance (and occasionally Masters of Business Administration) programmes. Going back to my study at what could be argued was this country's, if not Europe's, leading such school, we would have reference books such as Brearley Myers - Principles of Corporate Finance, or Megginson - Corporate Finance Theory each of which would have chapters on Dividend Theory leading on from basic Modigliani-Miller modelling etc. The good thing about such books (no doubt updated and replaced by others too) is that the text will reference numerous academic studies both in the US and UK (and others) that looked into the practice in addition to the theory and would have "trawled the data". eg the footnotes will specifically quote academic study references.

I'm not inclined to blow the dust of those tomes and go searching through those books for the academic studies, but they exist and it isn't controversial that share prices drop by the extent of the dividend (bar some frictions and taxes). The payment, and valuation of shares cum-div and ex-div, is almost enitely "mechanical". The more controversial Dividend Theories are around the information content of dividend announcements, and the asymmetry of information of insiders (deciding dividends) and outsiders such as investors. These occur at the time of the announcement and the release of that information (eg. not the dividend size itself, but what the news of that size says about the likely future cashflows of the underlying business and thus the worth of the company) not at the time of the payment of it.

I was looking for up to date, verifiable empirical evidence, or a paper. As you say there is no shortage of theory, but not everyone trusts financial theory. Quite understandable really.

Go to a large library, or a university or business school one, and track down books such as those quoted on Corporate Finance. They will have the theory but the footnotes will give you the source of the empirical evidence too, which you can then find in original publications or online. A lot easier than doing the work yourself.

JohnB wrote:Dividends are paid at the expense of capital growth. Capital growth occurs at the expense of dividends. Total return is the only true measure of the performance of a share, but you may prefer one or the other for tax reasons. Hardly a fallacy.

All true, the fallacy is in believing otherwise - that dividends are like interest payments. False assumptions based on the fallacy are not uncommon and are easy traps to fall into.

Ever come across statements such as "The share price has fallen, but that is OK provided the dividend is maintained"?

For another example, I was once sent a magazine by Hargreaves Lansdown discussing equity income funds and the article actually stated that share price falls were good as it meant the dividend payments bought more units when share prices were low. Utter nonsense of course, relying on the fallacy that dividend payments are equivalent to interest payments.

hiriskpaul wrote:

JohnB wrote:Dividends are paid at the expense of capital growth. Capital growth occurs at the expense of dividends. Total return is the only true measure of the performance of a share, but you may prefer one or the other for tax reasons. Hardly a fallacy.

All true, the fallacy is in believing otherwise - that dividends are like interest payments. False assumptions based on the fallacy are not uncommon and are easy traps to fall into.

Ever come across statements such as "The share price has fallen, but that is OK provided the dividend is maintained"?

For another example, I was once sent a magazine by Hargreaves Lansdown discussing equity income funds and the article actually stated that share price falls were good as it meant the dividend payments bought more units when share prices were low. Utter nonsense of course, relying on the fallacy that dividend payments are equivalent to interest payments.

On the whole I agree but it is not theory it is fact. When a dividend is paid the assets of the company have fallen by that amount. You do not need any theory to confirm that fact. But that simply has a (usually modest) effect on the NAV per share, note the 'V' in NAV. It may or may not affect the share price which is altogether a different matter.

On JohnB's points, I prefer dividends to capital growth because of my circumstances and it has nothing to do with tax since most of my shares are held in an ISA or a SIPP but I agree that total return is the only true measure of the success or otherwise of a share. I agree that dividends are paid at the expense of capital growth most of the time. I am not so sure about capital growth being at the expense of dividends though. Reading that one would think that capital growth is a given. It is not.

Dod

hiriskpaul wrote:

JohnB wrote:Dividends are paid at the expense of capital growth. Capital growth occurs at the expense of dividends. Total return is the only true measure of the performance of a share, but you may prefer one or the other for tax reasons. Hardly a fallacy.

All true, the fallacy is in believing otherwise - that dividends are like interest payments. False assumptions based on the fallacy are not uncommon and are easy traps to fall into.

Ever come across statements such as "The share price has fallen, but that is OK provided the dividend is maintained"?

For another example, I was once sent a magazine by Hargreaves Lansdown discussing equity income funds and the article actually stated that share price falls were good as it meant the dividend payments bought more units when share prices were low. Utter nonsense of course, relying on the fallacy that dividend payments are equivalent to interest payments.

The fallacy seems to be more clearly laid out by your last 2 paragraphs, not the "dividends are like interest payments" bit. Dividends are payments in cash, like interest payments, so once you've got them, their value is fixed. They both count as income (though currently taxed at different rates, in general). The fallacy is thinking of the share price as something that can be ignored, whereas rises or falls in it make a major difference to the amount you can get back for the shares, which savings investments don't feature.

jackdaww wrote:.

from these learned discussions . is it fair to to conclude then that their is nothing gained by favouring dividend paying shares, high yield or not , apart from possible accounting clarity ?

There are a number of reasons why some people prefer higher yielding shares to lower yielding ones. One is this fallacy and ideas leading from the fallacy, but some people believe higher yielding shares have higher expected returns than lower yielding shares. Another reason, mainly for those drawing an income from investments, is a preference for receiving income from dividends over share disposals.

hiriskpaul wrote:I know this has been discussed before ad nauseum, but on the back of a claim I made on another thread that essentially said that each dividend payment from a share will be paid for by a corresponding drop in price of the share, I thought I would try and find supporting evidence. It is not easy though due to the normal noise of share prices fluctuations. I know it has to be the case though as it would open up arbitrage opportunities - buying cum-div/selling ex-div would be systematically profitable or unprofitable.

Best empirical evidence I have thought of so far is with the iShares FTSE 100 ETF, ISF. This has been trading since April 2000 and has made 87 dividend payments. All the dividend payments and daily NAV values are available for download on the iShares web site.

The total of all the dividend payments per share since launch has been 769p, average 8.8p. The total drop in NAV on XD date from the previous day's NAV has been 822p, average 9.5p. I put the additional 0.7p loss per dividend payment down to noise rather than anything systemic - you are not going to profit by trading around XD date except by pure dumb luck.

Anyway, the dividend fallacy is in treating dividend payments like interest payments on bonds or cash deposits - each dividend payment is made at the expense of capital value.

Thank you for sharing your data.
It is useful to do spot checks on received wisdom from time to time.

It is worth considering whether the company paying the dividend could utilise the money itself better than the shareholder and the tax efficiency of either course.

hiriskpaul wrote:All true, the fallacy is in believing otherwise - that dividends are like interest payments. False assumptions based on the fallacy are not uncommon and are easy traps to fall into.

Ever come across statements such as "The share price has fallen, but that is OK provided the dividend is maintained"?

For another example, I was once sent a magazine by Hargreaves Lansdown discussing equity income funds and the article actually stated that share price falls were good as it meant the dividend payments bought more units when share prices were low. Utter nonsense of course, relying on the fallacy that dividend payments are equivalent to interest payments.

Hmm, maybe I'm naive, but aren't dividends rather better than interest payments? If not, why would anyone take the risk? I've never noticed my capital deposits which produce interest, growing in value as I have my share.

Arb.

Arborbridge wrote:

hiriskpaul wrote:All true, the fallacy is in believing otherwise - that dividends are like interest payments. False assumptions based on the fallacy are not uncommon and are easy traps to fall into.

Ever come across statements such as "The share price has fallen, but that is OK provided the dividend is maintained"?

For another example, I was once sent a magazine by Hargreaves Lansdown discussing equity income funds and the article actually stated that share price falls were good as it meant the dividend payments bought more units when share prices were low. Utter nonsense of course, relying on the fallacy that dividend payments are equivalent to interest payments.

Hmm, maybe I'm naive, but aren't dividends rather better than interest payments? If not, why would anyone take the risk? I've never noticed my capital deposits which produce interest, growing in value as I have my share.

Arb.

They are both cash. What is different is the underlying investments, and their potential to generate cashflows. A cash payment from either has the same impact on your bank account.