High dividend

Fuzzythinking

Hi

I am interested to invest my money in stock market in order to earn high dividends. Do you know which blue-chip company would be an ideal to invest in?

Fuzzythinking

cheerfulcat

Hi, FT,

You should find the Motley Fool High Yield Portfolio board and related articles of interest. Investing in only one company would be too risky for most people's taste; better to have a number of them in diverse sectors.

HTH

Cheerfulcat

PS Most people start with Lloyds TSB and United Utilities...

dunstonh

Lloyds TSB is a good example to look at when a dividend is too high. Take a look at the share price performance and see what capital loss you would have had.

cheerfulcat

Hello, dh,

A holder of Lloyds TSB would only have sustained losses if he or she had a) bought shares at one of the points in the last ten years when the shares were at a high ( and the yield was thus quite low ) and b) sold when the price was considerably lower ( and the yield quite high ). An investor looking for income would have done things the other way about ( or far more likely, simply bought more shares when the yield was higher ) and would thus be looking at a nice fat gain...

PS what yield do you think is " too high "? Over the last five years LLOY has yielded anything between 4.5% and 10% with the dividend remaining unchanged. Is it the dividend, which is ~1 and a bit x covered, or is it the fact that investors can't decide whether Lloyds is a growth or an income share?

dunstonh

I'm not saying buying LTSB is wrong (indeed, I used to have a significant holding of Lloyds Bank shares from old profit sharing and SAYE schemes when I used to work for them). I'm just saying that if you are considering this approach then it is worth looking at the share price history to understand that high yield shares often suffer on the share price front and LTSB is a good example of that. Whilst a medium risk portfolio acheiving only sector average performance would be up just over 62% now (if purchased in Nov 01), if you had bought LTSB shares at the same time, they would be in a capital loss position.

cheerfulcat

[...]it is worth looking at the share price history to understand that high yield shares often suffer on the share price front and LTSB is a good example of that.

I think that you're putting the cart before the horse, dh! LTSB, like many other high yielding shares, has a high(ish) yield because the shares have been trashed, not the other way about.

Whilst a medium risk portfolio acheiving only sector average performance would be up just over 62% now (if purchased in Nov 01), if you had bought LTSB shares at the same time, they would be in a capital loss position.

Nearly all of that loss would have been made up by dividend income. If the dividends had been re-invested in LTSB ( bearing in mind that dividend re-investment is the single biggest factor in historical equity returns ), the buyer of LTSB in 2001 would now be in profit. BTW I think that it is not very helpful to compare a static holding of one share to an active portfolio! Why not compare your model medium risk, sector averaging portfolio to an HYP?

EDIT: Here's the TMF HYP started in November 2000 for comparison.

dunstonh

Nearly all of that loss would have been made up by dividend income. If the dividends had been re-invested in LTSB

True but I get the feeling that this is to invest the money for income purposes rather than growth.

BTW I think that it is not very helpful to compare a static holding of one share to an active portfolio!

Diversification certainly helps but the OP was talking about one share and LTSB was mentioned. LTSB is a good example to use as well as it has all the characteristics of a share that has had a too high a dividend.

http://quote.fool.co.uk/chart.aspx?s=LLOY.L&q=l&l=off&t=5y

That 5 year chart shows the capital depreciation with income not re-invested.

I'm not going to preach to you CC as you know all about it. However, the OP doesnt (otherwise why would they ask). In which case, using an example of what can happen with income withdrawn is fair. Better to know what could happen in both directions then find out later, when its too late.

Why not compare your model medium risk, sector averaging portfolio to an HYP?

Dont want to bore you and point out that it would outperform the HYP over the long term

cheerfulcat

Diversification certainly helps but the OP was talking about one share and LTSB was mentioned.

Yes; I mentioned LTSB, in the context of a portfolio of shares.

LTSB is a good example to use as well as it has all the characteristics of a share that has had a too high a dividend.

I still don't understand your reasoning. For a while LLOY traded near the £8 mark and paid a dividend of 34.2 pence per annum. This is a dividend yield of ~4%, which was 0.5% more than the FTSE yield and the same as the bank base rate; hardly a high yielder! There is actually more of an argument for saying that LLOY is vulnerable to a dividend cut ( and thus a fall in share price ) now, when it is yielding nearly 6%. So in what way was the " too high " dividend responsible for the fall in share price? And given that the dividend has not been cut, though a cut was discussed and decided against, it can hardly be said to be " too high a yield ", at least in the view of the board...

dunstonh

http://uk.biz.yahoo.com/07112006/389/returns-slender.html

http://news.bbc.co.uk/1/shared/spl/hi/programmes/money_box/transcripts/06_09_04.txt
(scroll down to near bottom - search for LloydsTSB)

I am trying to google an article I read around 6 months ago about why LTSB yield would be better off being lower and that some growth in the share price would be more desirable. I cant find it at the moment.

cheerfulcat

Thanks for those, dh, but my question remains unanswered; in what way was a dividend yield of ~4% responsible for a fairly drastic fall in the LLOY share price? My own answer to this is simple - it wasn't. So there's no point in taking the LLOY chart as an example of what can happen to high yielding shares because it only became a high yielder after the drop! If you want an illustration of the dangers of " too high " a dividend you'd be better off looking at, say, Northern Foods' chart - note the sudden drop when the dividend was halved. Though even there it is interesting to note that the shares have crept up again.

jamesd

cheerfulcat, if you believe in perfect markets the fundamental reason is that the market dropped the price because the market expected future performance to be insufficiently good to justify the share price. That in turn increased the yield per share because the same amount of money was being paid out to new buyers who would get more shares for their money than the existing holders. But if the market is right, other shares will do better, otherwise the price wouldn't have dropped. Only time will tell whether the market is right or wrong about the prospects for the company.

Fuzzythinking, are you committed to buying only individual shares in a single blue stock company or are funds that can hold a mixture of companies to reduce the risk of interest? A mixture of some relatively safe funds and some riskier ones with higher yield could probably achieve higher income and lower risk than a single share purchase.

Regardless of what you choose to invest in, if you haven't used your stocks and shares ISA allowance, buying within one is one option you should consider because of the favorable treatment of income in an ISA.