Investing in high dividend companies

gadgetmind

Linton wrote: »

Dont you feel a little uneasy as tracked indexes get more complex and artificial, and so must cease to represent "The Market" which, as we are repeatedly told, cannot be beaten?

To answer your question, yes, it does make me a little uneasy.

Beating the market (after fees!) while holding only constituents of that market is *very* difficult and a vanishingly small number of fund managers manage it over the long term. If I could identify those who would (up front rather than after the fact) then I would not be using passive investments.

However, it has been shown that you can add a small amount of extra performance by using value investing strategies and by holding more smaller companies. I therefore mainly use "all of market" trackers but I then add *small amounts* of low-fee smaller company and value holdings.

Why not have an index composed of investments the fund manager likes? All funds are then index trackers.

Because you need not only low fees but also an objective approach that's been proven to work over the long term.

I have two main portfolios (both pensions) and one uses mainly passive trackers with me deciding on the territory/asset/cap composition, and another that also uses mainly trackers but with asset allocation performed by a fund manager.

Comparing the performance of these two is hard as one has ongoing contributions and the other doesn't, but I'm going to try!

Linton

gadgetmind wrote: »

.....


Because you need not only low fees but also an objective approach that's been proven to work over the long term.

....

Surely the one thing that has been learnt over the past 100+ years of guaranteed "beat the market" schemes is that no single approach works long term over all market conditions.

gadgetmind

Linton wrote: »

Surely the one thing that has been learnt over the past 100+ years of guaranteed "beat the market" schemes is that no single approach works long term over all market conditions.

There are certainly approaches that can work over some short/medium time frames, but it's hard to know which they are in advance (understatement!).

Over the long term, it's all about holding multiple classes of assets with as little correlation as possible, rebalancing between them, and keeping your fees as low as possible.

The slight (and it is only slight) advantage that comes from holding smaller companies and value companies has been shown across long periods of time, and the evidence was strong enough to sway my hand.

The other reason I over-weighted smaller companies is because they show a higher beta and I was pretty confident that the lift we saw over the last three months was coming. It duly did and small and mid caps have risen faster than the rest of the market.

sabretoothtigger

Just bought some

This is 10% dividend, 7 PE forecast and with net debt of about 2x the market cap and earnings before deductions.
High risk stuff but I reckon its worth it. Generally you should stick to unit trust distributed risk, the market says TEF will suffer badly but I think they are placed for growth in the right areas.

Goldman sachs wrote them down recently on the basis of increasing south american inflation. Which is true but I believe this will lag the debts they owe in currencies like sterlng which just now they pay 5.5% over 8 years on new bonds.
Thats good borrowing for a company written off for a Spanish disaster?

TEF bought the mobile division of BT some years back and similar such deals I support their strategy




Also Euro rate is at a relative advantage for sterling right now

BLB53

The slight (and it is only slight) advantage that comes from holding smaller companies and value companies has been shown across long periods of time, and the evidence was strong enough to sway my hand.

I believe it is a bit more than slight. Since 2000, the Hoare Govett smaller companies index has returned 5.7% per year compared to just 1.5% pa for the FTSE 100. However, the majority of this return will be more by way of growth rather than yield.

The FTSE 100 accounts for around 90% of all dividends, so thats the place to focus for the majority of the higher yield portfolio imo.

Linton

BLB53 wrote: »

I believe it is a bit more than slight. Since 2000, the Hoare Govett smaller companies index has returned 5.7% per year compared to just 1.5% pa for the FTSE 100. However, the majority of this return will be more by way of growth rather than yield.

The FTSE 100 accounts for around 90% of all dividends, so thats the place to focus for the majority of the higher yield portfolio imo.

There are quite a few smaller companies paying good dividends so I wouldnt rule out the FTSE250 - eg Marstons, Chesnara, Arriva, GoAhead,Halfords, Cineworld. You could go smaller but then you are into a riskier style of investing.

grey_gym_sock

BLB53 wrote: »

I believe it is a bit more than slight. Since 2000, the Hoare Govett smaller companies index has returned 5.7% per year compared to just 1.5% pa for the FTSE

it's been a bad decade or so for the FTSE 100 compared to small caps. you shouldn't extrapolate the difference in expected return from such a short period. i'm pretty sure the longer term difference is rather smaller (sorry, no figures, i'm just hand-waving).

i seem to remember small caps at one time yielding more than the the FTSE 100 (or do i mean the FTSE 250 yielding more than the 100?).

if one expects a (very slow) revision to mean, then the (greater than usual) underperformance of the FTSE 100 suggests a (weak) reason why it might outperform in the next decade or so.

amictus

Just thought I'd share a couple of links that might be useful...

Linton wrote: »

There does exist an ETF, IUKD, but its performance has been very erratic and the yield only moderate compared with some other options. Being blindly index driven, I believe it invested heavily in the banks right up to the crash. So IMHO an example of the pitfalls of tracking in inappropriate sectors.

iShares also offer a dividend focused ETF with stricter allocation controls:

"Only companies are included that have a non-negative historical five-year dividend-per-share growth rate and a dividend to earnings-per-share ratio of less than or equal to 60%. The index is weighted according to net dividend yield."

http://uk.ishares.com/en/rc/funds/IDVY

BLB53 wrote: »

I believe it is a bit more than slight. Since 2000, the Hoare Govett smaller companies index has returned 5.7% per year compared to just 1.5% pa for the FTSE 100. However, the majority of this return will be more by way of growth rather than yield.

The FTSE 100 accounts for around 90% of all dividends, so thats the place to focus for the majority of the higher yield portfolio imo.

Aberforth Smaller Companies may be worth considering:

http://monevator.com/2012/01/27/aberforth-smaller-companies-trust/

sabretoothtigger

Theres alot of banks in there, has to be considered high risk . Santander is my largest holding, Spain is seriously disliked

Linton

owains wrote: »

Just thought I'd share a couple of links that might be useful...



iShares also offer a dividend focused ETF with stricter allocation controls:

"Only companies are included that have a non-negative historical five-year dividend-per-share growth rate and a dividend to earnings-per-share ratio of less than or equal to 60%. The index is weighted according to net dividend yield."

http://uk.ishares.com/en/rc/funds/IDVY



Aberforth Smaller Companies may be worth considering:

http://monevator.com/2012/01/27/aberforth-smaller-companies-trust/

Look at the IDVY performance data - it looks pretty frightening to me with a greater than 50% fall in 2008 and a large drop (20%?) during 2011.

The difficulty I see with any passive dividend instrument is that it may not differentiate between a high yield because the company is doing well and a high yield because the share price has crashed. A person can of course see this immediately.