'Acc' funds vs 'Inc funds with dividends reinvested'

Dird

bowlhead99 wrote: »

That's a nonsense.

Don't really understand it. So people speculate BP will pay a 4% dividend this year and because BP pays a dividend the share price will drop as they assume they'll offer less next year?

coyrls wrote: »

I gave you the link to the annual report for your specific acc fund (Fundsmith Equity): https://www.fundsmith.co.uk/docs/default-source/documents---reports-accounts/2015-short-form-report-for-the-twelve-months-ended-31st-december-2015.pdf?sfvrsn=4 and directed you to the line in the accounts: "Retained distributions on accumulation shares"

Ah the prices seem to match up there. With an annual dividend (1 day after I invested) I guess all my fundsmith growth is just shares inflating.

coyrls

Dird wrote: »

Ah the prices seem to match up there. With an annual dividend (1 day after I invested) I guess all my fundsmith growth is just shares inflating.

I'm not sure where you are getting this information from. In the document that I linked to, it shows two Distribution Payment (dividend) dates: an Interim payment date of 31st August and a Final payment date of 28th February. You can see the payment details here: https://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=LSFX1&univ=O&typeCode=FLSX6&pageType=dividends
although the link doesn't seem to work properly, you need to go up to the drop down box and select the share class: "Fundsmith Equity I Acc".

AndyT678

Dird wrote: »

Don't really understand it. So people speculate BP will pay a 4% dividend this year and because BP pays a dividend the share price will drop as they assume they'll offer less next year?

No, not at all.

Let's take a basic example. Suppose you are the 100% owner of a company i.e. all the shares belong to you and there are 1,000 shares in issue. The company owns a machine worth say £10,000 and it also has a bank account with £5,000 of cash in it. If it's not trading or doing anything it's pretty easy to value that company at £15,000 right? So a theoretical share price is £15,000 / 1,000 = £15.

The management of the company then decides to pay a dividend from the company's cash reserves to its shareholders of say £3,000. You, personally now have £3,000 in your pocket/bank account and the company is left with a machine still worth £10,000 and a bank account with £2,000.

If I want to buy the company from you, how much would you expect me to pay? What should the share price be now?

bowlhead99

Dird wrote: »

Don't really understand it. So people speculate BP will pay a 4% dividend this year and because BP pays a dividend the share price will drop as they assume they'll offer less next year?

Let's say, the market considers that BP with its size and track record and the industry it's in, is considered to be worth "ten times its annual profits, plus the cash it has in its bank that it could give to the shareholders today if it wanted".

Its annual profits last year, divided by the number of shares in issue, were 30p per share. And it has cash in the bank worth 5p. So the market would say that a share of BP is "worth" (30p x 10) + 5p = 305p.

Fast forward a year, BP has reported great results, 40p of profits per share. The money in it's bank has swelled from 5p to 45p. As a result of making all these profits, which the market thinks are probably pretty much do-able every year from now, the market thinks the shares should be valued at (40p x 10) + 45p = 445p. If you or your fund invested in those shares at 305p you are doing well.

So at this point your fund which was invested big time into BP with a million shares, has a valuation for its holdings of £445 million. At the moment the improvement over the £305m cost is all capital growth because BP hasn't paid any dividends yet, and is keeping its 45p cash balance in its own bank account.

Then BP announces that in line with shareholder expectation it is going to pay a dividend of 4% of its share price. 4% of 445p is about 18p a share. It can afford to pay 18p a share because it has 45p a share in its bank account, and will keep the rest back in its bank account in case it wants to use it within the business or to pay dividends in later years.

So BP goes and pays out 18p a share to its investors. As the dividend was pretty much in line with expectations (4%), people don't change their opinion of BP and still value it at 10x annual profits plus cash in the bank. This is now (40p x 10) + 27 = 427p instead of 445p the day earlier.

As result, your fund's million shares of BP are not worth £445m any more, they are only worth £427m. And the fund has £18m of dividends in the bank so its overall portfolio (BP shares plus cash) is still worth £445m.

At this point, your fund has £445m of assets compared to £305m of cost, but it won't say it has made £140m of capital gains over the year, it will say its profits were £122m of capital gains and £18m of dividends.

What happens next depends if it is an Inc fund or an Acc fund.

If it is an Acc fund it will spend the spare £18m it for as dividends, on buying more shares in companies. Maybe some more BP ones at their current share price, or maybe some in Shell or Total or Exxon. So, your money is reinvested inside the fund for you, and your fund share value which had been £3050 last year is now £4450. You can say that's a combination of growth and reinvested dividends.

Instead, perhaps it's an Inc fund. If that was the case it would take the £18m of cash in the fund bank account and pay it out to the fund share owners. If it did that it would have no money to reinvest into more BP or Total or Exxon shares. It would simply pay the money out and be left with a £427m investment in BP and no cash.

At that point, you as the investor would not have £4450 of fund value. You would have £4270 of fund value and £180 dividend in your hand. You would still say the total value of £4450 is a combination of dividend and capital growth, but here the dividends are physically in your hand. If you like, you can spend that £180 on buying shares and be left with £4450 of fund value. Doing it that way *would get you some new shares* because the manager issues you new shares for the money you give him.

But in the Acc fund there is no reason to get given any more shares. You just keep your old shares that you had and no money needs to move between you and the fund. But each of those old Acc shares is worth £4.45 whereas in the Inc fund your shares (including the new ones you just bought) are worth only £4.27 each.

Dird

Thanks Andy & bowlhead for making it clearer

@coyrls, I'm not sure either I think I took the date (end of calendar year) to be the dividend date each year

talexuser

Dird wrote: »

my cash savings are generating 9%

still waiting for explanation how...

bowlhead99

talexuser wrote: »

still waiting for explanation how...

5% regular saver at Nationwide or Santander, and a 4% regular saver at Lloyds.

5% + 4% =9%, simple.

Apodemus

bowlhead99 wrote: »

5% regular saver at Nationwide or Santander, and a 4% regular saver at Lloyds.

5% + 4% =9%, simple.

I like that maths! By this measure my shares are paying a dividend in excess of 18%!

talexuser

Apodemus wrote: »

I like that maths! By this measure my shares are paying a dividend in excess of 18%!

That's nothing, by the same reckoning my funds are producing 32% according to latest yields. :rotfl:

richtips86

Apodemus wrote: »

I like that maths! By this measure my shares are paying a dividend in excess of 18%!

Yeah, I give 110% effort at work:
10% on Monday
20% on Tuesday
50% on Wednesday
20% on Thursday
10% on Friday

:beer: