Is the concept of dividends pointless for the sake of investing?

davomcdave

Yes you are.

Assume you have a company with shares worth 100p each the day they go ex-dividend. You hold 1 share for a year and nothing happens to make the company worth more or less except ongoing operations that yield a 5p/share dividend. Over the course of the year the !!!-dividend shares will slowly rise to be worth 105p until the 5p dividend is paid at which point the shares revert to being worth 100p but you have 5p dividend in your pocket.

The dividend works a bit like the interest payment on a savings account only there is a risk that the dividend will not get paid next year which is offset by the fact that the dividend may increase next year.

The difference between a dividend and the money being accrued by the company is that you can't fake a dividend. If you get your 5p dividend on the share that you own that's cool, hard cash. There is no dodgy accounting that can fake you holding money in your hand.

ThinkingOutLoud_2

So ignoring taxation and assuming the company has no debt to service ( and I am not sure you can as many do) and thinking for those with limited investments.

I agree
- the question for the company is if they can dole out their profit as dividends or want to retain the profits to reinvest in their business.
- the share value will be affected proportionately in real time as mentioned by whether they built up a dividend or just paid it - the markets are very smart but cannot always predict the dividend exactly.
- the selection and volatility of stock and their propensity to pay dividends should be considered if desired. But stock is not bad if it never pays dividends (esp. during major growth when it is cheaper than borrowing) or good because it feels obliged to pay a dividend because of history even when it does less well and should be investing to keep up.

So let's compare three models based on buyings and or selling shares the day after any dividend and effectively identical company performance of 10% growth reflected in the shares/dividend:-

> If I buy 100 shares at £1 each and they go up 10% to £1.10 but pay no dividend - at the end of the year I could sell 9 shares for cash of £9.90 (less costs to sell) and have a share value of £100.10. Total = £110
> If I buy 100 shares at £1 each and they do not go up ex-dividend BUT pay a dividend of 10p a share - I have cash of £10 and shares worth £100. Total = £110
> If I buy 100 shares at £1 each and they go up 5% to £1.05 ex-dividend paying 5p dividend- at the end of that year I have cash of £5.00 and shares worth £1.05. Total = £110

The outcome is the same.

But if in the real world I pay £10 transaction fee to sell any shares - selling a few shares wipes out my profit. However if I wanted to reinvest my dividends, that might have costs too.

So it depends if you want some income back without effort each year - assuming you can receive and bank your dividends for free.

So surely dividend are useful if the typical % paid our matches your desire to take some of the growth as cash (even if you cannot control the % dividends). If you are happy to sit back and see max growth and no income - then reinvesting dividends or no dividend are just as good.

Linton

TheTracker wrote: »

There is no peer reviewed evidence for any diversification benefit in dividend payers.

Is there any peer reviewed evidence that there isnt? Clearly if the paying of dividends is a proxy to some extent for Value then the avoidance of dividends would reduce diversity.

Dividend payers are a poorer proxy for value than other measures for which exist targeted funds.

Quite possibly but the data is a lot more accessible. And of course the availability of targetted funds is very limited.

Leaving aside tax and trading costs, there is no logical benefit in receiving dividends versus selling capital.

Why leave aside tax and trading costs? I would have thought they were a rather good basis for logical decisions. Arent trading costs one of the main arguments of the passive movement? There are plenty of practical benefits to taking income from dividends in that you dont need to continually decide which investments to sell. With the right platform facilities there is no cost nor work on your part to access the money. As dividends are a lot more stable than equity prices, you dont need to employ complex rules in deciding how much income to take depending on market conditions. Sounds like lots of logical benefits to me.

Finally, there is evidence that dividend payers are over valued based on behavioural preferences (such as yours) that eat well into the tax and trading aspects.

I thought the value was determined by the market. Or do you believe that certain investors can have insight into true value that is beyond that available to the market?

One test of value is in the yield. If dividend payers in the UK were significantly over valued you wouldnt be seeing solid companies paying say 5%-6% dividend annually. I am quite happy to get that level of steady-ish hassle free income .

It is a 'religious' issue, so having said my part I will stay quiet as there is little chance of convincing you, and I think no less of you for holding such views

Best to keep religion out of investing. In my view any absolute beliefs are a handicap to sensible investing and are not amenable to rational discussion.

Linton

ThinkingOutLoud wrote: »

.....

The outcome is the same.

But if in the real world I pay £10 transaction fee to sell any shares - selling a few shares wipes out my profit. However if I wanted to reinvest my dividends, that might have costs too.

So it depends if you want some income back without effort each year - assuming you can receive and bank your dividends for free.

So surely dividend are useful if the typical % paid our matches your desire to take some of the growth as cash (even if you cannot control the % dividends). If you are happy to sit back and see max growth and no income - then reinvesting dividends or no dividend are just as good.

Plus if your strategy is to raise income by selling shares you have the decision to make as to which shares to sell. It all requires some level of manual intervention.

EdGasket

Dividends are pointless in the sense that once the dividend is paid, the company no longer has that money so is worth less overall by the amount of cash it has paid out servicing the dividend. However if they never pay out dividends, then the only way you can get a return is to sell the shares or wait for a company wind-up or takeover. Generally paying a dividend is a sign of good health in a mature company.

What is totally pointless is company run dividend reinvestment schemes. Why? Because if all shareholders reinvest their dividends then they all own exactly the same portion of the company 'pie' as before the dividend and the dividend has been a pointless excercise and a waste of time and administartive expense.

Apodemus

TheTracker wrote: »

There is no peer reviewed evidence for any diversification benefit in dividend payers...

Except at the small-scale personal level, where amalgamating the dividend income from a portfolio of shares allows one to extend the portfolio diversification by adding a holding in other companies as time goes on, without incurring dealing costs on part sales of existing holdings. In this way Dividend reinvestment can provide a useful means of diversification and rebalancing.

I'm with you, though, on the religious aspect. We all have deep-seated gut-feel for what is right and proper in our investment strategy which often defies logical analysis or external argument!

seacaitch

Apodemus wrote: »

We all have deep-seated gut-feel for what is right and proper in our investment strategy which often defies logical analysis or external argument!

You can argue there is a form of 'logic' because the best strategy for an investor is the one they can stick with.

In order to do so through thick and thin it's essential the investor has 'belief' in their own strategy (cf. to how religious 'belief' can also get people through difficult times).

If for some investors the regular receipt of dividends provides an important psychological boon, enabling them to stick to (believe in) their plans through difficult times where they might otherwise have deviated from them and/or capitulated, then that is not something to be readily dismissed.

Of course, other investors who are minded that a dividend focus is sub-optimal can assemble different portfolios that meet their needs.

In this way, everyone can find a plan that works for them and everyone's happy.

darkidoe

Linton wrote: »

History shows that dividends are much less volatile than equity prices.

Are there any articles that expands on this?? For example, will the bull market in 2016 mean dividend yield as a percentage will drop off if the dividends stay the same? Or will it stay relatively stable? I guess there is no correlation whatsoever to underlying asset prices??

I personally prefer to see dividends payout as a psychological feelgood to let me know I am owning an asset. It also gives me slight freedom to choose how to rebalance my portfolio with with dividends as I see fit or perhaps take it as income if required.

Linton

darkidoe wrote: »

Are there any articles that expands on this (non volatility of dividends) ?? For example, will the bull market in 2016 mean dividend yield as a percentage will drop off if the dividends stay the same? Or will it stay relatively stable? I guess there is no correlation whatsoever to underlying asset prices??

......

No peer reviewed academic papers, just my own observation from 18 or so dividend paying shares held for upto 10 years. The yield varies, it's the actual cash value of the dividend that tends to be very stable but tending to increase over time. Shareholders and the wider market hate dividend cuts and so boards only decrease the dividend when under great financial pressure. For an income investor reliant on dividends the capital value of the shares is relatively unimportant. The things that matter are the dividend value and financial evidence that it is sustainable, eg that the dividend is fully covered by profits.

steampowered

TheTracker wrote: »

There is no peer reviewed evidence for any diversification benefit in dividend payers.

Finally, there is evidence that dividend payers are over valued based on behavioural preferences (such as yours) that eat well into the tax and trading aspects.

Where is your peer reviewed evidence that dividend payers are over valued?

Most of the largest FTSE 100 companies are big dividend payers so that's a pretty big assertion.