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

Eco_Miser

TheTracker wrote: »

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

Why leave aside tax and trading costs? Pay £5 or more to sell shares AND have a smaller share in the investment in future, or get dividends for free, and keep my current proportion of the investment?

Give me dividends every time.

ThinkingOutLoud_2

I cannot agree with the assertion that DRIPs (Dividend Reinvestment Plans) are pointless per EdGasket.

I think EdGasket may also be saying that the company issue new shares when doing this thus diluting your ownership. I am not sure that is the case often or even ever so (apologies if I misread you). Your are buying additional shares in the company.

I believe the DRIPs may often be be a good thing for several reasons (assuming you do not need the income dividends provide now):-
> often such schemes do not charge for reinvestment so a free or lower cost trade vs alternative reinvestment
> you effectively get some pound-cost averaging by buying your shares in that company over time (different debate if that is good thing of course!)
> you can choose not to do this next year if you need income or your view of the company's future changes
> there is theory that such action helps stabilise the share price of such companies
So if you like the stock in the first place and buy and nothing has changed to update that view and you do not need the cash -then it seems to me this is repeat of the previous investment decision you made. DRIPs are then a good thing.

ThinkingOutLoud_2

I think Darkido is right that dividends give you a prompt and a choice how to reinvest part of your portfolio growth that share price appreciation alone does not.

But I am less convinced that they should carry a feel good factor vs pure share growth.

Compare a company that believes so much in its products/ideas and growth trajectory that it uses the excess profit it has to invest in its future rather than take a loan or dilute its ownership to raise more capital VS. a company whose product is in decline with no future - they pay a dividend because they have nothing better to do with their money.

Which is the better asset to hold?
(Both painted a tad extreme for effect)

Linton

Which company would you rather hold to pay your pension...

A solid longstanding market leading company in a steady but constrained market that continues to generate large amounts of cash (perhaps a utility), and distributes that cash to its shareholders or a small high tech company that pours all its money into its latest brilliant idea with little idea of if or when it will actually come up with a viable product.

darkidoe

ThinkingOutLoud wrote: »

I think Darkido is right that dividends give you a prompt and a choice how to reinvest part of your portfolio growth that share price appreciation alone does not.

But I am less convinced that they should carry a feel good factor vs pure share growth.

Compare a company that believes so much in its products/ideas and growth trajectory that it uses the excess profit it has to invest in its future rather than take a loan or dilute its ownership to raise more capital VS. a company whose product is in decline with no future - they pay a dividend because they have nothing better to do with their money.

Which is the better asset to hold?
(Both painted a tad extreme for effect)

Sorry I am speaking purely from a passive investing point of view. I have no idea, no capabilities and at this moment in time no interest in deciding whether individual companies should be retaining profits for future growth or paying out dividends. Hence the passive approach.

Measuring year on year dividends is one of the ways I can track my progress in accumulating a passive income generator, with FI being the goal.

Have a clear goal, set your strategy and make a plan to make the dividends work for you.

grey_gym_sock

EdGasket wrote: »

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.

maximum pointlessness was achieved on the occasion when BTG plc decided that they could pay a dividend, but they'd rather retain the cash inside the company, so instead they issued bonus shares (based on some percentage of your existing number of shares) to shareholders. but because they couldn't issue fractional shares, they then paid out cash for silly amounts worth less than 1 share.

more seriously ... logically, i don't believe dividends matter, but i haven't entirely weaned myself off from liking seeing them come in.

Thrugelmir

ThinkingOutLoud wrote: »

Compare a company that believes so much in its products/ideas and growth trajectory that it uses the excess profit it has to invest in its future rather than take a loan or dilute its ownership to raise more capital VS. a company whose product is in decline with no future - they pay a dividend because they have nothing better to do with their money.

Which is the better asset to hold?
(Both painted a tad extreme for effect)

Far easier to raise the capital required to grow the business either organically or through acquisition than depend on the vagarities of profitability alone.


Because a company generates cash it does not mean it's in decline. Take Coca Cola. A mature business with a simple business model. Limited growth opportunity to boot.

Alternatively banks. What should they invest in? With their excess cash.

ThinkingOutLoud_2

linton, I don't think anyone would disagree with the inferred selection for a pensions seeking income not growth as having merit.

I also agree overhyped tech companies without product substance will continue to burn investors.

But OP question was about whether dividends were pointless.

I think we violently agree, they are not pointless.

Apple shares suggest not everything that is shiny is a bad investment. Yet it didn't pay dividends for quite a while.

ThinkingOutLoud_2

Thrugelmir wrote: »

Because a company generates cash it does not mean it's in decline.

Not sure I said that. I said a company whose product made profit but whose product lifespan was limited (a dog) and who had nothing new coming on stream. So maybe an old fashioned film developer chemical company who did not diversify a few years back.

The OP was about if dividends were pointless. The examples were solely to try paint dividends against pure share price growth - nothing more. That both had merits.