Woodford Concerns

itwasntme001

cogito wrote: »

If I have shares in a company worth £10 and they pay me a dividend of £1, how much money have I got? The answer is not £11.

The answer is £11. They paid you the dividend today. The ex-dividend is some time prior to today which is when the stock starts to reflect the cash that will be paid out as a dividend. All else being equal of course.

itwasntme001

Linton wrote: »

In some circumstances such as retirement you may want the cash. Dividends have the added advantage that they are a lot more stable than equity prices. Really dividends are to some extent much like interest on a loan, you spend a lump sum in order to get a steady income.


Another aspect of dividends is that they act as a proxy for solid well-run cash-rich defensive companies which see little opportunity to reinvest in the business - eg utilities, consumer essentials, certain property areas. This is why Woodford did so well in the 1990s when the benefits of such companies were not appreciated by many investors.


The danger of such companies not paying dividends is that they use their profits for takeovers, which generally are shareholder wealth destroying, and for ill-judged ventures in areas outside their competence.

I agree that dividend stocks are useful to those who require a relatively stable income, just like BTL is as well as high interest bank accounts. In fact it was due to interest rates falling that dividend stocks have done so well in terms of capital growth following the financial crisis. However, in terms of capital growth, when the markets start to price in rise in rates,these gains will erode. Dividends are also not safe by any means, they can easily be cut if companies need to.


Overall though, for a total return investor, it is best not to focus on dividend stocks or even best to avoid altogether (depends on the person's goals as well as macro factors) due to the following 2 reasons:
- Paying out dividends can mean companies do not know how to grow further and so capital growth will be limited making expected total return unfavorable.
- It may not be tax efficient for the investor (unless he invested in a tax efficient way) and certainly not tax efficient for the company as corporate tax needs to be paid on profits before dividends are deducted.

Linton

newatc wrote: »

Does anyone know that those investments in ill-liquid small companies was a strategy from the start or did he move more into those as a gamble to improve poor performance?

With say £5bn (or whatever) to invest perhaps he could not find sufficient other investment opportunities.


Using illiquid small companies to improve short/medium term performance makes no sense whatsoever because any gains will only come when the shares can be freely bouight and sold or when the companies reach a suufficient size and maturity to justify a take-iover by a larger company.

AnotherJoe

newatc wrote: »

Does anyone know that those investments in ill-liquid small companies was a strategy from the start or did he move more into those as a gamble to improve poor performance?

AIUI that was the strategy, hence the name patient capital, where patient implies waiting rather than something that's hospitalised and in need of urgent surgery.

However, I doubt many investors would imagine he'd spend around one third of a billion pounds of their money on what is nothing more than an outright scam, where more than patience is needed, a Greater Fool perhaps.

aroominyork

AnotherJoe wrote: »

AIUI that was the strategy, hence the name patient capital, where patient implies waiting rather than something that's hospitalised and in need of urgent surgery.

You say that in jest but I don't think it's so. He knew from Day 1 that he would invest heavily in biotech firms and I think it was an intentional play on words.

Linton

itwasntme001 wrote: »

..... Dividends are also not safe by any means, they can easily be cut if companies need to.

Dividends can be cut, but not that easily. Shareholders hate dividend cuts and the directors want to keep their jobs. So in practice a dividend cut is one of the later options when a company has problems.

Overall though, for a total return investor, it is best not to focus on dividend stocks or even best to avoid altogether (depends on the person's goals as well as macro factors) due to the following 2 reasons:
- Paying out dividends can mean companies do not know how to grow further and so capital growth will be limited making expected total return unfavorable.
- It may not be tax efficient for the investor (unless he invested in a tax efficient way) and certainly not tax efficient for the company as corporate tax needs to be paid on profits before dividends are deducted.

- diversification. Over the long term there is some evidence that value, which high dividend shares tend to provide, outperforms growth relative to the risk. As in most investment decisions both is better than either/or.

- if you are invested in a solid cash generating company would you rather it reinvested the profit internally with a fair chance of the money being wasted or gave its profits to you to reinvest elsewhere?

cogito

itwasntme001 wrote: »

The answer is £11. They paid you the dividend today. The ex-dividend is some time prior to today which is when the stock starts to reflect the cash that will be paid out as a dividend. All else being equal of course.

I think you just unwittingly proved my point.

Linton

cogito wrote: »

If I have shares in a company worth £10 and they pay me a dividend of £1, how much money have I got? The answer is not £11.

1) The company share is only worth £10 because someone is prepared to pay £10 knowing that they will get the 10% dividend. If it did not pay a 10% dividend why would it be worth £10?


2) Simplistically after the dividend is paid the company share price will drop to £9. But assuming nothing else happens in one years time the price will have risen back to £10 in anticipation of the next dividend, So by paying £10 (or even £9 a few months earlier) you are getting a steady 10% income stream. You can of course choose to invest this income in the same company or any other one.

itwasntme001

Linton wrote: »

Dividends can be cut, but not that easily. Shareholders hate dividend cuts and the directors want to keep their jobs. So in practice a dividend cut is one of the later options when a company has problems.





- diversification. Over the long term there is some evidence that value, which high dividend shares tend to provide, outperforms growth relative to the risk. As in most investment decisions both is better than either/or.

- if you are invested in a solid cash generating company would you rather it reinvested the profit internally with a fair chance of the money being wasted or gave its profits to you to reinvest elsewhere?

Dividends are usually the first things that are cut when a company faces financial difficulty. Its easy to do and is also tax efficient. In practice it is done in combination with rights issue, debt issuance etc etc. Dividend cut are just a lot easier to do then other methods to raise finance so is done first usually. why would you issue debt or dilute shareholders (both of which are also viewed as bad for shareholders) when cutting dividends is more tax efficient?????


There is no rule that over a long term value beats growth. If you use historical data it is only coincidental because we have been in a long term bull market in bonds and as you rightly said value tends to include dividend stocks which do well in bond bull markets. No idea what will outperform next 10, 20, 100 years but one should sensibly assume 50-50 and just be diversified in both. That does not mean one should invest with a mix of just dividend stocks and growth as not all value stocks are dividend stocks. But it does make sense to avoid over-weighting dividend stocks unless your goal is stable income.


On your last question, it depends on whether you think the solid company can reinvest the profits to produce more growth - which would be compounded of course and is highly tax efficient when compared to paying the profits out as dividends. If you think it will be wasted and they don't pay dividend then sell, if they pay out as dividend then hold (if income is your goal).


Unless you are income focused, dividend stocks should not be your focus. Its silly to assume dividend stocks are safe because they pay a dividend just as it is silly to assume a stock with a PE raito of 10 is safer then a stock with a PE ratio of 50.

itwasntme001

cogito wrote: »

I think you just unwittingly proved my point.

Care to explain why?