Basic Question: Marcus vs. FTSE 100 Dividend

Audaxer

coyrls said:

Audaxer said:

bowlhead99 said:

Audaxer said:
Great response Bowlhead. That reinforces my view that for income seekers, these sort of Investment Trusts are a better buy than equity income funds at this time, because although the funds might have similar yields to the ITs, there is less certainty that the funds will be able to maintain the same level of dividends in these uncertain times.

Yes, in a lean year they can simply sell out of some of their underlying investments to free up some cash to pay you the dividend, even if they don't receive much income for themselves.  So you would have a lower amount remaining invested than if they had paid you the natural income.

I thought in most cases the equity income ITs would still be able to continue to pay the dividends by dipping into their reserves built up to cover these times, so I didn't think the ITs like CTY would not need to sell any of their underlying investments to pay dividends?

The reserves are in the underlying investments.

I should have maybe said dividend cover rather than reserves. As I understand it, ITs will have retained some income for challenging years like this, whereas funds will have had pay out all the income when received.

Thrugelmir

CTY will have been funding quarterly dividends out of cash inflow from investments held. Any excess revenue will have been added to reserves and reinvested to generate more income. Revenue reserves are just one of several pots on the balance sheet underpinned by the listed investments held.  

coyrls

Audaxer said:

coyrls said:

Audaxer said:

bowlhead99 said:

Audaxer said:
Great response Bowlhead. That reinforces my view that for income seekers, these sort of Investment Trusts are a better buy than equity income funds at this time, because although the funds might have similar yields to the ITs, there is less certainty that the funds will be able to maintain the same level of dividends in these uncertain times.

Yes, in a lean year they can simply sell out of some of their underlying investments to free up some cash to pay you the dividend, even if they don't receive much income for themselves.  So you would have a lower amount remaining invested than if they had paid you the natural income.

I thought in most cases the equity income ITs would still be able to continue to pay the dividends by dipping into their reserves built up to cover these times, so I didn't think the ITs like CTY would not need to sell any of their underlying investments to pay dividends?

The reserves are in the underlying investments.

I should have maybe said dividend cover rather than reserves. As I understand it, ITs will have retained some income for challenging years like this, whereas funds will have had pay out all the income when received.

The retained income is in the underlying investments; there is no separate "pot" outside the investments. As Thrugelmir says, it is a logical pot on the balance sheet but not physically separate from the investments.

Prism

Well one of the big ones (Shell) has just cut its dividend significantly. Sounds like a  permanent reset rather than a one off. Its going to affect quite a few income funds.

londontutor1987

Prism said:

Every time a dividend is paid the value of the share price goes down by the same amount. So all things being equal, comparing those two examples, Marcus pays you £230 interest and then you get your 20k back. The FSTE 100 pays you £900 and then you get £19.1k back. The only way the FSTE pays more than Marcus is if the share price also grows during the year, which is more likely than not but far from sure.

This is interesting, thanks.
So on the day that the dividend is paid the shares move by that value?
e.g. Company X pays 3% dividend, but the day that it pays this, the share price drops by 3%?
If this is the case, seems like dividends are pointless in the short term.

londontutor1987

Thrugelmir said:

Improbable that the FTSE 100 is going to yield 4.5% over the next 12 months.  What's the source of your information? 

No complex analysis here on all the ftse constituents and what dividends they are claiming they will pay, just taking a very rough average over the last 5 years.

Thrugelmir

londontutor1987 said:

Thrugelmir said:

Improbable that the FTSE 100 is going to yield 4.5% over the next 12 months.  What's the source of your information? 

No complex analysis here on all the ftse constituents and what dividends they are claiming they will pay, just taking a very rough average over the last 5 years.

Take 50% of that figure and you'll be far closer to currently reality. 

Audaxer

londontutor1987 said:

Prism said:

Every time a dividend is paid the value of the share price goes down by the same amount. So all things being equal, comparing those two examples, Marcus pays you £230 interest and then you get your 20k back. The FSTE 100 pays you £900 and then you get £19.1k back. The only way the FSTE pays more than Marcus is if the share price also grows during the year, which is more likely than not but far from sure.

This is interesting, thanks.
So on the day that the dividend is paid the shares move by that value?
e.g. Company X pays 3% dividend, but the day that it pays this, the share price drops by 3%?
If this is the case, seems like dividends are pointless in the short term.

It is on the ex-div date, which is usually a month or two before the dividend is actually paid, that the share price will reduce by the dividend percentage. 

If you are in retirement with equity income funds, it makes sense to have INC versions of the funds if you are looking to receive the dividends as a source of income.