High Divident fund investing?

MinuteNoodles

Only a few years in, went the trusted VLS80 "fund and forget" route both in my ISA and SIPP. I keep reading about investing in dividend funds that invest in companies which consistently pay higher dividends ( not just cherry picking the ones that top the list for a particular year) and wondering if it's a better route? Currently approaching 50 and trying to build up something so I don't retire completely skint. Would this be a good strategy to do now, reinvesting the dividends in the same fund, or would it be something to be better done when I'm retired and having the dividends as an income? I know that the trade off is what is paid out in dividends usually affects the share price by an equal amount so at the time of the payout the value of the fund is the same.

Prism

You pretty much summarized the pointlessness of dividends in your last sentence. Whenever the company goes ex-dividend, the share price drops by the same amount as the dividend. Most companies do pay some sort of dividend and ones where there is little chance of growth (like a utility company) tend to pay a bit more, but I wouldn't go searching them out. 

Linton

There is no point in taking dividends when you don’t need the income. It is both cheaper and less hassle to use the ACC versions of the funds to ensure that dividends are automatically reinvested. Once you retire you may then wish to change your funds and your strategy.

dunstonh

 I know that the trade off is what is paid out in dividends usually affects the share price by an equal amount so at the time of the payout the value of the fund is the same.

Which is why total return needs to be considered and not just one aspect of it.

MinuteNoodles

Prism, one point being made is the share value lost from the dividend payout over time tends to be recovered due to normal trading hopefully increasing share prices so increasing the underlying value of your investment.

Linton, are you saying there's no point targetting funds that base themselves on investing in high dividend companies or to do so but reinvest the dividends which was what I would be intending to do until retiring?

Linton

I am saying there is no point in targeting funds that invest in high dividend companies whilst you are still building up your pension pot. Best to invest broadly without any major targeting. Also, In recent years high dividend companies have tended to produce lower total returns, including dividends, than those companies which prefer to reinvest profits internally. Though of course this could change.

After you retire and need income you may want to change your investment strategy.

Prism

MinuteNoodles said:

Prism, one point being made is the share value lost from the dividend payout over time tends to be recovered due to normal trading hopefully increasing share prices so increasing the underlying value of your investment.

Linton, are you saying there's no point targetting funds that base themselves on investing in high dividend companies or to do so but reinvest the dividends which was what I would be intending to do until retiring?

If the share price of a company is going to rise over time it will do that regardless of if a dividend was paid or not. If a company is doing well then yes it will pay its dividend an over the long run its share price will grow in line with its profits. If the company pays all of its profits out in dividends then it won't likely grow at all. Some companies feel obliged to pay out more in dividends than they actually earn in a given year. 

There are plenty of examples of companies that pay out dividends and their share price continues to drop year after year, until the dividend is reduced or dropped.

MinuteNoodles

Thanks to the both of you. For now I think then I'll continue as is investing in VLS80 ACC. Might not be the best method but it follows the KISS rule (keep it simple, stupid) and often I need to keep things simple 

album_song

There are funds like VHYL, Vanguard UK equity income, iShares Quality Dividend that are essentially index funds that buy either high dividend yielders, or resilient dividend payers. And a high yield does not necessarily imply an above average dividend payout ratio, it could as easily be caused by a low valuation.
The last 10 years has been particularly bad for dividend stocks, but over the very long term they have tended to slightly outperform although no-one knows if that is substainable indefinitely, so IMHO just buy the index.

Moe_The_Bartender

When you receive a dividend the value of the company reduces by the amount of the dividend paid out. In effect, a dividend represents a partial liquidation of the business. You are not receiving an income as much as a return of your own money.

Real income from investments is rent, contract payments, debt and royalties.

contr_arian

IanManc said:

Moe_The_Bartender said:

When you receive a dividend the value of the company reduces by the amount of the dividend paid out. In effect, a dividend represents a partial liquidation of the business. You are not receiving an income as much as a return of your own money.

Real income from investments is rent, contract payments, debt and royalties.

A dividend represents a portion of the profit made by the business, unless the company is borrowing to pay the dividend. A dividend does not "represent a partial liquidation of the business".

If a business decides that after retaining some of its profits for re-investment, the best way for it to allocate capital is distribute the excess to shareholders then that can be a sound capital allocation strategy. Most businesses do not liquidate themselves to pay out dividends, and either way their earnings growth rate is capped by nominal GDP growth. Berkshire Hathaway's 2019 letter to shareholders went over this in "The Power of Retained Earnings" section.