Are dividends not a good approach when deciding on investing?

isayhello

I'm planning to read up on more on this because in some way if the dividends are put back into the fund or investment, then they do impact the wealth of the investment don't they, so high regular dividends whether you take them as income or not are important it seems.

I got the feeling from the video and the reddit quote that taking them just as income is pointless as the overall value of the investment goes down by that same amount for shares but not that dividends were a bad thing.

Prism

Dividends or no dividends has no real bearing on total returns. For example, you can reinvest the dividends paid out from an income fund and generate exactly the same return as from the equivalent accumulation fund. Equally, you can sell units from an accumulation fund on the ex-dividend day of the income version to create the same level of income. There is zero tax difference either.

So how about specifically seeking funds and investments that pay a higher dividend yield? I can so no evidence at all that weighting investments towards higher dividend payers overall gives better results. You will get different results, but maybe not in the way intended and dividend cuts will likely effect you more. It may be simply representitive of the current investment cycle but at the moment the higher dividend paying companies tend to be more cyclical e.g banks, miners, oilers, energy etc. Not the place to be be overweight in a recession but better during ctimes of rising interest rates and inflation.

Then you have the investment trusts that pay higher than normal dividends, but there is no magic here. They simply sell their own shares to generate the desired dividend payout. They also pay out the dividend that they want to pay rather than the income that you want to recieve so you still need another strategy to either reinvest those dividends or sell something else to generate your desired income level.

Linton

[Deleted User] said:

Linton said:

Yes, if your objectives are to maximise long term capital gain and minimise tax hassle there does not seem to be much point in taking dividends - only take them if you need them. 

Any unsheltered investments will impact your wealth so obviously the best strategy is to maximise your use of S&S ISAs etc.   But I suggest people should not let tax drive their investment strategy - best to decide a strategy and then the most tax efficient way of implementing it.

That's not quite what I said.  My objective is not to maximise long-term capital gains but to maximise my long-term return.  Similarly, it is not to minimise tax hassle. I don't care in the slightest about tax hassle.  What I care about is my post-tax (and post-fees) long-term return. 

If you dont need income now there is no point and some downside in chasing dividends.  On the other hand the type of underlying companies that produce dividends are an essential part of any well diversified portfolio and so should not be avoided, even if the dividends are just going to be re-invested..

On a more important point, I dont see "maximising long term return" as a useful objective, at least for money that really matters:

The more you chase return the higher the risk that you will fail badly, and you wont know until it's too late.  In fact it is amost certain that you wont "maximise long term return"as there will always turn out to have been a better strategy that can only be known after the event.  To be useful an objective needs to be constrained by risk and time and be capable of being monitored.

So for example a better one would be "to achieve an invested sum of £200K at current prices by 2040".  WIth this objective you can check progress and make the decision to adjust your portfolio risk appropriately over time.  Or you have the choice of taking other steps to ensure the objective is met such as by making larger contributions.

If you dont have a specific objective that leads you in other directions I suggest you just put your money in a global tracker in the most tax efficient environment you can create and forget about it.

ColdIron

Prism said:

So how about specifically seeking funds and investments that pay a higher dividend yield? I can so no evidence at all that weighting investments towards higher dividend payers overall gives better results

Quite the opposite IMO. By focussing on a high dividend you are fishing in a smaller pool of typically dinosauric mature companies with lower growth prospects. Think tobacco, oilers and miners. Compare this to Amazon who have never paid a dividend and reinvest their profits into new big box warehouses, R&D into AWS etc

If I was in my 20s I know which I would choose. That said I'm not in my 20s, I'm retired and much more income focussed these days and if you've done it right growth moves down in your priorities and income in the form of dividends up. High yield dividends (6% +) do represent a very real prospect of capital loss but they have their place in a balanced portfolio of more mainstream yields (3% - 5%)

You will get different results, but maybe not in the way intended and dividend cuts will likely effect you more.

I'm not so sure about this. Dividends hold up better than share prices, certainly in the short term as the directors choose the payout and shareholders don't like dividend cuts. During the Covid period where there were dire warnings about dividend cuts my analysis shows no drop in my income whatsoever. Obviously there is a limit to how long this can be maintained but it does provide a useful resilience to those relying upon them

Bottom line: If you are young ignore dividends, focus on total return

aroominyork

Linton said:

[Deleted User] said:

Linton said:

[Deleted User] said:

isayhello said:

 ZERO impact yo wealth."

My personal view is that dividend yield is not a way to judge things.  In relation to "ZERO" impact on your wealth, that's right if the dividends are tax-sheltered (e.g. SIPP or ISA) or otherwise not taxable (e.g. covered by personal allowance or dividend allowance). Otherwise, the tax on a dividend does reduce your wealth (compared to a deferral until sale with a capital gain and potentially lower capital gain tax rates). 

Why does one need to judge things?  It should be more about your objectives - it you want income go for income, if you want long term capital growth go for that.  Trying to make one strategy meet the other's objectives seems somewhat counter-intuitive.  But both are needed for good diversification, the only question is in what %s.

My post was meant to focus on tax.  My objective is to maximise my post-tax, post-fee return on a well diversified portfolio. I judge my investments based on that objective, not on expected dividend yield.  Where I hold a particular investment (e.g. SIPP, ISA or otherwise) is based, among other things, on tax.  And because the long-term interaction of pensions, ISAs, IT, CGT and IHT under uncertainty are complex, dividends only play a small part of my overall tax thinking.  But unsheltered dividends do not have "ZERO impact" on wealth.  Does that make sense?      

But I suggest people should not let tax drive their investment strategy - best to decide a strategy and then the most tax efficient way of implementing it.

This is good advice to avoid being penny wise but pound foolish, letting the tail wag the dog, or succumbing to the metaphor of your choice. But there are times you can be caught on the cusp. Example: OH and I both have amounts in a GIA which it will take several years to move into sheltered SIPPs/ISAs. Both accounts have a global equity index fund (Inc.) and TN25 short dated gilts. When the gilts mature, or possibly before, I want those funds in an index gilt fund. However that will generate income which will be taxed. There is no way to reconfigure my SIPP/ISA/GIA to reduce tax, so one option is to buy a low coupon nominal gilt with maturity similar to a gilt index fund and every couple of years, as its maturity shortens, swap it for a longer dated one. Sensible or not?

Prism

ColdIron said:

I'm not so sure about this. Dividends hold up better than share prices, certainly in the short term as the directors choose the payout and shareholders don't like dividend cuts. During the Covid period where there were dire warnings about dividend cuts my analysis shows no drop in my income whatsoever. Obviously there is a limit to how long this can be maintained but it does provide a useful resilience to those relying upon them

Bottom line: If you are young ignore dividends, focus on total return

What I meant was that by relying more on dividends, should/when they get cut, it has a bigger impact on a strategy than lets say something like regular sales and withdrawals which just carries on regardless. It requires a decision on how much to sell to top up the dividend loss and an understanding of how that might impact future dividends from a lower number of units.

I still reckon that sell what you need from a balanced portfolio is simpler and more effective for most.

Linton

Prism said:

ColdIron said:

I'm not so sure about this. Dividends hold up better than share prices, certainly in the short term as the directors choose the payout and shareholders don't like dividend cuts. During the Covid period where there were dire warnings about dividend cuts my analysis shows no drop in my income whatsoever. Obviously there is a limit to how long this can be maintained but it does provide a useful resilience to those relying upon them

Bottom line: If you are young ignore dividends, focus on total return

What I meant was that by relying more on dividends, should/when they get cut, it has a bigger impact on a strategy than lets say something like regular sales and withdrawals which just carries on regardless. It requires a decision on how much to sell to top up the dividend loss and an understanding of how that might impact future dividends from a lower number of units.

I still reckon that sell what you need from a balanced portfolio is simpler and more effective for most.

In my experience, provided your portfolio is well diversified, cuts in dividends is less of a problem than say major falls in equity prices  Yields can rise and fall but generally  that is more a function of changes in value of the shares than changes in size in £ terms of the dividend/interest. Rather like bonds.

LHW99

Linton said:

Prism said:

ColdIron said:

I'm not so sure about this. Dividends hold up better than share prices, certainly in the short term as the directors choose the payout and shareholders don't like dividend cuts. During the Covid period where there were dire warnings about dividend cuts my analysis shows no drop in my income whatsoever. Obviously there is a limit to how long this can be maintained but it does provide a useful resilience to those relying upon them

Bottom line: If you are young ignore dividends, focus on total return

What I meant was that by relying more on dividends, should/when they get cut, it has a bigger impact on a strategy than lets say something like regular sales and withdrawals which just carries on regardless. It requires a decision on how much to sell to top up the dividend loss and an understanding of how that might impact future dividends from a lower number of units.

I still reckon that sell what you need from a balanced portfolio is simpler and more effective for most.

In my experience, provided your portfolio is well diversified, cuts in dividends is less of a problem than say major falls in equity prices  Yields can rise and fall but generally  that is more a function of changes in value of the shares than changes in size in £ terms of the dividend/interest. Rather like bonds.

And in particular, not to "chase high yield". I began positioning our SIPP portfolios around 15 years ago with an aim of providing a specific level of dividend income. I have around 15 funds, with only 1 specifically high income, the remainder mainly below 4% yield currently, with a couple of low yield, growth focussed funds which can be swapped to income generating if appropriate. Overall dividend income % has risen over time and is now 4.2% of the current capital value. Works for us, and will / should leave something when we go for the children / grandchildren.

Linton

LHW99 said:

Linton said:

Prism said:

ColdIron said:

I'm not so sure about this. Dividends hold up better than share prices, certainly in the short term as the directors choose the payout and shareholders don't like dividend cuts. During the Covid period where there were dire warnings about dividend cuts my analysis shows no drop in my income whatsoever. Obviously there is a limit to how long this can be maintained but it does provide a useful resilience to those relying upon them

Bottom line: If you are young ignore dividends, focus on total return

What I meant was that by relying more on dividends, should/when they get cut, it has a bigger impact on a strategy than lets say something like regular sales and withdrawals which just carries on regardless. It requires a decision on how much to sell to top up the dividend loss and an understanding of how that might impact future dividends from a lower number of units.

I still reckon that sell what you need from a balanced portfolio is simpler and more effective for most.

In my experience, provided your portfolio is well diversified, cuts in dividends is less of a problem than say major falls in equity prices  Yields can rise and fall but generally  that is more a function of changes in value of the shares than changes in size in £ terms of the dividend/interest. Rather like bonds.

And in particular, not to "chase high yield". I began positioning our SIPP portfolios around 15 years ago with an aim of providing a specific level of dividend income. I have around 15 funds, with only 1 specifically high income, the remainder mainly below 4% yield currently, with a couple of low yield, growth focussed funds which can be swapped to income generating if appropriate. Overall dividend income % has risen over time and is now 4.2% of the current capital value. Works for us, and will / should leave something when we go for the children / grandchildren.

I do aim for fairly high yield.  It is currently about 6.5%, mainly because capital values have fallen thanks to increased bond interest rates.  However I run separate growth and high income portfolios with the corresponding and very different objectives and hence very different structures.  So the growth portfolio is available to shore up the dividend one should it ever be necessary. So far after more than15 years it has not beyond dealing with inflation.

Audaxer

I understand all the arguments about total return, but I don't think there is anything wrong with retirees having part of their overall portfolio consisting of income funds, or some of the UK and global equity income ITs that generate increasing levels of income year after year.

During equity crashes I would feel happier continuing to take dividends from equity income funds/ITs, rather than deciding whether or when to sell units from growth funds/ITs.