Are dividends not a good approach when deciding on investing?

Johnjdc

adindas said:

Johnjdc said:

adindas said:

GeoffTF said:

They are pointless even if you need a regular income. The only things that matter are the total return (dividends + capital gains) that you make and the level of risk that you take. If you restrict yourself to higher yielding shares you reduce your diversification and increase your risk.

I concur with this perspective. Some individuals still consider dividends as a form of income, akin to the interest earned from savings. However, what's the point of receiving dividends if the  value of initial investment is decreasing. There are also a reasonable number of risk free alternative such as FSCS protected savings paying 6.00%+. Some of them are even easy access.

Moreover, the current scenario is improving. In contrast to earlier times, you can now sell your investments quickly with minimal or no cost on some platforms when you need the money. When selling investments, the basic knowledge is certainly needed, at least not selling the winner, not selling an investment currently in red that you believe may be having a temporary setback but could potentially recover with more time.

Surely the fundamental point is how much distributable excess cash the company is generating relative to its market capitalisation. Whether it retains that on its balance sheet and the share price goes up, spends it buying back shares and the share price goes up, or pays it out in dividends, is objectively irrelevant (though can matter for e.g. tax purposes and convenience).

I am quite highly invested in dividend stocks (within an ISA, owning mostly dividend stocks in a general account is probably silly in the UK at least) which was a hedge in the period of low interest rates, but the important question is whether the company is generating the profits to pay, and keep paying, the dividend. If it is, the capital value will be sustained. Some of them have done badly in the era of rising rates, but I have enough in cash savings that I was happy to deal with that.

Owning a company where it all accrues to capital value and then selling small amounts when you need the money is functionally the same thing, but feels less intuitive to people, which must be part of the ongoing popularity of dividend stocks.

The fact here is that some companies are distributing dividend even the companies are not making profit. Some of them are distributing almost all of that the free cash flow they have generated in recent years.

Yes, which is what matters - they're lossmaking. Unless something looks like changing radically in their future, they're bad companies to own whether they are depleting their capital with dividends or not. Distributing all their free cash flow suggests a loss of confidence in their business model, or a belief their shareholders are only in it for the dividends.

I own at least some of these (say, in the renewable energy space), a holdover from when they were profitable because their borrowing costs were close to zero, and a hedge for the future collapse in interest on my cash savings when they may become meaningfully profitable again (hence them sometimes being called "bond proxies"), but I'd agree that in general they are to be avoided.

Prism

wmb194 said:

Prism said:

wmb194 said:

Prism said:

wmb194 said:

Kaizen917 said:

I wish that accumulating funds have a clear way of showing the amounts of earned dividents, even when being reinvested. There is just something encouraging to seeing them generate.

Other than that, not a whole lot of sense aiming purely for divident focused funds.

*dividend. There is if you want an income.

You can take an income from accumulation funds almost as easily as income funds just by selling the same value amount in units. It makes no difference expect for a GIA and tax.

What if you don't want that aggravation? 

Many platforms have a regular payment feature were you can specific the exact repeat amounts to sell. Some platforms don't change anything for this. With a dividend you still have to set this up to transfer the cash out of the platform. So maybe a tiny bit of effort required but aggravation seems a little steep. Besides, the benefit is that you can control what you withdraw and when, whereas with dividends you are in the hands of the market.

With iWeb and HL for instance you tell them once to pay your dividends away to your nominated account and they will do it for ever more. No aggravation at all. You can also sell units when you choose.

Sounds like we are in agreement then. Dividends are easy to extract automatically. Selling units is also easy to extract automatically. Makes almost no difference - all dividends, some dividends, no dividends. I would do both since dividends yields are not generally high enough to support income alone. 

Prism

Linton said:

Prism said:

wmb194 said:

Prism said:

wmb194 said:

Kaizen917 said:

I wish that accumulating funds have a clear way of showing the amounts of earned dividents, even when being reinvested. There is just something encouraging to seeing them generate.

Other than that, not a whole lot of sense aiming purely for divident focused funds.

*dividend. There is if you want an income.

You can take an income from accumulation funds almost as easily as income funds just by selling the same value amount in units. It makes no difference expect for a GIA and tax.

What if you don't want that aggravation? 

Many platforms have a regular payment feature were you can specific the exact repeat amounts to sell. Some platforms don't change anything for this. With a dividend you still have to set this up to transfer the cash out of the platform. So maybe a tiny bit of effort required but aggravation seems a little steep. Besides, the benefit is that you can control what you withdraw and when, whereas with dividends you are in the hands of the market.

You can have all dividends paid out of an II S&S ISA automatically straight into your registered bank account within a few days of them being received.  So what's not to like? No work whatsoever, the money just turns up regularly throughout the year and it's all tax free so less pressure on the higher rate tax band.

It's no different to a steady tax free income but with a little variability.  No difficult decisions on what to sell, possibly at a loss.  No deep consideration as to whether the latest crash meets the requirements to cut expenditure. etc etc.   Why doesn't everybody do it?

Nothing not to like about it. I am just saying that selling units to generate an income involves about the same level of effort assuming the platform supports it e.g Vanguard. No difficult decisions on what to sell if you don't want there to be - just sell the same fund each time or rebalance as you go, all automatically.

LHW99

One other aspect of receiving dividends, as opposed to having accumulation funds, if you do not immediately need to draw the income is that you can accumulate them within the account, and use them to re-invest in other funds (for rebalancing etc) rather than having them automatically rolled into the same fund.

wmb194

LHW99 said:

One other aspect of receiving dividends, as opposed to having accumulation funds, if you do not immediately need to draw the income is that you can accumulate them within the account, and use them to re-invest in other funds (for rebalancing etc) rather than having them automatically rolled into the same fund.

Exactly. I've actually just done this today.

masonic

LHW99 said:

One other aspect of receiving dividends, as opposed to having accumulation funds, if you do not immediately need to draw the income is that you can accumulate them within the account, and use them to re-invest in other funds (for rebalancing etc) rather than having them automatically rolled into the same fund.

Which has both good and bad aspects.

LHW99

masonic said:

LHW99 said:

One other aspect of receiving dividends, as opposed to having accumulation funds, if you do not immediately need to draw the income is that you can accumulate them within the account, and use them to re-invest in other funds (for rebalancing etc) rather than having them automatically rolled into the same fund.

Which has both good and bad aspects.

As does investing generally

JohnWinder

My policy is to use a set of high dividend funds in an ISA for tax free income and an independent  set of mainly SIPP more growth oriented funds for long term growth to ensure income matches  inflation with a relative allocation based on need. 

That gives all the management advantages of automatic payout of steady-ish dividends and avoids disturbing a growth portfolio with the task of supplying an ongoing income.  Horses for courses.  Being able to control the overall allocations between the 2 investment tranches  gives a useful means of control.

In other posts there have been fuller explanations of this type of approach to retirement income, but this one serves to illustrate something which is nicely analysed in research on different approaches here: see the graphic, and listen from 12:30 to 24 minutes where the desire for time segmentation and options with investing (rather than locking in with annuities or insurance for example) is explained. https://www.youtube.com/watch?v=lM_fs-IXPq8&t=1432s  at the Bogleheads' conference.