Investing - Where's the pot of gold?

Bostonerimus1

RootOfAll said:

Further to inflation:  In the world of savings accounts I'm accustomed to look at say a fixed cash ISA with an interest of say 4.2% and then knock off say 3.5% for inflation and envisage a church mouse payout of 0.7%.  

However, in this world of investment, and I'm going to be most interested in income investment, I think I see that we assume the devaluing effect of inflation is going to be completely covered in the long term by the long term rise in value of our shrewd portfolio (we reasonably hope).  Hence a yield of say 3% really is a full 3% and any dividend payout is fully in our hands to do with as we may (including reinvesting) and not requiring to have a chunk effectively set aside to cover inflation.

Coming from planet Savings, this is a startling but delightful concept - just to be absolutely sure, can I ask, am I within touching distance of the right idea here please?

Dividends are not a great as they appear because with every dividend payment there's a associated drop in share price.

masonic

RootOfAll said:

Further to inflation:  In the world of savings accounts I'm accustomed to look at say a fixed cash ISA with an interest of say 4.2% and then knock off say 3.5% for inflation and envisage a church mouse payout of 0.7%.  
However, in this world of investment, and I'm going to be most interested in income investment, I think I see that we assume the devaluing effect of inflation is going to be completely covered in the long term by the long term rise in value of our shrewd portfolio (we reasonably hope).  Hence a yield of say 3% really is a full 3% and any dividend payout is fully in our hands to do with as we may (including reinvesting) and not requiring to have a chunk effectively set aside to cover inflation.
Coming from planet Savings, this is a startling but delightful concept - just to be absolutely sure, can I ask, am I within touching distance of the right idea here please?

You are thinking along the right lines to the extent that companies are generally able to, at least over the long term, sell their goods and services at higher prices to account for inflation, so their share price would rise with inflation assuming they can continue to make sales at those elevated prices. Dividends are paid out of profits, and are optional. If a business can efficiently reinvest their profits to grow their future revenue, then that may be preferable to paying them out to shareholders, and those companies are likely to have a greater total return as a result. It is also sometimes more tax efficient to raise the share price through buying back shares than crystallise a taxable income stream in the hands of the investors. And investors can at any time sell shares at their own pace to generate cash for their needs. So may not be necessary or wise to restrict yourself to companies that happen to pay out dividends at a suitable rate, when what really matters is an overall growth rate that can support your objectives.

LHW99

Bostonerimus1 said:

RootOfAll said:

Further to inflation:  In the world of savings accounts I'm accustomed to look at say a fixed cash ISA with an interest of say 4.2% and then knock off say 3.5% for inflation and envisage a church mouse payout of 0.7%.  

However, in this world of investment, and I'm going to be most interested in income investment, I think I see that we assume the devaluing effect of inflation is going to be completely covered in the long term by the long term rise in value of our shrewd portfolio (we reasonably hope).  Hence a yield of say 3% really is a full 3% and any dividend payout is fully in our hands to do with as we may (including reinvesting) and not requiring to have a chunk effectively set aside to cover inflation.

Coming from planet Savings, this is a startling but delightful concept - just to be absolutely sure, can I ask, am I within touching distance of the right idea here please?

Dividends are not a great as they appear because with every dividend payment there's a associated drop in share price.

I believe the adjustment is actually at the ex-dividend date (not at payment). And the adjustment often gets lost in the general noise of price movements

Therealdisraeli

RootOfAll said:

Further to inflation:  In the world of savings accounts I'm accustomed to look at say a fixed cash ISA with an interest of say 4.2% and then knock off say 3.5% for inflation and envisage a church mouse payout of 0.7%.  

However, in this world of investment, and I'm going to be most interested in income investment, I think I see that we assume the devaluing effect of inflation is going to be completely covered in the long term by the long term rise in value of our shrewd portfolio (we reasonably hope).  Hence a yield of say 3% really is a full 3% and any dividend payout is fully in our hands to do with as we may (including reinvesting) and not requiring to have a chunk effectively set aside to cover inflation.

Coming from planet Savings, this is a startling but delightful concept - just to be absolutely sure, can I ask, am I within touching distance of the right idea here please?

That's not quite right. I think you need to get away from thinking that an investment fund (of shares, for simplicity) is like a savings acocunt with a fixed interest, it isn't. The 'yield' is just a proportion of the fund's gain that is paid out as cash, expressed as a percentage of current share price, rather than an increase in share price (of the fund). It comes from the dividends or other earnings of the securities in the fund. Many funds have no yield at all because they reinvest it - accumulating funds. 

If you are under the impression that investment funds are inflation linked savings accounts you will be in for a bad surprise since stocks can easily underperform inflation for very long periods of time. 

Another thing, income investing is fine but is only useful if you already have a lot to invest or need the cash now rather than just selling shares when you need it. In the age of zero or low commisions on trading, selling shares and getting dividends is often mathematically identical

Bostonerimus1

LHW99 said:

Bostonerimus1 said:

RootOfAll said:

Further to inflation:  In the world of savings accounts I'm accustomed to look at say a fixed cash ISA with an interest of say 4.2% and then knock off say 3.5% for inflation and envisage a church mouse payout of 0.7%.  

However, in this world of investment, and I'm going to be most interested in income investment, I think I see that we assume the devaluing effect of inflation is going to be completely covered in the long term by the long term rise in value of our shrewd portfolio (we reasonably hope).  Hence a yield of say 3% really is a full 3% and any dividend payout is fully in our hands to do with as we may (including reinvesting) and not requiring to have a chunk effectively set aside to cover inflation.

Coming from planet Savings, this is a startling but delightful concept - just to be absolutely sure, can I ask, am I within touching distance of the right idea here please?

Dividends are not a great as they appear because with every dividend payment there's a associated drop in share price.

I believe the adjustment is actually at the ex-dividend date (not at payment). And the adjustment often gets lost in the general noise of price movements

Yes, which leads to people not connecting dividends with the associated fall in stock price. Ignorance is bliss I suppose.

Linton

Therealdisraeli said:

RootOfAll said:

Further to inflation:  In the world of savings accounts I'm accustomed to look at say a fixed cash ISA with an interest of say 4.2% and then knock off say 3.5% for inflation and envisage a church mouse payout of 0.7%.  

However, in this world of investment, and I'm going to be most interested in income investment, I think I see that we assume the devaluing effect of inflation is going to be completely covered in the long term by the long term rise in value of our shrewd portfolio (we reasonably hope).  Hence a yield of say 3% really is a full 3% and any dividend payout is fully in our hands to do with as we may (including reinvesting) and not requiring to have a chunk effectively set aside to cover inflation.

Coming from planet Savings, this is a startling but delightful concept - just to be absolutely sure, can I ask, am I within touching distance of the right idea here please?

That's not quite right. I think you need to get away from thinking that an investment fund (of shares, for simplicity) is like a savings acocunt with a fixed interest, it isn't. The 'yield' is just a proportion of the fund's gain that is paid out as cash, expressed as a percentage of current share price, rather than an increase in share price (of the fund). It comes from the dividends or other earnings of the securities in the fund. Many funds have no yield at all because they reinvest it - accumulating funds. 

If you are under the impression that investment funds are inflation linked savings accounts you will be in for a bad surprise since stocks can easily underperform inflation for very long periods of time. 

Another thing, income investing is fine but is only useful if you already have a lot to invest or need the cash now rather than just selling shares when you need it. In the age of zero or low commisions on trading, selling shares and getting dividends is often mathematically identical

In practice not identical at all...

1) All other things being equal, prior to the ex-dividend date the share price of a stock should steadily increase in the expectation of the future dividend to match the subsequent drop.

2) Dividends are paid in terms of £/share rather than as a % of whatever the current price happens to be.  "Yield" is purely a figure calculated after the predefined payout and has no direct relevence for the share. Company directors are loath to cut the dividend (in £ terms) unless really necessary because share holders dont like it. Also it is a red flag to all other investors. The benefit to the investor is that the payout is much more stable than the share price.

3) Selling shares requires an active consideration each month  of which shares to sell. Or perhaps to decide that if prices are low not to sell at all.  Dividend payouts happen completely automatically including (depending on the platform) an automatic transfer from the trading account to the associated bank account.  All this is at zero cost.

So in my view if it really is a steady income you want dividends (and interest) can be a better option than selling shares.

Equity dividends will tend to increase with inflation simply because higher inflation should mean that higher income from sales will match higher expenditure on inputs and wages and so profits should also rise by the same %.  But this is a long term trend with no guarantees.

RootOfAll

I'm obliged to Therealdisraeli for contributing a cooler slant to the discussion and it's brought some very interesting comments from Linton.

What I hang on to is the opinion from all sides that investments over time can be reasonably be expected to outperform cash.  Thus it should be wise to cautiously explore the investment avenue.  However, it sounds like at times or for periods, inflation can outrun everything.  Indeed, I think I noticed it was at 9+% for a little while recently.

Philosophically I can consider that if everyone else is getting poorer then me getting poorer too isn't being too hard done by.  Financially this is abject defeatism of course!

LHW99

Linton said:

Therealdisraeli said:

RootOfAll said:

Further to inflation:  In the world of savings accounts I'm accustomed to look at say a fixed cash ISA with an interest of say 4.2% and then knock off say 3.5% for inflation and envisage a church mouse payout of 0.7%.  

However, in this world of investment, and I'm going to be most interested in income investment, I think I see that we assume the devaluing effect of inflation is going to be completely covered in the long term by the long term rise in value of our shrewd portfolio (we reasonably hope).  Hence a yield of say 3% really is a full 3% and any dividend payout is fully in our hands to do with as we may (including reinvesting) and not requiring to have a chunk effectively set aside to cover inflation.

Coming from planet Savings, this is a startling but delightful concept - just to be absolutely sure, can I ask, am I within touching distance of the right idea here please?

That's not quite right. I think you need to get away from thinking that an investment fund (of shares, for simplicity) is like a savings acocunt with a fixed interest, it isn't. The 'yield' is just a proportion of the fund's gain that is paid out as cash, expressed as a percentage of current share price, rather than an increase in share price (of the fund). It comes from the dividends or other earnings of the securities in the fund. Many funds have no yield at all because they reinvest it - accumulating funds. 

If you are under the impression that investment funds are inflation linked savings accounts you will be in for a bad surprise since stocks can easily underperform inflation for very long periods of time. 

Another thing, income investing is fine but is only useful if you already have a lot to invest or need the cash now rather than just selling shares when you need it. In the age of zero or low commisions on trading, selling shares and getting dividends is often mathematically identical

In practice not identical at all...

1) All other things being equal, prior to the ex-dividend date the share price of a stock should steadily increase in the expectation of the future dividend to match the subsequent drop.

2) Dividends are paid in terms of £/share rather than as a % of whatever the current price happens to be.  "Yield" is purely a figure calculated after the predefined payout and has no direct relevence for the share. Company directors are loath to cut the dividend (in £ terms) unless really necessary because share holders dont like it. Also it is a red flag to all other investors. The benefit to the investor is that the payout is much more stable than the share price.

3) Selling shares requires an active consideration each month  of which shares to sell. Or perhaps to decide that if prices are low not to sell at all.  Dividend payouts happen completely automatically including (depending on the platform) an automatic transfer from the trading account to the associated bank account.  All this is at zero cost.

So in my view if it really is a steady income you want dividends (and interest) can be a better option than selling shares.

Equity dividends will tend to increase with inflation simply because higher inflation should mean that higher income from sales will match higher expenditure on inputs and wages and so profits should also rise by the same %.  But this is a long term trend with no guarantees.

And receiving gains as dividends even in the accumulation stage of saving can make rebalancing easier, as you are less likely to need to sell from one fund to invest in another, but can use the dividends to re-invest into whatever holding, not necessarily the one paying the dividend.

poseidon1

LHW99 said:

Linton said:

Therealdisraeli said:

RootOfAll said:

Further to inflation:  In the world of savings accounts I'm accustomed to look at say a fixed cash ISA with an interest of say 4.2% and then knock off say 3.5% for inflation and envisage a church mouse payout of 0.7%.  

However, in this world of investment, and I'm going to be most interested in income investment, I think I see that we assume the devaluing effect of inflation is going to be completely covered in the long term by the long term rise in value of our shrewd portfolio (we reasonably hope).  Hence a yield of say 3% really is a full 3% and any dividend payout is fully in our hands to do with as we may (including reinvesting) and not requiring to have a chunk effectively set aside to cover inflation.

Coming from planet Savings, this is a startling but delightful concept - just to be absolutely sure, can I ask, am I within touching distance of the right idea here please?

That's not quite right. I think you need to get away from thinking that an investment fund (of shares, for simplicity) is like a savings acocunt with a fixed interest, it isn't. The 'yield' is just a proportion of the fund's gain that is paid out as cash, expressed as a percentage of current share price, rather than an increase in share price (of the fund). It comes from the dividends or other earnings of the securities in the fund. Many funds have no yield at all because they reinvest it - accumulating funds. 

If you are under the impression that investment funds are inflation linked savings accounts you will be in for a bad surprise since stocks can easily underperform inflation for very long periods of time. 

Another thing, income investing is fine but is only useful if you already have a lot to invest or need the cash now rather than just selling shares when you need it. In the age of zero or low commisions on trading, selling shares and getting dividends is often mathematically identical

In practice not identical at all...

1) All other things being equal, prior to the ex-dividend date the share price of a stock should steadily increase in the expectation of the future dividend to match the subsequent drop.

2) Dividends are paid in terms of £/share rather than as a % of whatever the current price happens to be.  "Yield" is purely a figure calculated after the predefined payout and has no direct relevence for the share. Company directors are loath to cut the dividend (in £ terms) unless really necessary because share holders dont like it. Also it is a red flag to all other investors. The benefit to the investor is that the payout is much more stable than the share price.

3) Selling shares requires an active consideration each month  of which shares to sell. Or perhaps to decide that if prices are low not to sell at all.  Dividend payouts happen completely automatically including (depending on the platform) an automatic transfer from the trading account to the associated bank account.  All this is at zero cost.

So in my view if it really is a steady income you want dividends (and interest) can be a better option than selling shares.

Equity dividends will tend to increase with inflation simply because higher inflation should mean that higher income from sales will match higher expenditure on inputs and wages and so profits should also rise by the same %.  But this is a long term trend with no guarantees.

And receiving gains as dividends even in the accumulation stage of saving can make rebalancing easier, as you are less likely to need to sell from one fund to invest in another, but can use the dividends to re-invest into whatever holding, not necessarily the one paying the dividend.

That is exactly what I do.

I have a constant flow of Sipp cash dividends and bond interest which I may choose to  reinvest in existing holdings or totally new positions ( a gold etf has been a recent beneficiary of income cashflow). 

The importance of this constant income cash flow, is I will have no need to consider investment sales (at all) when the time comes to take UFPLSs.

That said, the income cashflow does require more active management and reinvestment decisions, so may not suit those in the ' fire and forget' camp.

DiamondLil

poseidon1 said:

And receiving gains as dividends even in the accumulation stage of saving can make rebalancing easier, as you are less likely to need to sell from one fund to invest in another, but can use the dividends to re-invest into whatever holding, not necessarily the one paying the dividend.

That is exactly what I do.

I have a constant flow of Sipp cash dividends and bond interest which I may choose to  reinvest in existing holdings or totally new positions ( a gold etf has been a recent beneficiary of income cashflow). 

The importance of this constant income cash flow, is I will have no need to consider investment sales (at all) when the time comes to take UFPLSs.

That said, the income cashflow does require more active management and reinvestment decisions, so may not suit those in the ' fire and forget' camp.

And that is exactly what I do too - except that the income flow comes from ISA dividends.