The Free Dividends Fallacy

Sarenco said:
If your cash rich companies simply bought back your stock you would be in the same economic position.
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But this is not the same thing as partially disposing of a position in order to obtain income! In a buy back you still retain a right to share in the same benefits of the company going forward. In disposing of the shares you reduce your right to future benefits. The suggesting being made is, as with all M&M related theories, all things being equal it works. But in the real all things are never equal.
 
Sorry Jim but I'm struggling to understand your point.

If you are saying that receiving a dividend payment on a stock and failing to reinvest same in the same stock is the financial equivalent of selling stock then we are in violent agreement. However, I suspect you are making a more subtle point that unfortunately is eluding me.
 
I know from their past contributions that the posters on this thread know their onions so the fact there is such disagreement on a very simple matter must be down to misinterpretations. Let me try and clarify.

First of all I am sure we can all agree that apart from tax considerations share buy backs have the same economic effect as dividends. The dividend policy of a company says a lot about its position in its development cycle and so IMHO is relevant. The analogy with Real Estate is I think helpful. Consider three different RE propositions.

1) A development site. There are no "dividends" here. Nonetheless it has value, mainly derived from its future potential to pay dividends/rent.

2) A long leasehold or freehold rented out. Clearly there is a capacity for a steady income payment. A modest rental yield will apply.

3) A leasehold nearing expiry. Rental yields can be expected to be very high in this situation.

So a start up high tech company will be similar to (1). A longstanding utility will be similar to (2) and an insurance company closed to new business will be similar to (3).

So what point am I making? Presuming all else equal the dividend policy of a company says a lot about its place in the development cycle. And on a spectrum we would go from high risk/high potential in (1) above through low risk/lower potential in (2) to safe/boring in (3).

I am not quite sure what point the IT article is making but if it is simply that dividends do not derive from Scotch mist then it is addressing an audience who in terms of financial awareness would have to be described as special needs. (Sarenco BH is a beast of an entirely different colour.)
 
The article is simply making the point that many investors act as if dividends and capital gains are separate disconnected attributes of the total return on a stock, not fully appreciating that dividends come at the expense of price decreases and making this mistake has various consequences.

The reality that the price of a stock falls to offset a dividend payment might seem incredibly obvious to some posters but I think this thread adequately demonstrates that others struggle to get beyond the simple idea that harvesting fruit from a tree is different to harvesting the tree itself.

On the point regarding the relative riskiness (volatility) of high yield stocks versus the broader market, I would note that over the last 10 years the annualised standardised deviation and maximum drawdown of the MSCI World High Dividend Index was actually higher than the broader MSCI World Index. The gross total return of the broader index was also higher over the same period (and that obviously ignores real world reinvestment costs and, more importantly, taxes).
 
The major plus as regards companies which continuously pay meaty dividends is that it imposes a huge discipline on management. Generally prevents them from making stupid acquisitions and encourages them to deploy capital sensibly. I would bet that companies which are committed to paying and growing above average dividends are less inclined to engage in aggressive accounting.
 
Sarenco said:
The article is simply making the point that many investors act as if dividends and capital gains are separate disconnected attributes of the total return on a stock, not fully appreciating that dividends come at the expense of price decreases and making this mistake has various consequences.

The reality that the price of a stock falls to offset a dividend payment might seem incredibly obvious to some posters but I think this thread adequately demonstrates that others struggle to get beyond the simple idea that harvesting fruit from a tree is different to harvesting the tree itself.

On the point regarding the relative riskiness (volatility) of high yield stocks versus the broader market, I would note that over the last 10 years the annualised standardised deviation and maximum drawdown of the MSCI World High Dividend Index was actually higher than the broader MSCI World Index. The gross total return of the broader index was also higher over the same period (and that obviously ignores real world reinvestment costs and, more importantly, taxes).
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I suppose I missed the main category of high dividend stocks. Continuing the analogy with RE we have category (4) a tenant is about to leave and there is considerable uncertainty over the re-let. Rental yield will be high to reflect the uncertain prospects. I suppose most high dividend stocks are reflective of doubts over their future and therefore by definition are high risk. The moral is that one needs to understand the reason for the high dividend yield (or more correctly why the share price is low compared to the dividend). The Phoenix insurance company has a high dividend yield but that is because it is in wind down and actually its future cashflow is fairly predictable. I presume it is more usual for the dividend yield to be high for the exact opposite reason viz. future cashflow is uncertain.
 
Sarenco said:
The article is simply making the point that many investors act as if dividends and capital gains are separate disconnected attributes of the total return on a stock, not fully appreciating that dividends come at the expense of price decreases and making this mistake has various consequences.

The reality that the price of a stock falls to offset a dividend payment might seem incredibly obvious to some posters but I think this thread adequately demonstrates that others struggle to get beyond the simple idea that harvesting fruit from a tree is different to harvesting the tree itself.

On the point regarding the relative riskiness (volatility) of high yield stocks versus the broader market, I would note that over the last 10 years the annualised standardised deviation and maximum drawdown of the MSCI World High Dividend Index was actually higher than the broader MSCI World Index. The gross total return of the broader index was also higher over the same period (and that obviously ignores real world reinvestment costs and, more importantly, taxes).
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dividend pay out ( or execution ) just happens to coincide with a share price decrease , the share can bounce back to where it was prior to the dividend ex date within a week in some cases , there are plenty of examples of solid dividend paying stocks which have outperformed stocks which dont pay any at all

again , so what if the share price temporarily falls to facilitate a dividend pay out ?
 
No, a dividend payment causes a share price decrease. That's really the key point that you don't seem to understand.
 
galway_blow_in said:
dividend pay out ( or execution ) just happens to coincide with a share price decrease
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If that were the case, then it would just happen with amazing consistency! No at least part of the drop when the stock goes ex-div is accounted for by the fact that it has gone ex-div. Just of apart of the uptake again is accounted for by the fact that the share has again started to carry a dividend right.
 
earlier poster could well be right , question of interpretation , a dividend cash pay out reduces the value of a company ( on ex dividend date ) so this ( at best ) slows the pace at which the stock price would - should otherwise appreciate

my point is due to bear markets where stocks will fall no matter what , at least you get the cash pay out every quarter from a dividend payer , im not sure im comfortable being only focussed on capital growth as you cant live off it
 
galway_blow_in said:
a dividend cash pay out reduces the value of a company
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And that reduction in value is reflected in the company's share price!

The reduction in the share price is offset by the corresponding dividend payment - and vice versa. Leaving taxes and costs aside, there is no rational reason to prefer one over the other. Your stated preference is entirely behavioural.
 
There are people who like dividend paying companies, and I am one of them.

Some investors like or need regular income, without having to trigger CGT, or trading costs.
Dont invest in dividend paying companies - that is like saying, I dont want a pay rise, because I will have to pay tax on it.

Agreeing with one of the above posters, a company with a progressive dividend policy is a strong company.

There are companies such as these, and you can buy them as one basket.
It does not matter if the share price goes down XD, by whatever the div. amount is. We all know this.
If you are investing for income - the XD adjustment does not matter. I am looking at intra-day price moves on XD date, say 0.5%.
They mean nothing when the market is moving up and down intra-day.
I like Total Return (income and capital growth) - its the holy grail of investing.
 
fistophobia said:
Dont invest in dividend paying companies
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Did anybody say "don't invest in dividend paying stocks"? I certainly didn't.

I did, however, say that many investors had an irrational preference for dividends over capital gains as a source of return and you clearly fall within that bracket.

The usual reasons given are that stocks with high dividend yields are intrinsically less volatile or produce higher total returns over the longer term. Neither of these statements are true on a stand-alone basis.

You seem to agree that a dividend payment is offset by a price decrease in the stock price and then go on to say that it doesn't matter. Well it may not matter to you - but it should.

Of course stock values change constantly in response to the absorption of new information by the market. The fact that this might disguise or mask the fact that a dividend payment is offset by a corresponding decrease in the relevant stock price doesn't mean it isn't happening. The market obviously has no responsibility to deliver what you "like or need".

You seem to be arguing that dividends are treated more favourably from a tax perspective than capital gains. That is pretty clearly not the case in almost all cases so I may have misunderstood your point in this regard.

fistophobia said:
I like Total Return (income and capital growth) - its the holy grail of investing.
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Total return is what you get regardless of your (irrational) preferences - it's certainly not a "holy grail".

Incidentally, I assume you understand that "total return" implies that you immediately reinvest all dividends received?
 
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