The Mystery of Dividend Preference

Buy Units
Get Dividends
Ignore Prices

More Units = More Dividends

 

Maybe and maybe not.

MU = LD where L is reduction.

Always a possibility.

Cheery little Vegemite aren't I?

 

Funny thing is that I also regard an “income from shares” mindset as the basis for being comfortable with share price volatility but I’m completely indifferent to the amount of dividends paid.

To me the income from shares that is meaningful is the “discretionary free cash flow” that a company generates. That is the cash available after the company has provided for sustaining capital and operating expenditure.

This discretionary FCF can be used in 5 ways: paid out as dividends, used to pay back debt, used for organic growth or to purchase other business or returned as capital ie buy backs etc.

By just concentrating on dividends you lose sight of the other uses of real income from shares. The poster child for retaining capital and using it for growth is Berkshire Hathaway – they have heaps of discretionary FCF but although they pay no dividend it’s still an income stock to me. If a company can generate high returns on the capital it retains a) you want to own it (at the right price) b) you don’t want it to pay you out dividends, you will not be as wealthy over the long run if they do.

USA companies use a lot more of their FCF on buybacks than Aus does and hence generate more share price growth. It doesn’t mean we should be limiting ourselves to Aus stocks because of a misconception that dividends are the only source of income from companies.

Cash for dividends can be found in the short to medium run by increasing debt levels or holding back on adequate investments in sustaining your economic relevance. (yield trap) this is not easy to see if you just look at dividends.

Only seeing income as the outcome of what boards decides to distribute to shareholders misses 4/5th of the picture. I would much rather look at the whole picture and if that means I have to generate my own dividend by selling a bit of the capital growth generated by retained earnings in good companies, its really no big deal.

A cow for its milk
A hen for its eggs
Shares for their income

But still I’m indifferent to dividends. The real income i.e. what is produced using discretionary free cash flow is what matters whether that be distributed by dividends or share price appreciation.

 

At a technical level I understand what you’re saying but that’s a very different mindset to what I was getting at. If I showed what you posted to my wife in terms of generating income if I was not around she would slap me and say get real. And it needs to be remembered one is investing for the household including one’s partner.

Perhaps the view of income shared by the likes of me, Thornhill, @SatayKing, @Snowball and @truong for example is becoming outdated? However I still remain convinced that the more investors can move their attention away from the capital value of shares the less stress they will experience when fear takes hold of markets (when share price “appreciation” disappears at an astonishing rate) and the less likely it is they will do something stupid.

If that turns out not to be the case well I suppose I’ll need to fall back on the “it’s all about me”.

 

Problem with what your saying is it’s probably more than the average investor can understand. Most can only calculate the dividend they receive. Trying to figure out the FCF of a business and how sustainable that FCF is not something most investors including myself would be able to work out. And that’s why I invest in passive funds or active funds where hopefully the manager can work that out for me.

 

Maybe it’s an old school thing where even the likes of Jack Boglehead would say “shares for their dividends, bonds for their interest”. Regardless despite understanding and hugely appreciating the incredible posts from @dunno I personally, even after decades of investing, need to keep my focus on the actual “cash” dividends / distributions as opposed to share price “appreciation” to be at ease with the sharemarket. Call it a behavioural failing if need be but it’s one thing I’ve never been able to change. And given how wonderfully this has worked for us I’m very content to accept this behavioural failing.

 

Paying out dividends can result in a significant reduction in available earnings for company owners. Companies that pay out dividends often spend money raising capital then, pay tax realizing profits.

 

@dunno Thank you for your fantastic post. I always look forward to these gems!

 

What happens now in this situation, VAS / VGS have there dividends fallen

 

Current distribution being paid now reflects previous dividends from their underlying holdings. Future distributions will reflect future underlying company payouts and fall correspondingly. VGS comes from a lower base and might have underlying companies that could reduce buy backs rather than cut dividend distributions so their dividend reduction may be less than VAS.

 

Also VGS dividends may not fall as much as they otherwise would due to lower AUD, is that correct?

 

https://www.vanguardinvestments.com.au/retail/ret/articles/insights/research-commentary/retirement-and-superannuation/pivoting-your-portfolio.jsp?


‘The total return approach allows you to separate your spending strategy from your portfolio strategy. ‘

Interesting that we often combine the two strategies with our preference for dividends.

 

Thumbs up @Anne11

As somebody that is a firm advocate of this, I can't over emphasise both the peace of mind that comes from setting your own spending parameters and the flexibility in portfolio construction that comes from separating the two.

 

Still a mystery why people accept such poor returns STW down 6% for I guess no net gain and massive oportunity cost. But at least the government may have received a gain. Noticed APX has now 11 bagged after another 50% rise on buying price on Friday. MP 1 up 300% since this post , APX up 50% and NEA down 30%, but share price still up 150% on acquisition cost, but company still looks good and will rise.

 

Whats your preferred moving forward from here @Fargo ?

I see NDQ is back at previous highs

 

Anything that has outperformed in the last 5 years.

 

The dividend argument and sleep@night factor becomes much more difficult to rally against if the portfolio is of sufficient size to generate 'enough' income through dividends alone. There is beauty in simplicity.
If one isn't likely to have enough to support that strategy I can entirely understand why a little total return hostility would be drawn from the holster. It's mathematically correct, but if I had enough to get the job done with dividends alone I sure as buggery wouldn't bother.

 

Suggesting it will continue to outperform, or hindsight is 20/20

 

A dividend focussed strategy leads to sector and country concentration. Personally anything above 40% AU passive equities doesn’t feel right for mine. International dividends don’t make sense from a tax perspective, so total return is part of SANF for me. High AU passive equities exposure is taking on risk that isn’t compensated in my view.

 

BUT

if the dividends alone from a sensible globally diversified portfolio provides all that’s needed then both financially and “peace of mind” one could want for no more! Of course not easy for most to do but if achieved oh what a feeling: