The Mystery of Dividend Preference

Probably me misinterpreting some posts which appear to at times suggest that us more dividend focused investors are blind to the arguments against it.

I’m not upset in any way about it but probably getting a bit bored with this topic having seen endless rounds of it on Boglehead forum. It forever seems to go around in circles.

Which likely suggests I am silly after all for bothering to get involved in such discussions. You would think I would have learnt by now.

 

Yes please. Something different in relation to the discussion of dividends would be nice.

 

I am not smart enough to work out which is better, dividend focussed investing or capital focussed investing.

So I do a bit of both .

Bit like the argument about which is better, property investing or share investing.

Once again, I am not smart enough, so I do both .

I am very happy with the results. My message is that if this old ******** can do it, then anyone/everyone can do it .

 

SK's Third Rule of Stupidity.

It's all about me so invest accordingly.

 

What are the first two rules?

 

Ignore the third rule .

(for me, I am so stupid that it has to be repeated)

 

Technically it's actually the Second Rule but as I make them I can break with tradition and the First/Second Rules are similar anyway.

SK's First Rule of Stupidity in regards to the market. No buying or even looking for a while when you feel it's too frothy.

SK's First Rule of Stupidity. Buy when the market is going down and never when it's going up. That way you'll always buy at the bottom but you won't know when it's been reached.

I never abide by the rules I'll have you know. That's the Second Rule.

 

Yeah I get it.

I've read so much over the years about what, how, why this or that aspect of investing is what you should follow it eventually ends up going around in circles. Totally confusing for this tiny brain. So I ignore the vast majority of it. Some snippets such as investing for income I apply. The rest goes into whatever is designated as the "waste bin" located in my brain.

Have funds surplus to living needs? Invest.
When to invest? Whenever you decide it's the right time to do so.
What to invest in? Whatever suits you.

That's all there is to it for me.

 

Rule 1 - Don’t do anything stupid.
Rule 2 - Refer to Rule 1.

 

S*&t. Continually doing dumb, stupid things is my preferred method of operation.

 

Sorry left out the comma.

Rule 1 - Don’t do anything, Stupid!
Rule 2 - Refer to Rule 1.

 

From the Canadian Couch Potato, so not Aus based and considering our taxation etc

Debunking Dividend Myths: Part 1

Many investors take it for granted that dividend-paying companies are superior to those that do not pay a yield. But this idea has been the subject of debate for decades, and many academics believe that it is irrational.

Let’s start with something everyone can agree on. Equity returns have two components: capital gains (price increases) and dividends. Add them together and you have the total return for a stock. Ignoring taxes and transactions costs, a stock that pays no dividend but increases in price by 6% provides precisely the same return as one whose share price rises 4% and pays a 2% dividend.

His view essentially

Why do shareholders believe so strongly that a $1 dividend is preferable to a $1 capital gain? Meir Statman looked at this question in a 1984 article called “Explaining Investor Preference for Cash Dividends,” coauthored by Hersh Sheffrin. He also reviews the idea in his new book, What Investors Really Want, pointing out that receiving $1,000 in dividends is no different from selling $1,000 worth of stock to create a “homemade dividend.”

Even when this idea is explained to people, most refuse to accept it. Statman suggests that it comes down to a cognitive bias called mental accounting. Investors categorize $1,000 in dividends as income that they will happily spend, but the idea of selling $1,000 worth of stock is “dipping into capital,” which causes them great anxiety. This idea is deeply ingrained in many investors, but it is an illusion, because a company that pays a dividend to shareholders is depleting its own capital.

 

And yet there is a contrary view. All About Dividend Investing, Schreiber and Stroik. Nor do the authors ignore capital growth.

 

I think thats in the study! About twins starting with 10k from memory!

 

As for a retirement strategy the no dividend approach could work better in Australia - actuallly a very small dividend would be ideal so you could still claim the interest.

When retiring you just sell small amounts of shares, enough to give you the income needed. CGT will be minimal, half of the tax that would have been paid on the dividends and greater compounding would mean a larger capital amount along the way.

 

Just dragged the book out and that's the one.

In a roundabout way, it is also what I and some others do. Sure I go for the dividend but I don't spend all of them and a lot are re-invested. I use LIC/ETF's as it is easier for me and deep down I don't entirely trust companies not to do silly things at some stage which ends up costing me.

 

Sounds fair enough too! Have any thoughts crept into your mind how over the future these lics will keep pace with the changing face of companies (ie in with the new out with the old like how etfs are self cleansing). Argo milton and the like look impressive based on track record and historical performance then you read books (bogle ish types) and they say past performance is not a prologue for future gains! Im sure argo's top 20 holdings have changed a fair bit from the early 80's or even earlier when you bought in!

 

I may as well give an example of my family. In his Will my Dad left money to my children. They were quite young at that stage. I invested the funds in LICs and an ETF. All dividends/distributions were DRP'd. Tax was not a consideration.

When the amount was vested it was handed over to those who asked. A couple have kept at it I understand and have also placed additional amounts of their funds into the holdings.

They are also entitled to income distributions from my late wife's Estate also invested via LIC's. When I administered it all dividends, etc were DRP'd. I was visiting one in Sydney I was told the DRP aspect has stopped as the funds are essentially fully invested. But nothing has been sold.

There was an attitude of "Gee, thanks for doing that for us" when I was informed the combined income now equates to around 20% of this child's salary income. Personally I don't consider that is too bad an outcome for basically doing Eff All initially - emotional aspects aside.

 

In that case it'd be all ETF if I was concerned to that level. I'm not wedded to the bloody things if they no longer suit my objective.

 

Firstly, I'm totally on board with the total return idea. I admit though that I do prefer the idea of living on the dividend and I admit that is likely for nothing more than behavioural reasons.

However, I feel I must be missing something so I'll ask.......

If I sell a share to create my own $1000 dividend it's gone and can't be sold again. It's a once off dividend.
If I get a $1000 dividend, the company may have depleted its own capital but I still own the share and therefore can receive more dividends in the future or sell the share and "create" another dividend.

So how am I, as an individual investor and disregarding tax for now, not better off with the dividend? Particularly considering it seems share prices rarely drop by exactly the DPS amount and in many cases the price recovers quite quickly anyway. On top of that I've read there seems to be little evidence to support the "no dividend equals better capital growth" idea anyway.