Looking at the original question of the threadâŚ
âIs dividend Growth Investing the Right Strategyâ
It seems the main argument against Dividend Investing, is made by comparing it to investing in growth stocks. The outcome measures of this comparison always uses the outcome measure of growth stock investing as the goal. i.e. growth in value of your portfolio.
You would hope that Growth-Stock investing would win this comparison, as that is the whole premise of the strategy
It is however an artificial comparison. An analogy would be to compare 2 athletes. A sprinter and a javelin thrower. You would hope the sprinter would always win the comparison if running speed was the measure of success. If however your measure of success was how far you could throw a spear, you would hope the javelin thrower would win.
The outcome measure of dividend investing is to grow an increasing regular income flow from your investments in stocks and ETFs. If you donât actually need the income flow, then you can reinvest your dividends to compound your investment, thus growing your income flow quicker, until a time when you do need the income flow. It is irrelevant what the value of your portfolio is as you never intend to cash it in. Itâs whole purpose is to provide that income flow, until you die . If your stocks go down in value it creates an opportunity to buy more at a better yield.
Growth Stock investing on the other hand measures its success by looking at the value of the portfolio. Itâs easy to increase your net-worth, and by looking at the paper value of your portfolio it can make you feel ârichâ. This is a much more complex strategy to actually gain wealth from. To actually be able to live off your investment portfolio involves selling your assets so you can use the money to buy goods and services. This is really hard to do as your out-goings are fairly regular, whereas you portfolio value will ebbb and flow with the market. Investing in growth-stock often results in people becoming asset rich but cash poor. Continually chasing a greater portfolio size, reluctant to remove cash from their portfolio. The risk is dying with a huge portfolio that actually provided them with little material use during their life.
Again no need to for that language
I think everyone respects the performance of this strategy for income investors. All that others are trying to communicate is that picking stocks just because the company growâs itâs dividend is naive. The fact that these companies CAN grow their dividends consistently is because of their moat, quality balance sheet, effective management etc. Growing dividends doesnât automatically make a company good
I personally have huge respect for anybody that shares their valuable insights into all investing areas.
I learn so much from some contributors in FreeTradeâs community. There are some super switched on contributors here. Which deffo helps provide insights because they are honest.
Nobody is attacking you here, believe me we all understand what Warren Buffet has done works, you do not need to convince us, we understand.
A number of fund managers, including Terry smith, say you should never invest for income. Instead you should focus on total return. The argument is that companies can use the money more effeciently than an individual investor can i.e. they can invest at higher rates of return. Therefore you should want a company to keep all its cash and not pay a dividends. Instead, a company should reinvest all the cash to grow the business and compound the value of your holdings over time.
The counterargument would be dividends are the primary reason many individual investors start investing. If it wasnât for dividend income, I probably would have never researched the concepts of passive income, investing or financial independence. Dividends just make things more tangible. It allows you to think like a business owner as you know youâll get higher and higher streams of dividends as the company makes higher and higher levels of profit.
I for one saw dividends as a way to cover my living expenses. I started investing in 2015 with this primary goal in mind. Last year, I received dividends worth ÂŁ3,800 from my portfolio companies.
Essentially, the way I see it, the dividends I received last year covered my mobile phone, broadband, electricity, council tax, water and food bills. (Iâm single, under 30 and live with a friend = cheap expenses). Yes those expenses will grow over time but so will my dividends!
I might have gone off topic with this post but the aim is to show that an investing strategy needs to meet your purpose. For me it is to cover my basic expenses using passive income and dividend growth investing is perfect of that.
Iâm allergic to dividends as iâd much rather the company reinvests those earnings and therefore compound shareholder value. But I want to defend income investors here:
Growth stocks are generally riskier than income stocks, not everyone has the stomach for them. E.g. If youâre retired and youâve âmade your moneyâ, youâd probably prefer wealth preservation over wealth creation/growth - i.e. you might prefer Coca Cola over Fevertree.
IMO the argument that ârather than rely on dividends, you can just sell sharesâ is flawed. Volatility will work against you; share prices can tank whilst dividends are stable.
Where I think some dividend investors go wrong is some have the investment horizon and risk tolerance for growth stocks, but just love seeing money paid in to their brokerage account and the associated endorphin boost too much; itâs a very tangible demonstration of value - it really psychologically hits home you own a company that is earning you money. Itâs much harder to mentally appreciate that a growth company is out there earning you money, itâs instead just saying âlet me keep your dividends for now, so I can pay you 10 times as much later onâ.
Not necessarily, for example Berkshire created their own income beyond the dividend by selling Apple stock. Berkshireâs latest letter shows that they did this without reducing their ownership of Apple.
When we finished our purchases in mid-2018, Berkshireâs general account owned 5.2% of Apple.
Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also â in 2020 â pocketed an additional $11 billion by selling a small portion of our position.
Despite that sale â voila! â Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding
Compare AT&T (high dividend) with Apple (low dividend), you might think an Apple investor had to reduce their assets to get the same yield, while the AT&T investor maintained the same ownership and received a dividend, but actually the opposite is true.
While Apple has consistently run buybacks (increasing each shareâs ownership) AT&T has sold new shares (diluting each shareâs ownership) to fund the dividend.
If you owned 1% of AT&T in 2016 youâd own ~0.78% now.
If you owned 1% of Apple in 2016 youâd own ~1.31% now.
So you could sell 40% of your Apple shares for income and youâd be in the same position (just with respect to dilution - completely ignoring the difference in growth of the 2 companies).
You have opened my mind to realise I will always have to be an 80% passive 20% active investor, because I simply would not know how to do what you have just explained, although I understand how clever it is. That is why Berkshire is Berkshireâđź
That isnât really anything to do with dividends though. Apple effectively decreased itâs market cap by buying back shares, so you had a bigger share of a smaller company, while AT&T increased it by selling shares. The reason Apple comes out looking so much better is because of the superior performance of the company rather than what they do regarding buybacks or dilution.
Thatâs not true, a buyback doesnât reduce market cap unless the company significantly overpays for the shares or the market has an unfavorable view of it, but in general it has no impact.
No this is agnostic to changes in valuation, thatâs why I expressed ownership as % rather than an absolute dollar amount. Both companies could have had an identical and unchanging valuation and it still comes out the same.
This doesnât mean dividends are bad, just that selling shares after a buyback and receiving a dividend are pretty much interchangeable (ignoring tax).
They are paying out money, unless the share price goes up they have decreased their market cap. The shares the bought back are effectively cancelled. Itâs the opposite of issuing new equity. In theory neither should change the share price. in practice they usually do.
I meant the reason Apple comes out looking better in general, rather than in your example. You donât see the reduction in market cap because of their excellent growth.
I think we are basically on the same page with the maths of it though. I like dividends because I like to buy big cash rich companies that pay out some of their profits to shareholders
This page might also be of interest to some of you bigsafedividends. Local libraries might offer the book, or the audiobook. I listened to it, nice coherent story. As others have pointed out though, total returns matter most, if they come from good dividend payers why not? You might sleep better at night!
I do get confused with the cgt in an isa account .
Do you pay tax over 20 k gains or the 20 k is the max you canât put in the account .
I thought there was no tax limit to gains in an isa account
Please help as a newbie
Thanks
There is a limit on how much new money you can contribute to an ISA, which is currently ÂŁ20k in any one tax year. But there is no limit on gains you can make inside the ISA, anything you earn from investments you have bought inside the ISA is tax-free.
Can I then take cash out and use I see fit ?
Am so grateful
Ever since joining ft i have had so much questions and joining the forum is helping me a lot
Thanks once again for all your help
. If your stocks go down in value it creates an opportunity to buy more at a better yield.
