Share this page:
Stay connected:
Welcome to the Citywire Money Forums, where members share investment ideas and discuss everything to do with their money.

You'll need to log in or set up an account to start new discussions or reply to existing ones. See you inside!

Notification

Icon
Error

Paying dividends from capital - good or bad?
Antonio VIvaldi
Posted: 27 January 2018 23:18:24(UTC)
#1

Joined: 09/08/2010(UTC)
Posts: 15

Was thanked: 9 time(s) in 4 post(s)
There is a small but growing trend for some ITs to pay dividends, not just out of their income but from capital i.e. by selling some of the shares they own to raise the necessary cash - as much as 6% of NAV each year in one or two cases. What do you think of this? It strikes me as a bad idea because investors are simply being handed back some of the assets they own via the trust. What's the point in that? If investors want to liquidate their holdings they can do so by selling their holdings in the trusts directly. Judging by the comments of one trust chairman (JP Morgan Asian) it seems to me to be a marketing ploy more than anything else. When shares and the NAV of trusts are rising this won't seem to matter much. But when share values fall the assets of the trust will be seen to have been eaten away, and with no revenue reserves left trusts may have no option but to cease paying dividends at all. Should one steer well clear of such trusts, or jump on board while the going is good (perhaps taking advantage of narrowing discounts when such a change in dividend policy is announced) but staying ready to jump the moment a trust's NAV falls?
Keith Cobby
Posted: 27 January 2018 23:54:14(UTC)
#2

Joined: 07/03/2012(UTC)
Posts: 463

Thanks: 275 times
Was thanked: 713 time(s) in 287 post(s)
I think too many managers are under pressure to hold/raise dividends and as a result their allocation of capital is affecting their investment decisions. Over the long term their dividends are effectively eating their capital.

Looking at total return it doesn't matter where the return comes from, either capital appreciation, income or a combination of both.

I hold EAT which has a long standing policy of paying out 6% NAV. At the moment I am reinvesting and the performance of the trust has been very good on a total return basis. If I was drawing income I could take say 3% and reinvest the other 3%.

King Lodos
Posted: 28 January 2018 06:46:50(UTC)
#3

Joined: 05/01/2016(UTC)
Posts: 2,325

Thanks: 458 times
Was thanked: 3414 time(s) in 1356 post(s)
Yeah, before Terry Smith said that, I was really unpopular for that view .. Now I'm only marginally unpopular for it.

I totally agree, the dividend requirements of equity income funds seem to have pushed managers into some tight spaces .. I'd perhaps suggest the requirements be based on interest rates. (and just forget what the FTSE 100's doing, because it's in some very cyclical sectors)

I think the fund freeing up capital and making distributions can be more efficient for investors – it avoids a trading cost, and means you don't have to hold lots of stocks to keep selling
1 user thanked King Lodos for this post.
andy on 28/01/2018(UTC)
andy
Posted: 28 January 2018 08:29:55(UTC)
#4

Joined: 11/03/2010(UTC)
Posts: 161

Thanks: 97 times
Was thanked: 179 time(s) in 82 post(s)
I would suggest this is another one of these "doesn't matter" answers.

I suggest that yes - a lot of it is a marketing ploy. I wonder in the event of a proper market crash how safe would that dividend be when the capital drops 60%. I have a holding in EAT - but it sits in my growth portfolio as for me - the dividends come out of growth,
1 user thanked andy for this post.
Mickey on 28/01/2018(UTC)
mark spurrier
Posted: 28 January 2018 09:20:38(UTC)
#5

Joined: 17/01/2018(UTC)
Posts: 2

Was thanked: 1 time(s) in 1 post(s)
As an abstract, theoretical question I dont think it makes any difference but on the three ITs I hold where this happens EAT, IBT and JPGI - It tends to control the discount without requiring buybacks that shrink the fund and increase the AMC and it seems to reduce the dealing spread sp providing a decent yield has the impact and you can't do that naturally from a portfolio that is made up of nil/low yield stocks.
1 user thanked mark spurrier for this post.
Mickey on 28/01/2018(UTC)
+ Reply to discussion

Markets

Other markets