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

Demand for stocks that pay irregular dividend and no dividend?
Dian
Posted: 08 April 2018 07:08:29(UTC)
#1

Joined: 09/10/2016(UTC)
Posts: 255

Thanks: 243 times
Was thanked: 103 time(s) in 74 post(s)
Why do people buy stocks that pay irregular dividend and no dividend?

I have noticed some quality companies don’t pay dividend. Some pay dividend and increase or decrease on yearly basis depending on the earnings. There are dividend champions as well. Companies that pay dividends include Apple, Microsoft, Exxon Mobil and Wells Fargo.

If I am right notable companies that historically have not paid dividends to shareholders include Facebook, Amazon, and Tesla. Another category is companies which paid dividend in the past have cut their dividends.

Despite not paying dividends, paying poor dividends or irregular dividend, share prices of those companies also have rocketed.

In my view if a company cut dividend, then there is something to worry. There are strong companies which don’t pay dividend, pay poor or irregular dividend and build cash. How it is going to benefit shareholders?

In short, I have found following types of dividend policy.

Irregular dividend policy
Regular dividend policy
Stable or constant dividend policy
No dividend policy

Which category is the best? Thanks.
2 users thanked Dian for this post.
gillyann on 08/04/2018(UTC), mcminvest on 09/04/2018(UTC)
Keith Cobby
Posted: 09 April 2018 08:20:47(UTC)
#2

Joined: 07/03/2012(UTC)
Posts: 529

Thanks: 332 times
Was thanked: 833 time(s) in 336 post(s)
Because the total return is most important. Low yielding stocks/funds reinvest into the business rather than paying out in dividends. High yielding investments are compromising future returns by paying out more of their earnings in dividends. Jam today rather than more jam tomorrow!
6 users thanked Keith Cobby for this post.
Dian on 09/04/2018(UTC), Inderpal Singh Khalsa on 09/04/2018(UTC), Mr Helpful on 09/04/2018(UTC), Law Man on 09/04/2018(UTC), John Miskelly on 09/04/2018(UTC), mcminvest on 09/04/2018(UTC)
Dian
Posted: 09 April 2018 08:33:38(UTC)
#3

Joined: 09/10/2016(UTC)
Posts: 255

Thanks: 243 times
Was thanked: 103 time(s) in 74 post(s)
Keith Cobby;60367 wrote:
Because the total return is most important. Low yielding stocks/funds reinvest into the business rather than paying out in dividends. High yielding investments are compromising future returns by paying out more of their earnings in dividends. Jam today rather than more jam tomorrow!

Thanks. a very good answer. Some shareholders always expect dividend. It seems intelligent investors prefer investment for the future.
dyfed
Posted: 09 April 2018 09:49:47(UTC)
#4

Joined: 01/09/2016(UTC)
Posts: 384

Thanks: 559 times
Was thanked: 556 time(s) in 230 post(s)
When I did my MBA there was a model developed by the BCG. It said that at various stages in a product life cycle you would expect different cash flows e.g.:
- a rising star: source of next year's profits but meanwhile needs investment to grow
- a cash cow: a mature product generating excess income
etc

I think about this when considering divi v growth. There will be times when a company needs to invest to grow, and others when it might be more reasonable to expect surplus cash.

So I expect DGE, ULVR, to pay me a reasonable divi as their mature brands and near-global distribution should be yielding enough to cover this. But a new tech company may well be gobbling up cash as it expands and hopefully creates tomorrow's divis.
5 users thanked dyfed for this post.
Dian on 09/04/2018(UTC), Mr Helpful on 09/04/2018(UTC), Tim D on 09/04/2018(UTC), John Miskelly on 09/04/2018(UTC), mcminvest on 09/04/2018(UTC)
Dian
Posted: 09 April 2018 10:40:14(UTC)
#5

Joined: 09/10/2016(UTC)
Posts: 255

Thanks: 243 times
Was thanked: 103 time(s) in 74 post(s)
dyfed;60370 wrote:
When I did my MBA there was a model developed by the BCG. It said that at various stages in a product life cycle you would expect different cash flows e.g.:
- a rising star: source of next year's profits but meanwhile needs investment to grow
- a cash cow: a mature product generating excess income
etc

I think about this when considering divi v growth. There will be times when a company needs to invest to grow, and others when it might be more reasonable to expect surplus cash.

So I expect DGE, ULVR, to pay me a reasonable divi as their mature brands and near-global distribution should be yielding enough to cover this. But a new tech company may well be gobbling up cash as it expands and hopefully creates tomorrow's divis.


Thank you for the information. So, mature companies cannot become fast growers and Young and emerging companies can become fast growers if they invest wisely without giving high dividend or without giving any dividend.

I have seen another category. They give good dividend while investing for the future, upgrading and modernizing their businesses and expanding their business. However, some investment can go wrong when they do over diversify or when they go into projects or businesses that they cannot understand. In that sense it is wise to avoid companies with poor managers and those who cannot bring their companies to the next level? Am I right?
dyfed
Posted: 09 April 2018 11:09:14(UTC)
#6

Joined: 01/09/2016(UTC)
Posts: 384

Thanks: 559 times
Was thanked: 556 time(s) in 230 post(s)
Well mature companies could b fast growers if they have found a new market or product. But, as you point out, the history books are littered with examples of previously successful companies that went down the tubes because they expanded too fast or in the wrong direction.
PaulSh
Posted: 09 April 2018 12:08:29(UTC)
#7

Joined: 02/12/2014(UTC)
Posts: 98

Thanks: 22 times
Was thanked: 138 time(s) in 76 post(s)
Depending on the size of your investment relative to your platform trading costs, if you are an income investor but would still like to hold a stock that doesn't pay dividends, you could generate a sort of "dividend" from it by selling a little of it from time to time.
King Lodos
Posted: 09 April 2018 13:32:59(UTC)
#8

Joined: 05/01/2016(UTC)
Posts: 2,767

Thanks: 605 times
Was thanked: 4225 time(s) in 1639 post(s)
Berkshire Hathaway doesn't pay a dividend because it's more tax-efficient for investors not to.

If you wanted the flexibility of a 5% income from it, you'd hold 95% Berkshire Hathaway, and 5% cash, and rebalance annually, so you've always got that 5% liquid and available .. and when it doesn't get used, it could be rebalanced back into BRK, or rolled over to next year.


If you think about owning an entire business (which is the way you should think about shares), if it's a growing business, you wouldn't want revenue to be paid out to shareholders when it should be invested in expansion .. Ultimately it's the value of the business itself that's your real investment .. That's where the 3,000% returns come from .. I think *many* dividend investors would actually be much better off with Corporate Bonds or Preferred Stock – which really do pay you in income (and a much safer income)
1 user thanked King Lodos for this post.
mcminvest on 09/04/2018(UTC)
Dexi
Posted: 09 April 2018 13:49:51(UTC)
#9

Joined: 03/04/2018(UTC)
Posts: 4

Thanks: 3 times
Maybe people prefer equity income funds/trusts because most of them give an income which rises over time.Fixed interest,on the other hand,although yielding more initially,might not do this.
King Lodos
Posted: 09 April 2018 14:11:27(UTC)
#10

Joined: 05/01/2016(UTC)
Posts: 2,767

Thanks: 605 times
Was thanked: 4225 time(s) in 1639 post(s)
That is the best reason.

But being able to grow dividends (sustainably) comes down much more to having those qualities you'd look for in a quality growth stock: high returns on capital; a competitive moat, stable revenue, etc.

So today, I find those companies are paying 2 to 2.5% dividends .. The companies paying 4 and 5% these days are often having to do so out of debt or selling assets – in which case, buying them for the dividend could be one of the big blunders investors are making .. The equity income sector is forced to keep buying those stocks, and the popularity of that sector might be propped up by what could be coined a 'yield bubble'.
4 users thanked King Lodos for this post.
Tim D on 09/04/2018(UTC), Dexi on 09/04/2018(UTC), mcminvest on 09/04/2018(UTC), Alan Selwood on 09/04/2018(UTC)
Mr Helpful
Posted: 09 April 2018 14:58:27(UTC)
#11

Joined: 04/11/2016(UTC)
Posts: 591

Thanks: 669 times
Was thanked: 783 time(s) in 370 post(s)
Dian;60331 wrote:
In short, I have found following types of dividend policy.
Irregular dividend policy
Regular dividend policy
Stable or constant dividend policy
No dividend policy

Which category is the best? Thanks.

There is always the 'Discounted Dividend Model' (DDM); present value of its future income stream, the sum of all the future dividends, discounted to the present.
"Irving Fisher's great gift to finance, which allows the investor to easily estimate the expected returns of Stocks and Bonds
the ultimate answer to the age-old question of how to separate Investment from Speculation, the latter where assets produce no income, and your return is dependent on someone else paying yet a higher price (aka greater fool)" Wm Bernstein (edited a smidgeon)

The DDM fortunately reduces to the simpler 'Gordon Equation'.
Market Return = Dividend Yield + Dividend Growth
(I.E. kinda Total Return as per Keith C post 2.)
Some investors take this a convoluted stage further by comparing 'Total Return' with the PE (sometimes "smoothed").

These day with the FAANGS et al, what a relief to have moved away from such primitive concepts.
Brave new world!!!

Berkshire Hathaway is a noteworthy anomaly perhaps, as underlying assets are certainly growing.
Amateur hour
Posted: 09 April 2018 15:37:55(UTC)
#15

Joined: 24/08/2017(UTC)
Posts: 17

Thanks: 3 times
Was thanked: 52 time(s) in 14 post(s)
Dividend fan here...

Two points. First, the investor’s life stage is significant. I invested specifically to generate a high and growing income in retirement, and the income is for spending. In other words I want ‘jam today’.

Second, dividends are kind of reversionary bonuses - once paid out, they can’t be taken back. And when markets are choppy that flow of dividends helps me to hold my nerve, and stay invested.

I regret not holding more growth oriented stuff earlier in my investment career, that’s true, but I’m happy with a strong ( but heavily diversified) income bias now.
7 users thanked Amateur hour for this post.
V.T Graham on 09/04/2018(UTC), Tim D on 09/04/2018(UTC), Aminatidi on 09/04/2018(UTC), dyfed on 09/04/2018(UTC), John Miskelly on 09/04/2018(UTC), Peter59 on 09/04/2018(UTC), mcminvest on 09/04/2018(UTC)
King Lodos
Posted: 09 April 2018 15:50:22(UTC)
#12

Joined: 05/01/2016(UTC)
Posts: 2,767

Thanks: 605 times
Was thanked: 4225 time(s) in 1639 post(s)
Mr Helpful;60382 wrote:
There is always the 'Discounted Dividend Model' (DDM); present value of its future income stream, the sum of all the future dividends, discounted to the present.
"Irving Fisher's great gift to finance, which allows the investor to easily estimate the expected returns of Stocks and Bonds
the ultimate answer to the age-old question of how to separate Investment from Speculation, the latter where assets produce no income, and your return is dependent on someone else paying yet a higher price (aka greater fool)" Wm Bernstein (edited a smidgeon)

The DDM fortunately reduces to the simpler 'Gordon Equation'.
Market Return = Dividend Yield + Dividend Growth
(I.E. kinda Total Return as per Keith C post 2.)

These day with the FAANGS et al, what a relief to have moved away from such primitive concepts.
Brave new world!!!

Berkshire Hathaway is a noteworthy anomaly perhaps, as underlying assets are certainly growing.


Not wanting to sound like a zealot .. but I think the DDM is the product of an era of popular financial illiteracy.

It would be true if dividends were the only way stocks returned value to shareholders .. But take two other ways: stock repurchases and debt reduction .. Combine all three and you get 'shareholder yield' – a far superior measure of what a business actually returns to shareholders.

But even that fails to grasp what an investment actually is .. Warren Buffett's approach fundamentally comes down to viewing a stock as ownership in a business .. And because the whole purpose of markets is to work out what things are worth, if a business you're investing in creates value and grows, then the real way it returns value is that your investment grows .. You owned a £3m furniture shop; now you own a £300m furniture shop .. Looking at dividends as the way a stock returns value is like buying a Ferrari for the floor mats
2 users thanked King Lodos for this post.
Mr Helpful on 09/04/2018(UTC), John Miskelly on 09/04/2018(UTC)
Money Spider
Posted: 09 April 2018 16:06:15(UTC)
#17

Joined: 11/01/2013(UTC)
Posts: 114

Thanks: 48 times
Was thanked: 219 time(s) in 77 post(s)
I don’t think there is a simple answer to the question. Also, there are two viewpoints: that of the company and that of the investor. These break down to elements/considerations that include:

Company
Mature or fledgling company(culture) – is there a history of dividends?
Cashflow
Mature of fledgling (product/service) – Dyfed’s ‘Boston Box’. Hi-tech, particularly in IT have generally not paid dividends. Better to re-invest (King Lodos).

Individual
Need of income (jam today)?
Stage of life – can I wait for the realisation of the investment?
Investment philosophy – reassured by actually receiving something rather than a compounded investment which could, perhaps, fail.
Tax position – CG for a higher rate tax payer costs less than tax on dividend income (20% vs 32.5%). Perhaps better to give away ‘gift from income’ than bequest a capital gain that is then subject to IHT.

So, I think there are many different answers to this question (and many more besides those above).

This made me think about Vodafone. They started out as part of Racal in the late 1980’s. Spun out to get focus and realise value. The initial motivation for most investors was (share price) growth (who had a mobile phone then?). Now, they’re in a mature market and are seen as a dividend champion. They now need to address a replacement market and how to make money as a ‘mobile voice/data pipe’ – something that BT has been struggling with for 30 years. The people making the money are the content providers like the FAANGs.
2 users thanked Money Spider for this post.
Keith Cobby on 09/04/2018(UTC), John Miskelly on 09/04/2018(UTC)
Rupert Otten
Posted: 09 April 2018 16:56:27(UTC)
#16

Joined: 30/09/2013(UTC)
Posts: 2

Amateur hour;60383 wrote:
Dividend fan here...

Two points. First, the investor’s life stage is significant. I invested specifically to generate a high and growing income in retirement, and the income is for spending. In other words I want ‘jam today’.

Second, dividends are kind of reversionary bonuses - once paid out, they can’t be taken back. And when markets are choppy that flow of dividends helps me to hold my nerve, and stay invested.

I regret not holding more growth oriented stuff earlier in my investment career, that’s true, but I’m happy with a strong ( but heavily diversified) income bias now.


I am also struggling with how to balance a need for dividend income with desire for growth not least because dividend income is now taxed far more heavily than capital gains.

My advice is not to invest in companies that pay dividends out of capital or have poor balance sheets. I have had a good look at my portfolio in recent months following the Carillion debacle and have been surprised to see just how many so called good names have their balance sheet stuffed with intangible assets. This is another example of jam today and pain tomorrow and increases the risk to investors if things start to go wrong in the business. It does not take much for goodwill to become valueless.

I am a fan of preference stock despite Aviva's attempted grab (i had sold out when the yield fell below their ordinary stock).

I am searching for companies that do not pay a dividend and have just purchased Edinburgh worldwide IT hoping for a revival in interest in tech companies..
Mr Helpful
Posted: 09 April 2018 17:33:25(UTC)
#13

Joined: 04/11/2016(UTC)
Posts: 591

Thanks: 669 times
Was thanked: 783 time(s) in 370 post(s)
King Lodos;60384 wrote:
Not wanting to sound like a zealot .. but I think the DDM is the product of an era of popular financial illiteracy.

It would be true if dividends were the only way stocks returned value to shareholders .. But take two other ways: stock repurchases and debt reduction .. Combine all three and you get 'shareholder yield' – a far superior measure of what a business actually returns to shareholders.


A zealot?
Never!

'Shareholder Yield'
Dividends : OK
Debt Reduction : OK
Stock Repurchases : Sometimes dubious incentives and possible value destruction, so it depends
1 user thanked Mr Helpful for this post.
King Lodos on 09/04/2018(UTC)
Bruce J.
Posted: 09 April 2018 17:41:56(UTC)
#18

Joined: 04/11/2016(UTC)
Posts: 40

Thanks: 36 times
Was thanked: 46 time(s) in 20 post(s)
All the explanations given above are valid and useful.

I however, have my own, much simpler reason for buying shares, and especially trusts, which give no dividend, and that is all to do with taxation.

If I get a dividend of £100 I will immediately lose £40 of it in tax.

If I buy an equally good share which pays no dividend, then in theory my holding gains the full £100 in added value.

Even if the share does have a dividend, it may be better for me to buy the share when it goes "ex-dividend" so that I get it cheaper and dont have any dividend to pay tax on.

Of course, one must eventually sell the shares - but as long as the total gains for the year do not exceed capital gains allowance there is no tax to pay.
1 user thanked Bruce J. for this post.
dyfed on 09/04/2018(UTC)
King Lodos
Posted: 09 April 2018 17:59:34(UTC)
#14

Joined: 05/01/2016(UTC)
Posts: 2,767

Thanks: 605 times
Was thanked: 4225 time(s) in 1639 post(s)
Mr Helpful;60394 wrote:
King Lodos;60384 wrote:
Not wanting to sound like a zealot .. but I think the DDM is the product of an era of popular financial illiteracy.

It would be true if dividends were the only way stocks returned value to shareholders .. But take two other ways: stock repurchases and debt reduction .. Combine all three and you get 'shareholder yield' – a far superior measure of what a business actually returns to shareholders.


A zealot?
Never!

'Shareholder Yield'
Dividends : OK
Debt Reduction : OK
Stock Repurchases : Sometimes dubious incentives and possible value destruction, so it depends


Well buybacks are largely what's fuelled the post-crisis rally .. Investors have been selling US shares and funds for years .. So their role in returning value to shareholders has probably far exceeded dividends this century. (it effectively means you own a larger share of the company)

But I think the main point is that a share in a business is analogous to owning that business .. And if you own a business, then it's the business itself you're really choosing to keep your wealth in .. and whether it's paying 5%, the other 95% of your wealth any given year is inextricably and fundamentally linked to the success of that business.
1 user thanked King Lodos for this post.
Mr Helpful on 09/04/2018(UTC)
mcminvest
Posted: 09 April 2018 21:09:21(UTC)
#19

Joined: 22/02/2018(UTC)
Posts: 51

Thanks: 135 times
Was thanked: 17 time(s) in 14 post(s)
Bruce J.;60396 wrote:
All the explanations given above are valid and useful.

I however, have my own, much simpler reason for buying shares, and especially trusts, which give no dividend, and that is all to do with taxation.

If I get a dividend of £100 I will immediately lose £40 of it in tax.

If I buy an equally good share which pays no dividend, then in theory my holding gains the full £100 in added value.

Even if the share does have a dividend, it may be better for me to buy the share when it goes "ex-dividend" so that I get it cheaper and dont have any dividend to pay tax on.

Of course, one must eventually sell the shares - but as long as the total gains for the year do not exceed capital gains allowance there is no tax to pay.


Out of interest, why not invest through an ISA and any gain is tax free?
Dian
Posted: 10 April 2018 06:39:27(UTC)
#20

Joined: 09/10/2016(UTC)
Posts: 255

Thanks: 243 times
Was thanked: 103 time(s) in 74 post(s)
I didn’t expect so many responses. I really learnt a lot. Thank you for everybody. Have a nice day!
1 user thanked Dian for this post.
Keith Cobby on 10/04/2018(UTC)
+ Reply to discussion

Markets

Other markets