# Dividends, are they worth it?



## hng049 (2 January 2016)

Hi all, I'm a new investor and have a question to ask regarding dividends: Are they worth it? I'm a bit confused so let me give you an example:

Company ABC is trading at $10 a share and I decide to buy 1000 shares, so I have invested $10,000 into ABC. This year they have decided to pay 20c per share fully franked. That means I get $200 back in cash (no DRP). But as we all know the price of the stock will fall roughly by 20c so even though I have pocketed $200 into my account, the value of my ABC shares have fallen by $200. So it seems to me that I've got the same value as I had before by in two different forms now? Also a $10,000 investment just to get back $200 seems very low indeed [Lets assume term deposits at the banks are 1%, so I understand it's relative ] Why do people specifically look for high yielding dividend stocks? It seems you'd have to have A LOT of money to begin with to get a good return. Your insight is much appreciated!


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## Bill M (2 January 2016)

hng049 said:


> Hi all, I'm a new investor and have a question to ask regarding dividends: Are they worth it? I'm a bit confused so let me give you an example:




Hi and Welcome to the forum. I live solely off my dividends and interest income so to me (someone who is a self funded retiree) it really is worth it. I am a long term investor and I don't do the trading gig, all I need is the steady flow of income.

This is how important dividends really are. If you have 500K in the bank earning 3% you would only receive 15K a year in interest, you couldn't really live off that. But on the other hand if you bought into a few High Yield ETF's you could get returns of around 7% to 8% grossed up from distributions alone and that would pay you 40K a year.

It should be mentioned that being in the markets with any stocks puts your capital at risk and if you do not know how to manage that you could lose a fair bit of what you put in in the first place. I am in somewhat of a different situation from many people on ASF, I live off my Super and take a pension and I don't pay any tax on the dividends, in fact all the franking credits come back to me too. So yes it really is worth it for me, cheers.


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## hng049 (2 January 2016)

Bill M said:


> It should be mentioned that being in the markets with any stocks puts your capital at risk and if you do not know how to manage that you could lose a fair bit of what you put in in the first place. I am in somewhat of a different situation from many people on ASF, I live off my Super and take a pension and I don't pay any tax on the dividends, in fact all the franking credits come back to me too. So yes it really is worth it for me, cheers.




Hi Bill, thanks for your insight! So for someone like me, 25 years old, earning a wage, it doesn't seem like investing for dividends (not specifically but just companies who give them out) would be as good as looking for capital growth shares? Example, I purchased $1000 (don't want to risk too much when I'm starting out ) in AMP which gives me roughly 175 shares, so after a year I'd get back approximately $40 based on previous dividends which is nothing haha. Even if I accumulate I'd have to put in a lot of my money to get a good return back, since AMP won't have as much growth as say a small market capital company??


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## So_Cynical (2 January 2016)

My annual portfolio returns are roughly split half dividends half trading profits, the trading profits are somewhat variable, this year has been very good, 2010/11 not so, 14 - 18% annual return of which 6 - 7% is dividends and franking credits.

Dividends are worth it if you are accumulating income, recurring income.


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## Smurf1976 (2 January 2016)

hng049 said:


> Hi Bill, thanks for your insight! So for someone like me, 25 years old, earning a wage, it doesn't seem like investing for dividends (not specifically but just companies who give them out) would be as good as looking for capital growth shares?




Those buying shares to receive dividends usually intend that it's a longer term investment (years) rather than just buying, receiving the dividend, then selling the shares. 

Going for dividends isn't a "get rich quick" strategy but it's potentially less risky to be investing in a solid business that is making a profit than investing in a junior company that may or may not be successful at whatever they plan to do. 

As an example, suppose that you bought 250 shares in JB Hi-Fi 10 years ago.

The shares were valued at $4 each and were paying 7.2 cents per annum in dividends, a yield of 1.8%. So you invested $1000 in order to receive $18 a year in dividends at the time. That alone doesn't sound too impressive.

Since that time the company has grown and the actual dividends you would have received total $1356.50 with all of those dividends fully franked. So the dividends alone have been worth more than your original investment.

Today, the company is paying 90 cents a year in dividends. That's $225 a year in this example *and represents a 22.5% dividend yield on your original investment of $1000*. Meanwhile your $1000 worth of shares are now valued at $4880.

So that's an example of how it can work, buying and holding long term in a company that pays dividends and has ongoing growth.

Note that I have used JB Hi-Fi as just a randomly selected example here. I am not commenting on future prospects, simply noting what would actually have happened if someone had bought shares 10 years ago and held them until today.


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## hng049 (2 January 2016)

Smurf1976 said:


> So that's an example of how it can work, buying and holding long term in a company that pays dividends and has ongoing growth.




So I'm in for the long run then! 

What are your opinions on DRPs?


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## Smurf1976 (2 January 2016)

hng049 said:


> So I'm in for the long run then!
> 
> What are your opinions on DRPs?




Something to consider is the psychological aspect. Using JB Hi-Fi as an example again, there were certainly some big drops in the share price over the past 10 years that would have (1) seriously tested the thoughts of those holding for the long term and (2) presented a trade the stock rather than simply holding.

Over $16 in 2007, then lost more than half its' value over the next year or so.

Hit $23 in late 2009, falling below $8 in 2012 then rising to over $22 within the next 18 months.

So shorter term trading is certainly a valid approach if you can get it right.

As for DRP's, personally I'm not keen on them simply due to it complicating the accounting when it comes time to sell and pay tax. I could do it certainly, but thus far I'm putting my time into other things.


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## pixel (3 January 2016)

hng049 said:


> So I'm in for the long run then!
> 
> What are your opinions on DRPs?




FWIW and my  - I don't like DRPs because I prefer to buy a stock - even one I hold for dividend and franking credits - when it's pulled back to a price zone where the general market shows support, not when a dividend has been paid and the sp is - usually - well above the low support price point.
.
That aside, increasing my holdings by a couple of percentage points is hardly worth the effort. If I want to increase my exposure to a particular sector or stock, I much prefer to invest a reasonable portion - usually in the order around 5% - of my investment capital.


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## shouldaindex (3 January 2016)

Playing devils advocate here with some general observations:

Let's say you own your own business that you can sell for 10 times earnings vs a business next door that has offers to be bought at 20 times earnings.  What does that infer the two businesses?

Let's also say your business can only reinvest 20% of those earnings before growth slowed and needed ideas for the rest vs a business that could reinvest 80%.  What does that infer about the quality of the two businesses?

Let's say your business is purely domestic and has no opportunity to grow overseas vs a business that expands overseas and is growing it's % of earnings globally.

In those cases, dividend investing would generally choose the perceived lower quality company (Lower PE, Higher Payout Ratio, Fully Franked).

The benefit is that the level of quality is mostly made up of market perception (PE expansion / contraction), and history shows that tends to overshoot to both the negative and positive, so that is why studies show high dividend and low payout stocks (Low market perception, High management perception) outperform.


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## Bill M (3 January 2016)

hng049 said:


> What are your opinions on DRPs?




Same as smurf and pixel. I do not do the DRP's with my stocks.

Sure, you can save on brokerage but it can become a bit busy at tax time. Lets say you sold a holding you have held for 10 years, you most likely will have 20 to 25 separate capital gains calculations to do. Easy with the right software, not to good if you got to work it out yourself. Plus I would much rather buy extra stocks at the price I want to pay and not at the going price (which you don't know what it will be) at the time. I did it years ago but now don't touch them, cheers.


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## Smurf1976 (3 January 2016)

Another way to look at it:

Buy dividend paying stocks and holding for the long term = you're the part owner of a business and intend making a profit from the ongoing activities of that business. 

Buying stocks on the basis of short term trading = you're trading shares as such and intend making a profit from the movement in market price of those shares. The "business" being carried on here is that of you buying and selling of shares as such.

Both approaches, or a combination of the two, can be a profitable approach.

Something to understand with dividend paying stocks is risk and sustainability. If someone's paying a 20% yield then another way to look at that is "this stock is ridiculously cheap". There's quite likely a reason why it's so cheap - others have worked out that it's going broke or at best won't be paying anywhere near that level of dividends in the future. If it sounds too good to be true then it probably is.


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## hng049 (3 January 2016)

shouldaindex said:


> The benefit is that the level of quality is mostly made up of market perception (PE expansion / contraction), and history shows that tends to overshoot to both the negative and positive, so that is why studies show high dividend and low payout stocks (Low market perception, High management perception) outperform.




Hi shouldaindex, thanks for your input! Can you give me an example of a company like the one you described?


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## hng049 (3 January 2016)

Bill M said:


> Lets say you sold a holding you have held for 10 years, you most likely will have 20 to 25 separate capital gains calculations to do.




Hi Bill M, thanks for your reply, why would you have that many separate capital gains calculations to do? How does  DRP complicate things at tax time?


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## hng049 (3 January 2016)

pixel said:


> FWIW and my  - I don't like DRPs because I prefer to buy a stock - even one I hold for dividend and franking credits - when it's pulled back to a price zone where the general market shows support, not when a dividend has been paid and the sp is - usually - well above the low support price point.




Hi Pixel, so for example if I wanted to buy more stock of a company I already own, would it be best to buy on the ex-dvidend date? Assuming someone who doesn't do a lot of technical analysis and doesn't know how to read charts that well


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## Smurf1976 (3 January 2016)

hng049 said:


> why would you have that many separate capital gains calculations to do? How does  DRP complicate things at tax time?




Capital Gains Tax (CGT) is payable on the profit made upon selling the shares. There's a little bit of complexity, nothing major, but in short if you buy the shares for $1 and sell for $3 then CGT is payable on the $2 profit that you made.

That's a very easy calculation if you buy 1000 shares in company XYZ today and sell them 3 years later.

It's a lot more effort to work it out if you've received 6 dividends along the way and reinvested them. Now you've got the original shares plus another 6 smaller lots all bought at different prices. Since you need to pay CGT based on the difference between the buy and sell prices, that means you've now got 7 calculations to do instead of 1. And you'll need to apportion the cost of selling (brokerage) between them all too.

That the dividends are taxable income, which may or may not be franked (tax already paid at the company tax rate), is another dimension to it. You won't have received any actual cash, it went straight into buying more shares, but there are still the tax implications to consider along the way.

It's certainly quite possible to do it, it just adds more account work which takes time. 

Personally, I'd rather take the dividends as cash and either invest in something different or, if I did want to buy more of the same stock, do it in one go of a decent size rather than a few shares every 6 months.

DRP as such is simple and straightforward, it's taxation which brings about the complexity.


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## pixel (3 January 2016)

hng049 said:


> Hi Pixel, so for example if I wanted to buy more stock of a company I already own, would it be best to buy on the ex-dvidend date? Assuming someone who doesn't do a lot of technical analysis and doesn't know how to read charts that well




Without doing a little more detective work, your chances of finding a reasonable accumulation point will be more or less haphazard. Sure, nearly all dividend-paying stocks will drop on ex-div day. The question is, how quickly will they recover, or for how long will they slide lower?
Checking out the price behaviour around past ex-div days will give you some valuable clues. No guarantees, to be sure, but you most definitely will improve your chances of getting a better deal than buying, say, on ex-div day or blindly accepting what you get under a DRP.

Checking that much of a chart isn't Rocket Science. All you need is a list of the last few years' ex-div dates and a chart. Zoom into each ex-div date and count the days to the Lowest price level where - *in hindsight* - you would wish you had bought this stock for best advantage, either cum or ex the respective dividend. If the majority of, say, the last six times falls in the same ballpark, you won't go wrong too often if you buy with a similar offset the next time. *Always assuming of course, your reason for adding more of the particular share is still sound.*


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## shouldaindex (3 January 2016)

Just to answer an earlier question, if you do a screen of Gross Dividends 7%+, Payout Ratio Under 66%, PE Under 13 you come up with some companies like RFG, SMX, CLH, CCV (not recommendations, just illustrations).


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## hng049 (3 January 2016)

Thanks everyone for your inputs into my questions!


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## Bill M (3 January 2016)

hng049, just thought I'd add to the dividend story. This is a true story.

Back in the year 2000 there was an IPO called The Australian Pipeline Trust (ticker APA). The IPO was for $2 a share and I got my Mother interested enough to buy into the IPO. I bought some too.

At that time the distribution was going to be around 10% per annum, some of it was capital returns as well as income. Over the years it turned into just income and no more capital returns.

This is an infrastructure company and it has bought out other companies and has expanded over the last 15 years. It has also changed names and it is still ticker APA but it's full name is APA Group (Stapled Securities). It's dividends have slowly increased over the years. APA last traded at $8.68, not too bad going up from $2.

The dividend for the last 12 Months was 75.75 cents per share. That means that for shares that we originally paid $2 each for are now paying us close to a 38% dividend/distribution per annum on original outlay. My Mother never sold her shares, unfortunately I did, too early. With all the things that has happened like the Twin Tower attacks and the GFC she held through. Now in her very old age she is using those dividends to pay for her aged care. Dividends are very important in creating wealth.


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## hng049 (6 January 2016)

Bill M said:


> That means that for shares that we originally paid $2 each for are now paying us close to a 38% dividend/distribution per annum on original outlay. My Mother never sold her shares, unfortunately I did, too early. With all the things that has happened like the Twin Tower attacks and the GFC she held through. Now in her very old age she is using those dividends to pay for her aged care. Dividends are very important in creating wealth.




Hi Bill, that's a great return! I certainly understand more about dividends now. I just need to accumulate more shares for dividends to make a decent return. I've got about 40 years till retirement so plenty of time


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## Value Collector (6 January 2016)

Bill M said:


> hng049, just thought I'd add to the dividend story. This is a true story.
> 
> Back in the year 2000 there was an IPO called The Australian Pipeline Trust (ticker APA). The IPO was for $2 a share and I got my Mother interested enough to buy into the IPO. I bought some too.
> 
> ...




Hey Bill, 

I think you have done your maths wrong, apa didn't pay 75cents per share, from memory they pay around 38cents.

I have been a holder of apa since 2000 also, it's been a great dividends payer and seen great capital growth.


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## Value Collector (6 January 2016)

hng049 said:


> Hi Bill, that's a great return! I certainly understand more about dividends now. I just need to accumulate more shares for dividends to make a decent return. I've got about 40 years till retirement so plenty of time




Don't forget the power of compounding, using your dividends to by more shares in other companies is a great way to grow your investment portfolio.

Think of yourself as a business owner, when you own a portfolio of shares, you own a portfolio of businesses, these businesses earn money and every 6 months they send you a dividend which is your part of the profits they are paying you (after they have retained some to keep growing the company) you can then take this money and increase your holdings by buying more shares in your existing businesses or buying into other companies, 

The thing with compounded growth is, at first it seems to take along time, but eventually you hit a tipping point and the growth suddenly seems to pick up steam and the dividend checks grow like crazy.


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## shouldaindex (6 January 2016)

I think I read one of my favourite posts of all time on here, basically said:

- He's a part owner of 300 of the best businesses in Australia, doesn't have to do anything and automatically gets to buy more year after year for free.  

- When someone gets the sack for losing a company a lot of money, he couldn't care less as it doesn't really matter.

- And just to prove the track record, any money invested 60 years ago (9% ASX returns with dividends reinvested) would be worth 170 times the amount today or $10k = $1.7m


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## Bill M (7 January 2016)

Value Collector said:


> Hey Bill,
> 
> I think you have done your maths wrong, apa didn't pay 75cents per share, from memory they pay around 38cents.
> 
> I have been a holder of apa since 2000 also, it's been a great dividends payer and seen great capital growth.




Hey Value Collector, you are right, my bad. APA use to pay distributions every quarter and I forgot they went to 6 Monthly distributions. What I did wrong was added up the last 4 distributions instead of the last 2

The latest distribution that was paid was at 20.5 c per share (on 16/09/2015) The next payment which was announced last week will be on 16/03/2016, it will be 19 c per share. That will make it a total of 39.5 c a share. So that means that for the original outlay of $2 per share, that initial investment is now paying you 19.7% per annum, still not too shabby + the share price has more than quadrupled (currently $8.42).

Thanks for pointing that out VC, I would hate to mislead anyone.


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## luutzu (8 January 2016)

Bill M said:


> Hey Value Collector, you are right, my bad. APA use to pay distributions every quarter and I forgot they went to 6 Monthly distributions. What I did wrong was added up the last 4 distributions instead of the last 2
> 
> The latest distribution that was paid was at 20.5 c per share (on 16/09/2015) The next payment which was announced last week will be on 16/03/2016, it will be 19 c per share. That will make it a total of 39.5 c a share. So that means that for the original outlay of $2 per share, that initial investment is now paying you 19.7% per annum, still not too shabby + the share price has more than quadrupled (currently $8.42).
> 
> Thanks for pointing that out VC, I would hate to mislead anyone.




Just nit picking here but probably wrong to compare dividends now to original share price. It's nice and feels good but maybe we ought to do some compounding then see if the dividend now is at a reasonable yield to what original capital, if invested and earn x% per year is now worth y etc. 

Now let's rain on this APA parade... maybe not, but can you guys tell me how APA keeps paying dividend above its earnings all these years?

I haven't read their Annual Reports yet, just downloading for a looksy but from MorningStar they seem to be paying higher dividends than their reported earning each year for a long while now. 

Saw they note it's from "normalised" operating cash or something on their website... Anyway, will take a look.


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## Value Collector (9 January 2016)

luutzu said:


> Just nit picking here but probably wrong to compare dividends now to original share price. It's nice and feels good but maybe we ought to do some compounding then see if the dividend now is at a reasonable yield to what original capital, if invested and earn x% per year is now worth y etc.
> 
> .




If you are comparing an allocation of $X in APA shares in 2000 to an allocation of $X into term deposits or some other cash investment, I think its fair to compare the current return to the original cash out lay, especially if you are a retired and spending the dividends.

eg. I retired person who put $100K into a term deposit and spent all the interest would currently have a $100K term deposit earning say $2000 or $3000 interest.

The APA investor would be receiving about $19,000 in dividends, on top of income the APA investor also has the benefit of his original cash outlay growing from $100,000 to over $400,000, that's a $300,000 gain which will be taxed at a 50% discount when its finally sold.

really holding APA shares since 2000 has meant your original investment has been producing over 10% in income for you, while your capital has been compounding at about 10%, its been a pretty good investment over time.



> Now let's rain on this APA parade... maybe not, but can you guys tell me how APA keeps paying dividend above its earnings all these years?
> 
> I haven't read their Annual Reports yet, just downloading for a looksy but from MorningStar they seem to be paying higher dividends than their reported earning each year for a long while now.




APA is an infrastructure company, it owns huge amounts of assets from which it can make a depreciation charge against its earnings, the depreciation charge is actually much higher than the amount that they actually have to spend to maintain their pipelines etc, the result is reported profits are much lower than the actual free cash flow they are generating.

eg. To build a pipeline involves all sorts of design costs, earth works, environmental impact studies, legal costs, negotiations with landholders, actual construction costs etc all these costs are rolled up into the capital value of the pipeline system, and will be written off over the years against earnings, however once its built the cost to maintain the pipe is relatively small, which means cashflows will be higher than reported profit.


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## shouldaindex (9 January 2016)

In Australia there is franking value that can add 3% just because someone decided you could on a 7% FF Dividend.

There are very few free lunches like that, where you can outperform an international counterpart by 42% doing the exact same thing, with no added risk.

But taking tax out of it, there's no difference between a stock that returns 7% through dividends or capital appreciation.  In the example didn't APA make more from capital appreciation anyway?


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## Value Collector (9 January 2016)

shouldaindex said:


> In the example didn't APA make more from capital appreciation anyway?




Not sure, but maybe.

I guess if you wanted to do a realistic comparison you would have to add compounded interest to the dividend you received, I guess if you used the dividend to buy more apa shares every six months, then the capital growth from the dividends you reinvested would really add a lot of extra growth.

But you are completely right with you point about dividends vs capital growth, it's the total shareholder return that's important, in some cases it's best for companies to pay out profits as dividends, in other cases companies have good ways of investing dollars they retain, and it's best for them not to pay a divvy, and just put the profits back to work in the business, which in turn leads the company value and share price to grow.

Look at the worlds biggest and most profitable company's, they would never have grown to that size paying out 100% of earnings, but on the other hand you have company's that don't have options to invest money and earn more than 10%, so you want these companies to pay out excess cash.


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## luutzu (9 January 2016)

Value Collector said:


> ...
> APA is an infrastructure company, it owns huge amounts of assets from which it can make a depreciation charge against its earnings, the depreciation charge is actually much higher than the amount that they actually have to spend to maintain their pipelines etc, the result is reported profits are much lower than the actual free cash flow they are generating.
> 
> eg. To build a pipeline involves all sorts of design costs, earth works, environmental impact studies, legal costs, negotiations with landholders, actual construction costs etc all these costs are rolled up into the capital value of the pipeline system, and will be written off over the years against earnings, however once its built the cost to maintain the pipe is relatively small, which means cashflows will be higher than reported profit.




And the taxman let them get away with it?

I'm sure you and Bill and others have look at it and know it best. But yea, as long as they are maintaining the assets properly and doing it for less than the allowable charge on the account; not cutting back on maintenance, increase operating cash but still claim the less profit through depreciation/accounting.

I guess pipelines are just a pipe in the ground with a few pump stations here and there, with Australia being pretty much Earthquake free so there won't be much cost to maintain the assets... but bear with me... say in the longer term, like another 10 years or 15... wouldn't all or most of these pipes need to be replace or heavily upgraded?

That's when all these depreciation charges will then come calling at once. 

What's the design life expectancy for these pipes you know?


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## Value Collector (10 January 2016)

luutzu said:


> And the taxman let them get away with it?
> 
> I'm sure you and Bill and others have look at it and know it best. But yea, as long as they are maintaining the assets properly and doing it for less than the allowable charge on the account; not cutting back on maintenance, increase operating cash but still claim the less profit through depreciation/accounting.
> 
> ...




It's not that they are "getting away with it", it's how depreciation is claimed on most things, but also the government wants company's to invest in infrastructure, so often they will offer sweet accounting deals as an incentive to get infrastructure built, eg allowing construction costs to be written off over shorter time frames etc.

Pipelines usually have a design life of 80years, but can last longer with good Maintenance, it's not like after 80 years they have to rip the whole thing up and rebuild, it just gets inspected and parts here and there that need work get work done, obviously as th system gets older it requires more maintenance though, but still nothing like the inflation adjusted cost of an original construction, but yeah one day the gas fields will be exhausted and the pipelines will be worthless, but it would have paid for itself dozens of times by then, and the cashflow produced will have been invested in other infrastructure investments along the way, as well as funding dividends.


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## Smurf1976 (10 January 2016)

Value Collector said:


> Pipelines usually have a design life of 80years, but can last longer with good Maintenance, it's not like after 80 years they have to rip the whole thing up and rebuild, it just gets inspected and parts here and there that need work get work done, obviously as th system gets older it requires more maintenance though, but still nothing like the inflation adjusted cost of an original construction




Same with most major infrastructure. Roads, rail, bridges, dams / hydro. It costs an outright fortune to build but once it's built it doesn't cost much to keep it running and it has a very long lifespan.

Victoria still uses the original gas pipeline built for the old Lurgi (gas produced from coal) plant 60 years ago although it transports natural gas these days (the coal gas plant as such was scrapped once natural gas became available). SA still uses the Moomba gas pipeline (1969) and NSW is still using theirs from 1976. 

Launceston got over 130 years out of the original gas system before it became uneconomic. And it wasn't actually worn out then, just became uneconomic (no natural gas in Tas at that time, so the problem was the cost of gas as such not the pipes).

Plenty of old bridges still in use right around the world. Same with rail.

Lake Margaret power station is 102 years old this year and Tarraleah is 78 years old (both are hydro plants in Tas). Both are still in full production (base load) today and they're running right now. 

Parts of Hobart's water supply system date from 1860 and they're still in full use today.

Parts of the electricity transmission system built in the 1930's are still in use today. Indeed it's only a few years ago that some stuff dating back to 1916 was finally taken out of service.

So broadly speaking, big infrastructure does have a very long lifespan if properly maintained. Things which run at high temperatures, eg boilers and steam turbines, have a shorter life but it's still a few decades.


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## Value Collector (10 January 2016)

Smurf1976 said:


> Same with most major infrastructure. Roads, rail, bridges, dams / hydro. It costs an outright fortune to build but once it's built it doesn't cost much to keep it running and it has a very long lifespan.
> 
> Victoria still uses the original gas pipeline built for the old Lurgi (gas produced from coal) plant 60 years ago although it transports natural gas these days (the coal gas plant as such was scrapped once natural gas became available). SA still uses the Moomba gas pipeline (1969) and NSW is still using theirs from 1976.
> 
> ...




Hey smurf,

I thought you might be interested in this video, They remove a hydro electric dam that had been in service for 99 years, and return the lake back to its original condition of fast flowing river.

The hydro electric station was still operational, but they wanted to return salmon to the area and it became viable to replace the load with power imported via transmission line.

It's a great video.

[video]https://m.youtube.com/watch?v=HES_-dKUE9I[/video]


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## luutzu (10 January 2016)

Value Collector said:


> It's not that they are "getting away with it", it's how depreciation is claimed on most things, but also the government wants company's to invest in infrastructure, so often they will offer sweet accounting deals as an incentive to get infrastructure built, eg allowing construction costs to be written off over shorter time frames etc.
> 
> Pipelines usually have a design life of 80years, but can last longer with good Maintenance, it's not like after 80 years they have to rip the whole thing up and rebuild, it just gets inspected and parts here and there that need work get work done, obviously as th system gets older it requires more maintenance though, but still nothing like the inflation adjusted cost of an original construction, but yeah one day the gas fields will be exhausted and the pipelines will be worthless, but it would have paid for itself dozens of times by then, and the cashflow produced will have been invested in other infrastructure investments along the way, as well as funding dividends.




So it's not a ponzi scheme then? 

I have APA on the watchlist but never took much interest in it. Mainly due to the high debt level, the high price and didn't really think a utility could make that much profit or margin or growth. Guess it showed me I ought to make no quick calls.

Scanning their 2015AR and they claim 1300% shareholder return in 15 years? Or 19% p.a. average since IPO?

But yea, interesting... thanks guys. Will try to dig into it after a few look at Dick Smith and may have a proper opinion.


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## luutzu (10 January 2016)

Smurf1976 said:


> Same with most major infrastructure. Roads, rail, bridges, dams / hydro. It costs an outright fortune to build but once it's built it doesn't cost much to keep it running and it has a very long lifespan.
> 
> Victoria still uses the original gas pipeline built for the old Lurgi (gas produced from coal) plant 60 years ago although it transports natural gas these days (the coal gas plant as such was scrapped once natural gas became available). SA still uses the Moomba gas pipeline (1969) and NSW is still using theirs from 1976.
> 
> ...




You sure know your power stuff Smurf.

So how would APA or any company properly maintain the pipelines?

Maybe check the pressure gauge for leakage or something like that? Now and then send some camera on a wheels down the line?


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## Value Collector (10 January 2016)

luutzu said:


> You sure know your power stuff Smurf.
> 
> So how would APA or any company properly maintain the pipelines?
> 
> Maybe check the pressure gauge for leakage or something like that? Now and then send some camera on a wheels down the line?




https://en.m.wikipedia.org/wiki/Pigging

It's called "pigging", there is probably a lot of other methods too,

Apa is actually pretty big in pipeline maintaince, unlike most other pipeline owners they have their own division that looks after maintaince, they also have contracts to maintain other pipelines that they don't own.

--------------

By the way, how awesome is investing, one moment you are researching the workings of a Hollywood studio, the next learning about how components of the hot section in jet engines are made and then how pipelines are maintained, lol


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## Value Collector (10 January 2016)

luutzu said:


> Mainly due to the high debt level, the high price and didn't really think a utility could make that much profit or margin or growth. Guess it showed me I ought to make no quick calls.
> 
> Scanning their 2015AR and they claim 1300% shareholder return in 15 years? Or 19% p.a. average since IPO?




The debt is a big reason for the high return, pipelines will earn somewhere around 8%-12% return on investment, but if you can fund 70% of the capital outlay with longterm bonds paying a coupon of 5%, then it will boost the return of the equity holders up to the 19% figure they have been earning.

As long as the debt levels are not totally crazy, and the maturity profile is kept long, debt is not a bad thing when it comes to companies with such stable regulate assets as apa has.

Even Buffett who is very risk averse and usually avoids debt holds a lot of debt in his infrastructure businesses eg, Mid American / B & H energy and his rail road, and even Ben Graham talks about how it makes sense for utilities hold a large portion of their capital structure in bonds.


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## Smurf1976 (10 January 2016)

I'm conscious that we're getting a bit off the dividends topic of the thread here... 

But gas pipeline operator would certainly be running inspection pigs through their pipelines. That's a very standard practice.

If the pipeline has any bridges (to cross rivers, valleys etc) then they'd inspect those too. Normal structural inspection for that and fix any problems found.

Where the pipeline is simply above ground, they would also do some visual inspection of supports and the pipeline itself looking for actual problems or threats (eg trees growing where they shouldn't be).

Gas pipelines also commonly use recompression stations along the pipeline to increase throughput. In short, if you just pump gas in one end then there's only a certain flow that you can achieve by doing that since the pipeline does have some resistance to flow. But if you put a recompression facility along the way, then that's basically a pump to increase the flow rate. Suck the gas in and pump it out again, adding energy to offset the resistance of the pipeline. Quite often a pipeline is initially built without them, then they're added later to increase capacity when required. Typically they are gas-powered (using gas from the pipeline as fuel) but in other cases they use grid electricity (where available) as the power source. Inspection for those would be a normal mechanical and electrical inspection and maintenance at periodic intervals. 

They'd also have incidents of suspected or actual damage due to all sorts of things - natural disasters, farming, construction work and so on. In that case they'd send someone out to investigate.

Also would be various remote monitoring systems these days. If an alarm goes off then it requires investigation.

And they would of course also know the volume going in and what's coming out. If gas is going missing then that's a problem to investigate.

That sounds a lot, but overall it's not that much when you consider the value of the asset and the value of what's being transported by it. You don't need a huge number of staff just to keep a watch on things like that.

In the case of APA, they're transporting gas so wouldn't have problems with biofouling (a problem in hydro pipelines and especially canals that requires periodic removal).


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## luutzu (11 January 2016)

Smurf1976 said:


> I'm conscious that we're getting a bit off the dividends topic of the thread here...
> 
> But gas pipeline operator would certainly be running inspection pigs through their pipelines. That's a very standard practice.
> 
> ...




But this is how dividends are paid, and if it's worth it or still be around to be paid. So we're on topic 

btw, what would happen if a pig get stuck in the pipe?

Interesting... all these time I thought watching documentaries and reading into stuff are just for fun and no money can be made out of it. Maybe shouldn't' speak too soon but awesome.


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## luutzu (11 January 2016)

Value Collector said:


> ....
> 
> By the way, how awesome is investing, one moment you are researching the workings of a Hollywood studio, the next learning about how components of the hot section in jet engines are made and then how pipelines are maintained, lol




Was that what the visit to Disneyland was? "Researching"? haha

Yes, investing is all that and also one of the few jobs where one could visit exotic places, meet up with a company's PR rep and tell the taxman to foot the bill, couldn't one?

A somewhat devious person, not you or I of course, may even start to buy companies in a few interesting countries with Annual General Meeting coinciding with their featured season.


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## Value Collector (12 January 2016)

luutzu said:


> Was that what the visit to Disneyland was? "Researching"? haha




Lol, something like that, it depends who's asking


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## luutzu (12 January 2016)

Value Collector said:


> Lol, something like that, it depends who's asking




That's the spirit.

Wondering at what age will kids be contract-able as consultants to take along these field research trips to give feedback on investment analysis. And they say accounting is boring.


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## Wysiwyg (17 March 2018)

From Div.co.au. 'At risk' for 45 days is a sufficient rule. No changes necessary Labor.

When the dividend imputation system was introduced in 1997 it quickly became obvious that traders could game the system by buying shares on the last cum-dividend date and selling them the following day ex-dividend. The typical result would be that of the trader receiving the dividend, while incurring an equivalent capital loss and qualifying for the franking credit with only overnight risk in holding the stock – a potentially lucrative statistical arbitrage opportunity.

On the 1st of July 2000 the Australian Tax Office (ATO) sought to rectify this anomaly and implemented the 45-day rule. Under this rule, investors must hold the stock “at risk” for at least 45 calendar days, not including the day the stock was acquired or disposed of, in order to qualify for the imputation credits with regards to the franking on the dividends received.


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## pixel (18 March 2018)

The 45-day rule cuts in only for total dividend amounts above a certain threshold - about $6,000 per annum, from memory. Why didn't Billy-boy protect his Mum and Dad investors by applying a similar threshold to his new "No Tax, No Imputation" Rule.
Let's do a quick back-of-postage-stamp calculation and assume a pension-age couple has $300k invested in high-yielding shares that pay 7% dividend p.a. plus 3% franking credits.
Under the Deeming Rules, they would still receive the full Age Pension, plus $21K dividends. If the Imputation threshold were set to $9,000 or above, they'd remain unaffected by the new rule. Only the wealthier ones that could either afford larger chunks of long-term investments, or chase the best dividends every couple of months, would have their unproductive skimming reduced. And they would, arguably, fall way outside the hardline Labor voters... Problem solvered


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## Wysiwyg (18 March 2018)

It's 5k except for SMSF. Dividend harvesting discouraged.
Continuing on ...

There are a number of exemptions to the 45-day rule, although these are mainly provided to smaller investors. The main exemption is for investors limit the total franking credits to a total less than $5,000 in a year. These investors are exempt from applying the 45-day rule. However, the $5000 exemption does not apply to self managed super funds (SMSF’s). This is because a SMSF in not a “natural person” as required by the legislation.


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## stevo2 (19 March 2018)

Good to hear all the long term holding price appreciation and big dividend stories.
But hows the story working out for those who bought HIH insurance, Great Southern Plantations, OneTel ect ect hoping for a steadily increasing dividend stream. 
Not all wonderful stories.


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## Wysiwyg (19 March 2018)

stevo2 said:


> Good to hear all the long term holding price appreciation and big dividend stories.
> But hows the story working out for those who bought HIH insurance, Great Southern Plantations, OneTel ect ect hoping for a steadily increasing dividend stream.
> Not all wonderful stories.



I was bitten once holding a stock to the death. Never again. Fundamental and trend blindness is holding a stock in trouble. A snapshot of HIH before wind up shows there is something not right. Only fall in love if they love you back. They are forever lessons and this is my reminder to all. 




Chart by thechartist.


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## Zaxon (19 June 2018)

Additional benefits of holding dividend stocks, besides those mentioned so far:

In periods where the stock market trends sideways (or even slightly down) for years, which does happen, holders of dividend paying stocks can still be receiving a nice payout, whilst everyone else has no capital growth and sit waiting
Dividends paying stocks can be a form of risk reduction.  If you invest $10,000 in a stock that pays a 10% dividend, in 10 years, that stock has paid you back your initial capital outlay.  It's essentially all risk free after that.  That's one reason you might consider not using DRPs.


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## luutzu (19 June 2018)

Zaxon said:


> Additional benefits of holding dividend stocks, besides those mentioned so far:
> 
> In periods where the stock market trends sideways (or even slightly down) for years, which does happen, holders of dividend paying stocks can still be receiving a nice payout, whilst everyone else has no capital growth and sit waiting
> Dividends paying stocks can be a form of risk reduction.  If you invest $10,000 in a stock that pays a 10% dividend, in 10 years, that stock has paid you back your initial capital outlay.  It's essentially all risk free after that.  That's one reason you might consider not using DRPs.




That's only true if we follow that theoretical "all else remaining equal" scenario.

Under normal circumstances... first, I don't think it's possible to buy anything paying 10% dividend without a scam attached. 

But there are companies that do pay 4 to 5%... And at those decent figures, an investor would have to wait some 20 odd years to have the capital returned completely. That's a long time to wait if the share price, and the company's business, doesn't go anywhere.

I mean it's not bad if the company managed to survived and keep paying that dividend without going broke or needing new capital injection. 

On the whole though, I think it's always better to find companies with strong balance sheet and in a good position (i.e. profitable and dominant in its industry). 

That way, the investor's dividend are more assured; capital gains over the medium term are pretty good. And if the market happen to dislike the company or the sector, seeing its share price going down the tube... that's the time you'd want to reactivate and join that DRP, not turning to cash.

So if the investment horizon is the long or medium term, I think it's better to find and hold onto quality businesses. 

To hang on to average or declining ones for the dividends is quite risky. Both in terms of it not surviving, needing to raise capital - thereby diluting your holdings, or going out of business altogether.


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## Izabarack2 (27 April 2019)

Found this thread in a search.   My situation is specific and only a plan, ATM.   I'm retired, income from Allocated Pension and a small Commonwealth pension that is taxable, but less than $35K.   Got a bit of mattress money and considering a buying a dividend.   I see the comments above about the typical price fall and longer recovery that is typical of going Ex Dividend.   My plan is to pick a company from the 200, keep abreast of earnings/profit guidance, then buy about 5 weeks before the record date in anticipation of a good % dividend and 100% franking.   In my vision, the franking credits will take care of the dividend and most, if not all, of any tax liability on my taxable pension, at worst.   At best, a little of the imputation credit would come my way.   After 12 months, I would cycle out and move to another selected stock.

I know fixed interest is pretty poor at the moment but mattress money is dead if an Age Pension is never going to happen.


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## Zaxon (27 April 2019)

There is an inherent fallacy that many people believe about dividends. Dividends are like bank interest.  Like a wage. You invest your money in the stock, and a dividend is the highly valued reward for doing so.

In reality, dividends are actually irrelevant.  Earnings is the thing that matters. Paying out earnings as dividends is a "neutral" event.  If a stock is worth $10 and it pays out $1 per share dividend, it's then worth $9.  The share may or may not go back up to $10 in the future, but that's due to future earnings. It's not an automatic post-dividend-recovery mechanism, because that doesn't exist.

To illustrate this further, image you have 2 bank savings accounts. Super Earner and Super Payer.  
Super Earner: Earns 10% pa.  Retains earnings.
Super Payer:  Earns 5% pa.  Pays out all earnings to another bank account of yours.

Which is the better account?  Let's see by investing $1000 for a year.

Super Earner earns 10%.  I now have $1100 in my account.  Super Earner doesn't pay a "dividend".  It retains all earnings in your savings account. It uses those retained earnings for future compound growth.

Super Payer only earns 5%.  I now have $1050. But it does pay a "dividend".  $50 leaves the savings account, and is transferred to your regular transaction bank account.

From the above accounts, we see that the earnings is really the only thing that matters.  Whether I'm paid out my earnings to another account (a dividend), or whether the earnings are retained for compound future earnings, is irrelevant.  You can always "sell some stock" (put in a bank withdrawal) to get past earnings out of your account should you want the cash.

However, some people have a particular mindset where they don't want to sell shares to recover their earnings.  So for some personalities types, chasing dividend may be the right choice for them emotionally, because it gives them peace of mind.  That becomes a valid reason for holding dividend stocks for them.


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## Knobby22 (27 April 2019)

Izabarack2 said:


> Found this thread in a search.   My situation is specific and only a plan, ATM.   I'm retired, income from Allocated Pension and a small Commonwealth pension that is taxable, but less than $35K.   Got a bit of mattress money and considering a buying a dividend.   I see the comments above about the typical price fall and longer recovery that is typical of going Ex Dividend.   My plan is to pick a company from the 200, keep abreast of earnings/profit guidance, then buy about 5 weeks before the record date in anticipation of a good % dividend and 100% franking.   In my vision, the franking credits will take care of the dividend and most, if not all, of any tax liability on my taxable pension, at worst.   At best, a little of the imputation credit would come my way.   After 12 months, I would cycle out and move to another selected stock.
> 
> I know fixed interest is pretty poor at the moment but mattress money is dead if an Age Pension is never going to happen.



Good plan.
Dividends are definitely worth it on a pension, (though I am not retired yet so talking from a taxation view).
You sound like you want low risk consistent earnings.
You can greatly add to your income through picking some shares that may show a small amount of growth with a safe strong dividend.
My personal picks are BEN, Bendigo Bank, very high yield, a drop in interest rates allows more margin spread, I think at the present price of $10 pretty safe. 
Another is BFG Bell Direct, great yield and pretty cheap at present. Earnings are more variable though.

Also look at utilities such as AGL.


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## Izabarack2 (27 April 2019)

Zaxon said:


> Dividends are like bank interest.
> ...... some people have a particular mindset where they don't want to sell shares to recover their earnings.



Pretty sure I get your point, thanks for the example.   The bank interest perspective is in my thoughts in the proposed strategy.   My Allocated Pension fund just rolled over some defensive fixed interest for 2.74 for 12 months.   If I can get 5% dividend plus about 3% through dividend imputation, that is a much better return for my mattress money outside super.
There is a further parallel to a fixed term idea as each dividend cycle will be tied to a Financial Year and a year by year tax effect to be considered.


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## Izabarack2 (27 April 2019)

Knobby22 said:


> Good plan.
> You can greatly add to your income through picking some shares that may show a small amount of growth with a safe strong dividend.



Dividend size is the first line in the decision matrix.   Must also be 100% franked for the personal tax effect.   Second line will be PE under 11 to acknowledge possible any Capital Gains effects.   I will wait for the election outcome before deciding whether to put the plan into effect.


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## Zaxon (29 April 2019)

Izabarack2 said:


> Pretty sure I get your point, thanks for the example.



I was addressing the thread topic, "Dividends, are they worth it?", so my answer was more general.  Let's see if I can tailor an answer to your specific post.


Izabarack2 said:


> buy about 5 weeks before the record date in anticipation of a good % dividend and 100% franking.



I'm not sure how effective dividend timing would be.  If we assume that stock prices go up in line with their earnings over time (ignoring random short term sentiment and general market trends), an overly simplified way a stock behaves is like this:

Date - Stock price
Jan - $100
Feb - $101
Mar - $102
...
Nov - $110
Nov 24 - $110.90 you buy into the stock
Dec   1 - $111
Dec 30 - $112
Dec 31- Stocks pays out 100% of its EPS: $12.  Stock goes ex-dividend
Dec 31 - $100

(This stock pays out 100% of its earnings to simplify this example.  We also assume the share price rises gradually over time, and we ignore any short term sentiment jump for earnings announcements.)

So you buy in 5 weeks early at $110.90 per share.  At the end of December you have $12 in dividends, and a stock worth $100.  So your total profit is $1.10.  This matches the amount of time you held the stock (5 weeks).  The $12 dividend is considered earnings for tax purposes, even though you essentially paid $10.90 of it yourself when you bought into the stock so late.

Dividends are great way of transferring earnings from a stock to cash.  I'm not sure that "dividend timing" is so effective.


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## Value Collector (31 October 2020)

luutzu said:


> Just nit picking here but probably wrong to compare dividends now to original share price.




Bill is right to compare the current dividend he gets to the share price he originally paid, because that is the return he is getting on his money, and that’s exactly how you would be calculating it if he had instead purchased bonds instead of shares.

also, nothing is stopping you compounding those dividends over time which would only increased the yield he stated, not to mention the share price growth.


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## Belli (1 November 2020)

I view dividends as a form of compensation for placing my funds at risk.

I've deferred the use of my funds by investing and not spending them.

Whether or not I reinvest a portion of those dividends via direct purchase or via DRP depends on the level of risk I am prepared to take at that time.


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