Dividends, are they worth it?

[luutzu]

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.

 

[Wysiwyg]

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.

 

[pixel]

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

 

[Wysiwyg]

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.

 

[stevo2]

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.

 

[Wysiwyg]

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.

 

[Zaxon]

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.

 

[luutzu]

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.

 

[Izabarack2]

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.

 

[Zaxon]

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.

 

[Knobby22]

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.

 

[Izabarack2]

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.

 

[Izabarack2]

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.

 

[Zaxon]

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.

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.

 

[Value Collector]

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.

 

[Belli]

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.