Why do we want share prices to go up?

[Tysonboss1]

You're assuming that yield would be sustainable. I'd say that's questionable if the share price isn't going up.

So, say you want just $50k p.a. and you have decided to get this from dividends and franking credits. As long as these are sustainable from the company's point of view, that level of income won't change just because the SP rises and gives you a capital gain. Remember that dividends are decided on the basis of cents per share, not % of the SP. The latter is simply a convenient way of assessing the yield factor.

How is the $ amount a company pays out as an annual dividend to share holders affected by the share price movements, Just because the share price trends down for a while doesn't mean that the underlying assets / businesses will lose profitabilty.

In regards to your second paragraph in the quote, This point reflects my point exactly, If share prices rise strongly and stay at high levels it will take a person many more years to acquire enough of the shares to pay them $50K / year than if the shares had stayed at lower levels.

Offcourse once you are towards the end of your investing you don't care about how high the prices go because you already own enough to give you the required return.

But that wasn't who I was talking about. I am talking about the young guys who celebrate their $20K portfoilio doubling and fear crashs. I am just trying to make the point that you can really benefit from lower share prices more than high.

 

[Sdajii]

Basically, he saw a good thing, got on it, then other people saw it and got on it until it was no longer a good thing. If he is smart he will quickly sell out while his two car parks are overvalued then either use his $40,000 to buy four car parks when the market loses interest, or, if the price of car parks stablises at a realistic price of around $15,000 he can either buy back in or find some other undervalued investment to jump into with his original $20,000 plus his quickly made $20,000. Or, he may buy back his original two car parks for $30,000 and invest his $10,000 profit into the speculative air space car parking for the proposed hovercars which are predicted to hit the market in a few years.

Either way, it was a good thing to get in on the undervalued investment while it was under the radar, and once the buying in further becomes too expensive, he can stop buying in.

Of course, he may sell out at $40,000 thinking he is getting out while car parks are overvalued, only to realise that the aliens were immigrating, increasing car park demand, and the few who knew about it early bought up, hence the jump in prices. Now that it's common knowledge the car parks at $100,000 each, and he has missed the boat. Oops!

If you want to make an analogy, you can't base the start on the assumption that nothing will ever change, then add a change to your analogy and say that nothing will ever change again in the future of this man's life. The market is dynamic, it changes, you never know what is going to happen, and it was silly for him to assume in the first place that neither car park prices, nor rental rates would ever change.

 

[Tysonboss1]

If you want to make an analogy, you can't base the start on the assumption that nothing will ever change, then add a change to your analogy and say that nothing will ever change again in the future of this man's life. The market is dynamic, it changes, you never know what is going to happen, and it was silly for him to assume in the first place that neither car park prices, nor rental rates would ever change.

Again it was a simple metaphor for asset prices in general,

I understand that over time asset prices flutuate, However all I am saying is that there is more to gain from lower prices than Higher.

Please watch the video I gave a link for in one of my previous posts, you will see warren buffet prefers stocks to go down too,

 

[skc]

A nice way to think about this topic is unlisted companies and assets. Without day to day share price movement, one can truely appreciate what investments supposed to mean from a business perspective. It's all about the return it generates. Capital value should be a result of the returns, not the other way round.

There is however, some slight premium to an asset where there is a liquid market that you can readily cash out on.

 

[wayneL]

Let's go from the absurd to the ridiculous.

Supposing you bought XYZ @ $0.005 with a 60% divvie and it went to $500 over a reasonably short period of time.

Who gives a rat's about the divvie any more? Put a wide trailing stop on and buy a dividend stock when you get taken out.

Sheesh! A six bagger and you're looking for the negatives?

 

[Beej]

What started my whole thought process on this topic was the recent share market crashed caused by the GFC.

At the darkest days of the market crash I was picking up stocks on ultra high dividend yeilds.

at one stocks low I was getting a yeild of 60%, Thats $600/year for every $1000 I put in. Now at the time I thought thats great yeild, but my main focus was on the inevitable recovery in the share price and the capital gains that would bring.

Now the share price has recovered and the company is back to trading at a yeild of 10%, So I am happy with the massive capital gain.

How ever had the company not recovered in share price I would have been far better off through the yield.

I mean a compounded rate of 60% for 20 years is better than a one of 600% return followed by a 10% compounded rate for 20 years.

That high yield was only available because of perceived increased risk being priced in by the market at that time. The market was pricing many/most shares as if there was a very high chance that earnings would fall dramatically and that in many cases companies would go bankrupt. Now, it turned out that most ASX listed companies did OK, only saw minimal earning falls and in most cases it's back to business as usual (for now anyway). BUT, anyone buying at that time (which included myself by the way!) was taking on the risk that things could have got much more pear shaped than they did.

PS: For my long term share portfolio (non super) I invest for yield, and potential for the yield to *grow*, noting that a growing yield over the long term usually correlates with a growing share price as well. The supply/demand arguments work when looking at share prices in the short term, but over the long term it's earnings/yield that drive the prices IMO. The only exception to this are true "bubble" cases where the share price has been pushed way way way too high due to speculatively driven demand (think .com bubble, P/E ratio's for large companies 50-100 etc).

Cheers,

Beej

 

[Sdajii]

The analogy here is like saying "Oh, look, an undervalued stock! I will just keep accumulating this one stock for the next 20 years, I won't buy anything else and I'll just assume that this one individual company will continue to behave in exactly the same way forever, with a static price and yearly dividend"

Quite clearly, you're going to end up saying "Gee, it was pretty stupid of me to put all my eggs in one basket and expect the exact same entry cost for 20 years and the same dividend for 50"

I tell you what, if you had a stock with a fixed dividend for the next 50 years, I can guarantee it wouldn't be sitting heavily undervalued for long. It would be a limited opportunity, and I guarantee that anything with a guaranteed 10% PA dividend over a 50 year period isn't going to fall in price, so you'll either have to buy in when you have the money, or miss the boat.

If you absolutely positively know you are never going to sell, AND the dividend is never going to change, AND you are ONLY ever going to invest in this one venture, AND you are COMMITTED to buying lots of it over the next 20 years, then sure, the more car park prices drop the better, but that's an extremely unrealistic hypothetical, don't you think? If you find such an example in the real world, please point me in the direction of this magical gravy train, 'cause I want a ticket.

If you want your stocks to go down I am sure you will have plenty of opportunity, and if you manage to fail, please give me your strategy!

 

[Mofra]

If you're geared at all it would be far easier to obtain further credit secured by an appreciating asset.

 

[Julia]

How is the $ amount a company pays out as an annual dividend to share holders affected by the share price movements, Just because the share price trends down for a while doesn't mean that the underlying assets / businesses will lose profitabilty.

If the SP has fallen to the point where there's a 60% yield, it has to reflect that the stock is regarded as high risk. If the SP rises, and therefore the yield reduces, that in turn obviously reflects market sentiment that less risk is attached to the company. Market sentiment is usually pretty right.
My point is that you're dreaming if you think you're going to get a 60% dividend on a long term basis. Simply makes no sense.

In regards to your second paragraph in the quote, This point reflects my point exactly, If share prices rise strongly and stay at high levels it will take a person many more years to acquire enough of the shares to pay them $50K / year than if the shares had stayed at lower levels.

Well, of course. But that same principle applies across all your investing.
Wealth usually takes time to accumulate in every sense.

 

[Tysonboss1]

The analogy here is like saying "Oh, look, an undervalued stock! I will just keep accumulating this one stock for the next 20 years,

No it's not, It's like saying "oh, look, Here is a fairly priced stock stockmarket trading on decent yields, I may start a plan to dollar cost average into this market over the next twenty years"

Now all I am saying is that Most investors seem to be hoping for the onset of a sharemarket bubble, rather than steady prices. But if they are going to be "net" buyers of stock over the next twenty years then they are better of paying lower prices,

Now for myself I know that I will personally be Putting Millions of $'s into various investments over the next twenty years, and I would rather get the most bang for my buck and to do this I would prefer to buy as cheaply as possible, So I will not be hoping for the onset of asset price bubbles, and I won't we fearing any down turn in asset prices,

 

[Tysonboss1]

My point is that you're dreaming if you think you're going to get a 60% dividend on a long term basis. Simply makes no sense.


Well, of course. But that same principle applies across all your investing.
Wealth usually takes time to accumulate in every sense.

I am not saying it is possible longterm, I know I can't stop share prices rising. What I am saying though is the lower the better.

I know that the principle applies accross all investing.

But if you knew that you were going to be steadily putting money into an investment over 20 years, which of the following examples would you be better of with.

1, Slow or slighlty stagnating share price growth for the first 10 years, followed by stronger growth leading into a bull market for the last 10years

or

2, strong bull market in first 10 years leading to stagnation and possible down ward pressure over the last 10 years.

Obviously having prices steady for 10years giving you enough time to build up a decent portfoilio before the price rises would benefit you more.

 

[bellenuit]

Tyson. To me you are really saying you would like to find undervalued stocks that no one else recognises.

Undervalued..... It has a higher earnings yield relative to the rest of the market and there is no extra risk attached to that stock compared to the others.

No one else recognises..... Everyone else has attached a higher risk factor to the stock than it deserves.

You, like Buffet, like everyone else would love to find such stocks. They are out there, finding them is the difficult thing.

When you say that you would prefer stocks to go down in price, you are really saying that you would prefer stocks to maintain earnings with no change in risk to those earnings, but at the same time have their price fall for no justifiable reason.

It happens. The market misprices stocks from time to time. But at the end of the day, if stocks are not mispriced then you want stock prices to rise because that means that the company is growing so that your initial investment is paying more than when you first bought in.

So unless you can find mispriced stocks, you really want stocks that are rising in value over the long term. That means the company earnings are increasing with no comparable change in risk.

 

[Sir Osisofliver]

Tyson,

Your example, as previously mentioned by Mofra, makes no provision for gearing.

If you were to gear you share portfolio, and periodically top your gearing back up to an "optimal" level whilst the market is strongly trending, you are in effect compounding your compounding, which can result in some spectactular levels of return.

The rub is that the gearing then works against you when the inevitable corrective pattern emerges.

I get excited about share price increases because it means I can access a greater amount of leverage and thereby enhance my return. I will only do this however in certain types of markets, and when markets become overvalued, allow the gearing to fall to non-existant levels.

Cheers

Sir O

 

[Sdajii]

I am not saying it is possible longterm, I know I can't stop share prices rising. What I am saying though is the lower the better.

I know that the principle applies accross all investing.

But if you knew that you were going to be steadily putting money into an investment over 20 years, which of the following examples would you be better of with.

1, Slow or slighlty stagnating share price growth for the first 10 years, followed by stronger growth leading into a bull market for the last 10years

or

2, strong bull market in first 10 years leading to stagnation and possible down ward pressure over the last 10 years.

Obviously having prices steady for 10years giving you enough time to build up a decent portfoilio before the price rises would benefit you more.

Typically, the only reason a share price is going to go down is that people realise it's actually a crap investment, or for whatever reason, people simply must get out of the investment. So if you bought it before the drop you paid too much, or were unlucky. Why would a good thing go down in price? If that happens, by all means, increase your holdings, but if that happens, I would regret having purchased in the first place. If you find a good, solid investment which for some reason is magically falling in price, why would you buy in? Save your pennies until the knife stops falling then jump in. Why would you want to buy something now which you could buy later for less money? Surely it would be better to buy the thing which is going to go up in value, then sell it when you want to buy the thing which was going down has stopped, and sit on it while it goes up.

Sure, if you buy something and it goes down for 10 years it might go up... but so what? It spent 10 years going down! Congratulations, you spent 10 years losing money. If you want to buy something from me now I'll guarantee to buy it back for less money in 10 years if you like. Pick any company on the stock market you like, I'll take you up on the offer any time.

Sure, if you spend 10 years making money, you might then lose some, but hey, get off when it starts falling and you've spent 10 years making money, then maybe lost money for one year. You can then buy for $10,000 what the other guy spent $100,000 on 10 years earlier.

 

[Julia]

"Money Morning" happen to have an article on yield today.

Anyway, back to the point, what do yields tell you about an investment?

Well, in the good old days, the yield of a stock, bond or cash was a good indicator for investors about the relative risk of an investment.

That's providing it was deemed to be an income producing investment. It works slightly differently for growth investments.

You could line up the yields of a few stocks, a government bond, a corporate bond and cash, and quickly see which was the safest and which was the least safe.

Of course, it wasn't foolproof. But it was a useful guide. You could see that a dependable old utility company offered a decent dividend yield - but not much growth - but that it wasn't as dependable as a government bond.

So the government bond would have a lower yield because it was seen as more secure. A corporate bond would yield something in between - all else being equal - the government bond and the share dividend yield.

It was riskier than the government bond, but less risky than the shares, because debt holders take precedent over share holders in the event of a company being wound up.

Then separate to that, you had companies that were priced for growth. That doesn't mean to say they didn't pay a dividend, but rather that the dividend was a bonus. Growth was the key.

Growth investments

Resources and technology companies are perfect examples of that.

But what determines the difference? At what point can you tell whether an investment is priced for growth and when it's priced for income?

Well, it's not as hard as it seems. Let's get the simple one out of the way first. If the stock or investment doesn't pay a dividend then it's priced for growth. It's as simple as that and therefore we can ignore it for the rest of this argument.

But what about investments that do pay a dividend? A good example to illustrate this is BHP Billiton Ltd [ASX: BHP]. The stock trades for around $41 and based on the last two dividend payments pays a yield of 2.8%.

So how do we know it's priced for growth rather than income? The simple way of looking at it is to compare it to what they used to call the 'risk free' interest rate. In other words, the central bank rate.

The current Reserve Bank of Australia (RBA) cash rate is 3.75%. That's the rate at which the banks can borrow money from the central bank overnight.

Then you can go one step further to look at government issued bonds for a one month maturity. The latest issue by the Australian Office of Financial Management (AOFM) for bonds that will mature on February 26 is for a yield of 3.864%.

And for a 10-year bond the recent tender produced a yield of 5.6316%.

For an investor you can make a good case to argue that's the gross yield, and if we take into account costs, but ignore tax, then the net yield is roughly the same...

Look, I know it's not the real net yield. The real net yield would factor in tax as well. But let's keep this simple for now. You know your editor doesn't like to over-complicate things!

Therefore, we can compare the yield on a government bond - 5.6316% - with the yield for BHP Billiton - 2.8% - and say that if an investor was interested in income then they would invest in the government bond because it pays a higher yield.

So, because BHP Billiton is a higher risk than the government, but it's yield is lower, then BHP Billiton must be priced for growth.

In other words, if it was priced for income, the yield would have to be higher (and therefore the share price lower, if the dividend was unchanged) than the yield for a 'risk free' government bond.

Still with me?

The distortion of yields

However, the situation with another asset class is quite interesting. That asset class is housing. But I'll get on to that in a moment, because first I want to look at the infrastructure funds that were devised under the so-called 'Macquarie Model.'

Back when we started writing for our sibling publication The Daily Reckoning in 2005 we questioned the sanity of investment advisers and commentators who sang the praises of the Macquarie Model of infrastructure funds.

It just didn't make sense to us that professional investment advisers were telling their clients they could get both growth and income from buying into toll roads and other infrastructure assets.

Furthermore, these investments were labelled as "reliable" and "secure" and "dependable", ideal for a superannuation fund.

As investors bought in the share prices climbed higher. That you would think should cause the yield to fall. But it didn't. First of all, it wasn't called a dividend, because dividends are paid from profits. Many - but not all - of these investments didn't have real profits so they had to be called distributions.

The distributions climbed because of a clever accounting trick. The funds could revalue the assets higher, book the revaluation as a profit and then pay out a bigger dividend, er, I mean distribution.

They were simply borrowing against future forecast cash flows in order to pay out an income stream today. That scam fell in a heap. Recent headlines in the press have highlighted how toll road investors have been stung with billions of dollars of losses - all from the same reliable, secure and dependable investments.

The point is, investors were fooled by the experts into believing that things were different and that a big dividend income and big capital growth were possible from the same investment.

I'm not saying that income and growth are mutually exclusive, but typically you won't find huge capital gain potential plus a massive income stream from the same investment.

 

[yonnie]

I dont know what everybody is going on about....................leverage, yield, all eggs in 1 basket etc. etc. Posters seem to pounce on every word, but dont see the big picture.

he`s only saying he rather buys investments for the long term on the cheap (after research ofcourse). so what is wrong with that???

 

[Sdajii]

I dont know what everybody is going on about....................leverage, yield, all eggs in 1 basket etc. etc. Posters seem to pounce on every word, but dont see the big picture.

he`s only saying he rather buys investments for the long term on the cheap (after research ofcourse). so what is wrong with that???

It's great to buy things after they go down if you're sure they'll go back up, but why would you want something to go down after you buy it?

I tell you what, I'll spend $10,000 on a stock and he can spend $10,000 on a stock. If mine goes down and his goes up, and that bothers him, I am more than happy to swap. Things tend to go down if their value decreases, so in general, if you buy something and it goes down, you made a mistake.

 

[yonnie]

I am not investing this way, but I can see where he is coming from. Provided a lot of research has gone into this strategy, I cant see much wrong with buying stuff after a dip and buying more if they go even lower

Will it work every time: ofcourse not, but then every strategy is not likely to work 100% of the time and I`m quite sure most traders here have a few losing trades.

Ever heard of contrarians?

 

[SmellyTerror]

Look, if the return goes up, the price will go up.

If the return stays the same, the price will stay the same.

If the return goes down the price will go down.

Of course there are lots of conflicting factors, but overall you want the price to go up because that tells you that you got good value. That tells you that you're getting a "high" return on what you originally paid. Even if you never sell it. A "high" return means other people will want it. They will pay for it. The price will go up.

Why would you expect the return to go up and not the price?

You're right: good returns are good. And people will pay for them. And the price will go up. A price that goes up tells you that, when you bought the stock, it had a good return. And if it goes up again, that means it was even better. Better is also good.

Would I prefer it if the price just sat there while I bought a million stocks? Of course. But that's just a fantasy - this is a market for a reason. Instead, I "hope" for my stocks to go up because that tells me that I bought something that was good value. I choose to hope for something realistic, rather than hope for mana from heaven.

(Income from capital appreciation is also good, being income. I am not too fussed where it comes from).

Me: "Hey, I sold my old car for ten grand!"

You: "Awww, if only it had spontaneously turned into a giant gold nugget first!" You start a thread "Why do we want to sell our old cars for good prices?" with post saying "wouldn't it be awesome if your old cars turned into giant gold nuggets!"

Yes. Yes it would. But a bit pointless to worry about, yes?

 

[Tysonboss1]

I tell you what, I'll spend $10,000 on a stock and he can spend $10,000 on a stock. If mine goes down and his goes up, and that bothers him, I am more than happy to swap. Things tend to go down if their value decreases, so in general, if you buy something and it goes down, you made a mistake.

but if your plan was to put $10,000 in each month for the next twelve months and it started trending up right away you will end up with less stock than if it had stagnated or dropped for a few months.

Everything you guys are saying about a stock only goes up if it's earnings go up and it only goes down if it's profits go down is BS.

Take Westfields for example, in the last 3 months it's traded as low as $11.70 and as high as $14.00

Last week it was 13.80 yesterday $13.20 today $13.60. And this is from a company whose profits are tied to long term leases. Westfields would be producing steady profits through, how ever it's share price swings up to 20%.

The same for most other stocks on the market, Aussie stocks will drop even due to unrelated bad american news