If you invest for the long term, shares will almost always pay higher returns than cash, right? Investment experts often make this point, but it relies on one big assumption — that all dividends paid by the companies are reinvested. If you strip out these payouts, cash has been more likely to beat shares over any 18-year period since 1899, when Queen Victoria was still on the throne, research for Money has shown.
Shares beat cash 99% of the time, according to the Barclays Equity Gilt Study, Britain’s longest-running analysis of shares versus cash and other investments. But if dividends were not reinvested — that is, the income was not used to buy more shares in the company making the payment — shares beat cash only 40% of the time.
It comes amid concern that company payouts are drying up. About £2.7bn of dividend cuts have been announced this year by companies including some of the most reliable payers, such as Rolls-Royce, BHP Billiton and Rio Tinto.
Couldn't seem to read the full (2 free articles) without signing up - sorry Times, not going to happen.
Do they define what they mean when they say "cash"?
OnlyMyOpinion wrote:Couldn't seem to read the full (2 free articles) without signing up - sorry Times, not going to happen.
Do they define what they mean when they say "cash"?
This is the bottom line (footnote added by yours truly):
Money invested in best buy cash over the whole 21 year period from 1 January 1995 to 1 January 2016 would have produced an average annual compound return of 5.0%. Over the same period the tracker* would have produced a compound annual return of 6.0%. The 1% difference is far lower than the 3% to 8% typically quoted for the ‘risk premium’ of investing in shares.
*‘tracks’ the FTSE100 index of shares in our biggest hundred companies
Not the original source I was quoting from but maybe close enough...
with cash that is moved each year into a best buy one year deposit account with a bank or building society – sometimes called a ‘one year bond’.
and
“This analysis of the new data shows that people who prefer the safety of cash can make returns that beat those on tracker funds in a majority of time periods.
Apparently I started this thread, so I guess I should comment.
Lewis's blog post is an interesting take on the age old argument about which investing strategy is the best. For many people, some of whom I know personally, cash or near cash is the best alternative and in many cases has saved them from making stupid mistakes by investing in things they don't know anything about and don't want to know about. For others, if the risk of losing money is unacceptable, well, of course cash is best. I myself would be quite happy to leave my money in the bank or buy a GIC if interest rates were in the 4%- 5% range (which is what I receive in dividends on average). In Canada, I imagine you could only squeak out 2% on GIC. In my case, (Japan) the interest rate at most banks on a three year GIC equivalent is .15 - .2%. Thus, leaving my money in any bank account is not really an option. My policy is to remain fully invested mainly in dividend paying stocks.
But, within the parameters which Lewis sets out for himself, there is probably an element of truth to what he says. However, I do question the overall basis of the study, and the implication that we should leave our money in a bank:
1. The FTSE 100 is not the best benchmark for the UK. The FTSE All Shares Index would make more sense as it covers all of the stocks listed on the LSE.
2. Past performance is not an indication of future performance.
a. The current reality is that the developed countries including the UK have dug themselves into a very deep debt hole. Raising interest rates from where they are now would not make sense, and I don't see any significant raises on the intermediate time horizon.
b. The Bank of England and Federal Reserve are most concerned about the economy as reflected in the stock market. You pick the reason. Thus, low interest rates are probably here to stay. If this study were to be done 10 years from now, leaving your money in a savings account would be really bad advice.
3. In terms of safety, I consider a dividend investment strategy as only marginally riskier than putting your money in a bank. A dividend is always a positive return as is interest on a bank account. A well diversified portfolio should have only a small percentage of dividend cuts, regardless of what the stock price is doing. A single dividend cut should not reduce your portfolio dividend yield significantly.
4. I don't think any financial advisor in his right mind would suggest owning just a FTSE 100 Index Tracker. It certainly includes the biggest companies, but not the best. A better comparison (for a UK resident) would be with a portfolio of funds including the FTSE All Shares Index fund, exposure to other developed markets such as the US and Europe, a smidge of emerging markets, and of course cash and fixed interest thrown in to taste. Back testing a more realistic investment choice would be more convincing for Mr. Lewis's argument, ...or not.
Anyway, dividend investors, stay invested would be my advice.
Cheers
"A dividend being paid today is always a positive return." Josh Peters, Morningstar
Norm Rothery has a column in Globeinvestor with the title "Chasing Dividend Growth: A Contrarian View". Unfortunately, I can't get past the G&M firewall.
Could anyone who has access to the article please give a brief synopsis as to what Norm is on about. I just want to find out if there's any chinks in my own armor I haven't thought of yet.
Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
Yes, PI this is a great start. Many thanks. I'm busy printing off the articles from Meb Faber's website so that I can at least read what he has to say.
I used to buy U.S. dividend growth stocks and the same with ADR's to obtain some international growth, but that all ended many years ago. Now I just stick to Canadian dividend growth equities.
I think most dividend growth investors who have been tinkering with this for quite a while have come to realize that dividend growth in itself isn't as powerful a performer as we may have thought through the 1980's and 90's. That all came out in the early 2000's with the publishing of "Triumph Of the Optimists" and "Dividends and the Three Dwarfs".
Shakespeare wrote: ↑16 May 2017 09:57
In Canada, DG may be more effective than in the US because of the peculiarities of our market: it tends to eliminate cyclicals.
May being the operative word. I'm not aware of a Canadian study on the subject.
More importantly, I'm not aware of a U.S. study on the subject based dividend-per-share growth rather than dividend growth. A rather important distinction for practitioners.
Unfortunately, the proof for dividend growth seems to largely anecdotal at this point.
The Ned Davis study seems to be the last one standing. But the big outperformance is based on a geometric index rather the usual arithmetic index (where it basically disappears).
Frankly, I'm still trying to get my head around the interpretation of a geometric index and how it differs from an arithmetic one. Assistance on the topic would be appreciated.
There was a study done on investing in Canadian dividend growth stocks compared to other strategies, but it's a few years old now. Could be time dependent.
Great studies but as a side note I am not sure how relevant they really are to the majority of investors on this board. I think many of us around here are driven by 'value' as much as dividends or dividend growth. Many of us who are mostly in dividend paying stocks wait for 'deals' and many of us trim their holdings when they exceed a certain threshold (~5% of the total dividend portfolio for example). In my case for example, I track dividend players from the TSX60 across different sectors and I usually buy them when the dividend gets relatively high or when the stock is trading close to the 52-wk lows. These two conditions are usually met around the same time.
%I don't put a lot of weight on dividends in my analysis. If the company delivers high returns on capital it means that they are successful at redeploying excess capital. If the reinvestment is giving back a 20% plus return to the company why pay dividends? I basically follow Joel Greenblatt's strategy. Find companies who are in the top 20& on valuation and return on capital. Eliminate financial and utilities in this screening. Over very long periods of time this approach has beaten the S&P500 by 7 or 8% per annum. I have been tracking my investments since Jan 1 2009 and I am averaging 22%. I do buy banks and utilities BUT i use a different approach. Dividends are nice but they aren't the centre piece of my approach.
But IIRC, you are talking about only a portion of your portfolio. If so, it is not meaningful to cherry pick a portion of your portfolio to the exclusion of everything else. It is misleading to the reader at best to not put it into perspective with the rest of the portfolio.
Taggart wrote: ↑16 May 2017 12:56
There was a study done on investing in Canadian dividend growth stocks compared to other strategies, but it's a few years old now. Could be time dependent.
Financial Post
Jonathan Ratner | August 17, 2011 9:50 AM ET
Thanks, I might try to track that down. I've become skeptical of many industry-related studies, which never seem to be delivered with sufficient details to figure out what they did precisely.
Taggart wrote: ↑16 May 2017 12:56
There was a study done on investing in Canadian dividend growth stocks compared to other strategies, but it's a few years old now. Could be time dependent.
Financial Post
Jonathan Ratner | August 17, 2011 9:50 AM ET
Thanks, I might try to track that down. I've become skeptical of many industry-related studies, which never seem to be delivered with sufficient details to figure out what they did precisely.
To be honest, I don't blame you Norm. It's not exactly an independent study. Vested interests could be playing a part.
AltaRed wrote: ↑16 May 2017 15:19
But IIRC, you are talking about only a portion of your portfolio. If so, it is not meaningful to cherry pick a portion of your portfolio to the exclusion of everything else. It is misleading to the reader at best to not put it into perspective with the rest of the portfolio.
Not really I am talking about 80% of my stock portfolio. I hold some Canadian banks, utilities and Reits in the remaining 20%. It's pretty hard to do a straight Greenbalt approach on Canadian stocks because so much of our market is resources, banks and utilities. Nothing misleading. Just screen for stocks with lower PE's and a high returns on capital. It isn't misleading and it isn't complicated.
NormR wrote: ↑16 May 2017 12:13
Frankly, I'm still trying to get my head around the interpretation of a geometric index and how it differs from an arithmetic one. Assistance on the topic would be appreciated.
An important and much-overlooked issue.
A geometric average depends entirely on the first and last point in a time series. Thus, the result is extremely sensitive to the start date and end date. The intermediate values are irrelevant. So if you just happen to start with an unusually high (or low) value, the result will have very little meaning as a representation of what to expect in future.
By contrast, an arithmetic average uses all the data points. So, while the result is still sensitive to the start and end points, this is attenuated.
Looked at another way, if you want to summarize the past, a geometric average will make a nice connection between start value and end value, and so it is neat and tidy. But if you are trying to get a handle on what might happen in future, the arithmetic average is much more robust, i.e. less sensitive to "blips".
Of course, you would get an even more representative value if you were to fit a simple regression to the logarithmic value of all the data points. Then the coefficient of the time variable would be your annual growth rate. That method would best incorporate all the information in your observed sample, so as to extrapolate into the future. But that's much too complicated for most financial analysts (or their clients).
NormR wrote: ↑16 May 2017 12:13
Frankly, I'm still trying to get my head around the interpretation of a geometric index and how it differs from an arithmetic one. Assistance on the topic would be appreciated.
An important and much-overlooked issue.
A geometric average depends entirely on the first and last point in a time series. Thus, the result is extremely sensitive to the start date and end date. The intermediate values are irrelevant. So if you just happen to start with an unusually high (or low) value, the result will have very little meaning as a representation of what to expect in future.
By contrast, an arithmetic average uses all the data points. So, while the result is still sensitive to the start and end points, this is attenuated.
Looked at another way, if you want to summarize the past, a geometric average will make a nice connection between start value and end value, and so it is neat and tidy. But if you are trying to get a handle on what might happen in future, the arithmetic average is much more robust, i.e. less sensitive to "blips".
Of course, you would get an even more representative value if you were to fit a simple regression to the logarithmic value of all the data points. Then the coefficient of the time variable would be your annual growth rate. That method would best incorporate all the information in your observed sample, so as to extrapolate into the future. But that's much too complicated for most financial analysts (or their clients).
Ah, correct me if I'm wrong, but I think you're talking about the difference between geometric and arithmetic returns. In this case it seems to be applied index construction. That is, geometrically-weighted indexes. Here's what valueline has to say
On June 30, 1961, we introduced the Value Line Composite Index. This market benchmark assumes equally weighted positions in every stock covered in The Value Line Investment Survey. That is, it is assumed that an equal dollar amount is invested in each and every stock. The returns from doing so are averaged geometrically every day across all the stocks in The Survey and, consequently, this index is frequently referred to as the Value Line (Geometric) Average (VALUG). The VALUG was intended to provide a rough approximation of how the median stock in the Value Line universe performed.
On February 1, 1988, Value Line began publishing the Value Line (Arithmetic) Average (VALUA) to fill a need that had been conveyed to us by subscribers and investors. Like the VALUG, the VALUA is equally weighted. The difference is the mathematical technique used to calculate the daily change.
The VALUA provides an estimate of how an equal-dollar weighted portfolio of stocks will perform. Or, put another way, it tracks the performance of the average, rather than the median, stock in our universe. It can be shown mathematically, for all practical purposes, that the daily percentage price change of the VALUA will always be higher than the VALUG. The systematic understatement of returns of VALUG is a major reason that the VALUA was developed. Moreover, although the differences between daily price changes may seem small, the magnitude of the annual differential between the two averages can be very large. The greater the market volatility, the larger the spread between the geometric and arithmetic averages becomes.
Note: I'm not entirely sure how the daily returns are compounded over the course of a year.