The No.1 Strategy For Retirement Income...
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- Опубликовано: 2 янв 2023
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I am a Chartered Wealth Manager and Partner in a financial planning practice based in the UK. If you would like to find out more about working with us, please follow this link: go.novawm.com/getintouch
Dividend Investing seems like it's a perfect strategy for retirees. High sustainable passive income, what's not to love!
But all is not as it seems...
Sources from this video:
The Dividend Disconnect
onlinelibrary.wiley.com/doi/1...
A Five-Factor Asset Pricing Model (Fama & French)
papers.ssrn.com/sol3/papers.c...
The Decumulation Paradox
investmentsandwealth.org/geta...
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This channel is for education purposes only and does not constitute financial advice - James is not responsible for investment actions taken by viewers. Please seek out a regulated advisor if you require assistance (whilst James is a financial adviser, he does not provide advice through this RUclips Channel, which is not affiliated with his employer).
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The author asserts their moral right under the Copyright, Designs and Patents Act 1988 to be identified as the author of this channel and any video published on it.
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Correction: For some brokers, not all, W8-BEN forms can reduce witholding taxes to 0% if the shares are held within a SIPP.
I had a feeling that if bought as part of an etf there in a Isa the tax was not as high?
@@ciaoatutti11111111 ISA's are 0% tax for all instruments...
@@radialb1894 I taught it was more conex since dividend generated in other countries could be subje to different country taxation.. I taught it was more an etf thing
Excellent, I did not know this. Thanks James!
Do I also need that form for dividend king etfs?
I'm 48, sad to say I made terrible money decisions growing up which I'm presently paying for, been dedicating every waking hours towards my retirement and I'd really love to retire to Portugal with atleast $3million by, the market up and down is not helping at all.
Same here buddy, the basic idea is to hold for long term, but I've only got 3years until my 50s are done, Im considering a sort of coach or investment adviser at this point.
Totally, an investment adviser is the best way to go about the market right now, especially for near retirees, I've been in touch with a coach for awhile now mostly cause I lack the depth knowledge and mental fortitude to deal with these recurring market conditions, my portfolio used to be up and down, but for the past couple years I've been having consistent profit growth scaling from $500k to $1.8million
well said, I actually signed for a few youtube courses but it didn't help much, a colleague suggested I use a proper financial advisor, how did you go about touching base with your adviser
@@osipsymon4168How can you get either 500k or 1.8 mil. It's either one or the other.
To manage investment risk, consider maintaining a broad diversification of your investments that reflects your personal risk tolerance, time horizon, and the nature of your financial goal. Remember, diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline. Because investing can be complicated, consider working with a financial professional to help guide you on your wealth-building journey.
Who would you endorse? I've been in the shadows for too long
@@carlosjohnson5457 My consultant is 'BRIDGET MARY TUROW", look her up online if you care for supervision.
The best thing that has happened in my life is working with BRIDGET MARY TUROW. I haven't just attained financial freedom, I have gained a lot of power in the knowledge I have acquired from her. She is highly recommended.
@@christinaryan9554 Thanks, I just googled her, and I'm really impressed with her credentials. I left a message for her and hope she replies to me soon.
Bridget Mary Turow changed my life for the best. I recommend her too.
The problem with growth stocks is that we have no idea when to cash out. Look at how Tesla has lost value overnight.
I'm not suggesting you buy growth stocks. Just that you ignore dividends.
@@JamesShack so what are you saying. Buy shares with reasonable dividends 3-5%. So confused.
@@g0801215 He means you should not factor dividends into your stock buying and selling decisions at all. Instead, you should let other (better) indicators inform your decisions.
Growth stocks are for the long term you cash out when you target to cash out, you can never time the market, dividend stocks can grow and lose value but at a lesser degree because they are huge long standing firms but you get the sustainable dividend return, I would prefer growth stocks over dividend stocks unless you are like 60 plus
@g0801215
Buy a low cost broad market index and you don't have to pick individual stocks. You will outperform 85% of fund managers over 20 years.
Dividends are like a personal pension, if invested in good companies it provides income and inflation protection as good companies increase dividends on a regular bases. I have been retired 13 years taken 400K out to spend and have increased my capital by 500K. We take the money we need and the one issue that needs discussion is cash flow. We keep a year of cash on hand at all times. We also tax plan and get the maximum government benefits every year. I know we will retire millionaires but who cares as long as we have the money and comfort it brings. Most people get too emotional and sell when markets go down. Holding good dividend paying companies we know our income is quite secure and just ride out the market fluctuations. cheers
James, first of all it's great that you take the time to answer so many of the comments on this video, so you should be applauded for that and some great content. What is also clear is the wide range of opinions on the subject which just shows that everyone's circumstances, experience and objectives vary greatly. There is no right answer - it just depends on the asking the right questions.
Your central premise is that reinvesting dividends and benefitting from compounded growth will lead generally to better overall returns than if dividends are taken and when buying a stock, you buy a quality company first and foremost based on fundamentals, with dividends being a secondary factor. After all, dividends can be cut or stopped, there may be insufficient dividend cover and there is usually a good reason why there's a high yield or low P/E (eg, it's a lower quality company or has less scope for growth) . And you are absolutely right in this respect to buy quality first and dividends second, if at all, and mathematically, reinvesting gives the best total returns. I think this is the message you were trying to convey but was perhaps misunderstood by some.
Taking dividends tends to be psychologically comforting - I watched another video shortly after yours by a US based CFA who was extolling the virtues of taking dividends so even the experts can't agree. So the decision comes down to one's personal view, experience and circumstances. Personally I like dividends from quality companies as it suits my investment, cashflow and tax planning where, outside my SIPP and ISA, I can offset the income actually received and taken against my personal tax allowances. I can also generate sufficient income to still allow my employment earnings to be invested into my SIPP and get tax relief on the contributions, I can create tax efficient income to generate excess income over expenditure, gift this to my kids, save 40% on IHT immediately in addition to some capital gifts ( I don't need to accrue more capital as I'm well into IHT already), they can reinvest into pensions and get tax relief on their contributions that they otherwise couldn't afford and I can also decide whether to spend any spare cash, reinvest or replenish my cash pot. And yes, I will sell at appropriate times to also use my CGT allowance, whatever that may be in the future.
If I was much younger, yes, I would reinvest my dividends to compound the growth. Share buybacks can help by reducing the shares in circulation and thus increasing the price, but one needs to understand why companies do this. Some CEOs are rewarded on increases in the share price, not profits or earnings, and often companies have leveraged their debt in times of low interest rates to buy back shares but place a huge burden on future profitability, especially when debt has to be renegotiated. Reinvested dividends are subject to bid / offer spreads and dealing charges as well as future gains and losses. A dividend received is cash in hand, not a number going up and down on a screen. It's definitely not straightforward as some like to think and one needs to do the right research before investing.
Diversification is also important. One commenter stated that he had been tracking the FTSE 100 index. If he invested in August 1999, the index was about the same as Oct 2022 (circa 6800) so only by reinvesting his dividends would he have been able to make money, otherwise his clever low cost strategy, investing in both good and bad companies alike ( however one defines this), would have been pretty abysmal and failed to keep pace with inflation - so for him dividends had to be reinvested and he was only saved by the rise in his one other investment, the S&P500 tracker. Not sure that the future will be quite so kind and further diversification may well be beneficial but that is for him to decide.
Do keep up the good work. This video has certainly promoted much debate, which is healthy as it means folk are thinking about investments and their financial strategy at a time when every penny counts.
Hi James. New to the channel and investing in general. Appreciate this isn't the topic of this video, but just want to say a big thanks. I have traditionaly saved in cash ISAs, but want to build a pot of money to retire as early as possible. Learning about index funds and the life strategy funds is a game changer, rather than clinging onto the intrest earned from saving in cash alone. I have downloaded your income calculator to understand what I need to put away for a given income in retirement etc, and I glad to say that at 26 years of age, I am in a position to do so. Big thanks again, subscriber for life!
I beg to differ, I love my dividends, no messing about having to keep selling all the time.
Thank you for this interesting contribution! I'm focusing on Dividend Investing avoiding those dividend traps that looks so tempting in the market, like some builders companies for example.
For me Dividend investing means Expanding: within the 20k limit of ISA being able to generate extra money to buy more share, expand and diversify my portfolio is the keystone of my strategy at the moment
Really like your vids. As a cautious investor i love dividends, gives me peace of mind. Do not have to worry about sequence of returns, not fretting about Re balancing portfolio. Seems to compliment my final salary benefits.
Think you somewhat missed the point of the video!
I agree. James's thinking is sound but also it is never as transparent as that, there are rarely 2 businesses that are the same. Dividends for a growth phase is a good solid strategy, so using it to reinvest 100%. Also it is important to do 2 things - understand the business you are investing in and its growth prospects and secondly have a strategy. Just saying dividends doesnt work is simplistic and could be good advice but not always.
you've no idea how much I appreciate your information! my favourite financial youtuber along with Andy clever cash.
Interesting video.
I'm very big on dividend investing, so watching this video was very intriguing.
Regarding your comparison of selling shares rather than taking dividends, you don't mention transaction costs which you don't get when you receive dividend income (at least not in my investing accounts). If you need to sell shares every month, you have 15 holdings and choose to sell a bit of each holding to keep yourself diversified, you will have 15x your transaction cost (eg £10) EVERY month, which is a HUGE amount of return.
The UK has some really good dividend companies (Unilever, Legal and General, British American Tabaco etc), so you don't need to invest abroad and be subject to that withholding tax.
You mention the idea of mental accounting (how we count money in different ways in our head), but this isn't true. The whole point of investing is to get liquid cash and stocks are just a way of acquiring it. £5 in a dividend is better than £5 in increased stock value because that £5 in cash won't fluctuate in value (ignoring inflation).
You also mention how dividend investors are subject to executives deciding how much you get, but investing in quality dividend stocks means you have a very good idea of how much you are going to get, so you can plan reasonably effectively. A stock that doesn't pay a dividend is just subject to market forces, and you the individual investor are always going to be behind the big hedge funds and pension funds when it comes to knowledge.
You also fail to mention longevity. No one knows how long they will live, so if you take a non-dividend approach, you could run out of capital before you die, meaning you're screwed. Having income means (theoretically) your money generation lasts forever, so you don't have to worry about living too long.
Also, what if you want to leave something for your children? Owning dividend stocks means that you have something to leave for the next generation.
Your analogy of fast cars painted red is extremely weak. A dividend signals that the company is confident enough its current situation that it can pay money back to investors. It shows the market that it is stable, and therefore is a solid investment.
I really hope you aren't just doing this so people feel the need to come to financial planners (like yourself) so they can try and get their estimates of income needed, life expectancy etc right.....
Thank you for you comment. I'm going to reply more fully here, as they're similar to points made in other comments.
1) If you're not dividend investing, you're probably not going to be invested in individual stocks, you'll likely be invested in funds. But if you are in direct stocks, and you want to trade on a quarterly basis find a platform that has zero trading fees.
2) The UK has some great dividend payers, but the UK only makes up 4% of global equities. By only selecting UK stocks you're reducing your opportunity set and diversification dramatically, which will reduce your expected return. Using dividend yield to set your asset allocation (which is the most important thing!) is not a good idea.
3) £4 of cash that I've just received from selling stock won't fluctuate in value either, and it's exactly the amount I require.
4) What you're suggesting is that to be a good dividend investor, you need to be good at picking stocks. Any strategy that relies on stock picking is not suitable for most people. I
5) In regards to the longevity question, as I said in the video dividends are a lazy way to solve this problem. On one side, very few people have enough assets that they can live well on a 4% dividend yield, most need to, and can afford to, take more than that. Whilst on the other side, if you have a lot of assets, it would be strange to prioritise high dividends if you don't really need them. Instead just invest in whatever is going to give you the best total return.
There are plenty of ways you can go about assessing safe withdrawal rates (that I discuss in my other videos) but it requires more mental effort.
6) Again, your children will be much happier if you just invest in whatever is going to give you the best total return. Rather than limiting yourself to dividend stocks.
7) Paying a dividend is not a signal. Earnings is what is important. If profits are then reinvested in the business, why does that make it a bad company? That's a signal that the company thinks it can re-invest at the same, or higher return on capital. If however the company decides to return capital to shareholders it can do this via dividends or share buy backs. Companies now returns twice as much capital to shareholders through buy backs as dividends, so by only investing in dividend stocks you're missing out on some of the worlds most profitable business.
The intention of this channel is to educate people so they can make their own decisions. For most people, dividend investing is not suitable because it relies on stock picking. But if you do genuinely love the process, have the time for it and it helps you sleep at night it can work for some people - even if it's not the most effective strategy.
@chazzzdposh Great reply. I was thinking exactly the same as you
@@JamesShack You make some fair points, but what about sequencing risk?
If the market takes a dive in your first year after you retire, you have to sell A LOT more of your capital to get the same income, which will HUGELY change you options going forward.
Quality dividend stocks don't have this problem. They keep paying dividends in economic downturns, so you will get roughly the same income without having to take a big hit on capital.
Not all dividend stocks are robust through downturns.
For the ones that are, the reason they’re robust is not because they pay a dividend. It’s likely because the business is profitable and in a defensive sector.
If you want a portfolio that is resilient to down turns invest in profitable defensive businesses. There’s no need to cut your opportunity set in half by only looking a dividend stocks.
However, I do not encourage people to invest defensively, or try to time when to get defensive, because you’re likely to get in wrong.
Instead invest for the best possible total return at all times. And then have a very clear Cashflow plan that uses cash, fixed term deposits and bonds for any money you need in the short term.
Thanks James, I love the way you explain things! You have a spreadsheet to help us plan retirement, but I can no longer find it. Could you please send me the URL?
Great video as always, but gotta love those lazy dividends though😃. At retirement, in a few years time, my wife and I are planning on having a big part of our pensions in the iShares UK Dividend ETF (IUKD). Appreciate that we'd be able to better returns by not doing that but our outgoings are going to be low and the dividends will help us sleep at night, while the other part of our pension makes stonks in growth ETF's (hopefully🤣).
Here's an analogy. Dividends is like sheering sheep, selling off your shares is like killing your sheep. Wool grows back, You can't bring your sheep back from the dead unless you buy a new one. You own sheep and you sell the wool. You sell the sheep, you are no longer owner of the sheep.
Your channel is wonderful James. I am now very interested in financial / retirement topics and can't stop watching your videos. Regards from Barcelona! 👏👏👏
Dividends do not make a lot of sense until you factor in one thing. What is the long term price of every stock? It is 0. Sooner or later the company will disappear. So getting some of your money back is a hedge. Also most good companies will continue to pay a dividend when times are bad. You do not want to sell your stocks when they are down. Picking good dividend stocks is not being lazy. It takes work and you need to stay on top of it.
Really helpful videos!! Thank you so much James. 🙂 Is there somewhere I can find some modelling software where I can plug in figures against the last 40 years of stock growth like you have shown on your Timeline system to help with understanding? I understand this software is only available to advisers. Last question, I have property as well as funds. Often people only talk about the rental income and do not take into consideration the yearly growth in the property value that adds a significant portion to the asset value. Although obviously, selling a property is not easy to do in retirement and perhaps why this is not mentioned much but still important to understand. Not forgetting about capital gains charges in selling!!!! 🤪
Thank you James for stopping me making a big mistake. Love the channel.
Both capital growth and dividends have their place. The key omission from this ok video is first you need to identify your time horizon and your end state. For example - a SIIP is currently a very tax efficient way of transferring wealth to the next generation - so capital preservation is important is this regards. However, if this is not your priority a mix of capital drawdown and dividend income could be the way forward. But…like any good journey - you need to plan fIrst!
I loved the Venn diagrams at the end. They really help to support the argument.
Just with automated regular investing during accumulation, do you suggest automated regular withdrawals during retirement? Takes timing the market (and the big regret issue) out of the picture in both accumulation and retirement phases.
I like investing in dividend ETFs because they have the tilt toward the outperforming factors of value and robust profitability. There are other studies that point to non-dividend paying stocks as having the lowest returns long term, so I don't think it's a big deal to trade lower diversification for potentially higher returns. Plus you get the added psychological benefits of dividends, even if they are irrelevant to the value of the business. Long term dividend ETFs will do great. Whether they outperform the market, who knows. But at that point one is splitting hairs. A vast majority of the benefits of equity investing will be captured.
Great video as always. Nothing gets people more excited than the perennial dividend debate 😁🍿
Always revs up the comments section.
I remember studying corporate finance at uni and the lecturer saying a company paying high dividends is actually a bad thing bc that means they no longer have any projects to invest in and the company has plateaued
Your right about potentially hanging on to long to do a bit of spending, just brought two sipps into payment, one is Dividend based and will draw 95% of Divs Av over 12 months. The second is growth based over eight funds and will dispose of anything that outperforms the diversified eight base starting figures, indexed at equivalent of 3.6% per annum. Will see how it goes. Both SIPPs were sitting as essentially "life insurance" but it does make sense to use a bit, until the state pension kicks in, just over six years away. But then I'll probably want to use the state pension to buy more investment trusts for a while 😂.
Very good video, Thanks
Thank you for another great video James. I am always fascinated by the psychological aspects of investing that you point out. There's a chimp in my mirror for sure!
It's worth mentioning what price you pay for that dividend share that will make a difference to the yield. Also, the compounding of re investing over time. Dividend shares brought at a good price and re invested over time can produce growth and income. I retired recently as a dividend investor as well as growth mixed in. A lot of people have retired successfully with dividend paying companies when they buy at a good price.
@@craig3613 yes that's what i was doing 👍
Out of interest how is your retirement portfolio positioned in percentage terms of income, factor(growth/value etc), and capital preservation (bonds/multi-asset) ?
@@boombustinvest around 65% income 25% growth 10% cash. No bonds. 👍
@@dubsdolby9437 looks like bonds have bottomed out... if they continue up will you rotate/allocate into some bonds?
The point of owning dividend companies is for cashflow. I think its a fundamental difference between people who realise cashflow is king vs people who just want to speculate in markets.
Great video again James, I find that within the industry our behavioural baises towards dividends are often overlooked so it's great to see someone tackle that.
I have a question regarding funds that invest in overseas holdings.
For example, would Vanguard 100% Lifestrategy (Distributing) be subject to the withholding tax on the overseas dividends that make up the dividend yield? If so, can it be avoided by being in the accumulation class?
Solid video, the name of the game for 2023 will be dividend and value investing, but the question becomes when... We are about to get hit with market news that could rock us into a recession (FED rate hikes).. invest cautiously and I am eager for more deals to present themselves, but I will be dollar cost averaging
Great info James. Happy New Year to you
TBF I think the biggest case study that has both the fors and againsts of your argument can be found in just one company. Berkshire Hathaway/ Warren Buffett.
Their investment holdings are heavily weighted to companies that pay a growing dividend and shareholder yield (granted also with focus on buybacks), majority of his picks over the years have a growing dividend and revolve around a longterm hold.
So much so that his Coca Cola now yields over 50% YOC purely from the dividend, he gets his initial investment back in under 2 years. Now KO wouldn't be a stock that you'd have highlighted, it's mature and little growth yet hugely valuable to Buffett due to the dividend? Same can be said for multitudes of his longterm holds over the years, even getting preferential higher dividend yields for his investment ( the banks in 08) so again tell me how dividends mean nothing?
BH is also an example of not paying a dividend and instead focusing purely on buybacks, growth and mergers and acquisitions along the way for shareholder yield, believing they offer greater value than paying you a dividend which again appears true.
So both arguments in a single company right there.
Also are you impacted by recency bias? A decade plus long bull run fueled purely by high growth tech companies. You've said dividends have had less impact since the 70s which is true but look at the low growth and multiple recessions in the 00's any gain at all was purely from dividend stocks as per your chart. Those dividends are often the only returns an investor gets in a sideways or bear market (as long as companies financials/debt load is healthy). But long bull runs in growth have possibly blinded us to this.
What use was holding high growth high valuation companies in 2000 many went bust and many are only now recovering to those values, if that's the case id feel more comfy being paid a dividend to wait.
Holy smokes. I just got to your big revelation. This is so eye opening. You're right about how hidden this is from my biases. i would rather have more control. Thanks for your rationale.
Lee, thank you very much for the Superthanks! I'm glad I was able to give you a new perspective. These are just some of the biases we have to overcome as investors. If you'd like to learn about other types of bias then I suggest you give this a watch : ruclips.net/video/EEpQqQhAU3U/видео.html
Great video! About the withholding tax, does it apply to indexes such as S&P? I am UK based and invested a lot in Vanguard S&P. Should I invest in UK indexes instead to avoid the withholding tax?
The way I always thought about it is that you're missing out on 'compound interest'. If Company A pays you the dividend, then that 5% isn't reinvested to make another 10% the next year so your return in Year 2 is only £10.50, meanwhile Company B reinvests the money and makes you $11 in Year 2 and so on... obviously you can minimise this by reinvesting your dividends, but why not just leave them within the companies in the first place rather than have them paid out and then buy more shares with them.
Mind blown. 🤯 You just earned yourself a subscriber, congrats. 🎉
Thanks!
A tricky subject but well explained James 👍🏻
There isn't a share holder out there who doesn't like receiving money via a dividend note but at the same time growth companies can give you a return over time!!
For me having a well diversified portfolio that has growth / value companies within it makes sense as you want a bit of everything really. Yes I do actively manage my portfolio and am not a buy and hold investor / passive.
Out of interest how is your retirement portfolio positioned in terms of income, factor(growth/value etc), and capital preservation (bonds/multi-asset) ?
@@boombustinvest I have around 20% in bonds / fixed income but am thinking about increasing that slightly. Roughly 75% of the remaining 80% is in value stocks with 25% in growth / non dividend paying US listed shares.
@@mattsennett ah ok, so apart from the growth stocks, you're a dividend investor by 'proxy' as it were then? (Dividend stocks also tend to be Value stocks)
@@boombustinvest Yeah an active dividend investor for the most part would be the best way to describe me.
Invest in the company not the dividend... sound advice as always, trick question though when you can only pick one or the other and they are impossibly "identical"🙂
I decided not to vote as I didn't think there was a good answer. Instead I tried to second guess what you would say. I was expecting an answer that involved not self-selecting single company investments as you head in to retirement (especially if you're basing your decision on dividend yield).
I invest in single companies now, but expect to wind that down to "fun money" by the time I retire and to be fair it's not a large part of my pension now. Having tried to build a dividend portfolio just before the financial crisis I know how things can change quickly.
This was amazing, new subscriber!
I’m a factor guy myself, and would highly appreciate more detailed videos on this. For example, if momentum belongs in a portfolio, even with its questionable behavioral explanation, but with clear negative correlation benefits to value. Would love to hear your take!
Great video. I personally don't care for dividend stocks because where I live dividends are heavily taxed. And also because I don't want to deal with more forms to fill out in my tax return
I'm just thrilled I got a question right
When I saw the poll, I knew that the answer would be it doesn't matter but as that wasn't one of the options and the way the question was worded I put dividend. I had a feeling there would be a video explaining why that wasn't the case
Love the video as always !
Do you need to fill out a w-8 Ben form for vanguard etf within isa or sips, been looking online and can’t find anything telling me to do so ?
This is all taken care of within their funds.
Interesting and thought provoking - makes even more sense when considering preference for buy-backs vis a vis dividends in the US.
Indeed, buybacks return 3X as much capital to shareholders than dividends.
Brilliant video as always!
Great video 👍... it helped me understand properly something, which has always felt not right. Its amazing how many retired people with all the time in the world available to them, are such "lazy" investors.
yes, in theory 5% from a div or 5% from sales is the same on a day when mr market is placid. But it's very much not the same on a day when mr market decides to drop your stock by 10% in addition to your required sale.
@@bartz4439 who knows, but dividends are stickier than stock prices.
In the uk, it’s worth noting that the gov is reducing tax free limits on dividends outside of ISAs and pensions over the next few years making it more unattractive
As the statisticians like to say "Correlation does not equal Causation". Dividends correlate with quality companies.
They do. And quality companies correlate with outperformance (or have done in the past!).
@@JamesShack Why not find the best companies, then get a subset of them that pay dividends that go up every year over time? In other words, find the fast cars first, then pick the red one after that?
@@farriskhan2352 You'll end up with too concentrated a portfolio. Why limit yourself to red cars when there are lots of other cars that are just as fast.
I am sorry, but it seems to me, you ignore a few things and also some mindsets:
As a retired person, you are kind of a *short-term* investor, you *need* X$ per *year*.
Stock prices perform well *in the long term*. This is good for the wealth accumulation phase.
Dividends are more stable, especially so in certain companies ('aristocrats'). Low volatility=>short term plans.
Tradeoff: worse performance, as always with low volat. investments.
Also, stock prices are not rational in the short term, while dividend payment decisions result decision of the management and will not ruin the company - if it is a good company.
I see a crucial difference between the two strategies easiest understood via thinking of Monte Carlo simulations ie. modelling many (we hope) realistic alterntive scenarios. Lets take it to the extreme for easier understanding - total loss:
A dividend strategy will never kill the portfolio of well managed companies (unless total bankrupcy occurs), they may lower dividends during huge crisis.
However, a "sell X$ regularly " strategy *can* damage or destroy the portfolio value when a sufficiently bad/long bear market of stock prices occurs - even without the companies suffering greatly, as stock prices are not really linked to that on the short term.
Regarding buying red cars....
No, I do not want to buy companies *because of dividends* - I want to buy *good* companies, sometimes only dividend paying ones!
Indeed, the tradeoff for low volatility is lower performance and lower diversification (risk) - at least the latter may be offset if you have some free cash to buy non-dividend companies.
Dividend investing is one of my investment strategies in my ISA. My other one is in my pension mixed between Index & Mutual funds. With my dividend investing I have some REITs and property. Some in energy and so on. I seem to be making a nice return in dividends so far. :-)
Great video James. Exceptionaly explained. I wonder how UK based investor can get exposure to these factors mentioned. Vanguard has closed their factor funds some time ago becuase they were unpopular. What a shame. Maybe this could be good material for next episode?
This episode kind of covers with what I was thinking when I decided to alocate 10% of my protfolio to high yeld dividend fund. It was not about dividends(I reinvest them into the same fund anyway) but about getting exposure to value factor. But I did not knew about tax implications that you have mentioned because (as you have also said) it's an ISA right? I am now full of doubt wether my allocation was a correct decision. On one end exposure to value is good, on another tax implications are bad, which one wins 🤷♂
Blackrock (iShares) has a suite of factor funds available to UK investors. So does SSGA. I believe the latter is slightly cheaper. I particularly like the SSGA small-cap value ETFs (USSC and ZPRX).
SPDR MSCI USA Small Cap Value Weighted and SPDR MSCI Europe Small Cap Value Weighted are the only true small cap value ETFs available in Europe. They great as well.
@@minasmina2700 thanks. Wish there was one 'all world' in this category.
@@pistopit7142 Me too 😭
It's almost like James times the video drop perfectly...I'm logging off for work at 17:00 and there it is!
Great video as always James, just wanted to pick your brain on something. I'm aware of the Fama and French five factor model, in which "investment" forms part of 4 of 5. (Conservative minus Aggressive) is a factor that states that the more aggressive a company is with re-investing, the lower returns are vs a business that is more conservative with re-investments.
I presume I'm overthinking your example that you've mentioned and the CMA is more useful when combined with other factors rather than stand-alone? Would love to know (if you know) how much of an effect CMA in your example (based on the Fama and French) has on future expected returns (although not sure if it's possible to run a regression on two identical hypothetical businesses).
Hi Daniel, I'm not sure. They found that factors are more potent when found together. Small cap as an example, has been a weak factor on it's own but is so heavily discussed because the other factors appear to be more potent within smaller companies. You can read their paper here: papers.ssrn.com/sol3/papers.cfm?abstract_id=2287202
@@JamesShack Thanks for the reply to my overly wordy question :)
Great video
I like to receive some dividend so that it covers broker fees etc but invest for growth at this time mainly.
I would be interested to see this video again but three ways
Company a and b the same however company c say half the dividend and half share buy back just for comparison
Thanks for sharing, glad I found your channel, right now everyone needs to find what gives true financial freedom and happiness. Making passive income is really cool I will try this in addition to my investment income😅
I recently did an analysis of my investments and my best performing investments by far are from solid companies like CVX and BMY that pay dividends. And the dividends paid are a major part of the total return. The presence of the dividend with the yield and payout ratio are markers of the health of the company.
I understand the emphasis on total return and that I am likely sacrificing that long term return but as a retiree I no longer have a long term perspective. Investing in dividend stocks for the dividends is not sensible for a younger investor, but I think it makes sense for a retiree in terms of the risk, income, and marker of company health. Anyway, it makes me feel better, even if my total dividend is only about 2.2%. Not much more than the S&P average.
One thing that I don't see properly emphasized in videos and analysis like this is just how important dividends are for total return. It might be true that it is not sensible to prefer the dividend in your example. But it is true that in the real world of companies that a majority of the total return is in dividends. Compare the total return of the S&P and the total return with reinvested dividends.
Dividends are certainly an important factor for total returns, I agree with that. But whether a company pays a dividend or not is irrelevant.
Apple as an example, is the greatest cash generator in the world, who returned $100bn to investors last year but it's not a high dividend stock. $14bn of that was through dividends, $86bn was share buybacks. US companies now return 3X more capital to investors through buy backs than dividends.
@@JamesShack I think irrelevant is not correct here. We just agreed in your first sentence that they are "an important factor"!
I consider share buybacks and dividends pretty much equivalent for this discussion. Both are returning cash to the shareholders to invest as they wish. For reinvestment, share buyback will be more efficient.
I would agree that preferring dividends over share buybacks is a psychological bias that I likely have. It is more "standard" to track dividend yield and dividend growth and so forth than share buyback yield and growth. I'll work on it!
In the video you say that those in the poll who selected Company A are wrong. But in fact those who selected Company B are also wrong as the video sort of suggests.
As a retiree who needs/wants the $5 income from the $110, I'd much rather received the dividend than hope that the stock price didn't drop 20% due to god knows what just before I was going to sell.
Yea like many things out of our control like ohhh let’s say Putin decides to nuke Ukraine. I’m sure your stocks will plummet 40 percent at market open the next day but hey, if you have dividend payers, sure some will be cut but you’ll still be getting paid. Seems like James assumes we live in this perfect world.
If you actually wanted $5 of income, and the company just so happened to pay out $5 it would be a big coincidence. This will rarely ever happen.
A rational investor will prefer to control their own cashflows to support their income. Home grown dividends also give you control of tax, and ensure you don't take out more than you need.
Most people do not reinvest dividends, or they keep them there to accumulate for several month before re-investing.
Interesting video. Is there any difference between investing in Company A vs Company B if the dividend is immediately reinvested, as in an accumulation fund or wrapper?
Only and tax and trading costs you pay to re-invest.
As a solid dividend investor, I believe that the dividends paid out by the company, allow me to decide as a shareholder where to invest the capital returned (dividends) in the best manner possible. Great companies have made bad mistakes, Colgate Lasagna or New Coke as past history examples.
AVGO is a great example of a company who pays a solid dividend and is growing over the past 10 years. Without dividends, retiring on the 4% rule does not hold up in a bear market as well as dividends.
The strategy that affords you the highest, most sustainable withdrawal rate is the one that gives you the best total return.
If you want to reallocate your capital, why wait for a dividend to be paid? Just sell shares and get to the right allocation exactly when you want to.
@@JamesShack Except using the 4% rule in a bear market is not sustainable. I do agree that most years are bull markets and non dividend investors would get better overall returns but it's impossible to predict when bear and bull markets happen.
@@glennshoemake4200 the 4% rule was developed because it WAS sustainable in even the worst market events.
Although I personally don’t think it’s very useful.
Hi James. Don’t disagree that people should focus on total returns however your chart showing the decreasing significance of the income portion of the total return pie could look very different in 10 years time.
Firstly we are at the end of 14 years of central bank constrained interest rates and minimal inflation which have worked in favour of a small number of US growth stocks. I’m sure you know that the FANGS alone have accounted for a hugely disproportionate percentage of gains in US equities.
Secondly if you go back and look at the 1970’s on your chart you will see that Diividends accounted for 40% of returns. The 2020’s are shaping up much like the 1970’s with higher inflation and rising interest rates traditionally much better for dividends than capital growth ( net of inflation) .
Finally. Many service sector companies ( eg Software) throw off more cash than they can effectively reinvest. If they don’t pay dividends they often resort to expensive acquisitions very few of which work out well for shareholders.
So whilst I agree with the central point re Total return the argument around dividends is far more nuanced than you suggest.
If you agree with investing for total return, why would you restrict yourself to dividend stocks?
@@JamesShack I wouldn’t and I don’t but I think it would be easy to get the impression from your chart that dividends are inevitably going to be an ever declining part of total returns whereas in fact conditions now have a distinctly seventies feel when dividends were a very significant component of total returns. I’m not arguing with your central point that people should look at total return just saying that I’m equally happy to have a five percent real return from dividends as from capital growth. In reality companies that grow dividends on a sustained basis are also growing FCF and EPS and the share price will reflect that over a reasonable time frame.
None of which should be taken as a criticism of your channel which I think communicates a lot of very important messages.
Isnt this a symptom of a very risky economy? Capital gains over a short time are likely to be because of some kind of hype, but if theres a company which grows 5% for 30 years (i.e. sustainably) may as well get a dividend stock?
Dividend companies are surely incentivised to keep dividend good, and will therefore do stuff like fire employees, sell assets etc to make the dividend every year.
Id rather be invested mostly in a company which good at long term survival rather then growth and collapse / buy out.
Quick question, if you could answer great and if you feel it might be worthwhile video even better.
When investing for the long term and picking a diversified fund.
What happens to that fund, will it always be still around or do they typically come to an end at some point?
Ie if you look at a lot of vanguard funds they only started 2012 - 2016.
Most passive funds stick around, but even if they did close you could just switch from the Vanagurd S&P 500 tracker to the HSBC S&P 500 traker as an example.
@@JamesShack
Thanks for the reply.
If the funds does end, do you just get the money of what the shares were worth at the closing date.
Or does announcement of the fund closing drive the price down?
Basically what I’m getting at is do you need to take this into account when picking funds or is there no risk to investment when it comes to if a fund ends or not
@@LoyalTech1 You just get your money back. The only problem is if the fund has illiquid holdings that can't be sold. This is what happened with Neil woodfords funds.
It's been proven many times that dividend paying companies outperform non dividend paying companies in the long run. In a long downturn , say 5 years , the A option continues to give you 5% ( all being well ) even if the stock price goes down , whereas the B option becomes less and less valuable and if you need to sell shares for income you could eventually sell the total holding and run out of options. Company A then recovers in price giving you 5%. Company B is now worthless as you`ve sold the lot.
He covers this point at 11:00
Interesting video and different perspective. What is your view to external factors that could impact performance of non dividend paying company. It's share price isn't just based on its performance and outlook. At least dividend is guaranteed income (at that point in time). Too many external factors drive share prices.
Money from selling shares is also guarenteed once it's sold. Dividends reduce share prices the moment you recieave it, it's exactly the same as if you'd sold shares for the same amount at that exact same time.
"What is your view to external factors that could impact performance of non dividend paying company." People realising that the companies USP is no longer a USP and growth falling off. To give one example I read (maybe before the price cuts) that Tesla would have to sell twice as many cars as Toyota while maintaining their existing profit margins to justify their share price.
I am retired using exactly the dividend investing strategy you are against here. I live comfortably on 2/3 of the dividend income and I reinvest 1/3 into the markets. ( either more dividend payers or whatever takes my fancy.).. One thing I know is that I sleep well at night not worrying about markets ups and downs. When you yourself reach an age when peace of mind is more important than building for the future, you might understand our mindset.
I agree with you Terry. Although I understand James’ approach, my monkey brain gets much comfort from regular monthly dividend payments popping in to my bank account regardless of stock market ups and downs. Of course, I’m not fully invested in dividend paying shares; one has to be diversified after all. 🙂
Hi Terry, as I said in the video, I would also love to be in the position of being able to just live of dividend income but for most people that is not a reality, they need more than that and therefore they need to invest more efficiently to achieve it.
He didn't really say he was 'against' div strategy... just that there are alternatives out there. And, that it's not the dividends that are the reason for any outperformance, but rather the other factors listed. Depending on how a div portfolio is put together it might turn out that as time goes on, the retiree becomes overweight in div stocks that are actually falling behind in those factors and therefore placing future dividends at risk. That is a perfectly valid point. Dividends aren't immune to being cut either, so it's good to know what the options are.
One persons peace of mind, is another’s lazy investing. You value “peace of mind” more than you value extra cash and thats a choice only you can make. But as James said, that’s a call only the most well off get to make !
Terry can we ask how much you have invested to be able to live of 2/3 of your dividends ?
You can't count on capital gains can you whereas companies that pay dividends have been doing so for years and at a % that you can actually count on for retirement. Either way I wouldn't be too invested in the stock market if I were approaching retirement or already retired.
Out of interest, if a UK retiree does have a divi portfolio in one or more equity income investment trusts, are they better than an equivalent but lower cost equity income ETF or Index fund?
Depends.... an ETF or collective fund is priced at net asset value (NAV)while an investment trust is priced at a premium or discount to NAV. It is also priced on supply and demand but if there is a rush of investors selling, an investment trust does not have to sell its underlying holdings, whereas a collective fund does. This can be useful in volatile markets but it's usually best to buy the shares when they are trading at a discount to their NAV. Generally Investment trusts perform better over the longer term but depends on the quality of the management, corporate governance etc although their charges are higher than an ETF or index fund but they are now coming down. They are active rather than passive investors, so should be investing in quality companies rather than the whole index but they may , or may not, beat the market, index or their benchmark.
If you own shares, you are an owner of the company. As an owner of a business it’s a basic expectation that you would get some income from it without reducing your share of ownership. That’s not irrational. If one can accumulate enough of a portfolio that they can live a comfortable retirement at the budget they’ve determined is need for that, why sell down?
Are there any platforms which offer factor investing within a stocks and shares Isa? Could you list a few?
Blackrock (ishares) offer a range, you should be able to find them on most open investment platforms.
I sort of have the opposite problem. I automatically reinvest all my ISA and SIPP index fund dividends back into the fund. So I have a massive income that I never actually see (except if the FTSE is the same level as a year ago, then the price of my unit has increased 3.5%).
I'm perfectly happy with the strategy and mathematics, but there are times when my human frailty wonders whether that income ever really existed at all.
Haha - yes, if you have a taxable account is can be very frustrating not actually seeing anything on the income side of the ledger but being taxed for it.
@@JamesShack yes ... Exactly that. I do have a relatively small portion in taxable and that used to bug me. Luckily a combination of splitting it into my wife's account and converting them to ISA means now that income falls within the dividend allowance.
But I'll dance a little jig in a couple of years when that account is emptied and everything is under a wrapper.
I can understand this theory when stock prices are rising, but is it equally applicable when stock prices are dropping particularly in the current climate where prices seem to be dropping independently of the underlying fundamentals of the business. Also does ignoring dividend paying stocks not limit the impact of compounding which is an important factor when growing wealth?
Yes, a stocks price will fall by the amount of the dividend even in a falling market.
I like this vid. Good insight,
Hi James, great video and lots of truth told. But I do have a question. Do people prefer dividends because it’s real cashflow paid out compared to capital gains which is often a function of demand and supply and market sentiment? Ie could there be a great company doing really well but the market price doesn’t reflect it? If you need income now? Is it actually rational to sell asset at a lower price and “wait” for it to bounce back? When a client comes on board and has an income requirement as part of their mandate, selecting a dividend paying fund combined with fixed income products and income producing investment trusts is common. I’m not sure dividend investing is purely in the mind but actually suits a persons objectives, time horizon and risk appetite and mandate.
That might happen if the market was inefficient, but that happens rarely and it's almost impossible to tell when it is.
I hear that a lot from investment mangers. Client's come in asking for income so they give them income, even if it means the client is likely to end up with a worse total return. Instead you need to spend time with the client to help them understand why total return is the only thing they should care about. Unless of course there is some tax based reason for them to prefer income.
@@JamesShack that’s brilliant, thanks James. And great content as always.
@@JamesShack At least dividends are a million times better than bonds as dividends grow over time and there is typically capital appreciation. With bonds, your yield will likely go down over time and not keep pace with inflation. I agree that bonds are a lousy investment just to get income while leading to lower total return.
Yes. I agree that people spend money (or points) differently depending on how they obtained it. Apparently most women save up their Advantage Card points at Boots and then buy something frivolous. Whereas I just use mine for reducing my bill for my routine toiletries. To me, 5,000 points = £50 extra freed up to go in my investments. Not a free bottle of perfume that I would never otherwise have bought. Boots must HATE me!
Dividends are taxed at a lower rate than capital gains inside registered retirement accounts. If it is unregistered savings or if it is inside a Roth or TFSA then it is better to have cap gains instead of dividends.
Thanks for top content as always!
Hi Richard, thank you so much for the donation! It's very much appreciated!
I love how your videos begin by selling me on an idea then debunking the crap out of it because I know it the debunking never came I would’ve just gone for it.
First of all I want to say that this is great video and nice starting point for dividend topic discussion. I would like to point out one huge missed point in this video (and one smaller one). With dividend investing you are still holding your shares. Therefore you don't need to sell them, at bear market, or (worse case scenario) Covid bottom to sustain your living. That's not regret issue, rather security and sleep well one. And if you want to, you can still sell them to compensate your lifestyle, just like with not-dividend stocks (in let's say 2020-2021 recovery with great "growth"). You can even use those dividends to buy more shares in that scenario, which selling stock won't provide (cuz obviously you are selling them). There is also another point, smaller one - not all investors want to drown down their 'nest egg' to zero, at the end of excel life (or whatever age you put border for living). Some see this as opportunity for stable life, for future generations, so they are not selling and still accumulating.
PS. All red cars are faster - that's common knowledge! (joke)
Thanks for the comment.
A dividend being paid in a bear market will reduce your share price by just as much as selling shares for income. In a way you’re being forced to sell at that point, of course you could reinvest again straight away but then you’d be in the same situation as if the company had never paid a dividend in the first place.
Some people are lucky enough to have large enough portfolios that they can survive on 3-4%, even so it’s not as efficient as factor investing.
@@JamesShack I don't see how it is "same situation" after reinvesting. Of course it is same in terms of your value of your shares in that moment, but it is not in long run, as you accumulate more shares therefore stock price movement provide more gains/losses.
3-4% is starting yield in terms of yield of cost, this of course changes over time with every dividend reinvested
@@Defomir why would it be different?
With company A, after reinvesting the dividend you would have $110 invested. With company B you would have $110 invested. It’s the same (less any taxes you pay on the dividend, and the lag for reinvesting).
@@Defomir How do you accumulate more equity than with company B if your equity drops by the amount of the dividend everytime?
How do I know if I am being charged the 30% withholding tax? For example if I own shares in a dividend paying ETF VWRL which is registered in UK, do I pay additional tax on it?
They pay 15% within the fund.
@@JamesShack Thanks for clarifying that. Is it better to invest in the accumulation version of this ETF then?
@@jacek_dzieciolowski it doesn’t make a difference from a tax perspective. It just depends on where you want to receive dividends or have them automatically reinvested.
@@JamesShack thanks! Love your channel. Please make more videos!
Interesting video James, I liked the red car analogy a lot - but what if you automatically reinvest your dividends? Don’t you benefit from as much from that as you would from a company that does not pay dividends? Does it not also smooth out the highs and lows a share price can have over time?
Yep, it would make no difference. Hence the "irrelevance" of dividends. If you have £100 worth of shares in a company and that company pays you a dividend of £5, the value of your shares falls to £95. By using that £5 to buy more shares of the same company, you're simply returning the value of your holdings to their pre-dividend value (notwithstanding any fluctuations in the share price between your receipt of the dividend and the moment you reinvest it, which may or may not go in your favour in the short term, but will probably be irrelevant in the long term).
Yes, makes no difference. The takeaway from this video however is just not to select stocks because of the dividend they pay. All portfolios will have some dividend income that either needs to be reinvested or you just own a ACC fund to make it easier.
I don't think Value as an investment concept can exist through fund management. The whole point of value is you pick up high quality at a low price - but when the price recovers, it no longer qualifies as value so you're endlessly buying falling stocks and cutting winners. Diageo at £36 isn't value, but at £23 it was - but if I buy into a value fund that bought in at £23 and still owns it, it's not really a value fund anymore.
Therefore I stock pick my own value positions. Not at all to be taken as financial advice but I like BASF, Black and Decker, Scotts Miracle, Continental AG, Bayer, Porsche, Sanofi, GSK, Asos in this area - however, they pay dividends, and the withholding tax of my German positions is such a bugbear of mine. All that happens is BASF will pay me £600, the German Govt will keep £200 and I'll spend the £400 on shares of BASF through dividend reinvestment
@@ba8898 I think that from a company performance point of view it does make a difference. A company paying dividends is likely to be well established and have been making the same product for years. A start up company, of the type favoured by Neil Woodford might burn through all their cash before even making anything (BritishVolt ?) Which would you chose to fund you retirement ?
VUSA and VWRL are growth ETFs that pay dividends. USDV -spdr S&P US dividend aristocrats etf constitutes of stocks that have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield, or pure capital oriented.
The above are examples of ETFs that give you the best of both worlds. If you take the dividends your stocks still grow and if you reinvest the dividends you grow further. You can eat your cake and still have it 😎
This would be true is the market were to be perfect. Well, it isn't. What you have in the stock market is the price of a stock. What he talked about was about value. Rarely one equals the other. For example, on an ex-dividend date the price should be equal to the price from the previous day plus the dividend. Well, not always. Usually it's different.
It never will be exactly the same, because there are other factors that effect the price. But it is discounted.
Another example:
I currently own a stock worth $100 and if you buy this off me now, you'll get a $5 dividend in a few weeks time. If you buy the stock tomorrow you won't get the dividend, I will. Are you suggesting you'd still pay $100 for the stock tomorrow?
@@JamesShack in a perfect market I would have to pay 95$. In the real market I could pay 100, 95 or 105. It really depends on much other factors other than the dividend. In the short term, the stock market is a voting machine, in the long term is a weighting machine.
Does it make a difference that the basic rate of dividend tax is only 8.75% vs the capital gains tax rate of 10%, are you surely not paying an extra 1.25% points of tax by selling shares rather than taking a dividend? I may just be misunderstanding!
Hi Adam, for most UK based investors these taxes aren't an issue due to pensions and ISAs. If you have a taxable investment account, it's extremely likey that you're a higher rate tax payer.
If however, you have a taxable investment account are a basic rate tax payer and have already used up your CGT allowance this year then you could save 1.25%. However with capital gains you can control when you pay tax, which enables you to realise gains in tax advantageous years or transfer them to a spouse. With dividend you don't get this control. Hence why gains are normally preferable even in this fringe circumstance.
@James Shack thanks for the reply, I forgot about ISAs! I'm new to this so thank you for taking the time to respond.
I do see what you're saying about these dividend companies ... and you also say ( 10:21 ) that an income from an income company is decided by a policy set by some company exec who doesn't care about our objectives. I would agree with this last point, and wonder if *any* exec cares about this.
As an investor, I can decide to re-invest my dividends back into the company by simply buying extra shares/units from the same stock. So it turns the dividend company into something more like a growth company. The point is that I can choose to 'bleed off' income as required with the remainder being re-invested (maybe even elsewhere to diversify the total portfolio). Growth stocks/funds cannot give that choice. The use of this idea can support another form of diversification (into growth vs income, or into other companies) within the portfolio and can provide inbuilt ability to alter the income a particular portfolio can generate (eg to accommodate changing income requirements with age).
Hi William, why can't you do that with a non-dividend paying company? Just sell shares when you need them.
Therefor you get income exactly when you need it and can diversify exactly when you want to rather than having to wait for a dividend to be paid.
We've not talking about growth stocks vs value stocks here. We're talking about dividend vs low or non-dividend payers.
@@JamesShack My point was that a dividend-paying company can be made to look like a non-divi company simply by re-investing the divi payments back into the same company. This completely meets the comparison example you gave. As a secondary effect, it will grow my holding in the company paying dividends - for good or ill.
All that said, I'm not sure I'd personally choose to invest using a 'divi vs growth' strategy - just my investment style, I suppose.
What if I re-invest my dividends?
OMG. I need you standing over my shoulder like all the time. I read that dividends are an important part of your portfolio in a down market because they proved some cushion against falling stock values. I think you are correct in your observations of how retirees (and soon to be retirees) look at their portfolios. I do have three Dividend Funds (SCHD, SPHD DGRO) in my portfolio along with my other funds.
Is your "Factor Investing" the same as "Momentum Investing" and if so, I may need to review that video again. It was not clear to me and made me feel like I needed a Financial Planner to look at it. Admittedly, I'm not a Financial Planner so I'm doing this on what I've learned from reading over the past few years. It has really been tough to watch all the losses in 2022 and I don't think 2023 will be any better and it's my last year to work full time if things go as planned.
Hi Chuck, factor investing is more complicated for sure but no where near as complicated as investing in individual companies. Many people decide against factor investing because they don't have enough faith in it (you need conviction!), and would rather stick with a simple index.
Why do you only have 71k subscribers? Your content is amazing
Haha thank you, we'll get there!
Great video. One interesting point was evidence that dividends have made up less of the return in recent decades than in older ones. If we are saying then that there are trends or changes over the course of a century that we can't ignore, wouldn't this potentially impact the value of the Timeline data that looks back over 100+ years?
The future will be different that's for sure but the main reason for the decline in dividends is the growth of share buy backs. Company's are paying out just as much but through different means.
Good graph in this showing dividends vs share buy backs:
www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/are-share-buybacks-jeopardizing-future-growth
@@JamesShack Thanks James!
James assumes we will be in a bull run forever. Have you been investing in the markets for 35 years? I have and seen many crashes and corrections. The current generation has not seen a true crash or depression.
Slightly off topic James, but what are your opinions of the worrying articles I have read recently regarding the possibility of looking at the state pension being unsustainable in its current form and therefore looking at an individuals total assets and only having a state pension for those with no or low pension/ ISA provision.
If something like this were to come about it would turn my plans on its head and would be unfair to those who have done the responsible thing and saved throughout their lives..
What are yours and your viewers thoughts. Thanks
Hi John, I don't have any views on this other than the fact that unless we have a lot of very high inflation, above govt borrowing rates, which will inflate away govt debt, we're going to have to increase taxes on the diminishing workforce and reduce costs. State pension changes could be one area of that, but i imagine it would be means tested to the degree that it would only affect those with very large asset bases.
@@JamesShack And I hope that asset base includes property too
You cannot have someone sat in a million pound home in the south east, but has not made any pension provision, getting full state pension,and someone in the north with a £300,000 house but has saved into pensions and isa with £700,000 not getting anything..
The full withholding tax , (not just the Ben 8 reduction but the whole amount) can be drawn back by your brokerage if your US dividend holding is held within a SIPP
What about share buybacks?
@@JamesShack I'm refering purely to dividends. Share buybacks would be no different to normal situation in regards to it just means your piece of said business pie increases or decreases dependent on dilution or buybacks. Irrelevant until it comes to sell and as you're fully aware no CGT when it comes to pensions.
Referring solely to dividend income from US companies into a Sipp, the withholding tax can be fully claimed back.
How about ETF that offer dividend?
Hi James, Hargreaves Lansdown apply 0% tax rate on US dividends held in a SIPP. ISA will attract a 15% tax.
From their website:
"A W-8BEN form means we can claim a US tax reduction for you on your dividends and interest from US shares. Withholding tax rates can be reduced from 30% to 15%, or to 0% if your shares are held in a SIPP."
Thanks Paul. That is correct. I've pinned a comment with a correction.
How are HL able to do this for US stocks held within a SIPP?
@@milkman1991 there is no withholding tax on US dividends held in any sipp, not just HL. It is an agreement the U.K. and US have.
Unfortunately not. The platform needs to be large enough to be independently registered with the IRS to receive dividends gross. Otherwise it’s taxed 15%. HL, AJBell, interactive are all registered.
@@JamesShack good to know, thanks.
Fascinating!
I had trouble with this at 1st. How to get income in retirement. Natural Income ?, no NAV on funds is important and we draw our income from our SIPP. Just like a salary every month no capital reduction.
Plan A for this year was to sell part of my S&P 500 index fund and look at dividend investing with FTSE 100 companies. This has made me question it and now I need to watch the next video. Bet I end up back at square one!
Is that because you need the income or think dividend investing can produce a higher return?
@@JamesShack it was for the higher returns with them then being re-invested. My Index fund in my S&S ISA hasn't provided any dividend return. In contrast, the two individual companies in my SIPP (Rio Tinto and British Land) have increased by 17% and 15% plus dividends alongside my Artemis high-income fund which is up 6% and provided dividends. I only started investing this time last year so still working it all out! Also trying to learn to control my inner chimp.
See my reply to this video
@@JamesShack turns out I needed to come back and rewatch the video again followed by the one on factor investing. I will definitely look into that for my SIPP and keep my current index funds. I will have a small amount invested in dividend stocks in my ISA to reinvest.
Looking at Ben Felix too. That's him and Pensioncraft thanks to you!
Uhm.. Not convinced here.. No mature investor will ever buy scam Ltd because is paying 12% dividend, it would be as unwise as buying micro cap stock just because size is sold as a factor (small being better). Dividend money should come fromt big stable and boring Companies with less margin to grow that prefer to pay this money out to be still actractive (as per example you provided a downselection of sp500 for example). So yes there is for me room for div investing, my strategy is 50% global div and 50% multifactor etf.. Let's see...
Hi James, Love your videos and am trying to slowly but surely get into investing as a way of making my money work. I watched a video of yours a while back on the vanguard lifestrategy funds as an invest and forget approach which to be honest is what i'm after at the moment and I wondered if you still feel this is a good move? I'm currently doing £100 per month with the intention of holding for 10+ years (Lifestrategy 80%).
Lifestrategy funds have not changed.
Interesting stuff although is 4-6% achievable now. Vanguard are saying cautions at 4% over this decade, and Labour govt in two years will be increasing taxes
Your assuming company b is going to reinvest its profits sensibly to add value to the company and not blow it on bonuses, pay rises and yacht's. Backtested data indicates that all investors should focus on investing in dividend-paying equities to maximize their portfolio’s growth for the long term. Furthermore, equities with long records of consecutive annual dividend hikes tend to deliver large long-term returns with minimal volatility.
As I discuss at the end of the video, dividend investing is a very inefficient way to get exposure to the factors that drive outperformance.