Should Investors Ditch Dividends?

The
presence
of
that
word
alone
meant
investors
saw
the
Woodford
Equity
Income
fund
as
safe
and
defensive,
but
the
manager
had
other
ideas.
As
part
of
our
income
special
report
week,
I’m
unpacking
our
obsession
with
getting
paid
for
owning
a
financial
instrument
and
why
it
can
lead
investors
astray.

As
investors,
we
grow
up
knowing
time
favours
those
who
continue
reinvest
their
dividends
–
and
the
arithmetic
is
impossible
to
argue
with.
You
can
accumulate
significant
sums
over
multi-decade
investment
horizons
if
you
buy
and
hold
–

I
wrote
about
the
importance
of
longevity
in
a
column
when
Queen
Elizabeth
died
in
2022.

Because
of
their
pivotal
role
in
creating
inflation-beating
wealth,
dividends
are
revered.
Warren
Buffett
likes
them
too,
as
reflected
in
his
large
stake
in
Coca-Cola.
My
colleague
Daniel
Noonan,
in
his
piece

For
Dividend
Investors,
Time
Pays,
discusses
this
stock
in
relation
to
its
unbroken
dividend
record:

“Dividends
are
by
no
means
a
magical
source
of
returns,
but
they
do
provide
an
edge
(or
slight
advantage)
in
a
portfolio.
By
extension,
slight
edges
can
compound
over
many
decades
and
end
up
feeling
like
magic,”
he
said.

Seven
Deadling
Sins
of
Investing

But
those
focused
only
on
dividends
can
easily
commit
some
of
the
seven
deadly
sins
of
investing:

•
Rear-view
mirror
investing:
a
stock
with
a
five-year
track
record
of
raising
dividends
may
seem
safer,
but
who
knows?

• Overpaying
for
stocks:
income
stocks
often
trade
at
unjustified
premiums
over
their
peers;

• Chasing
yields:
high
inflation
means
investors
will
focus
more
on
headline
numbers
rather
than
business
fundamentals;

• Refusing
to
sell
underperforming
investments:
good
dividends
can
mask
a
fundamentally
weak
business;

• Failure
to
diversify:
a
portfolio
of
reliable
income
stocks
may
be
riskier
than
you
think;

• Checking
your
portfolio
too
much
ties
you
to
the
quarterly
news
cycle;

• Home
bias:
an
overseas
income
portfolio
may
be
much
more
effective
than
a
domestic
one,
but
you
feel
more
comfortable
sticking
with
what
you
know.

Do
Investors
Have
the
Patience
for
Dividends?

It’s
clear
modern
consumers
of
all
ages
are
more
time-poor
and
easily
distracted
than
ever.
The
short
term
is
certainly
noisier
and
more
demanding
than
ever,
so
why
should
investing
not
reflect
this
change?

It
would
be
easy
to
conclude
people
aged
50
and
over
are
sensible,
cautious,
and
able
to
wait
patiently
for
quarterly
or
annual
dividends
to
hit
their
accounts,
while
20-year-olds
are
trading
crypto
watching
TikTok
videos.

Trading
platforms
suggest
that

hot
tech
stocks
such
as
Nvidia
are
the
most
bought
and
sold.

These
regular
surveys
reveal
something
about
investor
psychology:
many
people
want
to
make
short-term
gains
and
maybe
have
some
fun
(as
the
GameStop
phenomenon
taught
us;
the
meme
stocks
made
a
brief
comeback
in
May
2024).
The
mainstream
financial
services
industry
may
not
like
this.
And
governments
in
the
Western
world
won’t
either
because
they
want
you
to
build
a
nest
egg.

In

The
Intelligent
Investor,
Benjamin
Graham
asked
readers
to
ask
themselves
honestly
whether
they
are
investors
(good)
or
speculators
(bad).
In
the
modern
world
you
can
be
both.
Let
the
asset
managers
and
pension
funds
focus
on
“boring”
long-term
investing
and
harvesting
dividends
to
boost
total
returns.
Elsewhere,
investors
are
embracing
risk
and
reward
and
ditching
the
conservative
mindset.
In
this
sense,
long-term
dividend
investing
could
become
another
relic
of
the
analogue
age
like
print
newspapers
and
VHS
films.

Last
time

I
wrote
an
anti-income
piece
in
November
2021
I
cited
tech,
crypto
and
gold
as
examples
of
high-performing
investments
that
don’t
pay
an
income.
If
you’d
bought
in
to
two
of
these
asset
classes
at
this
point,
you
would
have
been
hammered
in
2022
during
the
crypto
winter
and
tech
meltdown.
But
if
you’d
been
brave/foolish
enough
to
buy
Bitcoin
at
the
November
2022
low,
you
would
have
made
spectacular
gains
since:
the
price
has
gone
from
$16,000
to
nearly
$70,000
in
that
period,
helped
by
the
introduction
of
Bitcoin
ETFs
in
the
US.

In
terms
of
tech,
shares
in
Meta
Platforms
(META)
cratered
in
2022
but
are
up
substantially
sinced
–
and

the
company
is
paying
its
first
dividend
in
2024.
As
for
gold,
the
original
anti-income
portfolio
stalwart,
it
has
hit
record
highs
in
2024
amid
fears
over
persistent
inflation.

These
sorts
of
gains
depend
on
luck,
courage
and
exceptional
market
timing
–
attributes
that
most
retail
investors
don’t
possess
(myself
included).
But
this
won’t
stop
some
people
shunning
the
more
cautious
approach,
especially
with
inflation
eating
into
take-home
pay.

To
these
anti-income
high
achievers,
I
could
add
a
long
list
of
alternative
assets
such
as
art,
jewellery,
guitars,
whisky,
wine,
handbags,
collectible
books
and
comics,
as
well
as
classic
cars.
They
don’t
pay
an
income
but
are
fun
to
own
and
have
a
long-term
track
record.

Breaking
the
Contract

What
about
those
who
depend
on
dividends
to
supplement
their
retirement
income?
“Why
Dividends
Matter”
is
a
research
paper
by
Paul
Shultz
at
the
University
of
Notre
Dame.

Shultz
says
that
“firms
use
their
dividend
policy
to
engage
in
an
implicit
contract
with
shareholders”.
He
continues:
“when
a
firm
does
cut
dividends,
it
is
very
bad
news.
The
firm
is
announcing
that
it
can

no
longer
honour
its
agreement
with
shareholders”.
(My
italics)

This
betrayal
of
trust
happens
more
often
than
investors
would
think.
2020
was
admittedly
an
outlier
year,
but
the
list
of
companies
cancelling
or
cutting
dividends
bulged.

In
the
UK
this
cost
investors
around
£50
billion,
or
roughly
half
of
the
total
payouts
received
in
2020.

Once
that
sacred
contract
has
been
broken,
should
income
investors
trust
companies
not
to
do
this
again
in
another
crisis?
From
Trump’s
victory
to
Covid-19,
investors
should
be
continually
alert
to
“unexpected”
events
that
cause
dislocations
for
listed
companies.
Sod’s
law
dictates
that
something
will
always
let
you
down
at
precisely
the
point
you
need
it!

Shultz
also
touches
on
the
idea
that
paying
dividends
reflects
a
company’s
capital
discipline,
its
respect
for
small
investors,
and
its
prudence.

“Paying
dividends
takes
cash
out
of
the
firm
and
prevents
managers
from
using
it
for
projects
of
dubious
value,”
he
says.

This
argument
is
sound.
M&A
famously
enriches
intermediaries
rather
than
minority
shareholders
–
but
still
segregates
payers
(good,
prudent)
from
hoarders
and
spendthrifts.

Mining
companies
have
been
forced
to
pay
out
special
dividends
rather
than
embark
on
new
projects
–
this
is
now
seen
as
the
right
approach,
but
who
knows
what
the
long-term
effect
will
be?
If
we
can’t
trust
companies
to
use
their
money
sensibly,
why
should
we
invest
in
them
at
all?

Of
course,
Apple
is
the
ultimate
outlier
here:
it
has
$57
billion
in
cash,
but
has
just
declared
a
paltry
$0.24
dividend,
meaning
it
yields
around
0.55%.
An
income
mindset
would
steer
you
away
from
Apple
towards
regulated
utilities
that
increase
their
dividends
every
year.
Apple
is
“sitting
on
cash”
but
its
20-year
share
price
record
speaks
for
itself.

Home
Bias,
UK
Style

There
are
cultural
factors
at
work
too.
Some
countries
are
more
“dividend-y”
than
others.

Morningstar’s
Global
Investor
Portfolio
Study
put
this
neatly:
“Building
a
portfolio
that
provides
natural
income
to
live
off
is
seen
by
many
as
a
priority.
The
UK
equity
market,
with
its
many
large
dividend
names,
provides
a
natural
target
market
for
such
investors.”

As
such,
it’s
hard-wired
into
the
UK
investor
mindset
to
“think
dividend”
–
and
that
has
been
rewarded.
But
has
that
held
stifled
innovation
and
risk
taking?
UK
companies
have
tended
to
focus
more
on
cash
generation
than
growth
and
that’s
now
reflected
in
our
biggest
companies
(pharma,
banks
and
oil).
Indeed,
our
growth
success
stories
are
thin
on
the
ground,
as
Liz
Truss
was
only
too
keen
to
point
out
last
year.

Generational
factors
are
also
at
work:
the
UK’s
income-dependent
older
investors
have
been
allowed
to
set
the
agenda.
If
pensioners
need
extra
income,
it
might
be
worth
asking
“why?”

The
answer
is
obvious.
Apart
from
for
the
fortunate
few,
retirement
here
is
actually
pretty
precarious.
At
around
£10,000
a
year,
the
UK’s
state
pension
is
lower
than
many
G7
countries
and
we
retire
later
than
other
countries
in
Europe.
A
lot
of
potential
productive
capital
that
could
be
used
to
build
nest
eggs
also
tends
to
be
sucked
into
the
hyperactive
residential
property
market.

Where
once
investors
were
taught
the
acronym
“TINA”
(“there
is
no
alternative”
to
stocks
and
bonds),
then,
that
agenda
has
come
unstuck
in
the
zero
and
negative
bond
yield
era.
Fixed
income
and
cash
assets
are
now
luring
savers
back
in
their
droves.

Bonds
have
the
benefit
of
capital
preservation
and
income
predictability,
while
cash
offers
a
level
of
safety
that
equity
income
really
can’t
match.
And,
when
things
go
wrong,
equity
investors
also
find
themselves
at
the
bottom
of
the
pile
of
creditors.
Whether
it’s
Woodford
or
something
else
cataclysmic,
a
financial
plan
is
anything
but
if
it
fails
to
account
for
worst-case
scenarios.

Perhaps
dividends
aren’t
as
safe
as
they
sometimes
look.

SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk