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Thanks Fleccy and compound, It is tricky i never know what to do for the best when you see the shares are constantly dropping, noticed the shares and funds have already lost value in the last few weeks, so probably left it too late for selling any off now, i did sell off a few funds a few months ago and purchased more dividend shares, some went ex div beginning of April but didn't reach the highs of last year, so held on to them for the dividend, so think i will just hold all the dividend payments on account until i see a good price for reinvesting, we are well overdue for a good year now, was hoping that would have been this year but seems not ?
cheers
"i did sell off a few funds a few months ago and purchased more dividend shares, some went ex div beginning of April but didn't reach the highs of last year, so held on to them for the dividend, so think i will just hold all the dividend payments on account until i see a good price for reinvesting"
Maybe I'm in a minority of one, because I haven't seen any articles with the same opinion, but I see dividend re-investment as a form of Growth. By re-investing dividends, you're growing your shareholding in the company, and grow your reinvested dividend capital gains during price recovery.
The markets are going through a change, with a Trillion Dollars wiped off tech stock valuations over the last week. At some point investors, in utility type stocks with real assets, will reap the benefits of buying while the prices have been low.
You’re right Fleccy - reinvested dividends make a huge difference to total returns. Take BATS as an example - nothing special looking at the price chart, but when you add in reinvested dividends over the last 20 years it’s one of the best performers in the FTSE for total returns and gives US markets a run for their money.
The only potential issue with dividend shares is that with rising interest rates they may suffer from yield decompression.
Take VOD as an example.
At 130p with a 9c div @120 GBP/EUR it offered a 5.77% yield.
If interest rates increase by 1%, then in order to maintain its risk premium the yield would need to increase to 6.77%.
If the dividend remains flat, then the only way the yield will increase is if the price drops, and in this case it would need to drop to 110.78, and if interest rates increase by 2% then the price would need to drop to 97.40.
I can’t see any companies increasing their dividends by enough to maintain the risk free premium. In the case of VOD that would mean a 17.3% increase in the dividend just to cover a 1% increase in interest rates.
I agree that tech is more vulnerable as those valuations use discounted cash flow models whose valuations can change even more dramatically with increases in interest rates. Those models also use expected growth rates, and if those start going down as well it could be a real bloodbath.
Powell made it absolutely clear last week that inflation is their number one priority so they are going to continue to raise rates until they get inflation under control. We aren’t going to see the same rate hikes in the UK as the economy isn’t as hot, but that in itself is another problem as we’re potentially heading to a recession much faster than the US, and recessions are always bad for share prices.
All of this has to run its course. Inflation has to come down, even if that means we have a recession.
The wild card is Russia, as peace in Ukraine could see a collapse in commodity prices which would bring down inflation without rates having to go up as much.
If that doesn’t happen in the next few months things are going to get very grim. Markets are tanking after a pretty good earnings season, but the next one in 2-3 months is going to be worse the effect of the sanctions against Russia will hit the top line of lots of companies (wait for the bloodbath in tech when Meta, Netflix etc report a massive drop in users) and high inflation will increase costs and erode the bottom line.
Add into the mix all major indexes are still way above their long term trend line and it could get very nasty this year with drops of 25-30% from current levels.
As I’ve said before, I wasn’t expecting a return to those trend lines for another 2-3 years but we may see it this year/next year unless something changes.
Keeping things in in the overall global context, VOD has 'survived' quite well probably as a consequence of the dividend.
Problem is at the moment, whatever dip you buy it's likely to suffer a lower one.
Over the long term of course a few pence here and there it doesn't make much difference.
"At 130p with a 9c div @120 GBP/EUR it offered a 5.77% yield.
If interest rates increase by 1%, then in order to maintain its risk premium the yield would need to increase to 6.77%.
If the dividend remains flat, then the only way the yield will increase is if the price drops, and in this case it would need to drop to 110.78, and if interest rates increase by 2% then the price would need to drop to 97.40."
Compound I'm sure you're correct in your maths, without checking, but I look at the dividend income, and make a determination that the companies I invest in are relatively safe. Most retail investors don't look at risk weightings, etc, I just look at the income I can generate from the investment, and decide if there's value in the current price based on historic prices and other factors. I don't have an investment window, so I can hold until the day I die, therefore I will take the dividends on offer until the price is right.
Fleccy - if the dividend income you are getting is sufficient to maintain the lifestyle you want without too much work or stress then you are doing the right thing and ignore most of what I say!
Dan - yes you can gain a statistical edge in the market if you put the hard work in. You need an understanding of macro economic events, sector trends and detailed company information and then blend that with the price action (charts) to try and pin point entry and exit points. It's not one thing - it's all of them together. You also need to realise that the best you can hope for is a statistical edge and you'll never be right all of the time. That's why single shares are hard work as you need to stay on top of it, and also risky as no matter how much work you put in you could be wrong and need to be prepared for that.
I've had a great in terms of returns, but I couldn't keep this up forever as it's time consuming and stressful. I'm waiting to take advantage of one more crash (it will happen whether it's this year or in 3 years time) and then I'm done. After that the money will be invested in funds where I only have to periodically review the strategic allocation and performance of my investments and my own personal and financial plans. I won't make anywhere near the same money, but I will save my sanity and be comfortable with the range of potential outcomes.
Conpound I think what you say makes sense. For the hours one has to put into share research one might as well stack shelves. You can't lose on that.
"After that the money will be invested in funds where I only have to periodically review the strategic allocation and performance of my investments and my own personal and financial plans."
I don't like funds, although things have moved on a lot since we last invested in one, but the charges are excessive in my opinion. Why not build a portfolio of "safe" dividend stocks, in your ISA's, and review them peridically as you would do in a fund?
Depending on the size of your investments, Fund charges can be excessive; For example, my wife and I have £450,000 invested, and Hargreaves Lansdown would charge us £1,625 in fees if the whole amount was in one Fund, but we couldn't do that as we'd have to transfer seperate ISA's and cash out shares in a standard share dealing account. It would be likely we'd either have to give up on the ISA's, or have three seperate funds at the full fee rate of 0.45% up to £250,000 per fund; So the fee's would likely be £2025, instead of our current total admin charge of £72 (£36 per account). All this is assuming we could transfer the ISA's, and keep the current tax free benefits.
Over a period of time, we do plan to Bed & ISA the shares in my wife's standard share dealing account, leading up to her receiving a state pension. I don't trust Fund Managers, and therefore would rather have full control over our investments, and decide the balance of how much dividends we reinvest, or take in income, as they become available. Because I only trade occasionaly, and don't mind sitting on a paper loss, I find it relatively stress free.
It's indeed true that charges especially in HL are excessive.
I've made more in funds that individual stocks on which I am deeply in the red on every one except Shell.
However, what gets my goat with the funds is that the managers knew the market was massively overvalued but made no moves to cash in. So like most PIs they've sat and watched a 30-40% decline since last Sept. Likewise I knew I should have sold last autumn but didn't FFS.
Hi Robina. I hope you don't mind me saying, but you do come across as someone who thinks whatever you do, the opposite is bound to happen? I would suggest therefore that the stock market is probably not right for you? Just a thought?!
Robina, Vanguard Lifestategy funds are worth a look IMO. They have very low charges & they are a buy & forget, I buy direct through Vanguard in ISA's in order to keep charges even lower, 0.22% I think.
I would advise drip feeding money in & buying some of their 60%, 80% & 100% funds, dependant on your appetite to risk of course.
They have done us very well indeed over the years, not so good recently but no worse than any other fund or share.
Then usual doing your own research caveat applies.
Robina, I used to have 11 funds with hl, have recently sold off 4 and bought more dividend stocks instead, they used to be very good, making more profit than the shares until a few months ago when the u/s tech stocks went out of fashion, since then i have been watching the profits draining away from them, it seems like the fund managers have done nothing to rebalance the stocks to stop this happening, makes you wonder what we have been paying the management charges , for, think i may be saying goodbye to a couple more
Funds always have an investment objective and which states where and how the money will be invested and the asset allocation. That could be 100% equities, bonds, money market, property, alternatives or a mixture. They have to stick to that objective and asset allocation so fund managers will never sell out and sit on a pile of cash as that would be in breach of that objective and leave them wide open to successful claims.
If you use a discretionary fund manager you’ll get the same - they agree a risk profile and asset allocation and will stick to it. Financial advisors will do the same, although their job should be far more wide ranging to include detailed tax and cash flow planning which should boost overall returns and give some clarity, although the ones that don’t do that are a waste of money.
That approach will never be as profitable as timing the markets correctly, but that’s very hard to do and most people would be better off sticking to a long term diversified investment strategy.
I use a spreadbetting account for my trading funds as the combination of tax free returns, charges, variety of instruments to trade, options to go long or short and leverage make it a significantly better choice for me. It is a massive step up in complexity and potential risk and you need to maintain your own calculations regarding position size, leverage, risks, costs, yield etc as none of the platforms give you all the information you need. If you don’t do all of that then the odds are you will get burned through a combination of higher charges and using way too much leverage. Around 70% of people lose money spreadbetting, as opposed to virtually 0% of people who invest for the long term in funds. To be one of the 30% over the long term requires a lot of work, discipline and risk management. I withdrew my original capital a few months ago and now take regular withdrawals as part of my risk management process. It also allows me to reduce my taxable income and increase pension contributions (which go into funds) so the tax savings will also significantly boost total returns for me. Too much work and stress to do it forever though !