In 2016, I wrote an article about why I like dividends so much as opposed to capital growth. Four years later and I’m largely still of the same opinion; I love dividends. There isn’t really much I can do about short-term price movement; prices go up (capital growth) and prices go down (capital loss). It’s a fact of investing. BUT, over the long term, those companies that grow their net asset values and profits should go up, whereas those that don’t should go down.
That relationship seems fairly obvious, but it also opens a new risk to investors that hold a company for dividends. What if the share price doesn’t go up?
I was listening to a podcast last week where one of the presenters was talking about a friend who had held Lloyd’s shares and had been debating whether to get rid of them or not. They had held them for about ten years and the price had done nothing but decline. Lloyds paid out a healthy dividend but on a capital basis, they were worth a fraction of what they once were. For every bit of good news, the shares seemed to rise a little and then back immediately. The friend asked what they should do.
Interestingly, the presenter said that they refuse to give individual stock advice but to look at what the price had done. If they’d bought £100,000 of Lloyds in 2010, they’d be worth about £60,000 today (excluding dividends, which might take the total up to around £75,000). In effect, by holding Lloyds for ten years, they’d lost £25,000, and that didn’t even take inflation into account.
So what was the point? If you accept that the goal of investing is to make money (or at the very least to grow your wealth with inflation), then investing in this share for the last ten years would have been an absolute waste of time.
Capital Value Matters
This question made me consider my own outlook on investing. When I first started investing, I focused on the dividends a company paid; were they sustainable, growing, and were they of a significant enough size to be attractive as a stream of income?
If you fast forward to my portfolio management style of today, these questions are also counterbalanced with a view of capital value. If a share pays out dividends that are high and growing but the share price consistently falls over time, then I’m essentially converting capital into income for a loss after inflation. As such, I’m also interested in a share’s price movement over time; after a year or two, I expect to see some level of upward movement based on growth in revenue, profit and/or NAV.
If this growth isn’t forthcoming, then I start to question why. It could be market lag; perhaps the sector is out of favour, or it could be that other investors know something I don’t. That the company is actually less attractive than my analysis suggests. I undertake regular review of my holdings, as part of which I ask myself the question “what if you’re wrong?”.
My thoughts on Lloyds have changed since I originally bought them; I no longer feel that they’re ‘ludicrously underpriced’ – as a highly popular retail stock, they’re one of the most analysed and highly covered companies on the FTSE. Instead, I treat them a little like a bond; the price moves in a tight band, the dividends keep rolling in and I can deploy that capital elsewhere. Perhaps over the very long-term, the price will see some upwards movement, but I’m not holding my breath for this.
The question mark for me is now whether to sell out on the recent dividend suspension thanks to the FCA trying to force banks to lend money. As a company with little-to-no growth potential and now no dividend either, I’ve started a timer after which the company will be leaving my portfolio unless the dividend is reinstated.
I think the dividend will be reinstated eventually but I’m wary of ‘falling in love’ with stocks (a little tip; just don’t). The company hasn’t performed for me capital-wise so my reasons for holding it are now pretty much non-existent. This is the first company I’ve invested in where I’ve had to make this decision; but also brings up the question of how long an investor should wait for capital growth.