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Saturday, 12 January 2013

The power of dividends and dividend growth

I was reading and listening with interest to the RPI/CPI/RPIJ debate/publicity that followed the announcement of the decision to maintain the formula effect in the RPI computation. It reminded me that CPI had gradually overtaken RPI as the main inflation measure watched and monitored by the media. This is despite the fact that to many RPI was the index that impacted their pension increase, and various other investments,e.g. Index Linked National Savings, price increases on utilities, train fares, excise duty increases, etc.

So what's that got to do with dividends and dividend growth?

Well how often do we hear from the media, and investment professionals, about the FTSE100 Index level? It peaked in September 1999 at 6,900+ and when will we see that level again?

Well my point is why do we use that index as a reference when it excludes the reinvestment of dividends?

How many trustees and individuals (and indeed investment consultants) realised that with dividends reinvested and through dividend growth the total return index peaked very recently and previously in 2007? (see graph)

Should we not relegate the FTSE100 index to the 2nd division and instead watch the dividend reinvested index (or whatever it is called)? And will the potential bond bubble burst mean a reassessment of equity income as a match for investing for pension funds? 

Dividends over the long term do tend to increase ahead of inflation so aren't they a good match for rising income needs? The answer is YES, but no one can guarantee a match with defined promises made years ago, and because of the visibility associated with mark to market accounting, bonds are still in demand, especially index linked (to RPI) bonds. This despite yields of less than 2% on 10 year fixed interest government bonds with an almost certain real terms capital loss when the bond matures. ILGs have yielded negative in some instances based on the market price!

It's a bit like a buy to let investor totally ignoring the rent received and just watching the sale price expectation or Halifax Index of property prices.

Why is this so important? It's a fact that trustees are often not as savvy on investment issues as they should be and even financial journalists and investment consultants don't seem to take enough notice of the power of dividends for long term investors. Just ask Warren Buffet, family offices and wealth managers what they think of dividends!

Stephen Tiley
12 January 2013
(This article can be copied if the source is acknowledged)

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