You what?

That peculiar characteristic of Britain’s investment environment is its obsession with income.

This obsession starts with individuals and organisations such as pension funds and charities – the clients of fund management firms – and transmits itself to those firms, which are for the most part the actual owners of the shares of British businesses.

Part of the firms’ response is to launch large numbers of income funds, which then need to find large numbers of firms that pay good dividends in which to invest their clients’ money.

The result is that many of this country’s listed companies feel pressure from their investors to use a lot of their profits to pay dividends. If they know that this is what their suppliers of capital want, they will be inclined to give it to them.

People doing what peeps want is a bad idea? Eh?

The largest portion of national capital is in fact those pensions. Which exist to provide an income for pensioners. The national capital producing an income is thus a bad idea?


9 thoughts on “You what?”

  1. If they weren’t income focused they’d be growth focused. And hence concentrating wealth in the hands of those already with it.

    You can’t win with these folks.

  2. Gosh! People are obsessed with income. Could that be why workers demand to be paid when they invest their capital (Human) in the work place and want interest on the money they deposit in a bank?

    Earth calling, Earth calling…

  3. Because the value (market price) of a share is the present value of all expected future dividends plus the present value of any expected sale or winding up. So if someone is going to buy the shares they want to receive the dividends.

  4. People doing what peeps want is a bad idea?

    Sometimes. Pretend businesses like the UK water companies being an example. Government mandated captive markets in essential services should not be subject to the usual market ownership squabble; certain types of businesses should be prevented from owning them.

  5. From the point of view of getting money the difference isn’t great. You don’t expect much capital upside from an income portfolio. If you want income from a low/no dividend growth portfolio you can sell some shares while keeping the money value the same. So basically no difference.

    The difference arises from the tax treatment. Dividends attract income tax, share sales attract capital gains tax. The former are higher than the latter. So whoever wrote the tripe above has his arse in his elbow.

  6. Paying dividends is just a capital allocation issue for a company. An investor has to decide whether a particular company is allocating capital efficiently – whether by re-investing profits, buying back shares or paying divvis. The concept of an income fund is simply paying someone to identify companies with a reliable dividend payout and prospects of growth sufficient to fuel those payouts. You really need to look at the total return a company makes rather than focus on the divvy. A company paying high divvis without growing is likely to be a bad investment in the long term

  7. The demand for water is growing pretty slowly as the impact of technological improvements increasing efficiency offsets the impact of population growth.
    So why should water companies need to allocate most of their profits to investment rather than dividends?
    The only good answer is that the impact of inflation causes the depreciation charge to be understated and a significant proportion of the stated profit is fictitious. In a non-inflationary non-growth environment investment would, over a period of years, equal the depreciation charge and all the profits could be paid out in dividends without increasing debt. BUT Questor says that debt is increasing while most (not more than all) of profits are paid out as dividends.
    SO some finance director has twigged that if he borrows (without inflation-linking his debt) to finance investment the impact of inflation on the depreciation charge will be matched by its impact on the debt.
    I wonder whether the FD of Severn Trent might know a little more about his business than a journalist hiding behind a pseudonym …

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