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Who are the two Ms?
An email from a reader says...
Hi AK,
I followed you and bought XXX because I want to have passive income.
The price is now down.
I don't blame you.
I made the decision to follow you.
However, I worried and I got more worried after talking to someone in a forum.
He said I am just taking back my own money when I get the dividend now.
Can you talk to yourself on this? Thank you.
YLF
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| It is a journey. |
AK says...
Hi YLF,
I gave some thought on how to answer your question.
Hmmm, let me tell you a story of two investors, A and B.
A and B decided to invest in XXX because they liked the business and XXX also paid a good dividend.
A few months later, XXX's stock declined in price.
The business had not changed and, in all likelihood, it would still pay the same dividend.
A said that he had lost money and that when XXX paid him dividend, it was like taking back his own money.
When he got the chance to break even, he sold and was happy.
B said that a lower stock price meant that he could increase his investment in XXX for a higher dividend yield because nothing else had changed.
He was quite happy and bought more of XXX's stock.
As XXX's business was still chugging along nicely over time, B continued to receive meaningful dividends year after year even as the stock price went up and down over time.
B was quite happy.
A became sad again.
Best wishes,
AK
There might be cases when a dividend is a return of capital.
We can tell when we look at the financial statements if that is the case.
In such an instance, we could say that we would be taking back our own money when paid the dividend.
However, to say that we are taking back our own money when we receive dividend from a company because its stock price has declined from our entry price is either mischievous (if the person is in the know) or misguided (if the person is not in the know).
The two Ms revealed.
Prices go down and prices go up.
It is normal.
If we are investing in a good business with money we do not need for anything else and if the business pays regular dividends, we can hold forever.
If we can hold forever, short term movement in prices doesn't mean anything.
As investors, we should have the stomach for some volatility or else the stock market is a bad place for our money.
"Our favourite holding period is forever."
Warren Buffett
Related post:
1. Does AK have anything uplifting to say?
2. "Patience is sometimes the hardest part..."
3. How to save 100% of your pay?
Bloggy Award
19 comments:
Well said! It is always good to have a plan on what you intend to get out from the investment. I am a strong believer of income investing and when prices fall, market will not work in the favour of the retail investors. But what is more important is to understand the business is viable and can survive for the next 5 years. If one thinks cannot, one has to rationalise why not and perhaps post them on forums to have some sensing. Two cents worth of considerations.
Hi Gary,
Yes, our motivations and our strategy must match.
Don't confuse ourselves and don't let others confuse us. -.-"
It has been quiet a hot topics and few articles been written by some bloggers in regards to whether dividend shud be clarified as " passive income " or just returned on capital with right pocket to left pocket. Regardless of how the price fluctuate prior or after CD / XD ,,, and is matters of accounting entry but sometimes price may fluctuate contrary to CD or XD effect due to market conditions,,We shud look at the dividend in more broader and long term prospective and is more meaningful to analyze the sustainability and capability of the company in generating the cash flow ,,,then trying to define whether such income is passive or not ,,, Also comparing the dividend from equity with rental or interest from Bond or FD is also meaningless as all these asset have different characteristics and each risk n reward of these asset is also very much different. We wud better look at each underlying asset differently. Regardless of how we call the income from each investment vehicle,be it equity , bond ,FD or property ,,,if the income cud suits to your investment purposes,,it shud be find on whatever it been called ,,, be it "white cat or black cat ,if it cud catch the mice ,,then is good cat " ,,,don't u think so ? Just two cents of comments,,cheers !
Hi AK,
I guess many new investors just jumped onto the income investing bandwagon without doing due diligence and analysis on their own. They did not have a clear understanding of how exactly their vested companies work.
So, when the markets become volatile, they tend to panic and doubt their judgement. They assume that stock prices will only go up.
IMO, the MOE really should weave in some form of basic financial literacy courses in schools to get our youngsters ready.
Sighz.....
Hi STE,
I like cats in all different colors as long as they fend off disease carrying rodents. ;)
Everyone would have a perspective on the subject (be it cats or passive income) and I am just sharing mine here. Some might decide that it makes sense and some might wave it away. LOL. ;p
At the end of the day, I just hope that people will put in some effort and think for themselves and be logical. Don't depend on other people and rely on what they say. There are plenty of fallacies floating out there. -.-"
Hi DK,
Yup, exactly what I shared with STE. Of course, I understand that people can be lazy. Alamak, AK is a very lazy guy, OK? -.-"
However, like everything in life, moderation is key. Can be lazy but in moderation. LOL. ;p
Hi AK:)
In my investing journey, I have impatiently given up 'trophy stocks' when I mistook 'return on capital' as 'return of capital'.
Likewise, I have held on to disappointing ones mistaking that temporal 'return of capital' as 'return on capital'.
BullytheBear wrote a good piece on this topic too. A 'return of capital' (in the form of dividends) to the investor can be a good thing if the investor can better use the funds THAN the company.
My 2 cents.
Cheers.
Hi AK ! Bravo ! Yap ,, the " healthy cat is more important than their colors " ,, so long as the company we invested didn't go " kapuk" which is more relevant,,,in such a volatile market ,, it is easy for one to loss their confidence and forget the " long term perspective " hence
became irrational in our decision making.. Even for those invested in ETF ,, one will be very " nervous and upset " to see their investment dropped by approx 20% in recent market turmoil,,,, so the key here is " long term ". When we were convinced by people to invest in ETF ... not to forget that what they shown us is the return of ETF on very long holding period ,, said 20-30 years of investment cycle to hv return of around 8-9% of market return (beta ),,,
Investment is a very long journey ,,,one shud hv the confidence of their own investment or strategy so long as it is build on right fundamental and value investment strategy,,,not to losing sight on " long term " due to short term volatility of the market ,,, cheers !! 😃😃✌️✌
Hi dorshii,
Very well said. I can identify with your experience.
Indeed, if a company is sitting on too much cash, it could be a good idea to return some of it to shareholders who might put it to better use.
Hi STE,
Volatility could provide opportunities for both traders and investors. Seasoned market participants know this.
We have to train ourselves to react to volatility in a rational manner. How we react to volatility should depend on our motivations and not our emotions. ;p
Hi AK,
This reminds me of what SMOL says about trust but verify. I am glad she / he has the trust to come to u to verify again.
At least now she understands a bit more about the dividend investing ...
If she doesn't even trust, then she need to do the hard work of figuring everything out herself ...
I not sure if the confusion in XD / CD Thou...
Just like teaching, when u find it hard to explain, just use jargon to confuse... LOL.
I am glad u are gentle enough to explain. I think we should stop "blaming" people for not doing homework la. We need to know how and what to do for homework at te first place.
The important message I have is (Kay Poh )
Think of the longer term earning power ( if cyclical then av. Power ) and the correlated fair price in relation to this earning and its yield.
Buy and watch the fundementals. Forget the short term price at least u want to take advantage of me market to earn some trading pocket money...
Hi Mike,
I rather readers don't trust me. They should seek to verify through their own research. Maybe, after researching, come and share with me and give me a chance to trust them. ;p
Whether my reply has done a good job to clear the fog is hard to say. I can only hope. :)
Lol, AK,
Better to trust a typical guy than a barber when asking whether to get a haircut.
The bloggersphere I felt, is reaching only to people who are already in the genre of investing.
U gave yourself too little credit, think u are the few among us that have reach beyond our community.
Continue to "educate", that's your roots are!! LOL
Hi Mike,
Ask me whether need a haircut, OK. Don't ask me to give a haircut. ;p
Actually, you hit the nail on the head.
Obviously, I didn't always think like that because I really started my blog out of boredom and curiosity. I didn't start my blog with the intention to educate.
However, once I saw the good that my blog could do, the feeling that my blog was probably preaching to only the converted bothered me. What is equally important is to reach out to the rest of the population.
This is surely still work in progress. Thanks for the encouragement. :)
Before I say anything else, I want to remind myself:
There are many roads to Rome and Rome was also not built in a day.
There is a camp that insists that dividends are not real income.
When people say something like this, it is important for us to see what their background is, what they do for a living and what their methods (and motivations) are.
There is no one size fits all kung fu. Not everyone is cut out to be a trader, for example.
So, if we want to be income investors, I would say to be mindful and ignore the two Ms. ;)
I recommended a distraught reader to read this blog post when she sent me this message:
Hi AK,
It has been quite sometimes since I msg u. I have a question which seems simple but yet "contradictory" with my emotions and I really need your advice on this.
Let's use an example:
If this year ie. Jan-Dec 2016, the total dividend achieved is $40K. There are stocks which I have bought in year 2015 are losing big and most probably there will be a capital loss of $37K in total.
Am I correct if I use $40K dividend to cover capital loss $37K (to fill in the holes) which means I did not lose my capital (or rather my own hard earned money) and my capital is recovered?
But of course 2016 dividend will only be left with $3K...which is the nett dividend income.
To me, capital are my hard earned money and dividend is an extra bonus..
Is the above correct?
This qn has been lingering in my mind for so many weeks which I think I need yr advice badly and i really have to put this behind me and brace forward and be more careful and cautious on the upcoming investment.
This is really a painful and expensive lesson which my hard earned money has went down the drain.
Basically I m trying to console myself telling myself that I did not lose any of my hard earned money by using dividend to cover it. The only thing is my profit has lessen but at least I am still gaining profits and not losing any money.
Am I correct to say that? Sorry to bother u but seriously I think I need yr advice to get myself out of this "internal debate" within myself
They are all investing in a good income generating company but why do some investors stay calm while others panic? ;)
As the stock market gets hammered, remind ourselves that this is a marathon and not a sprint.
Reader says...
Another decent return for you in the second quarter of 2018. This goes to show that patience and continuous investment are the way to achieving FI. Hence, option to RE is anytime at one's preference.
AK says...
Investing for income might sound like a boring avenue to eventual financial freedom but for those who have the will and ability, it works. ;)
Prices go down and prices go up.
If we can hold forever, short term movement in prices doesn't mean anything.
As investors, we should have the stomach for some volatility or else the stock market is a bad place for our money.
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