do many of you average down on stocks ?, page-31

Yes, at the end of 12 months, you would have a further 700 shares participating in dividends. But, in order to get to that position, you would also have forfeited 2x Dividend Payments on the 1,000 shares.

Chances are, if a stock, previously trading @$3.00, is now trading @$1.00, the likely dividend payment @$1.00 will also be much lower (in absolutes terms, if not in yield) than it was @$3.00.

For example, Telstra has in the course of the last 12 months, paid 22FF. If maintained at this level in 2003, Telstra's dividend yield (on a current price of $4.35) would be ~5%.

If we then assumed that Telstra's share price dropped to $3.00, but that the dividend was still maintained at 22FF, then the dividend yield would now be 7.3%.

So, @$3.00, Telstra is paying 22c per share (for argument sake), for a dividend yield of 7.3% (assuming fully franked).

Leaving aside tax considerations for now (ie: other than an assumed 30% corporate tax rate applicable to Telstra), the effective dividend benefit to me is 31.4c.

So, @$3.00, my 1,000 shares are now worth $3220FF, or $3314TXE (tax effected).

Holding onto those shares for 12 months would mean that their relative worth has reduced to $1314, for an overall loss on value of $1686 (assuming no time decay impact).

But, if I was then stopped out @$2.70, I would have also lost out on the dividend benefit, whilst gaining on the preservation of $1700 in capital, less ~$60 in brokerage (2x trades, on-line).

If subsequent to all this, I held 2700 Telstra shares, worth $1.00 each, but still yielding 7.3%, then my dividend payout would have been slashed to 7.3FF (or 10.43TXE).

The new dividend to me is now worth $282TXE, whereas the old dividend was worth $314TXE.

I now have, what appears to be, a permanent difference of $32 between the 2 dividend payment streams. Not enough overall to make up for the erosion in capital value over time (ie: in making up the $1640), but still enough to suggest a permanent time decay impact of ~2% per annum.

So, in order to now buy 1700 more shares in Telstra than I previously held, it has cost me:
1)
stop loss of $300;
2)
brokerage of $60;
3)
forgone dividends of $314; and
3)
dividend erosion of $32 per annum.

I may have saved $1700 in capital value in the process, but the cost of me doing >$700 in the first year (or >$400, excluding the stop loss impact) and more than this in the 2nd and subsequent years.

The dividend decay impact, however, will be worse than this if the dividend yield (pre- or tax effected) falls below the previously held /maintained levels.

You cannot, therefore, assume that:
1)
dividend yields will be maintained as they were once the share price has fallen (for whatever reason);
2)
the dividend imputation benefit will be as strong as what it was previously; or
3)
having more shares than previously will immediately return to you more dividends (ie: as a value proposition) than what was previously the case.

In the final analysis, you need to carefully overlay the capital value considerations of your purchase /exit decisions, with those of your income /dividend profile, and of your own tax position.

In doing this, nothing will ever turn out as it may otherwise seem, least of all making a killing for dividend yield purposes.