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.
- Forums
- ASX - General
- do many of you average down on stocks ?
do many of you average down on stocks ?, page-31
-
- There are more pages in this discussion • 12 more messages in this thread...
You’re viewing a single post only. To view the entire thread just sign in or Join Now (FREE)
Featured News
Featured News
The Watchlist
LU7
LITHIUM UNIVERSE LIMITED
Alex Hanly, CEO
Alex Hanly
CEO
SPONSORED BY The Market Online