Hobson: Don't Forget Dividends When You're Losing Share Gains

THE WEEK: Rodney Hobson has lost all share price gains amassed since 2009 in the recent volatility, but has collected thousands of pounds in dividends in that time

Rodney Hobson 12 February, 2016 | 12:03PM
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It’s been pretty bloody on the floors of stock markets around the world, as if you hadn’t noticed. I doubt if it’s all over yet.

The end of the world is not nigh. It just seems to be at times

What was particularly disturbing was that the FTSE 100 crashed down through the 5,800 point level from which it had bounced back upwards on several occasions in the past few months. That in my view meant we had to find support at 5,400 points, otherwise the abyss beckoned with 4,800 points at the bottom.

The Footsie does seem to have found a floor, albeit possibly a temporary one, above 5,400 but any bounce back at this stage has to be viewed with suspicion. The drops in share prices have been so severe that bargain hunters were bound to come in with a vengeance at some point. In the current mood of high nervousness, any confidence could evaporate with frightening speed.

However, it is worth reiterating two points.

Firstly, unless you are looking for a quick buck – in which case you are not a genuine investor – then you will hold shares for the long term. You will need to go through stern tests of nerves along the way. I have seen virtually all my share price gains amassed since 2009 wiped out but it is important to remember that I have not lost money. The shares are still worth what I paid for them.

Secondly, that brings us to the real reason for investing in shares. I have collected thousands of pounds in dividends in that time, money that cannot be taken away from me. And all I have done over the past seven years is invest my ISA allowance.

As soon as we reach April I shall be looking to invest my allowance for the next financial year. The sooner I am in, the sooner I start collecting more dividends.

The slowdown in China will continue to take its toll but the potential for India to take up the slack has not yet been factored in. India is in much the same position as China was a few years ago with a similar size of population suffering from a depressed standard of living. It could go through the same transformation.

It is already clear that Fed chair Janet Yellen regrets getting bounced by political and media pressure into raising US interest rates prematurely. The US economy remains vulnerable. However, there are correspondingly better noises coming out of Europe, where the combined economies of the Eurozone continue to show modest growth.

The end of the world is not nigh. It just seems to be at times.

Rio Stinko

No board of directors likes to slash the dividend, hence the euphemism that the dividend is ‘rebased’ rather than reduced. At least that does hold out the hope of a return to a progressive dividend policy, albeit from a lower level.

Now mining group Rio Tinto (RIO) has decided to introduce a ‘variable’ dividend. Despite the fact that the 2015 pay-out is maintained at 215 US cents, there is no hiding the fact that the dividend could be halved this year. With commodity prices showing no signs of serious recovery, you can bet your life it will be reduced.

In fact, it’s worse than that. At least with a rebased dividend you can be reasonably optimistic that the worst is over. With a variable dividend that depends on how well the company does year by year, we could see several reductions in a row.

Rio Tinto – and its dividend – will eventually recover along with the commodities markets. It is possible to make a case for buying now and waiting patiently for the cycle to turn. However, I cannot rate the shares as more than a hold – and I do hold Rio Tinto shares, having bought in prematurely to catch the bottom. I will have to be patient for longer than I had hoped.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not necessarily the views of Morningstar UK.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rio Tinto PLC5,264.00 GBX-3.54Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.