- My Safe Yields screens have produced a 200 per cent total return over 10 years compared with 87 per cent from the FTSE All-Share
- Why dividends are irrelevant to returns but should still matter to investors
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What’s the point of dividend yield? Many of the perceived attractions of dividends are illusory. When a dividend is paid it is simply the transfer of cash from one party to another. Cash goes from the company's bank account to the shareholder’s bank account. The loss of value to the company nets out the cash gain to the shareholder. There is no clearer illustration of this than the fact shares fall by an amount equivalent to the dividend being paid once shareholders’ rights to the payment become binding.
Many investors do not see things this way, though. There is evidence that we tend to regard dividend income as something separate to share price returns. This causes us to misunderstand how we are being rewarded for holding an investment. It’s a phenomenon psychologists refer to as the “free-dividend fallacy”. In reality, both dividends and share price movements contribute to total returns and it is total returns that determine the growth in one’s wealth regardless of what makes the biggest contribution.