Dividend Yield Play turn out to be a disaster (as usual, nothing new under the sun)

Today’s Sunday Times talk about Business investment trust in which it was found to be attractive to investors looking for dividends. I am always very fascinated by the idea of high dividend yield play. I know of even financial advisers advising clients to do that without knowing what they are talking about. There was this person who was quoted as saying, “The yield was the main factor,” said 27-year-old civil servant Chong Chun Siang, who invested in XXX in the middle of 2010. “The yield back then for XXX was around 11 per cent. It was a big draw factor.”

I decided to examine further how XXX has been doing. The following are the historical dividends of XXX and its corresponding S$ equivalent (source: SGX):

The total dividend calculated from 30 July 2010 to 2 May 2012 was $0.0753755. The share prices on 29 July 2010 and 15 June 2012 were S$0.42 and S$0.17 respectively. The total return from 29 July 2010 to 15 June 2012 was (0.17 – 0.42 +  0.0753755)/0.42 = -41.6%.

How did the STI ETF perform during this period? STI ETF also gives out dividends as shown below (source: SGX):

The share prices of the STI ETF on 29 July 2010 and 15 June 2012 were 3.03 and 2.87 respectively. The total return over this period was (2.87 - 3.03 + 0.1950)/3.03= 1.16%.

As it can be observed that the market was basically flat during this period but the XXX was down by -41.6% even taking dividends into account. The graphical picture just comparing prices of both are shown below:

Click to enlarge image

My purpose of using this as an example is to show that total return approach is the first most important consideration when investing. If you put dividends as the first priority, you could end up in this sad state. In fact, this has happened to most of my clients who invested using dividends yield approach (but not under my recommendation – usually they do that after reading some blogs) as the first priority resulting in a very sad state of affair. But that is not the saddest. The saddest part is that most investors did not know what wrong they have done as they turned a blind eye to the huge lost in capital. They will rationale that as long as they do not sell the shares, their capital lost is merely virtual (or unrealized). In the meantime, they can ‘ride out’ the storm by collecting dividends. In behavior finance, this is called “Self-Control”. For me, I call it simply: stupidity.

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