VALUE INVESTING
The Value Of Dividends

By Stephen Bland (TMFPyad)
September 8, 2005

In my Value Investor high yield portfolios (HYPs), there are ten shares, all in the first HYP and bought during 2004, which have been held long enough to have paid at least one year's dividends. Note that, unlike my public Fool eternity HYPs, I am prepared to trade the shares in the Value Investor HYPs. Two HYP shares have been sold to date, J Sainsbury (LSE: SBRY) at a modest profit of 4% and Exel (LSE: EXL) at a fat profit of 69%. These figures include dividends.

Here is the performance of those ten according to the latest Value Investor scorecard (dated 1 September 2005). The shares were selected monthly and the table is in month order, from January 2004 for Alliance & Leicester down to November 2004 for Northern Foods:

	Total Return%	Capital%	Dividend%
Alliance & Leicester (LSE: AL.)	+3.8	-4.8	+8.6
Royal Dutch Shell (LSE: RDSB)	+59.5	+49.7	+9.8
United Utilities (LSR: UU.)	+32.1	+18.2	+13.9
Legal & General (LSE: LGEN)	+29.7	+24.1	+5.6
British American Tobacco (LSE: BATS)	+43.0	+36.3	+6.7
Lloyds TSB (LSE: LLOY)	+27.8	+16.3	+11.5
Scottish & Newcastle (LSE: SCTN)	+19.7	+14.5	+5.2
BT (LSE: BT.A)	+24.2	+18.4	+5.8
De La Rue (LSE: DLAR)	+20.4	+3.6	+16.8
Northern Foods (LSE: NFDS)	-2.8	-8.3	+5.5
Average	+25.7	+16.8	+8.9
Proportion of TR	+100.0	+65.4	+34.6

What I show here is the total return on the holding in the first column, comprising the capital movement of the share price plus dividends received. The second and third columns split that total return into its elements of capital and dividends. My aim is to show the importance of dividends to the total return of the high yield strategy and I think this brings it out well.

Note that my Value Investor method of locating a new HYP share each month means that the selections are valid only around the time they are made because of contemporary market circumstances. It cannot be assumed that I would select the same shares now.

As revealed, the average total return of these ten shares is +25.7%. Breaking down this figure shows that the proportion contributed by dividends represents 34.6% of that return whilst 65.4% came from capital gain. Clearly then, dividends make a very important contribution to performance, which might be obvious because we are talking about high yield shares. By definition, they are going to deliver a better income than lower income shares, but it is only when you actually analyse the figures that you can see exactly how important these dividends can be.

Interestingly, the actual dividend contribution to total return between shares is very mixed. The share with the largest total return by far, Royal Dutch Shell, owes much less of its total return to dividends than the average, about 16%. Against that, Alliance & Leicester owes a huge 226% of its total return to dividends because that return is very low, the capital element being negative. Similarly Northern Foods, the only share with a negative total return, would be even more negative without the 196% derived from dividends.

The third biggest dividend contributor to total return is De La Rue at 82%, though this one has a good reason in that it paid a large special dividend. After that we have United Utilities at 43% and Lloyds TSB at 41% completing the five above average dividend contributors.

Note that my purpose here was not to consider HYP performance. Most readers will already be aware that the strategy can deliver outstanding returns over time. It was to examine to what extent those high yields contribute to performance once the shares have been held long enough to pay out at least a year's dividends. I knew dividends were crucial, but it is instructive to see exactly by how much, at least in the period examined. I don't know whether longer term this ratio between capital and income to total return will be maintained but whatever the figures, it is almost certain that dividends will continue to be a very significant factor.

Value Investor shows you how to construct a long term HYP by selecting one new share each month. And then selling on occasion if it appears advantageous to income or capital to do so.

Stephen holds shares in Alliance & Leicester, BT, Lloyds TSB and United Utilities.