Forum Archive Index - June 2000

["Jeremy" <jardley@electrosilk.net>]

> From: Oliver Shapleski <oliver.shapleski@vuw.ac.nz>
> Absolute fallacy I'm afraid, Jeremy.

Nice rhetoric, but how about a worked example for you. Borrow $100K.  at 8%.
Invest in company for 1 year and analyse the results

Case 1 : No Change in share price

Company pays 2% dividend, Sell shares Pay back bank $108K, Net result $6K
loss.
Company pays 8% dividend. At end of year, sell shares, pay back bank $108K
Nett result no gain or loss
Company pays 10% dividend, sell shares, etc make $2K

Case 2 : Share price increases at 1.5 x inflation rate (a rough long term
average here) - say 5% this year

10% dividend => $115K - $108K = $7K gain
8% dividend => $113K - $108K = $5K gain
2% dividend => $107K - $108K = $1K loss

Case 3 : Share price drops 50% -  like many NZ shares in the past 6-12
months

$48K - $40K losses

All your assumptions, Oliver, are based on the expectation that the market
and individual share prices will rise at an accelerated rate well above long
term averages.  The practical facts are that the NZ sharemarket has no major
short term growth potential, and the cost of money is comparatively high
now.  You also have the prospect of ever increasing interest rates as the
dollar falls

Synopsis : In a static market as a rational investor you have to expect a
dividend return from a company at least equal to the cost of money to buy
the shares.  In a declining market don't even bother to get out of bed.
Assuming the market will rise at a rate well above the long term average is
pure speculation and is clearly not justified at present.

Jeremy




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