Buy and hold - Share Price, Dividends and Capital Gains/Losses - The Pearler Exchange

Question

I'm looking to sense check my understanding...

1. I'm just starting to build my portfolio, so trying to hit the ground running. I note that some shares are quite expensive (IVV = $500+, A200 = $100+), whilst others are considerably lower (BKI = $2.00). At first glance it seems to make sense to buy more of the cheaper shares, as dividends are paid per share and therefore with a DRP you'll end up growing the number of shares quicker?

FOR EXAMPLE (estimate numbers used for ease of example) - IF I HAVE $1,000 TO INVEST:
     A) A200 = $100/Share = 10 shares x $1.50 qtr div = $15... carried forward as not enough to buy a new share yet
     B) BKI = $2/Share = 500 shares x $0.05 qtr div = $25... enough to buy 12.5 additional shares

So it seems to make more sense to go with option B as the snowball effect of accumulating shares will happen quicker. Am I missing anything critical in my understanding?

2. If I'm buying shares to hold to create a passive income, then Capital Gains/Losses doesn't come into the equation? My understanding is that Capital Gains/Losses are only triggered on the sale of the shares. I may sell at some point, but not likely for another 30, 40, maybe 50 years - so not worrying too much about the selling side of things (as hoping I will be completely financially independent and any financial impact from selling will be neither here nor there at that point!)

Thanks in advance for your responses. :)

Answer

Hi Lee-Anne.  This is a relatively common question and not intuitive at first.

Question 1:  The thing is, price ‘per share’ and comparing investments this way really isn’t very helpful.  It’s like buying a $10 pizza and cutting it into 10 slices worth $1 each, or 5 bigger slices that cost $2 each.  The $1 slices aren’t better value, they’re just cut up more than the others.  Shares are a bit like that.

Now, one key different as you’ve pointed out is with reinvesting dividends.  But again this isn’t really an issue because we can always use whatever dividends we get and put it toweards our next purchase.  So we aren’t exactly missing out even though it might not be enough for a whole share.  Plus, remember this is only a very short-term thing as after an other few purchases, then each dividend will be enough for a whole share.

Another way of looking at it is our money is earning returns in percentages, not in dollars.  So it makes no sense to think the smallest penny stock will give us a thousand times better returns because we can buy so many shares for our money.  It just doesn’t work like that.

Question 2:  Capital gains and losses for tax purposes don’t really matter much in the short term if an investor is not selling their shares.  But that doesn’t mean the actual return isn’t important.  Of course, we want our investments to have capital growth over time, rather than capital losses.  It’s a sign of a good, sustainable, long term investment.  So it’s also not a great idea to ignore this completely, especially because some extremely high yielding investments can be a trap that lure in novice investors.  Our whole return should be considered, dividends and capital gains.  Some people prefer more of one or the other, but they’re both important.

Hope these answers make sense and help clear up some of the issues :)

Answer

In addition to what Dave said (Also ❤️  we love Strong Money) – If investing were an ice cream flavour it would be vanilla no sprinkles – boring and plane – (which is great for those who like vallina!) History shows the market goes up over the long term, it might not always be smooth sailing and defs not a straight upward line (that’s why any money you have for short term goals always stays in cash!) But even when you look at our history over the last 100 years, there’s been World Wars, Pandemics, Financial Crisis but the ASX and S+P index has always gone up….

So if you think that we as humans are going to keep innovating, creating, buying, selling and building new products and services then long term investing buying and holding will be for you! Also benefits of buying and holding is you pay less capital gains tax! You get a little tax discount from the gov if you hold on to a stock for longer than a year!

Don’t search for the needle in a haystack buy the whole haystack (whch is looks like you are doing)!

Answer

It general it makes no difference what a share costs. A couple of points.
(1) In Australia, you can only own whole shares (and they are in your name), not fractions as in the US where (as I understand it), a custodian does and you a claim over some fraction.
(2) The ASX has rules on individuals holding unsaleable parcels of shares, and I believe that is $500. I believe pearler now have a minimum buy parcel of $650.
Ramifications include
(1) If you are wanting to buy an expensive share like IVV ($587), and pearler have a minimum of $650, then you have to buy 2 shares $1174. whereas NDQ ($26) you could buy 25 or 26, but you could get close to the threshold.
(2) If you have dividend reinvestment schemes, and you invest the same dollar amount, and they pay the same percentage return, with the lower cost share you will get to be able to accumulate enough for one share sooner.
The returns in terms of dividends and capital growth on expensive and cheaper shares should be the same in percentage terms.

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Buy and hold - Share Price, Dividends and Capital Gains/Losses

Lee-Anne Carr

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Molly Benjamin

David Horton

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