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Two kinds of dividends

This post has two objectives and two audiences: firstly, to disambiguate the concept of dividends in copy trading, audience being the eToro community and prospective copiers of my portfolio. Secondly, to explain the situation with the November dividend as affected by the new copy trading with auto-rebalancing introduced by eToro. The audience for this is primarily my current copiers.

🅰️ Dividends

Dividends on eToro are highly sought after. Many individuals invest their money on the platform to have it grow and produce a stream of income to integrate their earnings. Where there is a need, there is an offer, and several Popular Investors advertise that they offer dividends. The majority of these traders create portfolios filled with dividend-distributing shares or ETFs. Replicated in the portfolios of copiers, these portfolios provide dividends, and I’d like to term this type of dividend-producing portfolio a “dividend aggregator.” The pros and cons of dividend aggregators from a copier’s perspective are simple; the main pro is the income, and the main con is limited growth.

Another type of dividend-giving portfolio does not simply funnel the dividend produced by its containing elements. This type, which I like to call a “dividend generator,” works more like a company, producing growth and distributing some or all of its growth in the form of a dividend. Pros and cons of dividend generator portfolios are the same as for dividend aggregator portfolios, even though they are, in essence, growth portfolios that have replaced compounding with a dividend. There are not many dividend generator PI portfolios on eToro; in fact, I am the only one I know of, and there is a good reason for it. It is not in the interest of the PI to take money out of the portfolio and, by doing so, trigger a dividend to the copiers. If a 10% dividend is distributed by a PI, its Assets Under Management (AUM) decrease by 10%, and therefore, its monthly payment is reduced, calculated as a percentage of AUM.

You might wonder why I do it then.

There are many reasons:

  1. My portfolio works in a way that makes taking money out for the copiers a painful experience. This way, copiers who want money out of the copy can get it out pain-free, while keeping the money-making engine going.
  2. The freedom to compound or not is in the hands of the copiers; they can put the money back in or do something else with it.
  3. This approach opens me to the income market—a market of copiers that would not instinctively invest in a higher-risk portfolio.
  4. Also quite selfishly, I think that a more flexible offering might attract more copiers. Time will tell.
  5. Finally, the flexibility I extend to my copiers is also extended to me; from time to time, I might also decide to do something different with my money.

To summarize: Investing in my portfolio will give you a dividend equal to the growth of the portfolio during the month*. You can decide to put that money back in the portfolio not.

🅱️ November 2023 dividend:

The dividend of November was 2.12%, but it did not get distributed as eToro had just changed the copy trading procedure adding some rebalancing triggers upon adding and withdrawing funds from the copy. Weary of the fact that ⅓ of the copiers of the portfolio were not in sync, I decided to stop and investigate before triggering a mass rebalancing exercise, which for some might have meant potential losses.

What I know now is that:

  1. There will be no adverse effect for the ⅔ of people whose copy was in sync.
  2. Those who are not in sync have an avenue to synchronise their copy. Adding a funds triggers a rebalancing. The amount depends on the level of desynchronisation, but let’s say that you closed the ETF and the shares positions; adding 6% of the copy should be enough to bring you back in sync.
  3. It is just a one-off, Once in sync you’ll stay so, as the system, as far as I understand, will not let copy get out of sync.
  4. Between now and the end of the year, I plan to close as many of the non $UK100 positions as possible ($AMZN, $SPLV, $USMV). I will not close $SBSW or $VNQ as they would mean large losses. The non-UK100 business will be reduced to less than 5%.

🔥 I will issue the December dividend, including November’s, at the beginning of January, so I encourage the out-of-sync copiers to get the in sync between now and the end of the year***.

I understand that this might not please all copiers, but it’s the best I can do. A mediation between different expectations of a, fortunately very good and very growing community of copiers.

Good trading to all

Alex

* Conditional to the cash reserve indicator, given in the end-of-month report, being above 50%.
** This only applies to copiers who copied the portfolio before November 2023, and will not affect new copiers.
*** Now that the UK100 index is very close to 7600, it is a great time to sync, risking the least, even if some positions were closed.