When Equity Markets crash does divident yield decrease

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When Equity Markets crash does divident yield decrease

Postby antiqueman » Sun May 12, 2013 11:10 am

This is a basic question but I have trouble totally understanding what happens in a given situation.

Assume that one is able to presently live off ones dividends and other income such as SS / Pension. ( I dont )

'
If we assume a person has 100,000.00 dollars in stocks and the dividend/income paid out by stock index fund is 2% then the person receives 2k a year. If the $100,000 in stock index fund goes down to 50k then the dividend would go to 4 % I assume and the person would receive the same 2k.


But there has to be some scenario that adversely affects what one would perceive to be a safe steady income of 2k. Is the only risk one runs , is that dividends would be reduced if the stocks crashed 50%? I havent researched it, but I dont think the dividend payout on the index funds for Vangaurd Total decreased during the 2008-2009 sell off.


To put this question in the most concise way I know, let me ask it the following way:


Assume a person retires and has x amount of shares of VTI ( vangaurd index fund). At time of retirement his X shares is paying him 2k a year in dividends. The market crashes, but he doesnt care about the decrease in his stock values so long as he gets his 2k from his X shares of VTI. At what point should he worry about not receiving the 2k income. Would this only occur when a large number of compaines in the index reduce their dividends?

If I am correct then it seems that a person in retirement would have a lot more stock that is normally discussed on the forum IF, that person needs only the dividends from his shares to supplement social security.pernson.

Thanks.
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Re: When Equity Markets crash does divident yield decrease

Postby rustymutt » Sun May 12, 2013 11:16 am

Like most investments, dividend yields are not guaranteed. You might continue to receive the payout, but corporations are not legally liable to pay them out. Good luck.
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Re: When Equity Markets crash does divident yield decrease

Postby bottomfisher » Sun May 12, 2013 11:27 am

It appears that you have an adequate understanding of dividend payouts. Unfortunately, no one can provide the reassurance that your dividend payout will persist in a market downturn. If the stock prices are taking a beating its likely the underlying companies' earnings are also taking a beating. And those dividends are largely coming from earnings (there are exceptions to this like Apple's recent dividend payout). Some companies have reputations for reliable dividend payouts despite unfavorable market conditions. You may consider one of Vg Dividend foscused funds if you're planning on relying on them for retirement.
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Re: When Equity Markets crash does divident yield decrease

Postby nedsaid » Sun May 12, 2013 11:39 am

Normally dividend yields increase as the price of stocks fall. As other posters have pointed out, companies can cut their dividend. We saw this happen in the last financial crisis. Most companies try to maintain their payouts, a dividend cut is an admission of failure. But it does happen.

Of course as CD investors can attest, interest rates can be cut as well.

With dividends, you have the opportunity of perhaps seeing your payouts increase over time. Not guaranteed, but likely.
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Re: When Equity Markets crash does divident yield decrease

Postby grabiner » Sun May 12, 2013 11:49 am

If a corporation's share price declines, it may choose to keep its dollar dividend payout (which will increase the percentage yield), or reduce or eliminate the payout. In addition, some corporations may be forced to eliminate dividends because they do not have the profits to pay them.

In the most recent crash, a lot of corporations did cut dividends, and were slow to raise them back: 2011 dividend payments were slightly lower than 2007 dividend payments.

These numbers are per-share distributions on Total Stock Market Admiral shares. Thus if corporate dividends were not cut during the crash, the distributions would be the same. December distributions tend to be larger because not all dividends are paid quarterly and special dividends may be more likely to be paid in December.

March 2007: 14.6 cents
June 2007: 13.8 cents
September 2007: 15.7 cents
December 2007: 18.8 cents
March 2008: 15.2 cents
June 2008: 15.3 cents
September 2008: 14.3 cents
December 2008: 16.1 cents
March 2009: 13.5 cents
June 2009: 10.9 cents
September 2009: 12.0 cents
December 2009: 17.5 cents
March 2010: 11.5 cents
June 2010: 13.1 cents
September 2010: 14.5 cents
December 2010: 17.0 cents
March 2011: 13.7 cents
June 2011: 13.8 cents
September 2011: 14.9 cents
December 2011: 17.5 cents
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Re: When Equity Markets crash does divident yield decrease

Postby nisiprius » Sun May 12, 2013 11:52 am

The reason stock prices fall is because investors expect that the company will cut dividends. Will be forced by business considerations, known to the market, to cut dividends. Eventually. The timing is bound to be uncertain and which companies will be affected how much is bound to be uncertain. To the extent that an individual company is traditionally committed to a steady dividend, if it is conservative and has reserves and a steady business, it may well be able to average things out so that the dividend stream will fluctuate considerably less than the stock price.

Here's a chart of dividend yield that Google found me: phooey, phpBB doesn't like it as a direct image link:
http://tinyurl.com/brrfxgv

What's really wanted is the chart of dividends themselves, though, and, let's see... well, here's something:
http://dividata.com/stock/SPY/dividend
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Re: When Equity Markets crash does divident yield decrease

Postby Valuethinker » Sun May 12, 2013 12:02 pm

nisiprius wrote:The reason stock prices fall is because investors expect that the company will cut dividends. Will be forced by business considerations, known to the market, to cut dividends. Eventually. The timing is bound to be uncertain and which companies will be affected how much is bound to be uncertain. To the extent that an individual company is traditionally committed to a steady dividend, if it is conservative and has reserves and a steady business, it may well be able to average things out so that the dividend stream will fluctuate considerably less than the stock price.

Here's a chart of dividend yield that Google found me: phooey, phpBB doesn't like it as a direct image link:
http://tinyurl.com/brrfxgv


A couple of things going on here:

- systemic effects. The rising profits and hence EPS of the market in the 2000s was in large part due to the profits of financial companies, which in turn paid good dividends-- the banks were often yielding 4%+ by 2007.

So when the market crashed, the 'fuel' dried up as well. Hence passing the dividends (to receive bailout money in many cases) and paying dividends in scrip (ie more shares) etc.

That's something to be wary of. I thought HP, IBM etc. were 'safe' even though dot com stocks were overvalued. But, of course, they were doing huge amounts of business with those dot coms, funded by the shareholders of the dot coms when they raised money (ditto Nortel, Lucent etc. with the Telcos which borrowed trillions to build out networks-- vendor finance of telco equipment was a huge issue when the crash came).

- behavioural change-- once, company managements were ruthlessly 'punished' by shareholders for cutting dividends. That seems to be less the case, now

The overall conclusion is that yields tend to rise in bear markets, but don't count on it. With a lag, companies often then cut dividends. And the bad business conditions bear markets can bring (systemic effects) reinforces that.
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Re: When Equity Markets crash does divident yield decrease

Postby nisiprius » Sun May 12, 2013 12:21 pm

And don't forget:
In 'The Great Depression: A Diary,' Benjamin Roth wrote:June 15, 1931: Stocks continue to go lower and lower and dividends are being slashed right and left....

September 9th, 1931: The Youngstown Sheet & Tube Co. at a directors meeting decides to omit the quarterly dividend. The stock is now selling at $35 per shares. This is lower than in the 1921 depression when it sold at 45....

September 10th, 1931: Many Youngstown millionaires have been hard hit by the failure of Youngstown Sheet & Tube to pay its dividend. In a great many cases these families have over a million tied up in Sheet & Tube and Republic Steel and depended entirely on these stocks for income.

December 18, 1931: ....Down, down, down goes the stock market.... one Youngstown man... bought 6000 shares Republic pfd [Republic Steel, preferred] which gave him an income of about $30,000 net. Now the Republic pfd pays no dividend and is selling at $10.

April 30, 1932: ....U.S. Steel drops common dividend and sells at 27....

January 31, 1933: For the first time since its organization (32 yrs) the U.S. Steel corporation fails to pay the regular dividend on its preferred stock. Dividend on the common was suspended about a year ago.
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Re: When Equity Markets crash does divident yield decrease

Postby nedsaid » Sun May 12, 2013 12:30 pm

Wow. Nisiprius and Grabiner can be counted on to wow us with their graphs and knowledge of investment history. Hard to argue with those guys. They provided data that supports what I had suspected.

Pretty much, when the crisis hit the dividends were cut and it took approximately 4 1/2 years for the payouts to recover. This is very useful information.

It goes to show that fleeing to safe havens or perceived safe havens doesn't always work as hoped. People fleeing to dividend paying stocks were surprised to see the dividends cut. This shows how investors can get whipsawed when they change investment strategies in response to a crisis. It is usually better to stick to a plan.
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Re: When Equity Markets crash does divident yield decrease

Postby Angst » Sun May 12, 2013 12:32 pm

nisiprius wrote:Here's a chart of dividend yield that Google found me: phooey, phpBB doesn't like it as a direct image link:
http://tinyurl.com/brrfxgv

Yes, great graphs! Here's that uncooperative one:

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Re: When Equity Markets crash does divident yield decrease

Postby hafius500 » Sun May 12, 2013 12:41 pm

Declining stock prices predict lower dividends (or lower dividend growth rates) or they indicate that investors demand a higher return (i.e., the risk premium increases).

Stingy Investor - Is Dividend Income Safe?

inflation- adjusted dividends paid by the S&P500 reached a new high in 1911 but they then declined unevenly until they were reduced by 47.8% in 1920. The old 1911 high was only surpassed in 1929...
Starting from a new peak in 1930, dividends dropped by 46.3% in 1934, recovered a bit and then fell back to similar levels in 1946. It was only in 1956, some 26 years later, that the S&P500's inflation-adjusted dividend surpassed 1930 levels...
...inflation-adjusted dividends hit another high in 1966. This time dividends fared better with declines of "only" 24.1% by 1975. It took some 24 years to break beyond the 1966 dividend peak in 1990...


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Re: When Equity Markets crash does divident yield decrease

Postby grayfox » Sun May 12, 2013 12:55 pm

antiqueman wrote:To put this question in the most concise way I know, let me ask it the following way:


Assume a person retires and has x amount of shares of VTI ( vangaurd index fund). At time of retirement his X shares is paying him 2k a year in dividends. The market crashes, but he doesnt care about the decrease in his stock values so long as he gets his 2k from his X shares of VTI. At what point should he worry about not receiving the 2k income. Would this only occur when a large number of compaines in the index reduce their dividends?

If I am correct then it seems that a person in retirement would have a lot more stock that is normally discussed on the forum IF, that person needs only the dividends from his shares to supplement social security.pernson.

Thanks.


You are talking about the aggregate market. You mention VTI, but I'll use S&P500 Index, which is similar, because I have data for that

Historically, S&P 500 dividends have normally increased every year.
But annual dividends went down a little around recession of 2001
And after the financial crisis 2008/2009 S&P 500 dividends were cut about 21%
So they can go down sometimes, and by a lot.
But dividends didn't fall anywhere near as much as prices fell, so dividend yield went up during the bear markets

1999 16.69
2000 16.27 -2.52%
2001 15.74 -3.26%
2002 16.08 +2.14%
2003 17.39 +8.14%
2004 19.44 +11.82%
2005 22.22 +14.30%
2006 24.88 +11.98%
2007 27.73 +11.45%
2008 28.39 + 2.37% <- peak dividend year before crash
2009 22.41 -21.06%
2010 22.73 +1.43%
2011 26.43 +16.28
2012 31.25 +18.24% <- passed the 2008 peak

If you want to think in terms of retirement income, just make it thousands. For instance, in 2008 dividend income was $28,390, but then in 2009 it dropped to $22,410. He had $5980 less to spend. Now if he was smart, he would have saved some of the 2008 income to make up the shortfall in 2009. I think a lesson is to not increase your spending as fast as your income increases, because some years it may fall.

BTW, S&P500 index funds had slightly different results.
For example, in 2009,
IVV dividend went down -18.86%
SPY dividend went down -22.69%
But they probably rose less or more in 2010 so it more or less averages out.
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Re: When Equity Markets crash does divident yield decrease

Postby Valuethinker » Sun May 12, 2013 1:12 pm

Another bit of investment history.

From 1929 to 1958 stocks yielded *more* than A Grade Corporate Bonds. I do not know what the situation was pre 1929.

The rationale being that corporations could only escape interest payments on their bonds by going bankrupt, with heinous consequences for the company, the Board, the stockholders would be wiped out, and everyone's reputation (the ruthless use of Chapter 11 just didn't occur back then, perhaps it was illegal?).

Whereas dividends were risky. They could be cut, and often were.

After that line was crossed (from memory, 1958) for many years old timers held out investing in the market, believing it signalled an upcoming crash, that stocks were now very overvalued.

Who, in fact, is to say they were wrong? We might look back in 2068 and see that the 1958 line heralded a 50 year stock bubble, which was finally corrected.
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Re: When Equity Markets crash does divident yield decrease

Postby lazyday » Mon May 13, 2013 6:27 am

You can find data online to consider this question yourself.

For example http://www.econ.yale.edu/~shiller/data.htm

Not sure if that dataset is continuing or if it ends some years ago, in which case you would want another to add in the recent panic.

When I did this, I found that a dividend spender in the great depression would have done relatively well had they been able to survive on something like half or 2/3 of expected income based on peak or near peak dividends, IIRC. In comparison, stock prices fell about 90% from peak. (Small value much worse, perhaps something like 95%?? Which would mean an additional 50% drop--unless I exaggerate.)

It depends both how you think about it, and your start and end points. If you are withdrawing based on rosy estimates, retire at the peak, and don’t cut your withdrawals, could be much worse than even these numbers make it seem.

You can see for yourself if the pattern held in other terrible markets such as starting in late 1960's.

In the recent panic/financial crisis, dividends were cut by much less than stocks fell.

But consider that the future may be different than the past ever was. Including worse than ever. It is still worth looking to the past for guidance, but not for certainty. There is very limited past data, from a scientific/stats view. Even if there were plenty of data, the world changes.

Some people attempt to chose stocks or indexes of companies that have more reliable dividends. If careful and thoughtful, this might make some sense. If casual, this could lead to overpaying and poor returns even after adjusting for risk. There is competition for these stocks, some might be expensive. For example, today IMO consumer staples stocks might be overpriced. I used to like and own them but sold over the last couple years.
There are people who post about dividend investing, and many of them don’t make sense to me, but there are a few right here on this forum who seem pretty sharp to me. I am not sure if I can reccommend dividend investing to others because there can be many downsides and ways to misuse it, but it is worth mentioning as a choice. My guess is that the average dividend investor is harming themselves, similiar to the average Strategic Asset Allocator. But those few with sensible, reasoned strategies who take time and care might do OK, after adjusting for risk.
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Re: When Equity Markets crash does divident yield decrease

Postby nisiprius » Mon May 13, 2013 7:15 am

nedsaid wrote:Wow. Nisiprius ...can be counted on to wow us with their graphs and knowledge of investment history. Hard to argue with those guys.
My knowledge of investment history is shallow and I should be argued with. But I try to maintain a inquiring mind and a spirit of exploring, instead of just looking where the investment salespeople point. It's a constant discovery process and in general the investment industry doesn't particularly want people to think about the crashes. Ten years ago, I don't think I'd even heard of about the Long Depression that followed the panic of 1873. The big thing, whenever you think you've "learned" something, is to take the time to look for a data point or two for yourself--not data that someone else has picked for you--to see if it matches what you've been told.

I've been completely enthralled by Benjamin Roth's The Great Depression: A Diary and while the enchantment lasts I've been quoting it all over the place.

I recently have been brooding a lot about the dangers of the hypothetical. In judging the wisdom of some long-term investing strategy, the return of the strategy has to be adjusted to take account of the probability that an investor can actually follow that strategy for many decades. Thus, it is not fair to measure the hypothetical returns of an investor--a white-collar clerk, say--who invested "$15 a month in good common stocks" through the Great Depression because it was practically impossible to do this. The chances of encountering something that disrupts your investing plan compound over time, too.
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Re: When Equity Markets crash does divident yield decrease

Postby grabiner » Mon May 13, 2013 9:52 pm

nisiprius wrote:
nedsaid wrote:Wow. Nisiprius ...can be counted on to wow us with their graphs and knowledge of investment history. Hard to argue with those guys.
My knowledge of investment history is shallow and I should be argued with. But I try to maintain a inquiring mind and a spirit of exploring, instead of just looking where the investment salespeople point. It's a constant discovery process and in general the investment industry doesn't particularly want people to think about the crashes.


Likewise for me. I didn't know what had happened to dividend yields during the crash, but I decided I could look it up; I have held Total Stock Market for years and computed the quarterly dividends from my own records.
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Re: When Equity Markets crash does divident yield decrease

Postby stratton » Mon May 13, 2013 10:23 pm

What everyone is trying to say is, "Dividends are NOT forever."

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Re: When Equity Markets crash does divident yield decrease

Postby Scooter57 » Mon May 13, 2013 10:28 pm

Some stocks kept paying their dividends right through the crash of 2008. The amount of the dividend may not change much. What changes is what percent of the share price that dividend represents. If you buy in at a low share price your dividend will be identical to what is paid to someone who bought high. However yours will represent a much better yield on the investment. This holds true going forward, which is why it can pay to wait patiently to buy dividend stocks like Proctor and Gamble that have a consistent record for paying uninterrupted dividends. Once you buy in at a good rate, you can hold safely for many years. But now isn't a good time for most of the healthy ones because the prices have been bid up so high.
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Re: When Equity Markets crash does divident yield decrease

Postby telemark » Tue May 14, 2013 12:48 am

And individual companies can get in trouble for reasons unrelated to the market as a whole. BP suspended its dividend payments following the Deepwater Horizon spill. Another reason to avoid owning individual stocks.
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