Dividend-Paying Stocks Are Not Bonds

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Dividend-Paying Stocks Are Not Bonds

Postby gkaplan » Fri Nov 09, 2012 10:17 am

Vanguard's chief economist, Joe Davis, cautions investors who turn to equities to replace bond income and also offers some vehicles for short- and long-term inflation protection.


Morningstar's Christine Benz interviews Vanguard's Joe Davis.

http://www.morningstar.com/cover/videocenter.aspx?id=571880

(Note: Morningstar uses this link for all its current videos, so this link may not bring up the Joe Davis interview. If it does not, click on the latest tab on the right hand side of the page to access the Joe Davis video.)
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Re: Dividend-Paying Stocks Are Not Bonds

Postby staythecourse » Fri Nov 09, 2012 10:58 am

anybody looking at stocks as bonds deserve whatever happens to them.

If folks want/ need income from their portfolio my suggestion is to replace a portion of your stock allocation to high yield bonds. This would reduce your stock volatility and increase your income.

Good luck.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby Johm221122 » Fri Nov 09, 2012 11:11 am

staythecourse wrote:anybody looking at stocks as bonds deserve whatever happens to them.

If folks want/ need income from their portfolio my suggestion is to replace a portion of your stock allocation to high yield bonds. This would reduce your stock volatility and increase your income.

Good luck.

If anyone needs income from their portfolio depending on age I would see if SPIA would fit there need for some of there money
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Re: Dividend-Paying Stocks Are Not Bonds

Postby Booper » Fri Nov 09, 2012 12:29 pm

Yes, dividend-paying stocks are not bonds. But I am finding it very difficult to get accurate data on how the income stream from dividend paying / dividend growth stocks has actually fared.

S&P has the dividend aristocrats.
Vanguard has a divident growth fund

If, a decade ago, someone invested 10k and took the dividends in either of these funds, what would their annual income stream have been? what would their principle be today?
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Re: Dividend-Paying Stocks Are Not Bonds

Postby Sidney » Fri Nov 09, 2012 12:44 pm

Hopefully their principles haven't changed in 10 years.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby Booper » Fri Nov 09, 2012 12:48 pm

Sidney wrote:Hopefully their principles haven't changed in 10 years.


That was almost a valuable contribution to the thread. Almost.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby zaboomafoozarg » Fri Nov 09, 2012 1:10 pm

Booper wrote:
Sidney wrote:Hopefully their principles haven't changed in 10 years.


That was almost a valuable contribution to the thread. Almost.


Worth it, I LOL'd :D
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Re: Dividend-Paying Stocks Are Not Bonds

Postby umfundi » Fri Nov 09, 2012 3:06 pm

On the Vanguard webinar last night, they cautioned against "Income Investing", for you might end up chasing yield, thereby reducing your diversification and messing with your asset allocation. They recommended maintaining your asset allocation and diversification and making withdrawals as needed. They noted that liquidating what is perceived as "principal" is a behavioral issue for some.

They did not mention taxes. It seems to me that if these are taxable assets, dividends are ordinary income, but sales may be long-term capital gains.

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Re: Dividend-Paying Stocks Are Not Bonds

Postby YDNAL » Fri Nov 09, 2012 3:22 pm

greyfox wrote:[YDNAL, many of the minus signs in your table are missing or wrong.
One big one: 2008 -37% for S&P 500, VDIGX only down -25.57 DIff +11.43]

Thank you, greyfox, negative signs were missing in the copy-paste. I will fix later.
Last edited by YDNAL on Sat Nov 10, 2012 7:38 am, edited 3 times in total.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby dbr » Fri Nov 09, 2012 3:30 pm

VDIGX seems to have gone from a dividend of about $.50/year in 1993 to about $.30/year now, give or take and sorting out dividends that were really capital gains distributions in some years.

In real dollars at some back of the envelope inflation value, the income stream now is only 30% of the income stream in 1993.

There is a weird change to semiannual dividends from quarterly back in 2002-2003, also reflected in the data above where the yield drops from around 4% to around 2%.

If all of this is correct, then the idea of taking dividends as an income stream from this fund does not seem like it would have been a good plan for that early 1990's investor.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby grayfox » Fri Nov 09, 2012 8:26 pm

I look up VDIGX on M*

5-YR Data
.............VDIGX.......S&P 500 TR
TR...........3.66.........0.86
SD...........15.27........19.15
Sharpe.......0.26.........0.09
BearMkt%ile.....18.......39 for VFINX
BETA.........0.78.........1.02
R^2..........95.87........95.99

It looks like VDIGX is less volatile than the S&P 500. From CAPM you would expect lower return than S&P 500.
It actually had higher total return over 5, 10 and 15 years.
It had higher risk-adjusted returns.
It did better in bear markets.

If you go back to 16, 17, 18, 19 years, S&P 500 had higher return.
I think all the higher return was in the early years 1992-1999
1995-1999 was years of irrational exuberance for S&P 500.

10-Yr Chart

Change start date from 11/09/2002 to 11/09/1997 in the above chart, and VDIGX ends up with more money.
Change it to 1996, 1995 , 1994, 1993, VDIGX has less money.

[YDNAL, many of the minus signs in your table are missing or wrong.
One big one: 2008 -37% for S&P 500, VDIGX only down -25.57 DIff +11.43]
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Re: Dividend-Paying Stocks Are Not Bonds

Postby IlikeJackB » Fri Nov 09, 2012 9:09 pm

Here's the fine print regarding what is now known as the Vanguard Dividend Growth Fund:

*Effective December 6, 2002, the fund changed its investment objective and concentration policy. Prior to making these modifications, the fund was called Vanguard Utilities Income Fund, reflecting its former policy of investing in income-producing stocks of utilities companies. The performance prior to December 6, 2002, reflects the fund’s performance under its former investment objective and concentration policy.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby investor » Fri Nov 09, 2012 10:13 pm

Keep in mind that VDIGX changed managers about 6.5 years ago and re-vamped the portfolio. So your apples may not be the same apples used in the comparisons

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Re: Dividend-Paying Stocks Are Not Bonds

Postby YDNAL » Sat Nov 10, 2012 9:04 am

grayfox wrote:[YDNAL, many of the minus signs in your table are missing or wrong.
One big one: 2008 -37% for S&P 500, VDIGX only down -25.57 DIff +11.43]

Yes, missing negative signs, thanks for catching that. Vanguard Dividend Growth VDIGX became such starting in 2010, so any comparative number is simply meaningles. It actually included Utility Bonds 1992-2000, then just Utility/Telecom Stocks, then Russell 1000 (what a mess!).
Vanguard wrote:Prior to December 6, 2002, the comparative benchmark was known as the Utilities Composite Index. The index weightings were: 40% S&P Utilities Index, 40% S&P Telephone Index, and 20% Lehman Brothers Utility Bond Index through April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P Telephone Index, and 15% Lehman Brothers Utility Bond Index through March 31, 2000; 75% S&P Utilities Index and 25% S&P Telephone Index through December 31, 2001; and 75% S&P Utilities Index and 25% S&P Integrated Telecommunication Services Index through December 6, 2002. The fund’s benchmark was the Russell 1000 Index through January 31, 2010, after which it was changed to the Dividend Achievers Select Index.

So, on topic with OP's link to Morningstar, turning to Dividend Stocks as some sort of Bond replacement is a terrible strategy to be avoided.
gkaplan (OP) wrote:
Vanguard's chief economist, Joe Davis, cautions investors who turn to equities to replace bond income and also offers some vehicles for short- and long-term inflation protection.

Morningstar's Christine Benz interviews Vanguard's Joe Davis.

http://www.morningstar.com/cover/videoc ... ?id=571880
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Re: Dividend-Paying Stocks Are Not Bonds

Postby dbr » Sat Nov 10, 2012 1:45 pm

IlikeJackB wrote:Here's the fine print regarding what is now known as the Vanguard Dividend Growth Fund:

*Effective December 6, 2002, the fund changed its investment objective and concentration policy. Prior to making these modifications, the fund was called Vanguard Utilities Income Fund, reflecting its former policy of investing in income-producing stocks of utilities companies. The performance prior to December 6, 2002, reflects the fund’s performance under its former investment objective and concentration policy.


Good, that is the explanation.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby Dinero » Sat Nov 10, 2012 5:09 pm

YDNAL wrote:So, on topic with OP's link to Morningstar, turning to Dividend Stocks as some sort of Bond replacement is a terrible strategy to be avoided.


Although...Dr. Bernstein had this to say about dividend-paying stocks:

William Bernstein in The Ages of the Investor wrote:If you counted on your stock holdings to see you through retirement, you're likely to be seriously disappointed. Yet, there is a small part of the equity portfolio that can be considered in the funding of retirement: the "safe dividend flow" from stock holdings. Although the value of stocks can fluctuate wildly, their stream of income is much more stable. At no point in the history of the U.S.stock market has its real dividend stream fallen by more than half, even during the Great Depression. During the most recent financial crisis, for example, although stock prices fell by more than 50%, dividends also dropped, but by only 23% from their peak, and only temporarily.

You can thus reasonably add into your retirement permanent income flow about half of the dividends from your stocks or stock funds.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby YDNAL » Sat Nov 10, 2012 7:11 pm

Dinero wrote:
YDNAL wrote:So, on topic with OP's link to Morningstar, turning to Dividend Stocks as some sort of Bond replacement is a terrible strategy to be avoided.

Although...Dr. Bernstein had this to say about dividend-paying stocks:
William Bernstein in The Ages of the Investor wrote:If you counted on your stock holdings to see you through retirement, you're likely to be seriously disappointed. Yet, there is a small part of the equity portfolio that can be considered in the funding of retirement: the "safe dividend flow" from stock holdings......

There is no relevance quoting Bill Bernestein saying "a small part of the equity portfolio..." and "Dividend Stocks as some sort of Bond replacement is a terrible strategy to be avoided." What are you trying to say?
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Re: Dividend-Paying Stocks Are Not Bonds

Postby Dinero » Sat Nov 10, 2012 8:08 pm

YDNAL wrote:There is no relevance quoting Bill Bernestein [sic] saying "a small part of the equity portfolio..." and "Dividend Stocks as some sort of Bond replacement is a terrible strategy to be avoided." What are you trying to say?


I think there is plenty of relevance. He is distinguishing dividend-paying stocks (the "small part") from non-dividend-paying stocks. I think what Bill Bernstein is saying is that there are certain equities that have characteristics suitable for "funding retirement." I think one could infer that if the equity portion of your portfolio was invested in dividend-paying stocks then that is not an unreasonable approach to generate income in retirement.

Note that this part of Bill's book was almost a footnote, a kind of reluctant nod to dividend paying stocks. And he still considers such things as part of the "risk portfolio" and not part of the liability-matching portfolio.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby YDNAL » Sun Nov 11, 2012 8:13 am

Dinero wrote:
YDNAL wrote:There is no relevance quoting Bill Bernestein saying "a small part of the equity portfolio..." and "Dividend Stocks as some sort of Bond replacement is a terrible strategy to be avoided." What are you trying to say?

I think there is plenty of relevance. He is distinguishing dividend-paying stocks (the "small part") from non-dividend-paying stocks. I think what Bill Bernstein is saying is that there are certain equities that have characteristics suitable for "funding retirement."

OK, thank you for expanding on what you are trying to say. Actually, dividend-paying vs. non-dividend-paying Stocks have no relevance to "Bond replacement" in the portfolio - the subject of the OP.

Dinero wrote:I think one could infer that if the equity portion of your portfolio was invested in dividend-paying stocks then that is not an unreasonable approach to generate income in retirement.

Note that this part of Bill's book was almost a footnote, a kind of reluctant nod to dividend paying stocks. And he still considers such things as part of the "risk portfolio" and not part of the liability-matching portfolio.

What Bill is suggesting is that one may resonably count on 1/2 (not 100%) of the dividend from Stocks as part of your projected income in retirement. He discusses how even during the Great Depression and latest Financial crisis, that Stocks suffered significantly but dividend-flow was more stable.
William Bernstein in The Ages of the Investor wrote:If you counted on your stock holdings to see you through retirement, you're likely to be seriously disappointed. Yet, there is a small part of the equity portfolio that can be considered in the funding of retirement: the "safe dividend flow" from stock holdings. Although the value of stocks can fluctuate wildly, their stream of income is much more stable. At no point in the history of the U.S.stock market has its real dividend stream fallen by more than half, even during the Great Depression. During the most recent financial crisis, for example, although stock prices fell by more than 50%, dividends also dropped, but by only 23% from their peak, and only temporarily.

You can thus reasonably add into your retirement permanent income flow about half of the dividends from your stocks or stock funds.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby Dinero » Sun Nov 11, 2012 9:09 am

YADNAL wrote:Actually, dividend-paying vs. non-dividend-paying Stocks have no relevance to "Bond replacement" in the portfolio - the subject of the OP.


Re-read the statement in the original post. It was not about bond replacement: "Vanguard's chief economist, Joe Davis, cautions investors who turn to equities to replace bond income" [emphasis added]

That is exactly what Dr. Bernstein is discussing - relying on dividends in lieu of bond income - in a specific circumstance - retirement.

Of course it is self-evident that equities are not bonds. But one of the function of bonds, providing a source of income, could be met under certain circumstances by dividends, knowing full well the downside risk, etc., etc., etc.
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Re: Dividend-Paying Stocks Are Not Bonds

Postby YDNAL » Sun Nov 11, 2012 5:42 pm

Dinero wrote:Re-read the statement in the original post. It was not about bond replacement: "Vanguard's chief economist, Joe Davis, cautions investors who turn to equities to replace bond income" [emphasis added]

Really?... some re-reading is certainly appropriate. I believe that you are focused on semantics (or title) rather than the warning that Stocks are not Bonds. There is nothing further to discuss which is informative to others.
Morningstar wrote:Benz: Are you concerned that investors in this quest for yield, and it is a very low-yield environment, are perhaps taking on outsized risks with their fixed-income portfolios these days?

Davis: I am.....

I'm even more concerned, however, we're seeing from some investors on, say, a dividend portfolio or an equity-like portfolio, they're equating that as similar to a yield on a bond portfolio, and those are markedly different characteristics in terms of what they may mean for expected returns. So, again, dividend-paying stocks are not bonds and I think that's important for investors to go on. (my emphasis)
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