Why do investors chase dividend paying strategies

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Re: Why do investors chase dividend paying strategies

Postby BruceM » Sun Mar 31, 2013 2:17 pm

To those that are not in retirement, or have not studied retirement withdrawal strategies they may not get it, but there is a big difference between accumulation phase strategies, as compared to withdrawal strategies. During accumulation you should be looking to maximize your total return, but during retirement you are looking more towards guaranteed income streams and while some may think that dividend streams are no guaranteed, for me I feel much safer putting my money in a diversified basket of companies that has been increasing their dividend for 30-50 years than in a bond fund that has been doing nothing but the opposite over at least the last 10 years. Most people think the bond fund guarantees them a secure income stream, however they seem to realize nothing about how the bond fund income is created or how insecure it really is. Sure it has a very low correlation to equity returns, which is part of the reason most support putting bonds into a portfolio - however, low correlation to equities does not an income stream make, as anyone investing in bonds in the recent past knows.


That is well put.

Most income portfolios I'm knowledgeable of hold no bonds, as their income is both small and fixed, which is generally not a good combination for a investment portfolio whose primary goal is reliable income that will meet household income requirements in retirement.

Dividend growth time periods is one of 3 selection criteria I and others who invest for reliable retirement income, will use. But, of course, it is not used in the ongoing monitoring of income securities once they've been added.

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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sun Mar 31, 2013 2:30 pm

STC wrote:VYM (Vanguard Dividend Index) 5y Standard Deviation: 18.49
S&P 500 5y Standard Deviation: 18.87
VTI (Total Stock Market) 5y Standard Deviation: 19.64

Add to that list:
VEIRX (Vanguard Equity Income) 5y Standard Deviation: 17.35

And here is last 10 year's performance:
Image
To me that looks like a significant performance lead at a significantly lower risk when compared to any of the three you list. VEIRX is managed in part by Wellington.

EDIT: Oops! That's a 10 year chart.
Last edited by bertilak on Sun Mar 31, 2013 2:57 pm, edited 2 times in total.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sun Mar 31, 2013 2:47 pm

saurabhec
I'll try one last time
Dividends don't matter. That is the simple logic and the evidence
If you don't pay a dividend does that mean the company is worth more or less? It should be indifferent, and again the logic and evidence show that

Now let's assume that in fact for some reason dividends did matter. Then prices would adjust and div stocks would have higher valuations and lower expected returns

Bertilak
AS I stated, yes it's true strategies should change. So things like SPIAs should definitely be considered. But there is no reason to consider dividend paying strategies, neither logic or evidence. All they do is trade one risk for other risks.That is what my blog posts showed. Div strategies, whether high div or fast growth of divs have returns that are fully explained by the "traditional" factors, which demonstrates there is nothing unique there.

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Re: Why do investors chase dividend paying strategies

Postby saurabhec » Sun Mar 31, 2013 4:11 pm

larryswedroe wrote:saurabhec
I'll try one last time
Dividends don't matter. That is the simple logic and the evidence
If you don't pay a dividend does that mean the company is worth more or less? It should be indifferent, and again the logic and evidence show that

Now let's assume that in fact for some reason dividends did matter. Then prices would adjust and div stocks would have higher valuations and lower expected returns


First of all, if I am valuing a company, whether it pays a 2% dividend yield or a 4% yield of course does not really matter except for second order considerations such as whether or not I think the company is going to fritter away the reinvested earnings. What matters is the free cash flow and the discount rate, and the free cash flow projection is going to be driven by the earnings growth forecast. If one thinks that a company can reinvest free cash flow at a ROE that exceeds its cost of equity of course it is better for those earnings to be reinvested and propel future growth rather than be paid out as a dividend. I have already stated several times that dividend invesing is unlikely to result in maximizing total returns. It is really a risk management strategy that seeks to reduce the risk of having to sell stock during a bear market or a low return environment during withdrawal mode. If the choice is betwen having to generate a 4% inflation adjusted rate through a zero dividend equity portfolio in retirement or to take a little bit of a hit to expeceted total returns but have say a 3% dividend yield, I think a lot of people would opt for the latter. You might think this is inefficient, but that is simply because you believe that this strategy is undiversified and sub-obtimal in terms of total return maximization.

However even granting the theoretical reason for dividend paying stocks (especially those with above market yields) to underperform, the reality is that dividend payers do outperform in most long-term studies. Even in the relatively small period studied in the DFA study you cited, annualized returns were roughly equivalent. So even though it should theoretically lead to a return penalty, it doesn't seem to lead to one in practice.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sun Mar 31, 2013 9:33 pm

saurabhec
First the fact is that dividend payers DO NOT outperform once you do a factor analysis as opposed to comparing to the market. We know that div strategies are typically value strategies and value outperforms, which is the source of the outperformance, not the dividend.

Second, the downside protection is not there either because you got a dividend for the same reason, you can sell stock to create the dividend. It's just a mental accounting issue.
As I noted the high div strategies tend to be lower beta strategies which is why they may outperform in down markets, but it's not the div that is the reason, it's the low beta which explains it. So you can buy stocks with the same loading factors that don't pay divs and you would get the same result. That is what the research shows.

Also you have stated several times about some return penalty that did not appear. I never said div strategies underperform (except other value strategies). I said divs make no DIFFERENCE, neither for outperformance or underperformance. But once you use a div strategy you sacrifice diversification with no benefit---that's called uncompensated risk

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Re: Why do investors chase dividend paying strategies

Postby saurabhec » Sun Mar 31, 2013 10:14 pm

larryswedroe wrote:Second, the downside protection is not there either because you got a dividend for the same reason, you can sell stock to create the dividend. It's just a mental accounting issue.


Larry,

I will give up arguing the other points because we are both talking past each other. However how is having a higher dividend yield a mental accounting issue? Let us take one retirement portfolio with 0% dividend yield and another with a 4% dividend yield and the same expected return of 10%. Let us say both investors retired in 1998. In 2008, the investor with the first portfolio would be forced to sell in excess of 5% of his initial portfolio at retirment, which was probably close to 10% of this portfolio at the lows during that bear market.The dollars that were sold are gone forever. So even though they both had the same amount of money at retirement and the same amount of money left at the start of the bear market, the 100% total return investor now has less money. Had the markets not cooperated, he would really be faced with a dicey decision in subsequent withdrawals. If you want to make the point that the total return investor was following strategies that left him with a higher nest egg to begin with and hence he could take more of a bond allocation fine, but I don't think that is the argument you are making. Also now that we are faced with bond investments that are likely to generate negative real returns, this is an even bigger issue.
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Re: Why do investors chase dividend paying strategies

Postby fishnskiguy » Sun Mar 31, 2013 10:41 pm

saurabhec wrote:
larryswedroe wrote:saurabhec
I'll try one last time
Dividends don't matter. That is the simple logic and the evidence
If you don't pay a dividend does that mean the company is worth more or less? It should be indifferent, and again the logic and evidence show that

Now let's assume that in fact for some reason dividends did matter. Then prices would adjust and div stocks would have higher valuations and lower expected returns


First of all, if I am valuing a company, whether it pays a 2% dividend yield or a 4% yield of course does not really matter except for second order considerations such as whether or not I think the company is going to fritter away the reinvested earnings. What matters is the free cash flow and the discount rate, and the free cash flow projection is going to be driven by the earnings growth forecast. If one thinks that a company can reinvest free cash flow at a ROE that exceeds its cost of equity of course it is better for those earnings to be reinvested and propel future growth rather than be paid out as a dividend. I have already stated several times that dividend invesing is unlikely to result in maximizing total returns. It is really a risk management strategy that seeks to reduce the risk of having to sell stock during a bear market or a low return environment during withdrawal mode. If the choice is betwen having to generate a 4% inflation adjusted rate through a zero dividend equity portfolio in retirement or to take a little bit of a hit to expeceted total returns but have say a 3% dividend yield, I think a lot of people would opt for the latter. You might think this is inefficient, but that is simply because you believe that this strategy is undiversified and sub-obtimal in terms of total return maximization.

However even granting the theoretical reason for dividend paying stocks (especially those with above market yields) to underperform, the reality is that dividend payers do outperform in most long-term studies. Even in the relatively small period studied in the DFA study you cited, annualized returns were roughly equivalent. So even though it should theoretically lead to a return penalty, it doesn't seem to lead to one in practice.


Jeez, you'd think all those high paid MIT quants working for Blackrock and their brother would have thought that out by now and would have arb'ed it away.

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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sun Mar 31, 2013 11:32 pm

suarabhec
There is no difference if a div portfolio that pays say 4% and drops in value 40% or the total return approach that falls only 36 percent and sells four percent to create the dividend. The total returns must be the same. The dividend portfolio drops by 40%. And has 4 percent now in cash. The other portfolio is only down 36 percent and can raise the same 4 percent in cash.
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Re: Why do investors chase dividend paying strategies

Postby dbr » Sun Mar 31, 2013 11:39 pm

larryswedroe wrote:suarabhec
There is no difference if a div portfolio that pays say 4% and drops in value 40% or the total return approach that falls only 36 percent and sells four percent to create the dividend. The total returns must be the same. The dividend portfolio drops by 40%. And has 4 percent now in cash. The other portfolio is only down 36 percent and can raise the same 4 percent in cash.
Larry


In your illustration the two portfolios are equally volatile,the 40% total drop. For dividend investing to benefit, the assumption would have to be that the dividend portfolio is less volatile while otherwise offering the same expected return.

You have argued that a portfolio that in fact is less volatile while offering the same expected return would be an SV tilted stock allocation with risk reduced by allocating more to bonds.

The question would be whether or not dividend stock portfolios fail less frequently in retirement than total market portfolios of the same return. Likewise the question would be whether or not adjusted SV tilts fail less frequently in retirement than total market portfolios of the same return.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Mon Apr 01, 2013 9:16 am

dbr
No that is not what I said. I said a factor analysis will show no alpha for div strategies and that the returns of div strategies are well explained by the model, hence nothing unique.
I have shown already that a high div strategy is a low beta and value oriented portfolio, hence you get lower downside. But you can create that same thing without using a div strategy. In fact that is what the Larry Portfolio is all about

Here is link to the post I wrote and have cited many times when this comes up http://www.cbsnews.com/8301-500395_162-57383053/the-dangers-of-dividend-paying-stocks/

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Re: Why do investors chase dividend paying strategies

Postby Bradley » Mon Apr 01, 2013 9:27 am

larryswedroe wrote: In fact that is what the Larry Portfolio is all about


Best wishes
Larry


What is "the Larry Portfolio"? Where can it be found?

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Re: Why do investors chase dividend paying strategies

Postby dbr » Mon Apr 01, 2013 10:04 am

larryswedroe wrote:dbr
No that is not what I said. I said a factor analysis will show no alpha for div strategies and that the returns of div strategies are well explained by the model, hence nothing unique.
I have shown already that a high div strategy is a low beta and value oriented portfolio, hence you get lower downside. But you can create that same thing without using a div strategy. In fact that is what the Larry Portfolio is all about

Here is link to the post I wrote and have cited many times when this comes up http://www.cbsnews.com/8301-500395_162-57383053/the-dangers-of-dividend-paying-stocks/

Best wishes
Larry


If you get a lower downside, then in the example you created the dividend portfolio would not have fallen after dividend by 40%. If it falls 40% you have created an example where the downsides of the two portfolios are the same. In that case it is just simple arithmetic that there is no benefit to dividend investing and any difference in perception is the mental accounting you refer to. If the dividend portfolio has the same return and less downside than TSM, then there is an advantage to dividend investing. Am I confused that your total return portfolio was not a TSM portfolio but a Larry portfolio. In that case would not the Larry portfolio have fallen by less than 40% because it does an even better job of avoiding downside than a dividend portfolio does?

You state your message is that there are other ways to create the same result. I get that is what the message is. What I don't get is that if you claim the dividend portfolio accomplishes the same thing just as well, then there is an equal benefit to dividend investing. I thought that your analysis all along was that dividend investing does NOT serve this end as well as the "Larry" portfolio. IE, you show that dividend investing is a LESS efficient proxy for value investing. If dividend investing and value investing amount to the identical thing for all practical purposes, then portfolio theory explains dividend investing but does not offer a superior way to design a portfolio other than that design based on understanding is better than design based on mental accounting.

PS I have read and understand your articles. I do not understand your example as it appears to contradict your analysis. That is why I posted.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Mon Apr 01, 2013 10:09 am

larryswedroe wrote:Here is link to the post I wrote and have cited many times when this comes up http://www.cbsnews.com/8301-500395_162-57383053/the-dangers-of-dividend-paying-stocks/

The way I read that it makes the case that there is no good reason to invest in ANY stocks because they have:
  • significant exposure to market risk.
  • entirely different risks than bonds.
(Those are quotes from your article!)

OK, you'll say that is out of context because those quotes were in reference to the wisdom of replacing bonds with dividend stocks. But that makes the whole article out of context with respect to this thread since this thread is not considering a dividend strategy as a substitute for bonds.

Here is your very first post, the one that started this thread:
There is a whole "cult" of investors that seem to believe that investing in either the stocks of high dividend payers or companies with rapidly growing dividends provides superior results.
(btw, the pejorative reference to a "cult" is not a good way to help people see things your way, except perhaps those who already do.)

"Superior results" can mean more than maximizing a return/risk ratio. Perhaps those of us who believe (or hope) that dividend paying companies are more likely to provide a steady return (or as I see it, a managed safe withdrawal rate -- an appropriate return) have different ideas of "superior" than are addressed by MPT. That "appropriate" return is what makes it "safer."

I will be the first to admit I can be wrong in this, but I see nothing in your comments that even seems to address the issue. Now maybe you are talking over my head and maybe someday I will see the light, but for now I am relying on the Wellington Management Company who apparently disagree with you. They have a good history behind them that gives one confidence. You can say that "past performance, etc..." but MPT, EMH, etc, all rely on studies of the past to make their case. The thing is, I believe them! (As I believe everything YOU say.) I just don't know if they (and you) are addressing my concerns.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Mon Apr 01, 2013 11:14 am

DBR
I'll try to clear this up. What you have to look at is the two similar strategies. You cannot or should not compare a div strategy to "the market" but to strategies with similar loadings or similar expected returns.
Thus if you owned a div strategy and it was down 40% a portfolio with similar loadings should be down about the same. Then the question is are their more efficient strategies, the high tilt/low beta is more effective at reducing downside risk than a high div strategy because you have lower beta exposure, and of course you benefit from more global diversification.

Again, it's not that div strategies are inherently bad per se. But they provide no benefits of more efficient strategies and you lose diversification benefits which means you are taking uncompensated risks


Bertilak
You read it incorrectly. You don't invest in INDIVIDUAL stocks. You invest in broad asset classes to capture the risk premium and get broad diversification to eliminate/minimize the idiosyncratic risks. There is no "asset class" of dividend stocks because there is nothing special about them. If that was the case we would have a dividend factor in the model that explains returns.

As to cult, I purposely put that in quotes to try and avoid that perception, but with that said IMO it is good and accurate description because many of the people I talk to about divs have a "religious conviction" about it, meaning the facts are irrelevant, they believe period.

As to superior, as I noted there is nothing unique about dividends, it's factor loadings that matter. That is what the evidence and the logic and all the theory about investing show. Thus unless you can show that the theory is wrong, the data is wrong or the logic is wrong, than IMO there is no basis other than some belief that dividends are somehow better. But no facts nor any theory.

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Re: Why do investors chase dividend paying strategies

Postby bertilak » Mon Apr 01, 2013 11:25 am

larryswedroe wrote:You read it incorrectly. You don't invest in INDIVIDUAL stocks.

From the Wellington Summary Prospectus:
The Fund invests 60% to 70% of its assets in dividend-paying and, to a lesser extent, non-dividend-paying common stocks of established large and mid-size companies.
So Welling ton invests in INDIVIDUAL stocks for me. And does so primarily in "dividend-paying" stocks.

As to superior, as I noted there is nothing unique about dividends, it's factor loadings that matter.

The unanswered question is "Matters for what?"
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Mon Apr 01, 2013 12:01 pm

bertilak
Re Wellington, that of course is fine--mutual funds of course invest in individual stocks. And Wellington certainly has a great track record and is relatively low cost.
As to matters, that is exactly the point--the research makes clear is that the exposure to those factors explains almost all of the risk and expected return of a portfolio. Which is why factor regressions are the gold standard for research papers that look at performance of strategies/funds.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Mon Apr 01, 2013 12:29 pm

larryswedroe wrote:bertilak
Re Wellington, that of course is fine--mutual funds of course invest in individual stocks. And Wellington certainly has a great track record and is relatively low cost.
As to matters, that is exactly the point--the research makes clear is that the exposure to those factors explains almost all of the risk and expected return of a portfolio. Which is why factor regressions are the gold standard for research papers that look at performance of strategies/funds.
Larry

The idea of "factors" gets back to a question I posted earlier at: Two Kinds of Value Stocks?. I hear that value is a *risk* factor, but see that some apparently conservative funds (e.g. Wellington) invest in value stocks. It also seems to me that large, established, companies that can afford to pay dividends are inherently conservative. This (value=risk vs. value=conservative) seemed like a contradiction to me.

There are several criteria used to define value stocks: p/e, p/b, p/div, p/whatever. Maybe dividends are among the conservative criteria. Maybe some of those imply more or less risk. Perhaps there are multiple factors hiding behind the same "value" designation but perhaps there is no objective way to pull them apart, requiring active management (human judgement) to do so.
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Re: Why do investors chase dividend paying strategies

Postby STC » Mon Apr 01, 2013 12:32 pm

bertilak wrote:
larryswedroe wrote:bertilak
Re Wellington, that of course is fine--mutual funds of course invest in individual stocks. And Wellington certainly has a great track record and is relatively low cost.
As to matters, that is exactly the point--the research makes clear is that the exposure to those factors explains almost all of the risk and expected return of a portfolio. Which is why factor regressions are the gold standard for research papers that look at performance of strategies/funds.
Larry

The idea of "factors" gets back to a question I posted earlier at: Two Kinds of Value Stocks?. I hear that value is a *risk* factor, but see that some apparently conservative funds (e.g. Wellington) invest in value stocks. It also seems to me that large, established, companies that can afford to pay dividends are inherently conservative. This (value=risk vs. value=conservative) seemed like a contradiction to me.

There are several criteria used to define value stocks: p/e, p/b, p/div, p/whatever. Maybe dividends are among the conservative criteria. Maybe some of those imply more or less risk. Perhaps there are multiple factors hiding behind the same "value" designation but perhaps there is no objective way to pull them apart, requiring active management (human judgement) to do so.


This is a very interesting question...
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Mon Apr 01, 2013 12:34 pm

larryswedroe wrote:suarabhec
There is no difference if a div portfolio that pays say 4% and drops in value 40% or the total return approach that falls only 36 percent and sells four percent to create the dividend. The total returns must be the same. The dividend portfolio drops by 40%. And has 4 percent now in cash. The other portfolio is only down 36 percent and can raise the same 4 percent in cash.
Larry


Larry,
Maybe it will take your retirement for you to see this clearly. Of course there is no difference in the example above in year #1, but in down markets the portfolio that has to burn it's principal is at a distinct disadvantage. Let's carry your scenario out a few more years, with no market recovery. Starting with a $100,000 in both, with 4% ($4000) income from both. Remember market does not recover (or goes down further, which makes things worse) -- both portfolios (or companies) have plenty of income and or cash to ride through the downtime -- just that the investors are not kind to either group and their price does not change during the downturn.

Non -dividend payer $100,000 down to $60k during year 1 - pulls $4000
Year 1 - $56,000
Year 2 - $52,000
Year 3 - $48,000
..
.
Year 15 $0

Dividend payer $100,000
Doesn't matter what the principal of the portfolio is because the income comes from the 4% dividend.

$4000 dividend goes on for the complete 30 years of this persons retirement, portfolio eventually recovers in later years, investor still has his $100k.

In reality since the dividend payer is one of many that has increased it's dividend in every year of the past 30, the story is even much worse, since for the non-dividend investor to keep up, he will go broke much sooner. In fact with a mere 4% per year inflation of the $4000 payout, the non-dividend payer is broke in year 12.

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Re: Why do investors chase dividend paying strategies

Postby rvaboglehead » Mon Apr 01, 2013 1:15 pm

Larry,
Maybe it will take your retirement for you to see this clearly. Of course there is no difference in the example above in year #1, but in down markets the portfolio that has to burn it's principal is at a distinct disadvantage. Let's carry your scenario out a few more years, with no market recovery. Starting with a $100,000 in both, with 4% ($4000) income from both. Remember market does not recover (or goes down further, which makes things worse) -- both portfolios (or companies) have plenty of income and or cash to ride through the downtime -- just that the investors are not kind to either group and their price does not change during the downturn.

Non -dividend payer $100,000 down to $60k during year 1 - pulls $4000
Year 1 - $56,000
Year 2 - $52,000
Year 3 - $48,000
..
.
Year 15 $0

Dividend payer $100,000
Doesn't matter what the principal of the portfolio is because the income comes from the 4% dividend.

$4000 dividend goes on for the complete 30 years of this persons retirement, portfolio eventually recovers in later years, investor still has his $100k.

In reality since the dividend payer is one of many that has increased it's dividend in every year of the past 30, the story is even much worse, since for the non-dividend investor to keep up, he will go broke much sooner. In fact with a mere 4% per year inflation of the $4000 payout, the non-dividend payer is broke in year 12.

fd


Um... is this really the example you want? The assumptions appear to be:
1. Non-dividend paying portfolio drops 40%, then has 0% total return forever
2. Dividend paying portfolio drops 40%, then INCREASES dividend to ~6.66% to keep paying out a $4,000/year dividend.

If that's how the two portfolios perform, they're obviously not the same except for dividend strategies. The 2nd portofolio is magical, always producing at least $4,000/year regardless of the value of the portfolio, thus increasing dividends after a 40% decline in price.

If they both are really the same and drop 40%, even if the dividend portfolio keeps it's 4% dividend, that would be $2,400, meaning you would need to sell shares in a down market to get the $4,000 you need, which is the very thing you're saying dividend portfolios protect you from. Am I missing something?
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Re: Why do investors chase dividend paying strategies

Postby rvaboglehead » Mon Apr 01, 2013 1:37 pm

In other words, if you need a fixed amount of money each year in retirement, and if dividend vs. non-dividend strategies have the same TOTAL return, a 40% drop in year 1 has an equal chance of wrecking your portfolio regardless of whether its total return is made up of mostly dividends vs. mostly price appreciation.
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Re: Why do investors chase dividend paying strategies

Postby 325e » Mon Apr 01, 2013 1:49 pm

I think the posts that say "dividend return is only a mental feel good accounting" are funny.

Isn't the emotional part of investing at least half of it, maybe more? And if it makes people only feel better to have a check four times a year, then that is all they need. Their strategy of holding will outperform their strategy of freaking out and selling everything. I wouldn't put the word "only" in front of anything feel good or emotional.
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Re: Why do investors chase dividend paying strategies

Postby swyck » Mon Apr 01, 2013 2:13 pm

larryswedroe wrote:nedsaid
You missed the point or misinterpreted it. As I showed a high dividend strategy is nothing more than a value strategy and a poor one at that. It's a cult IMO because people who believe in that strategy cannot accept that fact, ignore the data, and so on. There is a reason for a value strategy based on the data, and either a risk or behavioral story. There is none for a dividend strategy, at least IMO.
The same is true of a high growth of dividend strategy. There is just nothing special about it
Best wishes
Larry

No, you've been trolling a bit using inflammatory language, or did you not use the phrase "cult of investors"? Yeah, how can we misinterpret this after seeing that?

Then, in your article you talk about high dividend strategies. But that's not the name of this post, it is "dividend paying strategies". Yet you don't define what "high dividend" means. Is it any stock that pays a dividend? Anything more than the S&P average? 4%+? Or how about anything above 10%+? How can we judge what you're saying if you don't tell us what this is?

The net result was that the annualized returns were the same 7.6 percent.
So at worst it's not any worse, huh? Yes, I did see you mentioned it's less volatile, but you're not really hitting a more run here are you?

And IMO using 1991-2012 as your range is cherry picking one of the highest stocks runs in history, along with a period of historic low dividend payments. Why not 1980-2012, what does that data show? Oh how about 1950-2012?

Note, I'm not actually saying you are wrong, just that your article doesn't make your case. Bring it up for discussion at your cult meeting.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Mon Apr 01, 2013 2:28 pm

325e wrote:I think the posts that say "dividend return is only a mental feel good accounting" are funny.

Isn't the emotional part of investing at least half of it, maybe more? And if it makes people only feel better to have a check four times a year, then that is all they need. Their strategy of holding will outperform their strategy of freaking out and selling everything. I wouldn't put the word "only" in front of anything feel good or emotional.

What about putting the word "only" after "feel good?" For example:

    "That approach makes people feel good only because they don't understand what they are doing."
I am someone who currently feels good about a dividend strategy but I will drop it like a hot rock if I come to believe I can do better with a different strategy.
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Re: Why do investors chase dividend paying strategies

Postby BruceM » Mon Apr 01, 2013 2:37 pm

I'm not FinancialDave, but....

Um... is this really the example you want? The assumptions appear to be:
1. Non-dividend paying portfolio drops 40%, then has 0% total return forever
2. Dividend paying portfolio drops 40%, then INCREASES dividend to ~6.66% to keep paying out a $4,000/year dividend.


#1 is unrealistic and should show growth...of course, depending on AA. Perhaps a 30/70 mix over a 20 year period beginning in 2000 as a comparison.

#2 is far more realistic. For example, I bought KMB in 1999 and in 2010 it was selling for just over what I paid for it....but its dividend had grown by an average of about 9%/yr. I'm not saying this is common....I'm saying that price and dividend do not necessarily have a causal relationship, as there are simply too many other variables affecting the former that may have little to do with the latter.

Example: During the market decline of 08/09, of the then 48 income stocks I held (then and now), only 4 cut their dividends (2 banks, an mREIT and a BDC). Of the remaining 64%, about 40% (28) grew their dividends over this period. Portolio income grew fractionally in 2008 and dropped by just over 4% in 2009. By 2011, portfolio income was back to the 2008 level, thanks to dividend growth.

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Re: Why do investors chase dividend paying strategies

Postby Ricola » Mon Apr 01, 2013 2:38 pm

Running the past performance math for both scenarios div vs. non-div is interesting, but personally I have an underlying distrust of corporate management which causes me to WANT to believe more in a div plan than a non-div one. Too much past history tells me corporate management will pay itself first before the stockholders with short-turn option enhancements, enormous salaries and perks, stupid strategies, wasteful en-devours, etc., all before caring about long term shareholders, that is if they believe there really are any long term shareholder other than just pure traders.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Mon Apr 01, 2013 2:42 pm

Bertilak
Fama and French when they published the papers said that they thought these were risk factors and left it to others to explain the sources of risk. Today, the issue of whether they are risk factors or not is a great debate. The way I think to best describe them is factors that explain the differences in returns between diversified portfolios.

Swyck
Trolling? You've got to be kidding.

As to inflammatory language, I explained why I used the term--because it's my experience that when presented with the facts and the evidence they basically ignore it.

As to titles of articles, if you know anything about the media I don't determine the titles at all. I submit a piece and the editors at CBS put whatever they think will attract the most attention. Sometimes it's misleading but I have no control.

as to div strategies, if you read all the posts you would know that I have described very specifically what the two main strategies, high div and fast growth of divs. And academics have specific meanings. So just like high div is top 30% of payers, the high BtM value strategy would also be top 30%. I even provided factor regressions on two funds that are high div and fast growing

As to the data, as I have pointed out, you have to look not at comparing the returns to the market, but to a portfolio with the same type loadings. And there are superior ways to reduce left tail risks.


325
If that mental accounting helps an investor to stay the course, then it's a good thing. Just as while owning a significant allocation to international stocks is the right strategy, if doing so causes you to panic when it underperforms, you're better off without any. But that doesn't make the strategy optimal

FD
First, I have been advising clients in retirement for almost 20 years. We always advised to take a total return approach. What you are missing that dividends don't create extra returns, they just change the form of the return from capital appreciation to current income. The total return from the stock is unchanged.

As I explained, assume stocks trade at book value, if you own stock at $100 and it earns $4 and pays a $4 dividend, your stock is now back to $100 and you have $4 in cash. My stock pays no dividend and is worth $104, and I paid no tax. Now if I want to raise $4 in cash I simply sell that amount of stock and I'm now in same position as you. There is no more invasion of principle in B than in A. It's identical. This is the main point that seems to be missed. If the stocks drop to 60 then your stock will go to 56 when it pays the dividend, but mine will remain at 60. Same thing

I hope that is helpful
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Mon Apr 01, 2013 2:43 pm

rvaboglehead wrote:If they both are really the same and drop 40%, even if the dividend portfolio keeps it's 4% dividend, that would be $2,400, meaning you would need to sell shares in a down market to get the $4,000 you need, which is the very thing you're saying dividend portfolios protect you from. Am I missing something?

I think what you are missing is that there ARE companies that have a history of maintaining and even increasing dividends through both bull and bear markets. Investing in THOSE companies is the strategy. Sure, some of those companies may fall off the wagon under stress, but the strategy doesn't have to work perfectly 100% of the time to be effective. And these are dividends measured in dollars, not percent. So maybe their NAV is slower to grow than that of other companies. Some of us will gladly make that trade-off.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Mon Apr 01, 2013 3:10 pm

larryswedroe wrote:Fama and French when they published the papers said that they thought these were risk factors and left it to others to explain the sources of risk. Today, the issue of whether they are risk factors or not is a great debate. The way I think to best describe them is factors that explain the differences in returns between diversified portfolios.

So I guess we can agree that there is some mystery about exactly what is going on here.

Maybe we disagree on whether or not any one cult has the incantations to unlock that mystery and tell us what strategies best achieve specific goals. Or is this still a work in progress?
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Re: Why do investors chase dividend paying strategies

Postby statsguy » Mon Apr 01, 2013 3:52 pm

rvaboglehead wrote:Um... is this really the example you want? The assumptions appear to be:
1. Non-dividend paying portfolio drops 40%, then has 0% total return forever
2. Dividend paying portfolio drops 40%, then INCREASES dividend to ~6.66% to keep paying out a $4,000/year dividend.

If that's how the two portfolios perform, they're obviously not the same except for dividend strategies. The 2nd portofolio is magical, always producing at least $4,000/year regardless of the value of the portfolio, thus increasing dividends after a 40% decline in price.

If they both are really the same and drop 40%, even if the dividend portfolio keeps it's 4% dividend, that would be $2,400, meaning you would need to sell shares in a down market to get the $4,000 you need, which is the very thing you're saying dividend portfolios protect you from. Am I missing something?



About your point #2, yes that is what happens and it is not magical or mystical... in my experience, it is just typical

For what it is worth that has been our experience. When we bought our stocks the dividend yield was around 4%, then during the recession it rose to almost 6% and today it is back down around 4% again. But the actual income has increased substantially from before the 2009 as all of our companies have raised their dividend multiple times since 2009.

NVS (Novartis), which we did not buy until 2010, paid $1.40/share is 2008 and has increased the dividend every year since, and it paid 2.48/share last year. That is a 61% rise in 4 years, they have indicated that in 2013 they will pay $2.53/share. I start with NVS because it has had really large dividend growth. A more typical dividend growth (the average growth for our portfolio) is KMB (Kimberly Clark). It paid $2.32/share in 2008 and has increased it every year since, paid 2.96 last year, and has announced it will pay $3.24/share this year. That is, almost a 40% increase in 5 years (the yield is similar today to what it was before the recession, meaning the share price has appreciated 40% too). A

True we had two (maybe it was three can't really remember now) that cut their dividends. PFE (Pfizer) was paying 1.28/share in 2008 and halved its dividend in 2009 and it is now back to 0.96/share. WFC (Wells Fargo) paid $1.30/share in 2008, then cut its dividend substantially paying only 0.20/share in 2010, but is now paying $1.00/share with promises to increase it again soon.

So in short, yes during a bear market, companies tend to keep paying (and most even increase) their dividends so that the overall yields increase. And when a bull market is going, companies tend to increase their dividends so that over time the yield stays about the same from decade to decade.

Best of luck
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Mon Apr 01, 2013 3:54 pm

rvaboglehead wrote:
Um... is this really the example you want? The assumptions appear to be:
1. Non-dividend paying portfolio drops 40%, then has 0% total return forever
2. Dividend paying portfolio drops 40%, then INCREASES dividend to ~6.66% to keep paying out a $4,000/year dividend.

If that's how the two portfolios perform, they're obviously not the same except for dividend strategies. The 2nd portofolio is magical, always producing at least $4,000/year regardless of the value of the portfolio, thus increasing dividends after a 40% decline in price.

If they both are really the same and drop 40%, even if the dividend portfolio keeps it's 4% dividend, that would be $2,400, meaning you would need to sell shares in a down market to get the $4,000 you need, which is the very thing you're saying dividend portfolios protect you from. Am I missing something?


I think you missed part of the example -- this person is retired and has no new money going in. When he bought the series of dividend paying stocks they were paying out 4% ($4000) and continued to do so and even showed growth over the 15+ years, so it continued paying out the $4000 + to its shareholders.

To be fair to the example, if the dividend payers dropped 40%, the non-dividend payers probably dropped more, as their Std/dev, and Beta, is almost always higher, but I simplified the example by saying there was no return over the given window. Sure, make up some other "down year numbers" like it went down 40% the first year and 20% the second year, then leveled off, no return for 5 years. Still the non-dividend portfolio has burned up enough of its cash in 7 years that it will most likely not recover. It's not like the market has to stay down forever - just a good 10 years and you are toast. Gee, have we had any recent 10 year periods where the market when nowhere?

:oops:
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Mon Apr 01, 2013 4:06 pm

I think you're missing the part where when a stock, mutual fund, or ETF pays a dividend, it's NAV drops by an amount equal to the amount of the dividend.

All your example really does is assume before the fact that dividend payers return more since their NAV does not drop. In this case, the dividend payers are returning 4% a year, or whatever the number is, while the non-dividend payers are returning nothing. Of course the dividend payers will have a better result if you assume that returns aren't flat for them.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Mon Apr 01, 2013 5:03 pm

Bertilak
The mystery is in the source of the premiums. We don't know exactly why they exist,. But we do know they explain returns. We also know there is no logic to a dividend strategy per se because the returns of such strategies are fully explained by their exposure to common factors other than dividends. If there was something special we would need another factor. That is why I used the word cult. There is nothing there except a "religious" belief. No logic, no theory, no evidence. That to me describes a cult.

Note further, high dividend paying stocks tend to have lower beta for simple reasons. The dividend makes them shorter duration stocks than those that don't pay out dividends. Also many are REITS and regulated utilities which trade off one risk (beta) for other risks (like term risk). The question is when comparing strategies are you comparing apples to apples to see which is the best.

Hope that helps
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Re: Why do investors chase dividend paying strategies

Postby jda » Mon Apr 01, 2013 5:08 pm

larryswedroe wrote:
As I explained, assume stocks trade at book value, if you own stock at $100 and it earns $4 and pays a $4 dividend, your stock is now back to $100 and you have $4 in cash. My stock pays no dividend and is worth $104, and I paid no tax. Now if I want to raise $4 in cash I simply sell that amount of stock and I'm now in same position as you. There is no more invasion of principle in B than in A. It's identical. This is the main point that seems to be missed. If the stocks drop to 60 then your stock will go to 56 when it pays the dividend, but mine will remain at 60. Same thing

I hope that is helpful
Larry


Ideally that's the case, but in reality it's almost never the case. Just because the stock doesn't pay dividend, doesn't mean the whole $4 translate into stock price, especially short term. This also applies to share buy back because often the share buy back is offset by company's equity incentives for its employee. Another thing about dividend is that it's harder to fake in the balance sheet because either you have the cash to pay for it or you raise debt to pay for it where as other metrics such as P/E can be manipulated more easily with creative accounting.
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Mon Apr 01, 2013 6:08 pm

Ketawa wrote:I think you're missing the part where when a stock, mutual fund, or ETF pays a dividend, it's NAV drops by an amount equal to the amount of the dividend.

All your example really does is assume before the fact that dividend payers return more since their NAV does not drop. In this case, the dividend payers are returning 4% a year, or whatever the number is, while the non-dividend payers are returning nothing. Of course the dividend payers will have a better result if you assume that returns aren't flat for them.


I think you are missing the point where it doesn't matter -- I hold the dividend payers only for income so the drop in NAV doesn't matter, and I hold companies that have been increasing their dividend for 30-50 years, which is a pretty high guarantee for any type of inflation protected income.

It's not about total return which you are hoping for while you are in your accumulation phase - it is about a continued income stream, which is much more valuable in your distribution phase.

fd
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Re: Why do investors chase dividend paying strategies

Postby SGM » Mon Apr 01, 2013 6:38 pm

I don’t want to get into this argument, because I don’t know what side I would come down on, liking a little bit of both strategies. Below are some musings, that may not shed any light and hopefully will not attract heat, but I will post it with the hope that it will help me clear up my own thinking.

I think it matters when you sell the non-dividend paying stock at the end of the year vs. the beginning of the year. Assuming an 8 percent return for the dividend paying stock and a 12 percent return for the non- dividend paying stock:

If you sell the non-dividend stock at the beginning of the year to make up for the $4 dividend you end up with stock worth 107.52. If you wait until the end of the year the stock is worth 108 if you assume a straight line increase of 12% (8% increase plus the unpaid dividend-the $4 selling). The dividend paying stock only goes up 8% and you end up with $108. However the dividend paying stock gives you $1 per quarter. You get your money earlier. A positive for selling the stock late is that over time the stock markets tend to go up until they don’t. Of course there is the January effect which now seems to be in October or November.

Negatives for the dividend strategy include paying the dividend tax yearly and there is a smaller universe of dividend paying stocks. You could put yourself in a bind with the strategy.

Negatives for the non-dividend strategy include when to sell Selling on January 2 is almost always a loser unless the market tanks for the whole year. One cannot pick the optimum time to sell without a crystal ball. You also don’t want to dollar cost average on the way out of an investment. Maybe AA balancing will take care of that issue.

I am for mixing and matching. Some dividend paying stocks and funds, some total return MFs and ETFs, some bonds, tips and SPIAs.

There is something about receiving a check periodically that is very reassuring. I have read of studies showing that retirees with regular checks coming in are the happiest.

The term cult doesn't bother me. Some people might think BHs are a cult. There are degrees of cult behavior.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Mon Apr 01, 2013 7:35 pm

SGM wrote:There is something about receiving a check periodically that is very reassuring. I have read of studies showing that retirees with regular checks coming in are the happiest.

If it's good enough for this guy, it's good enough for me.
Image

How it's worked out so far.
Image

Here's how non-dividend investing works.
Image
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Mon Apr 01, 2013 8:19 pm

jda
Unfortunately the research doesn't support your hypothesis. The fact is that all else equal dividend paying stocks have no different returns than ones that don't pay them.
One reason might be that even if your theory is right, the market knows it and prices accordingly.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Mon Apr 01, 2013 8:21 pm

FD
Sorry but you are missing the point. The income is not really income, it is just reduction in the value of the company paid to you in the form of a dividend. You can create your own dividends by selling shares.
That is what the evidence makes very clear---there is simply no difference in returns. It's just mental accounting
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Mon Apr 01, 2013 8:37 pm

FinancialDave wrote:I think you are missing the point where it doesn't matter -- I hold the dividend payers only for income so the drop in NAV doesn't matter, and I hold companies that have been increasing their dividend for 30-50 years, which is a pretty high guarantee for any type of inflation protected income.

It's not about total return which you are hoping for while you are in your accumulation phase - it is about a continued income stream, which is much more valuable in your distribution phase.

fd


If you are going to ignore the drop in NAV, then your example doesn't have much meaning. It's more efficient to create your own income stream from a diversified portfolio. The total return investor does this.

It's also more valuable in one way that is directly measurable and very apparent to the investor -- you avoid the higher taxes on dividends. Even if they're all qualified dividends, the total return investor defers taxes for decades and comes out ahead.

Dividend stocks have these two huge hurdles to overcome, and they don't.
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Re: Why do investors chase dividend paying strategies

Postby statsguy » Mon Apr 01, 2013 10:11 pm

larryswedroe wrote:FD
Sorry but you are missing the point. The income is not really income, it is just reduction in the value of the company paid to you in the form of a dividend. You can create your own dividends by selling shares.
That is what the evidence makes very clear---there is simply no difference in returns. It's just mental accounting
Larry


I think the point is that the income is fixed dollars and the share price is variable. When the market drop 30% you still get your dividend in the same number of dollars as before, but when you sell shares you need to sell 42% more shares to get your income.

Take an example, ignoring the obvious diversification issue if you only owned one stock
selling shares to create dividend
Say you buy 100 shares at $100 ($10,000) in a fund (or stock) with no dividend. The market drops 30% and you need to make a 4% withdraw. That means your shares are worth $70 each and so you need to sell 5.71 shares to get your $400 income. You now have about 94.29 shares worth $70 each.

dividend
Say you buy 100 shares at $100 ($10,000) in a fund (or stock) yielding 4%. The market drops 30% and you need to make a 4% withdrawal. You take your dividends and you still have 100 shares.

It is assumed that in the first case that the shares are more volatile so the drop was probably more than 30% (or the dividend stock dropped less than 30%), in any case, non-dividend investment is more volatile and it will need that extra volatility to recover because the dividend stock needs to increase 42% to get back to $10,000, while the non-dividend stock needs to increase 51.5% to get back to $10,000.

One risk for the non-dividend payer is that a bear market can last a very long time and his share count and over-all value may decrease faster than he/she can tolerate. The dividend investor has the risk of dividend cuts.

I think this is one of those cases summarized by.... there are many roads to Dublin.

Best of luck
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Re: Why do investors chase dividend paying strategies

Postby statsguy » Mon Apr 01, 2013 10:15 pm

Ketawa wrote:It's also more valuable in one way that is directly measurable and very apparent to the investor -- you avoid the higher taxes on dividends. Even if they're all qualified dividends, the total return investor defers taxes for decades and comes out ahead.


With good tax planning (or maybe simply earning less in retirement) dividends may be taxed at the 0% rate.

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Re: Why do investors chase dividend paying strategies

Postby gt4715b » Mon Apr 01, 2013 11:17 pm

statsguy wrote:
I think the point is that the income is fixed dollars and the share price is variable. When the market drop 30% you still get your dividend in the same number of dollars as before, but when you sell shares you need to sell 42% more shares to get your income.

...

It is assumed that in the first case that the shares are more volatile so the drop was probably more than 30% (or the dividend stock dropped less than 30%), in any case, non-dividend investment is more volatile and it will need that extra volatility to recover because the dividend stock needs to increase 42% to get back to $10,000, while the non-dividend stock needs to increase 51.5% to get back to $10,000.

One risk for the non-dividend payer is that a bear market can last a very long time and his share count and over-all value may decrease faster than he/she can tolerate. The dividend investor has the risk of dividend cuts.


This seems to assume that someone with a non-dividend strategy, i.e. Total Stock Market or more appropriately TSM with a value tilt, would be selling stock in a market downturn. This definitely wouldn't be the case for anyone that knows what they're doing. The main point that Larry is making is that a high dividend strategy can be matched with a value tilted portfolio with the appropriate allocation of bonds to match the lower beta of the high dividend portfolio. In a market downtown, bonds can be sold to meet any income shortfall. As a reference point, Vanguard Intermediate Treasury Fund was up 16.77% in 2008. So that could have been sold (a capital gain instead of ordinary income in case you're taxable).

There are two main claims that I've seen made by high dividend investors:
1. Owning stocks that generate high dividends give me a piece of mind that I don't get with a HmL tilted portfolio. I think this is valid point of view, especially if it helps you maintain a consistent strategy.

2. A high dividend strategy is superior to a HmL tilted stock/bond mix in either return, downside protection or portfolio longevity. This claim is false and the academic research demonstrates it. However, if an investor makes this claim but still maintains a consistent strategy it won't hurt them, but we shouldn't let false ideas spread since this is an educational forum.

EDITED TO REDUCE SIZE OF QUOTED POST
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Mon Apr 01, 2013 11:42 pm

statsguy
That is incorrect and I'm sure you will see it if you think about it. The stock price will drop by exactly the amount of the dividend paid. This is the point people cannot seem to understand. It's not a percent dividend. It's a dollar amount. And it's the same dollar amount whether company pays it to you in a dividend or it keeps in and you sell the same amount of stock to generate it.
Also dividends on NOT fixed. They are variable and can go to zero as well. In fact as I pointed out in 2008 a large percent of companies cut dividends and a large percent eliminated them.
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Re: Why do investors chase dividend paying strategies

Postby statsguy » Tue Apr 02, 2013 1:01 am

larryswedroe wrote:statsguy
Also dividends on NOT fixed. They are variable and can go to zero as well. In fact as I pointed out in 2008 a large percent of companies cut dividends and a large percent eliminated them.
Larry


I don't know the actual percentage of dividend cuts. We had 3 cuts out of 23 companies (13%) but the income increased year-over-year.

To provide some data... here is a copy of my post from Dec 25, 2009.
viewtopic.php?p=625465

For the record.... here are our dividend stocks.... grouped by dividend cuts, dividend increases, and no change.

no change--- PAYX (Paychex), VTR (Ventas), SYY (Sysco),

increase--- MMM (3M), SO (Southern), CMP (Compas Materials), SPH (Suburban Propane), O (Realty Income), BPL (Buckeye Partners), EPD (Enterprise Products Partners), WMT (Walmart), KMB (Kimberly Clark), LLTC (Linear Technology), JNJ (Johnson&Johnson), CVX (Chevron), PG (Proctor and Gamble), T (AT&T), KMR (Kinder Morgan Management), VA (Verizon), XOM(Exxon Mobile)

decrease--- WFC (Wells Fargo), PFE (Pfizer), GE (General Electric)

Maybe I got lucky, but we always try to choose stocks that will increase their dividends... I thought PFE was going to cut their dividend and considered selling but decided to keep it... the GE cut surprised me, and Wells Fargo cut its dividend once it took TARP money.... I hope its dividend will begin increasing again soon.

Anyway our income from dividend stocks this year is flat... actually our income is up a less than a $100 over last yea... the cuts were large and the increases small...

As I have said before we buy dividend stocks for the value value side of the M* stylebox in our portfolio.

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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Tue Apr 02, 2013 8:29 am

statsguy

I provided the data here in this post
http://www.cbsnews.com/8301-505123_162-57576075/why-chasing-dividends-is-a-mistake/

43 percent of firms around the globe cut dividends and 19 percent eliminated them. While dividends are more stable than earnings, there is still risk. They are certainly not a substitute for safe bonds (which many have been doing) and they are nothing special. That is what the evidence shows. People simply refuse to admit the facts. That is why I called it a cult. There is nothing special about dividends that the market doesn't already build into prices. Dividend strategies simply trade one risk for another--it's just that most people don't know the science here, the role of the factors in explaining returns. So they get fooled, and they play mental accounting games

Good luck to you. Remember that you are taking uncompensated risks that can be easily diversified away.

Best wishes
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Re: Why do investors chase dividend paying strategies

Postby linenfort » Tue Apr 02, 2013 9:53 am

I've been cutting back on dividend-oriented holdings ever since I discovered this site and the Boglehead book many years ago.
Still, the psychological pull is strong. I don't chase dividend growth anymore, but seeing dividends come in + seeing a raise in the news is like eating a sugary doughnut.

I often wonder, though, are people who look down their noses at gold because it produces no dividend the same members who sneer at dividend stocks?

SGM wrote:There is something about receiving a check periodically that is very reassuring. I have read of studies showing that retirees with regular checks coming in are the happiest.

It's something to look forward to, forever. I wonder if dividend investors live longer, which is surely the best investing strategy. :happy
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Tue Apr 02, 2013 10:19 am

larryswedroe wrote:Dividend strategies simply trade one risk for another...

But is that not a rational thing to do? You did say...
larryswedroe wrote:dividends are more stable than earnings

And I think that is what most of us in the dividend cult (and I think the Monopoly guy should be our cult mascot) are saying in other ways.

Perhaps I am accepting longer term risk (risk that my investments my not grow in NAV as much as a more efficient portfolio has the potential to do) in order to lessen shorter term risk (that I will not get enough return to pay the mortgage some moths). Perhaps, if I were not in dividend stocks, I would need to take some money off the table to use as a buffer for the shorter-term volatility of a portfolio that has longer term prospects.

ASIDE:
Here is a speculation on the effects of a company (or fund) losing value that offsets a dividend that just got paid. Perhaps in the weeks before the dividend, the stock went UP in value in anticipation so that when the price does drop it is doing so from a higher price than the stock would have been at at if it did not produce dividends. Whether or not it is rational of investors to bid up the price is secondary. If the stock goes up for behavioral reasons, I'll take it.
Last edited by bertilak on Tue Apr 02, 2013 10:20 am, edited 1 time in total.
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Re: Why do investors chase dividend paying strategies

Postby Grt2bOutdoors » Tue Apr 02, 2013 10:19 am

statsguy wrote:
larryswedroe wrote:statsguy
Also dividends on NOT fixed. They are variable and can go to zero as well. In fact as I pointed out in 2008 a large percent of companies cut dividends and a large percent eliminated them.
Larry


I don't know the actual percentage of dividend cuts. We had 3 cuts out of 23 companies (13%) but the income increased year-over-year.

To provide some data... here is a copy of my post from Dec 25, 2009.
viewtopic.php?p=625465

For the record.... here are our dividend stocks.... grouped by dividend cuts, dividend increases, and no change.

no change--- PAYX (Paychex), VTR (Ventas), SYY (Sysco),

increase--- MMM (3M), SO (Southern), CMP (Compas Materials), SPH (Suburban Propane), O (Realty Income), BPL (Buckeye Partners), EPD (Enterprise Products Partners), WMT (Walmart), KMB (Kimberly Clark), LLTC (Linear Technology), JNJ (Johnson&Johnson), CVX (Chevron), PG (Proctor and Gamble), T (AT&T), KMR (Kinder Morgan Management), VA (Verizon), XOM(Exxon Mobile)

decrease--- WFC (Wells Fargo), PFE (Pfizer), GE (General Electric)

Maybe I got lucky, but we always try to choose stocks that will increase their dividends... I thought PFE was going to cut their dividend and considered selling but decided to keep it... the GE cut surprised me, and Wells Fargo cut its dividend once it took TARP money.... I hope its dividend will begin increasing again soon.

Anyway our income from dividend stocks this year is flat... actually our income is up a less than a $100 over last yea... the cuts were large and the increases small...

As I have said before we buy dividend stocks for the value value side of the M* stylebox in our portfolio.



Stats


Five of the securities you show above that increased are limited partnerships making use of leverage and accounting rules to increase those distributions. Yes, earnings need to increase to support it, but many limited partnership distributions are affected by the general partners incentive distribution rights (IDRs) and decision-making. Initially, you may seem happy with those increases, however you should be cognizant that those distributions are a partial return of your capital, if held in a taxable account, you are merely delaying the tax impact to you. I own WFC and was not surprised about the dividend cut, I do not directly own GE and I was not surprised of the cut when over 55% of their operating earnings at the time were dervived from finance operations as opposed to the quasi-industrial conglomerate everyone thought they were. WFC has been raising the dividend over the last two years, but it still is not back to the $1.36 level is was prior to the cut. I also hold KMB - now, it's a great company, consistent dividend increases - in a year of record operating cash flow, they returned 76% back to the shareholders, you would also expect your percentage of stockholders equity to have grown right? - Well, stockholders equity actually declined. I also find it's valuation is quite stretched at 22-23 times earnings for a company that historically has traded at a 15 P/E. It's trading at a growth multiple instead of value. Great companies are not always good investments. One other thought on dividends, just how much of the dividend increases are being funded with cash flow from operations as opposed to cash flow from leverage and equity buybacks, the point is don't confuse the health of an individual company with the thought that the payment of a dividend or a pattern of increasing dividends is indicative of future returns. It is not! My point is alot of people are being seduced by the thought of just buying dividend paying companies is going to be a solution to all of their income needs when the actual solution is to save more, spend less and own a diversifed pool of investments.

For the record, I own mainly large cap value dividend paying individual equities, the only cut I experienced was WFC and USB in 2008 and I still hold them. The vast majority of my portfolio are held in diversified mutual funds.
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Re: Why do investors chase dividend paying strategies

Postby Grt2bOutdoors » Tue Apr 02, 2013 10:32 am

statsguy wrote:Hi Ed, we follow a similar approach. One thing we do that you did not mention is listen to quarterly conference calls... I am listening to see how important the dividend is to the management. I prefer investing in a company that supports the dividend. Another difference is that we tend to supplement our dividend stock portfolio with the midcap index instead of the 500 Index. That is because much of our dividend portfolio and another holding Vanguard Energy are mostly large cap based.

Best of luck
Stats


I find the quarterly conference calls to be worthless - here is why: In late 2012, the management of Exelon (old ComEd) declared their dividend of $2.10 a share to be sacrosant, it would be paid come hell or high water. Fast forward 3 months, guess what? they sliced the dividend almost in half. Accordingly, the stock price went from $36 to about $28 and is now trading around $32 and a reduced dividend. In other words, the board of directors tells management "Jump", Management responds "how high"?. The credit rating agencies say "Jump" Management again says "how high"? The regulators say "Jump", Management again says "how high"? Now using your premise above, had you held Exelon and listened to the quarterly call, you would now be the owner of a company who's management is what? :confused
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