Why do investors chase dividend paying strategies

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Re: Why do investors chase dividend paying strategies

Postby statsguy » Tue Apr 02, 2013 11:21 am

Grt2bOutdoors wrote:
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


Funny I recall the EXC differently. We sold before the dividend cut. Still EXC was not one of our best buys

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Re: Why do investors chase dividend paying strategies

Postby RTR2006 » Tue Apr 02, 2013 11:24 am

Boy, we're all really analyzing the CRAP out of this topic... there's a simple answer to all this. Why do investors chase dividend paying strategies? It's simple - because we can. And because we do feel that we're getting something tangible in return. Compound interest is the 8th wonder of the world, after all.

It's simple really, even though we want to parse this topic to death. Buy and hold and compare. If your dividend earnings stocks are doing better than VTSMX (VGD total stock mkt), then keep them. If they start to slide you can re-balance. I joined this board in mid 2007 and have held two dividend paying stocks since that time: GE and AT&T. When I joined, I was in the middle of re-balancing to low cost index mutual funds. How have I done over time? My VTSMX is up around 15%, my AT&T stock is up around 25%, and my GE (which I purchased in the 30s and then loaded up a small Ford Pinto station wagon when it hit 7/share,) is up around 130%.

I like getting dividend payments every quarter, just like I like getting my monthly bond dividends. They get sunk back into more stock (or bonds), and everything's right as rain.

Buy some dividend paying stocks if you want. Compare them to the mutual index fund alternatives. If they start to settle over time and you see that the mutual fund is doing better, just sell them and re-balance. Or, take the cash and buy yourself a nice $5000 watch!

:happy

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Re: Why do investors chase dividend paying strategies

Postby donaldfair71 » Tue Apr 02, 2013 11:31 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


Good article Larry, thank you for linking...

As a novice investor, I have VINIX (S&P 500) and VBTIX (Total Bond Market) in my 403b, as these are the ONLY Vanguard/Index funds that carry mini ERs. I balance this out by carrying VXUS (Vanguard International ETF) and VNQ (REIT ETF) in my IRA. I have to decide, eventually (once I fund my IRA enough to get desired allocation- I just began my IRA last year while my 403b is 6 years old) whether to use VIG or VTI for my U.S. exposure in my IRA. Your article makes me think I should use VTI as further diversity to the S&P 500, rather than my other prospective choice, VIG.

By the way, thank you to everyone in this thread for pointing out positives and negatives of dividend growth and total market/non-dividend concentration.
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Tue Apr 02, 2013 1:12 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


Like I said previously Larry, you will understand that income really is income once you get to retirement and have to spend that income. Spending income that doesn't erode your principal in a down market is quite preferable to selling LOW, especially when you have no money to BUY later on.

And please let's understand how the market works -- I get so tired of the argument that says a stock or fund goes down by the amount of the dividend - OF COURSE IT DOES - BUT SO WHAT, how long would it take the stock to go back up -- in the days of high frequency trading NOT VERY LONG. The market is driven by traders, if they decide your non-dividend stock or fund is out of favor, your precious returns may not last 2 weeks, let alone 20 years. HOWEVER, dividends are NOT driven by traders, nor any research papers, PE ratios, or book values, they are mainly driven by the balance sheet of the companies involved, and to a lessor extent the board of directors.

Sure, you may argue that you can find non-dividend companies with just as strong a balance sheet, BUT that won't really be of much comfort to you in retirement when you run out of INCOME, because the market decided to take all companies down, good and bad, no matter what their balance sheet was.

Once again, don't take my arguments to suggest dividends as a growth strategy for your accumulation years -- I am merely stating the importance of them as a secure income stream during retirement.

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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Tue Apr 02, 2013 2:26 pm

FD
Like I said, have been advising RETIREES on investing for almost two decades, and they understand this issue and none adopt dividend strategies. We use a total return approach and now manage almost $5 B at Buckingham and $18 billion in total.
Second, the price NEVER adjusts, comes back---ever--relative to what it would have been if the dividend was not paid. If it did, then dividend paying stocks would have higher returns by the size of the dividend. And it just isn't so. Just a total illusion and the failure to see that is why IMO it is appropriate to call it a "cult"--no logic, no data, no evidence, nothing but some belief --a religious belief.
Now if dividends help people via some mental accounting and it helps them stay the course then it has value to them. But no real value in economic terms.
Nothing more I can add.
Best wishes
Larry
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Re: Why do investors chase dividend paying strategies

Postby grayfox » Tue Apr 02, 2013 2:51 pm

This diagram should clear things up. Two stocks, A and B. A pays no dividend. B pays 100% of earnings as dividend. Assume P/B = 1.
Both stock A and B start with book value and market value of $10. After $1 of earnings, A has book value of $11.
After $1 earnings and paying %1 dividend B still has $10 book value + $1 cash.

Both investors have same $11 in market value
Code: Select all
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|      1     | 
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|             |  |               |
|   10        |  |    10         |
|             |  |               |  -------------
|             |  |               |  |      1     |
-------------    ---------------    -------------
     A                  B          +    Cash


Then stock market crashes 50% and P/B = 0.5

Code: Select all
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|      .5     | 
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|             |  |               |
|   5         |  |    5          |
|             |  |               |  -------------
|             |  |               |  |      1     |
-------------    ---------------    -------------
     A                  B          +    Cash


They both still have $11 in book value.
A has $5.50 in market value.
B has $6 in market value.

Dividend stock B is less risky.

This should be obvious. B pays back the investor sooner. In bond terms, shorter duration.
The faster you get your money back, the lower the risk.
Last edited by grayfox on Tue Apr 02, 2013 2:56 pm, edited 1 time in total.
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Re: Why do investors chase dividend paying strategies

Postby STC » Tue Apr 02, 2013 2:55 pm

grayfox wrote:This diagram should clear things up. Two stocks, A and B. A pays no dividend. B pays 100% dividend. Assume P/B = 1.
Both stock A and B start with book value and market value of $10. After $1 of earnings, A has book value of $11.
After $1 earnings and paying %1 dividend B still has $10 book value + $1 cash.

Both investors have same $11 in market value
Code: Select all
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|      1     | 
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|             |  |               |
|   10        |  |    10          |
|             |  |               |  -------------
|             |  |               |  |      1      |
-------------    ---------------    -------------
     A                  B          +    Cash


Then stock market crashes 50% and P/B = 0.5

Code: Select all
-------------
|      .5     | 
-------------     --------------
|             |  |               |
|   5         |  |    5          |
|             |  |               |  -------------
|             |  |               |  |      1      |
-------------    ---------------    -------------
     A                  B          +    Cash


They both still have $11 in book value.
A has $5.50 in market value.
B has $6 in market value.

Dividend stock B is less risky.

This should be obvious. B pays back the investor sooner. In bond terms, shorter duration.


Not if stock A is sold to produce its own dividend each quarter.
Not if stock B reinvests the dividend.

If automating taking money out of equities is the goal, then dividends is the path. If equality of risk and accounting is the goal, then neither has an advantage or disadvantage.
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Re: Why do investors chase dividend paying strategies

Postby grayfox » Tue Apr 02, 2013 3:04 pm

STC wrote:
Not if stock A is sold to produce its own dividend each quarter.
Not if stock B reinvests the dividend.

If automating taking money out of equities is the goal, then dividends is the path. If equality of risk and accounting is the goal, then neither has an advantage or disadvantage.


It is less risk because $1 dividend = exactly $1.00. There is no uncertainty.

With selling $1 of book value at market price P/B, the multiple is a random variable ~ N(1.0, sigma^2)
In others words the mean may be $1 if mean P/B = 1. But it could be .99, 1.02, .89, 1.19 at the time you sell.
The uncertainty brings risk.

(In practice, you could withdraw exactly $1.00, but then you have to adjust the number of shares. So you may be selling more or fewer shares than what the retained earnings actually were.)
Last edited by grayfox on Tue Apr 02, 2013 3:06 pm, edited 1 time in total.
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Re: Why do investors chase dividend paying strategies

Postby Robin » Tue Apr 02, 2013 3:06 pm

grayfox wrote:This diagram should clear things up. Two stocks, A and B. A pays no dividend. B pays 100% of earnings as dividend. Assume P/B = 1.
Both stock A and B start with book value and market value of $10. After $1 of earnings, A has book value of $11.
After $1 earnings and paying %1 dividend B still has $10 book value + $1 cash.

Both investors have same $11 in market value
Code: Select all
-------------
|      1     | 
-------------     --------------
|             |  |               |
|   10        |  |    10         |
|             |  |               |  -------------
|             |  |               |  |      1     |
-------------    ---------------    -------------
     A                  B          +    Cash


Then stock market crashes 50% and P/B = 0.5

Code: Select all
-------------
|      .5     | 
-------------     --------------
|             |  |               |
|   5         |  |    5          |
|             |  |               |  -------------
|             |  |               |  |      1     |
-------------    ---------------    -------------
     A                  B          +    Cash


They both still have $11 in book value.
A has $5.50 in market value.
B has $6 in market value.

Dividend stock B is less risky.

This should be obvious. B pays back the investor sooner. In bond terms, shorter duration.
The faster you get your money back, the lower the risk.


If all other aspects of the stocks are truly the same, right before B pays the dividend, the price would be $5.50 and it would drop to $4.50 when the dividend was paid.

Think about it. If you could somehow "sneak" the cash out without affecting the value, everyone would do it.
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Re: Why do investors chase dividend paying strategies

Postby grayfox » Tue Apr 02, 2013 3:09 pm

Robin wrote:
If all other aspects of the stocks are truly the same, right before B pays the dividend, the price would be $5.50 and it would drop to $4.50 when the dividend was paid.

Think about it. If you could somehow "sneak" the cash out without affecting the value, everyone would do it.


Nope, B would be $11 right before the dividend and then drop back to $10.
A would also be at $11 and stay at $11.

A day after the $1 dividend is paid, market crashes and P/B goes from 1.0 to 0.5.
But even before the crash, P/B fluctuates every second of the day. If you want to raise the $1.00 cash by selling shares, because of the continuous price fluctuations, there is uncertainty in exactly how many share you will have to sell.

When you put in a mutual fund sell order for the end of the day price, it's a crapshoot. You never know what price you will get and how many shares they will liquidate. As I said above, P/B is a random variable. So converting book value into cash has uncertainty and risk, unlike collecting a $1 dividend.
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Re: Why do investors chase dividend paying strategies

Postby Sidney » Tue Apr 02, 2013 3:28 pm

So why stop at a dollar? Why doesn't management and directors (who are all shareholders) sneak more more than a dollar out while the market isn't looking? Many of these companies have plenty of cash and borrowing capacity, why not suck it all out since that won't influence the price?
I always wanted to be a procrastinator.
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Tue Apr 02, 2013 3:36 pm

grayfox wrote:A day after the $1 dividend is paid, market crashes and P/B goes from 1.0 to 0.5.
But even before the crash, P/B fluctuates every second of the day. If you want to raise the $1.00 cash by selling shares, because of the continuous price fluctuations, there is uncertainty in exactly how many share you will have to sell.

When you put in a mutual fund sell order for the end of the day price, it's a crapshoot. You never know what price you will get and how many shares they will liquidate. As I said above, P/B is a random variable. So converting book value into cash has uncertainty and risk, unlike collecting a $1 dividend.


What's hidden here is that after the $1 dividend is paid, portfolio B is now 91% equities/9% cash instead of 100% equities. If the market drops 50%, B should beat A. This has nothing to do with the dividend since A can also move to a 91/9 split by selling 9% of their shares.

Any concerns about # of shares sold are alleviated by using ETFs. Or as some people seem to favor in this thread, individual stocks. This is not a very big concern anyway. I don't see people claiming that ETFs are better than mutual funds for this reason.
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Re: Why do investors chase dividend paying strategies

Postby MP173 » Tue Apr 02, 2013 4:13 pm

Statsguy:

You are my proxy on this thread. You and I think similarly except I have no MLPs.

A minor correction...PAYX increased dividend from 2008 to 2009....barely. It went from $1.22 to $1.24 per share.

A quick review of my 16 holdings at the time shows that 2 dramatically cut dividends - Pfizer from $1.28 to $.80 and Harley Davidson from $1.29 to $.40. My 16 holdings actually saw an increase in dividends by apx 2.7%.

Was I lucky? Probably. Lucky that my only financial holdings were American Express and Ameriprise (spun off from American Express a couple of years earlier). No banks were in my portfolio.

Larry, I want to thank you for the article and more importantly the discussion. I agree there tends to be a "cult" at this time for dividend growth stocks and high yield dividend stocks. Seeking Alpha seems to be a gathering point for a large number of dividend seekers (full disclosure...I go there daily). Further full disclosure...while I cannot admit to sipping the koolaid, I have enjoyed the view from the compound the past 18 years.

My goal the past few years has been to self annuitize thru dividend paying equities, certain ETFs and index funds, and UST based Vanguard bond funds (primarily in 401/IRAs). Still 10 years out from retirement.

My issues right now are the current low interest rates of USTs and the high values of both the USTs and the equities. Where does one go at this time with new accumulation money.

Thanks to all on this.
Ed
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Re: Why do investors chase dividend paying strategies

Postby midareff » Tue Apr 02, 2013 4:18 pm

EASY answer..... dividend paying asset allocations are more dependable to total market returns. If your 40 who gives a XXXX. If your 65 and living on pensions and dividend payments its much more of a big deal.
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Re: Why do investors chase dividend paying strategies

Postby grayfox » Tue Apr 02, 2013 4:30 pm

Ketawa wrote:What's hidden here is that after the $1 dividend is paid, portfolio B is now 91% equities/9% cash instead of 100% equities. If the market drops 50%, B should beat A. This has nothing to do with the dividend since A can also move to a 91/9 split by selling 9% of their shares.

Any concerns about # of shares sold are alleviated by using ETFs. Or as some people seem to favor in this thread, individual stocks. This is not a very big concern anyway. I don't see people claiming that ETFs are better than mutual funds for this reason.


That's all true. B went down less because it moved 9% out of stocks and into cash. In theory, A could have done the same thing. My point is that the mechanism by which B produces cash is direct, bypassing the market with it's fluctuating prices. A has to go through the market to produce the same amount of cash, which adds uncertainty.

How much uncertainty? Well I think S&P 500 daily prices had standard deviation on the order of ~1.5%. Let's say it's $10 per share. If you put an order at beginning of day to to sell $1000 worth of mutual fund shares at the closing price, that would be 100 shares on average. But 2/3 of the time it would be between 98.5 and 101.5 shares, and 95% of the time it would be between 97 and 103. A Really Bad Day could mean selling 106 or more shares. Like I said, it's a crapshoot.

If you go with the ETF's, you can place a limit order to sell 100 shares, only at $10 or better, but it may not fill if the market goes down.

Anyone that has sold stock or fund shares knows that their is uncertainty in either proceeds from the sale or the number of shares. Uncertainty make it more risky.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Tue Apr 02, 2013 4:53 pm

Grayfox
As pointed out you have changed the asset allocation in the example. That's wrong
To keep AA same you have to sell the shares to create the dividend. Once you do that it's obvious that a total return approach must be the same as a dividend approach, all else equal.
The whole argument from people here is that they take the cash flow approach, but that doesn't hold up because you can create the same cash flow through selling stock.
I don't know why this is difficult for people

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Re: Why do investors chase dividend paying strategies

Postby dbr » Tue Apr 02, 2013 5:13 pm

larryswedroe wrote:Grayfox
As pointed out you have changed the asset allocation in the example. That's wrong
To keep AA same you have to sell the shares to create the dividend. Once you do that it's obvious that a total return approach must be the same as a dividend approach, all else equal.
The whole argument from people here is that they take the cash flow approach, but that doesn't hold up because you can create the same cash flow through selling stock.
I don't know why this is difficult for people

Larry


There is the additional factor that a total return investor can set the cash flow exactly wherever it is wanted, any time, any amount. The income stream is exactly matched to requirements. The dividend investor has togo through gyrations, sometime buy inappropriate investments, accept less than optimal diversification, and pay more than necessary in taxes to configure the wanted income stream.
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Re: Why do investors chase dividend paying strategies

Postby leonard » Tue Apr 02, 2013 5:28 pm

A dollar of return - whether from dividend or realized capital appreciation - spends the same. People seem to think the source somehow changes that dollar. It doesn't.
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Re: Why do investors chase dividend paying strategies

Postby BruceM » Tue Apr 02, 2013 8:17 pm

Like I said previously Larry, you will understand that income really is income once you get to retirement and have to spend that income. Spending income that doesn't erode your principal in a down market is quite preferable to selling LOW, especially when you have no money to BUY later on.


fd

Why do you waste your breath? The man doesn't understand the income approach...has no interest in understanding it....never has. You and I and certain others I've occasioned know it works fine if managed correctly. I have found many other seeming intelligent total return investors who don't 'get it' and likely never will. I'm not sure why this is, other than it would require dropping a paradigm they have spent their lifetime learning and have no intention of allowing that to change or perhaps it would threaten their livelihood. Not sure. But IMHO, there comes a time to say to each their own and move on. You've made your case well....open minded retirees will read and learn...others will not.

Just my opinion.

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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Tue Apr 02, 2013 8:38 pm

BruceM wrote:
Like I said previously Larry, you will understand that income really is income once you get to retirement and have to spend that income. Spending income that doesn't erode your principal in a down market is quite preferable to selling LOW, especially when you have no money to BUY later on.


fd

Why do you waste your breath? The man doesn't understand the income approach...has no interest in understanding it....never has. You and I and certain others I've occasioned know it works fine if managed correctly. I have found many other seeming intelligent total return investors who don't 'get it' and likely never will. I'm not sure why this is, other than it would require dropping a paradigm they have spent their lifetime learning and have no intention of allowing that to change or perhaps it would threaten their livelihood. Not sure. But IMHO, there comes a time to say to each their own and move on. You've made your case well....open minded retirees will read and learn...others will not.

Just my opinion.

BruceM


Thanks Bruce,
I was beginning to think that common sense is somehow trumped by research papers.

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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Tue Apr 02, 2013 8:51 pm

Bruce and FD
I very definitely UNDERSTAND it. It's just that there is no logic or evidence to support it. I've shown that very clearly with evidence and logic. When you have some of either please show it, we'd love to see it. The only benefit is a purely psychological one, a mental accounting issue. If that helps you, fine. But being educated about why it's just an illusion is far better.
Best wishes
Larry
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Re: Why do investors chase dividend paying strategies

Postby TJSI » Tue Apr 02, 2013 9:16 pm

Just to throw a little more wood on the fire. A dollar of dividends is a compounding asset; a dollar of capital gains is a liquidating asset. If you keep on selling your assets to get your return, you eventually end up with an empty portfolio. There have been numerous studies showing the importance of compounding dividends in long term market returns. I don't know if large numbers of investors can construct portfolios of good dividend paying stocks which exceed market returns. I am sure that some can achieve it due to hard work, intelligence, or best of all luck.
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Tue Apr 02, 2013 9:34 pm

:oops: This thread is getting little out of hand...it is well known that the total return approach to investing is the "correct" approach.

This being Bogleheads, I'd be willing to bet most of us trust Vanguard's research. Here is one of their papers on the topic.

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

Some quotes, my emphasis added. See the paper for some detailed reasons on why higher dividends are not a preferred method.

Investors spending from a retirement portfolio typically employ one of two well-known methods: the total return approach or the income approach. Historically, these approaches have been discussed as mutually exclusive—an investor follows either one or the other. In reality, the two approaches are similar in many ways, and in fact operate identically up to a point. Using the total-return approach, the investor spends from both the principal and income components of his or her portfolio. Under the income approach, the investor typically spends only the income generated by the portfolio, which often is not sufficient to meet spending needs.


Common approaches for increasing portfolio income—and why they may be inadvisable

For those investors who are not comfortable spending from their portfolio’s balance and/or whose portfolio cash flow is insufficient for their needs, there are three primary ways to increase income: increase their overall allocation to bonds; keep their existing bond allocation but tilt it toward high-yield bonds; or tilt their existing equity allocation toward higher-dividend paying stocks. None of these are preferred strategies for maintaining inflation-adjusted spending over long periods.


In conclusion, the total-return approach to spending is identical to the income approach for investors whose portfolios generate enough cash flow to meet their spending needs. For those investors who need more cash flow than their portfolios yield, the total-return approach is the preferred method. Compared with the income-only approach, the total return approach is likelier to increase the longevity of the portfolio, increase its tax-efficiency, and reduce the number of times that the portfolio needs to be rebalanced. In addition, for most investors, a total return approach can produce the same cash flow as an income-only approach with no decrease in return and a lower tax liability.
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Re: Why do investors chase dividend paying strategies

Postby billjohnson » Tue Apr 02, 2013 9:36 pm

I'm firmly in Larry's camp on this one. Some of these pro-dividend examples are based more on fantasy than logic. And add in that some of us actually have to pay taxes on the dividends...

But i guess if it helps you stay the course, then by all means. I thought statsguy summed it up nicely here...

statsguy wrote:We own dividend stocks because they have a lower volatility and are willing to sacrifice some return for that safety. During the great recession, we were able to sleep well at night
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Tue Apr 02, 2013 9:44 pm

TJSI wrote:Just to throw a little more wood on the fire. A dollar of dividends is a compounding asset; a dollar of capital gains is a liquidating asset. If you keep on selling your assets to get your return, you eventually end up with an empty portfolio. There have been numerous studies showing the importance of compounding dividends in long term market returns. I don't know if large numbers of investors can construct portfolios of good dividend paying stocks which exceed market returns. I am sure that some can achieve it due to hard work, intelligence, or best of all luck.


The dividends only "compound" if you reinvest them. You have to choose to do this, by specifically choosing to automatically reinvest them, or using them to buy shares in whatever you like. It's just an accounting trick. Note that the second approach is preferred since it is more tax-efficient to rebalance by buying whatever is underweight in your asset allocation, and also easier if you use specific ID of shares when selling.

Re: studies that show importance of compounding dividends. Well certainly if you took away the dividends from your equities and assumed they had the same capital appreciation, they'd be be worth less today. This is similar to the mistake of looking at the S&P 500 Index number and assuming that equities haven't returned anything. But instead, let's say a company uses share buybacks in lieu of paying a dividend. This returns earnings to the shareholders more efficiently since there isn't a taxable event.
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Re: Why do investors chase dividend paying strategies

Postby TJSI » Tue Apr 02, 2013 10:00 pm

Ketwa,

I can assure that compounding is not an accounting trick. You say that you can beat market returns by active management taking your capital gains and investing them in underweight sectors/stocks. Good luck with that--some succeed, some fail, and some get lucky.
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Re: Why do investors chase dividend paying strategies

Postby EyeYield » Tue Apr 02, 2013 10:08 pm

Way, way, way, back in the day, when buying stocks meant paying a broker $100 to enter a trade, I was taught the low expense method of investing.

You bought stock directly from the company through dividend reinvestment plans and reinvested the dividends. Four times a year I would get a statement and a return envelop, with the opportunity to add to my investment. My first five drips go back over 50 years. I've never considered calculating how many one hundred dollar bills I saved by not using a broker for the decades I invested this way, but it would be substantial in today's dollars. I don't know how I could have saved those costs if I had just bought more of a stock that didn't pay dividends and didn't have drips available. Today it's different, trading is cheap, but I'm not accumulating now, so show me where I went wrong with the dividend stocks from 1962 until now.

Now I've stopped reinvesting the divs and have them posted to my cash account and can live off of them. I've had to rebalance because a few of these stocks grew to be almost 10% of my total portfolio and my allocation was way off for a retiree. I devised a plan and stuck to it through all the dips over the past 50 years and the only mistakes I've made were when I listened to Smith Barney recommend funds, but now I know better. It may be lucky that all of my drip stocks are alive and well today and maybe I'd think different if I had been burned on one, but I can't apologize for it now.

While I have indexed some bond and foreign funds, I'm on the fence with Total Stock Market. Maybe it's because it looks so familiar, but I'm very attracted to the Wellesley fund, because it looks so much like the portfolio I've accumulated, except much more diversified and tilted towards bonds.

When I look at the Total Stock Market Index, I see a it's heavily weighted towards dividend paying stocks. Is the index chasing dividends?

Does anyone know what percentage of the Vanguard Total Stock Market ETF (VTI) that does not pay dividends?? I scrolled through the first 1000 of the 3270 stocks it holds and most all the tickers I recognize pay dividends.

Frankly, I'm not seeing what the big (bad) deal is.

Everybody knows the story, if you bought one share of Coke Cola in 1919 for $40 and reinvested the divs you'd have 9.8 million (or something). How do I compare that to a non div stock for comparison? Or what the index looked like then???

It's too late for me, but the history buff in me would like to see some comparisons.

Thanks,
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Tue Apr 02, 2013 11:14 pm

TJSI wrote:Ketwa,

I can assure that compounding is not an accounting trick. You say that you can beat market returns by active management taking your capital gains and investing them in underweight sectors/stocks. Good luck with that--some succeed, some fail, and some get lucky.


That is not what I said -- I said that paying a dividend, then using it to buy more shares and claiming this is compounding is an accounting trick. A share buyback by a company accomplishes the same goal of returning earnings to shareholders.

I did not advocate active management. I advocated using dividends (which are cash) to rebalance your portfolio tax-efficiently. If stocks have gone up and you need to rebalance into bonds, use the dividends to buy bonds.

Many of the dividend investors in this thread are pushing for active management (of a sort) by investing in individual stocks.
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Re: Why do investors chase dividend paying strategies

Postby saurabhec » Tue Apr 02, 2013 11:18 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


Your example is flawed because you assume the non-dividend paying stock drops less in a bear market when actually it should probably drop more. That is common sense and backed by tons of empirical data. You are also completely ignoring the fact that the percentage of the portfolio being sold to generate he same required dollar amount of withdrawal will be higher for the non-dividend paying portfolio, and the longer the sequence of negative returns last, the more pronounced this will be. For the poster who was skeptical of this, the reason is that dividends are less volatile than stock prices. Just because stock prices are down 40% doesn't mean that dividends have to be down 40%, it is a pretty well established fact. If someone is going to argue that the dividend portfolio always has to fall by an amount that is greater than the non-dividend portfolio so as o equalize the total return in a down market, and that the dividends also have to fall by the same amount so as to keep the dividend yield constant, I am sorry but there is not a single bear market in the US of which I am aware where that was the case.
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Re: Why do investors chase dividend paying strategies

Postby TJSI » Tue Apr 02, 2013 11:54 pm

Ketawa,

Unfortunately, share buybacks won't get you the magic of compounding. It will deplete your portfolio.

(And let me congratulate the CEO of Citibank who recently stated that they wanted to do one billion of buybacks to support their management option programs. No happy talk of benefiting the shareholders-- such honestly needs to be acknowledged.)
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Re: Why do investors chase dividend paying strategies

Postby jda » Wed Apr 03, 2013 1:39 am

TJSI wrote:Ketawa,

Unfortunately, share buybacks won't get you the magic of compounding. It will deplete your portfolio.

(And let me congratulate the CEO of Citibank who recently stated that they wanted to do one billion of buybacks to support their management option programs. No happy talk of benefiting the shareholders-- such honestly needs to be acknowledged.)


+1

As I previously stated buy back is never equal to dividend because almost never a company retires 100% of its buy back stock. Usually the buy back stock are used for employee equity incentives. Also, most of the time companies initiate the buy back when time is good (ie. buy high) then sell low (ie issuing more stock during tough time).
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Wed Apr 03, 2013 2:21 am

TJSI wrote:Ketawa,

Unfortunately, share buybacks won't get you the magic of compounding. It will deplete your portfolio.

(And let me congratulate the CEO of Citibank who recently stated that they wanted to do one billion of buybacks to support their management option programs. No happy talk of benefiting the shareholders-- such honestly needs to be acknowledged.)


I'll refer you to several different links on share buyback/repurchase. It increases the value of publicly held shares. Saying that it depletes your portfolio is incorrect.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Wed Apr 03, 2013 10:41 am

TJSI
Sorry but that is obviously incorrect. AS is Saurabhec's analysis, as I have shown already

Here's the problem: What is remarkable is that each person who believes in this idea that income approach is better constructs a story which unfortunately CHANGES another variable.
For example, the idea that dividends compound. Now that is true if you REINVEST. Not spend. Now if you reinvest then it's the same exact thing as total return approach which only sells to meet spending needs. If you spend the dividends you don't get any compounding. You cannot change the returns by changing the nature from divs to K gains, you only make it less tax efficient and less diversified with a div approach.

As to Saurabhec, again his analysis changes the AA, Remember it's the different loadings that get you the lower beta and lower downside in bear markets (and reverse in bull) from a high div strategy, but you can get exactly the same thing with a total return approach by loading the same without using any div strategy. The point is there is nothing unique about dividends. Nothing. That is what factor regressions show.

Everyone seems to be trying to self justify their strategy, trying to create some story that seems to confirm their hypothesis that the dividend matters. But you cannot refute the facts nor the logic.

What is pretty amazing is that in academia this is not even discussed, there is no debate. It's no different than the DCA vs lump sum debate which was settled about 50 years ago by Constantinides and is not debated any longer in that realm but often in by individuals. And thanks to one poster we now have the common sense from an independent and highly regarded source in Vanguard that confirms all that I and others have been saying. The total return approach is clearly superior because you don't give up any diversification and you improve tax efficiency and nothing is lost. The rest is just a psychological crutch, nothing more. Now if that helps some people stay the course then it has value to them, but it doesn't make it logical

It's simple to show an income approach makes no sense. Just consider the 99 year old person who is living off her 2% income from her portfolio because she doesn't want to take a total return approach. You don't live forever. Thus that alone should be enough. At any age the same logic applies, it's just that for the 99 year old the answer is more obvious. Let alone the simple math examples that have been shown. But what's worse is the examples that Vanguard provides and we have discussed is that when rates get low the income approach forces investors to take more risk than is appropriate to create income--buying junk bonds, taking more duration risk, substituting dividend paying stocks for safe bonds and so on. This is the real problem. Then 2008 hits and the income investors get slaughtered. And cannot recover.

So you don't have to believe me or others, just take Vanguard's advice on the subject,

I hope this helps
Larry
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Re: Why do investors chase dividend paying strategies

Postby JamesSFO » Wed Apr 03, 2013 11:23 am

EyeYield wrote:Way, way, way, back in the day, when buying stocks meant paying a broker $100 to enter a trade, I was taught the low expense method of investing.
(snip)


It sounds like you made a mixture of very wise (cost-efficient) choices for your investments at a time when the costs were much higher. That said, using the logic of what was cheap 20-plus (30+) years ago to drive how to construct a portfolio today seems foolish.

Diversified ETFs and mutual funds can be bought with no trading costs--including dividend focused funds. (Aside, the VG total stock index is not "tilted" towards/against dividend stocks, it reflects the current behavior of investable US stocks...)

So that puts the question back to what strategy makes the most sense.

I suspect the behavioral economics/mental accounting issues are what starts to divide folks. I think there is a lot of emotional safety with the dividend/income route that causes people to favor it. One of my colleagues is "all in" on a high-dividend strategy right now that uses supposedly solid dividend paying stocks--including international in Spain/Italy to chase (my word) yields.

This likely will end poorly for him, but so have his other strategies of shorting the market.
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Re: Why do investors chase dividend paying strategies

Postby TJSI » Wed Apr 03, 2013 2:25 pm

Larry,

You are in deep denial of the importance of dividends. You seem to deny the existence of the many investors who are trying to grow their portfolios.
For those who wish to spend their gains, reap their rewards, liquidate their assets, the difference between capital gains and dividends many not matter. In fact, when taxes come into play capital gains are likely to be preferred.

But your constant claim " that dividends don't matter" forgets the universe of investors who are trying to grow their portfolio. For those, dividends matter and they matter greatly.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Wed Apr 03, 2013 2:45 pm

TJSI
Sorry but I'm not in denial of anything. You are the one in either denial or you are unaware of the evidence that whether a stock pays a dividend or not is irrelevant to its expected returns. That is not only the evidence as I have presented but also the logic and the most basic of financial theories. Now instead of saying I'm in denial why don't you present evidence that stocks that pay dividends have higher expected returns than stocks that have the same valuation metrics (like p/e and market cap)? Unfortunately there isn't any. That's why it's called a three factor model, with dividends irrelevant. The other various models that have been developed, including profitability and investment factors, none of them have dividends as a factor. Is the whole financial world of academics wrong and TJSI is right?
That is why I called this a cult. IT's a belief without any evidence of any logic. Do you also think the people at Vanguard that wrote their paper are also in denial? That's a rhetorical question by the way.

Best wishes
Larry
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Re: Why do investors chase dividend paying strategies

Postby gt4715b » Wed Apr 03, 2013 2:59 pm

I just happened to see this article which is relevant to the thread.

“Why do people love dividends? Because they don’t understand either corporate finance or taxes.”

At this point people either understand or they don't. The good thing is that as long as they are properly diversified they aren't doing any harm to themselves, except for possibly the tax inefficiency if the money is taxable.
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Re: Why do investors chase dividend paying strategies

Postby Sidney » Wed Apr 03, 2013 3:01 pm

gt4715b wrote:I just happened to see this article which is relevant to the thread.

“Why do people love dividends? Because they don’t understand either corporate finance or taxes.”

At this point people either understand or they don't. The good thing is that as long as they are properly diversified they aren't doing any harm to themselves, except for possibly the tax inefficiency if the money is taxable.

True
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Re: Why do investors chase dividend paying strategies

Postby Roy » Wed Apr 03, 2013 4:18 pm

larryswedroe wrote:That is why I called this a cult. IT's a belief without any evidence of any logic.


Larry: Thank-you for taking the time to unpack all this. I didn't realize how far down the rabbit hole this went.
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Re: Why do investors chase dividend paying strategies

Postby Random Musings » Wed Apr 03, 2013 4:41 pm

You can lead a horse to water.........

But some of these horses still chase dividend paying strategies. In that case, there will be some winners, but in the aggregate, the majority will underperform.

RM
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Re: Why do investors chase dividend paying strategies

Postby MP173 » Wed Apr 03, 2013 4:57 pm

EyeYield:

While my dividend reinvestment program (DRP) doesnt go back nearly as far as yours (mine began in 1994/5), I faced the same situation. My cash flow didnt generate large sums and it was much easier to write a check for $100 - $500 on a quarterly then monthly basis. Mutual funds were used for 401k, college funds, and avenues.

After reading all these pages, I have come to the conclusion, along with the link to the Forbes article that my dividend stock picking was dumb (Forbes term). So, I am a member of a cult and dumb.

Now that has been settled...what do I do next? Options are:
1. Do nothing and hold on to the equities.
2. Sell out and invest in TSM(?) or similar fund.

Seriously...what should be done at this time? I am not really interested in selling the portfolio, but understand the issues presented here. My capital gains tax would be significant. Would that come into play?

Thanks,

Ed
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Re: Why do investors chase dividend paying strategies

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

Ed
Even smart people make mistakes. I've made most of the mistakes covered in my book Investment mistakes even smart people make. What separates smart people from fools is that once they discover their mistakes they don't repeat them, they change their behavior recognizing the mistake is a sunk cost (except for possible tax implications which should be consisdered).
If you believe now that you made a mistake then you should consider building a mcuh more globally diversified portfolio using passive funds and get the AA right as well.
I hope that is helpful
Larry
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Re: Why do investors chase dividend paying strategies

Postby Clearly_Irrational » Wed Apr 03, 2013 5:16 pm

I'd say one of the few true advantages of a dividend strategy is that it helps you determine the sustainable withdrawal rate. The psychological benefit is also pretty good in that I think most people have an easier time holding on to an income generating asset in a falling market than one that is solely reliant on price appreciation. Overall though total return is better even if it is a bit less intuitive.
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Re: Why do investors chase dividend paying strategies

Postby TJSI » Wed Apr 03, 2013 5:43 pm

Larry,

I have not seen any quote from Farma & French that dividends don't matter. They have said that low b/m is a better screen than dividends alone in producing returns. That is a far cry than your repeated attacks on dividends stating that they don't matter. I suspect that the b/m screen produces a set of mostly dividend paying stocks. If someone produces a portfolio of value stocks that are none dividend payers and it beats the market return, then you can repeat that "dividends don't matter"

Until then , I will go with the academics Dimson, Marsh, Staunton, Siegel and the esteemed Mr. Bogle and keep believing that dividends play a very, very important role in generating returns.
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Re: Why do investors chase dividend paying strategies

Postby billjohnson » Wed Apr 03, 2013 5:55 pm

viewtopic.php?f=10&t=67995&p=948640#p945693

Why do shareholders believe so strongly that a $1 dividend is preferable to a $1 capital gain? Meir Statman looked at this question in a 1984 article called “Explaining Investor Preference for Cash Dividends,” coauthored by Hersh Sheffrin. He also reviews the idea in his new book, What Investors Really Want, pointing out that receiving $1,000 in dividends is no different from selling $1,000 worth of stock to create a “homemade dividend.”

Even when this idea is explained to people, most refuse to accept it. Statman suggests that it comes down to a cognitive bias called mental accounting. Investors categorize $1,000 in dividends as income that they will happily spend, but the idea of selling $1,000 worth of stock is “dipping into capital,” which causes them great anxiety. This idea is deeply ingrained in many investors, but it is an illusion, because a company that pays a dividend to shareholders is depleting its own capital.
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Re: Why do investors chase dividend paying strategies

Postby jebmke » Wed Apr 03, 2013 6:14 pm

Money can create illusions. I can't tell you how many people I see at my tax center who feel like they are worse off when they distribute funds from an IRA and pay the taxes. I try to explain to them that the tax part was never theirs to begin with but they can't grasp it sometimes.
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Re: Why do investors chase dividend paying strategies

Postby nisiprius » Wed Apr 03, 2013 6:23 pm

TJSI wrote:...I have not seen any quote from Farma & French that dividends don't matter...
No, the names you want are another alliterative pair, Modigliani & Miller.

Wikipedia:
The Modigliani-Miller Theorem
The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani–Miller theorem is also often called the capital structure irrelevance principle
This is how Modigliani and Miller stated it:
the average cost of capital, to any firm, is completely independent of its capital structure and is equal to the capitalization of a pure equity stream of its class.


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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Wed Apr 03, 2013 6:25 pm

Sidney wrote:
gt4715b wrote:I just happened to see this article which is relevant to the thread.

“Why do people love dividends? Because they don’t understand either corporate finance or taxes.”

At this point people either understand or they don't. The good thing is that as long as they are properly diversified they aren't doing any harm to themselves, except for possibly the tax inefficiency if the money is taxable.

True


Your kidding right -- quoting an article based on the 2012 fiscal cliff that didn't happen?
:oops:
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Re: Why do investors chase dividend paying strategies

Postby Clearly_Irrational » Wed Apr 03, 2013 6:45 pm

nisiprius wrote:Wikipedia:
The Modigliani-Miller Theorem
The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani–Miller theorem is also often called the capital structure irrelevance principle


Wow, that's a hefty stack of assumptions they're working off of there. Since it's a levy flight, there are taxes, bankruptcy costs, agency costs, asymmetric information and the market isn't completely efficient I wonder how that impacts the real life results?
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Re: Why do investors chase dividend paying strategies

Postby EyeYield » Wed Apr 03, 2013 6:52 pm

MP173 wrote:EyeYield:

While my dividend reinvestment program (DRP) doesnt go back nearly as far as yours (mine began in 1994/5), I faced the same situation. My cash flow didnt generate large sums and it was much easier to write a check for $100 - $500 on a quarterly then monthly basis. Mutual funds were used for 401k, college funds, and avenues.

After reading all these pages, I have come to the conclusion, along with the link to the Forbes article that my dividend stock picking was dumb (Forbes term). So, I am a member of a cult and dumb.

Now that has been settled...what do I do next? Options are:
1. Do nothing and hold on to the equities.
2. Sell out and invest in TSM(?) or similar fund.

Seriously...what should be done at this time? I am not really interested in selling the portfolio, but understand the issues presented here. My capital gains tax would be significant. Would that come into play?

Thanks,

Ed

Ed,

No two people have identical needs, nor an identical portfolio, but as long as we're mentally sound we have the ability to learn and adjust to the best of our ability.

I started out with drip's and added an account with a full service broker in my home town, from whom I usually bought some of his recommendations when I visited for the holidays. In my career town I opened an account with a discount broker and initiated an IRA and bought and sometimes traded stocks there.

It wasn't until the fall of 2011 that I brought the majority of my drip's into my full service account and sought the advice of my new broker; when I transferred my accounts to my second career town. He made some sweeping recommendations, which would have cost me thousands in fees as well as thousands in LT cap gains taxes. That's when I started my research, which led me to this site, which has led me to over a dozen books and counting. Fortunately, for me, I've never listened to anyone's advice until I've researched it for myself. When I looked at the biggest move he recommended, I realized that the ER's were larger than the yield, so I never took his advice and ended up transferring everything to the discount brokerage.

At that time, I devised a three year plan to rebalance my portfolio. This allows me to keep my LT tax gains to a minimum each year, while adding to sectors where I had been underweight or non existent. I was severely overweight on (DRIP's) US Large Growth and Value and underweight bonds and foreign. So far my plan is working. I know what I need and what I will sell. I plan to always keep a portion of my original stock portfolio and it will find a nice place in my overall allocation. 90% of my div stocks are not high dividend stocks and I never sought to chase such things, it's just the way it was done when I started investing and when I was in career mode it never occurred to me to stop and research, so I was vulnerable to the noise which I often acted on.

This ridiculous, redundant redactment about chasing is lost on me. Both the Wellesley fund and the Total Stock Market index fund have a higher yield than many of the div stocks I'm trimming and I'll take that yield for my expenses as well, so it won't change the fact that I can live from the yield and keep the principal intact for as long as possible. I'll just be better allocated.

So Ed, in my opinion your answer is both 1 and 2. Keep your expenses and taxes low, while meeting your desired asset allocation.

Good luck,
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