Why do investors chase dividend paying strategies

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Re: Why do investors chase dividend paying strategies

Postby grap0013 » Wed Apr 03, 2013 8:22 pm

A lot of defensiveness going on with this thread. You'd think some of the BGs 1st born children were insulted. I'm shocked by some of the tone. :shock: I guess if you have believed in dividends for many, many, many years then it would be most difficult to redirect and believe otherwise despite overwhelming evidence to the contrary. It is akin to thinking margarine is better for you than butter for 30 years and then you find out one day that it is not. Mind cannot fathom...fizzle...bzzzt...cognitive dissonance...fizzle....uggghhh...
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Wed Apr 03, 2013 9:48 pm

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"


You don't need a quote. If it mattered then you would have a factor model with dividends. Yes stocks with higher dividends have higher than market returns. But it's all else equal they don't matter. In other words stocks with the same P/E and same Market Cap or same BtM and same market cap have the same expected return REGARDLESS of dividends. That is why you need only a three factor model, not one that includes dividends. Note also that research done under Fama and French's direction is the very research I cited that shows that dividends don't impact returns. So while no direct quote, it's their research team that wrote the piece I cited
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Re: Why do investors chase dividend paying strategies

Postby TJSI » Wed Apr 03, 2013 10:07 pm

I have no more logs to throw on the fire.
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Re: Why do investors chase dividend paying strategies

Postby Snowjob » Thu Apr 04, 2013 3:08 pm

Quick, everyone think of the first method by which stocks are priced by the marketplace!


How many of you said earnings? How many said cash flow? How many said book value?

I would say the most dominant pricing mechanisms are probably in that order, Earnings/Share -> CF/Share -> BV/Share. I mean unless we are talking about extreme circumstances in the market where the world is seemingly coming to an end, pristine balance sheets typically don't drive prices more than EPS and FCF.

That said if a company can't find a reasonable investment for the excess cash on the books through buybacks, acquisitions or growth initiatives that meet their IRR hurdles a dividend payment is a good way to reward the shareholders. My belief is that a little bit of cash coming back to me in most cases is worth more than how the market will price that incremental amount of cash doing nothing on their balance sheets.

Over shorter time horizons, from my experience, I believe this is the case. However, regardless of whether the stock you buy pays a dividend or doesn't, its important to buy low as buying cheap is really the driver of great returns more than anything else...
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Re: Why do investors chase dividend paying strategies

Postby MP173 » Thu Apr 04, 2013 5:29 pm

Snow:

I think you made a great comment. If you are going to purchase individual stocks as I have...what are the factors. My accountant called yesterday with the news that my taxes are done. We had a conversation and he commented about the number of stocks I have and the dividend income. I jokingly told him that I was not only in a cult but also dumb and described this discussion. He offered no explanation but did comment that I have had these stocks for a number of years and asked why I purchased them.

I rattled off the reasons for purchasing (early on available drip programs, then refined to looking for consistent growth and then the focus on ROE and FCF). He asked about a few stocks which in the past had dividend statements but no longer. These were sold as they didnt meet expectation.

If you are going to buy stocks (I think of it as buying a company) then you should have a great reason for doing so and not to chase yield. Larry, I agree completely with that. It is kinda like looking at a woman in a little black dress (or a man in a tux) and deciding on the spot you want to marry that person without exploring the reasons why. The dividend may seem sexy but there should be compelling logic behind the initial appeal.
Again, great discussion.

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Re: Why do investors chase dividend paying strategies

Postby bertilak » Fri Apr 05, 2013 7:30 am

From John Bogle's book, DON'T COUNT ON IT! (pages 322 and following)

One of the great unexplained mysteries of the mutual fund industry is its unwillingness to call attention to the vital role of investment income in shaping the returns on equities. Theory tells us, and experience confirms, that dividend yields play a crucial role in shaping stock market returns. In fact, the dividend yields on stocks has accounted for almost one-half of their long-term return.


And more …
When we take inflation into account the importance of dividend income is magnified ... while dividend income has accounted for nearly 50 percent of the long-term nominal annual return on stocks and 75 percent of the real annual return, even these figures dramatically understate the cumulative role...


But all is not well …
But, in this era of “total return,” income is virtually ignored. Why? Because dividend income plays a remarkably small role in equity fund returns. … Where did all the income return go? It was slashed by fund expenses. ... Expense ratios have nearly doubled ... more and more of that priceless component of investment income was consumed by [fund] costs.
(I think this is because expenses are first paid out of dividends -- the cash is just sitting there -- before tapping any equity.)

But there is an exception, where the dividend advantage is seen in a fund ...
But there is a case – just one ... Wellington Fund ... attribut[ed] to the facts that (1) [it] is operated on an “at cost” basis; and (2) we [i.e. Vanguard] vigorously renegotiated the advisory fee [so that] our fund's owners share in the economies of scale.
(I think this would apply to Wellesely and Vanguard Equity-Income as they too are funds managed by Wellington that emphasize dividends.)

This would also seem to say that investors in individual stocks would get the dividend benefit since there are NO fund expenses to absorb.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Fri Apr 05, 2013 9:39 am

Bertilak
The problem is that the evidence is very clear--it makes no difference if stocks pay dividends or not--if you hold the other factors equal--market cap and book to market (or P/E) whether stocks pay dividends or not they get the same return. Those are the facts. And that is also exactly in line with financial theory.
Ignoring the facts doesn't change them
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Fri Apr 05, 2013 10:14 am

larryswedroe wrote:Bertilak
The problem is that the evidence is very clear--it makes no difference if stocks pay dividends or not--if you hold the other factors equal--market cap and book to market (or P/E) whether stocks pay dividends or not they get the same return. Those are the facts. And that is also exactly in line with financial theory.
Ignoring the facts doesn't change them
Best wishes
Larry

Larry,

Actually, I was a bit surprised myself to see what I quoted. It was new to me. I never looked at it that way. I never looked at dividends as a way to increase returns, but am happy to take it if it is true.

To me dividends mean the following:

  • A bit of a guarantee of at least some near-term return without having to wait for the long-term. "Long-term" is always either stated or implied with the words "expected return."
  • (EDITED to add this.) A "smoothing" of returns. Earlier you said that dividends were more stable than earnings (I think you used the words "more stable.")
  • A bit of a guarantee that a company hasn't cooked the books to artificially boost its reported earnings. "Dividends don't lie" is the cliche.
  • A managed payout. The company pays out in dividends what it thinks it can maintain as a fairly regular return, or even increase in return. To the extent that I can live within the dividend payout I have less of a worry that I will need to sell off equity. Even if that extent is not 100%, it helps. Strategies don't need to be perfect to be useful.

I note that a dividend reduces a company's book value but that's not the same as reducing its stock price. When the stock price drops (nearly) in the same amount as a dividend, some (most? all?) of that drop may be due to a price increase as the dividend date approaches. Those holding the stock demand more for it so as not to lose the value of the dividend. Other market forces push the price around so it is hard to factor out this effect just by looking at price history. My suspicion is that it is nearly a wash and paying a dividend has little effect on the stock price over the long term. It is built in to the price because people expect it. Increasing or decreasing the dividend probably has a fairly linear effect on the stock price, but simply paying that expected dividend has little or no effect other than price fluctuations as opposed to a lasting drop in price.
Last edited by bertilak on Fri Apr 05, 2013 10:32 am, edited 2 times in total.
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Fri Apr 05, 2013 10:31 am

bertilak wrote:
larryswedroe wrote:Bertilak
The problem is that the evidence is very clear--it makes no difference if stocks pay dividends or not--if you hold the other factors equal--market cap and book to market (or P/E) whether stocks pay dividends or not they get the same return. Those are the facts. And that is also exactly in line with financial theory.
Ignoring the facts doesn't change them
Best wishes
Larry

Larry,

Actually, I was a bit surprised myself to see what I quoted. It was new to me. I never looked at it that way. I never looked at dividends as a way to increase returns, but am happy to take it if it is true.

To me dividends mean the following:

  • A bit of a guarantee of at least some near-term return without having to wait for the long-term that is always either stated or implied with the words "expected return."
  • A bit of a guarantee that a company hasn't cooked the books to artificially boost its reported earnings. "Dividends don't lie" is the cliche.
  • A managed payout. The company pays out in dividends what it thinks it can maintain as a fairly regular return, or even increase in return. To the extent that I can live within the dividend payout I have less of a worry that I will need to sell off equity. Even if that extent is not 100%, it helps. Strategies don't need to be perfect to be useful.

I note that a dividend reduces a company's book value but that's not the same as reducing its stock price. When the stock price drops (nearly) in the same amount as a dividend, some (most? all?) of that drop may be due to a price increase just prior to the dividend as those holding the stock demand more for it so as not to lose the value of the dividend. Other market forces push the price around so it is hard to factor out this effect just by looking at price history. My suspicion is that it is nearly a wash and paying a dividend has little effect on the stock price over the long term. It is built in to the price because people expect it. Increasing or decreasing the dividend probably has a fairly linear effect on the stock price, but simply paying that expected dividend has little or no effect other than price fluctuations as opposed to a lasting drop in price.


Bert,
You are getting to the very heart of this discussion -- Larry wants to try and compare dividend and non-dividend stocks on an equal basis, but you just can't do it - it is like trying to compare a bond or even an annuity to a non dividend paying equity, there are just more things to consider besides just the price action or the book value. If you have essentially an annuity paying you a guaranteed income, why do you care what the price of the stock is?

Maybe his argument is you should put bonds paying 2% in your portfolio, in place of the dividend portfolio paying 5% --- that is certainly a good way to improve your total return.
:oops:



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Re: Why do investors chase dividend paying strategies

Postby grayfox » Fri Apr 05, 2013 11:11 am

Clearly_Irrational wrote:
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?


In theory there is no difference between theory and practice. In practice there is.
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It seems that there is an awful lot of financial theory that is built on a ton of assumptions that don't hold in the real world.
Тише едешь, дальше будешь. (Quieter you-go, further you-will-be.)
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Fri Apr 05, 2013 4:30 pm

FD
That is your problem because you absolutely can compare them and that is exactly why FF model is the standard. You are in effect saying that FF are wrong and the model is bad. That's all that is happening here.
The model does allow you to make those comparisons. The rest is just behavioral and mental accounting


Good luck
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Re: Why do investors chase dividend paying strategies

Postby nedsaid » Fri Apr 05, 2013 11:10 pm

I really liked the point that one of the posters made that you can manipulate earnings numbers but that you can't fake a dividend. Dividends don't lie.

The bumblebee flies happily unaware that it isn't supposed to be able to fly. Value and dividend investors that have enjoyed success with this strategy invested for years unaware that dividend strategies don't "work". I always believed that the dividends were a reward for a patient investing strategy, seeing cash come in regularly helps value investors hang in there. You might say it is psychological and only mental accounting. I would point out that successful investing is behavioral. If regular dividends and "mental accounting" encourage better investing behavior then perhaps this would lead to better investing results.

I don't doubt Larry's studies or the math. Larry points out that what you gain in dividends, you lose in capital gains. He talks about the efficiency of the markets. But I wonder about the time periods of those studies. The slicers and dicers all believe in the value premium and small cap premiums but even the most ardent believers in this school of thought acknowledge that these premiums disappear for periods of time only to reassert themselves later. Even the equity premium disappears for periods of time. Deep in my heart, I must have believed that a dividend premium exists. I wonder if the "dividend premium" has vanished because of low bond yields and investor interest in dividend stocks in recent years. The wallflower is now the belle of the ball. Dividend stocks were not always popular.

If Larry is correct that the market is efficient and that dividends make no difference, then I have to ask a question. If the markets are so efficient, then why do we believe in value and small cap premiums? Why do we believe in any premiums at all? Mr. Bogle does not.

What got me to thinking is that I have owned an Income and Growth fund for years. It used to outperform the market by at least 1% a year and held stocks in the same industry weightings of the S&P 500. In recent years, this fund has been underperforming the S&P 500 Index. My theory is that the underperformance is due to the popularity of the dividend strategy. "Everyone" wants to dance with dividend stocks when years ago these stocks were the wallflower of the dance. Whatever "dividend" premium that existed has disappeared. Picking dividend stocks that beat the market has become very difficult because these stocks have been bid up in price.

Could it be once interest rates rise and bonds become more competition for income investors that dividend stocks will go back to wallflower status? Could the "dividend" premium reassert itself?

My memory banks get foggy from time to time but I remember articles in financial magazines that touted the superiority of dividend stocks. Somebody some years back must have believed in a dividend premium. This is why I have said that boring is good and boring that pays a dividend is even better. You get both a value strategy and income. Maybe I swallowed the cool-aid and am a deluded cult member, but I don't think so. I really think I am on to something.

My friend whose retirement accounts yield over $50K in dividends a year and doubled his account in 10-12 years has results that are hard to argue with. Mr. Swedroe can attribute it to luck, I would say only if I were that lucky!!

So what I am wondering is if the lack of a "dividend premium" is a permanent market relationship or if it is a true premium that only disappears from time to time. A lot of awfully smart and successful investors seemed to believe that this premium exists or existed. They might well be wrong. But it is a good question to ask.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Fri Apr 05, 2013 11:23 pm

nedsaid
The data is for as long periods and not data mining. There is no cherry picking and it holds up everywhere you look
Again, it's all else equal though.
High dividend paying stocks do have higher returns, but that is because they have high BtM, not because of high divs. Other value metrics have higher premiums

What's really interesting IMO is that if anything if market was inefficient (and perhaps the love of divs is making it so) then dividend payers would have lower returns because investors falsely valuing them would drive their prices higher, just as they do for small cap growth stocks and penny stocks

The small premium is clearly a risk story and certainly a liquidity risk story is part of it. The value premium has two stories -some risk and some behavioral (mispricing, people overpaying for growth). But there is no story for dividends that would argue that investors UNDERPRICE them. That is what you have to believe to believe they have higher returns. I guess anything is possible but I have never heard that argument

Best wishes
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Re: Why do investors chase dividend paying strategies

Postby nedsaid » Sat Apr 06, 2013 12:48 am

Larry,

I do appreciate your thoughtful responses. The studies you sight give insight into why certain things work. In another thread, I learned about the liquidity premium. This is why I keep an open mind.

As for the "dividend premium", you are pretty much saying that correlation is not causation. It is dawning on me that you are probably right. It reminds me of my marketing professor telling us about the relationship between minister's salaries and the price of scotch. Higher minister's salaries do not cause the price of scotch to go up! You are making a similar argument about dividends and stock performance.

I am not a quant and on the other hand not terrible at math. I did okay until I got to Calculus and had to work really hard to get a "D" in a calculus course. I am more interested in the behavioral aspects of investing. Yet I believe that you cannot ignore the academic research and the numbers.

I do have a bit of skepticism about mathematical models and trying to measure performance against risk. It is pretty much trying to quantify human behavior. So I believe in the stuff you are talking about while at the same time showing a bit of skepticism. I also am skeptical of the quants because I am not a believer in the secret sauce. Too often investment stategies built on mathematical models blow up because of one factor they did not consider. Somehow, it is invariably the one thing not considered that blows up.

Attending a couple of the Merriman seminars in my area convinced me of the small cap and value premiums. The seminars also inspired me to further diversify my portfolios. So people in your school of thought have greatly influenced my thinking.

The reason I am mostly in your school of thought is that I believe there are solid behavioral and human nature reasons that the equity premium, the value premium, and the small cap premium exists. What you say aligns well with how people actually behave. It isn't just based on math. Value and small cap work because the stock market is an expectations game and stocks in these categories have lower expectations built into their prices. Low expectations have a better chance of surprising the market. So what you say makes sense to me.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Apr 06, 2013 8:27 am

nedsaid
We are in complete agreement. It's important to be skeptical, but not so skeptical you cannot learn anything new. And it's very clear that human behavior impacts markets or we would not have so many anomalies to try and explain. Note that some of the new models (like one using investment and profitability) explain the anomalies that the 3/4 factor models do not. That's is why they may eventually replace the FF model which works very well in most cases but cannot explain things like the small cap black hole or why high profitability stocks outperform when all else is equal.
I hope that helps

I would add just one more thing, while people say things like Larry is blind to or Larry ignores or whatever --certainly it's possible that is the case---but then that means that Vanguard (whose research people came to the same conclusions I came to) also is blind. And that creates a problem for them so they don't mention that,

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

Postby Jfet » Sat Apr 06, 2013 8:28 am

During the 2010 2011 scare of fraud in some reverse merger formed Chinese companies trading on the US exchanges, I often thought a dividend might at least be a way for a company to prove it has not cooked the books.

There were (still are?) many companies which claimed hundreds of millions of dollars in the bank and the market cap dropped to a fifth or tenth of that. Investors started realizing that the books were in some cases cooked.

Perhaps investing only in companies with a history of paying a dividend would eliminate this chance of being caught up in the fraud.

If Larry's numbers are correct though, it would seem that the aggregate of non-dividend paying companies that are not fraud plus the fraud part is still a greater return than the dividend paying portion.

I am buying VT as my only stock allocation. This way I get everything that is possible.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Apr 06, 2013 9:28 am

jfet
I would not make that interpretation. I would say that the fact that dividends are paid is reflected in the price you pay for the stock. That is what results in the same returns for stocks where market cap and BtM are the same but one pays divs and other doesn't. So if divs do make stock safer than that is in the price already. That's the way I would think about it

Remember we do know that there is information in dividends. Example, since companies don't like to cut divs when they raise them it is signalling forward confidence. But the market knows that and prices reflect it

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

Postby bertilak » Sat Apr 06, 2013 11:14 am

larryswedroe wrote:Example, since companies don't like to cut divs when they raise them it is signalling forward confidence. But the market knows that and prices reflect it

And some believe the price for that confidence is about right. Just because all factors are already priced in does not mean that they are not, individually, worth the price.

It's like buying apples (stocks) by the pound (expected return). Some apples' expected returns are driven by size, some by color, some by sweetness (eating apples), some by tartness (cooking apples), some by firmness, some by ability to store over winter (cider makers don't care but warehouses do), etc.. This does not mean everyone should buy a mixed basket of apples because every factor is already priced in. Some buyers would rather pay for redness (seasonal retailers?), others for store-ability (supermarket warehouses?) -- regardless of relative (but assumed fair) pricing differences. Sara Lee will go for tart over sweet, others vice versa. This is true even if the best and brightest can prove beyond a doubt that all apple buyers and sellers generally and over the long run make about the same profit or loss. It's even true if sweet apples are generally more profitable than tart apples. Sara Lee will still go for the cooking apples and that does not make cooks an irrational cult. Buyers and sellers understand the differences so grow and use different types of apples in the appropriate contexts. That is an efficient market.

Nor does it mean that, because there is a correlation between sweet apples and big-red-firm apples, a buyer should look for big-red-firm (LCV?) apples to find sweet (DIV?) apples. If sellers already have a sweet category, just go for that.

OK, that's a stretch but it was fun.

I can't back up any of that with facts or peer-reviewed studies. I bring it up because the anti-dividend arguments all seem to ignore that perspective. Again, I am willing to be convinced, but no one seems to even try.

P.S. I used to work for a company that grew and sold apples. I was a tree pruner, a picker, a shelf stocker and a sales clerk. I lived in an area where there were quite a few apple orchards and warehouses and I was used to seeing trucks filled with apples every fall. There were also trucks filled with the left over pressings from the juice and cider mills. The stuff wobbled around in the open trucks like jello in an earthquake and often ended up along the roads.

P.P.S. Cooks may be part of an irrational cult for other reasons!
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Re: Why do investors chase dividend paying strategies

Postby Ricola » Sat Apr 06, 2013 12:08 pm

As we are buying index funds consisting of a basket of stocks that we really know nothing about the company or management, the dividend instills some discipline or assurance in that the company management is faced with having to pay us something before they think about squandering company profits buying another jet, upping their bonuses, soirees in Majorca, remodeling their offices, etc. True or not?
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sat Apr 06, 2013 12:26 pm

Ricola wrote:As we are buying index funds consisting of a basket of stocks that we really know nothing about the company or management, the dividend instills some discipline or assurance in that the company management is faced with having to pay us something before they think about squandering company profits buying another jet, upping their bonuses, soirees in Majorca, remodeling their offices, etc. True or not?

A new buzz-phrase: "Where are all the stockholder's yachts?"

But I prefer "Where are all the stockholder's soirees?"
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Re: Why do investors chase dividend paying strategies

Postby hoops777 » Sat Apr 06, 2013 1:11 pm

An example.....John has 1 million in high quality div paying stocks like ATT and JNJ,KO,MCD,etc.Say the avg yield is 3.5%.He is living off the 35k in dividends yearly along with his SS.Bob has 1 million in non divid paying stocks and sells 35k a year to live on with his SS.The date is May 1,2013 and the market turns bearish and drops 20 % over the next 3 years.
John has to sell no stocks at a loss and still has the same amount of shares as the market recovers over the next 2 years.Bob has 20% fewer shares as the market recovers over the next 2 years.Will not John have more money after the market recovers back to the same level it was on May1,2013????
I know this is a rationale a lot of people use.
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Re: Why do investors chase dividend paying strategies

Postby dbr » Sat Apr 06, 2013 1:20 pm

hoops777 wrote:An example.....John has 1 million in high quality div paying stocks like ATT and JNJ,KO,MCD,etc.Say the avg yield is 3.5%.He is living off the 35k in dividends yearly along with his SS.Bob has 1 million in non divid paying stocks and sells 35k a year to live on with his SS.The date is May 1,2013 and the market turns bearish and drops 20 % over the next 3 years.
John has to sell no stocks at a loss and still has the same amount of shares as the market recovers over the next 2 years.Bob has 20% fewer shares as the market recovers over the next 2 years.Will not John have more money after the market recovers back to the same level it was on May1,2013????
I know this is a rationale a lot of people use.


If the two portfolios have the same total return in the same sequence, and the two investors take the same withdrawals, then it is an arithmetic fact that they will have the same wealth at the end.

For the dividend investor to protect his wealth better than the non-dividend investor, then the dividend portfolio has to have higher returns and/or less extreme downside volatility. Larry's whole explanation is an exploration of the degree to which return and volatility are and are not different for different portfolio compositions. The answer to that exploration is that the "risk" factors of market, size, and value explain those properties whatever the dividends paid might be. There is a correlation between dividend paying and value factors, but it is more direct and efficient to do the analysis on portfolio theory than on "feel good" concepts about dividends. The first analysis is an analysis of facts and the other analysis is plausible guesswork. Why guess when the data exists to know what actually happens?
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sat Apr 06, 2013 1:45 pm

dbr wrote:For the dividend investor to protect his wealth better than the non-dividend investor, then the dividend portfolio has to have higher returns and/or less extreme downside volatility.


But in this post viewtopic.php?p=1657368#p1657368 Larry says: "While dividends are more stable than earnings, there is still risk."

I read "more stable" as meaning less volatile.

Even if there was no change in the overall risk (perhaps volatility is not the only measure of risk) we do know that risk that is actualized earlier is more damaging. If stability means smoothing out risk over time it implies that there will be less up-front risk. This is especially important to someone who is no longer contributing savings as one cannot acquire new holdings at the lower price thereby diluting the loss. On the contrary, it means that one may need to sell more at the lower price.

Just as periodic constant dollar purchases can help in the accumulation phase (by buying more when prices are lower) periodic constant dollar sales can hurt during the decumulation phase (by selling more when prices are lower).
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Re: Why do investors chase dividend paying strategies

Postby dbr » Sat Apr 06, 2013 1:58 pm

bertilak wrote:
dbr wrote:For the dividend investor to protect his wealth better than the non-dividend investor, then the dividend portfolio has to have higher returns and/or less extreme downside volatility.


But in this post viewtopic.php?p=1657368#p1657368 Larry says: "While dividends are more stable than earnings, there is still risk."

I read "more stable" as meaning less volatility.

Even if there was no change in the overall risk (perhaps volatility is not the only measure of risk) we do know that risk that is actualized earlier is more damaging. If stability means smoothing out risk over time it implies that there will be less up-front risk. This is especially important to someone who is no longer contributing savings as one cannot acquire new holdings at the lower price thereby diluting the loss. On the contrary, it means that one may need to sell more at the lower price.


What I wrote is that the volatility of the portfolio returns, not the volatility of the dividends (which are only part of the returns) is what determines the outcome. The problem of sequence of returns is just exactly contained in the volatility (always speaking total returns because dividend fraction of returns is insufficient information). The more volatility the more chance for larger and damaging harmful sequences of returns. Too often people dismiss volatility as being only one and a not relevant form of risk when in fact what we are talking about here are all the consequences to the investor arising from what the behavior of returns is over the time period of interest. The reason a total return model is useful is that it considers all the information that determines the outcome while looking only at dividends considers only part of the information.

If a dividend portfolio has a favorable combination of higher total returns and/or lower volatility of total returns, then it will sustain more income with less chance of failure. Generally the comparison is not to portfolios selected for stocks that do not pay dividends but rather a portfolio of the total market. The question is whether concentrating the portfolio in stocks that pay higher, faster growing, or more reliable dividends is beneficial. The answer is that to the extent one can optimize the portfolio based on the factors of market, size, and value, then yes.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Apr 06, 2013 2:07 pm

Bertilak
You have the proof in the studies which show there is no difference in returns between div payers and non. Doesn't matter where in world you look same result
And that aligns with theory and logic
It is also exactly what the people at the research team at Vanguard wrote.
Myself and others have provided many explanations, as dbr did above
Nothing more one can say.

As to your statement about divs and stable, This was discussed in depth several times. Yes high divs have lower betas (making them less exposed to market risk) but they trade that off for more value risk. You have to learn to think in three factors not one (beta). Once you create the all else equal (market cap and btm) divs no longer matter. That is fact, not opinion.

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Re: Why do investors chase dividend paying strategies

Postby fishnskiguy » Sat Apr 06, 2013 2:45 pm

I'm convinced Larry is correct.

Why? Because his arguments make sense, and because Jim Cramer on Mad Money is forever extolling the beauty of dividend paying stocks. :D

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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Sat Apr 06, 2013 2:54 pm

fishnskiguy wrote:I'm convinced Larry is correct.

Why? Because his arguments make sense, and because Jim Cramer on Mad Money is forever extolling the beauty of dividend paying stocks. :D

Chris


I think you have it!

:oops:

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

Postby bertilak » Sat Apr 06, 2013 3:06 pm

Thank you dbr and Larry. I see your points, although my subtlety detector is flickering, telling me I have not completely internalized all you are saying.

larryswedroe wrote:Yes high divs have lower betas (making them less exposed to market risk) but they trade that off for more value risk.


One point that may separate us is acceptance of an active manager's ability to counteract that value risk. I think that was an unstated assumption on my part, unstated mostly because it was unrecognized. I look at the investment strategies for funds managed by Wellington and see:
In choosing these companies, the advisor seeks those that appear to be undervalued but have prospects for improvement.

and
companies whose stocks pay above-average levels of dividend income and are considered to have the potential for capital appreciation. In addition, the advisors generally look for companies that they believe are committed to paying dividends consistently.

Rightly or wrongly I tend to believe they have the ability to make those choices effectively. This is based on Wellington's long history of success.

Admittedly, comparisons to the Vanguard TSM fund shows only a slight advantage to Wellington, but there is a difference. According to Morningstar $10,000 invested at the 2007 high in a Wellington-managed dividend fund (Vanguard Equity-Income - VEIRX) vs $10,000 in Vanguard's TSM (VTSAX) gives only about a $400 advantage to VEIRX at the bottom in early 2009. Well, that is 4%, so maybe not too slight.

The Fund I have (Wellington - VWENX) does much better -- essentially matching TSM's total return over the past 10 years with significantly less volatility. VWENX is 35% bonds so I must credit their bond strategy even more than their equity strategy.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sat Apr 06, 2013 3:07 pm

fishnskiguy wrote:I'm convinced Larry is correct.

Why? Because his arguments make sense, and because Jim Cramer on Mad Money is forever extolling the beauty of dividend paying stocks. :D

Chris

Well, that caps it! And I don't need to keep up with Larry's deep thinking!
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Apr 06, 2013 4:56 pm

bertilak
Yes that fund has great record. What you're saying though is that active management is LIKELY to win going forward since you can identify the future winners. We all know how easy it is to identify past winners.I would also add that lots of funds have followed the same strategy with much worse records.

Having said that here are some thoughts on the fund.
A) The fund if memory serves does have a large alpha after adjusting for exposure to the five factors (adding term and default) that explain returns. Is it skill or luck? Hard to know and perhaps not even relevant going forward since past performance not a good indicator, especially as fund AUM grows--and this one now has $70b, though the bond side doesn't create capacity issues.
B) Unfortunately we cannot know if the alpha would be there if we ran the regression with the new profitability factor (DFA is still checking rigorously the data before they release the data on the new factor so we could analyze it) . It's possible the alpha, or some part of it, is really exposure to that factor.

Which leaves you the decision to trust the judgement of the fund going forward or not. Hard to argue with the track record. Also there is a big problem for investors who have choice of LOCATION. Since the fund holds both stocks and bonds you are holding one of the two assets in the wrong location.

I hope that is helpful

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Re: Why do investors chase dividend paying strategies

Postby hoops777 » Sat Apr 06, 2013 7:41 pm

Dbr...you say it is a fact that the 2 portfolios would have the same total return.Let me put it another way.
John has 10000 shares of stock ABC at 100 dollars per share total 1 million with a 4% div.Bob has 10000 shares of stock K at 100 dollars total 1 million paying no dividend.To get the 40 k per year Bob has to sell 400 shares per year and John sells nothing,just takes the dividend.After 2 years Bob has 9200 shares andvJohn has 10000.
The fact that Bob had to sell shares at a loss in a down market for 2 years and John sold none seems to change the outcome in my mind.Is this incorrect?The only way this can be incorrect is if the div paying stock drops a lot lower than the other.I understand the concept of total return but if one person sells shares at a loss I do not get how they would have the same outcome.
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Re: Why do investors chase dividend paying strategies

Postby Jfet » Sat Apr 06, 2013 8:45 pm

hoops777 wrote:Dbr...you say it is a fact that the 2 portfolios would have the same total return.Let me put it another way.
John has 10000 shares of stock ABC at 100 dollars per share total 1 million with a 4% div.Bob has 10000 shares of stock K at 100 dollars total 1 million paying no dividend.To get the 40 k per year Bob has to sell 400 shares per year and John sells nothing,just takes the dividend.After 2 years Bob has 9200 shares andvJohn has 10000.
The fact that Bob had to sell shares at a loss in a down market for 2 years and John sold none seems to change the outcome in my mind.Is this incorrect?The only way this can be incorrect is if the div paying stock drops a lot lower than the other.I understand the concept of total return but if one person sells shares at a loss I do not get how they would have the same outcome.


The stock K will usually recover to higher return after a fall than the stock ABC...that is probably where the difference is.

So John will still have 10,000 shares of ABC after it recovers and Bob will have only 9200 shares of K, but K will be worth 10% more than it was before the crash and ABC will just be back at even.
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Sat Apr 06, 2013 8:57 pm

hoops777 wrote:Dbr...you say it is a fact that the 2 portfolios would have the same total return.Let me put it another way.
John has 10000 shares of stock ABC at 100 dollars per share total 1 million with a 4% div.Bob has 10000 shares of stock K at 100 dollars total 1 million paying no dividend.To get the 40 k per year Bob has to sell 400 shares per year and John sells nothing,just takes the dividend.After 2 years Bob has 9200 shares andvJohn has 10000.
The fact that Bob had to sell shares at a loss in a down market for 2 years and John sold none seems to change the outcome in my mind.Is this incorrect?The only way this can be incorrect is if the div paying stock drops a lot lower than the other.I understand the concept of total return but if one person sells shares at a loss I do not get how they would have the same outcome.


This is incorrect, it has been covered in this thread.

Let's take your example. Whether it's a down market or not doesn't matter. Let's say the market is flat to simplify the question. Using your assumptions of stock price and dividend yield, Bob sells $40k of K every year. John gets $40k in dividends from ABC every year. Isn't John winning even if the market is flat? Wouldn't he be winning if the market is going up?

The answer is the direction doesn't matter. If the market is flat, K is $100 while ABC is $96. If both stocks drop 50%, K is $50 and ABC is $46.

If you're saying that ABC is still worth $100/share (or $50/share), and it paid a dividend, what you did is assume that it returned 4% more than K. Of course if you change the inputs so that ABC returns more than K, then John will beat Bob. All this does is to take inputs that should make the answer obvious, apply a context/outside circumstances that obfuscate the question, then return to the original assumption that ABC returns more than K.

What people are saying in this thread is that after controlling for the price and size factors (book to market, market cap), the stocks will generally have the same expected return, and the dividend yield doesn't give you any more information about expected returns. Otherwise, why wouldn't someone start a hedge fund to exploit this glaring inefficiency in the markets? Find stocks that have the same market cap and book to market, go long the stock that pays a dividend and short the stock that doesn't. If you diversify with hundreds of holdings and apply some leverage, wouldn't you guarantee huge profits every year?
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Re: Why do investors chase dividend paying strategies

Postby careytilden » Sun Apr 07, 2013 2:20 am

hoops777 wrote:Dbr...you say it is a fact that the 2 portfolios would have the same total return.Let me put it another way.
John has 10000 shares of stock ABC at 100 dollars per share total 1 million with a 4% div.Bob has 10000 shares of stock K at 100 dollars total 1 million paying no dividend.To get the 40 k per year Bob has to sell 400 shares per year and John sells nothing,just takes the dividend.After 2 years Bob has 9200 shares andvJohn has 10000.
The fact that Bob had to sell shares at a loss in a down market for 2 years and John sold none seems to change the outcome in my mind.Is this incorrect?The only way this can be incorrect is if the div paying stock drops a lot lower than the other.I understand the concept of total return but if one person sells shares at a loss I do not get how they would have the same outcome.


I think you might be missing one thing: when a dividend is issued, the stock's price drops. Even though John has more shares, they have a lower share price. So John and Bob's portfolios are worth the same number of dollars when all is said and done.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sun Apr 07, 2013 8:43 am

hoops777

Just think about the simple explanation

Let's say a stock sells always at its book value. Let's say Stock A and B both have book value of $10. And let's say they both earn $1. And they do so for 10 years. What do they sell at after 10 years? if A pays all earnings out in dividends and B pays none? Obviously since A pays out all earnings it will still sell at 10. B will sell at 20.

Now say investor in B after each year needs to generate the $1 for cash flow --the same cash flow that A gets. So, after first year his stock is selling at 11 and he sells 1/11th of his shares to get the $1. And his remaining 10/11ths are still trading at 11.So the value of his stock is 10 and he has 1 in cash. The same exact situation that A is in. The next year he repeats it and sells 1/12 of his shares because the stock is at 12. And that will put the two investors in the same situation once again. Yet the myth persists among individual investors.

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Re: Why do investors chase dividend paying strategies

Postby midareff » Sun Apr 07, 2013 9:00 am

larryswedroe wrote:hoops777

Just think about the simple explanation

Let's say a stock sells always at its book value. Let's say Stock A and B both have book value of $10. And let's say they both earn $1. And they do so for 10 years. What do they sell at after 10 years? if A pays all earnings out in dividends and B pays none? Obviously since A pays out all earnings it will still sell at 10. B will sell at 20.

Now say investor in B after each year needs to generate the $1 for cash flow --the same cash flow that A gets. So, after first year his stock is selling at 11 and he sells 1/11th of his shares to get the $1. And his remaining 10/11ths are still trading at 11.So the value of his stock is 10 and he has 1 in cash. The same exact situation that A is in. The next year he repeats it and sells 1/12 of his shares because the stock is at 12. And that will put the two investors in the same situation once again. Yet the myth persists among individual investors.

Best wishes
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That's plain and easy to understand Larry except it seems to make the wrong case. Sell a bit every year, transaction costs, good day/ bad day... vs., simply receive your electronic dividend transfer? For a retiree it seems to make great sense to get that 3% dividend payment vs. the 2% dividend payment of the total market and pay for it with a reduced, 1% less over time share price growth. No need to get into the tax differences of capital gains vs. dividends, loss harvesting, etc.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sun Apr 07, 2013 10:00 am

midreff
Sorry that doesn't make any sense, as Vanguard's paper which you should read points out. There is no reason why people love dividends except that they do.
First, if you own Vanguard funds with Vanguard there are no transactions costs. Second if you don't need the full cash flow then dividends become tax inefficient, losing the time value of deferring the gain. And even if there are transactions fee through a custodian, they are tiny. Also dividends force you to take income, which can create situation which pushes you into higher tax bracket.
Second, remember divs were taxed at higher tax rates and may yet be again.
Third, no idea what the good day/bad day means--already showed that it makes no difference if market up or down, it's the same.
Fourth with divs you pay taxes on full amount. With total return approach you only pay taxes on the amount by which the stock has gone up!! What if it hasn't gone up at all. No taxes.
It amazes me the length to which people will go to try and find some reason to justify what is not justifiable.
It simply makes no sense, just psychological crutch, a mental accounting issue.If that is what is needed to keep an investor disciplined, that's fine? But that doesn't change the fact that it's not rational.

Here is the link to the Vanguard paper which explains what I have been trying to explain
https://personal.vanguard.com/pdf/s557.pdf

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Re: Why do investors chase dividend paying strategies

Postby MCSquared » Sun Apr 07, 2013 1:10 pm

larryswedroe wrote:midreff
Sorry that doesn't make any sense, as Vanguard's paper which you should read points out. There is no reason why people love dividends except that they do.
First, if you own Vanguard funds with Vanguard there are no transactions costs. Second if you don't need the full cash flow then dividends become tax inefficient, losing the time value of deferring the gain. And even if there are transactions fee through a custodian, they are tiny. Also dividends force you to take income, which can create situation which pushes you into higher tax bracket.
Second, remember divs were taxed at higher tax rates and may yet be again.
Third, no idea what the good day/bad day means--already showed that it makes no difference if market up or down, it's the same.
Fourth with divs you pay taxes on full amount. With total return approach you only pay taxes on the amount by which the stock has gone up!! What if it hasn't gone up at all. No taxes.
It amazes me the length to which people will go to try and find some reason to justify what is not justifiable.
It simply makes no sense, just psychological crutch, a mental accounting issue.If that is what is needed to keep an investor disciplined, that's fine? But that doesn't change the fact that it's not rational.

Here is the link to the Vanguard paper which explains what I have been trying to explain
https://personal.vanguard.com/pdf/s557.pdf

Best wishes
Larry


I am not sure the case is as open and shut as you are stating. Why is it that only one strategy is correct? Here are a couple of articles from Geoff Considine that contradict the Vanguard paper:

http://www.advisorperspectives.com/news ... rategy.php

http://www.advisorperspectives.com/news ... idends.php
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Re: Why do investors chase dividend paying strategies

Postby Random Musings » Sun Apr 07, 2013 1:29 pm

I looked at the first link ~ Do they take into consideration tax efficiency for investors who have do deal with placement issues? Also wonder if there is advantages with respect to TLH on more volatile components if invested in taxable accounts?

Also, if one ratchets down expected return to 8.3%, won't thar affect expected returns on other side? Some companies utilize stock buybacks.

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Re: Why do investors chase dividend paying strategies

Postby JamesSFO » Sun Apr 07, 2013 1:35 pm

SDY ETF (The SPDR® S&P® Dividend ETF before expenses seeks to closely match the returns and characteristics of the S&P High Yield Dividend AristocratsTM Index) seems to have underperformed VTI ETF (VG Total Stock Market ETF).

Edit for emphasis: the dividend ETF underperformed the total market fund over a ~7 year period including the big dip, seems contrary to what the dividend approach is supposed to produce.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sun Apr 07, 2013 1:44 pm

James
I wrote a piece which clearly shows that the SDY returns are well explained by the FF model, so nothing unique

MCSquared
I have shown that basically there is nothing unique about dividends. That is very clear or should be. Also there are clear negatives from tax standpoint as we have discussed
Also Considine makes the mistake of not making all things equal which you must do. The second problem is that there is no alpha with the high div strategy--so again all else equal divs have nothing special and some negatives, just as logic and theory and evidence shows. You just have to know how to look at the things in the whole, not in isolation


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Re: Why do investors chase dividend paying strategies

Postby hoops777 » Sun Apr 07, 2013 1:53 pm

Larry and all...Thanks for setting me straight once and for all.I have been brainwashed by various stock gurus over the years and it is difficult to get them out of your head.The irony of investing is such a complex endeavor is actually so simple if you can block out all of the noise. :oops:
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Re: Why do investors chase dividend paying strategies

Postby Scooter57 » Sun Apr 07, 2013 2:08 pm

If the Vanguard study was based on the assumption that stocks will yield 10% and bonds 6% over the retirement period, then it is seriously misleading, since Vanguard's spokespeople are now telling investors to expect roughly 1.7% from bonds and 3-7% from stocks over the next ten years.

It always bothers me when people cite academic or industry research papers to support a position. I read, analyze, and comment on academic and industry research for a living, and what I've learned over the years is how flawed the underlying assumptions and statistical analysis are in many papers that are routinely cited as gospel. When you go back and read the whole paper, not the abstract, you may find that the study doesn't hold up at all when looked at in light of new information we know today. For example, many studies purporting to show that "high fat" diets cause heart disease were conducted in subjects eating diets full of carbohydrates and large amounts trans fat, both of which we now know can raise the risk of heart disease through mechanisms independent of any saturated fat in the diet. Saturated fat might cause health problems, but that often-cited research doesn't actually prove that it does.

So before you base your investment plans on any academic study you have to take a deep breath and look at the underlying assumptions, methodology, and data used to come up with the result. Then you have to look at who is promoting the study and what they have to gain by publicizing it. Do they earn more when you are convinced by the research? If so, it doesn't mean that the research is wrong, but it does mean that you need to look at more than those few studies in forming your investment strategy.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sun Apr 07, 2013 2:15 pm

MCSquared wrote:http://www.advisorperspectives.com/newsletters12/The_Superiority_of_Dividends.php

I'm a little fuzzy on how they account for the selling of assets in the high-E/P strategy when creating their charts. Look at this chart:

Image

The paper says
we see that a high-dividend strategy differs from a high-E/P strategy primarily
in that the higher dividends are comparable to a cash payment, in return for which we give
up potential price appreciation.

Does the loss of potential include the fact that dividends were not reinvested? Seems like that would be a flaw in their reasoning, but I couldn't find an explicit statement addressing the following...
  1. Are they taking an equal amount of cash out of both portfolios? Or is the red line high simply because they are NOT taking any cash from the High-E/P portfolio?
  2. Are they reinvesting dividends, which I presume are being paid in both portfolios, even if at different percentages?
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Re: Why do investors chase dividend paying strategies

Postby Ketawa » Sun Apr 07, 2013 2:27 pm

MCSquared wrote:I am not sure the case is as open and shut as you are stating. Why is it that only one strategy is correct? Here are a couple of articles from Geoff Considine that contradict the Vanguard paper:

http://www.advisorperspectives.com/news ... rategy.php

http://www.advisorperspectives.com/news ... idends.php


I only skimmed the articles, but I see a few issues.

In the first article, the author concludes that:

Research shows that value-oriented companies operate differently than companies that pay low or no dividends.
...(snipped)...
To express this another way, the trends in relationships among management, analysts, and investors make high-quality, low-beta, dividend-paying stocks more attractive than growth-oriented stocks. As such, an income-focused portfolio that emphasizes less glamorous equity sectors and corporate bonds provides a compelling choice.


This works better as an argument for value stocks, not dividend stocks. Dividend yield is not the preferred way to invest in value stocks since it returns less that book to market, it's less stable than book to market resulting in greater turnover, and it is not tax-efficient. Like RM pointed out, there's nothing in the paper about tax efficiency, either.

I'm also not very convinced by his two Monte Carlo portfolios. Portfolio #1 is 50% equities and it overweights small caps and emerging markets, holds QQQQ (!!!), and has 10% in commodities. He also uses a couple very expensive ETFs, EFA and EEM, when far better alternatives are available. Portfolio #2 basically exchanges all the equities for sector bets, probably has a higher allocation to domestic stocks since half the equities are U.S. only while the other half are both U.S./intl, and it exchanges the commodities and ST govt bonds for high yield bonds. I'd say that it's very difficult to draw any conclusions on what to expect with these portfolios, even with a MC analysis. If you're looking to make a fair comparison, why would you use Portfolio #1 which has serious issues IMO instead of something like Taylor's Three-Fund Portfolio? Or, you could compare Portfolio #2 to other ways of getting a small value tilt, like a portfolio holding VBR, VSS, EFV, etc.

Regarding the second article...ok he's addressing the "BtM is better than dividend yield" point. So he's mainly concerned about the return difference, but still doesn't say anything about tax efficiency. I'm not an expert on options but I know a little. I don't understand the nuances of the author's position in saying that a covered call position is similar to a dividend-paying stock.

Because both dividends and call option premiums are a form of tradeoff between future price appreciation and cash in hand, we can think of a portfolio that pays a dividend as implicitly having sold a call option. Through this new lens, we can re-compare dividend-paying stocks to other value strategies.


Our theory, however, is that high-dividend stocks tend to be value stocks, which means that owning them is similar to selling a call option against a value portfolio. Higher income from the sale of the option reduces the uncertainty in future returns, and we should expect that will come at a price.


A covered call changes the distribution of returns so you have no upside, you retain the downside, and you receive extra cash now in exchange for not having any upside. When he says that owning a dividend stock/MF is similar to selling a call option against a value portfolio, how? The distribution of returns are totally different. A dividend stock/MF doesn't lose any upside when it pays a dividend. And within your individual portfolio, you aren't trading away future price appreciation for cash in hand unless you willfully ignore your asset allocation and continuously build up more cash in your portfolio. Instead, you can reinvest the dividend and keep the same dollar amount invested in the stock/MF. Am I missing something here?
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sun Apr 07, 2013 5:04 pm

Scooter
It would make no difference whatsoever what rate of return Vanguard used. It's totally irrelevant. That's the point. That's what the research demonstrates, that's what theory states and that's what the logic makes clear.
The only possibility to make divs more attractive is if somehow investors disliked them and thus made the stocks of dividend payers too cheap---and anomaly. Never hear that case made because just as there is no evidence that that is the case there is no evidence that div payers are overvalued either. They just make no difference

Yet you lose diversification benefits and you lose tax efficiency and you gain nothing, just an illusion



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Re: Why do investors chase dividend paying strategies

Postby JamesSFO » Sun Apr 07, 2013 5:24 pm

larryswedroe wrote:James
I wrote a piece which clearly shows that the SDY returns are well explained by the FF model, so nothing unique


Larry:

They underperformed,I am generally in agreement with you. I perhaps should have added more commentary with my post, I was wondering why SDY would underperform VTI if dividends were superior over a ~7 year period.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sun Apr 07, 2013 5:55 pm

James
I don't know but my guess is if you did a factor analysis you would have your answer
Best wishes
Larry
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Re: Why do investors chase dividend paying strategies

Postby JamesSFO » Sun Apr 07, 2013 7:32 pm

larryswedroe wrote:James
I don't know but my guess is if you did a factor analysis you would have your answer
Best wishes
Larry


Yes, well the question wasn't really meant for you but the folks that love dividends. The most recent 7 year period included a deep recession and stock market decline, if dividends were all that and a bag of chips...

Anyhow...
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Re: Why do investors chase dividend paying strategies

Postby TJSI » Sun Apr 07, 2013 9:04 pm

Cultists Arise!

I thought it odd that there was no analysis of the role dividends played in the above market performance of value (high B/M) portfolios. Well there is. It was mentioned by Rick Ferri above and it is highly informative. ( See: The Journal of Portfolio Management, "Rebalancing and the Value Effect" by Chaves & Arnott).

Although I suspected that dividends were important, the findings were very surprising.

The authors decomposed several portfolios of stock returns into three component: valuation change, return from dividends, and growth in dividends.

Briefly here are some of their findings. Comparing a value and a market portfolio, the value returned 11.47% and the market returned 10.16% from 1963 to 2010.
And the decomposition of the returns was:

Value Portfolio
Valuation .96%
Dividends 4.12%
Div growth 6.04%

Market Portfolio
Valuation 1.07%
Dividends 3.13%
Div growth 5.69%


So the dividend factor accounted for 88.5% of the value fund return and over 100% of the performance improvement over the market fund. Amazing.

They also analyzed the FF small high value portfolio from 1928-2010

Total Return 14.76

Valuation .71%
Dividends 3.2%
Div growth 10.42%

Again, the dividend factor accounted for 92% of the Small High Value portfolio return.

So by that study the importance of dividends in growing a portfolio value lives on.


The article also gives a good discussion on the rebalancing program. An area in general which I think needs a lot of study.
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