Why do investors chase dividend paying strategies

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Re: Why do investors chase dividend paying strategies

Postby MP173 » Tue Mar 26, 2013 5:49 pm

I have been sipping the dividend koolaid cult drink since 1995 when I purchased two stocks and converted to Dividend Reinvestment Programs. Back then it was quite laborious...buy 100 shares of stock, have the brokerage issue you the stock certificate, and mail the certificate to the bank. Today it is much easier. I have 17 stocks now and statsguy and I seem to be among the few that actually hold and manage dividend paying companies.

Recognizing that these 17 holdings provide a concentrated nondiversified portfolio, i have balanced it with SPY, IBonds paying in the 3% plus inflation rate, GNMA, and Vanguard tax free munis (long term and intermediate) plus my 401k holdings. Yes, my portfolio is a bit complex, but it results in a 45/45/10 AA.

There are several issues which are important to me. I want companies with a "moat". I also want companies with a high FCF/revenue %. Currently my holdings average 15.1%. ROE is also important (current holdings - 20.6%). Payout ratio is another factor (current 46.6%). Most of my holdings are blue chip and are typically large cap/value. My earliest purchases were Emerson (EMR), Illinois Central Railroad (now CNI), Exxon (now XOM), McDonalds (MCD) and Proctor Gamble (PG). My most recent purchase was Johnson Johnson (JNJ) about 18 months ago. Dividends reinvest into more shares. I have projected out the 17 holdings for another 10 years with income projections based on conservative dividend growth. The plan is to use this income for retirement, along with 401/IRA and other funds.

I dont swing for the fences, instead wanting profitable companies that have decent growth. I missed on Apple. I also missed (negetively) on a few, but my holdings were fairly small.

While I do not understand most of the theories and formulas that are being used in your argument Larry, I respect what you do. I try to buy "companies" rather than stocks.

I know that I have been lucky but make no apologies about it. I recommend people purchase SPY and other index funds.

Ed
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Tue Mar 26, 2013 6:23 pm

Ed
That is not a bad screen, in fact on cursory review they it fits some of profitability factor that has been now identified (and was practiced by Buffett) --
But it's not the dividends that matter, just the other factors.

As to SDY my blog post on it clearly shows that there is nothing there, no reason to own it. It's returns fully explained by factor models and you sacrifice the benefits of global diversification

Good luck to you

Larry
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Re: Why do investors chase dividend paying strategies

Postby statsguy » Tue Mar 26, 2013 7:23 pm

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
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Tue Mar 26, 2013 8:15 pm

statsguy wrote:Larry, I find it hard to believe that investors substitute SDY for bonds, probably because I have not met anyone who would do that. Of course that is a crazy strategy. When I talk of owning dividend stocks, they come for the equity side of the equation.

Stats


Stats,

I guess you haven't met everyone. I have never invested in bonds (except just in passing once or twice as a short term cash hold) and see no need to start now. The added return that this has added, has helped me retire at 60 and convert about 1/4 of my nest egg to my bucket 1 income, which comes 100% from 20 dividend paying stocks, a good portion of which have been increasing their dividend every year for 30-50 years.

I don't claim this is a superior total return strategy, and I did not use it for my accumulation stage, but in retirement, the game changes to one of income -- if you think the game is growth or total return, you can be eaten alive with a few down years that are strung together.

I don't however use SDY, but load up on Total Stock Market type growth in the rest of my portfolio.

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Re: Why do investors chase dividend paying strategies

Postby MP173 » Tue Mar 26, 2013 10:43 pm

I use SPY not SDY.

Also use a couple of Russell Value ETFs - 2000 Value and I believe the 1000 value. I probably have too much overlap on certain things. I havent really used a good analytical process for accumulating.

Yes, my methods tend to mirror Mr. Buffet's...that is on purpose. No airlines and very few financials tho, although my American Express has done quite well.

Ed
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Re: Why do investors chase dividend paying strategies

Postby BruceM » Wed Mar 27, 2013 2:21 am

Sorry to be late to this discussion.

I have been an income investor for 13 years. I know this space reasonably well. The income produced by the investments I hold have provided reliable retirement income over this period. My primary objective is reliable income. Capital preservation is not one of my principal objectives....at least not that portion of our savings that I invest for income.

The excess of savings beyond this amount I invest for long term growth for possible long term care or as a legacy, using the tenets of MPT and passive investing. I've been doing this since I read "A Random Walk" and Bill Berstein's "The Four Pillars"

In short, I do both.

Income investing works...IF...let me repeat that...IF...it is done correctly. I haven't read a post here yet, except perhaps Stats, that has any idea of how to invest for reliable income CORRECTLY.

Investing for long term reliable income is a separate discipline with tenets that are different than MPT and safe withdrawal rates. It is neither wrong nor right, it is simply a separate approach to providing long term reliable income during retirement. It has its own risks, a couple of which might cause an informed and impartial retiree who requires income, to choose not to use it as an investment strategy. If so, that is how it should be. But this requires an impartial study and attention to what is important. I have seen none of that here.

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Re: Why do investors chase dividend paying strategies

Postby saurabhec » Fri Mar 29, 2013 11:28 am

larryswedroe wrote:http://www.cbsnews.com/8301-505123_162-57576075/theres-no-reason-to-chase-dividends/

There is a whole "cult" of investors that seem to believe that investing in either the stocks of high dividend payers or companies with rapidly growing dividends provides superior results.

Hope you find it of interest

Larry


Larry,

I don't disagree with you that dividend-focused investors can often resemble a cult in their beliefs. However I think you were a bit unfair and harsh in your dismissal of this approach.

As you probably know, empirical studies of historical returns of various strategies are very sensitive to the length of time and the starting and ending periods. Just dropping or adding a few years can lead to a big change in findings. Many other U.S. stock market studies show that dividend payers outperform non-dividend payers. This study shows identical annualized returns. How would the results have changed if 1991-2012 were not the chosen time period? It almost seems as if the period were picked to be neutral to the annualized returns of dividend payers and non-payers.

Second, your criticism primarily makes two points - the first that dividend yields are not the best way to maximize total returns and second that dividend strategies lead to a lack of diversification.

I don't think that most dividend investors are trying to outperform the market. I think most would be happy to match the market. What they are trying to avoid is sequence of returns risk in the withdrawal phase, where relying on capital appreciation can bite in low or negative return environments. Finally, it seems strange to criticize dividend strategies for lack of diversification when value and size strategies are also undiversified relative to the overall market.
Last edited by saurabhec on Fri Mar 29, 2013 5:22 pm, edited 2 times in total.
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Re: Why do investors chase dividend paying strategies

Postby leo383 » Fri Mar 29, 2013 11:48 am

I don't buy dividend stocks (we are 100% Vanguard Index Funds), but there is something inherently comforting (to me at least) about buying a stock, then having it pay you cold hard cash for as long as you own it. That cash is yours, you are free to spend it as you wish. :)

I think a lot of dividend investors like that feeling more than they think they are going to outperform the market.
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Re: Why do investors chase dividend paying strategies

Postby dbr » Fri Mar 29, 2013 11:51 am

leo383 wrote:I don't buy dividend stocks (we are 100% Vanguard Index Funds), but there is something inherently comforting (to me at least) about buying a stock, then having it pay you cold hard cash for as long as you own it. That cash is yours, you are free to spend it as you wish. :)

I think a lot of dividend investors like that feeling more than they think they are going to outperform the market.


I am convinced that this psychology is the dominating reason for liking dividend stocks for those that do. I think the rest is rationalization, valid or invalid that rationalization might be.
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Fri Mar 29, 2013 12:28 pm

dbr wrote:
leo383 wrote:I don't buy dividend stocks (we are 100% Vanguard Index Funds), but there is something inherently comforting (to me at least) about buying a stock, then having it pay you cold hard cash for as long as you own it. That cash is yours, you are free to spend it as you wish. :)

I think a lot of dividend investors like that feeling more than they think they are going to outperform the market.


I am convinced that this psychology is the dominating reason for liking dividend stocks for those that do. I think the rest is rationalization, valid or invalid that rationalization might be.


I don't have any idea whether this is the dominating psychology or not, but I don't see it as my reason for owning dividend paying stocks.

For me I see it as a very practical strategy that suits my income needs in retirement. Owning stocks that have increased their dividend through most of recent history (in some cases over 50 years) seems like a comparable trade-off to purchasing annuities, with their inherent short comings, such as costly inflation protection, and many companies that certainly have not been around even for 50 years, or buying bonds, which in the first place can not equal the returns of stocks, either on the growth or the income side of the equation.

Once again I do not see this as a total return strategy - it is only the income side of the bigger picture, to suit the needs of retirement withdrawal. It is also not for everyone, as this strategy takes some time and energy to set up and maintain.

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Re: Why do investors chase dividend paying strategies

Postby cheapskate » Fri Mar 29, 2013 12:28 pm

dbr wrote:
leo383 wrote:I don't buy dividend stocks (we are 100% Vanguard Index Funds), but there is something inherently comforting (to me at least) about buying a stock, then having it pay you cold hard cash for as long as you own it. That cash is yours, you are free to spend it as you wish. :)

I think a lot of dividend investors like that feeling more than they think they are going to outperform the market.


I am convinced that this psychology is the dominating reason for liking dividend stocks for those that do. I think the rest is rationalization, valid or invalid that rationalization might be.


Not entirely. I am not in the distribution phase and won't be for a long while.

I like dividends primarily because they enforce good corporate governance and discipline. I don't like share buybacks (as the alternative mentioned here often) to return money back to shareholders because in my personal experience, I have seen massive abuse of buybacks (and outright theft of shareholder money). This is particularly rampant in the technology sector.
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Re: Why do investors chase dividend paying strategies

Postby jebmke » Fri Mar 29, 2013 4:12 pm

cheapskate wrote:I like dividends primarily because they enforce good corporate governance and discipline.

I worked for a public company in the early '80s where the exact opposite occurred. When the recession hit, the board allowed the CEO to borrow a large slug of money at 16.75% fixed with no prepayment on 15 year note in order to finance the dividend. The company nearly went under.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Fri Mar 29, 2013 11:48 pm

saurabhec

we do have very long data on dividend strategies relative to other value strategies, so low p/d,p/e, p/s, p/c or p/d
and p/d is the lowest return --in other words it's a weak value strategy
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Sat Mar 30, 2013 1:47 am

larryswedroe wrote:saurabhec

we do have very long data on dividend strategies relative to other value strategies, so low p/d,p/e, p/s, p/c or p/d
and p/d is the lowest return --in other words it's a weak value strategy
Larry


Well, I suppose it also matters what dividend strategy you are analyzing and how it compares on a risk adjusted basis. I have been tracking the 19 stocks laid out by Hersh Cohen and they look far from weak to me - beating both the Vanguard VBR and the DFA - DFFVX, over the last 5 years, and doing it with much less volatility than either of these funds.

As a point of reference the Morningstar reported returns over the last 5 years for these 19 stocks have been:

2008 -17.79
2009 +23.56
2010 +11.54
2011 +12.8
2012 +15.81

current 5yr return +10.05

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Re: Why do investors chase dividend paying strategies

Postby saurabhec » Sat Mar 30, 2013 8:06 am

larryswedroe wrote:saurabhec

we do have very long data on dividend strategies relative to other value strategies, so low p/d,p/e, p/s, p/c or p/d
and p/d is the lowest return --in other words it's a weak value strategy
Larry


I have crunched the numbers myself and know quite well that a naive strategy picking the highest yielding dividend stocks underperforms relative to other value strategies. However a lot of that underperformance comes from the highest yielders which are either going to cut their dividend, or fail to grow it. I don't think any dividend investor in the real world follows a naive strategy of simply picking stocks with the highest dividend yield. A lot of dividend investors are picking stocks with yields that would we second quintile or slightly above average yields and good growth prospects. You also dont acknowledge that dividend investors are not motivated by return maximization but by avoiding sequence of returns risk in withdrawal mode. But that said you never addresses by comment about sensitivity of empirical studies to the sample studied. It seems that the period has been picked to show equivalence in return between dividend payers and non dividend payers when most studies show that dividend payers outperform. Also it seems a double standard to criticize dividend strategies for a lack of diversification when value strategies are also undiversified. I think it would be fair if you said that you think that any strategy that relies on individual stock picking and does not try to capture either beta or value or size per FF is sacrilege, but then I think one should simply add that as a lead-in to all of your commentary.
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Re: Why do investors chase dividend paying strategies

Postby Rick Ferri » Sat Mar 30, 2013 9:23 am

Dividends do play an important role in why the “value premium” has occurred. Recent studies by Research Affiliates (RA) help explain their role:

Value Stocks and Dividends

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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Mar 30, 2013 10:32 am

Few things
You also dont acknowledge that dividend investors are not motivated by return maximization but by avoiding sequence of returns risk in withdrawal mode. But that said you never addresses by comment about sensitivity of empirical studies to the sample studied. It seems that the period has been picked to show equivalence in return between dividend payers and non dividend payers when most studies show that dividend payers outperform. Also it seems a double standard to criticize dividend strategies for a lack of diversification when value strategies are also undiversified. I think it would be fair if you said that you think that any strategy that relies on individual stock picking and does not try to capture either beta or value or size per FF is sacrilege, but then I think one should simply add that as a lead-in to all of your commentary


First, if you want to avoid or minimize risks of negative sequence then all one needs to is use a lower beta and higher tilt strategy--which in effect is what a high dividend strategy is as it has lower beta and higher value tilt than market. It's just not as efficient

Second,basically dividends don't matter whether you cut the high dividends or not, or whether you choose a high growth of dividends. There just isn't even any logic to it because dividends don't determine returns. If they did we would have a dividend factor or a growth of div factor. But a four factor model explains almost all returns of diversified portfolios without a dividend factor


Third, a value strategy is way more diversified, even if you just limit yourself to US you can over a thousand stocks and if you properly diversify int'l you get thousands and add geographic diversification

Fourth while you may think it was data mining as to the period the period was chosen for the data availability

Finally, this is not about religious belief but about evidence and logic that is supported by evidence

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

Postby larryswedroe » Sat Mar 30, 2013 10:36 am

Rick
FWIW IMO that study on migration doesn't tell you anything about dividends contributing because it would not have mattered if the stocks paid dividends or not, paying dividends doesn't impact returns, and for taxable investors it has negative impact.

In fact as you I'm sure know DFA used to run div screens when divs where taxed higher for their TM funds. And they would lower exposure to divs without impact exposure to value premium and thus no impact on returns. They did that until they felt the diversification loss would be too high

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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Mar 30, 2013 10:42 am

financial dave
First there are two types of div strategies, high paying and fast growth and they are very different. I blogged on both and showed their returns are both well explained by factor exposures, just different types. Also DFA study showed that faster growing div companies don't provide higher returns even if you could predict with 100% accuracy who they would be

Second, while I don't doubt your data there might also be another 19 stocks that someone else chose that did poorly.

The period you cite is obviously very short and it's one characterized by an "obsession" with yield and thus it would not surprise me that in such a period a high div strategy might outperform other say value strategies

third, the stocks chosen might very well be high profitability stocks (Robert Novy Marx paper) and that would explain their returns. so it might not be dividends explaining returns but exposure to profitability factor.

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

Postby nedsaid » Sat Mar 30, 2013 12:03 pm

This has been an interesting discussion.

There is a real world aspect to all of this. I have dividend paying stocks in my portfolio, stocks (mostly) purchased at reasonable prices, which I hold for long periods of time. I have had some success with this and I have used the dividends to purchase other investments. I didn't know about the studies that Larry Swedroe talks about and did okay. Other posters have followed a similar path and have done okay.

The fellow that got me started in stock investing told me last year that he is getting something over $55K in dividends from his and his wife's account each year. He did go for a high dividend strategy (which I don't advocate) and he is pretty much 100% in individual stocks (which I don't advocate either). My comment to him was, "With Social Security, you can retire on that income." I wish I was getting that kind of income on my portfolio. My friend changed his strategy from what I advocate (for those that want to do individual stocks) to a high dividend paying strategy.

Whatever faults you can find in what he is doing, his results have been good and I won't argue with him. He also said that his portfolio doubled in the last 10 years or so. Not bad.

I do think that by pursuing a high dividend strategy that he is giving up a lot of potential capital gains. His return will be mostly dividends. Secondly at whatever point that bond yields get to be in the 4-5% range, funds will flow out of the high dividend stocks back into what are perceived to be safer (that is bonds). High dividend stocks are still stocks, they are not bonds. I hope that my friend is flexible enough to switch back into stocks that yield closer to the market benchmarks.

I also think that the high dividend strategy is the classic case of "hot money" chasing the highest perceived returns. When the hot money flows out, a lot of people will be disillusioned.

In our discussion, I told my friend that I discovered modern portfolio theory and diversification. Seeing the stock market drop by half twice during the 2000's decade was too much. He has always been a 100% stock market investor and that probably won't change.

I never thought of dividends as a "free lunch." I have thought of them as a reward for waiting for your stock to appreciate. Sometimes a good value story takes time to play out. Dividends are a very important part of the return that you get from stocks. I still think this is an important part of value investing.

Nevertheless, I do believe the academic research and don't ignore the numbers. The individual stocks I own are a bit less than 15 percent of my portfolio. Everything else is stock and bond mutual funds and stock ETFs. I am indexing more and more of my funds all the time. I tilt towards small and value. I am 2/3 stocks and 1/3 bonds and cash at age 53. When I heard about buying non-correlating assets, reducing volatility, and increasing return my ears perked up. Time will tell if my strategy works or not.

Much of what Larry Swedroe talks about I have seen borne out in real life experiences of myself and others I know. Yet I have a hard time arguing with people that utilize some form of a dividend strategy and had success with it. So if what I do works, I am a genius. If it doesn't work, then I am an idiot. We will see what happens and ultimately who is right.
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Re: Why do investors chase dividend paying strategies

Postby abuss368 » Sat Mar 30, 2013 12:36 pm

larryswedroe wrote:
Second,basically dividends don't matter whether you cut the high dividends or not, or whether you choose a high growth of dividends. There just isn't even any logic to it because dividends don't determine returns. If they did we would have a dividend factor or a growth of div factor. But a four factor model explains almost all returns of diversified portfolios without a dividend factor

Best wishes
Larry



Hi Larry,

Maybe I am not understanding here. I thought many of Jack Bogle's excellent books (which I do not have in front of me at the moment to look up or quote) note that returns are a functions of three items:

1) earning growth
2) dividends
3) speculation

In terms of speculation, Jack has discussed in his books that over time that is a non-factor and washed out. The result being earnings growth and dividends determine an investors return. Jack has gone on to explain how dividends are declined over the decades as well.

Thoughts?
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Re: Why do investors chase dividend paying strategies

Postby Rick Ferri » Sat Mar 30, 2013 12:50 pm

larryswedroe wrote:Rick
FWIW IMO that study on migration doesn't tell you anything about dividends contributing because it would not have mattered if the stocks paid dividends or not, paying dividends doesn't impact returns, and for taxable investors it has negative impact.

Larry


Don't dismiss the research so fast. The RA paper looked into the value premium as a dividend growth story rather than a dividend yield story. It's a different take on this conversation, but an important part of the big picture.

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Re: Why do investors chase dividend paying strategies

Postby nedsaid » Sat Mar 30, 2013 1:15 pm

My foggy memory banks recall articles in financial publications touting the superior returns of dividend paying stocks, particularly of those that increase their payouts over time. These articles I read some years ago. This fuels my suspicion and the suspicion of another poster that the results of studies you site are dependent on the time period studied.

I also know that Equity Income and Growth and Income strategies are time honored investment strategies. I just find it hard to dismiss something that has worked pretty darned well for decades.

My suspicion is that the dividend strategies are not producing excess returns now because of low bond yields and yield chasing. "Everyone" has discovered dividends now and whatever premium or advantage has disappeared. In the late 1990's, value was pretty much "dead" only to come back to life in the 2000's. What you have discovered is that as of now there is no dividend premium in value investing or in any investment style. I will be curious what the data will show years from now.

I believe in the value premium and the small cap premium and the equity premium. But from time to time, these premiums tend to disappear for a while until they reassert themselves again. I am sure that in 1999, I suspect people could have citied studies showing that value investing doesn't work. Fast forward a few years and the results of studies would have been different.

I think your basic point is valid. Dividends are not a free lunch or a ticket to increased returns. As I have always said, you have to pay attention to valuation. If you buy dividend stocks and high dividend stocks at a premium price, then of course your future returns will be muted. Right now seemingly everyone wants dividends. You have to buy things when they are out of style.

It is interesting that John Bogle doesn't seem to believe in premiums at all other than the equity premium over bonds. He believes that the small cap and value premiums do not exist at all. If he is right, then everything we said is pretty much bunk. He does talk about dividends as being an important part of equity returns. He probably doesn't believe in a dividend premium either.
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Re: Why do investors chase dividend paying strategies

Postby Bradley » Sat Mar 30, 2013 1:51 pm

saurabhec wrote:
I don't think that most dividend investors are trying to outperform the market. I think most would be happy to match the market. What they are trying to avoid is sequence of returns risk in the withdrawal phase,


Matching the market' s performance(-cost of invesment) is really quite easy for those who take the time to read and employ the teachings found on this forum.

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Re: Why do investors chase dividend paying strategies

Postby saurabhec » Sat Mar 30, 2013 2:09 pm

Bradley wrote:
saurabhec wrote:
I don't think that most dividend investors are trying to outperform the market. I think most would be happy to match the market. What they are trying to avoid is sequence of returns risk in the withdrawal phase,


Matching the market' s performance(-cost of invesment) is really quite easy for those who take the time to read and employ the teachings found on this forum.

Bradley


Yes but dividend investors are trying to avoid selling their holdings and limit withdrawals to just dividends when they are in retirement. Given how unreliable the equity risk premium is, I wouldn't dismiss that approach out of hand. Dividends are far less volatile than stock prices.
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Re: Why do investors chase dividend paying strategies

Postby saurabhec » Sat Mar 30, 2013 2:29 pm

larryswedroe wrote:First, if you want to avoid or minimize risks of negative sequence then all one needs to is use a lower beta and higher tilt strategy--which in effect is what a high dividend strategy is as it has lower beta and higher value tilt than market. It's just not as efficient


The yield difference between the broad market indices and value indices is not that high relative to what dividend investors seek. Also last I recall Fama himself thinks that value stocks are riskier, yet you assert otherwise.

Second,basically dividends don't matter whether you cut the high dividends or not, or whether you choose a high growth of dividends. There just isn't even any logic to it because dividends don't determine returns. If they did we would have a dividend factor or a growth of div factor. But a four factor model explains almost all returns of diversified portfolios without a dividend factor


Maybe you meant that for a narrow period of time they don't explain return differences between stocks. It is bizarre to suggest that over long periods they don't matter. Stock market returns will depend on earnings growth and changes in valuation multiples. Earnings growth will translate into dividend growth unless payout ratios decline. No firm has endless profitable reinvestment opportunities, so eventually a stock will have to pay dividends - investors will demand it.

I find it strange that you take comfort in the number of stocks as justifying a deviation from market weightings even if they lead to sector weights that vary significantly from the market, yet you knock dividend strategies for being undiversified.

You know quite well that US stock market data is available for many more decades than the period cited, and most studies that measure this over long periods show statistically significant differences in returns between dividend payers and non-payers. That doesn't imply that a dividend strategy is the best way to maximize total returns, but at least let us be fair and not suggest that dividend focused strategies incur some huge return penalty.
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Re: Why do investors chase dividend paying strategies

Postby fishnskiguy » Sat Mar 30, 2013 2:39 pm

Interesting thread.

I wish Andy (wagnerjb) would weigh in. He has enough assets that he has decided to roll his own mutual fund in his taxable account. He has stated that he does zero fundamental analysis, and only looks at what industry his stock picks are in to insure he is well diversified. Once he decides that he need to invest in a new industry he buys a company with a low or zero dividend payout to improve tax efficiency.

Different strokes for different folks.

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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sat Mar 30, 2013 2:42 pm

saurabhec wrote:The yield difference between the broad market indices and value indices is not that high relative to what dividend investors seek. Also last I recall Fama himself thinks that value stocks are riskier, yet you assert otherwise.

I'm sure someone will correct me if I am wrong, but I think Fama &co. found that there was excess return from value stocks and made the assumption (or left it to others to make the assumption) that this extra return was payment for the assumed higher risk. Value is a factor, but is it a risk factor?

See also the thread I started that touches on this: Two kinds of value stocks?
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Re: Why do investors chase dividend paying strategies

Postby dbr » Sat Mar 30, 2013 2:56 pm

bertilak wrote:
saurabhec wrote:The yield difference between the broad market indices and value indices is not that high relative to what dividend investors seek. Also last I recall Fama himself thinks that value stocks are riskier, yet you assert otherwise.

I'm sure someone will correct me if I am wrong, but I think Fama &co. found that there was excess return from value stocks and made the assumption (or left it to others to make the assumption) that this extra return was payment for the assumed higher risk. Value is a factor, but is it a risk factor?

See also the thread I started that touches on this: Two kinds of value stocks?


As I posted earlier, or somewhere else, FF have used the words "risk-return relationship" for the model and in one paper used the word "factor" several times more often than the words "risk factor" to describe the small and value variables, but they did use the words "risk factor."

The problem is that assuming getting more return can be done without more risk means we have found a free lunch, and it is difficult to accept that free lunches persist systematically for the taking by anyone, anytime. On the other side of the coin, it is definitely possible to take risk without increasing expected returns and there are all kinds of expensive lunches available to anyone, anytime.
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Sat Mar 30, 2013 3:00 pm

larryswedroe wrote:financial dave

Second, while I don't doubt your data there might also be another 19 stocks that someone else chose that did poorly.



Larry, don't take this wrong, but the above seems like a pretty lame excuse, as that argument could be said about almost any strategy, active or passive.

:oops:

The period you cite is obviously very short and it's one characterized by an "obsession" with yield and thus it would not surprise me that in such a period a high div strategy might outperform other say value strategies


I have a little different take on the last 5 years I guess -- those that have failed to adjust to the economics of the situation, have in most regards underperformed the market. By not seeing the coming "fixed income" nightmare, they will most likely underperform the market for many years to come. However, if holding a large "boat anchor" in bonds helps you sleep at night - because someone tells you it is a more risk adverse strategy, then that is not for me to judge, even though most people know where a boat anchor eventually ends up!

Hope this helps someone!
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Re: Why do investors chase dividend paying strategies

Postby FinancialDave » Sat Mar 30, 2013 3:06 pm

bertilak wrote:
saurabhec wrote:The yield difference between the broad market indices and value indices is not that high relative to what dividend investors seek. Also last I recall Fama himself thinks that value stocks are riskier, yet you assert otherwise.

I'm sure someone will correct me if I am wrong, but I think Fama &co. found that there was excess return from value stocks and made the assumption (or left it to others to make the assumption) that this extra return was payment for the assumed higher risk. Value is a factor, but is it a risk factor?

See also the thread I started that touches on this: Two kinds of value stocks?


As I noted earlier, the extra risk associated with say the DFA small value fund, has NOT produced better returns at least over the last 5 years, when compared to some dividend strategies, that by the way have produced these better returns with orders of magnitude of less volatility.

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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sat Mar 30, 2013 3:15 pm

dbr wrote:As I posted earlier, or somewhere else, FF have used the words "risk-return relationship" for the model and in one paper used the word "factor" several times more often than the words "risk factor" to describe the small and value variables, but they did use the words "risk factor.

Thanks for the correction. I wasn't sure if I had that right.

As for the free lunch -- I don't think there is a free lunch involved, just that different people pick different things from the menu, and at least sometimes for good reasons. When I go to the salad bar I get things like potato salad and ranch dressing. If DW goes up for me she gets me salad with a bit of vinegar and no croutons. We are both being rational!
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Mar 30, 2013 5:21 pm

aAbuss
Yes that formula is right and it explains returns after the fact
But if you have no dividends for example earnings will grow faster because they get reinvested.
Also to show divs don't matter
Two companies A and B. Both always sell at book. Both now have book of $10. Both now earn $1. A pays div of 1 but B pays none. A sells at $10 and investor has $1 in cash, total $11. B sells at $11. If want $1 in cash investor sells $1 of stock and in same place. Div policy irrelevant

Rick we'll just disagree on the conclusion you can draw.

suarabhec
the period included international stocks and hence the choice of periods


As to bizarre, one of the most basic tenets of finance for many decades is that div policy is irrelevant to cost of capital and hence to returns. I studied that in my MBA program 40 years ago. What's bizarre is that people believe it matters.

No one said anything about divs being bad. it's that stocks where all else is equal (market cap, btm,p/e, and so on) you get no more and no less expected return. And you lose diversification and tax efficiency

as to number of stocks if you are going to accept less diversification you should get a benefit, like a risk premium, or diversification across risk factors. Here there is none

as to 19 stocks, nothing lame about it. Fact is randomly one could select 19 stocks and they might outperform and they might get killed. Tells you nothing about whether a strategy was good or bad. What you have to look at is data over long periods and with a consistent strategy, can it be replicated. And as to last 5 years, IMO you have it exactly backwards. Since there is no evidence or logic to believe div payers should have higher returns, than it's likely a random outcome (perhaps a behavioral error, which is my opinion) and thus the logic is that their now higher valuations will lead to lower future returns.


RE Fama and French--DFA now certainly takes the view that it's tough to explain value as a total risk story, just too much evidence on the behavioral side. That doesn't change its status as an explanatory variable though


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

Postby Sidney » Sat Mar 30, 2013 5:37 pm

FinancialDave wrote:
bertilak wrote:
saurabhec wrote:The yield difference between the broad market indices and value indices is not that high relative to what dividend investors seek. Also last I recall Fama himself thinks that value stocks are riskier, yet you assert otherwise.

I'm sure someone will correct me if I am wrong, but I think Fama &co. found that there was excess return from value stocks and made the assumption (or left it to others to make the assumption) that this extra return was payment for the assumed higher risk. Value is a factor, but is it a risk factor?

See also the thread I started that touches on this: Two kinds of value stocks?


As I noted earlier, the extra risk associated with say the DFA small value fund, has NOT produced better returns at least over the last 5 years, when compared to some dividend strategies, that by the way have produced these better returns with orders of magnitude of less volatility.

fd

Your benchmark horizon is 5 years?
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sat Mar 30, 2013 5:46 pm

Sidney wrote:Your benchmark horizon is 5 years?

I'm not FinancialDave, but if I don't see something positive in 5 years I would seriously question my strategy. Once retired and pushing 70 one does not have an overabundance of five-year periods to experiment with.
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Re: Why do investors chase dividend paying strategies

Postby Sidney » Sat Mar 30, 2013 5:53 pm

bertilak wrote:
Sidney wrote:Your benchmark horizon is 5 years?

I'm not FinancialDave, but if I don't see something positive in 5 years I would seriously question my strategy. Once retired and pushing 70 one does not have an overabundance of five-year periods to experiment with.

those with shorter horizons may need to focus on risk management vs returns. Over any given short period of time (I would say <=15 years) one could see low to negative real returns across the board. Not a prediction, just part of the possible outcomes.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sat Mar 30, 2013 6:07 pm

Sidney wrote:
bertilak wrote:
Sidney wrote:Your benchmark horizon is 5 years?

I'm not FinancialDave, but if I don't see something positive in 5 years I would seriously question my strategy. Once retired and pushing 70 one does not have an overabundance of five-year periods to experiment with.

those with shorter horizons may need to focus on risk management vs returns. Over any given short period of time (I would say <=15 years) one could see low to negative real returns across the board. Not a prediction, just part of the possible outcomes.

My long term risk management plan (still under review with a few years to go before I need to activate it) is to use SPIAs to expand my guaranteed income beyond pension + SS.
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Mar 30, 2013 6:08 pm

bertilak
If you did that, 5 year tests, you would give up on all kinds of things like the equity risk premium, the value premium, emerging market premiums, and jump from one bad strategy to another

It's such short horizons like 5 years that cause investors to chase one strategy after another. you think Buffett's horizon is 5 years?

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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sat Mar 30, 2013 6:14 pm

larryswedroe wrote:bertilak
If you did that, 5 year tests, you would give up on all kinds of things like the equity risk premium, the value premium, emerging market premiums, and jump from one bad strategy to another

It's such short horizons like 5 years that cause investors to chase one strategy after another. you think Buffett's horizon is 5 years?

Larry

Buffett has a lot more freedom of action than I do. If someone will stake me I will try to match Buffett action-for-action!

Anyway, once someone retires and is no longer in the accumulation phase of life one needs to change strategies. Risk is no longer seen as an opportunity to earn returns. One does not look forward to rebalancing into a losing position. Volatility is no longer your friend. Cash flow is paramount.

MPT. EMH, and most other acronyms discussed here are all concepts used in building wealth, not maintaining it and using it to generate income.
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Re: Why do investors chase dividend paying strategies

Postby statsguy » Sat Mar 30, 2013 7:19 pm

Sidney wrote:
bertilak wrote:
Sidney wrote:Your benchmark horizon is 5 years?

I'm not FinancialDave, but if I don't see something positive in 5 years I would seriously question my strategy. Once retired and pushing 70 one does not have an overabundance of five-year periods to experiment with.

those with shorter horizons may need to focus on risk management vs returns...


Forgive me, but I thought "like a dividend strategy" ;-)

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Re: Why do investors chase dividend paying strategies

Postby Sidney » Sat Mar 30, 2013 8:57 pm

If my horizon were low (say < 15 years) and I couldn't withstand a substantial hit to equity over a protracted period, I would probably shift some of my assets to annuities. I don't view dividends as providing material risk reduction. Certainly not on the tail.
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Re: Why do investors chase dividend paying strategies

Postby stemikger » Sat Mar 30, 2013 9:37 pm

larryswedroe wrote:http://www.cbsnews.com/8301-505123_162-57576075/theres-no-reason-to-chase-dividends/

There is a whole "cult" of investors that seem to believe that investing in either the stocks of high dividend payers or companies with rapidly growing dividends provides superior results.

Hope you find it of interest

Larry


Larry I just started reading your latest book "Think, Act, and Invest Like Warren Buffett". So far I'm loving every second. Thanks for writing a non-technical book for the rest of us. I will give it a 5 star review on Amazon as soon as I'm done.

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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Mar 30, 2013 10:16 pm

Bertilak
First, as I point out in my new book Think, Act and Invest Like Warren Buffett, while you cannot invest exactly like him you can take the advise he offers you about how YOU should invest.

Second, every word in your last statement is totally incorrect. MPT/EMH has nothing to do with per se accumulation or withdrawal phase. While it certainly is true that one should change AA as you move from accumulation to withdrawal, that doesn't have anything to do with a dividend or not strategy--as the evidence is very clear there is nothing special about dividends and there is only illusion of some safety. it is the exposure to the factors that explains returns that matter, not whether a stock pays divs or not.


Steve, I was asked to write a book that would be non technical and could be read in about two hours and bring all the key issues to the table. Glad to hear you are enjoying it. Best wishes
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Re: Why do investors chase dividend paying strategies

Postby larryswedroe » Sat Mar 30, 2013 10:16 pm

Bertilak
First, as I point out in my new book Think, Act and Invest Like Warren Buffett, while you cannot invest exactly like him you can take the advise he offers you about how YOU should invest.

Second, every word in your last statement is totally incorrect. MPT/EMH has nothing to do with per se accumulation or withdrawal phase. While it certainly is true that one should change AA as you move from accumulation to withdrawal, that doesn't have anything to do with a dividend or not strategy--as the evidence is very clear there is nothing special about dividends and there is only illusion of some safety. it is the exposure to the factors that explains returns that matter, not whether a stock pays divs or not.


Steve, I was asked to write a book that would be non technical and could be read in about two hours and bring all the key issues to the table. Glad to hear you are enjoying it. Best wishes
Larry
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Re: Why do investors chase dividend paying strategies

Postby saurabhec » Sat Mar 30, 2013 10:50 pm

Larry,

I actually did attend B-School and fully understand the point you make. Why are you constructing a straw man and attacking that? I never suggested that a decision to pay dividends can somehow make a company worth more. I simply said that it is bizzare to argue that dividend growth has no bearing on long term stock market returns.
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Re: Why do investors chase dividend paying strategies

Postby cheesepep » Sat Mar 30, 2013 11:14 pm

I'm a dividend growth investor. As someone earlier pointed out, the goal for such investors is not to beat the market (they would be happy to equal the market), but just to provide a steady source of income. And if you start earlier, and reinvest those dividends (either in the same stock or other stocks), then your end result is very nice. You do have to manage your portfolio a bit more than index funds to achieve good results, but I enjoy doing so. I have a portfolio of about 20 stocks.

For those who want to invest in such stocks, seekingalpha is a nice website to visit.
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Re: Why do investors chase dividend paying strategies

Postby bertilak » Sun Mar 31, 2013 6:58 am

larryswedroe wrote:Bertilak
First, as I point out in my new book Think, Act and Invest Like Warren Buffett, while you cannot invest exactly like him you can take the advise he offers you about how YOU should invest.

Second, every word in your last statement is totally incorrect. MPT/EMH has nothing to do with per se accumulation or withdrawal phase. While it certainly is true that one should change AA as you move from accumulation to withdrawal, that doesn't have anything to do with a dividend or not strategy--as the evidence is very clear there is nothing special about dividends and there is only illusion of some safety. it is the exposure to the factors that explains returns that matter, not whether a stock pays divs or not.


Larry,

Sorry; I overstated my case. Of course EMH, MPT, AA have a big role to play post-retirement. What I am getting at, is that it is not enough. During the pre-retirement, accumulation, period one is focused on building wealth. Part of this is done by taking on risk, risk that one can bear to have actualized because there is time to recover. Expected returns count. In the post-retirement, decumulation, period one cares more about worst-case scenarios than average expectations. Averages are not good enough. One needs to emphasize risk management -- or perhaps risk avoidance. No AA is going to do that job 100% no matter what MPT tells us.

Right now I am in a transition phase between accumulation and decumulation, mostly coasting through the tail end of accumulation. I am trying to figure out a strategy for my soon-to-come decumulation period and I know that simply going for a more conservative, bond-heavy, AA won't cut it. Nor will a finely-tuned N-factor AA.

My thoughts involve SPIAs, options, and dividends; dividends because they are a way of "locking in" return. Once I take a dividend it can't be taken back. I understand that I can make my own "dividends" by selling off shares but I look at the performance of funds built on dividend strategies and see success. I think it is not so much the actual dividend that counts, but the ability to pay dividends that signals a safer, more conservative, investment. Also, I believe dividends are more stable than the stock price. I am letting the company's management determine what a "safe withdrawal rate" is. They can probably do this better than I can. Maybe not every company can do this, but those that show a long history give one confidence. Funds like Wellington look for these companies.

Again, sorry to come across so contentiously. I have learned a lot from your posts here and from your books. I am sure to buy your new one.
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Re: Why do investors chase dividend paying strategies

Postby STC » Sun Mar 31, 2013 9:50 am

bertilak wrote:My thoughts involve SPIAs, options, and dividends; dividends because they are a way of "locking in" return.


SIPA - you are too young and yields are too low to make this attractive for you for quite some time

Options - really bad idea. if you are doing covered calls, you are cutting off the wrong risk tail to produce income. Not a good idea.

Dividends - the illusion of safety. Look at the standard deviations of dividend funds, they are similar to all TSM. Dividends can and have been cut during a downturn.

The problem you have is that you seem to need the feeling of safety when none exists. So you are shying towards the "illusion" of safety with dividends, even though the empirical evidence clearly shows that it is in fact an illusion. Why do you do that? I don't think Larry would be arguing with you if you stated that you knew a dividend strategy was no less risky then TSM - but wanted to pursue it anyway. It is the fact that you are ignoring the data that is the genesis of the contention.

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

This is DURING the big sales pitch by the industry towards dividend stocks. For comparative purposes:

BND (Total Bond Market) 5y Standard Deviation: 3.58

The illusion of safety...
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Re: Why do investors chase dividend paying strategies

Postby statsguy » Sun Mar 31, 2013 11:42 am

It is my experience that our dividend growth portfolio increased dividends on 2009 (the increase was less than 1%) despite two significant dividend cuts. All other years have seen dividend growth above inflation. Over time our portfolio yield has dropped a little less than 1% since NAV has kept up with dividend growth. It does not feel like an illusion of safety when you know that the income from your portfolio can support your spending even as the market declines. During the dark days of the Great Recession we slept well at night and were buyers instead of sellers.

If this is just an illusion I will take it. When we invested in total stock market I found I would watch the NAV nervously when I knew I would need some cash. I am much happier with a dividend portfolio.

I think that you are overstating the risks of dividend investing. I think you are right that a total market approach may be nearer optimal but I don't see the dividend approach as being bad. In my case, I know it is better because I can stay the course and would not with total market approach.

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

Postby FinancialDave » Sun Mar 31, 2013 11:56 am

bertilak wrote:
Sidney wrote:Your benchmark horizon is 5 years?

I'm not FinancialDave, but if I don't see something positive in 5 years I would seriously question my strategy. Once retired and pushing 70 one does not have an overabundance of five-year periods to experiment with.


This is partially the answer, but for me, it is how did I do over the last five years, compared to a 100% equity market such as VTSMX or SP500. More importantly how might I do over the next five years using the strategy I am using. Right now moving into year 2 of retirement, it is all about income, total return really means nothing, except how it affects my heirs, as they will reap the benefits of my total return bucket and to a very minor effect I may want to transfer some of that total return to a higher income stream.

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

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