another post on dividend strategies

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another post on dividend strategies

Postby larryswedroe » Thu May 09, 2013 2:42 pm

the chase for yield and the "cult" of dividends has really begun to impact valuations and thus expected returns

I was really surprised to see that the two dividend funds covered had each added $2b in assets in just last few months and the impact this has had on valuations really surprised me

Given that valuation metrics explain a significant part of future returns, forewarned is forearmed

http://www.cbsnews.com/8301-505123_162-57583663/why-invest-in-stocks-with-a-high-dividend-yield/

hope you found it helpful

Larry
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Re: another post on dividend strategies

Postby Random Musings » Thu May 09, 2013 2:55 pm

The metrics between the two funds are surprising indeed. However they do get a higher dividend which in turn lowers the price. :oops:

Another illusion.

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Re: another post on dividend strategies

Postby rmelvey » Thu May 09, 2013 3:03 pm

Random Musings wrote:The metrics between the two funds are surprising indeed. However they do get a higher dividend which in turn lowers the price. :oops:

Another illusion.

RM


Wait. You mean dividends aren't free money?!!!
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Re: another post on dividend strategies

Postby Beagler » Thu May 09, 2013 4:02 pm

Elderly retirees who don't have a long time horizon seem understandably drawn to stocks paying higher dividends. Quarterly dividend checks seem more important to them than theoretical strategies about maximizing return over a future time frame through which they might not live.

In years gone by the DJI stocks routinely paid what some now label "high dividends."
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Re: another post on dividend strategies

Postby larryswedroe » Thu May 09, 2013 4:19 pm

beagler
Elderly retirees who don't have a long time horizon seem understandably drawn to stocks paying higher dividends

One may understand why they do it while at same time understanding that it's just not rational, in fact thinking high div stocks are substitutes for safe bonds is irrational
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Re: another post on dividend strategies

Postby bilperk » Thu May 09, 2013 4:31 pm

larryswedroe wrote:beagler
Elderly retirees who don't have a long time horizon seem understandably drawn to stocks paying higher dividends

One may understand why they do it while at same time understanding that it's just not rational, in fact thinking high div stocks are substitutes for safe bonds is irrational
Larry


Not sure Beagler was talking about using them as a bond substitute, but you said " also that a high-dividend strategy is really just a weak value strategy." Someone needing income now in addition to their regular bond allocation which does not provide the income it once did, might not want/ be able to wait around for the expected value premium to kick in somewhere down the road.
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Re: another post on dividend strategies

Postby dbr » Thu May 09, 2013 4:47 pm

bilperk wrote:
larryswedroe wrote:beagler
Elderly retirees who don't have a long time horizon seem understandably drawn to stocks paying higher dividends

One may understand why they do it while at same time understanding that it's just not rational, in fact thinking high div stocks are substitutes for safe bonds is irrational
Larry


Not sure Beagler was talking about using them as a bond substitute, but you said " also that a high-dividend strategy is really just a weak value strategy." Someone needing income now in addition to their regular bond allocation which does not provide the income it once did, might not want/ be able to wait around for the expected value premium to kick in somewhere down the road.


Does anyone understand the persistence of equating "income" from a portfolio with what dividends are paid?
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Re: another post on dividend strategies

Postby Clearly_Irrational » Thu May 09, 2013 4:53 pm

dbr wrote:Does anyone understand the persistence of equating "income" from a portfolio with what dividends are paid?


1) It's conceptually simple to understand.
2) Spending dividends only pretty much always represent a "safe" withdrawal rate for a diversified portfolio.
3) It's psychologically helpful in that it teaches you to ignore changes in asset values and stay the course

All that said I think dividend stocks are becoming over-valued since they're so trendy right now.
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Re: another post on dividend strategies

Postby Sidney » Thu May 09, 2013 4:55 pm

dbr wrote:
Does anyone understand the persistence of equating "income" from a portfolio with what dividends are paid?

Part of it is the illusion of having someone send you money rather than you take the money. There is also a low understanding generally about the concept of money being fungible.
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Re: another post on dividend strategies

Postby dbc47 » Thu May 09, 2013 5:11 pm

Perhaps Vanguard should change one of their fund names from "Vanguard Equity Income (VEIPX), which I own, to Vanguard Total Return?
:?
This fund is designed to provide investors with an above-average level of current income while offering exposure to the stock market. Since the fund typically invests in companies that are dedicated to consistently paying dividends, it may have a higher yield than other Vanguard stock funds.
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Re: another post on dividend strategies

Postby Beagler » Thu May 09, 2013 5:13 pm

It's easy to see where a yield-starved elderly investor would find certain VG products attractive.
Over the past 10 years, VG Equity Income is worth more today than VTSMX, and has thrown off more income.

As Bill points out, the eventual reward for holding FF type value funds may beyond the life expectancy of some retirees.

This from Charles Ellis:
So someone with half of his or her money in bonds should move it into cash?
"Moving entirely out of bonds into money funds or bank CDs may be too extreme for some people. But you can diversify more. You could look at foreign bonds or dividend-paying stocks, though you will be taking on more market risk than you would with CDs. Or you could perhaps stick with a short-term bond fund, which would fall less if rates were to rise. There's no simple answer."
http://money.cnn.com/2013/05/01/investi ... index.html
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Re: another post on dividend strategies

Postby bilperk » Fri May 10, 2013 10:31 am

dbc47 wrote:Perhaps Vanguard should change one of their fund names from "Vanguard Equity Income (VEIPX), which I own, to Vanguard Total Return?
:?
This fund is designed to provide investors with an above-average level of current income while offering exposure to the stock market. Since the fund typically invests in companies that are dedicated to consistently paying dividends, it may have a higher yield than other Vanguard stock funds.


And Vanguard equity income, with its higher dividend yield, has crushed the value index fund over the last 22 years. 22 years is a long time in retirement.
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Re: another post on dividend strategies

Postby larryswedroe » Fri May 10, 2013 12:11 pm

bilperk
The problem is that a div strategy IS a value strategy, so you are relying on the value premium, only you don't get really get it, much lower returns than either BtM, P/S, P/E or P/C
Again dividends only create an illusion of safety.
The idea that we hear that dividends prevent you from having to sell stocks in downturns to raise cash simply shows that people don't understand that the company paying the dividend is in effect selling shares for you to give you cash (the price drops reflecting the dividend-the company clearly is worth less by the value of the dividend plus the value of the future earnings on the dividend that was paid)
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Re: another post on dividend strategies

Postby bilperk » Fri May 10, 2013 2:11 pm

larryswedroe wrote:bilperk
The problem is that a div strategy IS a value strategy, so you are relying on the value premium, only you don't get really get it, much lower returns than either BtM, P/S, P/E or P/C
Again dividends only create an illusion of safety.
The idea that we hear that dividends prevent you from having to sell stocks in downturns to raise cash simply shows that people don't understand that the company paying the dividend is in effect selling shares for you to give you cash (the price drops reflecting the dividend-the company clearly is worth less by the value of the dividend plus the value of the future earnings on the dividend that was paid)
Larry


I understood what you said the first time, but in the real Vanguard world, that isn't what happened over the last 22 years with Value index visa vie Equity income. It not only got better returns, but It got more returns in comfy dividends. You will also notice that during the two bear periods, Equity income really outperformed value index, by 9.8% in 2007-8, and by a 21.5% in 2000-2002. At 67, I won't likely be around in another 22 years.

While I agree that dividends are no better than selling appreciated shares, they do tend to be more stable than appreciation in non-dividend payers.
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Re: another post on dividend strategies

Postby Beagler » Fri May 10, 2013 2:38 pm

While DFLVX has modestly outperformed VEIPX since the 1993 inception of the DFA fund ($10k has grown to approx. $67,800 for the DFA fund and $63,900 for the VG fund), the more widely used VG large cap value fund VIVAX has grown to only $54,737.
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Re: another post on dividend strategies

Postby larryswedroe » Fri May 10, 2013 3:42 pm

Bill
Yes you can have even long periods when you get anomalous returns. Should that mean that you should expect them going forward? Of course not.
In fact the div strategies NOW look good for recent returns because investors have chased the dividends--but that is virtually dooming them to poor returns going forward, just as the tech bubble doomed investors to future low returns. That is painfully obvious in the valuation metrics I showed on SDY vs even Vanguard's value fund, let alone a deeper value fund like Bridgeway's Omni Fund. Sadly, investors make the mistake, repeatedly, over and over again, of investing in what has done well recently instead of being contrarian rebalancers
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Re: another post on dividend strategies

Postby Beagler » Fri May 10, 2013 4:56 pm

Those "chasing dividends" today may be the octogenarian with a short expected investing horizon, and if they care more about the income than bouncing principal, they may fit into the investor category recently described by Mr. Bogle:

"Bogle: I think it is a pretty good strategy for those willing to take the market bumps. When you think about it, what’s important when you buy for dividends is the dividend. And your annual income is what you're trying to protect. And it basically does not matter—except to your brain and your behavior—that the value of the principal is going up and down, up or down, year after year. It shouldn’t matter to you. But for an awful lot of investors, it does. The long-term fixture of dividends on the S&P 500, for example, is almost without a blemish. It’s up and up and up and up and up, an exception in the ’30s, and an exception obviously in 2008, generated almost entirely by bank stocks.

So I feel pretty comfortable that dividend streams aren't going to plummet. I think they should gradually ease up. So if people are going to be able to endure the temptation to get out when something goes way down, I think it’s worth doing this at the edges. Twenty percent—I don’t know how to give you a number, really, but I’ve never plunged into anything. The S&P is now yielding about 2 percent, so maybe you move the equity position partly into income-producing stock to get, say, as much as 3 percent, is one way to do it. So it’s all balancing out a portfolio that you can hold onto forever."

http://www.indexuniverse.com/hot-topics ... =1&start=5
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Re: another post on dividend strategies

Postby Default User BR » Fri May 10, 2013 5:09 pm

Beagler wrote:Those "chasing dividends" today may be the octogenarian with a short expected investing horizon, and if they care more about the income than bouncing principal,

The person in this case should just keep it in savings and spend the principal.


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Re: another post on dividend strategies

Postby bilperk » Fri May 10, 2013 5:20 pm

larryswedroe wrote:Bill
Yes you can have even long periods when you get anomalous returns. Should that mean that you should expect them going forward? Of course not.
In fact the div strategies NOW look good for recent returns because investors have chased the dividends--but that is virtually dooming them to poor returns going forward, just as the tech bubble doomed investors to future low returns. That is painfully obvious in the valuation metrics I showed on SDY vs even Vanguard's value fund, let alone a deeper value fund like Bridgeway's Omni Fund. Sadly, investors make the mistake, repeatedly, over and over again, of investing in what has done well recently instead of being contrarian rebalancers
Larry


Larry,
Let's limit this to Vanguard. That is the only place I invest. No brokerage. Equity income has a PE of 15.1 according to VG's site. Value index is 15.6. The yields are only 35bp apart in favor of EI. The only real difference seems to be the return.
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Re: another post on dividend strategies

Postby Beagler » Fri May 10, 2013 5:33 pm

bilperk wrote:
larryswedroe wrote:Bill
Yes you can have even long periods when you get anomalous returns. Should that mean that you should expect them going forward? Of course not.
In fact the div strategies NOW look good for recent returns because investors have chased the dividends--but that is virtually dooming them to poor returns going forward, just as the tech bubble doomed investors to future low returns. That is painfully obvious in the valuation metrics I showed on SDY vs even Vanguard's value fund, let alone a deeper value fund like Bridgeway's Omni Fund. Sadly, investors make the mistake, repeatedly, over and over again, of investing in what has done well recently instead of being contrarian rebalancers
Larry


Larry,
Let's limit this to Vanguard. That is the only place I invest. No brokerage. Equity income has a PE of 15.1 according to VG's site. Value index is 15.6. The yields are only 35bp apart in favor of EI. The only real difference seems to be the return.


And perhaps the fact that VG Equity Income is actively managed by Wellington and VG, and the Value Index fund is passive.
:)
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Re: another post on dividend strategies

Postby bertilak » Fri May 10, 2013 5:51 pm

Beagler wrote:And perhaps the fact that VG Equity Income is actively managed by Wellington and VG, and the Value Index fund is passive.
:)

I note that in other threads Larry talks about DFA studies and funds. DFA themselves state that they do not have "index" funds. Here is a quote from a paper/pamphlet from DFA (see http://www.dfaus.com/pdf/science_of_inv ... s_2012.pdf):
Dimensional chooses a different path. It structures strategies based on scientific evidence rather than on speculation or commercial indexes.

Wellington and Vanguard describe the VEIPX/VEIRX strategy as:
The Fund invests mainly in common stocks of mid-size and large 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. Under normal
circumstances, the Fund will invest at least 80% of its assets in equity securities.

So, perhaps Wellington and DFA have similar stock-picking strategies.
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Re: another post on dividend strategies

Postby Jebediah » Fri May 10, 2013 8:04 pm

dividends are magic
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Re: another post on dividend strategies

Postby Yipee-Ki-O » Fri May 10, 2013 8:34 pm

larryswedroe wrote:bilperk
The problem is that a div strategy IS a value strategy, so you are relying on the value premium, only you don't get really get it, much lower returns than either BtM, P/S, P/E or P/C
Again dividends only create an illusion of safety.
The idea that we hear that dividends prevent you from having to sell stocks in downturns to raise cash simply shows that people don't understand that the company paying the dividend is in effect selling shares for you to give you cash the price drops reflecting the dividend-the company clearly is worth less by the value of the dividend plus the value of the future earnings on the dividend that was paid)
Larry

Assuming of course that the retained dividends are employed in such a manner as to be additive to future earnings and not squandered on such things as paying 220 million for stadium naming rights or lining the pockets of senior executives, etc.
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Re: another post on dividend strategies

Postby bilperk » Fri May 10, 2013 8:46 pm

Jebediah wrote:dividends are magic


“The world is full of magic things, patiently waiting for our senses to grow sharper.”

W. B. Yeats
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Re: another post on dividend strategies

Postby SpaceCommander » Fri May 10, 2013 10:34 pm

Frankly, I don't think this is the right forum to discuss dividend paying strategies. Speaking of the "cult" of dividends, I believe the anti-dividend crowd on this board clings to a certain investing "model" with a religious conviction typically reserved for issues of the highest theological urgency.

I thought this was the Bogle board, but somewhere along the line it got hijacked by the Fama/French crowd. "Frenchheads" anyone? Mr. Bogle's thoughts on dividends were reported above by Beagler. He calls it "a pretty good strategy..." Yet his position is ridiculed; it's called irrational; it's mocked, it's a "cult" etc.

An intelligent discussion of dividend paying strategies can be found at Seeking Alpha (without the condescension).

Best,
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Re: another post on dividend strategies

Postby zotty » Fri May 10, 2013 10:47 pm

If a market distorting amount of money is flowing into dividend stocks, might they outperform anyway? Supply meets demand?
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Re: another post on dividend strategies

Postby nedsaid » Fri May 10, 2013 11:56 pm

This is a very interesting topic to me as I have been a value investor that likes dividends.

The Horse pretty well died in Larry's other thread on high dividend strategies and we still keep beating it. Flail away!!!

Larry pretty well convinced me that dividend stocks do well because of their value characteristics and not because of the dividend. So I looked at the evidence and learned something from Larry.

I still like dividends though. It is now that I realize that dividends are not a free lunch.

Poor horse. I guess we will have to beat on it again.
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