Dividend Strategy Ain't For Everyone

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Phineas J. Whoopee
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Re: Dividend Strategy Ain't For Everyone

Post by Phineas J. Whoopee »

fposte wrote:
nedsaid wrote:Phineas J. Whoopee, I am asking a rhetorical question and pointing out the weakness of a "total return" approach. That is that portfolios sometimes have negative returns. I also want to repeat Rick Ferri's observation that if retirees can live off the income derived from their portfolios in down markets that this will help them hang in there staying the course and not selling their stocks at or near the bottom. It preserves the mental boundary of not "dipping into the principal."
Sure, if that mental boundary is, as it is for my friend, what keeps somebody interested in dividends and what keeps somebody from bailing, that's personally helpful. But that doesn't make it financially superior to total return as a concept.
I agree fposte, and if I may add, it works out very much like a buckets strategy.

If one has a mixed portfolio of stocks and bonds that's what one has. Some proportion is in one, and 1 - that proportion in the other.

One can think of dividends and interest as "income" and pretend the rest doesn't exist. Note I didn't say doesn't matter - what matters or not depends on the individual or organization. But think of it that way or another way, the portfolio is there, and after a negative return in one component or both, it has a proportion in one, and 1 - that proportion in the other.

The same works for buckets. Thinking of short-term and intermediate-term bonds as separate from the mixed portfolio is fine, but it doesn't change the fact that it has a proportion in one, etc.

nedsaid - you're free to think of things however you want and to explain and even promote your views, but the facts remain that taking interest and dividends out of a portfolio is withdrawing from it, and that it's still a mixed portfolio of stocks and bonds each of which has a market value at a given time.

The difference is not one of substance.

PJW
bucksfan2
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Re: Dividend Strategy Ain't For Everyone

Post by bucksfan2 »

I follow a DRIP strategy for my taxable portfolio. I try to find companies that have a good history of not only paying dividends but also increasing them each and every year. It may not fit most peoples strategy but at this point in my life it fits mine. I am still relatively young (32) and in the time I have spent investing in dividend paying stocks I have learned quite a bit. I have seriously curtailed my trading, and have become a pretty "lazy" investor. I still pay attention to the ebbs and flows of a market but rarely trade. Right now I own 2 non dividend paying stocks in UA and GOOGL for the shear fact that I believe them to be two of the most innovative companies in the world. I also own a small portion of Manchester United (MANU) because I think its cool to own an international soccer team, albeit my stake is roughly $150.

Right now that strategy works for me. I have seen AEP trade flat, in a flat market year, but I made 5% because of the yield. I have also seen the same thing with VZ and other dividend stocks. Whenever this discussion arises here I always think if you could tell me today, with 100% accuracy, where the market is heading tomorrow you can have all of my money and invest it which ever way you wish. Until then, I will chose what ever method I feel best serves my philosophy.
avburns
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Re: Dividend Strategy Ain't For Everyone

Post by avburns »

This may be too simple, so forgive me.

But ALL of my ETF's pay dividends, too. If VTI's dividend is around 2% and some of the DGI favorites like (XOM, JNJ and PG) are around 3%; does the debate really come down to 1% dividend yield?

If I'm getting about the same yield with a lot more diversification and I don't have to spend my time analyzing stocks (even though it's apparently a very fun activity for so many SA commenters) isn't that worth sacrificing 1% yield?

Many of the growth stocks like GOOGL that don't pay dividends and probably wouldn't work their way into a DGI portfolio because tech is so fleeting; factor highly in a broad market index. Isn't it a good thing to profit off the growth of these type of companies, again without doing a bunch of research, and know if they implode they are just 1 company out of thousands?

Again, I may be too simplistic but these are some of the questions I think about when I read Seeking Alpha articles about dividend growth investing.
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nedsaid
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Re: Dividend Strategy Ain't For Everyone

Post by nedsaid »

Yes a dividend strategy is a lot like a buckets strategy. The idea is to not sell your stocks in down markets. People will say this is mental accounting. Well, I say whatever works to keep people in the stock market even when things look bad. Nothing destroys the returns of a portfolio like selling your stocks at the bottom of a bear market.

The reality is that I am not going to put 100% of my portfolio into dividend stocks. I have a friend who does and it works for him but I sure don't do that myself or suggest it to others. A co-worker of mine is also doing this. I want a widely diversified portfolio and my individual stocks are about 15% of my retirement assets and that proportion is shrinking. The other reality is that my portfolio will probably not grow large enough that I could just draw on the dividends and interest. This is why I spent a whole paragraph explaining why investors need to be flexible in their thinking.

Another reason that I don't advocate 100% dividend stock portfolio is that higher interest rates can hurt high-yielding stocks just like they hurt bonds. Also dividend stocks are still stocks, they have more volatility than bonds. In my opinion, investors still need bonds.

I don't see that what I am saying is so far off the reservation. Heck, our mentor Jack Bogle has advocated putting a portion of a retirement portfolio into dividend paying stocks. This is a way of stretching for yield just as Mr. Bogle's suggestion that an investor own a higher proportion of corporate bonds than what are contained in the Total Bond Index. And I will say yet again, Rick Ferri has made comments similar to mine. Jeez, I didn't think wanting dividend income from your portfolio was a capital crime around here.
A fool and his money are good for business.
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Phineas J. Whoopee
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Re: Dividend Strategy Ain't For Everyone

Post by Phineas J. Whoopee »

nedsaid wrote:... Jeez, I didn't think wanting dividend income from your portfolio was a capital crime around here.
Hyperbole noted, and if I've piled that much pressure on you I was out of line. On the other hand, one can hardly expect to make assertions here, especially ones saying total return is bunk, without expecting some pushback.

It's OK to disagree, and say why, without attacking the individual as marked for death. If I've violated that principal then point out where it was and I'll vow to refrain from doing it again. If all I've done is disagreed with your repeated assertions on a public forum then that's no grand jury indictment.

For the record, as I've already written, I have no problem if any investor says non-dividend-paying stocks aren't attractive to them so they choose to invest elsewhere. I do have a problem when posters claim any strategy other than a current dividend seeking one is wrong and only pursued by the ignorant. That philosophy embodies far too many unstated assumptions to stand on its own.

You've not claimed that in the post I've quoted you from.

Again for the record, I personally am not anti-dividend, so to speak, at least in tax-advantaged accounts, but I do think, and have posted why several times, the dividend-seeking strategy is flawed.

No dividend seeker can take advantage of me as a sucker due to my attitude, because I'm also a total-market indexer when it comes to stocks.

PJW
Sidney
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Re: Dividend Strategy Ain't For Everyone

Post by Sidney »

nedsaid wrote: The idea is to not sell your stocks in down markets.
Right, the idea is to buy more stock in down market by selling bonds. Except for those with high/all equity portfolios, the worry about having to "sell stocks in down markets" shouldn't be a real worry.
I always wanted to be a procrastinator.
manwithnoname
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Re: Dividend Strategy Ain't For Everyone

Post by manwithnoname »

Sidney wrote:
nedsaid wrote: The idea is to not sell your stocks in down markets.
Right, the idea is to buy more stock in down market by selling bonds. Except for those with high/all equity portfolios, the worry about having to "sell stocks in down markets" shouldn't be a real worry.
Why do you need to sell stocks in a down market? I am 85 equities/15% fixed which generates increasing income each year.

I have an investment portfolio that generates a tax efficient 5% return in qualified dividends, muni bond income, MLP distributions, REIT income, CEF distributions and fixed income. The portfolio and SS provide more than enough income to pay my expenses at a 5% tax rate. I can buy stocks with spare cash generated from investment income without selling bonds which will always be redeemed at par.

I have a second portfolio of 100% equities invested in retirement plan assets which is structured for growth. Annual IRA distributions are converted to Roth IRA which will accumulate tax free and tax free distributions will only commence upon my death. 50% of the assets will be in the roth IRA. If their is a market decline I don't need to sell any equities from the income portfolio and I can convert more IRA assets to roth IRA so that they will accumulate tax free forever.
cjking
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Re: Dividend Strategy Ain't For Everyone

Post by cjking »

avburns wrote:If VTI's dividend is around 2% and some of the DGI favorites like (XOM, JNJ and PG) are around 3%; does the debate really come down to 1% dividend yield?
On the subject of diversified yield, VEU has a yield of 3.1% at the moment. I wonder if any American investors are eccentric enough to be 100% VEU?

(Suspect it might be considered unpatriotic? :) )

(I do think it would be a rational choice, at the moment, for someone who wanted value and simplicity, and who shares the view that a dividend-only income means capital is in some sense preserved, hence no need for bonds.)

(I'm not advocating being VEU all-the-time, just while it's earnings and dividend yields are considerably higher than US index. There would need to be some wider strategy to determine switching/allocating between VEU and US equities.)
Sidney
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Re: Dividend Strategy Ain't For Everyone

Post by Sidney »

manwithnoname wrote:Why do you need to sell stocks in a down market? I am 85 equities/15% fixed which generates increasing income each year.
Spending dividend income is identical to selling stock. In fact, it is economically equivalent to selling a specific lot of stock that has zero cost basis.
I always wanted to be a procrastinator.
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DonCamillo
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Re: Dividend Strategy Ain't For Everyone

Post by DonCamillo »

rkatz0 wrote: McDonald's MCD
Wal-Mart WMT
Altria MO
Coca-Cola
Johnson & Johnson JNJ
Procter & Gamble PG
Microsoft MSFT
Becton-Dickinson BDX
Target TGT
Sysco SYY
Intel INTC
BP BP
Ensco ESV
Bank of Montreal BMO
Apple AAPL
Allianz AZSEY
Concentrating on the stocks and ignoring the funds and MLPs listed by RKatz, the basic problems with a dividend growth strategy are that you are concentrated in Megacap Value, you are chasing the same popular (and therefore overpriced) stocks as everyone else seeking dividends, and your stock selection selects the same few stocks as several other strategies, including the now discredited but still practiced "Dogs of the Dow." So you have poor diversification and you are overpaying for the most popular stocks in the market.

Having said this, I do have a taxable dividend portfolio with the very specific objective of providing a few thousand dollars a month in cash income without selling stocks. It simplifies my accounting and tax returns. I avoid MLPs and BDCs because I don't like waiting for K1s to file my tax returns. But I am also aware that my dividend portfolio skews my returns away from total market returns and therefore keep it limited to a small portion of my equities.
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avburns
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Re: Dividend Strategy Ain't For Everyone

Post by avburns »

On the subject of diversified yield, VEU has a yield of 3.1% at the moment. I wonder if any American investors are eccentric enough to be 100% VEU?

(Suspect it might be considered unpatriotic? :) )

cjking, VEU is one of the ETF's I was alluding to in my question. It yields about as much if not more than many of the stocks referenced on Seeking Alpha. It's diversified. It can be purchased commission-free. Does the fact that it mirrors an index disqualify it from being part of a dividend growth investor portfolio and/or strategy? And if it doesn't, does replacing 25-30 researched individual stocks with a handful (or less) of ETF's yielding around 2-3% suddenly equal a dividend growth investor portfolio/strategy even if said portfolio bears a strong resemblance to many Boglehead portfolios?

And if it doesn't, why not? The ongoing expense ratio? Not having to research individual stocks? VEU excluding the U.S. (does that mean a portfolio of dividend spitting ADR's wouldn't fit a dividend growth strategy?)?
manwithnoname
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Re: Dividend Strategy Ain't For Everyone

Post by manwithnoname »

Sidney wrote:
manwithnoname wrote:Why do you need to sell stocks in a down market? I am 85 equities/15% fixed which generates increasing income each year.
Spending dividend income is identical to selling stock. In fact, it is economically equivalent to selling a specific lot of stock that has zero cost basis.


I have no taxation on muni bond income, qual dividends, MLP distributions, and some REIT income which is 80% of the income for which zero cost basis is meaningless metric. If I didn do roth conversions my tax rate would be 0%. If you have a tax efficient investment portfolio (not a tax diversified portfolio), taxation is an insignificant amount. But you need to have the taxation skill set to minimize taxation.
Sidney
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Re: Dividend Strategy Ain't For Everyone

Post by Sidney »

manwithnoname wrote:
Sidney wrote:
manwithnoname wrote:Why do you need to sell stocks in a down market? I am 85 equities/15% fixed which generates increasing income each year.
Spending dividend income is identical to selling stock. In fact, it is economically equivalent to selling a specific lot of stock that has zero cost basis.


I have no taxation on muni bond income, qual dividends, MLP distributions, and some REIT income which is 80% of the income for which zero cost basis is meaningless metric. If I didn do roth conversions my tax rate would be 0%. If you have a tax efficient investment portfolio (not a tax diversified portfolio), taxation is an insignificant amount. But you need to have the taxation skill set to minimize taxation.
True. Right now I can manage along the edges but once RMDs start, game over on taxes -- even with ROTH conversions.

But my main point was that spending dividends is the same as selling stock (independent of tax issues). The idea that living off dividends enables one to "avoid selling stocks in a down market" is just an illusion.
I always wanted to be a procrastinator.
postingname
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Re: Dividend Strategy Ain't For Everyone

Post by postingname »

Sidney wrote:
manwithnoname wrote:Why do you need to sell stocks in a down market? I am 85 equities/15% fixed which generates increasing income each year.
Spending dividend income is identical to selling stock. In fact, it is economically equivalent to selling a specific lot of stock that has zero cost basis.
Well, that is another rationale for dividend investing. It works for people like me who have read statements like that over and over and still don't get it. :)

Seriously, I concede to being arithmetically challenged, so those kinds of arguments never take root in my brain. It's easier for me to see the dividend income coming in, matching my liabilities and/or my desire to accummulate cash. And not forcing me to sell in a down market, and so I can let my securities appreciate until I'm ready to sell them high. It doesn't matter if I"m ignorant and don't understand how this is a dumb move. It keeps me in the market and keeps my portfolio appreciating, so it's a good move for me. 8-)
bucksfan2
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Re: Dividend Strategy Ain't For Everyone

Post by bucksfan2 »

Sidney wrote:True. Right now I can manage along the edges but once RMDs start, game over on taxes -- even with ROTH conversions.

But my main point was that spending dividends is the same as selling stock (independent of tax issues). The idea that living off dividends enables one to "avoid selling stocks in a down market" is just an illusion.
How exactly is it an illusion?
bhsince87
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Re: Dividend Strategy Ain't For Everyone

Post by bhsince87 »

bucksfan2 wrote:
Sidney wrote:True. Right now I can manage along the edges but once RMDs start, game over on taxes -- even with ROTH conversions.

But my main point was that spending dividends is the same as selling stock (independent of tax issues). The idea that living off dividends enables one to "avoid selling stocks in a down market" is just an illusion.
How exactly is it an illusion?
My take is, it's an illusion because, while you aren't ACTIVELY selling part of your shares when the market is down, the company is paying you a certain amount of it's equity as a dividend. You are effectively passively selling a portion your shares.

And really, that's the basic point of all of this. If the company pays you a $1 dividend per share, each share is now worth exactly $1 less (at that point in time).

If they pay you $1 when the price is $100 per share, it's losing 1% of it's value. If they pay you $1 per share when its price is at $50 a share, it's losing 2% of its value.

One more step: Assume you have 100 shares of this company, that's worth $10,000. They pay you a $1 per share dividend. Now each share is worth $99. You now have $9900 worth of stock (100 shares @$99 each), and $100 in cash.

Now suppose the company doesn't pay a dividend, but you still need $100. You sell 1 share. So now you have 99 shares, each still worth $100 per share (since the didn't pay a dividend). So now you have $9900 worth of stock (99 shares @$100 each), and $100 in cash. Same as above.

But what if the market is down, and each share is worth $50? You have 100 shares. They pay you your dividend of $1 per share, so you end up with $100 in cash. And each share again declines by $1. Now each share is worth $49, you have 100 shares, so you have $4900 in stock and $100 in cash.

If they don't pay a dividend in this case, you need to sell 2 shares to get your $100. So now you end up with 98 shares, each worth $50, or $4900 in stock, and $100 in cash. Same as above

So paying you the dividend when the market was down had the same net effect as you selling 2 shares when the market was down.

I will edit to add that this is why I actually prefer to own low to zero dividend paying stocks, at least in my taxable account. That allows ME to decide if/when I turn equity into cash.
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bucksfan2
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Re: Dividend Strategy Ain't For Everyone

Post by bucksfan2 »

I have found the whole "buying the dividend" theory to be a sound theory but lacking in reality.

Most stocks move based upon where the stock is going in the future not where it is now.

I think growth rates, dividend growth rates, cash flows, dividend payout ratio's, all have more weight on the value of a stock then what happens to a $100 stock when it pays a $1 dividend.
bhsince87
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Re: Dividend Strategy Ain't For Everyone

Post by bhsince87 »

bucksfan2 wrote:I have found the whole "buying the dividend" theory to be a sound theory but lacking in reality.

Most stocks move based upon where the stock is going in the future not where it is now.

I think growth rates, dividend growth rates, cash flows, dividend payout ratio's, all have more weight on the value of a stock then what happens to a $100 stock when it pays a $1 dividend.

This isn't about "buying the dividend". This is about what happens to the real value of the company. I agree that how the market responds to that is an unknown.

But it's an accounting/mathematical fact. The dividend comes right off the balance sheet. The company is literally worth less the second the dividend goes out than it was the second before.
Time is what we want most, but what we use worst. William Penn
pop77
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Re: Dividend Strategy Ain't For Everyone

Post by pop77 »

bhsince87 wrote:
bucksfan2 wrote:
Sidney wrote:True. Right now I can manage along the edges but once RMDs start, game over on taxes -- even with ROTH conversions.

But my main point was that spending dividends is the same as selling stock (independent of tax issues). The idea that living off dividends enables one to "avoid selling stocks in a down market" is just an illusion.
How exactly is it an illusion?
My take is, it's an illusion because, while you aren't ACTIVELY selling part of your shares when the market is down, the company is paying you a certain amount of it's equity as a dividend. You are effectively passively selling a portion your shares.

And really, that's the basic point of all of this. If the company pays you a $1 dividend per share, each share is now worth exactly $1 less (at that point in time).

If they pay you $1 when the price is $100 per share, it's losing 1% of it's value. If they pay you $1 per share when its price is at $50 a share, it's losing 2% of its value.

One more step: Assume you have 100 shares of this company, that's worth $10,000. They pay you a $1 per share dividend. Now each share is worth $99. You now have $9900 worth of stock (100 shares @$99 each), and $100 in cash.

Now suppose the company doesn't pay a dividend, but you still need $100. You sell 1 share. So now you have 99 shares, each still worth $100 per share (since the didn't pay a dividend). So now you have $9900 worth of stock (99 shares @$100 each), and $100 in cash. Same as above.

But what if the market is down, and each share is worth $50? You have 100 shares. They pay you your dividend of $1 per share, so you end up with $100 in cash. And each share again declines by $1. Now each share is worth $49, you have 100 shares, so you have $4900 in stock and $100 in cash.

If they don't pay a dividend in this case, you need to sell 2 shares to get your $100. So now you end up with 98 shares, each worth $50, or $4900 in stock, and $100 in cash. Same as above

So paying you the dividend when the market was down had the same net effect as you selling 2 shares when the market was down.

I will edit to add that this is why I actually prefer to own low to zero dividend paying stocks, at least in my taxable account. That allows ME to decide if/when I turn equity into cash.
What you have outlined in your example is an illusion. The market value of an equity portfolio depends on the price of a stock. The problem with price of a stock is that it is based upon Mr. Market's mood. One dollar of earnings may be value as 25 dollars when Mr. Market is in a good mood or it could be 10 dollars when he is in a bad mood. This is a very fundamental concept. The earnings of a company itself fluctuates quite a bit on economic cycles. Even consumer staples stocks cannot avoid such fluctuations. On top of it, there is earnings growth expectations that determines the multiple. You now have multiple variables to deal with when you want covert equity to cash.

As a dividend growth investor I have chosen a company that is well diversified, has consistent earnings growth, has enough financial flexibility in terms of payout ratio to keep the dividends coming even in economic down turns. Anyone who claims that they can sell the stock to create their own dividend is living in a dream world..
bhsince87
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Re: Dividend Strategy Ain't For Everyone

Post by bhsince87 »

OK then. If you think accounting and math are illusions, then there is no point in me discussing this any further.

Best of luck to you!
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ogd
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Re: Dividend Strategy Ain't For Everyone

Post by ogd »

pop77 and others: if y'all think that the main virtue of dividend stocks is that they keep paying reliable dividends during the crisis, and it's hard to convince you otherwise, why not do this: invest normally until a crisis hits, then during the crisis buy the reliable income you need. After all , it is the case, by your own arguments I believe, or otherwise easily proved by data, that dividend stocks lose about the same value as the rest of them, so you wouldn't be losing anything in the transaction compared to the guy who was holding dividend stocks all along. And meanwhile, you wouldn't be losing diversification and money to taxes.

More generally, you could just "buy" the exact amount of dividends you need any given year, that is the amount you won't be reinvesting but taking out of the portfolio, and invest the rest more efficiently. That takes care of the tax problem (capital gains taken, not deferred, are not that different tax-wise than qualified dividends). You're still left with the diversification loss, but it might not be huge if you buy a lot of stocks.
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ogd
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Re: Dividend Strategy Ain't For Everyone

Post by ogd »

goodoboy: if you're still around surveying this sea of replies: please don't feel bad about what you hear from dividend investors.

You hear that "most investors don't have the time or inclination to do this" (adapted from rkatz0), as if "this" got you something. Here's the thing: it will get you absolutely nothing. You do all this work, you have an under-diversified portfolio and possibly pay too much taxes, and in exchange you get ... I repeat, nothing. Perhaps a questionable hobby, if anything, although following around McDonalds and Coke earnings and dividend announcements doesn't sound like any fun to me.

And notice the language, too. It might sound like it's allowing for other approaches, but it not-so-subtly push(ed) you to feel something along the lines of lazy and incompetent when it came to managing your own money. It's not true. Your hesitation to act was the best sign you know what you're doing.

What you need in order to outperform is luck. Not research, there's far too much of it already and a guy with a newsletter subscription and a 10 digit calculator figuring out dividend growth rates doesn't stand a chance to do a better job than the professionals. It's luck. That's what the newsletter that outperformed last quarter had. In a sense it's true that as an index investor you can't outperform the average and if you go off the index you can, but imagine that the choice you were offered was actually honestly formulated: You could invest in the index and be stuck at average, or you could roll this dice and at least have a chance to outperform. Whoever still likes that idea would be better off with, say, 1M in an index and 10K on a roulette number every year -- the difference maker being the casino freebies :sharebeer
Sidney
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Re: Dividend Strategy Ain't For Everyone

Post by Sidney »

bhsince87 wrote:My take is, it's an illusion because, while you aren't ACTIVELY selling part of your shares when the market is down, the company is paying you a certain amount of it's equity as a dividend. You are effectively passively selling a portion your shares.

And really, that's the basic point of all of this. If the company pays you a $1 dividend per share, each share is now worth exactly $1 less (at that point in time).

If they pay you $1 when the price is $100 per share, it's losing 1% of it's value. If they pay you $1 per share when its price is at $50 a share, it's losing 2% of its value.

One more step: Assume you have 100 shares of this company, that's worth $10,000. They pay you a $1 per share dividend. Now each share is worth $99. You now have $9900 worth of stock (100 shares @$99 each), and $100 in cash.

Now suppose the company doesn't pay a dividend, but you still need $100. You sell 1 share. So now you have 99 shares, each still worth $100 per share (since the didn't pay a dividend). So now you have $9900 worth of stock (99 shares @$100 each), and $100 in cash. Same as above.

But what if the market is down, and each share is worth $50? You have 100 shares. They pay you your dividend of $1 per share, so you end up with $100 in cash. And each share again declines by $1. Now each share is worth $49, you have 100 shares, so you have $4900 in stock and $100 in cash.

If they don't pay a dividend in this case, you need to sell 2 shares to get your $100. So now you end up with 98 shares, each worth $50, or $4900 in stock, and $100 in cash. Same as above

So paying you the dividend when the market was down had the same net effect as you selling 2 shares when the market was down.
That is an accurate take. If I have $10 in my wallet and then move a dollar to my front pocket (my wallet pays a dividend of $1), I still have $10. If I then spend the one in my pocket I am down to $9.
I always wanted to be a procrastinator.
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DonCamillo
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Re: Dividend Strategy Ain't For Everyone

Post by DonCamillo »

bhsince87 wrote:OK then. If you think accounting and math are illusions, then there is no point in me discussing this any further.
I don't think math is an illusion. Two plus two will always be four.

But accounting is almost completely fiction. It may be a useful fiction, but it is still an illusion. The only honest number in a financial statement is a cash dividend. Every other number has been put there as a result of decisions made by executives who have a financial interest in presenting the numbers in a certain way. In accounting, two plus two is whatever the CEO wants and the CFO allows him to get away with.

Take profit, for example. It is the result of decisions such as when to recognize sales, what value to assign to reserves or to accounts receivable based on assumptions made about the likelihood and timing of payments, how to account for intellectual property (or shift it to another tax jurisdiction), choices about depreciation and amortization, arbitrary valuations of raw material, work in process, and finished goods inventories, the probable outcome of lawsuits, what value to give to stock options and other incentives, and dozens of other factors which can be interpreted in different ways. A privately held company might minimize profits to avoid taxes, while a public company might maximize them to enhance the value of its stock. If a public company goes private, you can be certain that the accounting will change dramatically.
Les vieillards aiment à donner de bons préceptes, pour se consoler de n'être plus en état de donner de mauvais exemples. | (François, duc de La Rochefoucauld, maxim 93)
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Ketawa
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Re: Dividend Strategy Ain't For Everyone

Post by Ketawa »

Who cares if "accounting if fiction", or if cash dividends are an "honest number"? This has nothing to do with whether dividends have any special sauce beyond being a component of total return.

When a company pays a dividend, the market expects its stock price to drop by the amount of the dividend. The actual outcome will almost certainly be different, but it's impossible to predict what it will be. Otherwise, where are the hedge funds taking advantage of this pricing error?

Let's say that stock prices were expected to drop by only 95% of the dividend's value and that the average dividend-paying stock had a yield of about 2%. You personally identify 100 trading days per year where you want to capture the dividend. That would be an additional risk-free 10% return (2% * 5% * 100) above and beyond the return from the stocks you held. Why aren't you juicing the returns in your Roth IRA? Even I would be thinking about doing this; an extra 10% in return would be well worth the reduced diversification.
pop77
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Re: Dividend Strategy Ain't For Everyone

Post by pop77 »

bhsince87 wrote:OK then. If you think accounting and math are illusions, then there is no point in me discussing this any further.

Best of luck to you!
Accounting and Math are not illusions, your belief that market is always fairly and uniformly valued so that you can sell at any time and get the same valuation is. Remember we are not trying to capture dividend and run, we are finding reliable companies and sticking with them ignoring market noise.
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Re: Dividend Strategy Ain't For Everyone

Post by pop77 »

Sidney wrote:
bhsince87 wrote:My take is, it's an illusion because, while you aren't ACTIVELY selling part of your shares when the market is down, the company is paying you a certain amount of it's equity as a dividend. You are effectively passively selling a portion your shares.

And really, that's the basic point of all of this. If the company pays you a $1 dividend per share, each share is now worth exactly $1 less (at that point in time).

If they pay you $1 when the price is $100 per share, it's losing 1% of it's value. If they pay you $1 per share when its price is at $50 a share, it's losing 2% of its value.

One more step: Assume you have 100 shares of this company, that's worth $10,000. They pay you a $1 per share dividend. Now each share is worth $99. You now have $9900 worth of stock (100 shares @$99 each), and $100 in cash.

Now suppose the company doesn't pay a dividend, but you still need $100. You sell 1 share. So now you have 99 shares, each still worth $100 per share (since the didn't pay a dividend). So now you have $9900 worth of stock (99 shares @$100 each), and $100 in cash. Same as above.

But what if the market is down, and each share is worth $50? You have 100 shares. They pay you your dividend of $1 per share, so you end up with $100 in cash. And each share again declines by $1. Now each share is worth $49, you have 100 shares, so you have $4900 in stock and $100 in cash.

If they don't pay a dividend in this case, you need to sell 2 shares to get your $100. So now you end up with 98 shares, each worth $50, or $4900 in stock, and $100 in cash. Same as above

So paying you the dividend when the market was down had the same net effect as you selling 2 shares when the market was down.
That is an accurate take. If I have $10 in my wallet and then move a dollar to my front pocket (my wallet pays a dividend of $1), I still have $10. If I then spend the one in my pocket I am down to $9.
This is accurate ONLY when the market ALWAYS trades at a P/B of 1 without any fluctuations. You are not paying whatever the company is worth in terms of book value you are paying whatever the market is willing to sell the stock for.
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Re: Dividend Strategy Ain't For Everyone

Post by bhsince87 »

Hmm, I thought I had a line in there along the lines of "How the market will react to this drop in value is unknown," But now I don't see it. I must have edited that out by mistake before I posted.

Sorry. I do agree that market sentiment matters on stock price.

I should also add that my example was not entirely real world. The actual drop in value per share depends on factors such as number of shares outstanding, cash on hand etc. In other words, the share price will rarely drop dollar per dollar in step with the dividend pay out. I just chose that case to make the illustration simple.
Time is what we want most, but what we use worst. William Penn
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JoMoney
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Re: Dividend Strategy Ain't For Everyone

Post by JoMoney »

I prefer to be dividend agnostic :) but to play dividend advocate for arguments sake:
Dividends may provide information or somehow signal to investors about the 'quality' of a company and it's earnings. It may not be something that can be exploited for higher returns, but if someone was stock picking it may provide information about the company that has some basis and is easier to recognize then other more elaborate research. If research costs are free, then it's a wash. If there is a cost involved to the stock picking research, and that similar research might otherwise be easier accounted for using some sort of dividend growth model (or some other dividend signal) then it's a benefit.
Despite the low costs of modern discount stock brokers, there is an expense to selling shares, selling fractions of shares is not a common feature - and using margin until a full share can be sold has a cost. If someone is in a withdrawal phase, being able to harvest gains through dividends may be a benefit with lower costs than paying brokerage commissions.

I think most Boglehead style investing strategies make both of those arguments irrelevant... but for arguments sake :twisted:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Dividend Strategy Ain't For Everyone

Post by Sidney »

pop77 wrote:This is accurate ONLY when the market ALWAYS trades at a P/B of 1 without any fluctuations. You are not paying whatever the company is worth in terms of book value you are paying whatever the market is willing to sell the stock for.
I guess the best strategy is to not hold the stock at all. Just buy it the day before the dividend, grab the dividend the next day and sell at the original price on the third day.
I always wanted to be a procrastinator.
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Re: Dividend Strategy Ain't For Everyone

Post by postingname »

bhsince87 wrote:
bucksfan2 wrote:
Sidney wrote:True. Right now I can manage along the edges but once RMDs start, game over on taxes -- even with ROTH conversions.

But my main point was that spending dividends is the same as selling stock (independent of tax issues). The idea that living off dividends enables one to "avoid selling stocks in a down market" is just an illusion.
How exactly is it an illusion?
My take is, it's an illusion because, while you aren't ACTIVELY selling part of your shares when the market is down, the company is paying you a certain amount of it's equity as a dividend. You are effectively passively selling a portion your shares.
Have you heard of the BTFD strategy? (Buy the F--ing Dip!) That has made ex-div dates the most popular day of the year for buying some securities. It's almost comical how people try to buy low on ex-div day and they can't because the price has already rocketed up due to high demand!
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Re: Dividend Strategy Ain't For Everyone

Post by Ketawa »

postingname wrote:Have you heard of the BTFD strategy? (Buy the F--ing Dip!) That has made ex-div dates the most popular day of the year for buying some securities. It's almost comical how people try to buy low on ex-div day and they can't because the price has already rocketed up due to high demand!
But if this effect is real, the answer is obvious. Buy the day before ex dividend, then sell after you have collected the dividend and the price has "rocketed up".
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Re: Dividend Strategy Ain't For Everyone

Post by manwithnoname »

ogd wrote:pop77 and others: if y'all think that the main virtue of dividend stocks is that they keep paying reliable dividends during the crisis, and it's hard to convince you otherwise, why not do this: invest normally until a crisis hits, then during the crisis buy the reliable income you need. After all , it is the case, by your own arguments I believe, or otherwise easily proved by data, that dividend stocks lose about the same value as the rest of them, so you wouldn't be losing anything in the transaction compared to the guy who was holding dividend stocks all along. And meanwhile, you wouldn't be losing diversification and money to taxes.

More generally, you could just "buy" the exact amount of dividends you need any given year, that is the amount you won't be reinvesting but taking out of the portfolio, and invest the rest more efficiently. That takes care of the tax problem (capital gains taken, not deferred, are not that different tax-wise than qualified dividends). You're still left with the diversification loss, but it might not be huge if you buy a lot of stocks.
The reason your theory doesn't work is that you will never know when the market has hit bottom so its impossible to time when to buy sufficient equities to generate income needed for expenses. I rely on a stream of income from income producing assets because I don't have to worry about selling stocks at depressed prices to generate income for expenses- the income exceeds my expenses. My tax rate is about 5% because I use tax efficient investments. If I get lucky like I did in Feb 2009 when I started buying depressed equities at the bottom then I will reap additional gains but I don't need to worry about receiving sufficient income while trying to time the market. The assets will receive a stepped up basis when they are inherited. I have a second portfolio invested growth equities which is designed to out perform the market but I don't need to receive any income from it to pay my living expenses. The fund will be inherited by my heirs with minimal taxation because it will consist mostly of roth IRA assets. Any income from the second fund will be invested for long term growth.
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Re: Dividend Strategy Ain't For Everyone

Post by EyeYield »

Aww, jeez.

CXBC - Reaking News - "Shares of XYZ rose 15% in after hours trading today after paying it's dividend and getting a strong buy rating from Finporn analyst Flubber Gasbag."

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Ketawa
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Re: Dividend Strategy Ain't For Everyone

Post by Ketawa »

manwithnoname wrote:The reason your theory doesn't work is that you will never know when the market has hit bottom so its impossible to time when to buy sufficient equities to generate income needed for expenses.
This is not an accurate representation of the argument against dividend investing.
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Re: Dividend Strategy Ain't For Everyone

Post by nedsaid »

I would like to set the record straight, I have never said that a total return approach is bunk. All I was saying is that this is not a 100% foolproof strategy. This approach has problems in a scenario of a bear market right after an investor's retirement. It is the sequence of returns problem. In an era of very low interest rates and perhaps muted stock market returns, the prospect of dialing down a withdrawal rate from 4% to 3% or maybe even 2% is not an attractive prospect.

This is why financial planners do Monte Carlo simulations, to assess the risk of running out of money in retirement. Probably most retirement financial plans drawn up by planners assume a total return approach. It is an attempt to quantify the very issues I am bringing up.

I have also said that no investment strategy works 100% of the time. All investment strategies fail at some point or another. The best strategies fail much less often and for shorter periods of time than the bad strategies. So to point out weakness in an investment strategy or an investment approach is not to say that it is bunk.

A couple posters correctly pointed out that dividends don't always grow and in fact can be cut. We saw this in 2008-2009. A dividend strategy or a dividend growth strategy works pretty well but not all the time. This is not a foolproof strategy either.

So somehow a retiree has to deal with volatile markets and the sequence of returns problem. No one knows what the proper withdrawal rate from a retirement portfolio is. We have some good ideas about this but no withdrawal strategy is foolproof. A retiree also has to guard against selling his stocks when they are down. An "income" strategy or a "buckets" strategy are attempts to get around the problem of down stock markets and to give deflated stocks a chance to rebound.

What I am suggesting is that an income strategy is not an irrational approach. It is harder to execute in these days of very low interest rates. Heck, I remember when retirees put their nest eggs in Certificates of Deposit at the bank and lived off the interest. That is pretty hard to do now a days.

So we are disagreeing at the margins. There is controversy created that I did not intend to create. So mild disagreements with other posters does not mean that I regard their ideas as bunk.
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Re: Dividend Strategy Ain't For Everyone

Post by postingname »

Ketawa wrote:
postingname wrote:Have you heard of the BTFD strategy? (Buy the F--ing Dip!) That has made ex-div dates the most popular day of the year for buying some securities. It's almost comical how people try to buy low on ex-div day and they can't because the price has already rocketed up due to high demand!
But if this effect is real, the answer is obvious. Buy the day before ex dividend, then sell after you have collected the dividend and the price has "rocketed up".
I suppose if all I wanted was the dividend and I didn't mind frequent trading, I could try that. But I like capital appreciation too. And I like the ability to forget about the market, which I can easily do as a dividend/total returns investor.

People talk about attaining a "zen-like" state in their investing career. It wasn't until I included dividends that I reached that state.

As they say, there is more than one road to Nirvana.

(All right, so it's Dublin. 8-) )
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Re: Dividend Strategy Ain't For Everyone

Post by nedsaid »

Of the individual stocks that I have owned, most have paid dividends. But I have owned stocks that don't pay dividends too. My preference is to own dividend payers but it is not a religion with me. I also own pretty aggressive mutual funds based on earnings and price momentum. These funds often pay little or no dividends after expenses, but these funds I didn't buy for the dividend. I bought them because I wanted aggressive investments in my portfolio.

I certainly don't buy an investment just because it pays a dividend. I factor that into my thinking but I am not a dividends for dividends sake type of guy.

There are two statements that have a big grain of truth to them. Increasing dividend payments over time is often a sign of increasing earnings over time and thus a measure of a company's quality. You can't fake a dividend also has a big grain of truth to it. Reported earnings can be manipulated a lot easier than dividends can. The dividend history of a company can tell you an awful lot.

I prefer value over growth but I have growth investments. I prefer dividend companies over non-dividend paying companies but I own both. I am not an "all or nothing" type of investor.
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Re: Dividend Strategy Ain't For Everyone

Post by manwithnoname »

Ketawa wrote:
manwithnoname wrote:The reason your theory doesn't work is that you will never know when the market has hit bottom so its impossible to time when to buy sufficient equities to generate income needed for expenses.
This is not an accurate representation of the argument against dividend investing.
So? There is no one correct answer. I prefer to receive distributions of income each month to pay my expenses instead of selling shares because I have less capital gains reporting on my tax return. I don't worry about sequence of return risk because of a market correction. No brainer. If other investors prefer to periodically sell shares to generate income because they think total return generate higher value go right ahead. Whatever floats your boat.

As I noted previously I also buy equities when prices decline in value.
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Re: Dividend Strategy Ain't For Everyone

Post by ogd »

manwithnoname wrote: The reason your theory doesn't work is that you will never know when the market has hit bottom so its impossible to time when to buy sufficient equities to generate income needed for expenses. I rely on a stream of income from income producing assets because I don't have to worry about selling stocks at depressed prices to generate income for expenses- the income exceeds my expenses.
It doesn't rely on guessing the bottom at all - you could buy the income you need at any time. The argument only relies on dividend stock values generally tracking the index, which is quite verifiable.

The key point is to only get the dividends you're actually going to spend, as opposed to preemptively holding dividend stocks always with the loss of efficiency that it entails. It sounds like that's what you're doing (as long as the "exceeds" is not huge) and I don't have as big of a problem with that as with the assertion that dividend stocks is the way to invest at all times.

The nice thing about this argument is that I don't have to convince you that selling stocks vs taking dividends doesn't make a difference even in a crash, which seems to be hard to do. All I'm asking is, why are you (the generic "you") holding more income stocks than you need.

Another way to formulate this is: if I have a portfolio with the same or superior total return than investor X, I can at any time exchange it for a portfolio with the same or higher income as X: just buy what they're holding, but more of it. The reverse is not true. So it makes sense to invest for total return and take only the income you need.
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Re: Dividend Strategy Ain't For Everyone

Post by cjking »

pop77 wrote:What you have outlined in your example is an illusion. The market value of an equity portfolio depends on the price of a stock. The problem with price of a stock is that it is based upon Mr. Market's mood. One dollar of earnings may be value as 25 dollars when Mr. Market is in a good mood or it could be 10 dollars when he is in a bad mood. This is a very fundamental concept. The earnings of a company itself fluctuates quite a bit on economic cycles. Even consumer staples stocks cannot avoid such fluctuations. On top of it, there is earnings growth expectations that determines the multiple. You now have multiple variables to deal with when you want covert equity to cash.
I understand your point of view, because I used to be on your side of the argument. Please consider the following argument.

There are two listings, one of which pays a dividend. We presume that at all times they have the same expected return as each other, due to market efficiency. The market plunges. A dividend is paid by the dividend-paying equity, the price of which adjusts to the dividend going out. Since this is an idealised example, we assume that the dividend could be reinvested immediately and frictionlessly, meaning the dividend listing share-holder who doesn't need income right now can choose to end up in exactly the same position as the other share-holder. If instead he decides to spend the dividend, he has given up exactly the same amount of future return as someone who "manufactured a dividend" by selling the other equity.

The person who "manufactures a dividend" during a crisis may be selling his share at a huge discount to some measure of value. The person who spends rather than reinvests a real dividend when shares are at that huge discount is giving up the same amount of future returns, by not buying when shares are cheap. There is no difference in the amount they are giving up by withdrawing the same amount at that time.
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Re: Dividend Strategy Ain't For Everyone

Post by Leeraar »

nedsaid wrote:The problem with a total return strategy is what do you do when you have no return? Or if you have a negative return? Dollar cost averaging in reverse during a down market can be devastating to a portfolio. Rick Ferri posted that if retired investors could withdraw only the income generated from a portfolio during down markets that this would help them hang in there and not bail on their stocks. Investing for income in those situations doesn't look so dumb. It keeps a psychological barrier of "drawing from the principal" from being crossed.

If one used a total return strategy, a variable withdrawal strategy would need to be used. That is take out less to live on during bad markets.
Dividends are not evil, they're just not different.

To think that explicitly selling a part of your portfolio to get cash is different than receiving a dividend is different is just plain wrong. Except, receiving the dividend is an involuntary taxable event, possibly taxable at a higher rate than a capital gain from voluntarily selling part of an investment.

No matter whether the recent market is up or down, the dividend paid is reflected in the value of your holding.

L.
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JoMoney
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Re: Dividend Strategy Ain't For Everyone

Post by JoMoney »

I would highly recommend Warren Buffets explanation in considering dividends that he lays out on page 20 of the 2012 Berkshire Hathaway Annual Report. It's a compelling argument against dividends:
http://www.berkshirehathaway.com/2012ar/2012ar.pdf
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Re: Dividend Strategy Ain't For Everyone

Post by pop77 »

cjking wrote:
pop77 wrote:What you have outlined in your example is an illusion. The market value of an equity portfolio depends on the price of a stock. The problem with price of a stock is that it is based upon Mr. Market's mood. One dollar of earnings may be value as 25 dollars when Mr. Market is in a good mood or it could be 10 dollars when he is in a bad mood. This is a very fundamental concept. The earnings of a company itself fluctuates quite a bit on economic cycles. Even consumer staples stocks cannot avoid such fluctuations. On top of it, there is earnings growth expectations that determines the multiple. You now have multiple variables to deal with when you want covert equity to cash.
I understand your point of view, because I used to be on your side of the argument. Please consider the following argument.

Since this is an idealised example, we assume that the dividend could be reinvested immediately and frictionlessly, meaning the dividend listing share-holder who doesn't need income right now can choose to end up in exactly the same position as the other share-holder. If instead he decides to spend the dividend, he has given up exactly the same amount of future return as someone who "manufactured a dividend" by selling the other equity.

The person who "manufactures a dividend" during a crisis may be selling his share at a huge discount to some measure of value. The person who spends rather than reinvests a real dividend when shares are at that huge discount is giving up the same amount of future returns, by not buying when shares are cheap. There is no difference in the amount they are giving up by withdrawing the same amount at that time.
You said it in your response "idealized example". The argument against dividend growth investing is purely theoretical and has no merit in practical world.

Once a company has grown big enough, the unfortunate truth is the company cannot find enough opportunities to reinvest all the profits back into the business. This is a practical capital allocation problem. In theory if a company has a Return on Invested Capital of 15% and can reinvest all the profits and get the same return, I am all for it. But trees cannot grow to skies. That is why you now see all the big technology companies have started paying dividends and grow them.

Though Warren argues against dividends, he always invests in companies that generates free cash flow and pays him back. Everyone is not Buffett and cannot get away with billions of dollars of cash in balance sheet. Moreover Berkshire is a conglomerate and can invest in any business.

I want to reiterate that dividend growth investing is not about capturing current dividend. It is about finding companies with predictable earnings (relative) and a disciplined capital allocation so that you can be rewarded as an equity holder over the long term. Some had said that dividend growth did not work in 2008. I beg to differ. This is why you need to have a portfolio of stocks. In my portfolio, only GE cut it's dividend and all the other companies increased their dividend yes increased in 2008.

If you look and argue based on theory, dividend growth investing is sub optimal. But our portfolio and retirement are very practical.
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Re: Dividend Strategy Ain't For Everyone

Post by nedsaid »

Why do people keep saying that dividend investors are naïve and think that dividends are somehow free money that the market doesn't know about? Yes, I am aware that the price of a stock will normally drop when the stock goes ex-dividend by the amount of the dividend. This happens unless there is some other piece of news that affects the stock price.

There are many rational reasons to desire dividends. First your payouts have a good chance of growing with and perhaps beating inflation. Dividend growth is often a sign of earnings growth which in turn is often a sign of a company's quality. Third, the best use of excess cash by a company is often to return it to its shareholders. Peter Lynch talked about the bladder theory, which is that companies tend to piss away their excess cash on unprofitable acquisitions. I think a good argument that too much cash can have a long term negative effect on a company's value. Fourth, too much cash on a balance sheet can make a company vulnerable to takeover because in effect a company finds its own cash being used as a source of funds for the other company making the acquisition. Fifth, a dividend is exactly like a small business owner taking a draw from his business to live on.

It boils down to preference. A dividend strategy is an income strategy and a total return strategy in large part is a capital gains story. So yes a withdrawal from a portfolio is a withdrawal. A business owner takes cash out of his business to live on and doesn't sell off his interest in his company in little pieces bit by bit. He or she keeps the ownership stake and takes out cash. What is the difference between owning one business and taking cash withdrawals and owning stocks in many businesses and doing the very same thing? I don't think this is irrational. A small business owner does not follow a total return strategy with his own company, for one thing his ownership interest is not liquid as stocks on a stock exchange are. But the principle is the same.
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Re: Dividend Strategy Ain't For Everyone

Post by Trek9 »

livesoft wrote:I read other blogs that state that the dividend income strategy is flawed and that a lot of people are fooled into thinking it is good. I do not use it and I don't think anyone else should use it either --- even if they get to step 3.
I know this is somewhat old post, but Livesoft, would you mind sharing what other blogs you read? just out of personal curiosity :)
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Re: Dividend Strategy Ain't For Everyone

Post by Sidney »

nedsaid wrote: A business owner takes cash out of his business to live on and doesn't sell off his interest in his company in little pieces bit by bit.
Often. Startup entrepreneurs often sell off slices to keep enough money flowing to both pay their rent and sustain the business.
I always wanted to be a procrastinator.
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Re: Dividend Strategy Ain't For Everyone

Post by postingname »

nedsaid wrote:Why do people keep saying that dividend investors are naïve and think that dividends are somehow free money that the market doesn't know about?
Anytime one is invested in their own strategy, they are prone to discrediting any other strategy. That's human nature. There's probably a behavioral economics term for that. Though it is true that some dividend investors are naive. Obviously, those would be the classic yield-chasers that are only looking at one aspect of their returns. But you could say the same thing about the naive TSM investors who pile into VTI or SPY just when things are getting hot. They're sold on the total market concept, have been told that lump sum wins in the long-run, and so they finally get up enough nerve to pile in...at exactly the wrong time. Yes, in the long-run it won't matter (assuming a long enough time horizon), but by piling in enthusiastically at the wrong time, they may be horrified at what it feels like to have minimal-yielding equity without the rewards of a nice dividend, and so they may very well sell.
Dividend growth is often a sign of earnings growth which in turn is often a sign of a company's quality.
That's definitely part of the appeal. Anecdotally, I can say that of all the stocks I've owned, the ones that did well over the long run were those that paid a divdend and over time grew the dividend. Obviously, there are going to be dividend-heavy sectors that suffer occasionally, and the financial sector suffered in this last crisis. But in dividend investing, as in any other kind of investing, diversification is key.
Third, the best use of excess cash by a company is often to return it to its shareholders.
I believe that is true. When a company decides to buy back shares instead -- which seems to be the most popular alternative these days -- it may result in a temporary increase in price as the float decreases, but that can be a good time to sell. CEO's are notoriously bad market-timers and frequently buy back shares at market tops (according to articles I have read).

Your other points about the best use of cash are good as well.

I personally like the concept of "dueling investment strategies". Sort of a half this investment strategy, half another investment strategy. That can be used either to test which one works the best for you, or it's a way of hedging your bets. If you end up preferring one strategy over another, you can eventually change your portolio to the favored one. I started out half and half and have remained that way. I like having the diversification of strategies. As long as the two strategies are not "bad", you really can't go wrong. And I don't think avyone, as much as they may argue against it, would accuse dividend investing as being "bad". Just like dividend investors wouldn't consider TSM investing as bad either, maybe just "uncomfortable" to them.
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Re: Dividend Strategy Ain't For Everyone

Post by cjking »

pop77 wrote:You said it in your response "idealized example". The argument against dividend growth investing is purely theoretical and has no merit in practical world.
OK, if I've understood correctly, you're rejecting the assumption in my example that all equities have the same expected returns at all times. That's fine, I haven't been paying close attention to the thread so it's possible that the argument wasn't about what I thought it was. (Even now I'm too lazy to go back and check. :) )

The idea that taking an income from dividends is safer just because you don't have sell shares in a downturn is wrong, and what I was arguing against, but I don't have a problem with the idea that leaning towards higher yielding stocks could give you better risk-adjusted returns. For example, Vanguard UK have a world tracker ETF and a high-yield world tracker that invests in that half of the world index that has higher dividend yield. I have a spreadsheet calculation that tells me to expect a 0.7% a year higher return from the second fund, based on the smoothed earnings yields (1/PE10) of the underlying country stock-markets. The high-yield fund has lower exposure to the USA, which is relatively expensive at the moment.

Edited to add: my broad working assumption is that stock-markets are internally efficient, but there isn't enough global arbitrage to keep different stock-markets completely in line with each other. These are just rules-of-thumb for someone whose equity exposure is based on using 5 or 6 index funds to cover the world. I'm willing to believe you can find inconsistencies within a country stock-market if you look. In fact I treat UK REITs as separate to other UK stocks, a couple of years ago I had them on the same expected return, now I project UK REITs to have half the return of the UK stock-market generally, so I'm quite willing to abandon the idea of intra-market efficiency when it suits me.
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nedsaid
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Re: Dividend Strategy Ain't For Everyone

Post by nedsaid »

If my portfolio was large enough, I certainly would exercise an income strategy taking the income from dividends and interest. But I don't and probably won't, so a combination of annuitizing a portion of my nest egg and a total return strategy with the rest is probably what I will do in retirement. Another reason for the dividend strategy is that dividends and interest are pretty reliable sources of income whereas capital gains don't always materialize. Interest rates can fall and dividends can be cut, but I can see why retirees feel safer with an income strategy.
A fool and his money are good for business.
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