Dividends and Market Slides

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fortyofforty
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Dividends and Market Slides

Post by fortyofforty »

Do dividend paying stocks provide any measure of protection in a market downturn? The dividend yield is relatively low, but at least it's there. Does that provide any cushioning effect? Also, does the fact that many of the dividend paying companies tend to put them in the value category? If so, value stocks generally decline less than growth during market slides, don't they?
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Re: Dividends and Market Slides

Post by livesoft »

I think the answers are (in order): No. No. No. No.
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Angst
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Re: Dividends and Market Slides

Post by Angst »

Dividends, to me, are something of a distraction for people. Whether a company pays out a dividend, or it doesn't and you just sell a small portion of your holdings, it's the same thing. Well, there are different tax implications...
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fortyofforty
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Re: Dividends and Market Slides

Post by fortyofforty »

So growth stocks and value stocks behave exactly the same in down markets? Interesting.

And I am not asking about living off dividends.

Perhaps my questions weren't clear. I am asking about the value of dividends to overall returns, especially in down markets, and the stock-price implications of dividend paying corporations versus non-dividend paying corporations.
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Noobvestor
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Re: Dividends and Market Slides

Post by Noobvestor »

fortyofforty wrote:So growth stocks and value stocks behave exactly the same in down markets? Interesting.

And I am not asking about living off dividends.

Perhaps my questions weren't clear. I am asking about the value of dividends to overall returns, especially in down markets, and the stock-price implications of dividend paying corporations versus non-dividend paying corporations.
Yeah, OK, dividend-paying stocks may be more value-y, and thus may have some benefits, but the short answer is no: you won't find dividend-paying stocks providing meaningful additional ptoection during a downturn, and dividends are just growth in another format. Last crash Vanguard Small Value did slightly worse than Total Market - Dividend Growth did slightly better - all tanked together, though.
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denovo
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Re: Dividends and Market Slides

Post by denovo »

Dividend companies didn't provide any measure of protection in the last downturn. Look at this description of the Vanguard High Dividend Yield Fund.


https://personal.vanguard.com/us/funds/ ... =INT#tab=0
This index fund seeks to track a benchmark that provides broad exposure to U.S. companies that are dedicated to consistently paying larger-than-average dividends. In addition to general stock market risks, the fund’s emphasis on slower-growing, higher-yielding companies can also mean that its total return may not be as strong in a significant bull market.
So I guess conversely you would hope there was some protection during the down market. But it didn't turn out to be so.

In fact, the dividend fund did slightly worse. https://www.google.com/finance?q=vhdyx& ... sQe28oHYBw

Between July 2007-March 2009, the SP 500 lost 51 percent, and the High Dividend Yield Fund lost 53 percent.

There's nothing special about a dividend. Dividends are distributed at the discretion of the board and can be cut at any time. One of the reasons why the dividend fund probably got beaten down during the 2007-2009 recession was that a lot of the good dividend payers were financial companies that got hit hard and eventually had to eliminate their dividends. Maybe next recession the dividend funds will do marginally better, but who knows.

During the bear market of 2000-2002 when stocks lost 50 percent, the REIT Funds went up. I probably don't have to tell you, but that wasn't the case during the 2008-2009 bear market.

I would stick to the US Total Market Fund.
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fortyofforty
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Re: Dividends and Market Slides

Post by fortyofforty »

So, since a dividend is cash paid out by a company, Peter Lynch was partially right (it's been a long, long time so forgive me if my memory isn't correct) when he shied away from dividend paying companies. Lynch wanted the company to put that cash to work building value within the business, rather than returning it to shareholders via a dividend. Ultimately, the goal of investing is to get our money back and much more, and dividends are just one way (and not the best) to receive part of our money back. To me, it's counterintuitive to believe that dividend paying companies don't hold up better in downturns, but the data don't lie. Thanks for providing those.
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Riprap
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Re: Dividends and Market Slides

Post by Riprap »

Bill Bernstein said in Deep Value (or another of his recent mini books) that the dividend of the SP500 has never fallen by more than 50%. He said that in the context of someone living off a mostly stock portfolio with a low withdrawal rate.
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Re: Dividends and Market Slides

Post by alex_686 »

fortyofforty wrote:So, since a dividend is cash paid out by a company, Peter Lynch was partially right (it's been a long, long time so forgive me if my memory isn't correct) when he shied away from dividend paying companies. Lynch wanted the company to put that cash to work building value within the business, rather than returning it to shareholders via a dividend. Ultimately, the goal of investing is to get our money back and much more, and dividends are just one way (and not the best) to receive part of our money back. To me, it's counterintuitive to believe that dividend paying companies don't hold up better in downturns, but the data don't lie. Thanks for providing those.

From theory, it makes no difference if a company pays a dividend or not.

http://en.wikipedia.org/wiki/Modigliani ... er_theorem

The theory makes some assumptions, which is where it gets interesting for us. It assumes that the risk adjusted rate of return is the same for the market and for the company. That is, if the market is expected to return 10% that the company can find new projects that also yield 10%.

So what Peter Lynch is sayings is that he prefers growth companies because they have all of these great opportunities to invest in. As a passive investor I am a bit more skeptical. Growth companies do grow faster but I have to pay a higher price for those companies so it is a bit of a wash. In a downturn I am even more skeptical because there are few opportunities – unless you can do superior research to identify the company and time the purchase right. Which is not passive investing, so.....

In downturns, value companies tend to do better than growth companies and value companies tend to pay dividends. However that is a correlation, not a causation.
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jfn111
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Re: Dividends and Market Slides

Post by jfn111 »

The problems with dividends is that they can go away. Transocean's (RIG) high dividend wasn't sustainable during the downturn in oil exploration so the dividend didn't protect the stock price because most investors knew it would have to be slashed or eliminated.
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Re: Dividends and Market Slides

Post by staythecourse »

fortyofforty wrote:Do dividend paying stocks provide any measure of protection in a market downturn? The dividend yield is relatively low, but at least it's there. Does that provide any cushioning effect? Also, does the fact that many of the dividend paying companies tend to put them in the value category? If so, value stocks generally decline less than growth during market slides, don't they?
I will take the opposite position to the other posters and say YES it does provide protection. Dr. Bernstein in his new-er book "Rational Expectations" does discuss even in the WORST market periods (Great Depression and 2008 crisis) dividends were cut, BUT not that much. Think it was something like 1/4 to 1/3, but you would have to confirm with the book. That is not much at all considering the absolute disasters those equity periods produced. The math does support if one reinvests the dividends as the market is tanking one's peak to trough during these market bears are quite muted. I am sure you can just google it and find someone who has done the math.

So I would have to say YES it does provide protection. This is part of the reasoning of "stand there and do nothing" when the market tanks. It doesn't just mean not selling at inopportune times, but also let the normal course of auto investing with one's dividends payments to continue. This is even more muted if one continues to buy each month during these downswings. I know ?Bret Arends or something like that from WSJ had a great graph showing if there was an index to invest during the Great Depression and one continued to just invest every month AND reinvested their dividends their peak to trough was not 89% but 66% or so. Also the recovery of the losses was MUCH shorter then the 15 or so years that are usually quoted.

Good luck.
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JoMoney
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Re: Dividends and Market Slides

Post by JoMoney »

There is a distinction between "high dividend" and "dividend growth" stocks. Neither is a good representation of how value or growth styles are generally depicted, but high div would tend to be more value style and div growth more growth-y. Come up with a list of really high div stocks and it will probably contain stocks considered more risky, whereas a list of stocks that have consistently raised dividends over time will tend to be considered "blue chip" "widow and orphans" stocks.
Different styles sometimes seem to respond differently in different situations.
Fads can develop that drive prices up in any niche of the market, as well as the broad market itself. There is no certainty with anything in stocks, things can (and do) change all the time.
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Re: Dividends and Market Slides

Post by nedsaid »

People have to realize that the 2008-2009 financial crisis was a once in a lifetime event and there wasn't much that worked in that environment. A lot of dividend and value stocks tend to be financial stocks and this sector was hit particularly hard. No strategy works all the time.

The perception has been that dividends give an investor some downside protection in bad markets. We also perceive the cushioning effect of regular interest payments from bonds in such an environment.

JoMoney makes a good point about the difference between high dividends and dividend growth. My preference would be for dividend growth.
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Texas Radio
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Re: Dividends and Market Slides

Post by Texas Radio »

If you reinvest dividends you will purchase more shares in a down market. This may accelerate the compounding effect. Dividend paying stocks have historically trounced non-dividend paying stocks in total return. This is even more pronounced in stocks that have a history of annual dividend increases.
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Re: Dividends and Market Slides

Post by linenfort »

nedsaid wrote:People have to realize that the 2008-2009 financial crisis was a once in a lifetime event
Are you sure?
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ogd
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Re: Dividends and Market Slides

Post by ogd »

Texas Radio wrote:If you reinvest dividends you will purchase more shares in a down market. This may accelerate the compounding effect. Dividend paying stocks have historically trounced non-dividend paying stocks in total return. This is even more pronounced in stocks that have a history of annual dividend increases.
This is manifestly not true, except maybe to the extent that dividend overlaps with value, which has been known to outperform historically and also shown to be the dominating factor (i.e. the difference maker -- between value stocks, dividends don't make a difference, whereas between dividend stocks the value factor does).

Dividend reinvestment in downmarkets is already captured in total return numbers and it tells the same story.

As for "the history of annual dividend increases", if you look at today's dividend growers and their performance in the past, you will probably find outperformance but it will be a worthless factoid as an investor today -- much like investing in companies with outsized price appreciation since that investment would have been great, if only you had a crystal ball to select them. Companies that have done well, have done well, but this isn't a predictor for "will do well".
nedsaid wrote:The perception has been that dividends give an investor some downside protection in bad markets. We also perceive the cushioning effect of regular interest payments from bonds in such an environment.
No. There is a huge difference between bond payments and dividend payments. The former are not only guaranteed but have a time limit after which your relationship with the bond issuer ends. The latter are very much subject to the precise fortunes of the underlying company -- and after any particular period of "dividend stability" you still have to worry about future performance of the company or your stock might be so depreciated as to take away any profits the dividends might have given you. Interestingly enough, a note promising to pay all the dividends of company X for 5 years would be a much safer asset than shares of company X, but when re-combined with the share value you just get regular stock risks and returns.

In other words, if I have a business with the usual risks and I strive to pay $X a quarter from that business, it does not make the business any safer.
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Re: Dividends and Market Slides

Post by fortyofforty »

ogd wrote:In other words, if I have a business with the usual risks and I strive to pay $X a quarter from that business, it does not make the business any safer.
But wouldn't an investment in the stock of said company be safer, especially if that company was not striving to make dividend payments but had plenty of cash on hand each quarter to make the payments?
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Re: Dividends and Market Slides

Post by ogd »

fortyofforty wrote:
ogd wrote:In other words, if I have a business with the usual risks and I strive to pay $X a quarter from that business, it does not make the business any safer.
But wouldn't an investment in the stock of said company be safer, especially if that company was not striving to make dividend payments but had plenty of cash on hand each quarter to make the payments?
Maybe, but in this case it's the cash that makes a difference by diluting the risk (and returns) of the company, something that you can do on your own if you want to. It's not the dividend payment per se. There are plenty of companies that have cash but don't pay dividends.

Moreover, the cash cushions that are earmarked for dividends are small in the grand scheme of things and the horde of stock analysts take cash into account at all times.

Again, if dividends made a difference in safety we'd see it plainly in total returns during recessions. We don't.
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Re: Dividends and Market Slides

Post by Hunky-dory »

fortyofforty wrote:But wouldn't an investment in the stock of said company be safer, especially if that company was not striving to make dividend payments but had plenty of cash on hand each quarter to make the payments?
It is not unusual for companies that pay dividends to use debt financing or asset sales to maintain dividend levels before cutting the dividend. When a shareholder base is attracted to the company because of its dividend, it is very hard to take that dividend away. It will be interesting to see what the big oil companies do over the next couple of months, as many are attractive to investors because of their dividends. I would not be surprised if they took on debt to maintain their current dividend levels.
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Re: Dividends and Market Slides

Post by JimmyJammy »

I came across this 40 point dividend info sheet on Dividend.com:
http://www.dividend.com/dividend-educat ... ould-know/

Item #35 has a chart showing volatility of dividend paying S&P stocks vs. non-dividend paying S&P stocks (1972-2013), followed by this claim:

"The data also reveals that dividend-paying stocks tend to perform better during bull markets as well as bear markets compared to their non-dividend-paying counterparts."

So, it that claim disputed here?
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Re: Dividends and Market Slides

Post by Noobvestor »

JimmyJammy wrote:I came across this 40 point dividend info sheet on Dividend.com:
http://www.dividend.com/dividend-educat ... ould-know/

Item #35 has a chart showing volatility of dividend paying S&P stocks vs. non-dividend paying S&P stocks (1972-2013), followed by this claim:

"The data also reveals that dividend-paying stocks tend to perform better during bull markets as well as bear markets compared to their non-dividend-paying counterparts."

So, it that claim disputed here?
Yes - the idea that dividend-paying stocks perform better in all conditions, proposed by Dividend.com, seems a little suspiciously self-serving no? ;)
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ogd
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Re: Dividends and Market Slides

Post by ogd »

JimmyJammy wrote:I came across this 40 point dividend info sheet on Dividend.com:
http://www.dividend.com/dividend-educat ... ould-know/

Item #35 has a chart showing volatility of dividend paying S&P stocks vs. non-dividend paying S&P stocks (1972-2013), followed by this claim:

"The data also reveals that dividend-paying stocks tend to perform better during bull markets as well as bear markets compared to their non-dividend-paying counterparts."

So, it that claim disputed here?
Yes. A rigorous analysis would try to separate out the value factor, which we know has outperformed over the period.

Dividend stocks tend to overlap with value stocks to a significant degree. Like I was saying above, choosing value as the focus is not a simple matter of equal choice: value is the one with the explanatory power, which studies discern by looking at "value within dividend" (where we still find outperformance) vs "dividend within value" (where we don't).

It's easy enough to invest in value directly if one chooses to, without hurting as much from taxes as a purely dividend strategy would. However, the usual cautionary tale for past performance applies, with an even stronger twist: value is now known and accepted, which may hurt it going forward. In fact, as far as I can tell the outperformance of value since it's been widely publicized came primarily through avoiding the dot-coms in 2000 (which is a big contributor to your chart as well). It was a significant win, and you could always claim that it's by design, but just the same one might suspect it was by accident and the next sectoral crash could easily be in a value sector. Who knows.
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Re: Dividends and Market Slides

Post by nisiprius »

fortyofforty wrote:Do dividend paying stocks provide any measure of protection in a market downturn? The dividend yield is relatively low, but at least it's there. Does that provide any cushioning effect? Also, does the fact that many of the dividend paying companies tend to put them in the value category? If so, value stocks generally decline less than growth during market slides, don't they?
I generally ignore "tends-to" claims. They often fail to hold up if I simply look at the past for myself, and even when the claimed effect exists it's usually weak. You really need to look for yourself, but I am going to tell you the sort of thing I've always found: things like "fell 48% instead of 53% during 2008-2009," big deal, or "seemed to protect during one particular market decline but not another."

Stocks are stocks. Claims for predictable differences in behavior between different categories of stock are questionable. And when you do find them, they get more questionable when you try to take risk into account.

Claims for predictable differences in behavior between stocks and bonds are robust. People hate the fact that bonds have lower return, but at least they really do have lower risk.

Now let me do my own check. Whatever I pick as a good example of dividend stocks, dividend stock fans always say I picked The Wrong One so I keep trying different ones. How about, say, comparing the 500 Index Fund to a) T. Rowe Price Equity Income Fund, PRFDX, "The fund's objective is to seek a high level of dividend income and long-term capital growth primarily through investments in stocks" and b) Vanguard's own Equity Income Fund, VEIPX, "designed to provide investors with an above-average level of current income while offering exposure to the stock market... the fund typically invests in companies that are dedicated to consistently paying dividends."

Source: Morningstar

First, overall. If you look at total return, do you see any evidence for dividend stocks having higher OR lower total return than stocks in general? I don't. I do see that the two dividend-oriented funds did not participate in "irrational exuberance," if that's a good thing.

Image

Second, 2008-2009, testing the idea of downside protection, with Total Bond (yellow) added for comparison. The chart shows what would have happened to $10,000 invested in 12/31/2007. I think the big message here is that there isn't that much difference between the three stock funds. A drawdown of 52%, 55%, 51%... if you want to call 51% instead of 52% "downside protection" be my guest, but I don't. Meanwhile, dull old Total Bond may be a drag on return but it really truly did provide comfort in 2008-2009.

I want meaningful protection during market slides, and I use bonds and accept that lower risk comes with lower returns. I just don't think you can get robust, meaningful risk reduction by choosing various types or flavors of stock.

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Re: Dividends and Market Slides

Post by Tamales »

I suppose you could argue that even if there was strong correlation and the 1.95% dividend yield for the S&P500 (at the end of 2014) gave you a one-for-one cushion, is 1.95% really going to make any notable difference if there's a 30-60% thrashing of the S&P500?

There is a really interesting market history slide set from Merrill-Lynch (it's from 2012 and I'm sure some of you have seen it before). The 2015 version hasn't been made public. Here's the 2012 slide deck: http://www.merrilledge.com/publish/cont ... ce1800.pdf

As far as dividends go, there are some graphs along with a few factoids on the following slides:
p60: 10 yr treasury and dividend yield spread since 1871
p63 US dividend yield since 1871
p64 Real dividend yield since 1871
(and various dividend-related data points for other countries on other slides)
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Re: Dividends and Market Slides

Post by fortyofforty »

OK, so stocks of companies that pay dividends drop when the market drops. That's a given. Yet, the claim that they fall equally as fast, in general, as non-dividend payers, seems to be false. We invest in Vanguard to put an extra 0.50% or 0.65% of management fees in our pockets. Why turn away from a 1.95% dividend yield, even if the stocks fall as fast and as far? And I am not so worried about whether dividend paying companies tend to fall in the value category, or if value companies tend to pay dividends. It's a "chicken or egg" thing, to me. I certainly did not mean to imply, if I did, that dividend stocks are a safe haven from market slides. I know stocks are stocks.
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Re: Dividends and Market Slides

Post by ogd »

fortyofforty wrote:Yet, the claim that they fall equally as fast, in general, as non-dividend payers, seems to be false.
It's true.
fortyofforty wrote:We invest in Vanguard to put an extra 0.50% or 0.65% of management fees in our pockets. Why turn away from a 1.95% dividend yield, even if the stocks fall as fast and as far?
Because it's not free money. It's your own money, which used to exist inside the company, being paid back to you with a detour through the IRS. Which, by the way, amounts to about 0.4%, and this time it's certain.
fortyofforty wrote:And I am not so worried about whether dividend paying companies tend to fall in the value category, or if value companies tend to pay dividends. It's a "chicken or egg" thing, to me.
Like I said twice above, it's not an arbitrary choice. One can distinguish between the chicken and the egg in this case, and value is the meaningful factor, not dividend.
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Re: Dividends and Market Slides

Post by Ricola »

I like getting the dividends in cash. :mrgreen:

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Re: Dividends and Market Slides

Post by dbr »

I don't have a problem debating possible subtle differences in risk and return, especially at the extreme downside of the returns distribution, in a sub-selection of the total stock market based on dividend paying. I have a big problem if lying behind that is an investor who is misunderstanding the facts, especially if under the delusion that dividends are free money. Sometimes it is difficult to see for sure which case is at hand.
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Re: Dividends and Market Slides

Post by fortyofforty »

Dividends are not "free money". Nobody thinks they are, any more than dividends paid by a mutual fund are "free money". They are cash in the company, or they are cash in the fund, until paid out to investors. The goal for both is for us to get our investment back, and more. One way to see our money back is the immediate payout of cash, right into our pocket, rather than relying purely on price appreciation of a stock or fund share. I for one am under no illusions about the origin of dividend money, despite the implications otherwise.
ogd wrote:
fortyofforty wrote:Yet, the claim that they fall equally as fast, in general, as non-dividend payers, seems to be false.
It's true.
Then, with a dividend on top of the share price, you're saying value stocks actually fall even farther and faster than growth stocks, measured by share price at least.
fortyofforty wrote:We invest in Vanguard to put an extra 0.50% or 0.65% of management fees in our pockets. Why turn away from a 1.95% dividend yield, even if the stocks fall as fast and as far?
Because it's not free money. It's your own money, which used to exist inside the company, being paid back to you with a detour through the IRS. Which, by the way, amounts to about 0.4%, and this time it's certain.
I understand that dividends are cash sitting inside the company, then paid out. But if a company sits on the money, then squanders it or blows it on bad ideas, it's gone. If they send you a check, which you may use to invest otherwise, it's in your own pocket. You'd want a growth oriented company using its cash to expand product lines, or innovate, or buy up competitors, or hire the best people. A value oriented company might simply generate cash and pay it out. All of those factors ought to be reflected in the share price (at least faster and more efficiently than I could react).
fortyofforty wrote:And I am not so worried about whether dividend paying companies tend to fall in the value category, or if value companies tend to pay dividends. It's a "chicken or egg" thing, to me.
Like I said twice above, it's not an arbitrary choice. One can distinguish between the chicken and the egg in this case, and value is the meaningful factor, not dividend.
If value is the meaningful factor, then why not take your value and put the dividends to work as you see fit? Unless somebody is claiming that value stocks fall faster and farther than growth stocks (and many have said exactly the opposite), dividends might be a slight reward for those who can put up with investing in non-sexy growth stocks.

No reason for anyone to get bent out of shape on this. Seriously. I'm unsubscribing to the thread. I'm done.
Last edited by fortyofforty on Thu Mar 12, 2015 6:15 pm, edited 1 time in total.
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Re: Dividends and Market Slides

Post by nisiprius »

Dividends are just a kind of controlled money leak. There's nothing magic about them. What you receive in dividends is money the company can't invest in its own growth. The company that retains dividends grows faster. The company that pays dividends grows slower.

In the world of the 1960s, where mutual funds were a sideshow, stocks were usually traded in round lots of 100, and it cost $100-$150 in brokerage fees to do it, it was good personal strategy to choose categories of stocks whose money leaks happened to match the amount of money you want to draw, so the young investor invested in "growth stocks" that did not pay dividends, and the retiree invested in "widows and orphans" stocks that did.

In the world of mutual funds, we can redeem arbitrarily small or large amounts of any size we want any time we want, often at zero cost. If we leave the fund alone, it distributes dividends at a fast or slow rate and, conversely, grows at a slow or fast rate. But we can set our own policy and choose our own withdrawal rate, and, thus, the growth rate.

We can set up automatic reinvestment on a high-dividend mutual fund, drawing none of the dividends it pays out, and our number of shares will grow and our account value will grow faster than the fund itself. We can set up an automatic withdrawal from a low-dividend mutual fund, selling $100 a month or whatever we like, and we will receive more each month, but our number of shares will drop and our account value will grow more slowly than the fund itself.

If we choose to withdraw $100 a month from an stock mutual fund, that $100 lines our pockets with folding cash that is just as green as dividend cash.

To a rough approximation it shouldn't matter. To believe that it does matter, we have to believe that dividends are an easy, objective measurement of management integrity and that as a group, dividend paying companies are just plain better than other companies.

But I've noticed that dividend enthusiasts frequently reject any kind of indexing or index fund approach. It is usually a stock-picking approach, with dividends simply being one of many considerations the stock-picker brings to his decisions.
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Re: Dividends and Market Slides

Post by randomguy »

fortyofforty wrote:
I understand that dividends are cash sitting inside the company, then paid out. But if a company sits on the money, then squanders it or blows it on bad ideas, it's gone. If they send you a check, which you may use to invest otherwise, it's in your own pocket. You'd want a growth oriented company using its cash to expand product lines, or innovate, or buy up competitors, or hire the best people. A value oriented company might simply generate cash and pay it out. All of those factors ought to be reflected in the share price (at least faster and more efficiently than I could react).
And if a company invests the money efficiently it grows faster without a tax drag. Historically companies with similiar factor loadings that don't pay out dividends have higher total return than the ones that do. You can debate if that is a cause or a correlation. In 2008, would you have been happier owning a stock that dropped 40% in value and paid 0% dividends or one that dropped 43% and paid out a 3% dividend? Dividends tend to be a trailing indicator. They get raised slower and drop slower than market price changes. You can debate if that is good or bad. For minor market hiccups it is probably good (divs just don't raised) but when the big fluctuations happen, it is unclear if it is remotely helpful.
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ogd
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Re: Dividends and Market Slides

Post by ogd »

fortyofforty wrote:
ogd wrote:
fortyofforty wrote:Yet, the claim that they fall equally as fast, in general, as non-dividend payers, seems to be false.
It's true.
Then, with a dividend on top of the share price, you're saying value stocks actually fall even farther and faster than growth stocks, measured by share price at least.
Yes.

To be precise, if you use the dividends to buy more shares in the company, you are in the same place, which is if you think about it even worse. This is what total return is. There is no room for a free lunch in the numbers.
fortyofforty wrote:
ogd wrote:Because it's not free money. It's your own money, which used to exist inside the company, being paid back to you with a detour through the IRS. Which, by the way, amounts to about 0.4%, and this time it's certain.
I understand that dividends are cash sitting inside the company, then paid out. But if a company sits on the money, then squanders it or blows it on bad ideas, it's gone. If they send you a check, which you may use to invest otherwise, it's in your own pocket. You'd want a growth oriented company using its cash to expand product lines, or innovate, or buy up competitors, or hire the best people. A value oriented company might simply generate cash and pay it out. All of those factors ought to be reflected in the share price (at least faster and more efficiently than I could react).
The company had better not mismanage your money, seeing how it's sitting on the other 97% of it.

There are times when sticking to a dividend schedule to appease ... well, you ... could cause equally boneheaded decisions for the company. Like being forced to borrow at high rates because of deteriorating credit conditions, instead of using that nice cash cushion.

Anyway, you can debate this theoretically all you want, in practice it turns out not to matter. Paying out a dividend does not a better executive team make.

If you want money out of the company, sell some shares. History shows that it doesn't hurt in any particular way at any particular time (see total return argument above).
fortyofforty wrote: If value is the meaningful factor, then why not take your value and put the dividends to work as you see fit? Unless somebody is claiming that value stocks fall faster and farther than growth stocks (and many have said exactly the opposite), dividends might be a slight reward for those who can put up with investing in non-sexy growth stocks.
Because I could take the value without paying 20% of the dividends to the IRS, knowing that selecting for dividends doesn't do anything extra. If I were confident that value will continue to outperform, which I'm not, so instead I take the path of least resistance and buy everything equally.
fortyofforty wrote:No reason for anyone to get bent out of shape on this. Seriously.
You are on bogleheads advocating stock picking on what must be the world's simplest selection criterion. You can't expect this to go unchallenged. Investors are hurting themselves daily through lack of diversification, taxes, and what I'd call the "behavioral exit tax" when their strategy happens to outperform for a while (see it all the time). And it's all based on arguments that don't stand up to scrutiny.
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Re: Dividends and Market Slides

Post by fortyofforty »

ogd wrote:
fortyofforty wrote:No reason for anyone to get bent out of shape on this. Seriously.
You are on bogleheads advocating stock picking on what must be the world's simplest selection criterion. You can't expect this to go unchallenged. Investors are hurting themselves daily through lack of diversification, taxes, and what I'd call the "behavioral exit tax" when their strategy happens to outperform for a while (see it all the time). And it's all based on arguments that don't stand up to scrutiny.
As I wrote initially:
fortyofforty wrote:Do dividend paying stocks provide any measure of protection in a market downturn? The dividend yield is relatively low, but at least it's there. Does that provide any cushioning effect? Also, does the fact that many of the dividend paying companies tend to put them in the value category? If so, value stocks generally decline less than growth during market slides, don't they?
So if, by asking a question, I am "advocating stock picking" based on one thing or another, then this board has serious issues.
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Re: Dividends and Market Slides

Post by ogd »

nisiprius wrote:But I've noticed that dividend enthusiasts frequently reject any kind of indexing or index fund approach. It is usually a stock-picking approach, with dividends simply being one of many considerations the stock-picker brings to his decisions.
And here's I think where the dirty secret lies. The current crop of amateur dividend list makers / stock pickers is guilty of selection and survivorship bias to a degree that would give an investment company lawyer stomach ulcers. Over and over they pick the current payers / growers and show their historical performance, whereas a mutual fund has to live with the returns of their selection as of 5 years ago. Their conclusion is that mutual funds don't work for this stuff and one must make or track lists, which are far more "flexible" in their return claims.
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Re: Dividends and Market Slides

Post by JimmyJammy »

As a New Yorker, I'm feeling the pain of a higher-than-average tax rate on dividends here. Time to move to Seattle.

Here's a state by state breakdown: http://www.forbes.com/sites/baldwin/201 ... -lovers/2/

The same author is in the anti-dividend camp:
http://www.forbes.com/sites/baldwin/201 ... d-for-you/

sourced study: http://taxfoundation.org/article/united ... end-income
Last edited by JimmyJammy on Sun Mar 01, 2015 4:30 pm, edited 1 time in total.
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Re: Dividends and Market Slides

Post by ogd »

fortyofforty wrote:Do dividend paying stocks provide any measure of protection in a market downturn? The dividend yield is relatively low, but at least it's there. Does that provide any cushioning effect? Also, does the fact that many of the dividend paying companies tend to put them in the value category? If so, value stocks generally decline less than growth during market slides, don't they?

So if, by asking a question, I am "advocating stock picking" based on one thing or another, then this board has serious issues.
You know full well that it's not about the question but about the "claim that they fall as fast ...seems to be false", the "chicken and egg", the "blowing on bad ideas" and perhaps most of all the "turning away 1.95% dividend yield" as if it would disappear into a black hole, all of which point to a stock selection criterion.
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Re: Dividends and Market Slides

Post by knapp9 »

I'd offer a little different perspective. I think the answer depends on your investment strategy.

Roughly 25% of my nest egg is in 25 (+/-) dividend stocks. I bought most of them in '09 and '10, so admittedly I am earning a sinful amount of dividends on invested capital vs. today's market. They provide about 45% of my retirement income today. The 75% balance of my nest egg funds the remaining 55% of my income and comes from a "total return" investment strategy that I've accumulated over my working lifetime.

Have those dividend stocks provided me with any measure of measure of protection in a market downturn? Not really. Their capital appreciation since purchase has been on average in line the S&P 500. Roughly half have done better than the S&P since I bought them. The other half have not. My total return investments on the other hand, have mirrored the market in both up and down periods as is to be expected. If the stock market tanks tomorrow, I plan on staying the course.
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Re: Dividends and Market Slides

Post by fortyofforty »

ogd wrote:
fortyofforty wrote:Do dividend paying stocks provide any measure of protection in a market downturn? The dividend yield is relatively low, but at least it's there. Does that provide any cushioning effect? Also, does the fact that many of the dividend paying companies tend to put them in the value category? If so, value stocks generally decline less than growth during market slides, don't they?

So if, by asking a question, I am "advocating stock picking" based on one thing or another, then this board has serious issues.
You know full well that it's not about the question but about the "claim that they fall as fast ...seems to be false", the "chicken and egg", the "blowing on bad ideas" and perhaps most of all the "turning away 1.95% dividend yield" as if it would disappear into a black hole, all of which point to a stock selection criterion.
[OT comments removed by admin LadyGeek]

If it makes you sleep better, know that the vast majority of my investable assets are invested in capitalization weighted index funds. By far the vast majority. I sleep just fine with that.
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Re: Dividends and Market Slides

Post by nedsaid »

linenfort wrote:
nedsaid wrote:People have to realize that the 2008-2009 financial crisis was a once in a lifetime event
Are you sure?
Well, I am 55 years old and I hadn't seen anything like it before. I don't know about anyone else but I was really, really scared.
A fool and his money are good for business.
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Re: Dividends and Market Slides

Post by linenfort »

What I mean is, who's to say something equally bad won't happen during our lifetimes?
Not that we can't handle it. We can.
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Re: Dividends and Market Slides

Post by TJSI »

Nisiprius said:

"The company that retains dividends grows faster. The company that pays dividends grows slower."

Although this may have some intuitive appeal, the facts are otherwise.

Suggest those interested read:

Surprise! Higher Dividends = Higher Earnings Growth by Arnott & Asness

And for an explanation why (with some colorful language!) see:

Of Earnings, Dividends, and Agency By William Bernstein in Efficient Frontier.

TJSI
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Re: Dividends and Market Slides

Post by Leesbro63 »

nedsaid wrote:People have to realize that the 2008-2009 financial crisis was a once in a lifetime event
Let's hope
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Re: Dividends and Market Slides

Post by garlandwhizzer »

Stocks that pay good dividends tend to be value stocks, large cap stocks, and to operate in mature seasoned markets not rapidly growing ones. Their cash flows in general tend to be more reliable but to grow more slowly than their opposite: smaller cap growth stocks in rapidly expanding and rapidly changing markets. In the tech crash of 2000- 2003 dividend payers held up better than high flying tech, especially the negative PE, all hype small cap internet stocks where a 90% drop in market value was not uncommon. In the 2008 - 2009 collapse dividend payers didn't hold up well because of their heavy weighting in the financial sector, the epicenter of the collapse. I expect the conclusion is that there is no reliable way to know beforehand how dividend payers will handle a market decline unless you know in advance where the bubble is going to burst. Even in declines when they are expected to hold up better they do so only to minimal extent. A falling tide lowers all boats and when that tide is a tsunami (2008-9) all equity boats drop dramatically. There is nowhere in the equity space to hide out. The only thing that shines brightly in such a situation is high quality bonds.

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Re: Dividends and Market Slides

Post by nisiprius »

nedsaid wrote:
linenfort wrote:
nedsaid wrote:People have to realize that the 2008-2009 financial crisis was a once in a lifetime event
Are you sure?
Well, I am 55 years old and I hadn't seen anything like it before. I don't know about anyone else but I was really, really scared.
Me, too.

However, the 1937 crash was about the same depth and considerably longer in duration than 2008-2009, and it occurred only eight years after 1929. So there have been two crashes as bad or worse than 2008-2009 in a period of time much shorter than an average lifetime.
Last edited by nisiprius on Sun Mar 01, 2015 8:54 pm, edited 1 time in total.
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Re: Dividends and Market Slides

Post by nisiprius »

TJSI wrote:Nisiprius said:

"The company that retains dividends grows faster. The company that pays dividends grows slower."

Although this may have some intuitive appeal, the facts are otherwise.
By "growth" I meant "capital appreciation." Perhaps your authors were referring to total return (growth of the investment assuming reinvested dividends).

Source: Morningstar
On this price chart, the dividend-focussed fund, Vanguard Equity VEIPX, green, showed far less capital appreciation than Vanguard 500 index, VFINX, orange. Overall, 200% growth for the dividend-focussed fund versus 600% for the S&P 500 index fund.

The dividend-focussed fund paid out more in dividends, grew capital more slowly, and had about the same total return as 500 Index. They had about the same total return, they got it in different ways.

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Re: Dividends and Market Slides

Post by IPer »

Well the S&P 500 has a slightly higher dividend than Total Stock. It has also outperformed by .2%
So the difference is that .2% Jack Bogle asked about in the interview? :wink: :beer

I believe Compound Interest vs Compound Dividends is a more interesting discussion.
I also like the Living off Dividends discussion due to the Tax Implications. But this only works
if an investor has enough anticipated dividends to cover at least a large portion of their nut. I
used to think it must cover all of the nut, but with social security, pensions, other forms of
income, it now looks like much less than an all or nothing proposition.
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Re: Dividends and Market Slides

Post by Ricola »

nedsaid wrote:
linenfort wrote:
nedsaid wrote:People have to realize that the 2008-2009 financial crisis was a once in a lifetime event
Are you sure?
Well, I am 55 years old and I hadn't seen anything like it before. I don't know about anyone else but I was really, really scared.
Agree, I will always remember the morning when I was sitting in the back of a hotel airport bus with some pilots in DC waiting to leave for the airport. They were all talking about the market drops of a 1000 or more points each day. Market was going from 7000 to 6000 with no end in sight. People on that bus were scared, talking about their 401k losses and not knowing the future.
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Re: Dividends and Market Slides

Post by TJSI »

Nisiprius,

The Arnott & Asness paper shows that higher dividend payout in general means higher earnings growth (see Fig 2 of their paper). They were not talking about total return. And higher earnings in general should mean higher price appreciation.

William Bernstein discusses why this is so.

TJSI
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Re: Dividends and Market Slides

Post by foodstamp »

I do a combination of dividend growth stocks and indexing.

It works for me.

Psychologically I love getting residual income.

I understand that doesn't mean anything, but I sleep well at night with my JNJ and other boring dividend stocks.
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Re: Dividends and Market Slides

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