another look at dividend paying stocks and valuations

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nedsaid
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Re: another look at dividend paying stocks and valuations

Post by nedsaid »

Larry, I read through the articles and in the shorter term your predictions were wrong. I do think you will be proven correct longer term as valuations really do matter. High Dividend did better than you thought at the time.

Larry, your articles also warned against Dividend Growth. Let me summarize what I found by looking at the relative performance of Large Value, High Dividend, the S&P 500, and Dividend Growth. When you look at the growth of $10,000 on Morningstar, Dividend Growth left the other three groups in the dust. It went down less than the S&P 500 during the 2008-2009 financial crisis and maintained its edge on the way back up. High Dividend and the S&P 500 pretty much tracked each other with a small edge to the benchmark index. Large Value did the worst of the four groups that I compared. This seems to contradict the information in your articles.

What the charts told me is not that you were wrong necessarily, but I think you underestimated the amounts of money that investors would throw at Dividend Growth and High Dividend. Contrary to what you wrote, High Dividend turned out to be a great Value strategy since the 2008-2009 bear market, High Dividend bounced back better than plain old value. Dividend Growth did best of all despite your warnings. In the short run, investors would have been best served to ignore your advice. In the longer run, I suspect you will be proven right.

My best guess is that even Dividend Growth will not be a good place to hide when the markets turn. My next best guess is that High Dividend will fare much worse than Dividend Growth. The S&P 500 will do what it is supposed to do and my guess is that plain Jane Large Cap Value will do the best of the four groups in the future.

Plain Old Large Value has been left behind because the money flows went to Dividend Growth and to High Dividend. The relative performance of Dividend Growth to the S&P 500 and the strong relative performance of High Dividend to Value is the opposite of what your articles predicted in 2010-2012. My suspicion is that you will be proven right given more time.
A fool and his money are good for business.
Tozan13
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Re: another look at dividend paying stocks and valuations

Post by Tozan13 »

For someone with no finance background, nor more than a few years of investing experience, this is an interesting thread. That said, I am not sure why the topic of dividends brings out such strong (seeming) negative emotions from some. Sure, when someone asks about a dividend strategy here, it's fine to point out that dividends aren't "magical"--that you don't have any more money after the dividend than before--and that for those using a taxable account, dividends can be sub-optimal in the sense of taxes. One can also point out that a company paying a high dividend may in fact be in serious trouble, or that high-dividend funds are more expensive to own (and tend to be less diversified) than a full-market index fund. That's all well and good, and I'm glad to have received the instruction from so many articulate posters on this forum.

My question is: why continue the argument after that? If a dividend strategy is sub-optimal, then those who use it will figure it out on their own--some years down the line, maybe, or the next time they do their taxes, whenever. My understanding is that dividend strategies worked better in the past in part because the high costs associated with buying and selling shares made it the most cost-effective way of making money from stocks. Our current world, in which we can sell fractions of a share at no cost, is perhaps fundamentally different from the old one in that regard. If so, then bravo to those who explain it to the rest of us who were introduced to the market by an older generation who came of age when dividend investing was the wise thing to do.

My point is, let's not get carried away in argument. As several posters in other threads have shown with charts, a sufficiently diverse index of dividend stocks has, in the last ten years, achieved a similar return as the broader market, albeit with more expensive funds and in a less tax-efficient manner. Perhaps their portfolio could be improved, but it's not doing terribly, and if they're achieving their investing goals then why put them down?

Happy Memorial Day :)
"An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can't easily recognize that they are the same." -Daniel Kahneman
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backpacker
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Re: another look at dividend paying stocks and valuations

Post by backpacker »

larryswedroe wrote:Dug up a list of some pieces on dividend paying strategies I wrote for CBS a while back. Thought it might be helpful.
http://www.cbsnews.com/8301-505123_162- ... end-yield/
fortyofforty wrote:Thanks for all those links, Larry. I'm working my way through them. A common theme seems to be focusing on dividends is a worse-performing strategy than a value focus.
nedsaid wrote: One of your articles mentioned that High Dividend was a value strategy but that there were better ways to capture the premium. However when I pulled up the chart showing the performance of the Vanguard High Dividend Yield Index since inception, High Dividend has actually OUTPERFORMED plain old Large Cap Value.
Dividend investing is a perfectly good value strategy. Larry's articles on this suffer from US myopia. Which value strategies outperform over which periods of time is mostly a matter of chance. Historically, dividend yield strategies have done much better in other markets than in the US. This chart is from the 2011 Credit Suisse Yearbook. Notice that the US had the fourth worst dividend premium. The premium was higher in 18 out of the 22 countries.

Image

That said, I see no reason to tilt only towards high dividend stocks. Most value indexes use dividend yield as one factor among many. Why use only one value strategy when you can use many?
Last edited by backpacker on Mon May 25, 2015 12:36 pm, edited 4 times in total.
Valuethinker
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Re: another look at dividend paying stocks and valuations

Post by Valuethinker »

ogd wrote: Speaking of bond-like, a bond without a maturity date would in fact have immense volatility, rivaling that of stocks. Such instruments don't exist, to my knowledge, but for an idea of what it would look like, check out the very long fund EDV which is definitely not for the faint of heart despite being backed by the full faith and credit. s.
UK government has perpetual gilts, although the Chancellor is buying them in (he can now refinance at even lower rates).

http://www.dmo.gov.uk/reportView.aspx?r ... rtpage=D1A

go down the 4 pages and you will find the ultra long (50 year) and perpetual bonds.

http://www.dmo.gov.uk/docs/publications ... 120525.pdf

Some banks issued perpetual bonds as a form of capital which the regulators were prepared to treat as equity like.
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nedsaid
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Re: another look at dividend paying stocks and valuations

Post by nedsaid »

Tozan13 wrote:For someone with no finance background, nor more than a few years of investing experience, this is an interesting thread. That said, I am not sure why the topic of dividends brings out such strong (seeming) negative emotions from some. Sure, when someone asks about a dividend strategy here, it's fine to point out that dividends aren't "magical"--that you don't have any more money after the dividend than before--and that for those using a taxable account, dividends can be sub-optimal in the sense of taxes. One can also point out that a company paying a high dividend may in fact be in serious trouble, or that high-dividend funds are more expensive to own (and tend to be less diversified) than a full-market index fund. That's all well and good, and I'm glad to have received the instruction from so many articulate posters on this forum.

My question is: why continue the argument after that? If a dividend strategy is sub-optimal, then those who use it will figure it out on their own--some years down the line, maybe, or the next time they do their taxes, whenever. My understanding is that dividend strategies worked better in the past in part because the high costs associated with buying and selling shares made it the most cost-effective way of making money from stocks. Our current world, in which we can sell fractions of a share at no cost, is perhaps fundamentally different from the old one in that regard. If so, then bravo to those who explain it to the rest of us who were introduced to the market by an older generation who came of age when dividend investing was the wise thing to do.

My point is, let's not get carried away in argument. As several posters in other threads have shown with charts, a sufficiently diverse index of dividend stocks has, in the last ten years, achieved a similar return as the broader market, albeit with more expensive funds and in a less tax-efficient manner. Perhaps their portfolio could be improved, but it's not doing terribly, and if they're achieving their investing goals then why put them down?

Happy Memorial Day :)
Yes, you have found the same thing that I have. There are all kinds of posts here about a "dividend cult" and how irrational it supposedly is. But there seems to be a lot of emotion on the other side of the argument too. Sometimes you have to agree to disagree.

I started my first stock mutual fund in July of 1984. I started with individual stocks in a brokerage office that believed in value investing and favored dividends, that was sometime in 1988. The commission rate was about 3% on a trade, so the in and out would run you about 6%. Hence a low turnover, value and dividend oriented philosophy. Get paid while you wait was a common saying of those brokers. A lot of what I have posted comes from what I learned from those brokers.

My largest holding in my retirement accounts is a US Total Stock Market Index fund. I also hold some pretty aggressive earnings and price momentum funds. I do a whole lot more than collect dividends. But somehow, I feel the need to defend the honor of a tried and true method of investing.

It is a bit annoying when people say that investing in individual stocks is too risky and that it can't be done. Folks have done it for years and enjoyed success. Other folks say that dividends don't matter even though investors have had a positive experience with this method of investing. It is like the Bumblebee that isn't supposed to be able to fly but somehow it didn't get the memo and flies on. People say it can't be done and yet people do the very things that are supposedly not optimal and succeed anyway.

I deeply admire and respect Larry Swedroe and his articles on posts here have been a big influence. I have repeated a lot of his concepts and statements. The fact is that his advice was wrong at least in the short term though I believe that longer term he will be vindicated. But he certainly is not infallible.

What I will say is that market-cap weighted indexing is a terrific way to invest. It beats most anything else out there. I really have no argument with the indexing advocates.

I have tried factor investing for many years without realizing it and Larry Swedroe's writings have in my mind vindicated my investing practices. I learned from him the "why" of a lot of the things I had done and was relieved to know that I was not a kook. But a lot of folks out there don't believe in factor investing and just want to do the indexes. That is fine with me.

What I say is that we should celebrate success provided that people achieve it in an honorable and ethical manner. If someone makes a mint with individual stocks, more power to them. If someone succeeds at day trading, God love 'em. (I absolutely do not endorse day trading). If people succeed with some form of tilting, great.

I personally have endorsed two methods of investing for new investors. First would be market-cap weighted indexing using the very broad indexes in a 3-5 fund portfolio. This is for the people who believe in efficient markets and who are skeptical of factor investing. Second would be small/value tilting based on academic research. This is for investors who believe that markets are reasonably efficient but who also believe that there are pockets of inefficiency that can be exploited with factor investing. It is a choice of investing philosophy and preference. Neither is right or wrong.

I have posted about investing in individual stocks. From 1988 to 2000, I was really passionate about this. After the crash, I lost interest in doing all the research and after that let things ride and relied more on my broker. I still own them but they are a shrinking part of my portfolio. I do not recommend individual stocks to any one but if someone just has to do it, I will tell them how to avoid the worst pitfalls. I have also told people that they will probably not beat the market doing this.

I also have posted about owning active mutual funds. I have done well enough that I haven't switched out of them but the greatest bulk of my new monies for investment have been into Index Funds or ETFs based on indexes for the last 16 years. I do not endorse active funds except for the no-load funds and those that have lower expense ratios.

I have posted about the non-Boglehead behavior on my part because it is only fair to be honest with others about what I am doing. People need to know where I am coming from.
A fool and his money are good for business.
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Electron
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Re: another look at dividend paying stocks and valuations

Post by Electron »

The Fall 2014 issue of the T. Rowe Price Report had some comments along the same lines as this topic. The manager of the Global Stock Fund wrote "I am 100% sure that we are in a yield-chasing bubble right now — just like with the tech and housing bubbles". See the article on Global Investing on page 8.

http://individual.troweprice.com/public ... ice-Report

If we are in a yield chasing bubble, let's hope it unwinds slowly. That could result in disappointing returns from many of the higher yielding stocks and bonds that have been so popular in recent years.
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JoMoney
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Re: another look at dividend paying stocks and valuations

Post by JoMoney »

nedsaid wrote:...I personally have endorsed two methods of investing for new investors. First would be market-cap weighted indexing using the very broad indexes in a 3-5 fund portfolio. This is for the people who believe in efficient markets and who are skeptical of factor investing. Second would be small/value tilting based on academic research. This is for investors who believe that markets are reasonably efficient but who also believe that there are pockets of inefficiency that can be exploited with factor investing. It is a choice of investing philosophy and preference. Neither is right or wrong.
...
I agree with your conclusion, it's not a 'right or wrong' thing, people have to decide for themselves. People can make alternative choices whether they feel they 'know something' or just speculating, and it's not a crime to take a gamble in the stock market.
There are other preferences people might have on stocks outside of a focus on returns, like "socially responsible investing", but most differentiation between stock portfolios I see people talking about are explicitly about higher returns, and future returns are one of the aspects people have the least control over.
I don't really think anything good comes out of having too much preference for particular types of stocks outside risk/return either, but some people may want to feel more connected to WB by owning some shares in Berkshire Hathaway or something. If it's a small amount of the portfolio it probably doesn't do much harm, and people certainly make lots of other purchases to satisfy various preferences, but looking at my investments as a toy to be played with or have feelings about isn't something I've found to be beneficial.
I do take issue with the idea about "total stock market" being for efficient market believers, and factor tilters for market inefficiencies.
I see it the other way around, buying the broad market is a portfolio for people who acknowledge they don't know any better than the market, whether it's efficient or not. If the market is inefficient the argument for it may be even stronger, because in an inefficient market if you're not a "know something" investor, you're more likely to be taken advantage of by those who know more or are in a position to profit from your mistakes - whether it's financial sales people/advisers (what Warren Buffett calls "helpers"), or traders in the market with better information or positions. Most people are at a disadvantage when they step into the financial markets, and it's hard to know who you can trust. Deciding not to play the game for excess returns seems like a prudent thing to do, if you don't know how you're getting your advantage over some other investor. Beating the market is a zero-sum game in aggregate.
Factor investing on the other hand is explicitly focused on "Risk Factors" which alludes to the "Efficient Market Hypothesis" and it's claims with regards to risk/return. Except rather than assuming people are risk averse like the hypothesis is premised on, people take the formulas and try to invert them believing that if they take on more risk it's somehow more likely to get them higher returns. Without EMH "Factor" investing could just be a behavioral thing and isn't much different than any other chasing of whatever the hot style or sector is. The "factor" models might still be useful as a more detailed analysis of a stock portfolio, but it's just a fancy Morningstar style box at that point.
Fama and French, in The Cross-Section of Expected Stock Returns wrote:If asset-pricing is irrational and size and BE/ME do not proxy for risk, our results might still be used to evaluate portfolio performance and measure the expected returns from alternative investment strategies. If stock prices are irrational, however, the likely persistence of the results is more suspect.
"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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nedsaid
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Re: another look at dividend paying stocks and valuations

Post by nedsaid »

JoMoney, a couple of things have come to me from this discussion are don't practice guruism and asset classes have a bad habit of behaving in a way you don't expect. I also realized the importance of checking things out for yourself and not just believe what someone else is asserting.

I am a big fan of Larry Swedroe and have enjoyed reading his posts and interacting with him. He gave some advice regarding dividend stocks that just didn't work out. His advice was very sound and well reasoned but he underestimated the degree to which people would chase yields. People actually would have been better off to ignore his advice in the short term. I think Larry was right but the market participants overruled his good judgment. I am not bashing Larry but it shows that his crystal ball was cloudy just like everyone else.

This also reinforces my observation is that asset classes do not have to act in accordance with expectations. In other words, markets have a way of doing the one thing you don't expect. Larry expected High Dividend to be the worst part of the Value universe and it actually turned out to be the best. He probably also didn't expect Dividend Growth to do as well as it did. The market will do what the market will do no matter how much historical data and research you have backing you up.

I have to admit when I ran the Growth of $10,000 charts for the Vanguard High Yield Index and for the Vanguard Dividend Growth Fund that I expected everything that I had posted earlier in the threads to be contradicted. Nedsaid would be shown once for all to be wrong. I was actually astonished when the graphs supported what I had been saying. Imagine that, I was actually right about something! It seems to happen on this forum about every six months. Now you can ignore everything else I say for the next six months. ;o)

I was also astonished that when I went through the links to articles that Larry graciously provided that he turned out to be wrong in the short run. By golly, I actually know something!

The thing is that I have been wrong and others have gleefully pointed it out. The give and take is how we all learn and I suspect Larry has learned from the forum as well. My goal is to learn from this forum even if I look a bit silly from time to time.

I will still read Larry's articles and posts and continue to learn from them. In fairness to him, those articles were written from 2010 to 2012. Some things have changed since then. And that is yet another lesson. That is the markets are dynamic.
A fool and his money are good for business.
hoops777
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Re: another look at dividend paying stocks and valuations

Post by hoops777 »

Once one drinks the dividend kool aid,it is almost impossible to shake the belief.Regardless of all the points being made,if one wants to invest most or all of their stock allocation to dividend payers,as long as they stick to the quality companies,the difference between that and just buying the market is going to be so small that this all is really meaningless.
Now,on the other hand,if one really goes after the high yielders 5 pct and above,it is going to end badly.
K.I.S.S........so easy to say so difficult to do.
fortyofforty
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Re: another look at dividend paying stocks and valuations

Post by fortyofforty »

hoops777 wrote:Once one drinks the dividend kool aid,it is almost impossible to shake the belief.Regardless of all the points being made,if one wants to invest most or all of their stock allocation to dividend payers,as long as they stick to the quality companies,the difference between that and just buying the market is going to be so small that this all is really meaningless.
Now,on the other hand,if one really goes after the high yielders 5 pct and above,it is going to end badly.
It's not drinking the Kool Aid to believe in tilting toward dividend payers any more than it is drinking the Kool Aid to tilt towards value, or tilt towards small, or tilt towards small value. To call it so is to belittle those who do it, and do it successfully. The equal weight advocates would refer to market cap weight indexers as Kool Aid drinkers, and vice versa. We should just say there are many roads, and leave it at that. :sharebeer
hoops777
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Re: another look at dividend paying stocks and valuations

Post by hoops777 »

Just an expression did not mean it as a put down.As someone who has taken a few sips of the kool aid,I have to look at the cold hard mathmatical evidence and understand the facts.With that being said,I honestly believe there is an emotional response with many dividend focused investors.I think it is related to feeling safe about your investments......protected from the market declining.Of course everyone is different and people believe what they believe for many different reasons.When you have had success doing something a certain way it is very difficult to listen to anyone telling you that your approach is not optimum.I would say that is magnified when talking about something as volatile as investing can be.
K.I.S.S........so easy to say so difficult to do.
fortyofforty
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Re: another look at dividend paying stocks and valuations

Post by fortyofforty »

Fair enough. :happy But there does seem to be an emotional attachment to many investing approaches here, and disdain for competing ideas, even if everyone can point to competing data to prove the superiority of their approach. From Morningstar:
The lesson is that no business can grow faster than the economy indefinitely, but that lack of growth doesn't cap investor returns. Amazingly, by maximizing boring old dividends and share buybacks, a low-growth business can turn out to be the highest total return investment of all time. As Siegel makes abundantly clear, "growth does not equal return." Only profitable growth--in businesses protected by an economic moat--can do that.
euroman
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Re: another look at dividend paying stocks and valuations

Post by euroman »

some analysts seem to endorse dividend stocks in current high valuation environment:
Mr. Kostin, Goldman Sachs Group Inc.’s chief U.S. stock strategist, last week forecast no price gain at all for the S&P 500 over the next 12 months, with the index’s only return coming from dividends. For the coming 10 years he projected just 5% yearly total returns, with nearly half from dividends. That means the index value would rise only about 2.7% a year for a decade.
...

Mr. Kostin is skeptical of foreign stocks because of the cost of hedging against currency declines. He prefers U.S. companies “that are returning cash to shareholders, and the Nasdaq 100 index looks better to us than the S&P 500,” he said.

...
Mr. Kostin and Nicholas Bohnsack, head of quantitative research at Strategas Research Partners, suggest that with dividends making up a growing share of market returns, clients put money in stocks that can sustain high dividend yields.
http://blogs.wsj.com/moneybeat/2015/05/ ... -s-stocks/
LRonHalfelven
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Re: another look at dividend paying stocks and valuations

Post by LRonHalfelven »

Mr. Kostin and Nicholas Bohnsack, head of quantitative research at Strategas Research Partners, suggest that with dividends making up a growing share of market returns, clients put money in stocks that can sustain high dividend yields.
Even assuming their premise is correct, the conclusion does not follow. If all the dividend-paying stocks making up an index were to suffer a large drop in price that happened to be offset by a large increase in the price of the non-dividend-paying stocks, the index would end up unchanged and its total return would be entirely owing to the dividends-- yet the non-dividend stocks would have the better return on the year.
"If you change your strategy frequently you don't really have one." --Garry Kasparov
sagitarius_d
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Re: another look at dividend paying stocks and valuations

Post by sagitarius_d »

I read the article by Larry.

I found some of the arguments inconclusive. For example the level of assets under management in "dividend etfs" is a drop in the bucket, relative to the amount of money chasing index funds these days. Many investors are switching to indexing, believing it is all there is to be about investing. Most of those investors are just told to index, and many do, regardless of price, valuation, quality and understanding of bear markets, stock price fluctuations etc.

If you look at money flows between strategies, money is definitely chasing index funds to a ratio of hundred to one.
Hence the argument could be made that the dumb money is actually chasing index funds, and not dividend stocks.

Also, does Larry Swedroe think that 3 years is a statistically significant period to make observations on dividend versus non-dividend paying stocks?

Hint: It is not

Non-dividend paying stocks did much better than dividend paying stocks in 1998 and 1999. What happened next?

Hint: Speculative non-dividend paying stocks resulted in heavy losses for investors

And why does he compare dividend stocks to bonds? Does he really think that they are the same?
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