dividend paying stocks

[atfish]

Since 1926 dividend paying stocks have provided approximately 50% of the total market return. How come BH's don't pay more attention to dividend funds such as DVY. Granted the historic return of dividend stocks is skewed to earlier decades, but in the future it could revert to the mean.

[livesoft]

Because practically all funds pay dividends, so you don't need a fund with "dividend" in the name to get dividends. Lots of dividends.

[NYBoglehead]

Because practically all funds pay dividends, so you don't need a fund with "dividend" in the name to get dividends. Lots of dividends.

If you look at the Vanguard Dividend Growth Fund, the SEC yield right now is 2.29%. TSM Admiral Shares is 2.09%. While the Dividend Yield is 20 basis points higher, the fund is 25 basis points more expensive to own than TSM.

Many dividend focused funds have higher yields than the TSM or S&P, but it seems that most of the time the added ER means a lower overall return than sticking with pure index investing.

[atfish]

Because practically all funds pay dividends, so you don't need a fund with "dividend" in the name to get dividends. Lots of dividends.

If you look at the Vanguard Dividend Growth Fund, the SEC yield right now is 2.29%. TSM Admiral Shares is 2.09%. While the Dividend Yield is 20 basis points higher, the fund is 25 basis points more expensive to own than TSM.

Many dividend focused funds have higher yields than the TSM or S&P, but it seems that most of the time the added ER means a lower overall return than sticking with pure index investing.

Is it the general opinion that dividend stocks are overpriced due to the influx of monies chasing yield due to low yields of CD's, bonds, & money market funds??

[livesoft]

I don't know what the general opinion is, but that's not my opinion. I also don't think that stocks are underpriced either.

[NYBoglehead]

Whenever you hear "general opinion" just disregard whatever is being said. In most cases, the "general opinion" is incredibly off. The general opinion has seen massive inflows into bond funds since the financial crisis, while those who invested in equities have roughly doubled their money since the 2009 lows.

[kenyan]

The problem with the dividend-chasing strategies that are en vogue currently is that many people are advocating using them in lieu of fixed income in the chase for yield. This may lead to a very bad day/year/decade for said people when the risk shows up.

[nisiprius]

Suppose bank A offered a money market deposit account paying 1% per year, with the interest simply added to the account balance in the usual way.

Suppose bank B across the street offered an innovative new account, paying 1% per year, in which, at the end of the year, they automatically withdrew 0.5% of the balance in the account, cut a check for the amount, called it a "dividend," and mailed it to you.

Bank A's account pays no dividends and grows faster. Bank B's account pays dividends but grows slower. Which would you prefer and why?

I believe the concept of "dividend paying stocks" is actually a holdover in thinking from Ye Olde Days of fixed brokerage commissions, and a time when mutual funds were far less popular than today. In those days, it was extremely expensive to sell small quantities of stock. Therefore, "total return investing" was impractical. If you were in the accumulation phase and didn't need income, you'd select "growth stocks" that didn't pay dividends. If you were in retirement and wanted a stream of income, you'd pick "income stocks," sometimes called "widows-and-orphans" stocks, that paid dividends but grew slowly. In effect, the only way to regulate your withdrawal rate was to assemble a portfolio whose natural rate of dividend payments approximated the desired withdrawal rate. And you'd also ladder them so that about 1/3 of the portfolio was making its quarterly payments every month. "Portfolio construction" meant tailoring the portfolio to the need for income, not Fama-French factors and MPT.

"Dividend paying stocks" means two things. You are choosing how much of the company's earnings are retained and reinvested internally, before stockholders ever see them, versus how much are paid out for you to reinvest if you so choose. In theory, if the company can make good use of retained earnings, it really shouldn't matter at all whether they are paid out in dividends or not.

If a stock mutual fund pays dividends and you don't need dividends, you just check the "reinvest" box. If it doesn't pay dividends and you want them, or if you want to withdraw more than the dividend stream, you just head over to "account options" and set up automatic withdrawals.

The other thing is can mean is Just Another Stock-Picking Theory, that holds that companies that pay out dividends are somehow better than those that don't, and that that superiority is, for some reason, not reflected in the price of the stock.

Since the value of a stock is, precisely, the present value of its estimated future stream of dividends, the idea that dividends are overlooked and not priced in seems awfully implausible.

[Wagnerjb]

Since 1926 dividend paying stocks have provided approximately 50% of the total market return.

That does mean that dividend paying stocks have higher total return than non-dividend paying stocks, or that larger dividend payouts mean higher total returns. It is simply a statistic used by people that - for behavioural reasons - like to receive regular dividends in the mail.

It is more important to be well-diversified, and skewing towards higher dividend companies will diminish your diversification. If you find that dividends are less tax efficient for you, then minimizing dividends may be more logical.

Best wishes.

[nisiprius]

Just to drive the point home. First of all, my point is not not not whether Vanguard Total Stock Market Index (VTSMX) or iShares Dow Jones Select Dividend Index (DVY) did better. For any two funds that are different, the results will be different and cheerleaders for the one that happened to do better will claim it's better while the cheerleaders for the one that didn't will have an alibi.

Here's the point, and it will take two charts to make it. VTSMX and DVY got about the same returns, even though they got it in different ways.

First, growth, the actual dollars you'd have if you invested in both funds and let your investment sit there and grow. About the same. (Certainly, DVY didn't do much better.) Total Stock made you about $7,000, DVY made you about $6,000, over a different time period it might have been different. But about the same. Squint, and the two lines sorta-kinda of merge together.



Now, look at price.



They don't track together, they separate. DVY falls far, far behind.

The price per share for VTSMX is up about 44% overall over that time period, the price per share of DVY is only up about 13%. VTSMX share price gained three times as much as DVY.

But, as noted, both funds returned a total of $6,000-$7,000. In both cases, the total return was considerably higher than the capital appreciation, which is represented by the increase in the share price. The extra return was the dividends. Total Stock got most of that 60-70% return from capital appreciation, DVY got most of it from dividends. DVY is as advertised. It did pay much higher dividends, but, just as you'd expect, as a result, the shares themselves grew much less.

Total return is total return, no matter where it happens to come from.

[Default User BR]

I have an asset allocation that consists of an overweight to small and to value (not specifically dividend) stocks. That's based on research that I did in the past. I haven't seen any reason to deviate.


Brian

[atfish]

Thanks nisiprius , you did an excellent job of explaining Total Return. "Total return is total return, no matter where it happens to come from."