What happens to Dividend Yields when the stock market tanks?

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MrVargas
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What happens to Dividend Yields when the stock market tanks?

Post by MrVargas »

3 Questions:

1) Is there a site that allows me to see the quarterly/yearly dividend amounts/yields for a mutual fund? I can only seem to find sites that show total return.

2) When the stock market tanks what usually happens to the amount of dividends given off by a Dividend paying fund such Vanguards High-Dividend Yield fund? I'm assuming yield goes up and your dividends do not go down anywhere near as much as the market drop but what have they historically done. Do they go down at all? Do they stay flat? Do they continue growing but at a slower pace? (obviously I am talking historically).

3) It seems like in the grand scheme of things, Total return investing or Tilting towards SCV and Emerging will get you better returns as opposed to a Dividend strategy. However, Dividend investors like the stability of their dividends, particularly when they are living off their nest egg vs. selling shares (as illogical as this might be I get it). Why don't dividend investors, invest in whatever gives them the best possible return during their accumulating years and then change their allocation to a dividend strategy once they are in retirement. If Dividends remain fairly stable during a big market drop it wouldn't matter if your total return portfolio goes down a lot right before you make the switch. The higher yields would ensure that you're getting as much income as if you were in a Dividend portfolio the whole time (and possibly higher because the total return portfolio probably would've grown faster and your nest egg was bigger to begin with).

Insights would be greatly appreciated.
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Riprap
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Re: What happens to Dividend Yields when the stock market tanks?

Post by Riprap »

1) If you go to Yahoo finance and enter the symbol of the fund you're interested in, you can then click historical prices and further sort to dividends. I have found this to be the easiest way to find dividend history.

2) There was a dip in the dividends of Vanguard 500 fund during the "great recession" but not as much as the total drop in the value of the fund itself from peak to trough. I believe the drop in the dividend was due to financial companies cutting or eliminating their dividends while they repaired their balance sheets. The growth of dividends in recent years has exceeded the historical norm and I suspect will slow considerably, especially now as energy companies are starting to cut their dividends. The Vanguard 500 fund is likely as good as a proxy as any to get the general feel for the behavior of dividends during market volatility.

3) All I can say here is that timing almost never works. Put me in the camp that behaves irrationally, preferring to spend dividends only even though I understand the math behind total return investing. I also only rebalance using dividends and interest. My portfolio is over 90% taxable and I do have legacy goals. Based on personal experience, the federal tax inefficiency argument of dividends is way overblown for someone living off their portfolio, especially if the dividends are qualified. Anyone can prove this playing around with tax caster for free. I believe the step up in basis at death to be the best tax break of all and manage my affairs accordingly.
FreddieG
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Re: What happens to Dividend Yields when the stock market tanks?

Post by FreddieG »

MrVargas wrote:3 Questions:

3) It seems like in the grand scheme of things, Total return investing or Tilting towards SCV and Emerging will get you better returns as opposed to a Dividend strategy. However, Dividend investors like the stability of their dividends, particularly when they are living off their nest egg vs. selling shares (as illogical as this might be I get it). Why don't dividend investors, invest in whatever gives them the best possible return during their accumulating years and then change their allocation to a dividend strategy once they are in retirement. If Dividends remain fairly stable during a big market drop it wouldn't matter if your total return portfolio goes down a lot right before you make the switch. The higher yields would ensure that you're getting as much income as if you were in a Dividend portfolio the whole time (and possibly higher because the total return portfolio probably would've grown faster and your nest egg was bigger to begin with).

Insights would be greatly appreciated.

I am an illogical dividend investor in my late 50's.

I could sell all my large-cap, value-tilted dividend funds, and buy what? Cap Opportunity? Explorer Fund?

Most of the conservative options for people in my position, by definition, pay dividends.
livesoft
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Re: What happens to Dividend Yields when the stock market tanks?

Post by livesoft »

MrVargas wrote:Why don't dividend investors, invest in whatever gives them the best possible return during their accumulating years and then change their allocation to a dividend strategy once they are in retirement.
Bond funds pay dividends, so many investors do shift to more bond funds as they get older. Thus, their portfolio does pay out more dividends as they get older, too. BTW, all the target retirement date funds do the same thing. This is a well-established method.
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nisiprius
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Re: What happens to Dividend Yields when the stock market tanks?

Post by nisiprius »

It is probably true that dividends react more slowly and are more stable than share values. However, the share value reflects what the market expects future dividends to me. There's no magic. If the stock market goes down and stays down for a long time, it's because most businesses are doing poorly and are expected to keep doing poorly, and eventually they cut or reduce their dividends. It happened a lot during the Great Depression.

If you assume that company A and company B are equally "good" companies, but company A pays dividends and company B does not, then their total return will be equal. Company A will pay out dividends, and their share price will rise more slowly than company B--they will experience slower capital appreciation than company B. But if you reinvest those dividends, you will own more and more shares, so your total return will be the same as someone investing in company B. The only difference is that you are choosing to reinvest those dividends, while the management of company B is reinvesting them for you.

Since I don't share them, it's hard for me to present the beliefs of dividend investors. Claims that dividend stocks as a group are much better or much worse than stocks in general don't seem to hold up when I look at them for myself. Frequently, claims for dividend investing are entangled in claims for stock-picking and market timing--that is to say, dividend advocate will say that just investing in dividend stocks doesn't work, but that (for some reason) market timing and stock picking do work within the universe of dividend stocks. Thus, for example:

Stock Picking Made the Difference for Dividend Investors -- stock-picking.

Dividend Seekers: It's Not Your Time Yet -- Market timing.

And then, of course, there's the mysterious-to-me claim that These Investments Provide Peace of Mind in Turbulent Markets You can compare the behavior of dividend stocks in 2008-2009 with the market as a whole for yourself. There may be a difference, but it's the difference between a 47% decline and a 53% decline. Whereas something like Vanguard Total Bond Fund had about a 0% decline.
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inbox788
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Re: What happens to Dividend Yields when the stock market tanks?

Post by inbox788 »

I subscribe to the idea that dividends are just cash, no different than cash used to do buy backs, or retained as cash, paying off debt, or invested back in the business. It is managements job to balance these needs and optimize a business's cash usage. Some folks believe high cash leads to poor management behavior, while others think yields can be used to evaluate a company's health and future prospects.

Generally, stocks go up and so do dividends. If stocks go up, but dividends didn't change, the Dividend Yield would actually go down. But when they both go up, the Dividend Yields remain fairly flat. When a stock price falls, the Dividend Yield goes up! So people associate a high dividend yield with a good company, either one that is stable and returns a good yield or a company that has some temporary stock price fall that eventually recovers. So, you either make money getting a good yield or the price of the stock appreciates. All good, except when there is something wrong with the company and they're running out of cash, and then they decide to cut the yield. If they do that, not only do you lose the dividend, but the fall of the stock is prolonged.

So when the market tanks a little, I expect the Dividend Yields to go up! Note that absolute dollars you receive don't change, and if companies start cutting their dividends, you can actually see the dollars go down, even though the yields are up.

In stressful times, many companies stop raising their dividends, but try hard to maintain them. So you see stock prices lower with same dividend. And even after their stock prices have recovered, and the business has stabilized, they're slow to reinstate dividend increases. Doesn't mean that companies aren't doing better or well, just that you don't see it in the dividend (yet).
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