Thoughts on individual dividend investing?

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Grt2bOutdoors
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Re: Thoughts on individual dividend investing?

Postby Grt2bOutdoors » Thu Jul 13, 2017 8:53 am

RAchip wrote:The OP also asks about BP. There is certainly a lot of money that could be made in BP. I have certainly considered putting a bunch of money into it. If oil prices recover into the 70s-80s you will be getting a near 7% dividend on your initial investment along with likely very substantial price appreciation and aggressive future dividend growth.


Read my post about what the difference is between BP and Exxon Mobil. But if you really want to be levered to a rise in oil prices, why buy BP when you can buy established E&P companies with more oomph - names like EOG or Anadarko Petroleum, Devon, Continental Resources, etc. The risk is oil prices reach a new normal of $50 - BP will likely be known as Before Price decline instead of British Petroleum.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

not4me
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Re: Thoughts on individual dividend investing?

Postby not4me » Thu Jul 13, 2017 8:59 am

rgs92 wrote:Does anyone think an investment in a set of dividend stocks would have less volatility than an S&P500 investment?
What about the volatility of a dividend-focused ETF or regular fund compared to the S&P500?
Would such and investment be more stable if used for income?
Just curious if anyone had done research on this. Thanks.


nothing exhaustive, but just pulled up these 4 Vanguard funds & their standard deviations: Dividend Appreciation (VDADX) - 2.71; High Dividend Yield (VHDYX) - 2.77; sp500 (VFIAX) - 2.95; TSM (VTSAX) - 3.02

Nothing surprising & only a snapshot. I'm sure you can shop around for other data & draw various conclusions!

dbr
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Re: Thoughts on individual dividend investing?

Postby dbr » Thu Jul 13, 2017 9:02 am

rgs92 wrote:Does anyone think an investment in a set of dividend stocks would have less volatility than an S&P500 investment?
What about the volatility of a dividend-focused ETF or regular fund compared to the S&P500?
Would such and investment be more stable if used for income?
Just curious if anyone had done research on this. Thanks.


You are kidding right?: https://www.google.com/search?sitesearc ... investing+

You should track down and read the ongoing set of articles Larry Swedroe wrote about dividend investing.

For backtesting various funds you can look here: https://www.portfoliovisualizer.com/backtest-portfolio

Another back test is linked in this thread from ten years ago (see Simba), and you can search for posts by Trev H. The discussion has been going on forever and seems to constantly attract a train of new questioners:

viewtopic.php?t=2520

Wakefield1
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Re: Thoughts on individual dividend investing?

Postby Wakefield1 » Thu Jul 13, 2017 9:12 am

BP sounds to me like "Deep Value" that is a company whose stock price is depressed hence the high dividend yield (part of the reason that price is depressed is fear that the dividend cannot be sustained)
some Deep Value stocks eventually survive their problems and recover (earnings and earnings growth),some may not.
I think certain mutual fund advisors used to have their reputation based as being able to pick which deep value stocks to buy and which to avoid. Did one such advisor sell his firm to Franklin/Templeton? Crystal Ball? Deep Value = extra risk and extra reward if things turn out better than expected?

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Re: Thoughts on individual dividend investing?

Postby Grt2bOutdoors » Thu Jul 13, 2017 10:02 am

Wakefield1 wrote:BP sounds to me like "Deep Value" that is a company whose stock price is depressed hence the high dividend yield (part of the reason that price is depressed is fear that the dividend cannot be sustained)
some Deep Value stocks eventually survive their problems and recover (earnings and earnings growth),some may not.
I think certain mutual fund advisors used to have their reputation based as being able to pick which deep value stocks to buy and which to avoid. Did one such advisor sell his firm to Franklin/Templeton? Crystal Ball? Deep Value = extra risk and extra reward if things turn out better than expected?


Mike Price sold his firm Mutual Shares to Franklin/Templeton. Deep value can also equal Value Trap. BP is a real sticky quagmire that will be difficult to realize value from as the British establishment will not permit the sale of that company, so without the sale lever you need the price of oil to rise appreciably and stay there for a period of years for them to "recoup" the value. The culture at BP has been known for "cutting corners" when safety should have been the overriding concern. Tough to change the culture that is ingrained in the company, the CEO Dudley has done a great job, but that company gets no respect. I owned that equity for almost 10 years, maybe I made the wrong call, but you have to know when to give up. I don't see the great value investment shop Dodge and Cox taking a big position in them, that ought to tell you something.
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saltycaper
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Re: Thoughts on individual dividend investing?

Postby saltycaper » Thu Jul 13, 2017 12:15 pm

kjvmartin wrote:
My grandfather made a small fortune off dividend stocks starting around 1970 with DRIPs mostly in utilities. He was a WW2 vet, then a fireman, had a pension, and lived well below his means. I'm not sure if low cost funds were available during his accumulation phase? When he passed away a few years back, he was a just shy of the 2 comma mark.

Anyway, I'm sure there are a lot of very comfortable retirees and boomers getting inheritances because of conservative dividend investors.


There's lots of people invested today in high-cost, actively managed funds. Many of them will make out just fine. Some will be millionaires. That doesn't mean it's a good strategy to invest in high-cost, actively managed funds. Of course, in your grandfather's time, investing in individual dividend-paying stocks might not have been as poor a strategy compared to other options as it is today.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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saltycaper
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Re: Thoughts on individual dividend investing?

Postby saltycaper » Thu Jul 13, 2017 12:23 pm

RAchip wrote:The OP also asks about BP. There is certainly a lot of money that could be made in BP. I have certainly considered putting a bunch of money into it. If oil prices recover into the 70s-80s you will be getting a near 7% dividend on your initial investment along with likely very substantial price appreciation and aggressive future dividend growth.

(emphasis added)


I only mention this because it relates to our previous exchange about the importance of marking to market. Perhaps you already see it this way, but just to emphasize, if you invest in an individual company when it pays a 7% dividend, and the share price subsequently increases, you don't want to calculate the dividend yield on the initial investment (the price at which you bought), but rather on the value of the current investment (the current share price). The yield when you buy is only relevant when you buy, even if the company doesn't change the dollar amount of the dividend. Because you could sell the stock and reap the capital gains, you always want to compare current yields to other current yields. So going forward, you're not getting 7% plus price appreciation. You're getting whatever the current yield is plus price appreciation.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

tesuzuki2002
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Re: Thoughts on individual dividend investing?

Postby tesuzuki2002 » Thu Jul 13, 2017 12:48 pm

FootballFan5548 wrote:I've foolishly done the same thing in the past. I bought a bunch of Verizon thinking they had offered a very attractive dividend. Since I've bought them the stock price is down 16% and I'm out thousands of dollars....

But YAY I get $0.57 per share coming up August 1st!

Chasing dividends is risky business.




It sounds like you paid way to much for the stock... If you are reinvesting dividends you'll buy more shares with that 0.57 dividend... If you want to hold it I have other Telco stocks that have paid me 3 times over what I put in my original investment in just 8 years... I keep saying I should get out as they have become large holdings in my over all portfolio... but I have been selling off some at they keep appreciating and growing.

tesuzuki2002
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Re: Thoughts on individual dividend investing?

Postby tesuzuki2002 » Thu Jul 13, 2017 12:52 pm

I personally have several individual equities for years with great dividends and it nice every month or quarter to see a little bump to the account. However, since I have gone index investing.. the year end dividends I get from that do that same thing... That just only occur in December and are a more stable approach to the broader market.

I have been selling my individual equities and grabbing more broader market options. It has been good.. but also creates work since I have to pay more attention... Now I just invest and invest and invest.. and $$$ shows up at the end of the year.

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nedsaid
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Re: Thoughts on individual dividend investing?

Postby nedsaid » Thu Jul 13, 2017 1:32 pm

not4me wrote:
nedsaid wrote:Dividend investing with individual stocks can be done. I have done it myself and always suspected that I about matched the market indexes. I didn't know how I actually did until I recently discovered that Quicken could calculate the returns of my individual stock portfolio.

I beat the market over one, three, and five years. However, long term is what counts and I trailed over ten and fifteen years. Not a disaster, but last I checked the S&P 500 did 8.10% and I did 7.65% annually over fifteen years. The US Total Stock Market Index grew 8.47% over that same time period. This was as of June 24, 2017. I had good habits buying my stocks at good or at least reasonable periods and long holding periods. A day trader I am not. My average holding period is over 5 years.

So I tried hard, doing what you want to do, and I still couldn't beat the market. I might eventually get disgusted and just switch my stocks for the S&P 500 or the US Total Stock Market Index. These stocks are less than 13% of my retirement portfolio. I do hold index funds, in fact, the US Total Stock Market Index is my largest holding.


I'm not familiar with how Quicken works & so asking a clarifying, curiosity question. Are you saying that Quicken calculated 7.65% for your specific portfolio (accounting for buy/sell, reinvest, etc) as well as sp500/tsm for June 24, 2002 - June 24, 2017? Or was the sp500/tsm determined another way?


Yes, Quicken calculated my returns The S&P 500 and Total Market Index performance records comes from Morningstar.

My returns as calculated does include dividends and takes into account new monies for investment.
A fool and his money are good for business.

not4me
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Re: Thoughts on individual dividend investing?

Postby not4me » Thu Jul 13, 2017 3:00 pm

nedsaid wrote:
Yes, Quicken calculated my returns The S&P 500 and Total Market Index performance records comes from Morningstar.

My returns as calculated does include dividends and takes into account new monies for investment.


A number of years ago, I used a website that would accept ticker symbols, amount invested/sold, etc & calculate an individual return. It had some limitations such as if dividends were re-invested for one in the portfolio, they had to be for all in the portfolio. If dividends weren't re-invested, they stayed as "cash" (that is, no growth). I came to realize though, that it rounded off to the nearest start/end of a month which can really skew. It had enough slight things that over a 15 year time period, the margin of error would be large enough that in your case the numbers would be considered almost the same. No surprise -- the website went away. Sounds like I need to check into quicken -- thanks

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nedsaid
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Re: Thoughts on individual dividend investing?

Postby nedsaid » Sat Jul 15, 2017 9:06 am

rgs92 wrote:Does anyone think an investment in a set of dividend stocks would have less volatility than an S&P500 investment?
What about the volatility of a dividend-focused ETF or regular fund compared to the S&P500?
Would such and investment be more stable if used for income?
Just curious if anyone had done research on this. Thanks.


That is the theory. What has happened is that the market has chased High Dividend and Low Volatility. I did some analysis on this and found that the so-called low volatility stocks and the Consumer Staples stocks (classic low volatility stocks) were more expensive than the rest of the market. High Dividend at one time was more expensive than the market but now seems less expensive than the market. Pretty much what happens when money chases yield and chases performance.

My advice would be to not chase High Dividend or Low Volatility. Good old boring Large Cap Value will work better in the future in my opinion. You will get cheaper stocks, still a better than the market's dividend yield, and avoid the yield chasing to High Dividend and the performance chasing to Low Volatility. Vanguard Value Index is a place to start looking as you get plain old boring Large Value.

I did an analysis comparing such things as Vanguard High Dividend Index, Vanguard Dividend Growth, Vanguard Consumer Staples, a Low Volatility ETF, and the S&P 500. Just click around and you should be able to find it. You will see what I mean.
A fool and his money are good for business.

jbolden1517
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Re: Thoughts on individual dividend investing?

Postby jbolden1517 » Sat Jul 15, 2017 11:55 am

aj76er wrote:See the below thread which has an excellent analysis by forum member #Cruncher proving that there is no mathematical advantage to dividend focused investing. Also posted is historical performance data that further backs up the math.

viewtopic.php?f=1&t=222643


It is a good thread. The problem is the arguments are wrong. A volatile asset insuring fixed expenses is not remotely the same as a savings account, a non volatile asset, insuring fixed expenses. When you are dollar cost averaging you end up buying shares at the harmonic mean of the price, which means your average share price for shares purchased is always lower than the average share price of the shares of the time you were accumulating. When you are dollar cost selling the math works the same your average sale price for shares sold will always be lower than the average price over the period. That's why portfolios go broke in bad markets with stuff like a 4% inflation adjusted withdraw over 30 years. The volatility causes their effective withdraw rate to outpace the portfolio even as the portfolio's average returns are quite high.

The advice circulating here of not taking higher quality stocks yielding 5%, inflation and often USA economic growth adjusted, to instead buy 2.5% bonds for "stability" is frankly nuts.

If you want to see the difference take an asset yielding $1 growing 5% per year whose value is randomly either 10x or 40x its yield every year. Whether you are accumulating or income oriented that's a great asset. The only time that asset is a problem is right before the switch from accumulating to income when principle stability is more of a problem than returns.

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Re: Thoughts on individual dividend investing?

Postby aj76er » Sat Jul 15, 2017 3:31 pm

jbolden1517 wrote:If you want to see the difference take an asset yielding $1 growing 5% per year whose value is randomly either 10x or 40x its yield every year. Whether you are accumulating or income oriented that's a great asset. The only time that asset is a problem is right before the switch from accumulating to income when principle stability is more of a problem than returns.


Yes, I believe you are describing the characteristics of a total stock market fund (e.g. VTSAX) coupled with "sequence of returns risk" that can occur early in a long withdrawal phase from a portfolio that is heavily invested in such an asset. Holding a significant amount of bonds yielding 2.5% can help mitigate this risk significantly.

The problem with not holding bonds during accumulation is that you never know when a forced long withdrawal phase may occur (e.g. due to a layoff or disability). I think the general consensus on this site concerning the low yield on bonds is to use them, but to also adjust expectations accordingly (e.g. save more, lower withdrawal rate, etc..)
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Thoughts on individual dividend investing?

Postby jbolden1517 » Sat Jul 15, 2017 4:31 pm

aj76er wrote:Yes, I believe you are describing the characteristics of a total stock market fund (e.g. VTSAX) coupled with "sequence of returns risk" that can occur early in a long withdrawal phase from a portfolio that is heavily invested in such an asset. Holding a significant amount of bonds yielding 2.5% can help mitigate this risk significantly.


This board recommends intermediate term and higher quality bonds. So the problems in returns are likely a slow bleed of underperformance (same as a high ER) not a huge sudden drop (there are scenarios where those sorts of bonds could get killed, and while rare they are likely in say a 100 year cycle). The problem with VTSAX at this point IMHO is a slow bleed in high PE stocks because of float weighting and stock market volatility. Essentially I think the Boglehead board recommend portfolio is likely to underperform by about 150 basis points the same way a high ER portfolio would. Over a few decades that adds up and digs substantially into the total asset base.

But there are worse options. Let's pick a bad case scenario for this portfolio. Stocks are overvalued and we head into a 3 year period of high inflation with interest rates well below the inflation rate. Stocks get hurt but nothing drastic (say -%50 real, -30% nominal) and the bonds get hurt in real terms (duration is lowish so while they are hurt nominally the low duration keeps the damage down). You get to do one good rebalance about midway through the real drop. You pretty much catch the whole bear the rebalance helps so lets say -20% nominal, -35% real in the first few years. Your spending has jumped 30% due to inflation and what was before a 3.5% draw is now about 5.7%. Returns can be good and that's still going to cut things very close with a reasonable chance of not getting through retirement. If I make the inflationary recession just a bit worse or say the recovery doesn't happen quickly (a 5 year period of stagnation) then it isn't close anymore at all, you stand no chance.

The problem with cash is it dilutes it doesn't diversify. Intermediate high quality bonds have two diversifying factors: duration risk and credit risk but in such low quantities they don't do much. Far far better would be to take on diversified risk that doesn't dilute. For example volatility is an asset with a -8% annual return, huge standard deviation and a strong negative correlation with stocks. Even a small percentage of volatility is going to do a much better job of protecting your portfolio than that little bit of duration and credit risk.

Now with dividend stocks you get a very different reaction to that scenario. Your dividends likely go up with inflation or better. Corporations with high dividends are heavily short long bonds (they have often lots of debt). The recession is bad for them, the inflation is terrific for them.

aj76er wrote: The problem with not holding bonds during accumulation is that you never know when a forced long withdrawal phase may occur (e.g. due to a layoff or disability). I think the general consensus on this site concerning the low yield on bonds is to use them, but to also adjust expectations accordingly (e.g. save more, lower withdrawal rate, etc..)


I agree that's the consensus. I think the consensus is wrong. Why intentionally buy bad assets that at best give you a lowish return and at worst give you a real negative return? There are far better assets that can accomplish the safety more efficiently.

rgs92
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Re: Thoughts on individual dividend investing?

Postby rgs92 » Sat Jul 15, 2017 7:58 pm

Thank you very much (again) Nedsaid.

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Re: Thoughts on individual dividend investing?

Postby aj76er » Sun Jul 16, 2017 2:48 pm

jbolden1517 wrote:
aj76er wrote:Yes, I believe you are describing the characteristics of a total stock market fund (e.g. VTSAX) coupled with "sequence of returns risk" that can occur early in a long withdrawal phase from a portfolio that is heavily invested in such an asset. Holding a significant amount of bonds yielding 2.5% can help mitigate this risk significantly.


This board recommends intermediate term and higher quality bonds. So the problems in returns are likely a slow bleed of underperformance (same as a high ER) not a huge sudden drop (there are scenarios where those sorts of bonds could get killed, and while rare they are likely in say a 100 year cycle). The problem with VTSAX at this point IMHO is a slow bleed in high PE stocks because of float weighting and stock market volatility. Essentially I think the Boglehead board recommend portfolio is likely to underperform by about 150 basis points the same way a high ER portfolio would. Over a few decades that adds up and digs substantially into the total asset base.

But there are worse options. Let's pick a bad case scenario for this portfolio. Stocks are overvalued and we head into a 3 year period of high inflation with interest rates well below the inflation rate. Stocks get hurt but nothing drastic (say -%50 real, -30% nominal) and the bonds get hurt in real terms (duration is lowish so while they are hurt nominally the low duration keeps the damage down). You get to do one good rebalance about midway through the real drop. You pretty much catch the whole bear the rebalance helps so lets say -20% nominal, -35% real in the first few years. Your spending has jumped 30% due to inflation and what was before a 3.5% draw is now about 5.7%. Returns can be good and that's still going to cut things very close with a reasonable chance of not getting through retirement. If I make the inflationary recession just a bit worse or say the recovery doesn't happen quickly (a 5 year period of stagnation) then it isn't close anymore at all, you stand no chance.

The problem with cash is it dilutes it doesn't diversify. Intermediate high quality bonds have two diversifying factors: duration risk and credit risk but in such low quantities they don't do much. Far far better would be to take on diversified risk that doesn't dilute. For example volatility is an asset with a -8% annual return, huge standard deviation and a strong negative correlation with stocks. Even a small percentage of volatility is going to do a much better job of protecting your portfolio than that little bit of duration and credit risk.

Now with dividend stocks you get a very different reaction to that scenario. Your dividends likely go up with inflation or better. Corporations with high dividends are heavily short long bonds (they have often lots of debt). The recession is bad for them, the inflation is terrific for them.

aj76er wrote: The problem with not holding bonds during accumulation is that you never know when a forced long withdrawal phase may occur (e.g. due to a layoff or disability). I think the general consensus on this site concerning the low yield on bonds is to use them, but to also adjust expectations accordingly (e.g. save more, lower withdrawal rate, etc..)


I agree that's the consensus. I think the consensus is wrong. Why intentionally buy bad assets that at best give you a lowish return and at worst give you a real negative return? There are far better assets that can accomplish the safety more efficiently.


Don't want to start an argument, but lots of what you wrote seems like speculation and predictions of the future. I'll just say that there has been no historical premium for holding dividend-paying stocks over the long term. You are trading off earnings growth for more dividends, which after taxes, is inefficient. The stock market value over time is composed of three components: Earnings Growth + Dividends + Price Speculation. In the short-term Price Speculation accounts for ~50% of the gains (and losses). But over the decades, the Price Speculation part gets averaged out (and contributes a mere 0.1% to the overall return). Anyway, I think it's better to stay focused on the long-term (10, 20, 30yrs) than get hung up on what may happen over the next couple of days, months, years.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Thoughts on individual dividend investing?

Postby jbolden1517 » Sun Jul 16, 2017 3:41 pm

aj76er wrote:Don't want to start an argument, but lots of what you wrote seems like speculation and predictions of the future. I'll just say that there has been no historical premium for holding dividend-paying stocks over the long term. You are trading off earnings growth for more dividends, which after taxes, is inefficient. The stock market value over time is composed of three components: Earnings Growth + Dividends + Price Speculation. In the short-term Price Speculation accounts for ~50% of the gains (and losses). But over the decades, the Price Speculation part gets averaged out (and contributes a mere 0.1% to the overall return). Anyway, I think it's better to stay focused on the long-term (10, 20, 30yrs) than get hung up on what may happen over the next couple of days, months, years.


If we are talking about the long term the earnings growth is really just an estimate for dividends growth. If you include the final payout for an acquisition the return of a stock is current dividend yield + future dividend growth.

There has been a quite substantial premium for holding higher dividend paying stocks. Low P/D is not as important as low P/E, low P/S and low P/B but it certainly does matter. High yield stocks outperform low yield by about 1.5% per year on average.

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Re: Thoughts on individual dividend investing?

Postby Ged » Sun Jul 16, 2017 5:48 pm

Snowjob wrote:the dividend investing flow chart --

Start-->Do you believe dividend investing leads to higher returns?
+No --> seek a total return approach (standard boglehead)
+Yes--> Do you believe you are better than the professional investors who are managing funds focused on the same strategy?
+++No --> Tilt you portfolio towards dividends using a cheap vehicle that closest matches your dividend objective (SCHD, VDIGX etc)
+++Yes--> Spend lots of time and energy researching companies and hope for the best.


For a period of time I was at "Spend lots of time and energy researching companies and hope for the best".

What finally woke me up was the BP oil spill. The problem with this strategy is that there are relatively few high dividend paying stocks and using them to build your portfolio leads to being overly concentrated in these issues. When one of them blows up you suffer unnecessary losses.

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Re: Thoughts on individual dividend investing?

Postby Phineas J. Whoopee » Sun Jul 16, 2017 7:50 pm


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Re: Thoughts on individual dividend investing?

Postby aj76er » Mon Jul 17, 2017 2:00 pm

jbolden1517 wrote:
aj76er wrote:Don't want to start an argument, but lots of what you wrote seems like speculation and predictions of the future. I'll just say that there has been no historical premium for holding dividend-paying stocks over the long term. You are trading off earnings growth for more dividends, which after taxes, is inefficient. The stock market value over time is composed of three components: Earnings Growth + Dividends + Price Speculation. In the short-term Price Speculation accounts for ~50% of the gains (and losses). But over the decades, the Price Speculation part gets averaged out (and contributes a mere 0.1% to the overall return). Anyway, I think it's better to stay focused on the long-term (10, 20, 30yrs) than get hung up on what may happen over the next couple of days, months, years.


If we are talking about the long term the earnings growth is really just an estimate for dividends growth. If you include the final payout for an acquisition the return of a stock is current dividend yield + future dividend growth.

There has been a quite substantial premium for holding higher dividend paying stocks. Low P/D is not as important as low P/E, low P/S and low P/B but it certainly does matter. High yield stocks outperform low yield by about 1.5% per year on average.


I'll leave this by saying that you should thoroughly investigate the data to back up your claim of a premium for dividend-paying stocks. What you may be seeing is a hidden "value" effect, which can better be explained by factor-style theory rather than just dividends (but I believe you can use dividends as one of the screens to detect a large-cap value factor). Anyway, you may be interested in writings by Larry Swedroe in which he discusses these concepts in great detail. Also, here's an article by him discussing dividends:

http://www.etf.com/sections/index-inves ... nopaging=1

In the article he quotes:

In summary, 2008 should have taught investors that dividend-paying stocks are not alternatives to safe bonds. Unfortunately, far too many investors failed to learn this lesson, and that could prove very costly when the next bear market arrives. The issue is compounded by the fact that the popularity of dividend strategies has led to valuations above those of the overall market. Forewarned is forearmed.


Having said all this, there has been a slight historical premium for holding large-cap value stocks. However, one would have had to hold these for very long time-periods to see the outperformance; and would have had to endure long timeframes of underperformance and tracking error. Furthermore, there's no guarantee of the premium occurring in the future over your specific holding period as an investor. With those caveats, many still choose to hold large cap value. You can search these forums for lots of discussions on the subject.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Thoughts on individual dividend investing?

Postby jbolden1517 » Mon Jul 17, 2017 6:24 pm

aj76er wrote:I'll leave this by saying that you should thoroughly investigate the data to back up your claim of a premium for dividend-paying stocks. What you may be seeing is a hidden "value" effect, which can better be explained by factor-style theory rather than just dividends


I have no problem agreeing this is a value effect. P/D is a value metric and correlates with P/E, P/S and P/B which are also value metrics (and arguably better ones). The claim though was that low P/D stocks outperform high P/D stocks and saying it is a value effect is agreeing with this claim.

The main point was that dividend yield is much more stable than capital gains and grows with inflation. Income oriented investors want a stable real return. Which means income oriented investors can safely hold a higher percentage of equity in low P/D stocks. For someone pulling money out of a portfolio annually this is the advantage. The dividends allow them not to have to dollar cost sell.


aj76er wrote:(but I believe you can use dividends as one of the screens to detect a large-cap value factor). Anyway, you may be interested in writings by Larry Swedroe in which he discusses these concepts in great detail. Also, here's an article by him discussing dividends:

http://www.etf.com/sections/index-inves ... nopaging=1

In the article he quotes:

In summary, 2008 should have taught investors that dividend-paying stocks are not alternatives to safe bonds. Unfortunately, far too many investors failed to learn this lesson, and that could prove very costly when the next bear market arrives. The issue is compounded by the fact that the popularity of dividend strategies has led to valuations above those of the overall market. Forewarned is forearmed.


In 2008 we had a truly horrid bear market. Dividends declined 21%. There wasn't much inflation so any investor who had started in 2006 or earlier was getting the real yield he had started with. By 2012 he was way above where he had started. The cap gains investor didn't hit the break even mark till 2013, and worse had been as bad as -56% when he was selling shares to meet expenses. Forced sales during bear markets are why income investors go broke.

aj76er wrote: Having said all this, there has been a slight historical premium for holding large-cap value stocks. However, one would have had to hold these for very long time-periods to see the outperformance; and would have had to endure long timeframes of underperformance and tracking error.


Why is tracking error something an investor has to endure? I understand the rationale for a pension fund manager or mutual fund manager but why should an investor care about tracking error?

Good conversation.

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patrick013
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Re: Thoughts on individual dividend investing?

Postby patrick013 » Mon Jul 17, 2017 8:59 pm

jbolden1517 wrote:The main point was that dividend yield is much more stable than capital gains and grows with inflation. Income oriented investors want a stable real return. Which means income oriented investors can safely hold a higher percentage of equity in low P/D stocks. For someone pulling money out of a portfolio annually this is the advantage. The dividends allow them not to have to dollar cost sell.


Not that my portfolio can't be goofy in the sense that several tilts
might be used but with similar long term reliability I hate high priced
indexes in any event, value or growth. I think inflation shouldn't be
an orientation but just another observation point.

What do you think of this new fund, ticker SPYD ?
My old favorites of HDV, DTN, are getting some competition
from stuff like SPHD.
age in bonds, buy-and-hold, 10 year business cycle

Thesaints
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Re: Thoughts on individual dividend investing?

Postby Thesaints » Mon Jul 17, 2017 9:04 pm

jbolden1517 wrote:There has been a quite substantial premium for holding higher dividend paying stocks. Low P/D is not as important as low P/E, low P/S and low P/B but it certainly does matter. High yield stocks outperform low yield by about 1.5% per year on average.


Yes, but "there has been" when ? And when was your average calculated ?

You guys might be confusing the consequence of a financial model which is not followed anymore for a cause.

jbolden1517
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Re: Thoughts on individual dividend investing?

Postby jbolden1517 » Mon Jul 17, 2017 9:47 pm

patrick013 wrote:
jbolden1517 wrote:The main point was that dividend yield is much more stable than capital gains and grows with inflation. Income oriented investors want a stable real return. Which means income oriented investors can safely hold a higher percentage of equity in low P/D stocks. For someone pulling money out of a portfolio annually this is the advantage. The dividends allow them not to have to dollar cost sell.


Not that my portfolio can't be goofy in the sense that several tilts
might be used but with similar long term reliability I hate high priced
indexes in any event, value or growth. I think inflation shouldn't be
an orientation but just another observation point.

What do you think of this new fund, ticker SPYD ?
My old favorites of HDV, DTN, are getting some competition
from stuff like SPHD.


Haven't thought about it much, but a heck of a deal for equal weighting at 12 basis points. Also gotta say I love the diversification in ector breakdowns, this is a really diversified portfolio of large and midcap:
% Fund S&P 500 %
Basic Materials 5.78 2.89
Consumer Cyclical 15.29 11.02
Financial Services 5.39 16.33
Real Estate 17.89 2.32
Sensitive 28.06 40.34
...............................................................................................
Communication Services 5.02 3.89
Energy 6.71 6.01
Industrials 7.06 10.56
Technology 9.27 19.88
Defensive 27.59 27.09
...............................................................................................
Consumer Defensive 4.33 9.12
Healthcare 4.30 14.81
Utilities 18.96 3.16

This is the sort of fund that would make a very nice core holding for someone needing to draw income.

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patrick013
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Re: Thoughts on individual dividend investing?

Postby patrick013 » Mon Jul 17, 2017 10:22 pm

jbolden1517 wrote:Haven't thought about it much, but a heck
of a deal for equal weighting at 12 basis points.

Most studies dividend-wise seem to excel with yield
or equal weighting. Some older studies with dividend
size as the weighting factor are getting left behind the
last ten years. Something eclectic is happening.

Thanks for the response.
age in bonds, buy-and-hold, 10 year business cycle

Longtermgrowth
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Re: Thoughts on individual dividend investing?

Postby Longtermgrowth » Mon Jul 17, 2017 11:53 pm

patrick013 wrote:
jbolden1517 wrote:Haven't thought about it much, but a heck
of a deal for equal weighting at 12 basis points.

Most studies dividend-wise seem to excel with yield
or equal weighting. Some older studies with dividend
size as the weighting factor are getting left behind the
last ten years. Something eclectic is happening.

Thanks for the response.


SPYD (SPDR S&P 500 High Dividend ETF) does look interesting. I wonder what percentage of its distributions are Qualified Dividend Income since it currently holds almost 18% Real Estate?

jbolden1517
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Re: Thoughts on individual dividend investing?

Postby jbolden1517 » Tue Jul 18, 2017 6:16 am

rgs92 wrote:Does anyone think an investment in a set of dividend stocks would have less volatility than an S&P500 investment?
What about the volatility of a dividend-focused ETF or regular fund compared to the S&P500?
Would such an investment be more stable if used for income?


It doesn't have to be more stable to be more stable for income. You've seen the arguments for dollar cost averaging, and how a dollar cost averaging investor will end up buying shares for the harmonic mean which means the average purchase share price will be lower than the average share price over the same period of time. The math works the opposite for dollar cost selling.

Picture two assets:
X pays a 1% dividend increasing by 5% per year. Its price will randomly move to yield either .5% and 2% (i.e. only -50/ +100% of the intrinsic value) every year
Y pays a 5% dividend increasing by 0% per year. Its price will randomly move to yield either 1% and 25% (i.e. -80/+400%) every year

X has a higher long term return than Y and is less volatile. While Y may be more risky the risk of Y doesn't impact the income investor needing 5% yield from Y in perpetuity. However such an investor would go broke rather quickly holding X. For the early good years they would only be selling 2% of their holdings of X. On bad years they would have to sell 8% of their holdings of X. The 5% average annual capital gain won't keep up with the damage the bad years cause. The X income investor goes broke the Y income investor is fine.

aj76er
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Re: Thoughts on individual dividend investing?

Postby aj76er » Thu Jul 20, 2017 7:30 pm

jbolden1517 wrote:
aj76er wrote:I'll leave this by saying that you should thoroughly investigate the data to back up your claim of a premium for dividend-paying stocks. What you may be seeing is a hidden "value" effect, which can better be explained by factor-style theory rather than just dividends


I have no problem agreeing this is a value effect. P/D is a value metric and correlates with P/E, P/S and P/B which are also value metrics (and arguably better ones). The claim though was that low P/D stocks outperform high P/D stocks and saying it is a value effect is agreeing with this claim.

The main point was that dividend yield is much more stable than capital gains and grows with inflation. Income oriented investors want a stable real return. Which means income oriented investors can safely hold a higher percentage of equity in low P/D stocks. For someone pulling money out of a portfolio annually this is the advantage. The dividends allow them not to have to dollar cost sell.


aj76er wrote:(but I believe you can use dividends as one of the screens to detect a large-cap value factor). Anyway, you may be interested in writings by Larry Swedroe in which he discusses these concepts in great detail. Also, here's an article by him discussing dividends:

http://www.etf.com/sections/index-inves ... nopaging=1

In the article he quotes:

In summary, 2008 should have taught investors that dividend-paying stocks are not alternatives to safe bonds. Unfortunately, far too many investors failed to learn this lesson, and that could prove very costly when the next bear market arrives. The issue is compounded by the fact that the popularity of dividend strategies has led to valuations above those of the overall market. Forewarned is forearmed.


In 2008 we had a truly horrid bear market. Dividends declined 21%. There wasn't much inflation so any investor who had started in 2006 or earlier was getting the real yield he had started with. By 2012 he was way above where he had started. The cap gains investor didn't hit the break even mark till 2013, and worse had been as bad as -56% when he was selling shares to meet expenses. Forced sales during bear markets are why income investors go broke.

aj76er wrote: Having said all this, there has been a slight historical premium for holding large-cap value stocks. However, one would have had to hold these for very long time-periods to see the outperformance; and would have had to endure long timeframes of underperformance and tracking error.


Why is tracking error something an investor has to endure? I understand the rationale for a pension fund manager or mutual fund manager but why should an investor care about tracking error?

Good conversation.


Because for an individual holding a reasonable Portfolio, staying the course is one of the most important things. Tracking error can lead to behavioral mistakes such as switching away from a strategy at the wrong time.

If you recognize this and have a sound strategy, then of course tracking error is of little consequence.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

rgs92
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Re: Thoughts on individual dividend investing?

Postby rgs92 » Thu Jul 20, 2017 8:07 pm

Thanks Jbolden for that comprehensive analysis. I never thought about this way. Regards.

jbolden1517
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Re: Thoughts on individual dividend investing?

Postby jbolden1517 » Fri Jul 21, 2017 4:57 am

aj76er wrote:
jbolden1517 wrote:Why is tracking error something an investor has to endure? I understand the rationale for a pension fund manager or mutual fund manager but why should an investor care about tracking error?

Good conversation.


Because for an individual holding a reasonable Portfolio, staying the course is one of the most important things. Tracking error can lead to behavioral mistakes such as switching away from a strategy at the wrong time.

If you recognize this and have a sound strategy, then of course tracking error is of little consequence.


Agreed. I should mention that IMHO lots of tracking error with the broad USA stock market can help a lot here. Having an investor always be in bear markets with part of their portfolio and always be in bull markets with part of their portfolio does a lot to get people use to bull/bear swings. By the time they have 10 or more years experience they have seen a market they are in tank and recover. By 20 they have seen horrible bear markets reverse. They stop feeling nearly so tied to one particular market.

I hadn't thought about it but you are right a little tracking error, which is what equity income would experience, might be the worst of all possible worlds. Close enough to compare and yet would often compare unfavorably. So maybe a clear explicit disclaimer to make the investor understand their portfolio is designed for growing inflation adjusted income not designed to track the broader market. The cap gains won't track well. Rather they are likely going to underperform in bulls from a cap gains perspective sometimes by a lot, overperform in bears by often by less and the only compensations they get is that they have a portfolio which grows faster because they are holding less bonds and that they have far less risk of outliving their assets. That's a good trade rationally but they gotta understand that they are buying a to them useful subset of the market not the market.


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