Dividends, dividends, dividends.

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brak
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Dividends, dividends, dividends.

Post by brak »

So what are people's thoughts about constructing a portfolio that has more of a focus on dividends? Vanguard seems to have three dividend-oriented funds - High Dividend Yield, Dividend Appreciation, and Dividend Growth. High Dividend Yield appears to be somewhat more aggressive than the other two, but it also brings with it a higher dividend. Do people think a dividend focus to your portfolio is valid, and if so which (if any) of these funds would they use? and would they use them in the taxable or tax-protected portion of their portfolio?
Gregory
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Post by Gregory »

What has your search of the MANY posts on this topic (some quite recent) revealed?
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus
shelanman
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Post by shelanman »

With the incredibly large number of topics that get rehashed every few days, I don't see a need to be so unhelpful.

My personal analysis is that there are only two* things that connect the price of a company's stock to the intrinsic value of the company:

1) The net present value of future dividends paid out by the company

2) The ability of a single investor or a small group of investors to either buy the company outright or to acquire a sufficient majority of shares so as to effectively own the company outright, and then said investor(s) ability to extract value from their ownership of the company essentially as the greater of net present value of future earnings as operated by the owners or liquidation value of the assets if sold off.

Otherwise, you're left with just

3*) The tendency of investors to assume that because the stock certificates have a company's name on them, the shares must have value in proportion to the value of the company that printed them.

I like companies that pay dividends for two reasons.

First, it gives a reasonable basis for the stock's value being correlated with the company's value without the need for #2 (or #3*) above.

Second, if a company goes through its entire life without ever paying out a cent in dividends, then the company never made a profit for its owners. Oh, it may have had paper earnings, but they were all reinvested into the company, which never paid out a return.

Offtopic, but this is one of the reasons that I have never been an owner of Google. Google has asserted that they will never, ever, ever pay a dividend. Google has also designed their equity structure so that even though the founders have a very small percentage of the shares, they will be able to control the company completely regardless of who owns all of the Google-embossed paper.

I believe that the company Google is a valuable enterprise that, if it can overcome its present growing pains still has the ability to grow its business and its profits greatly, and to sustain that growth for a considerable period. (Their overcoming present growing pains is a question mark in my mind, but the founders are pretty smart and pretty savvy, and they definitely could succeed).

But I have no idea what the future value of the paper will be, because I can't fathom any rational reason why the value of the shares should be tied to the success or failure of the company beyond #3 above.

Anyway, that's my take. If someone out there is capable of shooting holes in this analysis... by all means! Please do! Stock market history suggests that either #3 is disturbingly powerful or my analysis is flawed. I can't see the flaw, so I'm forced to assume that it's all #3... it would explain why frothiness and volatility appear to have grown over the last decade or so while returns shrunk (because dividends have completely gone out of favor, to the point that people flock to by shares in companies that will never ever pay them)... but it's hard for even me to be this cynical and still take myself seriously.
dumbmoney
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Post by dumbmoney »

The IRS loves dividend investors.
Charles Mahaffey
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Post by Charles Mahaffey »

I believe that a dividend strategy can be a very good way to invest for retirement as increasing dividends are a great inflation hedge and they provide protection to the investor in a down market. The protection is provided by the investor living off the dividend stream vs. having to live off principal. However, if attempting to do this with individual stocks you better have a large portfolio to achieve adequate diversification even then when you look at companies with long histories of dividend increases you will find certain sectors to be heavily represented such as consumer product companies; KO, PEP, PG, CL, etc. A good place to start searching for these companies is the S&P Dividends Aristocrats Index. It is composed of companies that have increased their payouts for 25 years or more. However, there are several financial companies in the index that will be dropped this year. If employing this strategy don't just invest for yield but evaluate the company's ability to sustain its dividend in tough times. Also, this will not match the return of the market in an up market, you must look at totla return.
beardsworth
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Re: Dividends, dividends, dividends.

Post by beardsworth »

brak wrote:Vanguard seems to have three dividend-oriented funds - High Dividend Yield, Dividend Appreciation, and Dividend Growth.
This list, of course, omits Vanguard Equity Income (VEIPX), the oldest of this subgroup, which currently sports a yield above 4.3%.

https://personal.vanguard.com/us/funds/ ... ist::tab=1

By the way, another fund on your list, Dividend Growth in its current incarnation, is not as old as its inception date alone would indicate. Unless my memory is askew, Dividend Growth was once an income–oriented sector fund, Vanguard Utilities. But as the telephone and power industries consolidated, became less regulated in certain ways, and new competitors entered markets, utilities stopped being the quiet, well–regulated, staid old dividend machines they'd once been, and (I assume) trying to reliably fill an entire fund with dividend–paying utilities became unsustainable. So VDIGX became a different (and renamed) fund from its long–ago self, and not particularly utilities–oriented at all. (Just a bit of history here, not portfolio construction advice.)

Marc
Die Hard
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Post by Die Hard »

This may not pertain to a Boglehead, but has anyone seen this strategy....or better yet tried it? From http://dogsofthedow.com

Dog Steps
Investing in the Dogs of the Dow is relatively simple. After the stock market closes on the last day of the year, of the 30 stocks that make up the Dow Jones Industrial Average, select the ten stocks which have the highest dividend yield. Then simply get in touch with your broker and invest an equal dollar amount in each of these ten high yield stocks. Then hold these ten "Dogs of the Dow" for one year. Repeat these steps each and every year. That's it!

If simplicity is what you are looking for, this is about as simple as it gets. One telephone call to your broker per year and your Dogs of the Dow portfolio is ready to go. And to make it even simpler, just select your Dogs of the Dow bookmark on the last day of the calendar year and the official Dogs of the Dow will be listed for your convenience.

Small Dog Steps
Some of you may be interested in trying to outperform even the traditional Dogs of the Dow. Well, we have a way that historically has done just that. On the last day of any given year, select the ten highest yielding stocks as you normally would. Of these ten Dogs simply select the five Dogs with the lowest stock price and you will have what we call the Small Dogs of the Dow (Sometimes referred to as the Puppies of the Dow or the Flying Five). Then get in touch with your broker and invest an equal dollar amount in each of these 5 high yielding, low priced stocks. Then hold these five "Small Dogs of the Dow" for one year. Investing in the Puppies of the Dow would have resulted in a 20.9% average annual return since 1973! (As reported in U.S. News & World Report, July 8, 1996)

You are welcome to shoot arrows or bullets at this strategy........I've never done this, but passing on for any/all to reply.........
The best way to teach your children about money is to not have any.............
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alec
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Post by alec »

brak,

See this recent conversation, Why do companies pay dividends?

Die Hard,

See Does the Dow-10 Investment Strategy Beat the Dow Statistically and Economically? Financial Analysts Journal, Vol. 53, No. 4, July/August, pp. 66-72:
Abstract
A comparison of returns from 1946 to 1995 on a portfolio of the 10 Dow Jones Industrial Average stocks with the highest dividend yields (the Dow-10) with those from a portfolio of all 30 stocks in the DJIA (the Dow-30) shows that the Dow-10 portfolio beats the Dow-30 statistically; that is, the Dow-10 has significantly higher average annual returns. After adjusting for the Dow-10 portfolio�s higher risk, extra transaction costs, and unfavorable tax treatment, however, the Dow-10 does not beat the Dow-30 economically. In some subperiods, Dow-10 performance is economically superior, but the question is how to interpret this information in light of the potential for data mining and investor learning.
See also Investorhome's "Dogs of the Dow" and the "Foolish Four"

- Alec
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
Die Hard
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Post by Die Hard »

alec,
Thanks for the great research info.

Although, I don't think this strategy could do any worse than my Vanguard portfolio has done over the past year :shock: :x
The best way to teach your children about money is to not have any.............
livesoft
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Post by livesoft »

Dividends, schmividends

https://institutional.vanguard.com/iip/ ... talRet.pdf

Note in the paper (if I recall correctly) it was shown there was no advantage to dividend-paying stocks over a broad-based set of stocks, except that cap gains give one a lower effective tax rate.

A "normal" 60:40 portfolio is probably going to pay out about 3% in dividends each year without any special need for overweighting dividend paying stocks.
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Adrian Nenu
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Post by Adrian Nenu »

Other than providing retirement income, no logical reason to hold tax inefficient equity in a taxable account. Can be held in tax advantaged accounts if value tilt is desired.

Adrian
anenu@tampabay.rr.com
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alec
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Post by alec »

Die Hard wrote:alec,
Thanks for the great research info.

Although, I don't think this strategy could do any worse than my Vanguard portfolio has done over the past year :shock: :x
See also High Dividend Stocks: Bonds with price appreciation? by Aswath Damodaran of NYU and his book Investment Fables: Exposing the Myths of "Can't Miss" Investment Strategies.

- Alec
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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happy2
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Post by happy2 »

Which should we be more skeptical of:
a) companies that consistently pay a dividend of 50% of their earnings?
b) companies that promise to re-invest their earnings?

Doesn't our knowledge of human nature make the former approach reasonable? If companies have to pay-out a good portion of their earnings to their owners, that instills discipline and leaves less money for shenanigans.

Sorry, I've seen too many Enrons and Makoff's, etc... to make me have more faith in managers who seek to keep the capital.

Nothing wrong with paying Uncle Sam a small percentage to receive actual cash back from a company you own. That's the idea of owning a company right? Getting your share of what it earns. Today, and in the future...

That said, I follow a TSM approach, not a dividend chasing approach. But I understand and respect it, anyway.
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Post by raddr »

livesoft wrote:Dividends, schmividends

https://institutional.vanguard.com/iip/ ... talRet.pdf

Note in the paper (if I recall correctly) it was shown there was no advantage to dividend-paying stocks over a broad-based set of stocks, except that cap gains give one a lower effective tax rate.
Their study included only the 20 year period bull market period from 1986 to 2006, a time when the capital gains component of the total return dwarfed dividends. If you look at Fama and French's data from 1927 to 2007, encompassing several bull-bear cycles, dividend-paying stocks (especially those paying the largest dividends) handily beat the non-dividend payers.
atomiclightbulb
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Post by atomiclightbulb »

Dividends are real $ in your hands. Capital gains are often irrational exuberance.

Dividends are the only reason why stocks exist in the first place. When the first joint stock companies formed centuries ago, people put money into these companies in the hopes that they would realize future profits.

That being said, future dividends may fluctuate just like stock prices fluctuate. I'd rather just buy a stock Index Fund and try to get the benefits of dividends and capital growth. For income providing assets, I would go with bond funds.
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alec
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Post by alec »

raddr wrote:
livesoft wrote:Dividends, schmividends

https://institutional.vanguard.com/iip/ ... talRet.pdf

Note in the paper (if I recall correctly) it was shown there was no advantage to dividend-paying stocks over a broad-based set of stocks, except that cap gains give one a lower effective tax rate.
Their study included only the 20 year period bull market period from 1986 to 2006, a time when the capital gains component of the total return dwarfed dividends. If you look at Fama and French's data from 1927 to 2007, encompassing several bull-bear cycles, dividend-paying stocks (especially those paying the largest dividends) handily beat the non-dividend payers.
And value stocks beat the TSM and growth stocks. But that doesn't mean it will be so in the future. :wink:

btw - good to see you here raddr.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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drbagel
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Post by drbagel »

happy2 wrote:Which should we be more skeptical of:
a) companies that consistently pay a dividend of 50% of their earnings?
b) companies that promise to re-invest their earnings?

Doesn't our knowledge of human nature make the former approach reasonable? If companies have to pay-out a good portion of their earnings to their owners, that instills discipline and leaves less money for shenanigans.

Sorry, I've seen too many Enrons and Makoff's, etc... to make me have more faith in managers who seek to keep the capital.

Nothing wrong with paying Uncle Sam a small percentage to receive actual cash back from a company you own. That's the idea of owning a company right? Getting your share of what it earns. Today, and in the future...

That said, I follow a TSM approach, not a dividend chasing approach. But I understand and respect it, anyway.

I completely agree with you. Dividends are a more reliable way to share in the profits of a corporation. Also, consider that capital gains are dependent on the price earnings ratio, a number heavily influenced by speculation. If the market PE drops by 50% during a panic, you lose out even if the company you own is healthy.

On the other hand, I have some problems with dividend heavy funds and indexes as well. Dividend indexes tend to overweight certain sectors. This adds sector risk, which can bite you at exactly the wrong time (i.e. financial stocks over the last 2 years)

The debate rages on. I also prefer a TSM approach, although I do hold a few dividend stocks with my "play money."
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Petrocelli
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Post by Petrocelli »

I am not a slave to dividend paying stocks. However, when I buy a stock, I make sure it pays at least a 2% dividend. I think it shows a certain level of commitment to the shareholders if the company regularly distributes cash.
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statsguy
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Post by statsguy »

Petro... rather than 2% we use a moving target. When we buy a stock we typically require a dividend yield of that beats the current yield on money market funds.... stocks are more volatile than mutual funds and this is at least one way that we try to get paid for the extra risk.

We are also going to live on the dividends in 2 years so having a bit more than money markets pay is also need based.

Currently our dividend stocks pay about 4.6% which is nice... this year the income in our stock portfolio increased 12%. That beats inflation.

Stats
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Petrocelli
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Post by Petrocelli »

statsguy wrote:Petro... rather than 2% we use a moving target. When we buy a stock we typically require a dividend yield of that beats the current yield on money market funds.
That wouldn't be hard these days! :wink:

I got the 2% figure from a stock screen used by Geoff Considine at Quantext. It's just a starting point. Because I won't need the dividends for many years, I am not interested in maximizing dividends. I am more interested in Beta and the R2 of the stocks to the rest of my portfolio.
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Gregory
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Post by Gregory »

raddr wrote:
livesoft wrote:Dividends, schmividends

https://institutional.vanguard.com/iip/ ... talRet.pdf

Note in the paper (if I recall correctly) it was shown there was no advantage to dividend-paying stocks over a broad-based set of stocks, except that cap gains give one a lower effective tax rate.
Their study included only the 20 year period bull market period from 1986 to 2006, a time when the capital gains component of the total return dwarfed dividends. If you look at Fama and French's data from 1927 to 2007, encompassing several bull-bear cycles, dividend-paying stocks (especially those paying the largest dividends) handily beat the non-dividend payers.
Don't let a little data mining get in the way of a VG paper. :wink:

I wonder how current index-based retirees feel about dividends today. Are they happy with the CG's they've had over the past decade? Do they wish they had a greater dividend income stream?
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus
Gregory
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Post by Gregory »

Petrocelli wrote:I am not a slave to dividend paying stocks. However, when I buy a stock, I make sure it pays at least a 2% dividend. I think it shows a certain level of commitment to the shareholders if the company regularly distributes cash.
Ben Graham felt strongly about returning cash to investors via dividends -- you're in good company Petro.
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus
discman017
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Post by discman017 »

I'd hazard a guess that Dividend Growth and Dividend Appreciation Index are two of Vanguard's most-misunderstood funds. Consider their yields vs. that of the S&P 500 (SEC yield, which I retrieved from Vanguard's website just a few minutes ago):

Dividend Growth: 2.57%
Dividend Appreciation Index: 2.40%
500 Index: 2.87%

That's right -- Vanguard's 500 Index fund pays out a higher dividend rate than either Dividend Growth or Dividend Appreciation. Only part of that difference is explained by the lower expense ratio of the 500 Index fund. Conclusion: Dividend Growth and Dividend Appreciation are not "high-dividend" funds. Instead, they're "slightly-below-market-average-dividend" funds.

Donald Kilbride from Wellington, manager of Dividend Growth, follows a rising-dividend strategy -- he looks for companies that he expects to be able to increase their dividends for years to come, and he may even invest in companies that currently pay no dividends, so long as he expects future dividend growth.

The Dividend Appreciation Index is based on the Mergent Dividend Achievers Select Index, which applies a set of Vanguard-proprietary quantitative filters to the Mergent Dividend Achievers Index (an index of companies with a history of increasing dividends) to remove companies that are considered unlikely to be able to continue increasing their dividends.

These are rising-dividend funds, not high-dividend funds -- that may sound similar, but the resulting portfolios look nothing like those of high-dividend funds. These are really high-quality equity funds, not high-dividend funds. Many characteristics of high-dividend funds don't apply here, including tax inefficiency and heavy financials stakes.

I believe that these are both great funds -- in fact, I own both. But I own them because I want to weight my portfolio toward quality stocks, and not because I want high-dividend-paying stocks.
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cato
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Post by cato »

shelanman wrote:....Offtopic, but this is one of the reasons that I have never been an owner of Google.....
You could hardly have matched my feelings on this more precisely.
At the end of the day, an asset is worth the discounted value of the income it generates to its owners. If your stock doesn't generate income, it's little more than a baseball trading card.

There has been an amazing number of companies (particularly in tech), who have been very well run, and performed fabulously for a while -- sometimes a decade or two -- but never paid a dividend. In the long run, owners of these companies are left with nothing. Think of Prime computer, DEC, Unisys, and now Sun Microsystems. These were all the stellar companies of their day; they're now essentially worthless.
Citigroup delenda est.
cheapskate
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Post by cheapskate »

Petrocelli wrote:I am not a slave to dividend paying stocks. However, when I buy a stock, I make sure it pays at least a 2% dividend. I think it shows a certain level of commitment to the shareholders if the company regularly distributes cash.
Paying out steady (and increasing dividends) back to shareholders also reduces the money left over for

- Pursuing worthless acquisitions with cash.
- Repurchasing equity and handing that back out to execs and management. Essentially making money off shareholders rather than for shareholders.

As someone who has worked in Silicon Valley tech companies and has seen a lot of both, I am totally for tilting towards dividends.
smackfu
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Post by smackfu »

Also look at all those companies that were doing stock buybacks last year. Turns out that was a pretty bad use of their cash.
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tetractys
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Re: Dividends, dividends, dividends.

Post by tetractys »

brak wrote:So what are people's thoughts about constructing a portfolio that has more of a focus on dividends? Vanguard seems to have three dividend-oriented funds - High Dividend Yield, Dividend Appreciation, and Dividend Growth. High Dividend Yield appears to be somewhat more aggressive than the other two, but it also brings with it a higher dividend. Do people think a dividend focus to your portfolio is valid, and if so which (if any) of these funds would they use? and would they use them in the taxable or tax-protected portion of their portfolio?
I like to consider dividend oriented funds as value plays, and specifically have considered High Dividend Yield Index (VHDYX) as a portfolio replacement for Value Index (VIVAX). Definitely I would hold either of these funds in a tax-sheltered account.

- VHDYX has +.20% E/R over VIVAX, but makes up for it with +.26% more yield.
- VHDYX has greater diversification, 529 stocks vs. 432 for VIVAX
- VIVAX is more value tilted, with -1.8x from the P/e, and -.3x from the P/b.
- VHDYX is bigger and seems to have a lot less turnover.

For all practical purposes its a near toss up IMO. If I were looking for the dividends and less interested in the value tilt I would give more consideration to VHDYX, and anticipate the E/R coming down in the near future.

In general, like several of the posters so far, I like dividend paying stocks because of what I like to call cash on the barrel head good faith. But there's also the case for pure growth stocks, and for owning both, because in time the success of either wanes and waxes.

All the best in your investing, Tet
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cheapskate
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Post by cheapskate »

smackfu wrote:Also look at all those companies that were doing stock buybacks last year. Turns out that was a pretty bad use of their cash.
The way I look at that is, just as individuals can't time the market,
companies can't.

I don't have a problem with companies doing buybacks (even if the stock is
bought back high) with the intent of "retiring" the bought back stock,
thereby increasing each shareholder's stake in the firm. My concern is that more often than not, the buybacks are done purely so that stock grants can
be issued to management. This is of course way more prevalent with technology companies than others.
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