Buy High Dividend Stocks and Ignore The Noise

[JoMoney]

...
- also dividend yield is sometimes used as a proxy for value strategies (price to book works better in most research). But high yield often simply means the dividend is about to get cut
...
So a dividend strategy is in a sense another form of a 'value' strategy. Mixed evidence on whether it works, AFAIK.

I would argue that the best long-term dividend achievers come from "Growth" companies... preferably bought when they're at "Value" prices

[Valuethinker]

...
- also dividend yield is sometimes used as a proxy for value strategies (price to book works better in most research). But high yield often simply means the dividend is about to get cut
...
So a dividend strategy is in a sense another form of a 'value' strategy. Mixed evidence on whether it works, AFAIK.

I would argue that the best long-term dividend achievers come from "Growth" companies... preferably bought when they're at "Value" prices

Thinking something like J&J?

Agreed, but in terms of 'growth' and 'value' screens they appear when they drop into 'value'. Hence CISCO and MSFT as value stocks (given their yields and cover ratios). Or Merck and Pfizer.

Philip Morris, BAT, Imperial Tobacco are probably the only examples (or the best ones) of stocks that have stayed resolutely 'value' in multiples even as their dividends have grown.

[JoMoney]

I don't know what the future holds for JNJ, but the owners would be better rewarded if they could resume faster growth, whether or not that sector will continue to be an outperformer going forward may be another topic. There are plenty of long-time "Dividend Achievers" that would find themselves in the growth category of the stock spectrum. Coke, Colgate Palmolive, Nike, and more... someone focused on the initial dividend yield may be put off, but over time the growth has more then compensated a buy and hold investor. There's some serious questions about whether the future will be as good as the past for all these companies, but it was clearly the growth that made them star performers of the past. But, like dividends being a lousy "value" strategy, it's also not a great growth strategy.. or maybe the other way around growth generally yields lower initial dividends, but patient investors are often rewarded.

What is the definition of Value vs. Growth stocks?
No two distinct categories of business. PV of cash a company generates is what the business is worth. No distinction in our mind between growth & value. All decision you decide how much value you are going to get.

All intelligent investing is value investing; then acquire more than you are paying for. Investing is where you find a few great companies and then sit on your a$$ .

[hafius500]

In all likelihood, someone who invests in high-dividend stocks and withdraws and spends only the dividends will leave less than someone who invests in the total market and withdraws and spends only the dividends.

Do you have any data that support this assertion?

Some back-tested studies suggest that higher pay-out ratios predict higher earnings growth or that high-dividend strategies had higher safe withdrawal rates than TSM. And in this case one might conclude that the terminal value should have been higher:
T Rowe Price - Dividends Can Play Key Role in Retirement Income Plans

First graph: "Benefits of a High-Yield Equity Strategy in Retirement
Annual Account Value of High-Yield Equity Portfolio vs. S&P 500: 1972–2007"

This analysis assumes a $500,000 portfolio in each strategy on December 31, 1972; 4.5% of portfolio assets withdrawn the first year of retirement; and annual increases in withdrawals to keep pace with actual inflation. Withdrawals are made at the end of each year. The highyield equity portfolio consists of the top 50% of dividend-paying companies in the S&P 500
Stock Index, adjusted every January based on the prior year.
....
As seen in the chart below, the high-yielding stock portfolio provided all the withdrawals but still had a balance of more than $4.4 million at the end of 2007, while the S&P 500 portfolio ran out of money in 2005.

Morningstar Thread

Scroll down to post "FF Data
11-08-2007, 8:02 PM | Post #2454946", written by mathguy2:

It is the 1927-2006 FF data by dividend yield deciles. I have four portfolios -- Total Stock Market (TSM), Large Cap (Lg) which is close to the S&P 500, Highest 30% Dividend Yield stocks (D30), and Highest 10% Dividend Yield stocks (D10). I looked at 30-year retirement periods beginning in the year shown with [actual historical] inflation-adjusted withdrawals. Portfolios are 100% invested in stocks and any dividends in excess of the year's withdrawal are reinvested in stocks...
...
The dividend portfolios have significantly higher average WR than the "index" portfolios -- 9.13% and 8.46% for D30 and D10 versus 7.52% and 7.16% for TSM and Lg.

BTW, do not conflate high-dividend strategies with dividend-growth strategies. The former is a simple quantitative strategy that uses historical data. The latter is a complex strategy that tries to predict the future profitability of a firm and capture the profitability premium.

[Clearly_Irrational]

The main advantage I can see from owning individual dividend stocks is the psychological component. For a "total value" portfolio there is no way I could tolerate 100% stocks, the value swings would totally stress me out. For an all dividend portfolio though I'm pretty sure I could train myself to just ignore the market prices and only pay attention the cash flow which would allow me to tolerate the volatility that goes with 100% stocks. Does greater psychological safety have real value when it allows you to tolerate a "riskier" allocation?

[JoMoney]

I've seen that argument used several times in financial blogs and writings, that dividend stocks provide a psychological comfort allowing retirees to hold a higher level of equities then they might otherwise be comfortable with.

[umfundi]

The consensus of the experts at the BH2013 meeting was to invest for total return, not for dividends.

Yes, I know: You can easily find mutual funds and ETFs that are based on dividend strategies. Morningstar continually tries to sell me a newsletter that recommends (picks) individual dividend-paying stocks.

For mutual funds the effect of a distribution is crystal clear: The value of the distribution is deducted from the fund price. If the distribution is reinvested, you end up with more shares but the exact same total value.

For stocks it is a little less clear, because the dividend cannot be immediately reinvested (unless it is a DRIP). But, just think about it: A $10 stock announces it will pay a $0.50 dividend after the close of the market tomorrow (Tuesday). What is the expected opening price on Wednesday? If it is not $9.50, there is a lot of free money lying around! (Yes, I know: The $0.50 is taxable, so I might not pay $0.50 to get it.)

Keith

[snowman9000]

I think it's unfortunate that it took about 50 posts for someone to mention that dividends are real, and cannot be faked. In stark contrast to a lot of the number-massaging that goes on in corporate accounting. In some ways, buying a stock that never pays a dividend is an application of the greater fool theory. I'm not saying it doesn't work, though.

[jebmke]

I think it's unfortunate that it took about 50 posts for someone to mention that dividends are real, and cannot be faked. In stark contrast to a lot of the number-massaging that goes on in corporate accounting. In some ways, buying a stock that never pays a dividend is an application of the greater fool theory. I'm not saying it doesn't work, though.

I worked for a company that borrowed heavily for three years to maintain the dividend during the 1981-82 recession despite near zero free cash flow. In fact, the chairman convinced the board to take on 15-year debt at 18% with no prepayment capability. The company nearly went bankrupt. So, yes, you can fake a dividend.

[countdown]

I'm admittedly a novice, but haven't generations successfully retired using this approach with a combination of Wellesley and Wellington?
I'm honestly asking.
I believe it was Pfau, in a 2012 article about retirement strategies, that lists them as the 'Classics', which I interpreted as ''one of the roads to Dublin'.
Thoughts?

[JoMoney]

I think it's unfortunate that it took about 50 posts for someone to mention that dividends are real, and cannot be faked. In stark contrast to a lot of the number-massaging that goes on in corporate accounting. In some ways, buying a stock that never pays a dividend is an application of the greater fool theory. I'm not saying it doesn't work, though.

Some people like to assume that dividends always come from a companies free cash flow and if they couldn't afford to pay it out, they wouldn't. But this is not always the case. Companies that pay regular dividends know they have owners who have come to expect regular payments and will generally avoid cutting it at all but the most drastic times, even if it means diluting equity through new IPO's, selling assets, or going out and borrowing money to do so.

In terms of dividends, you get into an expectational problem. Most public companies don’t bounce around their dividend from year to year (although this is very common in private companies and Berkshire subsidiaries) because investors come to rely on it. So once you establish a dividend policy at a public company, think a long time before changing it.

http://online.wsj.com/news/articles/SB1 ... 3951820736 AT&T Inc. has signaled in meetings with investors and analysts in recent weeks that it would be open to selling its multibillion-dollar portfolio of cellphone towers and its stake in the Latin American phone company owned by Carlos Slim if necessary to keep paying its dividend or buying back stock...

http://seekingalpha.com/article/796991-ipo-preview-cke ...On the IPO 50% of stock is from selling shareholders, with the other proceeds to be used to pay Apollo a $14 million management termination, the balance to repay debt, probably incurred to pay dividends to Apollo after they bought CK...

It's not always apparent where the money is coming from, but dividends can quite certainly be "faked", or maybe more appropriately just being taken from the owners in other ways.
While not necessarily compared to a good business, I think it's important to keep in mind that the Bernie Madoff ponzie scheme also kept people at bay paying "fake" dividends from new "investors"...

[JoMoney]

It get's a little complicated, but Warren Buffett gives a great example of how a selling of shares can represent a superior income growth strategy then dividends (on page 20 of the BRK annual letter):
http://www.berkshirehathaway.com/letters/2012ltr.pdf
Despite your percentage ownership in a stock (or group of stocks) being decreased, if you make reasonable assumptions on the companies ability to grow retained earnings, the dollar value of those retained earnings go even further then if you reinvested dividends (with very reasonable assumptions on the markets markup on price to book of those assets created by the retained earnings).

[Bustoff]

Why does Wellesley Income Fund have better performance features than the balanced index funds with similar stock/bond allocations.

For example, Life Strategies Conservative Growth fund holds 60% of its assets in bonds, a portion of which is allocated to international bonds, and 40% in stocks, a portion of which is allocated to international stocks.
Wellesley is one-third stocks and two-thirds bonds.
It seems like Wellesley performs better in both good and bad markets in that Wellesley returns have been higher and it dropped less during the 2008 crises.

According to Vanguard "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income focused balanced funds." This seems to be the case when you observe the Vanguard growth of $10000 charts.

[dbr]

Why does Wellesley Income Fund have better performance features than the balanced index funds with similar stock/bond allocations.

For one thing, Wellesley takes more duration and quality risk in bonds to reach for higher return.

[Bustoff]

Why does Wellesley Income Fund have better performance features than the balanced index funds with similar stock/bond allocations.

For one thing, Wellesley takes more duration and quality risk in bonds to reach for higher return.

Thanks dbr. What's interesting about your observation is that even though Wellesley's emphasis is on corporate bonds, it still held up better than the similar balanced index fund during the financial crises. What's really interesting is that individually the Total Bond fund, which also represents the bond portion of the balanced index funds, held up better than the Intermediate-term Investment Grade bond fund during the crises. Perhaps this is an example of the futility of examining asset classes in isolation.

What confuses me even more is that Wellesley holds very few stocks compared to the balanced index funds. You would think Wellesley's lack of diversification should make it riskier than a balanced index fund. Yet Life Strategy Consrv Grwth and Wellesley both carry the same Vanguard risk rating of 3.

[jdb]

I'm admittedly a novice, but haven't generations successfully retired using this approach with a combination of Wellesley and Wellington?
I'm honestly asking.
I believe it was Pfau, in a 2012 article about retirement strategies, that lists them as the 'Classics', which I interpreted as ''one of the roads to Dublin'.
Thoughts?

I suspect that if Wellesley and Wellington had been available during period of say 1945-1970 that there would have been a migration of some investors from the old time high dividend stock portolios to those funds.

[Browser]

Go here to look at Vanguard Dividend Appreciation ETF (VIG) compared to the overall market:

VIG vs. Russell 1000

Price/Prospective Earnings* 15.76 15.16
Price/Book* 2.95 2.13
Price/Sales* 1.29 1.40
Price/Cash Flow* 9.86 7.35

Dividend stocks have historically sold at a valuation discount to the market, and are now selling at a premium to the general market. Sound good to you? Using dividends as a valuation indicator right now might not turn out as well as it has in the past -- unless you expect these valuations to stay permanently high.

[countdown]

Yes, jdb. I agree. The pairing which became available in 1970 with the addition of Wellesley seems to satisfy many investors/retirees. Again, it may not be better than the total return approach of today, but it is another way. Yes?

[stratton]

There is this myth that "dividend" stocks pay reliable dividends over time and also have a stock price that tracks the market.

2008 totally disproves that myth. Some financial companies still haven't resumed dividends yet.

Paul

[umfundi]

There is this myth that "dividend" stocks pay reliable dividends over time and also have a stock price that tracks the market.

2008 totally disproves that myth. Some financial companies still haven't resumed dividends yet.

Paul

Paul,

Yes. They pay dividends reliably until they don't.

If you just look around at all the newsletters and advice, and all the ETFs and mutual funds targeted to dividend strategies, you must realize it's not a sure thing. I just do not think that investing for dividends should be cause to sleep better (or worse, for that matter) at night.

Keith

[stratton]

I'm admittedly a novice, but haven't generations successfully retired using this approach with a combination of Wellesley and Wellington?
I'm honestly asking.
I believe it was Pfau, in a 2012 article about retirement strategies, that lists them as the 'Classics', which I interpreted as ''one of the roads to Dublin'.
Thoughts?

I suspect that if Wellesley and Wellington had been available during period of say 1945-1970 that there would have been a migration of some investors from the old time high dividend stock portolios to those funds.

Wellington dates from 1929.

You can see the annual performance here.

Paul

[Sidney]

There is this myth that "dividend" stocks pay reliable dividends over time and also have a stock price that tracks the market.

2008 totally disproves that myth. Some financial companies still haven't resumed dividends yet.

Paul

And some are just plain dead.