misguided interest in div strategies

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nedsaid
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Re: misguided interest in div strategies

Post by nedsaid » Sun Jan 12, 2014 12:57 pm

Larry, I have to admit that I was aghast at posters on this forum that considered the "Larry Swedroe Portfolio" consisting of treasuries and small cap value.

Wow, I get the lectures from folks about the dangers of having 15% of my retirement in individual stocks. I can't imagine a more volatile asset class for 100% of one's stock market investments than small cap value. Wow, I would never put 100% of my stocks in what is essentially a 3% slice of the US Stock Market. Of course, you are balancing this out with lots and lots of low risk treasuries. I can't imagine putting 100% of my money in two asset classes.

Of course, the "Larry" portfolio has done well and you have the math to back it up. But I personally would not steer anyone that way.

So I guess you will take your market risks and I will take mine. But one cannot say that I don't believe in broad diversification.
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Re: misguided interest in div strategies

Post by dkturner » Sun Jan 12, 2014 1:18 pm

Aptenodytes wrote: Seven years of returns is almost entirely meaningless.
How about 14 years of returns?

Vanguard Equity Income Fund (VEIPX - the fund I've used for the last 14 years for my l-c value exposure) 7.24% annualized total return. Vanguard Value Index (VIVAX) 5.14% annualized return.

Luck? Possibly - but I still get to keep the extra 210 basis points of annualized returns I've earned for the last 14 years. (;-)

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Re: misguided interest in div strategies

Post by larryswedroe » Sun Jan 12, 2014 3:59 pm

nedsaid
First, the portfolio is not just US SV, it includes international and EM stocks as well
Second, it contains THOUSANDS of stocks and is diversified by US, international and EM and unlike TSM which is undiversified totally by factors (only beta) it is much more diversified having exposure to all three factors and in more equal weighting too in term of it's impact.
Those are the issues that really matter
Best wishes
Larry

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nedsaid
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Re: misguided interest in div strategies

Post by nedsaid » Sun Jan 12, 2014 5:21 pm

Thanks Larry for clarifying the "Larry" portfolio.

It is a rational portfolio and it solves the mega-cap overweight problem that I mentioned. For a long-term investor it should do very, very well.

A person has to understand that "small" and "value" can underform for years at a time as they did in the 1990's. For the "Larry" portfolio to do its magic, one needs a long time horizon. Since I believe in these factors myself, I can't be too critical of your portfolio. So someone who adopted the "Larry" portfolio in 1990 would not have been happy with it for several years, whereas someone who adopted the "Larry" portfolio in 2000 would swear you were a market genius.

The thing is, any good investment strategy can be picked to death. The US Total Stock Market derives half its value from 100 or so stocks. I own the Total Stock Market Index Fund and it is my largest holding, but I realize that it is mostly a mega-cap and large-cap index. So I have done what many have suggested and overweight my mid-cap and small-cap holdings as compared to the Total Market. I certainly am not going to argue that index investing doesn't work.

I don't want to be the champion of stock picking on the Boglehead's forum. I am just pointing out that it has worked well enough for a lot of folks. Is it the optimal strategy? No. Is it the best strategy? No. But I still say the dangers of doing this are overblown.

I am a believer in Value strategies. But there are folks out there that say value doesn't matter. And they can pick even that apart. Pretty much, I am a value-oriented investor and by golly those dividends sure seem to come in handy. The folks that say dividends don't matter, well we can agree to disagree. I will keep collecting those meaningless dividends, thank you.
A fool and his money are good for business.

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Re: misguided interest in div strategies

Post by larryswedroe » Sun Jan 12, 2014 6:00 pm

nedsaid
Few thoughts for you, while one can try and pick value apart the evidence is overwhelming, so efforts like Bogle's in the "Telltale chart" simply don't hold up to scrutiny. Value premium is persistent not only in US, but everywhere you look in world and even across asset classes.
Second, the evidence is coming in pretty strong now that while value is not a free lunch, there is a risk story, it might even be more than the free stop at the dessert tray I used to think it was, and may even be more like free entree. The premium just too big to justify the size----a big chunk is behavioral clearly as investors overprice growth stocks persistently and overvalue "lottery like investments."
Third, the value premium, especially the SV is at least as persistent as the equity premium, and over really long periods it's much more persistent.

Hope that helps
larry

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Re: misguided interest in div strategies

Post by larryswedroe » Sun Jan 12, 2014 6:03 pm

nedsaid
The facts are that dividends don't matter. That's not opinion. That's what the data shows clearly. Now, by not matter I mean that they don't add any value in explaining the differences in returns between diversified portfolios in way that isn't already better explained by the other factors. IN other words including looking at dividends as a screen adds no value whatsover and likely subtracts it. In fact one study found just that (and it is likely because p/d is the worst of the value screens, and people overpay for their "beloved" dividends thinking they add value)

Best wishes
Larry

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nedsaid
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Re: misguided interest in div strategies

Post by nedsaid » Sun Jan 12, 2014 6:22 pm

Larry, I am a huge believer in the Value premium. I have believed this my entire investing career.

I believe like you that Value is largely a behavioral story. I don't buy the argument that this is a risk story, the expectations the street has for these stocks are lower. I have always believed that it is easier to beat low expectations than high expectations. I won't say it is a free lunch, or dessert, or entree. The price you pay is patience and buying unpopular and unloved investments. Value is a dreadfully boring strategy and doesn't excite at cocktail parties.

In other posts, you talked about DFA screening enough for momentum to atleast get the momentum factors from negative to neutral. This makes sense to me. I wonder if this screens out the "value traps." That is the companies that are cheap for a darned good reason and should probably forever remain cheap.

And yes, I very firmly believe in the small-cap premium. This works for much the same reason as value, these stocks are just not as widely known and followed. Being small means greater potential for growth. Small is sometimes though not always unpopular.

As far as dividends go, I agree that by themselves they are not a good metric. It is only one thing out of several that I consider. And as I have said many, many times, I don't believe in yield chasing in either the stock side or the fixed income side.

So we don't disagree on that much. I clearly have aligned my investments to take advantage of these premiums.
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Re: misguided interest in div strategies

Post by lazyday » Sun Jan 12, 2014 8:12 pm

ogd wrote:much more testable (see if stocks / funds outperform each other in conditions X, Y and Z), but also in terms of what you need.
Testable if happen to have nearly identical curves for two funds in an appropriate time period.
Not ideal for what I want, which would be more like a portfolio survival test, like SWR studies.

Agree it's generally a terrible idea to replace fixed income with dividends. Maybe when high market div yield, a bit of this could make sense if understand risks and approach as TAA Tactical Asset Allocation.

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Re: misguided interest in div strategies

Post by lazyday » Sun Jan 12, 2014 8:24 pm

On # of stocks needed:

- Could have dividend strategy for only part of the portfolio.
Maybe some is a mix. Around 2010ish, when Europe index still had high yield, I held some VGK mostly for other reasons, but partly for yield.
Some of my individual stocks were from Europe.

- Around same time frame, I held 100-175 stocks, plus indexes. As I recall, had a soft limit of 1% of portfolio in any stock, aimed for .5% or less.
There are downsides to individual stocks, like rights offerings, tender offers, shareholder lawsuits, etc, requiring work to avoid dillution. Partly for this reason I've reduced the number of stocks held, increasing theoretically uncompensated risk.

- I think individual stocks are a bad idea unless have good reasons.

- Wiki

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Re: misguided interest in div strategies

Post by FinancialDave » Sun Jan 12, 2014 8:32 pm

larryswedroe wrote:
So Larry, I don't disagree with you but I think the risks of owning individual stocks are overstated.
Oh really? Ask those that had high percentages in stocks like Fannie and Freddie and Enron and on and on.
Now obviously the greater the number of stocks you own and the more diversified by dollars, industries, countries, and so on the less risky it becomes, but it takes about now perhaps 50-100 US large to get tracking error to US large to less than 5%, and then if you want to add small your into the many hundreds, and then value, and international and EM, and so on.

Also what people forget is that the volatility of the portfolio can matter a great deal in the withdrawal phase where the order of returns matters. If you run MCS you can see significant differences in success rates with individual stock portfolios and globally diversified ones.

And remember, there is NO COMPENSATION for the extra risk you can diversify away, just extra risks

Best wishes
Larry
Really? And Just how does volatility of a portfolio matter if you have designed it to only withdraw the dividends, which is what I do. You do not take on price volatility in this kind of design - price volatility is caused by the market. In this particular case your risk is what I might call "company risk" - or the risk that a company does not pay its dividend. This is not the same tail risk that is caused by market events like 2008, 911, or other short term events that disrupt the market. Sure, if the market event is such that it stomps on a complete sector such as the banking sector in 2008, then you could have taken a hit on any banking stocks. I also don't design a withdrawal strategy that requires you to use all your funds for the dividend income, so if one stock becomes an Enron, you could just replace it with money from your growth account. It does not take a 10 digit portfolio to do this. In fact you could put 100 stocks in a $100k portfolio and suffer only a 1% decline in income if any one stock went to zero. This is more diversity that you get in some Mutual Funds and ETF's. In my particular case I only use 20 stocks, which has proven to be quite adequate. And by the way, there are a list of about 130 stocks that have been increasing dividends for between 20-60 years.

Here is one aspect of retirement withdrawal using dividends that doesn't seem to be talked about. In general, the yield from your account is based on your retirement date when you buy the stocks. Unlike bond funds which don't appreciate in price over time, stocks usually do increase their cash flow over time if you have invested in quality companies. Let's however look at something more mundane like an SP500 index VFINX. Last year is a good year to look at because we got the typical gains of 2-3 years all in one year, so what would have happened to your income had you bought VFINX? Generally you might look at the quoted yield of this fund and think well it only delivered about 1.8-2% last year, but let's look at how the retiree faired with this simple index.

The investor buys 1000 shares VFINX on the first day of 2013 for a price of $131,370. The following cash flow and yield results:

$635 - yield to cost 1.93%
$697 - yield to cost 2.12%
$747 - yield to cost 2.27%
$869 - yield to cost 2.65%
Total increase in $ over the 1 year is about 16% above the original plan, had the dividends not increased.

This is just an illustration and not meant to suggest VFINX is a good source of increasing dividends, because it has had over the years what I might consider a "volatile" income stream, since it holds 500 different companies which change on an annual basis. It is really just meant to suggest that the term "yield to cost" is what is important to a retiree, as this is the money he has to work with. So image the inflation protection from a company like JNJ that has been increasing it's dividends for 50+ years, to the retire that bought it 10 years ago. For someone to look at the current JNJ yield of something around 2.9%, this seems fairly low compared to some other longer term bonds, but consider, I bought my JNJ a little over 2 years ago and already my yield to cost is 4.2%. Say you bought your JNJ 10 years ago, your yield today has almost tripled.

So if this type of portfolio is designed properly, you have an inflation adjusted income stream, that is NOT subject to the market volatility.

fd
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Re: misguided interest in div strategies

Post by nedsaid » Sun Jan 12, 2014 9:34 pm

Thanks Financial Dave for your post. Someone out there actually is making the points I have attempted (and failed) to make myself.

This is why I have not sold off my individual stocks. I am considering such a strategy with part of my portfolio, collecting dividends from individual stocks which hopefully will grow over time.

So dividends don't matter in predicting return on stocks. I agree with Larry on that. But dividends do matter as far as cash flow generated that one can live on. (I know, I know, folks will talk about "total return" investing), There is just something about seeing that cash hit your account. So I guess I am old fashioned in my thinking.
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Re: misguided interest in div strategies

Post by ogd » Sun Jan 12, 2014 10:13 pm

lazyday wrote:Testable if happen to have nearly identical curves for two funds in an appropriate time period.
Not ideal for what I want, which would be more like a portfolio survival test, like SWR studies.
Not just if they are identical -- if they diverge in the conditions you are interested in, that tells you something. The hypothesis is "dividend stocks are better in conditions X and Y in the presence of withdrawals". The argument I made is, if they are better in the presence of withdrawals, they are better in total return as well, without withdrawals. Which leads to the following test: do dividend stocks have higher total return in conditions X and Y (period)? In 2008 they weren't. Find another time you're worried about, look at total return with dividends reinvested, and that should tell you if dividends help without any withdrawal simulations.
lazyday wrote:Agree it's generally a terrible idea to replace fixed income with dividends.
I hear it a lot, including on this very thread:
FinancialDave wrote:So if this type of portfolio is designed properly, you have an inflation adjusted income stream, that is NOT subject to the market volatility.

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Re: misguided interest in div strategies

Post by lazyday » Sun Jan 12, 2014 10:58 pm

ogd wrote:, if they are better in the presence of withdrawals, they are better in total return as well, without withdrawals
Depending what you mean, we are in disagreement again. But a minor point because:
- I think what you say is unlikely to be untrue in any given case, except some extremes
- Probably no good fund comparison to make for appropriate historical periods
ogd wrote:
lazyday wrote:Agree it's generally a terrible idea to replace fixed income with dividends.
I hear it a lot, including on this very thread:
FinancialDave wrote:So if this type of portfolio is designed properly, you have an inflation adjusted income stream, that is NOT subject to the market volatility.
In FD's defense here, this may technically be true and might be about trying to use equity more safely without replacing bonds.
Of course the dividend income stream is subject to economic and other systemic risk, but the response of dividends to economic risk has been different than the response of equity prices.

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Re: misguided interest in div strategies

Post by FinancialDave » Mon Jan 13, 2014 1:14 pm

lazyday wrote:
FinancialDave wrote:So if this type of portfolio is designed properly, you have an inflation adjusted income stream, that is NOT subject to the market volatility.
In FD's defense here, this may technically be true and might be about trying to use equity more safely without replacing bonds.
Of course the dividend income stream is subject to economic and other systemic risk, but the response of dividends to economic risk has been different than the response of equity prices.
Said a little more eloquently than I could have done.

Point being the risk is of a different character (and IMHO lessor magnitude) than the price volatility suffered by someone selling their investments for income.


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Re: misguided interest in div strategies

Post by ogd » Mon Jan 13, 2014 3:07 pm

lazyday wrote:Depending what you mean, we are in disagreement again. But a minor point because:
- I think what you say is unlikely to be untrue in any given case, except some extremes
- Probably no good fund comparison to make for appropriate historical periods
I think you're stuck on the path dependence we discussed earlier. How about this more rigorous formulation?

"If portfolio A performs better or equal to portfolio B, at every point during a given period, with dividends reinvested and no withdrawals, then necessarily A will be better or equal if withdrawals of the same amount are taken from both portfolios, and viceversa."

Do you really disagree with this? I hold it to be self-evident although the implications somewhat subtle. It means that if you tell me dividends were better in some period for a retiree, I can ask you to point it out on the growth of 10K graph, where it should show up as a divergence, one portfolio looking less volatile than the other. Provided the data exists, as you say.
lazyday wrote:
FinancialDave wrote:So if this type of portfolio is designed properly, you have an inflation adjusted income stream, that is NOT subject to the market volatility.
In FD's defense here, this may technically be true and might be about trying to use equity more safely without replacing bonds.
Of course the dividend income stream is subject to economic and other systemic risk, but the response of dividends to economic risk has been different than the response of equity prices.
I have a feeling that FD defines "market volatility" as "anything that doesn't affect my dividends", which makes the statement trivially true.

It doesn't mean that they're any safer for a retiree. In the irrational short term you should be spending fixed income and buying stocks at those irrational prices, including with the dividends. In the longer term that the retiree should really fear, the market volatility will manifest itself in the dividend stream, the underlying earnings being the common cause. E.g. market prices in 2009 merely anticipated what was going to happen to JNJ's earning stream if we kept losing 2 million jobs per month. I.e, very bad things. Luckily, we got out of this one, but I guarantee you JNJ and a Treasury looked very, very different at the bottom.

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Re: misguided interest in div strategies

Post by lazyday » Mon Jan 13, 2014 3:50 pm

ogd wrote:"If portfolio A performs better or equal to portfolio B, at every point during a given period, with dividends reinvested and no withdrawals, then necessarily A will be better or equal if withdrawals of the same amount are taken from both portfolios, and viceversa."
:thumbsup :happy
In the irrational short term you should be spending fixed income and buying stocks at those irrational prices, including with the dividends.

Yes, to the extent we can. A retiree needs to spend, and the downturn may have made the portfolio small including fixed income. Some with high return hopes may have high equity %.
In the longer term that the retiree should really fear, the market volatility will manifest itself in the dividend stream, the underlying earnings being the common cause. E.g. market prices in 2009 merely anticipated what was going to happen to JNJ's earning stream if we kept losing 2 million jobs per month
- If prices are not efficient in some extremes, they can be too low even after considering future earnings and dividend decline.
- The decline of the Great Depression was pretty long, and dividends generally fell much less than prices. Not sure about 1968-82, or Japan.
- Since we're far from my Exxon illustration, adding complication mentioned earlier: I've selected quality, low debt, recession resistant stocks. Including JNJ!

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Re: misguided interest in div strategies

Post by galeno » Mon Jan 13, 2014 5:06 pm

I'm SO tempted to enter this discussion. However I made a New Year's resolution to not argue about religion, politics, or "income investing". I'm not going to break it on Jan 11th.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: misguided interest in div strategies

Post by FinancialDave » Mon Jan 13, 2014 6:20 pm

galeno wrote:I'm SO tempted to enter this discussion. However I made a New Year's resolution to not argue about religion, politics, or "income investing". I'm not going to break it on Jan 11th.
You must be weakening as this is the third time (I know of) you needed to remind yourself!

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Re: misguided interest in div strategies

Post by ogd » Mon Jan 13, 2014 7:33 pm

lazyday wrote:Some with high return hopes may have high equity %.
Now who gave them that idea, at a time when they needed safety? :mrgreen:
lazyday wrote:- If prices are not efficient in some extremes, they can be too low even after considering future earnings and dividend decline.
I'm not in the habit of second-guessing Wall Street and neither should you. It is what it is.
lazyday wrote:- The decline of the Great Depression was pretty long, and dividends generally fell much less than prices. Not sure about 1968-82, or Japan.
I still have to check on this. Mental note. As mentioned before, it would be visible on a total return graph (yes I'll keep pounding on this).
lazyday wrote:- Since we're far from my Exxon illustration, adding complication mentioned earlier: I've selected quality, low debt, recession resistant stocks. Including JNJ!
Sooo, you want lower volatility in your portfolio. You think you can do this with stock selection, while not affecting the return. You might be forgetting that your counterparty on Wall Street has access to 0% leverage to bring risk and returns back in line. 50% less risky @ 75% the returns? A smart hedgie simply leverages up 2x and reaps the extra 50%, whereby the prices of such wonderstocks quickly rise to where they should be. As you know, they're not fans of giving away free lunches over there.

The right way to do this is with bonds (or any other asset not correlated with the stock market), because diversification is the only free lunch. One that the market doesn't give to you as an individual, you either take it from the aggregate pool of diversification or you don't.

As for JNJ and Exxon, beware of the tautological "I've selected stocks that have done well -- look how well they've done". It's a favorite on the website mentioned at the start of the thread. I'm sure BP looked just dandy on April 19th, 2010, but the long history of rising dividends went up in smoke the following night.

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Re: misguided interest in div strategies

Post by lazyday » Mon Jan 13, 2014 8:56 pm

ogd,

A retiree may have some desire for:
- high returns, which might push towards high equity %.
- low volatility, which might push towards a low equity %.
- not running out of money. There is no obvious solution. Reducing equity might not reduce this risk.

Say an early retiree has a WR (withdrawal rate) of 2.5% of today's portfolio, wouldn't mind becoming richer to afford more luxury, but could probably survive on 1.5%.
What is likely to cause the retiree to run out of money?

A fair answer is tinkering with the portfolio too much! (so don't! do as I say, not as I do.)

From today's equity and bond prices, I think a significant risk is an extended bad market, especially if part of it is quite horrid.
A retiree might have more sensitivity to tail event risk than the average investor.

Portfolio survival is more important to me than maximizing returns. So if I believe that quality dividend stocks are likely to provide better survivability in a long bad market, I might prefer them to the market or other value & quality stocks, even if I reduce expected risk (volatility) adjusted returns a bit.
I showed some reasoning behind my belief with the Exxon narrative, but gave no proof or historical example. I don't suggest others invest on beliefs without good evidence. If someone does a decent analysis, I might be convinced to change my mind / strengthen my conviction.

On checking the dividend record: I've used http://aida.wss.yale.edu/~shiller/data.htm for US.

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Re: misguided interest in div strategies

Post by Atilla » Mon Jan 13, 2014 9:26 pm

I dunno. My play money account filled with pipeline MLPs and a good slice of VE (bought at a low point :) ) seems to zig when the market zags - and pays a real nice chunk in dividends every 3 months. Today was a good day - the last quarter of last year - not so good. Like I say when the market zigs, my individual stocks zag.

Alls I know is at tax time the MLPs are a piece of cake. Turbo Tax does handle it nicely - and the dividends the last 3 months paid for the .357 revolver I bought and the chunk of cash I gave my 16 year old boy to put towards a car. I plan on continuing to buy and keep long term.

I like my dividend strategy and I loves my play money account.
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Re: misguided interest in div strategies

Post by hoops777 » Mon Jan 13, 2014 10:21 pm

Financial Dave.....What you say makes perfect sense to me,especially if you are using only high quality blue chip companies like JNJ or KO,etc.I would be very interested in knowing what your 20 stocks are.I have posted about this in the past in a less eloquent way :D and got blasted as have many others.I believe 20 or 30 of the highest quality dividend paying companies with wide moats is enough diversity for me.I know I like not having to sell shares in a down market and I like the way the income increases over time.If the type of stocks I am talking about crash I will guarantee anybody on this thread that the market will be worse off.I cannot think of any scenario where these type of stocks would ever or have ever performed worse than the market in a 2008 type crash.
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Re: misguided interest in div strategies

Post by JoMoney » Tue Jan 14, 2014 5:23 am

hoops777 wrote:...I believe 20 or 30 of the highest quality dividend paying companies with wide moats is enough diversity for me....If the type of stocks I am talking about crash I will guarantee anybody on this thread that the market will be worse off.I cannot think of any scenario where these type of stocks would ever or have ever performed worse than the market in a 2008 type crash...
There is a bit of survivorship bias, in selecting stocks today that we all know have been great companies with great performance records through the decades in the past. Picking what will be the high-quality stocks of the future today is not as easy at it seems. Also, "quality" stocks in companies with good "growth" performance records often sell at a premium that seriously impacts the return an investor sees. It has been true though, that if an investor is able to hold on long enough, that over time the premium paid is often compensated with long-term growth. Ideally, an investor would be able to pick out the times when these stocks don't hold such a premium price. If we all had the insight of Warren Buffett maybe the average investor would have realized in the late '80's that even though the "Pepsi taste test challenge" proved people preferred Pepsi (for the first sip), and Coke fumbled the ball with "New Coke" that it wasn't the end of the story... but what typically happens is it hits a company hard and things turn very bad. With perfect hindsight we know things turned out ok for Coke, but there are many other stories we conveniently forget. The companies that turn into "value" stocks and become "value traps".

Suggesting that these types of stocks can't crash worse than the market is also a bad bet. The Nifty-Fifty era saw a strategy similar to this run up the price of several such stocks (including KO and JNJ) and inevitably crash (much harder than the market).
Prof. Jeremy Siegel has a paper that goes on to show that for an investor who managed to "stay the course" with these stocks from their peak in 1972 they would have had to wait 26 long years until 1998 before they managed to match the market return of the S&P500. They would have endured more severe volatility than the larger more diversified market portfolio, and had their ideas of what "quality stocks" are tested many many times as several companies indeed went out of business.
The idea of owning a select portfolio of quality dividend stocks is very appealing, and I would wager that with the stories of things like "momentum" and "quality" factors gaining in popularity we'll see many such ideas appear as new "alternative indexes" but even if the rise and fall of various styles of stock selection are inevitable, timing when to get in and out in a fashion that beats the market remains incredibly difficult. As a group, all investors own the total-market portfolio and will be limited to it's return. We can't all be above average.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: misguided interest in div strategies

Post by FinancialDave » Tue Jan 14, 2014 1:50 pm

Jo,

I can not say what stocks I might have picked 30, 40, 50 years ago at a retirement date (in fact 50 years ago I would have been 12, so I don't think I would have been picking stocks -- but since you mentioned KO & JNJ, these two stocks delivered no such problems for the income investor in retirement, who designed their portfolio to live off the income -- which by the way many people did back then, before the advent of personal computers.

Both KO & JNJ have been increasing their dividends for over 50 years, so if an income stream was designed back then, it has had great income protection over the last 50 years -- though I doubt in most cases a retirement income stream was needed for 50 years.

People weren't as much into diversification back then, as they usually held stocks from the company their worked at, which we all know "can" be a bad idea. However, there were many other companies that have also increased their dividend for 50+ years that they could have been invested in, such as DBD, AWR, NWN, PG, GPC, PH, DOV, EMR, MMM, VVC, LANC, LOW,CL.

Sure maybe one or two stocks you picked either stopped the dividend increase, cut it altogether, or just trimmed it. So what, - your total cash flow decreased by maybe 5-10%. Far cry from someone who's income stream had to be cut 50%, because they didn't want to run out of money. By the way unless this happened in year one of your retirement, your income stream had probably already increased by much more than 5%. Just think if you had a cash cushion or bond cushion you could sell and replace those "Stinkers" with some stocks yielding a much higher return, based on the fact that their price had fallen greatly.

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Re: misguided interest in div strategies

Post by daffyd » Sun Feb 02, 2014 9:15 pm

I'd be interested to get Larry and others' thoughts on using a "dividend strategy" as an imperfect value tilt when an explicit value fund for an asset class is unavailable or too expensive.

An example close to my heart (and wallet) is Australia. I imagine Canada would be similar, albeit with simpler access to US products. Vanguard and iShares have some low-cost index ETFs available here but do not have any value funds. DFA do have one not especially diversified Large Value fund (see below re: diversification; also no Small Value) but DFA advisors are even rarer here and unless it's a large amount will tend to make it more costly than I imagine the value premium can justify. However there is some evidence of a Value premium here, just like in other countries.

So if we take a belief in a value premium as given (whether it be a risk story or a behavioural story, and noting that underperformance can still occur over fairly long periods of time) and want to try to capture that premium, where does that leave us?

--We could construct our own portfolio of value stocks. But unless we have a very large amount to invest we are taking on uncompensated risk that could be diversified away.
--We could look further for a fund. There are some options using fundamental indices (arguably another proxy for value) but not many inexpensive ones. We could look at active management (with all its risks, often with highly undiversified portfolios in this small market, and fees >1% plus often performance fees)
--We could choose a fund that offers a "dividend strategy" at reasonable cost

[Aside: An example would be IHD http://au.ishares.com/fund/fund-overview-IHD-ASX.do
They apply a "dividend strategy" implemented as an index fund.
Expense Ratio of 0.3% is pretty inexpensive for the Australian market [Vanguard charge 0.25% for their comparable ETF but lacking some of the features below]
They cap individual sectors and individual weightings in the index [The Australian cap-weighted ASX200 index is overly weighted to Financials (~39% of the index) and Mining. Also VAS, the Vanguard ASX300 index fund has approximately 55% of the index in the top 10 holdings]
They screen for things such as dividend growth history and profitability
The ~50 holdings seems low (to me). [However any Australian index currently available as a fund effectively has very few securities in it: VAS, the Vanguard ASX300 index fund, is probably as diversified as you can get with capitalisation-weighting. But while it has ~300 securities in principle, in practice the top 8 make up ~50% of the index and the top 25 over 70% of the index.]]

In such a case is it still worth trying to capture the expected Value premium? And given the expense and risks involved in the alternatives I've outlined above, is a dividend strategy index fund a reasonable compromise way to try to tilt in that direction?

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Re: misguided interest in div strategies

Post by larryswedroe » Sun Feb 02, 2014 11:37 pm

daffy
Just check the various value metrics like p/b, p/cf, p/e and p/s to see how valuey it is.
Larry

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Re: misguided interest in div strategies

Post by docneil88 » Mon Feb 03, 2014 12:42 am

larryswedroe wrote:in http://seekingalpha.com/article/1900721 ... ing-stocks :
DFA's March 2013 study, "Global Dividend-Paying Stocks: A Recent History," studied the data from 23 developed markets over the period 1991-2012. The following is a summary of their findings:

The simple average annual returns were 9.1 percent for dividend payers and 11.1 percent for nonpayers. However, the standard deviation of the returns of nonpayers was higher than for dividend payers. The net result was that the annualized returns were the same - 7.6 percent for both dividend payers and nonpayers. ...
In my opinion, the simple average annual return numbers matter little if at all compared to the annualized return numbers. DFA is saying that over 21 years and 23 developed markets, the dividend-paying stocks annualized returns matched the nonpayers, and with less volatility. That's evidence for dividend strategies, not against them. Granted such strategies are less diversified than corresponding total market indexing strategies, but, if the volatility is less, I'm not worried about being somewhat less diversified. Dividend indexing strategies (such as those provided by Vanguard and WisdomTree) can still involve many hundreds of stocks in almost every industry. Best, Neil

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Re: misguided interest in div strategies

Post by lazyday » Mon Feb 03, 2014 8:16 am

daffyd wrote:They screen for things such as dividend growth history and profitability
This might cause a small or large shift from high yield and value to profitability and quality. Not saying this is bad, just something to think about when testing for value.

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Re: misguided interest in div strategies

Post by larryswedroe » Mon Feb 03, 2014 10:08 am

docneill
Doc, I would not draw that conclusion because what we know is that there are many stocks that don't pay dividends that fall into the buckets of lousy performers---IPOs, low priced stocks, extreme small growth stocks---and thus if you screened out those stocks you would likely get a different answer (though I don't think this is as much of an issue outside US as is inside as companies here tend to go public much sooner--or at least they did). But the other issues are
a) the returns of dividend payers are explained by the exposure to other factors not related to dividends----so it might be value factor for example or beta
b) screening for dividends means you lose a large diversification benefit as about 60% of stocks don't pay dividends
c) the individual volatiltiies don't matter, it would be the portfolio of the stocks volatility that would, and we don't know that--the correlations would matter, but again would also depend even on how that asset mixed with other assets

Larry

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Re: misguided interest in div strategies

Post by DonCamillo » Mon Feb 03, 2014 10:39 am

I don't really care. Collecting dividend paying stocks is a fun hobby. Most of my investments are in Bogleheads three fund portfolio plus about 7% TIAA Real Estate. But I collect individual dividend paying stocks the way some people collect coins or cars. I prefer companies that I encounter every day. I just like it when I pass a Sysco truck or a Waste Management trash truck or see Tide in the grocery store or Post-it Notes on my admin's desk and I can think "That company is paying me $5 a day." So what if I could be getting $5.25 a day by investing more rationally?

I am also corrupting my grandchildren. 100 shares of MacDonalds, 100 shares of Hasbro, 100 shares of Mattel, 100 shares of Dunkin Brands and they feel like owners when they play with toys, eat out, or watch their friends patronize the companies they own.

My father and his friends played with their boats. To me, a yacht is just a floating bar with sea-sickness to make being drunk even worse.
Les vieillards aiment à donner de bons préceptes, pour se consoler de n'être plus en état de donner de mauvais exemples. | (François, duc de La Rochefoucauld, maxim 93)

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Re: misguided interest in div strategies

Post by goblue100 » Mon Feb 03, 2014 11:07 am

larryswedroe wrote:Midareff
Sorry I disagree. the dividend issue is bogus. As I said you can create your own dividends and it would have the same impact as if the company had paid them. That's simple math, not theory

Best wishes
Larry
I didn't read all 4 pages of this thread, so forgive me if this has been posted. Warren Buffet makes essentially the same point when talking about why Berkshire doesn't pay a dividend. And you can read the whole article without registering. :wink:

http://www.businessinsider.com/warren-b ... nds-2013-3

It does seem a little odd since some of his favorite positions are stocks which are consistent dividend payers (KO for one) but I assume it is because he thinks he can do a better job of re-investing the money than Cokes management can.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: misguided interest in div strategies

Post by lazyday » Mon Feb 03, 2014 12:35 pm

My counter to the "simple math" argument is on page 3: http://www.bogleheads.org/forum/viewtop ... 0#p1917137

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Re: misguided interest in div strategies

Post by JoMoney » Mon Feb 03, 2014 3:19 pm

DonCamillo wrote:I don't really care. Collecting dividend paying stocks is a fun hobby. Most of my investments are in Bogleheads three fund portfolio plus about 7% TIAA Real Estate. But I collect individual dividend paying stocks the way some people collect coins or cars. I prefer companies that I encounter every day. I just like it when I pass a Sysco truck or a Waste Management trash truck or see Tide in the grocery store or Post-it Notes on my admin's desk and I can think "That company is paying me $5 a day." So what if I could be getting $5.25 a day by investing more rationally?

I am also corrupting my grandchildren. 100 shares of MacDonalds, 100 shares of Hasbro, 100 shares of Mattel, 100 shares of Dunkin Brands and they feel like owners when they play with toys, eat out, or watch their friends patronize the companies they own.

My father and his friends played with their boats. To me, a yacht is just a floating bar with sea-sickness to make being drunk even worse.
When I did pick individual stocks, I was heavily influenced by dividends and by companies who had products I was familiar with. Later on I became convinced there were other factors that were equally if not more important... and even later, I became convinced that my efforts to try to identify a superior selection of stocks was specious - especially using the same data everyone else is looking at.
It may be true that dividend strategies are lousy "value" strategies, Vanguard's High Dividend Yield Index has had higher P/B ratios than the Value Index.
Dividend strategies are also lousy "growth" strategies, the Dividend fund has had lower ROE and hasn't matched the superior return growth funds have had recently.
But one thing dividend strategies excel at is dividends, both value and growth indexes make lousy dividend strategies. If you're going tilt to some metric that systematically defines what stocks you're going to include or exclude, it might as well be the one you prefer and believe in. :beer
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Re: misguided interest in div strategies

Post by larryswedroe » Mon Feb 03, 2014 4:22 pm

lazyday
Sorry your math isn't correct. it makes no difference. And why investors prefer dividends is one of the great puzzles in finance discussed in paper by Hersch Shefrin and Meir Statman
Larry

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Re: misguided interest in div strategies

Post by lazyday » Mon Feb 03, 2014 5:06 pm

larryswedroe wrote:Sorry your math isn't correct.
What math? What isn't correct?

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Re: misguided interest in div strategies

Post by larryswedroe » Mon Feb 03, 2014 5:43 pm

lazyday
Your post on prior page you cited
Larry

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Re: misguided interest in div strategies

Post by hoops777 » Mon Feb 03, 2014 6:05 pm

Larry has the science on his side and I am certain that he would win the argument in front of a board of PHD's who do investment research.I understand Financial Dave's side and beliefs as well.The bottom line is if you take a portfolio of 25 stocks with the quality of a JNJ I am really certain that your return is going to be just fine in relation to the market.I believe it all comes down to emotion......feeling good seeing the dividends multiply vs the technically correct but more boring total market index alternative.
K.I.S.S........so easy to say so difficult to do.

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Re: misguided interest in div strategies

Post by lazyday » Mon Feb 03, 2014 6:45 pm

hoops777 wrote:Larry has the science on his side and I am certain that he would win the argument in front of a board of PHD's who do investment research.
Larry may be much smarter than me and more often right. That doesn't mean he is right about everything.

I doubt he really read my post.

I don't see the point of a post that says "you are wrong" without saying why.

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Re: misguided interest in div strategies

Post by larryswedroe » Mon Feb 03, 2014 7:30 pm

hoops
the 25 stock idea really makes no sense IMO. At best you have the same expected return to the market but have a much wider potential dispersion of returns--so more risk. We have shown that using MCS.
Second, that idea, though need more like perhaps 100 stocks today really only works in large stocks, once get to small you have too much idiosyncratic risks so need hundreds of stocks
Then add international and EM and simply no real way to do it unless have 8 figure equity portfolio

Lazy-read your post and the point about running out of stocks to sell is simply wrong. It makes no sense.

BTW-suggest reading Shefrin and Statman paper on why do investors prefer dividends
Larry

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Re: misguided interest in div strategies

Post by hoops777 » Mon Feb 03, 2014 9:59 pm

Larry I understand and of course you are right.On the other hand,look at the historical returns of the Dow 30 vs the total market.

Again,my only point is that if someone likes the dividend stock theory and they invest in only the highest quality stocks from all sectors,it will return very close to the total market in the long run.It is not crazy.It is not like they are putting their entire stock allocation into small caps....now that would be crazy :happy :D :)

I for one really appreciate that you take the time to post here and help people like me who really need it.I am no longer a proponent of the dividend theory but I did consider it a couple of years ago,and to be honest it can really grab you if you are not a highly educated investor.There is something about seeing those dividends that hooks you regardless of total return.
K.I.S.S........so easy to say so difficult to do.

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Re: misguided interest in div strategies

Post by larryswedroe » Mon Feb 03, 2014 11:35 pm

hoops
That's the quality effect at work, so why not own a broad based fund that buys such stocks
or better yet a true small value fund and outperform them all (:-))

And yes there is something mythical about dividends that turns people into "religious fanatics" on subject and they cannot think rationally and/or lose the power to do simple arithmetic---that's the conclusion I draw after discussions with crazies on Seeking Alpha. It's truly amazing what they believe.

If have not read the paper by Shefrin and Statman I would highly recommend it

Larry

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Re: misguided interest in div strategies

Post by lazyday » Tue Feb 04, 2014 9:53 am

Larry, The paper you suggested seems to address investor behavior, which doesn’t address my post:
Our theory suggests that some investors would be willing to pay a premium for cash dividends because of self-control reasons, the desire to segregate, or the wish to avoid regret.
larryswedroe wrote:Lazy-read your post and the point about running out of stocks to sell is simply wrong. It makes no sense.
My proposal is that in an irrational market such as in the Great Depression, retained earnings are undervalued. So a pro-dividend policy will have better total shareholder return.

The retiree making simulated dividends by selling shares will have worse total return, so may run out of assets, including stock shares.

The linked post gives greater detail.

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Re: misguided interest in div strategies

Post by larryswedroe » Tue Feb 04, 2014 10:51 am

lazyday
Unfortunately your theory doesn't have any evidence to support it. If you look at stocks with the same prices to value metrics they have the same returns regardless of paying dividends or not--if that was not so then the FF model would not be able to explain returns as well as it does, we would need a dividend factor
In fact if anything I would argue that an irrational preference for dividends we are now seeing might well lead to lower returns to such strategies--we are seeing that in the valuation metrics of dividend strategies ---they are getting less valuey
Larry

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Re: misguided interest in div strategies

Post by lazyday » Tue Feb 04, 2014 11:59 am

Larry,
I agree dividend stocks may be priced for suboptimal returns. My view is one of shortfall risk for a retiree.
Unfortunately your theory doesn't have any evidence to support it.
My simplistic view of the much greater dividend than price stability makes me suspect the theory could hold.
But yes, agree completely, I've no evidence. Too much work for me to produce, even if I were qualified.

My opinion is that the dividend question is not just simple math, because that requires assumptions which may not hold in an inefficient market.

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Re: misguided interest in div strategies

Post by ogd » Tue Feb 04, 2014 12:45 pm

lazyday: if you don't have the time / skills to produce the evidence, perhaps it's worth considering some implications of your P/B -based dividend mispricing theory.

1) You only need to hold dividend stocks during a crash (or the conditions you consider inefficient/irrational). After all, your theory is that the market misprices these dividends even as they are being paid; if it comes to its senses and prices appropriately then dividend stocks will offer no advantage. So you don't need to bother with the transactions, reduced diversification and higher taxes (usually) during normal times.
2) Under a slightly stronger version of the assumption, you should not hold dividend stocks with P/B greater than one, because the dividends will be priced lower than they would be if retained.
3) If you combine these two mispricing conclusions and you pay small or no transaction fees, here is the road to untold riches: hold dividend stocks with P/B smaller than one over the dividend pay date. Hold stocks with P/B greater than 1 (preferably non dividend payers) the rest of the time. Profit. It should be noted that large funds have very efficient transaction costs, so they could actually implement this.

So #2 and #3 are somewhat tongue in cheek, but maybe #1 sways you. Why bother holding dividend stocks when pricing is rational? Just buy them during a crash before the first underpriced dividend is paid.

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Re: misguided interest in div strategies

Post by larryswedroe » Tue Feb 04, 2014 1:04 pm

lazyday
But there is just no evidence to back that up that theory of yours. The only thing for dividends is that the stocks of payers tend to have lower betas. But you can construct a portfolio that doesn't screen based on dividends to have the same loadings. Thus dividends don't add any explanatory power.
Larry

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Re: misguided interest in div strategies

Post by lazyday » Tue Feb 04, 2014 2:48 pm

Larry,
(1) I’d be concerned that during the crash, dividend stocks will fall less than the market. Hard to time entry and exit.

(2) Do you mean when market is efficient? The example totally falls apart with efficiency.

(3) But timing of any excess return is unknown:
lazyday wrote:As the ex-dividend date is crossed in Universe 1, Exxon stock price drops more than it does in Universe A, maybe by approximately the amount of the dividend.
But what about over the coming weeks?
larryswedroe wrote:The only thing for dividends is that the stocks of payers tend to have lower betas.
I suppose any dividend study on retiree shortfall risk would have to account for this.

Low beta (stocks or the Larry Portfolio) may be an alternative or adjunct. I don’t know if SWR or shortfall risk with withdrawals has been studied for low beta strategies.

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Re: misguided interest in div strategies

Post by larryswedroe » Tue Feb 04, 2014 3:23 pm

Lazyday
first the whole low beta strategy IMO is basically flawed--the reason is unlike with say size and value where you have monotonic differences as you go up deciles with low beta not so. The returns in the middle are basically all the same. So all you have to do is screen out the lousy high beta stocks with low returns--the same stocks that are the "lottery like" tickets that DFA screens out already
second, dividend strategies can have lower beta but that just means you can replicate that type portfolio with bonds as well as stocks--there just isn't any alpha or uniqueness there
Larry

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Re: misguided interest in div strategies

Post by lazyday » Tue Feb 04, 2014 6:05 pm

larryswedroe wrote:first the whole low beta strategy IMO is basically flawed--the reason is unlike with say size and value where you have monotonic differences as you go up deciles with low beta not so. The returns in the middle are basically all the same. So all you have to do is screen out the lousy high beta stocks with low returns
Looking into this, found this article of yours on a low vol/beta paper: http://www.cbsnews.com/news/can-you-win ... trategies/

Of course my interest here isn't just performance, but I suspect there's a limited amount of research on choosing assets for retiree portfolio survival. Though it seems I've missed some of Wade Pfau's papers: http://wpfau.blogspot.com/p/articles-an ... ks-to.html

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Re: misguided interest in div strategies

Post by larryswedroe » Tue Feb 04, 2014 6:09 pm

lazyday
I've written a bunch of papers on low volatility and IMO it's almost all about the lousy performance of the high beta stocks, not the good performance of low beta ones.
As to best retiree strategy IMO it's very clearly low beta and high tilt--which cuts the left tail risk sharply and that's the risk retirees are most concerned about--and it cuts it much more than it cuts right tail "risk"
Stay tuned for my book which should be out in April now
Larry

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