dividend paying stocks good substitutes for safe bonds (NOT)

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dltnfs
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by dltnfs » Sun Jul 03, 2016 2:44 pm

TonyDAntonio wrote:Beta,
Thanks for your response. I bolded an important point (for me) in your post. Before I switched bonds for VZ and T I went back and looked at how they did during the 2008-9 crash. While their share prices both sank their dividend payouts did not change.
That just means management decided not to change the dividend payout. Maybe they did this because they were so confident in the business that they saw no reason. Or, maybe they knew that investors like you valued the apparent stability of a consistent dividend, and decided to cater to your perception. There is no way to know just from that history, which shows "how much the CEO decided to pay out" and nothing else.

Looking at historical dividends is fundamentally unlike looking at historical stock prices, or bond defaults, or other factors that are set by the market.

naha66
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by naha66 » Sun Jul 03, 2016 11:20 pm

TonyDAntonio wrote:Who's wrong? If this is directed at me I don't understand...really. When I look at all the dividend payouts in this chart they are ever increasing. I do see the 2/1 splits and so I got two shares for every one but my stock price was cut in half. I don't know how they distribute dividends in these cases because I didn't hold the stock back when they did the split. Surely I didn't get a dividend payout for double the shares of stock??
Anyway, T dividend looks pretty darn stable to me and having worked in and around the phone company for 30 years I know the company is very stable. I realize that none of this means much going forward and I understand that dividends can be cut and the company can go out of business and I could lose my entire investment. While I'm not comfortable with these thoughts I do sleep at night. I appreciate the feedback because I like to make sure I'm not complacent about my investments. I'm really not complacent about my T and VZ investments.
naha66 wrote:
rustymutt wrote:
TonyDAntonio wrote:Larry, when was the last time AT&T(SBC) and VZ lowered their dividend payments? I'd say their dividend history is very relevant to an investor who is looking at their income streams. It's interesting to me that we accept treasury bonds yielding less and less (for safety sake) and yet we quickly dismiss companies that have NEVER lowered their dividend payouts.
As an aside (actually the crux of my issue), I do not like selling stocks and bonds to eat. I've only been a buyer these last 30 years. I'm working on that.
I appreciate your points of view.
larryswedroe wrote:Tony
Irrelevant that their dividends did not fall during the period. Their prices DID and so did your net worth. More importantly there was no guarantee that the outcome we got of recovery was preordained. Clearly other alternative universes might have shown up. One mistake by central bankers and we might have had another great depression, and your dividends would have been dramatically reduced or eliminated. Also note that you likely were just lucky as many dividends were cut. S&P 500 dividends collapsed from about $28 to about $22.

Again confusing strategy and outcome and failing to consider what alternative universes might have shown up is one of the worst and most common errors investor make, which leads to big mistakes the next time around when the outcome might be different. This is what the lessons of history has taught those who have managed risks for their careers.

Best wishes
Larry
Larry I had bunches of T at one time. I nervously sold it at $69 a share, and it's never been back close to that. If fact at one time it was less than $10 a share. But it sure does keep paying out those dividends. Lots of cash on hand.

What? https://finance.yahoo.com/echarts?s=T+I ... T;range=my

Split adjusted what you say is just wrong
No tony not you rustymutt numbers on t don't add up.

MondayMorningQB
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by MondayMorningQB » Mon Jul 04, 2016 12:57 am

Tony, I very much think that AT&T and Verizon(my carrier) are going the way of Blockbuster. More and more I'm sending texts through apps over the Internet that don't involve Verizon at all. Also, the last time I was in Mexico I called the US using Facebook through the internet(for free!) that also didn't involve Verizon. The only reason I need Verizon now is to keep me connected when I'm away from Internet connectivity. Google, Facebook, Ford, GMC are all working to change that and make it possible to have Internet access wherever we are, even while driving. When we reach that point, I don't see a need for Verizon or AT&T's services.

Your investment is totally dependent on those TWO companies. While it has been a great investment so far, there is no guarantee that it will continue. If you owned the S&P 500 instead, it really would be of little concern to you what the future of any TWO companies are because their loss is probably someone(that you already own) else's gain.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Mon Jul 04, 2016 1:52 am

You are correct. I'm not getting a free lunch with these 5% dividends. I'm taking a risk. I do own a large amount of every ETF in the Merriman slice and dice portfolio so I don't solely depend on T and VZ but your points are well taken. Believe me though that T and VZ are monster companies that have plenty of revenue streams. They may go bankrupt but I wouldn't bet on it for the foreseeable future and that is about as far as I am looking. Once interest rates start to rise I will make the shift back to bonds. I know I'll lose a bit in the process (eg. I'm sure T and VZ's stock prices will fall when interest rates rise) but I'm hoping to more than make up for this by having collected the 5% dividends for a few years (or many years if we turn out like Japan). Thanks for your feedback.
MondayMorningQB wrote:Tony, I very much think that AT&T and Verizon(my carrier) are going the way of Blockbuster. More and more I'm sending texts through apps over the Internet that don't involve Verizon at all. Also, the last time I was in Mexico I called the US using Facebook through the internet(for free!) that also didn't involve Verizon. The only reason I need Verizon now is to keep me connected when I'm away from Internet connectivity. Google, Facebook, Ford, GMC are all working to change that and make it possible to have Internet access wherever we are, even while driving. When we reach that point, I don't see a need for Verizon or AT&T's services.

Your investment is totally dependent on those TWO companies. While it has been a great investment so far, there is no guarantee that it will continue. If you owned the S&P 500 instead, it really would be of little concern to you what the future of any TWO companies are because their loss is probably someone(that you already own) else's gain.

larryswedroe
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Mon Jul 04, 2016 7:30 am

Tony
Consider the very stable for decades dividends of a SAFE utility called P,G &E and they were safe until they declared bankruptcy.
Or the utility Ameren which had steadily raised dividends until they sharply cut them
And the list could go on and on and on.
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by abner kravitz » Mon Jul 04, 2016 8:50 am

MondayMorningQB wrote:Tony, I very much think that AT&T and Verizon(my carrier) are going the way of Blockbuster. More and more I'm sending texts through apps over the Internet that don't involve Verizon at all. Also, the last time I was in Mexico I called the US using Facebook through the internet(for free!) that also didn't involve Verizon. The only reason I need Verizon now is to keep me connected when I'm away from Internet connectivity. Google, Facebook, Ford, GMC are all working to change that and make it possible to have Internet access wherever we are, even while driving. When we reach that point, I don't see a need for Verizon or AT&T's services
The internet connectivity in cars is provided by cellular service, so you'll still most likely need a carrier. I personally don't see these companies going away any time soon - they have their tentacles embedded pretty deeply in communications.

Full disclosure, I own some T stock

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Mon Jul 04, 2016 10:46 am

Thanks Larry.
I just looked at the PG&E chart and saw the discontinuing of the dividend for a number of years. Didn't know they had done that. Maybe I need to, at least, move my T and VZ holdings into something like Vanguard's High Dividend Yield ETF. At least I will have gotten rid of the 'single stock' risk. And it looks as if this will only 'cost' me 1% dividend yield. That seems like a pretty good tradeoff. On top of that I will have locked in some good gains. I really appreciate you (and all of you) continuing to respond to me about these stock dividends. I know you are truly trying to help. I can hear your voice in the back of my head constantly (I used to listen to the Merriman podcasts you were on).

larryswedroe wrote:Tony
Consider the very stable for decades dividends of a SAFE utility called P,G &E and they were safe until they declared bankruptcy.
Or the utility Ameren which had steadily raised dividends until they sharply cut them
And the list could go on and on and on.
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Mon Jul 04, 2016 11:20 am

tony
glad to help, and yes that idea is FAR better, getting rid of the uncompensated idiosyncratic risks.
Personally I would ignore dividends as a factor, they logically (and in the literature) should not explain returns and while high divs used to value stocks at least (but with the lowest value premium by FAR). Now the demand for cash flow from retail investors has driven prices higher so now they look like more like growth stocks and thus lower expected returns.

Personally I believe the right way to invest is based on total return, ignoring cash flows. Vanguard agrees by the way, and they have a nice paper on it
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by nedsaid » Mon Jul 04, 2016 11:34 am

larryswedroe wrote:tony
glad to help, and yes that idea is FAR better, getting rid of the uncompensated idiosyncratic risks.
Personally I would ignore dividends as a factor, they logically (and in the literature) should not explain returns and while high divs used to value stocks at least (but with the lowest value premium by FAR). Now the demand for cash flow from retail investors has driven prices higher so now they look like more like growth stocks and thus lower expected returns.

Personally I believe the right way to invest is based on total return, ignoring cash flows. Vanguard agrees by the way, and they have a nice paper on it
Larry
Cash flows are the only reason I invest. But I am talking about earnings. Stocks are valued at a multiple of their cash flows. Steady cash flows are valued at lower multiples than growing cash flows. If you have consistently growing cash flows from earnings (quality), that will get even a higher multiple. It is the market placing multiples on earnings streams that propel capital gains. What makes the stock market go up is the growth of the economy and thus the growth of corporate earnings.

I invest in bonds because of their cash flows. Since their cash flows are constant over the life of the bond, there isn't really a multiple as such put on their earnings. Credit quality, shorter durations, and better credit quality reduce the coupon on the bonds but you have a better chance of getting your money back. Since the cash flow is predictable, bonds won't fluctuate as much in value as stocks.

I do like dividends but have come to realize they aren't a factor in returns. Really, it is a decision of how much of earnings to return to shareholders in the form of cash. When I say that I invest for cash flow, I am talking about the earnings from a stock or the coupon from a bond.
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by rustymutt » Wed Jul 06, 2016 9:04 am

TonyDAntonio wrote:You are correct. I'm not getting a free lunch with these 5% dividends. I'm taking a risk. I do own a large amount of every ETF in the Merriman slice and dice portfolio so I don't solely depend on T and VZ but your points are well taken. Believe me though that T and VZ are monster companies that have plenty of revenue streams. They may go bankrupt but I wouldn't bet on it for the foreseeable future and that is about as far as I am looking. Once interest rates start to rise I will make the shift back to bonds. I know I'll lose a bit in the process (eg. I'm sure T and VZ's stock prices will fall when interest rates rise) but I'm hoping to more than make up for this by having collected the 5% dividends for a few years (or many years if we turn out like Japan). Thanks for your feedback.
MondayMorningQB wrote:Tony, I very much think that AT&T and Verizon(my carrier) are going the way of Blockbuster. More and more I'm sending texts through apps over the Internet that don't involve Verizon at all. Also, the last time I was in Mexico I called the US using Facebook through the internet(for free!) that also didn't involve Verizon. The only reason I need Verizon now is to keep me connected when I'm away from Internet connectivity. Google, Facebook, Ford, GMC are all working to change that and make it possible to have Internet access wherever we are, even while driving. When we reach that point, I don't see a need for Verizon or AT&T's services.

Your investment is totally dependent on those TWO companies. While it has been a great investment so far, there is no guarantee that it will continue. If you owned the S&P 500 instead, it really would be of little concern to you what the future of any TWO companies are because their loss is probably someone(that you already own) else's gain.
"revenue streams" Could be stressed for T, since they've made some of what many consider bad large investments outside the USA, that could effect their ability to pay in the future unknown date. It rides on the world economy like everything else. I couldn't choose between either, so I bought a ETF with both in it. Now that added diversity, and that's a smart plan. I've friends who own lots of both. I don't say a thing, it's not my business, unless they ask. They do pay out nicely, and that's something for nothing thing makes since. So, I'd say that it's possible for them to cut dividends, but they just worship the continued increases, cause that's what people and investors want to see in reports.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Wed Jul 06, 2016 1:44 pm

It's definitely a risk and these are not lifetime holds for me. What finally convinced me to pull the trigger at the beginning of the year was T and VZ's dividend performance during 2008-9 crisis. I figured that if the dividend could weather that storm then it would hold up pretty well. Their are other things AT&T has done over the years to keep their cash flow going, Directv is one example. Not a sexy acquisition but it definitely helps with cash. We'll see. I will most likely trade T and VZ for the Vanguard Dividend Fund and then back into bonds once things get back to normal, whenever and whatever that is. :oops: That's code for I don't really know what I'm doing.
rustymutt wrote:
TonyDAntonio wrote:You are correct. I'm not getting a free lunch with these 5% dividends. I'm taking a risk. I do own a large amount of every ETF in the Merriman slice and dice portfolio so I don't solely depend on T and VZ but your points are well taken. Believe me though that T and VZ are monster companies that have plenty of revenue streams. They may go bankrupt but I wouldn't bet on it for the foreseeable future and that is about as far as I am looking. Once interest rates start to rise I will make the shift back to bonds. I know I'll lose a bit in the process (eg. I'm sure T and VZ's stock prices will fall when interest rates rise) but I'm hoping to more than make up for this by having collected the 5% dividends for a few years (or many years if we turn out like Japan). Thanks for your feedback.
MondayMorningQB wrote:Tony, I very much think that AT&T and Verizon(my carrier) are going the way of Blockbuster. More and more I'm sending texts through apps over the Internet that don't involve Verizon at all. Also, the last time I was in Mexico I called the US using Facebook through the internet(for free!) that also didn't involve Verizon. The only reason I need Verizon now is to keep me connected when I'm away from Internet connectivity. Google, Facebook, Ford, GMC are all working to change that and make it possible to have Internet access wherever we are, even while driving. When we reach that point, I don't see a need for Verizon or AT&T's services.

Your investment is totally dependent on those TWO companies. While it has been a great investment so far, there is no guarantee that it will continue. If you owned the S&P 500 instead, it really would be of little concern to you what the future of any TWO companies are because their loss is probably someone(that you already own) else's gain.
"revenue streams" Could be stressed for T, since they've made some of what many consider bad large investments outside the USA, that could effect their ability to pay in the future unknown date. It rides on the world economy like everything else. I couldn't choose between either, so I bought a ETF with both in it. Now that added diversity, and that's a smart plan. I've friends who own lots of both. I don't say a thing, it's not my business, unless they ask. They do pay out nicely, and that's something for nothing thing makes since. So, I'd say that it's possible for them to cut dividends, but they just worship the continued increases, cause that's what people and investors want to see in reports.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Wed Jul 06, 2016 2:48 pm

Tony, keep in mind that an alternative universe might have shown up and those dividends disappeared. Nothing magical about them, they just reduce your investment in the company. The way to think about it correctly is that every time you get a dividend it's basically the equivalent of if you sold some shares to reduce your investment (and the company did not pay a dividend)---it's just that the company did it for you.
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Wed Jul 06, 2016 3:16 pm

Larry,
It is very appropriate that you wrote this today: T and VZ ex-div day. Today is also a good example of why this point is so hard for me to take (corrective) action on. T and VZ stock prices rose, the number of shares I own of each stayed the same (ie. I didn't sell) so my net worth increased, and I got 'paid' $3000 for holding each stock (payable on Aug 1st, my birthday no less). And since I hold these in an IRA I will gain access to this 'free' $6000 by selling $6000 of VOO in my taxable account (with long term capital gains and thus pay little or no taxes) and buy VOO back in my IRA. $6000 of retirement income with no changes to my portfolio. I feel like an investing wizard!
Keep posting though, I know you are right.

larryswedroe wrote:Tony, keep in mind that an alternative universe might have shown up and those dividends disappeared. Nothing magical about them, they just reduce your investment in the company. The way to think about it correctly is that every time you get a dividend it's basically the equivalent of if you sold some shares to reduce your investment (and the company did not pay a dividend)---it's just that the company did it for you.
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by jay22 » Wed Jul 06, 2016 4:14 pm

Maybe I am missing something here: dividend or not, stocks are still stocks, are they not? Why would anyone assume stocks are a good substitute for "safe" bonds?

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Wed Jul 06, 2016 5:22 pm

Tony, the price would have risen by MORE than it actually did if they had not paid the dividend. That's not only simple but common sense. The company clearly would be worth more if he had more cash, a dollar is worth at least $1, and more cash makes the company less risky.
give up the "ghost." Smart people make mistakes but when they learn there is a better way they change, don't remain locked in to past behaviors just because they got lucky outcomes
Jay you aren't missing anything
Larry

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patrick013
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by patrick013 » Wed Jul 06, 2016 7:20 pm

jay22 wrote:Maybe I am missing something here: dividend or not, stocks are still stocks, are they not? Why would anyone assume stocks are a good substitute for "safe" bonds?
Maybe not a substitute but a complement. Somebody said once when
you have a bond you receive interest based on a piece of paper, but
when you have a dividend stock you receive cash based on a real
productive activity. I still say if growth, both domestic and int'l, stalls
there is still going to be a group of stocks with good balance sheets,
that are profitable, and pay a dividend. And, they're going to be in a
dividend stock index fund. I wish ticker PEY had a nicer expense ratio.

Being income oriented myself, so 50% of my portfolio would be income
oriented and the other 50% still the 500, I'm quite diversified with bonds,
dividend stocks, the usual 500 index, but very selective everything is
investment grade.
age in bonds, buy-and-hold, 10 year business cycle

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Wed Jul 06, 2016 7:39 pm

Patrick
But the dividend doesn't do anything for you that you cannot do yourself, by selling enough shares to create a self dividend. The rest is just investors deluding themselves.
Larry

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patrick013
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by patrick013 » Wed Jul 06, 2016 7:57 pm

larryswedroe wrote:Patrick
But the dividend doesn't do anything for you that you cannot do yourself, by selling enough shares to create a self dividend. The rest is just investors deluding themselves.
Larry
But the risk/return metrics are all good. Some people appreciate that,
compared to bonds here anyway.

It used to be risk was a measure of losing all your money, now
with indexing it's just a measure of volatility. Pushing for cap
gains isn't more relaxing than pushing for high yield either. I'm
surprised there's not an official income portfolio to account
for an income portion of one's investments. I guess traditional
finance doesn't go long term growth all the time.
age in bonds, buy-and-hold, 10 year business cycle

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Wed Jul 06, 2016 8:08 pm

Patrick
Again an illusion, there is NO DIFFERENCE, the risk-return metrics are the SAME. And it has nothing to do with bonds. This is one of the great puzzles in finance, why people think this way. It's all self deception
Larry

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patrick013
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by patrick013 » Wed Jul 06, 2016 8:18 pm

larryswedroe wrote:Patrick
Again an illusion, there is NO DIFFERENCE, the risk-return metrics are the SAME. And it has nothing to do with bonds. This is one of the great puzzles in finance, why people think this way. It's all self deception
Larry
Yeah, I know, the 100 year chart remains the same. But, my RIA,
myself, likes this AA the way it is for a long while. Need to change it
later for some other need, will do, long story short.
age in bonds, buy-and-hold, 10 year business cycle

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by Hyoga » Wed Jul 06, 2016 8:38 pm

larryswedroe wrote:Patrick
But the dividend doesn't do anything for you that you cannot do yourself, by selling enough shares to create a self dividend. The rest is just investors deluding themselves.
Larry
That sems logical, if markets are efficient. Now, what about downturns? Say, after a big crash, when PE ratios are very low. Wouldn't it be better to just count on the company's dividends, rather than being forced to sell to a discount?
That is how I initially understood the idea of "stable" dividend paying stocks as substitutes for bonds.

Inversely, it would be better to sell company stock rather that get dividends, when PE ratios are high. But that would be more like a return enhancement: if you already live off dividends, you don't really care to do better.
よろしくお願いします

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by jay22 » Wed Jul 06, 2016 9:32 pm

patrick013 wrote:
jay22 wrote:Maybe I am missing something here: dividend or not, stocks are still stocks, are they not? Why would anyone assume stocks are a good substitute for "safe" bonds?
Maybe not a substitute but a complement. Somebody said once when
you have a bond you receive interest based on a piece of paper, but
when you have a dividend stock you receive cash based on a real
productive activity. I still say if growth, both domestic and int'l, stalls
there is still going to be a group of stocks with good balance sheets,
that are profitable, and pay a dividend. And, they're going to be in a
dividend stock index fund. I wish ticker PEY had a nicer expense ratio.

Being income oriented myself, so 50% of my portfolio would be income
oriented and the other 50% still the 500, I'm quite diversified with bonds,
dividend stocks, the usual 500 index, but very selective everything is
investment grade.
Doesn't matter how to categorize it. The risk profile of a dividend paying stock is in no way similar to a "safe" bond. If it was a junk bond, I would still see your point, but you're essentially saying that you can replace a US Treasury bill with a dividend paying stock.

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patrick013
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by patrick013 » Wed Jul 06, 2016 9:48 pm

jay22 wrote: Doesn't matter how to categorize it. The risk profile of a dividend paying stock is in no way similar to a "safe" bond. If it was a junk bond, I would still see your point, but you're essentially saying that you can replace a US Treasury bill with a dividend paying stock.
VCIT Interm-Term Corporate Bond ETF
VYM High Div Yield Index ETF
VPU Utilities ETF
VNQ REIT ETF

If I get a good entry point I can pay alot of bills with this
portfolio, yielding perhaps 4% cash. Not that greedy.
Nothing stopping opening a second account for TSM and LT TRSY.
age in bonds, buy-and-hold, 10 year business cycle

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Thu Jul 07, 2016 12:40 am

I thought that the only reason VZ and T are rising in price is because they are paying a healthy dividend and look to be able to generate enough cash to sustain them? Their prices would not be going up if they didn't pay a dividend. That's why Utilities and Telecom are two of the leading sectors of the market this year, DIVIDEND PAYERS!!

I understand your points and rather than continue to go back and forth with you (and you are correct, I'm just playing a bit of the devil's advocate) I'll say once again thank you for taking the time to respond to my inquiries. I've truly learned so much from this forum and from you in particular.

Tony

PS. I'm not locked into these investments and they are not my long term behavior. I think about the risk every day (but I sleep well at night) and don't mind rethinking my positions.
larryswedroe wrote:Tony, the price would have risen by MORE than it actually did if they had not paid the dividend. That's not only simple but common sense. The company clearly would be worth more if he had more cash, a dollar is worth at least $1, and more cash makes the company less risky.
give up the "ghost." Smart people make mistakes but when they learn there is a better way they change, don't remain locked in to past behaviors just because they got lucky outcomes
Jay you aren't missing anything
Larry

dltnfs
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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by dltnfs » Thu Jul 07, 2016 1:14 am

TonyDAntonio wrote:I thought that the only reason VZ and T are rising in price is because they are paying a healthy dividend and look to be able to generate enough cash to sustain them? Their prices would not be going up if they didn't pay a dividend.
(1) If something happens that means on average, the market expects that the NPV of all dividends paid by a company in future increases by $1 (e.g., it announces a promising new technology, lands a major new client, etc.), then its share price will go up by $1.

(2) If a company pays a dividend of $1, then its share price will go down by $1.

You are taking elements from both of these true statements to create a false implication.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Thu Jul 07, 2016 7:31 am

Hyoga
The assumption is that the market price is the best estimate of the right price. Thus, the expectation is that the company will earn its cost of capital (which is based on valuations). When valuations are high you expect low returns and vice versa.

Also keep in mind that broadly diversified portfolios don't exclude dividends, with US market you get about 2%.
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Thu Jul 07, 2016 9:58 am

You're saying T and VZ have been going up this year because of new technologies (or something similar) rather than the fact that the buyers have been seeking yield?
What new technology has GLD or IAU been producing? How does their share price rise or fall?
You say my implication is false. I'd say your view of how stock's are priced is simplistic.
dltnfs wrote:
TonyDAntonio wrote:I thought that the only reason VZ and T are rising in price is because they are paying a healthy dividend and look to be able to generate enough cash to sustain them? Their prices would not be going up if they didn't pay a dividend.
(1) If something happens that means on average, the market expects that the NPV of all dividends paid by a company in future increases by $1 (e.g., it announces a promising new technology, lands a major new client, etc.), then its share price will go up by $1.

(2) If a company pays a dividend of $1, then its share price will go down by $1.

You are taking elements from both of these true statements to create a false implication.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Thu Jul 07, 2016 10:02 am

Tony
IMO they, like all higher yielding assets like REITS and utilities, have benefited from investors chasing yield as cash flow investors. Of course if rates rise, or should I say when, this typically all reverses and does so quickly
Note there is a good paper showing that mutual funds know that investors chase yield in low rate environments so they buy these same stocks as well, and of course then reverse course.
Forewarned is forearmed
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Thu Jul 07, 2016 10:37 am

Totally agree that T and VZ could drop in price quickly when rates start to normalize.
larryswedroe wrote:Tony
IMO they, like all higher yielding assets like REITS and utilities, have benefited from investors chasing yield as cash flow investors. Of course if rates rise, or should I say when, this typically all reverses and does so quickly
Note there is a good paper showing that mutual funds know that investors chase yield in low rate environments so they buy these same stocks as well, and of course then reverse course.
Forewarned is forearmed
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Thu Jul 07, 2016 11:19 am

Tony
BTW, till illustrate the point that dividend focus makes no sense, you would be better off if your holding are in taxable account if they instead of paying dividends bought stock back and you then sold shares to create the self dividend. This way instead of you paying tax on the full dividend you only pay tax on the portion that is the gain, a far better outcome. Hence dividends really don't make much sense unless companies think their stock is overvalued and they are better off paying dividends than buying stock

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by patrick013 » Thu Jul 07, 2016 11:24 am

So they say you cannot chase yield in a low rate environment
any more than you can expect capital gains in a low growth
market.

Here is a chart of dividend stock performance thru various
interest rate cycles from reputable researcher Morningstar.
Few rate increases and low debt companies should soften
the small loss expected but the future looks bright overall.

Image
age in bonds, buy-and-hold, 10 year business cycle

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by dltnfs » Thu Jul 07, 2016 11:37 am

TonyDAntonio wrote:You're saying T and VZ have been going up this year because of new technologies (or something similar) rather than the fact that the buyers have been seeking yield?
What new technology has GLD or IAU been producing? How does their share price rise or fall?
You say my implication is false. I'd say your view of how stock's are priced is simplistic.
A change in the discount rate (i.e., the market's estimate of the best opportunities available elsewhere) also changes the NPV, so this model still explains buyers "seeking yield". If the buyers are rational, this is future earnings yield, not present dividend yield.

Irrational factors can of course move stock prices too, if enough traders believe in them; so dividend yield certainly does affect stock prices, in a "greater fool" sense. If you said you were buying dividend stocks because you thought a lot of people liked dividend stocks and would irrationally bid them up, and you planned to sell before that irrational belief reversed, then I'd have no fundamental disagreement with your plan.

Gold is valuable as a decentralized medium of exchange and store of value. This is different from the reason why stocks or bonds are valuable in the long term. Your view of how dividends work defies arithmetic. (If I always buy stock right before it goes ex dividend, and always sell it right after, will I collect the full dividend yield while taking only slight market risk?) A lot of people have spent a lot of time trying to explain that, but I don't think you'll be convinced.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Thu Jul 07, 2016 1:14 pm

I'm holding T and VZ in my IRA. I have detailed in a previous post how I get the dividends so that I can spend them. I pay little or no tax on these. Yes, I have use up some of my long term capital gains to do this. I haven't factored that into any equations. Well, I have no equations.
larryswedroe wrote:Tony
BTW, till illustrate the point that dividend focus makes no sense, you would be better off if your holding are in taxable account if they instead of paying dividends bought stock back and you then sold shares to create the self dividend. This way instead of you paying tax on the full dividend you only pay tax on the portion that is the gain, a far better outcome. Hence dividends really don't make much sense unless companies think their stock is overvalued and they are better off paying dividends than buying stock

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Thu Jul 07, 2016 1:23 pm

I don't have a view of how dividends work and I am not buying and selling VZ and T around the dividend dates. What I have been saying is that VZ and T are going up in price for about a year because, among other things, they are part of the yield chase. That's it. Others have pointed out how the stock prices of these behave around the ex-div date. I've understood their posts. I've read up on it. And what I have noticed is that the stock prices of VZ and T still go up on and around the ex-div date. I'm sure it's because there are many, many other factors involved in a stock price other than dividend payouts and company fundamentals. Everyone says, "Yes, but you don't understand how it works". I understand what I've seen. T and VZ stock prices aren't rising because they've come out with some great new product. They are rising because they pay a healthy dividend and people are buying into that, rightly or wrongly, greater fool or not. If you disagree then I think we have to agree to disagree.

dltnfs wrote:
TonyDAntonio wrote:You're saying T and VZ have been going up this year because of new technologies (or something similar) rather than the fact that the buyers have been seeking yield?
What new technology has GLD or IAU been producing? How does their share price rise or fall?
You say my implication is false. I'd say your view of how stock's are priced is simplistic.
A change in the discount rate (i.e., the market's estimate of the best opportunities available elsewhere) also changes the NPV, so this model still explains buyers "seeking yield". If the buyers are rational, this is future earnings yield, not present dividend yield.

Irrational factors can of course move stock prices too, if enough traders believe in them; so dividend yield certainly does affect stock prices, in a "greater fool" sense. If you said you were buying dividend stocks because you thought a lot of people liked dividend stocks and would irrationally bid them up, and you planned to sell before that irrational belief reversed, then I'd have no fundamental disagreement with your plan.

Gold is valuable as a decentralized medium of exchange and store of value. This is different from the reason why stocks or bonds are valuable in the long term. Your view of how dividends work defies arithmetic. (If I always buy stock right before it goes ex dividend, and always sell it right after, will I collect the full dividend yield while taking only slight market risk?) A lot of people have spent a lot of time trying to explain that, but I don't think you'll be convinced.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by Longtermgrowth » Thu Jul 07, 2016 2:54 pm

I have read through many threads on this forum regarding the total return vs dividend strategy. It keeps being repeated that a higher dividend yield is the equivalent of selling shares in the total return approach, which I think I understand, but I keep thinking what if this were over a period of a century or longer in a trust?

Trust A has its equity portion invested in a high dividend yield index. Trust B has its equity portion invested in a total stock market index. Both have the same income requirements. Say every year a percentage of trust B's equity has to be sold off to meet the income requirements that trust A meets from its dividend yield. After 100 years of this, trust A has the same number of shares, but where is trust B at this point?
I'm guessing the answer is that the capital gains over the years keeps the value of the remaining shares as high or higher than the many more shares that never had to be sold in trust A... What about 200 years out for the great great grandchildren? At some point doesn't the equity get completely sold off in trust B? Or are there stock splits or something else that happens besides long term capital gains that would keep the share count high enough through the centuries?

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by dbr » Thu Jul 07, 2016 6:04 pm

Longtermgrowth wrote:I have read through many threads on this forum regarding the total return vs dividend strategy. It keeps being repeated that a higher dividend yield is the equivalent of selling shares in the total return approach, which I think I understand, but I keep thinking what if this were over a period of a century or longer in a trust?

Trust A has its equity portion invested in a high dividend yield index. Trust B has its equity portion invested in a total stock market index. Both have the same income requirements. Say every year a percentage of trust B's equity has to be sold off to meet the income requirements that trust A meets from its dividend yield. After 100 years of this, trust A has the same number of shares, but where is trust B at this point?
I'm guessing the answer is that the capital gains over the years keeps the value of the remaining shares as high or higher than the many more shares that never had to be sold in trust A... What about 200 years out for the great great grandchildren? At some point doesn't the equity get completely sold off in trust B? Or are there stock splits or something else that happens besides long term capital gains that would keep the share count high enough through the centuries?
Part of the answer depends on the mathematical fact that if the return generated by the two different kinds of investments is the same, and the withdrawals are the same, the value of the assets at the end of any period of time has to be the same. The number of shares is irrelevant. The scenario that there are splits would work. The scenario that the few remaining shares of B are very high priced would work. I think the mathematical solution to the dilemma you pose is that as the price of a share increases over time and the number of shares left declines, the number of shares that need to be sold to take a withdrawal declines as well. In some bizarre scenario one could end up with one share worth a gazillion dollars with no way to sell a fraction of a share. In the real world I don't think there are any stocks that have been on the market for 200 years, and stock splits are common. Also people own portfolios of many stocks, among which there are failures, liquidations, mergers, acquisitions, new issues, and so on.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by dltnfs » Thu Jul 07, 2016 11:24 pm

TonyDAntonio wrote:What I have been saying is that VZ and T are going up in price for about a year because, among other things, they are part of the yield chase. That's it.
If the risk-free rate goes down, then the NPV of a stream of future payments (e.g., VZ or T's future earnings) goes up. So the "simplistic" dividend discount model absolutely predicts the behavior that you observe. It just doesn't matter (to a rational investor) whether they pay out the dividend now, or buy back shares, or repay debt, or retain and reinvest the earnings.
TonyDAntonio wrote:Others have pointed out how the stock prices of these behave around the ex-div date. I've understood their posts. I've read up on it. And what I have noticed is that the stock prices of VZ and T still go up on and around the ex-div date.
We are saying that from just before to just after the ex-dividend date, the stock price, all other things being equal, drops by the amount of the dividend. Do you disagree? What do you think is the average change in VZ's stock price from the close before the dividend to the open after, over a decent statistical sample (e.g., the last few years)?

We are not saying that dividends are bad. We are saying that a dividend is just a transfer from one account (the value of the shares) to another (the value of your brokerage account's cash). The first balance goes down, and the second goes up, and the deltas sum to zero. Yahoo Finance has the historical data for free, so you can easily check this. I just did for fun, and arithmetic seems to be working as expected.
TonyDAntonio wrote:I'm sure it's because there are many, many other factors involved in a stock price other than dividend payouts and company fundamentals.
Asset prices change for many irrational reasons. But, irrational behavior tends to eventually stop. I invest based on rational fundamentals because that lets me buy and hold indefinitely, vs. buying, and trying to figure out when the irrational behavior will stop and I should exit the trade.

I don't think there's anything wrong with trying to profit from irrational behavior of other market participants, and lots of people have made more money than I have doing that successfully. I just think (a) that this is a game of skill played against smart people who have dedicated their lives to winning at this, so it's usually (but not always) a losing proposition, and (b) that if you're doing that, you should admit that, at least to yourself.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by TonyDAntonio » Fri Jul 08, 2016 12:25 am

I have admitted it, over and over and over. I took a risk. It has paid off. I don't plan on holding VZ and T forever and hope I have it in me to sell them before they go south.
I appreciate the time you took to write your responses. You know a lot more about this stuff than I.
dltnfs wrote: I don't think there's anything wrong with trying to profit from irrational behavior of other market participants, and lots of people have made more money than I have doing that successfully. I just think (a) that this is a game of skill played against smart people who have dedicated their lives to winning at this, so it's usually (but not always) a losing proposition, and (b) that if you're doing that, you should admit that, at least to yourself.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by dltnfs » Fri Jul 08, 2016 1:23 am

TonyDAntonio wrote:I have admitted it, over and over and over. I took a risk. It has paid off. I don't plan on holding VZ and T forever and hope I have it in me to sell them before they go south.
I appreciate the time you took to write your responses. You know a lot more about this stuff than I.
I agree that e.g. when you said above that these weren't lifetime holds, you were implicitly saying that this is a trade for you, and not an investment. You could make that explicit, and write:
I think that when interest rates are low, investors will chase yield, and therefore buy dividend stocks. I'm going to buy dividend stocks. This demand for dividend stocks will drive up their prices, and earn me a superior total return. This demand is speculative, so it will eventually stop or reverse. I think I can watch and predict when that will happen, and sell before that.
Most people here would advise against your plan, but they couldn't say that anything you'd written was specifically wrong.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by PowerBuilder3 » Mon Jul 11, 2016 10:46 am

larryswedroe wrote:Patrick
Again an illusion, there is NO DIFFERENCE, the risk-return metrics are the SAME. And it has nothing to do with bonds. This is one of the great puzzles in finance, why people think this way. It's all self deception
Larry
What about sequence risk?

Say you have a choice between 2 equity-index funds over a 3 year period.

You are retired and pulling a fixed amount from the fund each quarter, say 8% of the initial investment.

BOTH funds will have a total return of 8% per year for 3 years (say you find this after the fact).

One fund pays 0 dividends, so after 3 years its price goes from 50.00 to 63.00 a share.
The other fund pays 8% dividends, so after 3 years its price starts at 50.00 and ends at 50.

Say the 'market' goes through a sharp bear market, followed by a bull market. The bear was so deep and sharp that the dividend payout stays the same.

Your 'personal total return' is the sum of the money pulled out, + the starting value (shares*$ per share) vs ending value.

In the dividend fund your personal total return was 8% per year! I didn't matter what the NAV price did over that time, because you didn't buy or sell any shares!

In the no-dividend fund you did worse, because you had to sell shares at a low price to keep pulling your fixed amount, so you ended up with a lower 'personal total return'.

Of course, if the market had a Bull then Bear (for the same total return), it would be better to be in the 0 dividend fund, since you were selling shares at a higher price.

So if you just a zillion simulations, or average over time, it does not matter.

BUT if you are retired, and get to run it only once - I'd rather be in the dividend fund, because it reduces my downside risk!

WHAT IS WRONG WITH MY ANALYSIS?

(As long as the total return is the same, you are pulling money, and the dividend payout falls less that the effective share prices you have to sell at - you are safer in a dividend oriented fund).

(I was reading something that said during the 2008-9 drop, dividend payouts fell like 20% while the market fell 60% and I looked at some of my old CEF's behavior during the crash, and realized the crazy price swings had no meaning over that period if I was just pulling the dividend).

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Mon Jul 11, 2016 11:23 am

The fund that did pay dividends has lower prices by that 8% versus the other fund. The ending prices will be 8% per year lower. And of course the expected returns going forward are higher for the companies that didn't pay dividends because they have more capital retained.

Finally remember that if you own a broad based diversified portfolio that isn't your choice. Most funds have dividends in area of 2%, not much different than market portfolio.

No one is suggesting avoiding dividends, only that seeking them doesn't make sense,

I would also add that you are ignoring taxes--you are paying taxes on the full amount of the dividends while the other case only on any capital gains.
Larry

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by saltycaper » Mon Jul 11, 2016 11:38 am

PowerBuilder3 wrote:
WHAT IS WRONG WITH MY ANALYSIS?

(As long as the total return is the same, you are pulling money, and the dividend payout falls less that the effective share prices you have to sell at - you are safer in a dividend oriented fund).
What's wrong is your statement contradicts itself. If the total return is the same, it does not matter which fund you owned, ignoring taxes. If the total returns are different, then there are factors other than the dividend payment that are at work, and it is not an equal comparison. Doesn't matter if the market goes up, down, or sideways.
Quod vitae sectabor iter?

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by PowerBuilder3 » Mon Jul 11, 2016 11:52 am

saltycaper wrote:
PowerBuilder3 wrote:
WHAT IS WRONG WITH MY ANALYSIS?

(As long as the total return is the same, you are pulling money, and the dividend payout falls less that the effective share prices you have to sell at - you are safer in a dividend oriented fund).
What's wrong is your statement contradicts itself. If the total return is the same, it does not matter which fund you owned, ignoring taxes. If the total returns are different, then there are factors other than the dividend payment that are at work, and it is not an equal comparison. Doesn't matter if the market goes up, down, or sideways.
But 'reported total return' will be the same (if you looked at the 3 year return) in say Morningstar. But as a retiree pulling funds, I will never get that total return. The return I get is the $ value pulled out (and spent) plus the ending share price * number of ending shares, vs. starting share price * number of starting shares. I ran many setups in Excel, making sure the 'offical' total return is the same, and in a bear -> bull 3 year one, the Dividend payer fund was better off vs the non-dividend payer. With RE-INVESTED dividends, the total return is the same, but that's not happening for this scenario.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by PowerBuilder3 » Mon Jul 11, 2016 12:00 pm

larryswedroe wrote:The fund that did pay dividends has lower prices by that 8% versus the other fund. The ending prices will be 8% per year lower. And of course the expected returns going forward are higher for the companies that didn't pay dividends because they have more capital retained.

Finally remember that if you own a broad based diversified portfolio that isn't your choice. Most funds have dividends in area of 2%, not much different than market portfolio.

No one is suggesting avoiding dividends, only that seeking them doesn't make sense,

I would also add that you are ignoring taxes--you are paying taxes on the full amount of the dividends while the other case only on any capital gains.
Larry
"The fund that did pay dividends has lower prices by that 8% versus the other fund." Yes, The "No Dividend Fund starts at 50 and ends at 63", but Dividend Fund starts at 50 and end at 50. So that is factored in. BUT if withdrawing during a bear->bull cycle (for both) you had to sell more shares. I ran many Excel spreadsheets of this, and in Bear->Bull dividend always wins, assuming the same Total Return, pulling cash out, and dividends falling LESS than share prices. All the books say that starting retirement with a Bear market is the worse case - even if in the long run you get average growth.

"ignoring taxes" - I don't think so. Dividends are taxed at 15%, assuming the fund was held long-term, long term capital gains were also 15% on sold shared (remember I'm only talking about retirement withdraw phase).

"

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by dbr » Mon Jul 11, 2016 2:17 pm

PowerBuilder3 wrote:
"The fund that did pay dividends has lower prices by that 8% versus the other fund." Yes, The "No Dividend Fund starts at 50 and ends at 63", but Dividend Fund starts at 50 and end at 50. So that is factored in. BUT if withdrawing during a bear->bull cycle (for both) you had to sell more shares. I ran many Excel spreadsheets of this, and in Bear->Bull dividend always wins, assuming the same Total Return, pulling cash out, and dividends falling LESS than share prices. All the books say that starting retirement with a Bear market is the worse case - even if in the long run you get average growth.
If the return year by year is the same and the amount withdrawn year by year is the same, then it is a mathematical necessity that the two investments starting at the same value end at the same value. Otherwise either the returns are not the same or the withdrawals were not the same.

Somehow whatever was calculated did not keep return and withdrawal the same or there is a mathematical error.

The comment about sequence of returns is true but is not affected by whether withdrawals are taken by selling shares or cashing dividends unless one somehow engineers different returns or different amounts of withdrawal between the two cases.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by PowerBuilder3 » Mon Jul 11, 2016 3:22 pm

dbr wrote:
PowerBuilder3 wrote:
"The fund that did pay dividends has lower prices by that 8% versus the other fund." Yes, The "No Dividend Fund starts at 50 and ends at 63", but Dividend Fund starts at 50 and end at 50. So that is factored in. BUT if withdrawing during a bear->bull cycle (for both) you had to sell more shares. I ran many Excel spreadsheets of this, and in Bear->Bull dividend always wins, assuming the same Total Return, pulling cash out, and dividends falling LESS than share prices. All the books say that starting retirement with a Bear market is the worse case - even if in the long run you get average growth.
If the return year by year is the same and the amount withdrawn year by year is the same, then it is a mathematical necessity that the two investments starting at the same value end at the same value. Otherwise either the returns are not the same or the withdrawals were not the same.

Somehow whatever was calculated did not keep return and withdrawal the same or there is a mathematical error.

The comment about sequence of returns is true but is not affected by whether withdrawals are taken by selling shares or cashing dividends unless one somehow engineers different returns or different amounts of withdrawal between the two cases.
I'm probably not using the correct terms, as Total Return always assumes the re-investment of dividends at the share price of the Stock (or Fund) at the moment the dividends were paid, and with my example that does not happen.

BUT If I don't care about the official Total Return, but my personal Total Return while I pull money from a fund, I think I limit my downside risk if I bias toward more dividends rather than less dividends, even if the "total return" nearly the same?


Here is a simplified example.

Both funds: Year 0 $50 per share, $10,000 total investment to start, hold for 2 years, returns 2% per year compounded.

No-Dividend Fund: Say ending price is $52.02 (50*(1.02)^2), no dividends, which would be 2% per year compounded.

Dividend Fund: Ending price is $50.00 but it paid 2 2% dividends of $200 each.



OK now I have to pull $200 a year out of the fund. And there is a horrible crash then full recovery, but its so fast the company (or fund) didn't change its dividend because neither its fundamentals or cash flow changed - say there was a crazy rumor that the CEO went insane so the multiple dropped, then they found out it was a hoax.

NoDividend:

Year 0 $10,000 $50 per share = 200 shares
Year 1 Price crashes to $5.00 per share! But I need $200 so I sell 40 shares,
So I now have 160 shares
Year 2 Whew! Price recovers to $52.02 So I only need to sell 3.84 shares!

So now I have 156.15 shares x $52.02 = 8,123.20 (plus my $400 in cash).

Dividend:

Year 0 $10,000 $50 per share = 200 shares
Year 1 Price crashes to $5.00 per share! But I still get my $200 cash, and sell nothing.
Year 2 Whew! Price recovers to $50 And I get my $200 cash.

So now I have 200 shares x $50.00 = 10,000 (plus my $400 in cash).


Obviously if the reverse happened, and the multiple went to the moon in Year 1, then I would have to sell almost no shares, and I would be better off with my 52.02 shares than my 50.00 shares.

So ON AVERAGE it doesn't make a difference, also I can't say its 'better' to own the Dividend vs NoDividend, but I still think in short bear markets the dividend payer earns bonus, therefore reduces downside risk.

I'm guessing that's one reason why dividend stocks have a premium, all other things being equal?

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by dbr » Mon Jul 11, 2016 4:59 pm

PowerBuilder3 wrote: NoDividend:

Year 0 $10,000 $50 per share = 200 shares
Year 1 Price crashes to $5.00 per share! But I need $200 so I sell 40 shares,
So I now have 160 shares

The loss is $9000 and the return is -90% for this year. You then withdraw $200 and are left with $800 in stock, 160 shares

Year 2 Whew! Price recovers to $52.02 So I only need to sell 3. 84 shares!

So now I have 156.15 shares x $52.02 = 8,123.20 (plus my $400 in cash).

Now the return is the same as in the case of the other stock which, see below, is 1,275% applied to a holding of $800. This comes to $10,200 not $8123.20. The price returns from $5 to $63.75 for this stock and $4 to $50 for the other. You sell enough shares to withdraw $200 leaving $10,000 in the account and $400 withdrawn,


Dividend:

Year 0 $10,000 $50 per share = 200 shares
Year 1 Price crashes to $5.00 per share! But I still get my $200 cash, and sell nothing.

The loss including the dividend is $8800 and the return is -88% for this year. To get a return the same as the other stock of -90% you need to lose another 2% or $200 which is $1/share and the share price will be $4.00 per share. For the same return the share price must go down when the dividend is paid. You violated the assumption that the returns were the same and you let dividends be free money.

Year 2 Whew! Price recovers to $50 And I get my $200 cash.

To recover from $4 to $50 you need a return of 12,250%. You have also added $200 in cash or $1/share which is 25% on $4 so your second year return is 1,275%.

So now I have 200 shares x $50.00 = 10,000 (plus my $400 in cash).

Now you have a total of $10,400 The same as with the other investment. Your calculation is off because you don't have the same returns for each investment as we agreed was the initial condition. You made the mistake of taking a dividend to be free money and not part of the return.

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Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by larryswedroe » Mon Jul 11, 2016 7:49 pm

DBr
Thanks for saving me from having to do the math, which I have done in numerous other examples.

But I repeat that it's not black or white, and the differences cannot be as great as the example showed- 0 vs. a large dividend. Dividend strategies typically have maybe 1 or 2% difference from a market or value strategy. So you are not even talking about much of a need to sell shares

Power Builder As to the tax issue --paying 15%, or higher for higher bracket investors, tax on dividends is far worse than paying perhaps no tax when you only pay a tax on the small percent that might be at a gain. And of course you have the potential for stepped up basis on death.

Larry

passiveincome
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Joined: Wed Dec 26, 2012 6:21 pm

Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by passiveincome » Tue Jul 12, 2016 8:18 am

I think income producing residential real estate is way safer than bonds. A lot more work but way safer

Calhoon
Posts: 107
Joined: Wed Feb 16, 2011 1:29 pm

Re: dividend paying stocks good substitutes for safe bonds (NOT)

Post by Calhoon » Tue Jul 12, 2016 8:57 am

While not a substitute for bonds, aren't dividend etfs performing better than indexes and bonds ytd?

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