Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

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misterno
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Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by misterno » Sat Dec 17, 2016 4:20 am

http://www.forbes.com/sites/steveschaef ... 08df442ba1

So what does this mean? Allocate more of the dividend paying stocks to capture more value?

Is there a research out tthere that shows that dividend paying stocks returm more than S&P 500 index?

boglephreak
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by boglephreak » Sat Dec 17, 2016 5:06 am

how is that possible if the dividend comes out of the value of the stock?

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by minimalistmarc » Sat Dec 17, 2016 5:28 am

I don't understand.

Not reinvesting the dividend is the same as selling the same amount of stock so what is the difference?

If there were no dividends and companies only did buy backs or reinvestment, then 0% would come from dividends and 100% from capital growth

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by Toons » Sat Dec 17, 2016 6:06 am

boglephreak wrote:how is that possible if the dividend comes out of the value of the stock?
I've owned Mcdonalds Stock since 1990
The latest dividednd was .97 cents per share.
The Stock price was 122.84 Dec.14
The Stock price was 122.36-Dividend Payable Date.,Dec.15th
The Stock price was 123.34 Dec.16
I didn't sell any stock,
I incurred no transaction costs.
The dividend has increased every year.
The stock has split.
The "average"annual return for the stock has been over 10%.(inlcuding dividends)
I have been fortunate in that the long term capital growth of the company as of now has been,excellent :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by JoMoney » Sat Dec 17, 2016 6:25 am

I can only find Vanguard annual reports for the S&P 500 fund showing their calculated book value going back to 1996, so I can only look at the last 20 years, but if I take the number they provided in in 12/31/1996 annual report for the Vanguard 500 Mutual fund of Price/Book= 3.4x, and the S&P500 price on 12/31/1996 of $740.74 I can work out the book value of the S&P500 as $740.74/3.4= $217.86

If I look at what Vanguard is showing as the P/B currently, 2.8x and the S&P500 at $2,258.07 then the current book value is $2258.07/2.8= $806.45

The capital assets recorded on the books of these companies went from $217.86 to $806.45, over 20 years that's a CAGR of 6.76%

The stock market has decided they're not willing to pay as a high a P/B multiple for those assets today, but it seems to me that "capital appreciation" has made up a very significant portion of the value the investors received.
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by Longdog » Sat Dec 17, 2016 6:35 am

boglephreak wrote:how is that possible if the dividend comes out of the value of the stock?
The dividend comes from earnings (or at least revenue) of the company that the board of directors chooses to distribute to shareholders.
Steve

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by cherijoh » Sat Dec 17, 2016 7:24 am

misterno wrote:http://www.forbes.com/sites/steveschaef ... 08df442ba1

So what does this mean? Allocate more of the dividend paying stocks to capture more value?

Is there a research out tthere that shows that dividend paying stocks returm more than S&P 500 index?
Actually, It wouldn't surprise me if most of the companies in the S&P 500 ARE dividend paying stocks.

The article stated "71% of return..." as though it was well known fact, but I'm always suspicious when statistics are thrown out this way with no back story.

What is the population being considered? Companies in the DJIA? S&P 500? All US stocks?

How were the numbers calculated? If they assumed that the dividends, once paid, are taken out of the market then that would grossly inflate the percent return coming from dividends since paid dividends would not have been subject to market volatility the same way the "capital appreciation" portion would have been. In some cases, companies are resistant to cutting the dividend, so when the stock prices are down you have an increase in the dividend return as a % of stock price at the same time you have negative "capital appreciation".

I certainly wouldn't change my investment philosophy based on some passing reference in an article in Forbes.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by siamond » Sat Dec 17, 2016 9:15 am

cherijoh wrote:The article stated "71% of return..." as though it was well known fact, but I'm always suspicious when statistics are thrown out this way with no back story.

What is the population being considered? Companies in the DJIA? S&P 500? All US stocks?
There is limited historical data about dividends besides the S&P 500, so this was probably a reference to the S&P 500 and Prof. Shiller's data series. If one looks at some facts in this respect (I'll be nice and do the math in real terms as an attempt to replicate the number quoted in the article):
- between 1871 and 2015, the total return was 6.7%, while the dividends returned 4.4% (that's actually close to a 70% ratio)
- between 1927 and 2015, the total return was 6.8%, while the dividends returned 3.8% (less than 60% ratio)
- between 1955 and 2015, the total return was 6.9%, while the dividends returned 3.1% (less than 50% ratio)
- between 1975 and 2015, the total return was 6.6%, while the dividends returned 3.0% (less than 50% ratio)

This more or less tracks the evolution of the dividends payout ratio (dividends/earnings) over time.

Clearly, dividends thinking is very skewed towards the past -- that is, if O'Leary did use such historical data instead of just listening to his mother :twisted:. It is also totally meaningless. Dividends and price appreciation are fungible quantities. Less dividends, more reinvested earnings, more price appreciation, same overall total return.

It has been demonstrated many times that investing in dividends-oriented stocks and believing this makes a difference is a complete fallacy. Now if that helps you to stick to the course, I don't think it would hurt that much either (beware of taxes in a taxable account though).

PS. it is just plain luck that the total-returns of the historical periods I listed were so close. Using other start/stop points would end up with different numbers, but the general pattern of the dividends going down is clearly there. And it doesn't matter whatsoever!

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by mikeguima » Sat Dec 17, 2016 11:17 am

I don't know if it's true or not, but if no company had paid the dividends total return would be the same, since prices reflect dividend payments in the exact same amount to account for the cash outflow. So, paying or not paying dividends is the same in terms of total return. Even more, not paying dividends can increase the total return if the company uses the money on profitable investments which might boost its performance even further. However, it's generally the case that dividend paying stocks are already approaching later phases of growth or even maturity.

Dividends, however, have two main important advantages: they reduce agency costs by reducing the free cash flow available to managers and produce very powerfull signalling: managers only increase dividends if they are confident about the future of the company and its cash flow generating ability, since dividend cuts are very badly perceived by the market. Therefore, you can sort of judge how the manager feels about the future of the company by its dividend policy.

If you're interested in dividend investing, I recommend Sure Dividend, it's a brilliant website for that.

If you're and index investor like most people here, one recommendation: opt for accumulating (non distributing) funds, since they'll compound dividends without you having to pay taxes on them.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by whodidntante » Sat Dec 17, 2016 11:43 am

If you're thinking of overweighting dividend stocks based on this, I wouldn't. Dividends are not a factor according to Larry S. The choice to pay a dividend is a decision about how to allocate a company's capital. Distributing capital to shareholders could mean that the company doesn't have attractive investment opportunities to grow the business.

Also, the market timer on my shoulder says that there has been a search for yield in this low rate environment, and these dividend stocks will depreciate if bonds begin to pay a compelling yield. I think people who bought dividend stocks understand they are stocks and could go down 50% or even 100% as stocks do. They'll begin loving bonds again if they can get their yield safely.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by boglephreak » Sat Dec 17, 2016 1:01 pm

Longdog wrote:
boglephreak wrote:how is that possible if the dividend comes out of the value of the stock?
The dividend comes from earnings (or at least revenue) of the company that the board of directors chooses to distribute to shareholders.
this is from bogleheads wiki:
For example:You own 500 shares at $11 per share at year-end, for a total worth of $5,500. There is a $1 per share dividend. Therefore, net of accumulated dividends in the fund, your fund is worth $10 per share. Assuming dividends are reinvested, you'll get $500 ($1 x 500 shares) reinvested in the fund. $500 / $10 per share = 50 additional shares. Now you own 550 shares at $10 each, which equals your original $5,500.
how can you say there is a "return" when before and after the dividend the value is the same? thats where my difficulty in understanding this is coming from.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by dbr » Sat Dec 17, 2016 1:06 pm

It's too bad they have to repeat an incorrect conclusion that arises in mathematical illiteracy. How one talks about compounded return and geometric growth is different from how one talks about linear growth, simple return.

Somebody can find the example I wrote up some months ago which proves that 71% of the stock market's return comes from dividends and the other 71% comes from capital appreciation. (In the example dividends were half the annual return. If they are less, the other part is bigger than 71%)

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by pkcrafter » Sat Dec 17, 2016 1:31 pm

misterno wrote:http://www.forbes.com/sites/steveschaef ... 08df442ba1

So what does this mean? Allocate more of the dividend paying stocks to capture more value?

You should think of it this way - Dividends are a slice from total return and earnings that a company returns to you on a regular basis. See what happens to portfolio growth if you remove dividends. Scroll down a bit to see chart.

http://www.indexologyblog.com/2013/08/0 ... einvested/

So, you don't want to take dividends during accumulation. If you take dividends in retirement you don't get to choose when to take them, and that's not good either. If a company pays out dividends and you don't take them they are used to buy you more shares, and you can also take a distribution at the most opportune time for you--and that's is a good thing.

Is there a research out there that shows that dividend paying stocks returnD more than S&P 500 index?
Dividends are usually associated with large value and large value has outperformed the broad market, but not because of dividends, but because large value has higher risk.

http://www.marketwatch.com/story/8-less ... 2014-11-19


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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by dbr » Sat Dec 17, 2016 1:36 pm

boglephreak wrote:
Longdog wrote:
boglephreak wrote:how is that possible if the dividend comes out of the value of the stock?
The dividend comes from earnings (or at least revenue) of the company that the board of directors chooses to distribute to shareholders.
this is from bogleheads wiki:
For example:You own 500 shares at $11 per share at year-end, for a total worth of $5,500. There is a $1 per share dividend. Therefore, net of accumulated dividends in the fund, your fund is worth $10 per share. Assuming dividends are reinvested, you'll get $500 ($1 x 500 shares) reinvested in the fund. $500 / $10 per share = 50 additional shares. Now you own 550 shares at $10 each, which equals your original $5,500.
how can you say there is a "return" when before and after the dividend the value is the same? thats where my difficulty in understanding this is coming from.
Presumably because at the beginning of the year the stock price was something other than $11. If less, you got a positive return, and if more, you got a negative return. Return is a comparison from the beginning of a time period to the end. Your model of stocks is like taking interest on a savings account where the money saved is fixed and every now and then they pay out some interest. Stocks are not money in savings accounts and neither dividends nor capital gains are interest.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by nisiprius » Sat Dec 17, 2016 1:40 pm

dbr wrote:It's too bad they have to repeat an incorrect conclusion that arises in mathematical illiteracy. How one talks about compounded return and geometric growth is different from how one talks about linear growth, simple return.

Somebody can find the example I wrote up some months ago which proves that 71% of the stock market's return comes from dividends and the other 71% comes from capital appreciation. (In the example dividends were half the annual return. If they are less, the other part is bigger than 71%)
This.

It's very hard to determine if there's any truth in the claims made for "dividend stocks" because almost every presentation of dividend stocks is horribly polluted with spin. One thing is clear: dividend stocks as a group are not hugely superior to the market as a whole. (This is often the point as which dividend stock fans say "it's not fair to consider dividend stocks as a group or look at indexes, you have to pick the good dividend stocks...")

Dividends are important, in the sense of being an important part of the total return of the stock market.

But 1) they're not anywhere near that important, and

2) Using a 40-year period is misleading because dividend yields on stocks have gone steadily down and are much lower now than they were forty years ago,

Image

3) Dividends are not some extra added return that you don't get from non-dividend stocks. If a company pays out dividends, those dividends are not being reinvested in the business, and the stock capital value will grow more slowly.

To see this, let's compare the price charts of a dividend-focussed mutual fund, Vanguard Equity-Income Fund, VEIPX, green, and an S&P 500 index fund, VFINX, orange.

Source

Image

As you can see, over the specified time period--28 years, a good chunk of that "forty"--the price per share of the S&P 500 far outstripped the price per share of the dividend-focussed fund, gaining a grand total of almost 600% while the dividend-focussed fund only gained 200%.

So was the S&P 500 fund that much better? No, because all that time the dividend-focussed fund was paying out high dividends and the S&P 500 fund was paying out low dividends. If you plot total growth with dividends reinvested, the two were reasonably similar. The two funds had about the same total return, they just produced it in different ways. The dividends were not free extra money, they came out of total return and were at the expense of capital appreciation.

Image
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by lack_ey » Sat Dec 17, 2016 1:48 pm

nisiprius wrote:3) Dividends are not some extra added return that you don't get from non-dividend stocks. If a company pays out dividends, those dividends are not being reinvested in the business, and the stock capital value will grow more slowly.

To see this, let's compare the price charts of a dividend-focussed mutual fund, Vanguard Equity-Income Fund, VEIPX, green, and an S&P 500 index fund, VFINX, orange.
Isn't a lot of the discrepancy between price and total return there a function of the active fund's capital gains distributions rather than dividends?

No complaints about the broader points, just wondering about that specifically.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by Whakamole » Sat Dec 17, 2016 1:54 pm

It would seem that a benefit to dividends being paid to index fund owners is that they increase diversification - your dividend is used to buy more shares of all companies in the index - as opposed to the company keeping the dividend.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by Longdog » Sat Dec 17, 2016 2:02 pm

boglephreak wrote:
Longdog wrote:
boglephreak wrote:how is that possible if the dividend comes out of the value of the stock?
The dividend comes from earnings (or at least revenue) of the company that the board of directors chooses to distribute to shareholders.
this is from bogleheads wiki:
For example:You own 500 shares at $11 per share at year-end, for a total worth of $5,500. There is a $1 per share dividend. Therefore, net of accumulated dividends in the fund, your fund is worth $10 per share. Assuming dividends are reinvested, you'll get $500 ($1 x 500 shares) reinvested in the fund. $500 / $10 per share = 50 additional shares. Now you own 550 shares at $10 each, which equals your original $5,500.
how can you say there is a "return" when before and after the dividend the value is the same? thats where my difficulty in understanding this is coming from.
At any instant in time, the company's assets include things like capital, real estate holdings, cash, and many other things that make it the company that it is. If the company is profitable the cash will accumulate between dividend payouts and should be reflected in its value, which is equal to share price times number of shares. When a dividend is paid out, it comes from the cash held by the company and is no longer part of the company, so the remaining value of the company goes down by the amount of cash they no longer hold. No worries though - it will get replenished as a result of the company doing business, just in time for the next dividend payment. Now, realize, it is up to the board of directors whether to pay out the dividend or do something else with the cash. So, if the assertion is correct that a significant portion of market return comes from dividends, it merely means that boards of directors have tended to distribute a significant portion of company earnings as dividends, rather than reinvest those earnings in the company in other ways to grow the business or reduce the number of shares by share buybacks.
Steve

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by dbr » Sat Dec 17, 2016 2:04 pm

Longdog wrote:. So, if the assertion is correct that a significant portion of market return comes from dividends, it merely means that boards of directors have tended to distribute a significant portion of company earnings as dividends, rather than reinvest those earnings in the company in other ways to grow the business or reduce the number of shares by share buybacks.
Yes, correct. But the assertion under present discussion is actually a mathematical blunder and just not so.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by boglephreak » Sat Dec 17, 2016 2:41 pm

Longdog wrote:
boglephreak wrote:
Longdog wrote:
boglephreak wrote:how is that possible if the dividend comes out of the value of the stock?
The dividend comes from earnings (or at least revenue) of the company that the board of directors chooses to distribute to shareholders.
this is from bogleheads wiki:
For example:You own 500 shares at $11 per share at year-end, for a total worth of $5,500. There is a $1 per share dividend. Therefore, net of accumulated dividends in the fund, your fund is worth $10 per share. Assuming dividends are reinvested, you'll get $500 ($1 x 500 shares) reinvested in the fund. $500 / $10 per share = 50 additional shares. Now you own 550 shares at $10 each, which equals your original $5,500.
how can you say there is a "return" when before and after the dividend the value is the same? thats where my difficulty in understanding this is coming from.
At any instant in time, the company's assets include things like capital, real estate holdings, cash, and many other things that make it the company that it is. If the company is profitable the cash will accumulate between dividend payouts and should be reflected in its value, which is equal to share price times number of shares. When a dividend is paid out, it comes from the cash held by the company and is no longer part of the company, so the remaining value of the company goes down by the amount of cash they no longer hold. No worries though - it will get replenished as a result of the company doing business, just in time for the next dividend payment. Now, realize, it is up to the board of directors whether to pay out the dividend or do something else with the cash. So, if the assertion is correct that a significant portion of market return comes from dividends, it merely means that boards of directors have tended to distribute a significant portion of company earnings as dividends, rather than reinvest those earnings in the company in other ways to grow the business or reduce the number of shares by share buybacks.
okay, but i still dont understand how that means there is a return.

if company A stock is worth $100 at the beginning of the year, it pays a dividend of $20, which drops the value of stock to $80, then at the end of the year, you have $100 (assuming no capital appreciation).

if company A stock is worth $100 at the beginning of the year, it pays no dividend, then at the end of the year, you have $100 (assuming no capital appreciation).

so, how is the $20 dividend a "return." you havent earned anything for either dividend or no dividend.

edit: also ignoring taxes on teh $20 dividend.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by sk.dolcevita » Sat Dec 17, 2016 2:45 pm

Doesn't a healthy dividend policy impose a capital allocation discipline on managers? I see some posts saying dividends signal lack of growth opportunities. Fine. However, healthy dividend can also take cash out of managers' hands so they don't go on negative ROI reinvestment sprees, e.g. mergers and acquisitions of dubious values. Mathematically, this should decrease the risk premium associated with such companies and hence, lead to higher valuation.

Higher valuation is fine and dandy but it doesn't imply higher returns unless (1) valuation increase further (multiple expansion), or (2) there is earnings acceleration. This implies returns for companies that have a long history of increasing dividends may be of interest. It would seem these companies do find means to keep increasing their earnings while keeping them less volatile. Here are few charts I borrowed from http://www.suredividend.com/dividend-aristocrats-list/ for smaller subset of such companies - the Dividend Aristocrats. One could argue that the first chart is misleading as it covers a time period that has been extraordinarily beneficial to holding dividend paying stocks. However, scroll down to the bottom to see somewhat more mixed/thought-provoking results that indicate that such names (1) greatly underperform during manic markets , e.g. 1999 and 2007 (2) greatly outperform during recessions, and (3) are able to somewhat keep up during modest economic expansions. I think it is the combination of these three observations that may account for relative outperformance of these stocks over a full business cycle.

Image

Image
Last edited by sk.dolcevita on Sat Dec 17, 2016 3:06 pm, edited 4 times in total.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by dbr » Sat Dec 17, 2016 2:46 pm

boglephreak wrote: okay, but i still dont understand how that means there is a return.

if company A stock is worth $100 at the beginning of the year, it pays a dividend of $20, which drops the value of stock to $80, then at the end of the year, you have $100 (assuming no capital appreciation).

if company A stock is worth $100 at the beginning of the year, it pays no dividend, then at the end of the year, you have $100 (assuming no capital appreciation).

so, how is the $20 dividend a "return." you havent earned anything for either dividend or no dividend.
In the second case the return is obviously zero. In the first case there is a +$20 gain from collecting the dividend but the stock had a negative capital appreciation of $20 from a starting price of $100 to an ending price of $80. +$20-$20 equals zero gain. Your assumption of no capital appreciation is not correct in face of the fact that the stock price dropped from $100 to $80.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by nisiprius » Sat Dec 17, 2016 3:05 pm

lack_ey wrote:
nisiprius wrote:3) Dividends are not some extra added return that you don't get from non-dividend stocks. If a company pays out dividends, those dividends are not being reinvested in the business, and the stock capital value will grow more slowly.

To see this, let's compare the price charts of a dividend-focussed mutual fund, Vanguard Equity-Income Fund, VEIPX, green, and an S&P 500 index fund, VFINX, orange.
Isn't a lot of the discrepancy between price and total return there a function of the active fund's capital gains distributions rather than dividends?

No complaints about the broader points, just wondering about that specifically.
:oops: Thanks, lack_ey. I'm not sure how to address this. I guess I'd have to go back to something like Shiller's data which shows both dividends and price index, except that I've never quite been able to figure out how to work the numbers properly (i.e. find a simple calculation from his data that precisely matches the S&P 500 total annual return numbers.
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by boglephreak » Sat Dec 17, 2016 3:15 pm

dbr wrote:
boglephreak wrote: okay, but i still dont understand how that means there is a return.

if company A stock is worth $100 at the beginning of the year, it pays a dividend of $20, which drops the value of stock to $80, then at the end of the year, you have $100 (assuming no capital appreciation).

if company A stock is worth $100 at the beginning of the year, it pays no dividend, then at the end of the year, you have $100 (assuming no capital appreciation).

so, how is the $20 dividend a "return." you havent earned anything for either dividend or no dividend.
In the second case the return is obviously zero. In the first case there is a +$20 gain from collecting the dividend but the stock had a negative capital appreciation of $20 from a starting price of $100 to an ending price of $80. +$20-$20 equals zero gain. Your assumption of no capital appreciation is not correct in face of the fact that the stock price dropped from $100 to $80.
i didnt articulate that well, i meant no capital appreciation other than the dividend payment.

i may not be getting the point of the article. if we end up at $100 at the end of the day with both dividend/non-dividend, who cares about the dividend? i mean, cant i just make my own dividends by selling a certain amount of non-dividend paying stock each quarter, and then say a % of my return comes from selling my stock?

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by dbr » Sat Dec 17, 2016 3:29 pm

boglephreak wrote: i may not be getting the point of the article. if we end up at $100 at the end of the day with both dividend/non-dividend, who cares about the dividend? i mean, cant i just make my own dividends by selling a certain amount of non-dividend paying stock each quarter, and then say a % of my return comes from selling my stock?
Yes, your conclusion is the whole point. As I already pointed out the statement in the article involves a mathematical blunder. Here is one way you can do it:

Take an annualized return of 8% and assume the dividend is 4% and 4% is capital appreciation. With both in play the value multiplies in 40 years by 21.7 times or a gain of 20.7. If one does not get the dividend the multiplier is 4.8 or a gain of 3.8. So without dividends the gain is reduced from 20.7 to 3.8, or dividends accounted for 80% of the gain, in this case. On the other hand if we had no dividends but got the capital appreciation of 4%, then the value would also be multiplied by 4.8 for a gain of 3.8 and by the same reasoning capital appreciation accounts for 80% of the return. Note the formula for getting the 40 year multiple is m=(1+return)^40, return being stated as a fraction, .04, .08, etc.

The problem is that when returns are compounded it doesn't make any sense to attribute the gain to either of the components. Consider what happens in just a second year of compounding. An original investment of 1 multiplies to (1+div+cg)*(1+div+cg) = 1+div+cg+div^2+cg^2+2*div*cg

The problem is does that term div*cg come from the dividends or from the capital gains? It won't make sense to attribute it to either or to neither. This is what it means that compound growth is multiplicative and not additive. As the years go by more and more of the result comes from terms in which div and cg are multiplied. That is the mathematical blunder.
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by nisiprius » Sat Dec 17, 2016 3:32 pm

sk.dolcevita wrote:....Doesn't a healthy dividend policy impose a capital allocation discipline on managers? I see some posts saying dividends signal lack of growth opportunities. Fine. However, healthy dividend can also take cash out of managers' hands so they don't go on negative ROI reinvestment sprees, e.g. mergers and acquisitions of dubious values. Mathematically, this should decrease the risk premium associated with such companies and hence, lead to higher valuation....
It's a theory. It's a frequently stated theory. I think there's something to that theory.

But, it's not good enough to theorize about benefits from "capital allocation discipline. You need to explain why the benefits of "capital allocation discipline" aren't understood by the market, and reflected in the price investors are willing to pay for responsible management.

But do notice, first of all, that the numbers like "Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation" are still completely bogus. (And 71% isn't even the limit: even more bogus claims get made: Dividends Make Up 90% of Total Return). That kind of nonsense is often cited as if it were a slam-dunk knockdown proof that dividend stocks are better.

Now, lots of people believe that there are simple, easily identified subsets of the stock market that are just plain better than the market is a whole. Some of the subsets claimed as "just plain better" include: high dividend yield stocks, dividend growth stocks (not the same thing), small-cap value stocks, consumer staples stocks, stocks that happen to have a low price per share, and on and on. Over any specified time period, roughly half of all stock categories will beat the stock market as a whole, so it is easy to find "evidence," and fairly easy to find impressive, mouthwatering "evidence."

If you happen to think that "dividend growth stocks" are just plain better, then you have a choice of vehicles to invest in, including the Vanguard Dividend Appreciation Index Fund, VDIAX, which tracks the NASDAQ US Dividend Achievers Select Index, and the ProShares S&P 500 Dividend Aristocrats ETF, NOBL, which tracks the S&P 500 Dividend Aristocrats index.

In the case of the chart you posted, I think it is wise to completely ignore any presentation of data that doesn't bother to state a reason for choosing the time period shown. Does your source say why they chose 2007?

Now, here's my chart. And here's my stated reason for choosing it: it's "all available data for VDAIX (blue), since inception, compared to the total stock market (VTSMX, orange)."

(Actually, in this case, starting at 2007 would have resulted in underperformance for the dividend growth index fund... which means you also need to explain why the "capital allocation discipline" argument applies to the S&P Dividend Aristocrats but not to the NASDAQ Select Dividend Achievers.)

Source

Yes, I see there's a case to be made for "same return, lower risk," but the overall story is suddenly nowhere near as compelling as your chart.

Image
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by rkhusky » Sat Dec 17, 2016 3:40 pm

What is the connection between dividends and stock price? It seems to me that there is not necessarily a direct link between the two. The stock price is the value of the stock as determined by buyers and sellers of the stock in the market, which could certainly be influenced by the dividend. The dividend is provided by the company to those that own shares of the company. Why would the stock price necessarily fall a specified amount relative to the dividend amount? I see how the value of the company would necessarily fall in direct relation to the dividend paid, but why would the stock price?

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by nisiprius » Sat Dec 17, 2016 3:51 pm

rkhusky wrote:What is the connection between dividends and stock price? It seems to me that there is not necessarily a direct link between the two. The stock price is the value of the stock as determined by buyers and sellers of the stock in the market, which could certainly be influenced by the dividend. The dividend is provided by the company to those that own shares of the company. Why would the stock price necessarily fall a specified amount relative to the dividend amount? I see how the value of the company would necessarily fall in direct relation to the dividend paid, but why would the stock price?
Because one theory of stock values is that the value of a stock is the present value of the anticipated stream of future dividends.
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by Northern Flicker » Sat Dec 17, 2016 3:55 pm

misterno wrote:So what does this mean? Allocate more of the dividend paying stocks to capture more value?

Is there a research out tthere that shows that dividend paying stocks returm more than S&P 500 index?
Saying 71% of stock returns came from dividends and that dividend paying stocks had higher total return are two very different statements. Whether or not the latter statement is true, it is not a logical consequence of the first statement.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by selftalk » Sat Dec 17, 2016 3:59 pm

Really good article. I would like John Bogle to evaluate the U.S. O`Shares (OUSA) versus the Total Stock Market Index Fund.Compounding is very important.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by JoMoney » Sat Dec 17, 2016 4:01 pm

rkhusky wrote:What is the connection between dividends and stock price? It seems to me that there is not necessarily a direct link between the two. The stock price is the value of the stock as determined by buyers and sellers of the stock in the market, which could certainly be influenced by the dividend. The dividend is provided by the company to those that own shares of the company. Why would the stock price necessarily fall a specified amount relative to the dividend amount? I see how the value of the company would necessarily fall in direct relation to the dividend paid, but why would the stock price?
It's not the dividend so much, as the assets of the company.
On the day before the dividend, a buyer is paying for a company with let's say $1Million in assets. Then they announce a dividend paying out $100,000 dollars. After it's been paid, the company only has $900,000 in assets. Why would a buyer pay the same price when the company is now smaller with fewer assets?
The expected future earnings and operations of a company seems to change frequently, so the price change impacts from dividends are often lost in the noise, but it happens. Look at a Government Bond mutual fund ETF before and after the dividend for a clear example that's valued with more precision. A mutual fund is just a type of company, Registered Investment Company, and shares in the fund are it's stock. It's only assets are the cash and bonds in the fund, and you're asking why the price should change if they take some of that cash and pay it out to the current owners ... ??? ...
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by lack_ey » Sat Dec 17, 2016 4:21 pm

nisiprius wrote:
rkhusky wrote:What is the connection between dividends and stock price? It seems to me that there is not necessarily a direct link between the two. The stock price is the value of the stock as determined by buyers and sellers of the stock in the market, which could certainly be influenced by the dividend. The dividend is provided by the company to those that own shares of the company. Why would the stock price necessarily fall a specified amount relative to the dividend amount? I see how the value of the company would necessarily fall in direct relation to the dividend paid, but why would the stock price?
Because one theory of stock values is that the value of a stock is the present value of the anticipated stream of future dividends.
Hm, I don't think it's worth invoking theoretical price models (which are all probably wrong) unless really necessary. This is about stock and cash valuation and maybe some notion of pricing efficiency/arbitrage.


Imagine a company X paying out a per-share dividend of Y tomorrow. Let's say the market consensus, or at least that of buyers and sellers transacting in the stock, is that one share is worth about Z based on the stock's long-term prospects and any other concerns such as liquidity, risk preference overall, etc., minus the value of the upcoming dividend. What's today's value of Y, the dividend coming tomorrow? It's not far from cash or let's say a zero-coupon bond with 1 day remaining. It's more or less worth Y. And as such the stock price is something like Y+Z.

Then tomorrow after the dividend, unless there are changes, the stock price given all the same previous information as before (it's not like opinions of the long-term trajectory are much different now) should be about Z. Somebody invested through this episode has Y cash and Z value of the stock now, the same Y+Z as before.

If the stock price after the dividend were more than Z (in the absence of updated info), then this would be a clear mispricing. If large enough you could buy at Y+Z before the dividend, get the dividend Y, and sell at a price higher than Z for a profit. Likewise there would be a mispricing if the stock price after the dividend were less than Z. Even if these differences are too small after transaction costs to profit from buying/selling the dividend like this, it still doesn't really make sense. You'd have to provide a convincing case for why the price should be something other than Z.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by pkcrafter » Sat Dec 17, 2016 4:25 pm

Boglephreak wrote:[quote] if company A stock is worth $100 at the beginning of the year, it pays a dividend of $20, which drops the value of stock to $80, then at the end of the year, you have $100 (assuming no capital appreciation).

In this example, you must be thinking the dividend was reinvested. When reinvested the divy buys a bit more in shares at a slightly lower price. If there is no appreciation, then you end up with $100. If you take the divy, at the end of the year you have $20 in your pocket and $80 in the stock. Some investors like the $20 in their pocket.

if company A stock is worth $100 at the beginning of the year, it pays no dividend, then at the end of the year, you have $100 (assuming no capital appreciation).

so, how is the $20 dividend a "return." you havent earned anything for either dividend or no dividend.
If you accept the dividend, you've got $20 in your pocket, but you've just exchanged it for less value of the investment. You made a withdrawal.

Data from a few years ago showed there were 420 dividend-paying stocks in the S&P500.


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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by larryswedroe » Sat Dec 17, 2016 4:57 pm

Dont have the time to read the thread but these articles tend to be so dumb in that the way they read it would make it seem that if the companies paid no dividend the returns would have been 71% lower, which of course is nonsense. All else equal in terms of loading on beta, size and value, etc stocks that pay no dividends have the same returns as stocks that do. That's theory and the evidence. Some companies choose to pay dividends, others reinvest it and some buy back stock. But it doesn't have anything to do with returns. And the percentage of companies paying dividends has dropped sharply in last 20 years for variety of reasons.
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by sk.dolcevita » Sat Dec 17, 2016 5:57 pm

nisiprius wrote:
sk.dolcevita wrote:....Doesn't a healthy dividend policy impose a capital allocation discipline on managers? I see some posts saying dividends signal lack of growth opportunities. Fine. However, healthy dividend can also take cash out of managers' hands so they don't go on negative ROI reinvestment sprees, e.g. mergers and acquisitions of dubious values. Mathematically, this should decrease the risk premium associated with such companies and hence, lead to higher valuation....
It's a theory. It's a frequently stated theory. I think there's something to that theory.

But, it's not good enough to theorize about benefits from "capital allocation discipline. You need to explain why the benefits of "capital allocation discipline" aren't understood by the market, and reflected in the price investors are willing to pay for responsible management.

...
I agree re: the mathematical abuse quoted by OP.

I digressed towards answering a question that was not asked but perhaps implied. That is, if one was to create a portfolio of dividend growth stocks, could such a portfolio outperform a total market portfolio on total return basis over long term and, if so, why? My answer clearly did not do a good job of providing a robust evidence. However, in the tradition of putting cart before the horse, I did make an layman's attempt to answer the why. So continuing down that path and driving the cart further into the horse...

Re: theory (rather hypothesis/narrative). Very true for this board that subscribes to the style of investing with EMT as its cornerstone. Not holding the entire market leads to breaking up with Fama and consorting with Schiller. Once I am with Schiller, I could see pricing dislocations - dividend growth companies tend to be staid boring companies versus the sexy flavor of the day in IT, biotech or such. Chlorox vs. Tesla. Or Lululemon vs. a diaper maker(a high-end retailer having the word lemon in its name, hmm).

Or, one can get more technical and say that a portfolio of such stocks has a loading of factors that favors higher total returns. For example, volatility is now considered a factor by some (or perhaps a pseudo factor masquerading value)? If true, low volatility of dividend growth stocks may be what generates the alpha.

I am sure there is data that supports or disputes the above narrative; I will try to find it.

BTW, do people feel comfortable stating share buyback is always the same as paying out dividends? I have seen companies doing share buybacks often to manage short-term market reactions and expectations than to create shareholder value.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by JoMoney » Sat Dec 17, 2016 6:34 pm

sk.dolcevita wrote:...do people feel comfortable stating share buyback is always the same as paying out dividends? I have seen companies doing share buybacks often to manage short-term market reactions and expectations than to create shareholder value.
Without qualification, absolute statements like "always" are usually false. ... but regarding creating shareholder value, whether it's used to manage expectations or not, a buyback gives shareholders a larger stake in ownership of the company. Whether or not going forward the company creates value for shareholders is an unknown. It may turn out that the company destroys value and should have been liquidated for the benefit of the shareholders... but if you're going to continue owning the company (i.e. you as an investor are continuing to buy, or at least not sell at the current price) then you should probably be indifferent to whether they perform a buyback or distributing a special dividend, if you don't want to own a larger stake in the company you can sell some shares and be in the same position you were with the difference in cash. If you're convinced the buyback is wrong at the current price and believe it will fall, or the company is not creating value, you probably should have already sold your shares in the company at current prices and it wouldn't be a concern.
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by RAchip » Sat Dec 17, 2016 6:57 pm

" Less dividends, more reinvested earnings, more price appreciation, same overall total return."

Actually, if the earnings could be reinvested to produce more earnings, the total return would go way up above the return from earnings dividended out. Companies trade at multiples of earnings. A dollar reinvested that produces more earnings would, in theory, raise the market cap by more than $1. But dividends are guaranteed money in your pocket, retainee earnings can and often are squandered.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by JoMoney » Sat Dec 17, 2016 7:07 pm

RAchip wrote:" ... But dividends are guaranteed money in your pocket, retainee earnings can and often are squandered.
This is frequently stated, and is definitely true in some cases, but if that were the norm the value of a business would dwindle away as the capital assets depreciate over time... but instead, as I was trying to show in a post somewhere above, the companies not only maintain their value they accumulate more and more.. which doesn't just happen out of thin air it's only by reinvesting, expanding operations, and recapitalizing depreciated assets.
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by dbr » Sat Dec 17, 2016 7:28 pm

Just for fun one can see how far off base this bad math gets. If one tabulates how much of the return comes from the dividend and how much from capital gain for an 8% return obtained from a 4% dividend and 4% capital gain one gets as a function of years compounding the following:

Years Fraction from Div. Fraction from CG
1 50% 50%
2 51% 51%
5 54% 54%
10 59% 59%
20 67% 67%
50 87% 87%
100 98% 98%

This proves that if you invest long enough you can double the return of an 8% stock and get 16%, but only if half the return comes from dividends.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by Miriam2 » Sat Dec 17, 2016 8:45 pm

dbr wrote:It's too bad they have to repeat an incorrect conclusion that arises in mathematical illiteracy. How one talks about compounded return and geometric growth is different from how one talks about linear growth, simple return.

Somebody can find the example I wrote up some months ago which proves that 71% of the stock market's return comes from dividends and the other 71% comes from capital appreciation. (In the example dividends were half the annual return. If they are less, the other part is bigger than 71%)
Perhaps you are thinking of your post in this thread viewtopic.php?f=10&t=189820#p2881508 - "Dividend Stocks"

In that other thread, Larry Swedroe also discussed the 71% he just mentioned up-post here, and he posted a list of the many articles he has written on dividends.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by rkhusky » Sat Dec 17, 2016 9:08 pm

JoMoney wrote:
rkhusky wrote:What is the connection between dividends and stock price? It seems to me that there is not necessarily a direct link between the two. The stock price is the value of the stock as determined by buyers and sellers of the stock in the market, which could certainly be influenced by the dividend. The dividend is provided by the company to those that own shares of the company. Why would the stock price necessarily fall a specified amount relative to the dividend amount? I see how the value of the company would necessarily fall in direct relation to the dividend paid, but why would the stock price?
It's not the dividend so much, as the assets of the company.
On the day before the dividend, a buyer is paying for a company with let's say $1Million in assets. Then they announce a dividend paying out $100,000 dollars. After it's been paid, the company only has $900,000 in assets. Why would a buyer pay the same price when the company is now smaller with fewer assets?
The expected future earnings and operations of a company seems to change frequently, so the price change impacts from dividends are often lost in the noise, but it happens. Look at a Government Bond mutual fund ETF before and after the dividend for a clear example that's valued with more precision. A mutual fund is just a type of company, Registered Investment Company, and shares in the fund are it's stock. It's only assets are the cash and bonds in the fund, and you're asking why the price should change if they take some of that cash and pay it out to the current owners ... ??? ...
It is not clear to me why one would have exactly the same amount before and after the dividend, i.e. the stock price drops exactly the right amount to compensate for the dividend. That would only occur if the stock price is entirely set by the company's assets. Would the stock price drop the exact same amount if the owners withdrew an amount of cash equivalent to the dividend and burned it in an incinerator? Do all buyers/sellers operate in lock step and agree that the stock price should drop exactly the right amount to compensate for the dividend?

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by larryswedroe » Sat Dec 17, 2016 9:19 pm

First in world where taxes matter you should always prefer the company to buy back stock as if you sell to generate that sure thing, the same cash in hand, you only pay tax on the K gain instead of the full dividend amount.

Second, for rhusky, a company with a $1 less in cash is surely worth $1 less than if it had the extra dollar.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by dbr » Sat Dec 17, 2016 9:25 pm

Miriam2 wrote:
dbr wrote:It's too bad they have to repeat an incorrect conclusion that arises in mathematical illiteracy. How one talks about compounded return and geometric growth is different from how one talks about linear growth, simple return.

Somebody can find the example I wrote up some months ago which proves that 71% of the stock market's return comes from dividends and the other 71% comes from capital appreciation. (In the example dividends were half the annual return. If they are less, the other part is bigger than 71%)
Perhaps you are thinking of your post in this thread viewtopic.php?f=10&t=189820#p2881508 - "Dividend Stocks"

In that other thread, Larry Swedroe also discussed the 71% he just mentioned up-post here, and he posted a list of the many articles he has written on dividends.
Right, thanks. And I think Larry is the hero here in giving people an objective and rational discussion of dividends in investing.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by dbr » Sat Dec 17, 2016 9:29 pm

rkhusky wrote: It is not clear to me why one would have exactly the same amount before and after the dividend, i.e. the stock price drops exactly the right amount to compensate for the dividend. That would only occur if the stock price is entirely set by the company's assets. Would the stock price drop the exact same amount if the owners withdrew an amount of cash equivalent to the dividend and burned it in an incinerator? Do all buyers/sellers operate in lock step and agree that the stock price should drop exactly the right amount to compensate for the dividend?
They do because otherwise one could arbitrage the dividend. Actually one paper I read on this demonstrated from gathering a lot of actual data that the price drop is very close to the after tax value of the dividend, having done some work to estimate the average tax cost over traders in the stocks examined. That is what would be expected in the real world. I am sorry I don't have that reference any more. This is not a simple thing to examine in practice as the daily standard deviation of stock prices is as large or greater than the dividend paid in any instant.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by lack_ey » Sat Dec 17, 2016 9:32 pm

rkhusky wrote:It is not clear to me why one would have exactly the same amount before and after the dividend, i.e. the stock price drops exactly the right amount to compensate for the dividend. That would only occur if the stock price is entirely set by the company's assets. Would the stock price drop the exact same amount if the owners withdrew an amount of cash equivalent to the dividend and burned it in an incinerator? Do all buyers/sellers operate in lock step and agree that the stock price should drop exactly the right amount to compensate for the dividend?
See my above response.

If owners withdrew the cash out of nowhere and incinerated it, that would have a different effect because it is unexpected. The dividend is something everybody knows about already.

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by rkhusky » Sun Dec 18, 2016 8:23 am

larryswedroe wrote: Second, for rhusky, a company with a $1 less in cash is surely worth $1 less than if it had the extra dollar.
Yes, but the stock price is not fixed by the size of a company's bank account. There are many other factors that people use to determine what price they are willing to pay for a stock.

I agree though that if everything else is fixed and if there was no day-to-day risk in buying a stock, that the stock price should change in direct relation to the dividend so that people could not game the system. Perhaps for a mutual fund with thousands of stocks, everything else averages out and the NAV drop is precisely equal to the dividend paid. Or does Vanguard make that happen?

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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by grabiner » Sun Dec 18, 2016 12:12 pm

rkhusky wrote:
larryswedroe wrote: Second, for rhusky, a company with a $1 less in cash is surely worth $1 less than if it had the extra dollar.
Yes, but the stock price is not fixed by the size of a company's bank account. There are many other factors that people use to determine what price they are willing to pay for a stock.

I agree though that if everything else is fixed and if there was no day-to-day risk in buying a stock, that the stock price should change in direct relation to the dividend so that people could not game the system.
Another way to view this is to look at the comparison from the investor's point of view. Suppose that a company will pay out a $1 dividend on Wednesday. If I expect a share of stock to be worth $20 on Thursday, I should be willing to pay $21 on Wednesday to receive $1 in cash and that share of stock, and a seller will demand $21 to sell it. The stock might not be worth $20 on Thursday, depending on what happens to the market and the company, but that has to be a reasonable estimate.
Perhaps for a mutual fund with thousands of stocks, everything else averages out and the NAV drop is precisely equal to the dividend paid. Or does Vanguard make that happen?
The mutual fund's dividend is an accounting entry. Dividends paid by stocks stay in the fund until the fund makes its distribution. The fund is priced at net asset value, so its NAV drops by the amount of the assets paid out. For example, if a fund has one million shares each worth $100, this implies that the fund holds $100M in assets. If the fund then pays out a dividend of $1 per share, its assets decrease to $99M; if the market doesn't move, the share price must drop to $99 because it now has $1M less in cash.
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Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by Phineas J. Whoopee » Sun Dec 18, 2016 1:34 pm

rkhusky wrote:...
Yes, but the stock price is not fixed by the size of a company's bank account. There are many other factors that people use to determine what price they are willing to pay for a stock.
...
Hi rkhuskey.

What I'm about to write is not a different point than already expressed by other posters earlier in this thread, but maybe it's a very simple example to demonstrate the concept.

Imagine a company whose market price is $11 / share. A couple of weeks ago it announced it would pay a $1 / share dividend to whoever owns its shares at close of trade today.

Tomorrow the day has passed, and whoever owns the stock that day does not get the previously-announced dividend.

How much would you pay for a share of stock plus $1? How much would you pay for the very same share but without the $1?

You correctly state that share prices are influenced by a wide variety of factors every day, so it's usually hard to see the effect, but to reiterate, how much would you pay for a share of stock plus $1, and how much for the very same share without the $1?

Did that help?

PJW

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Phineas J. Whoopee
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Joined: Sun Dec 18, 2011 6:18 pm

Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by Phineas J. Whoopee » Sun Dec 18, 2016 1:46 pm

Longdog wrote:...
The dividend comes from earnings (or at least revenue) of the company that the board of directors chooses to distribute to shareholders.
It does not necessarily come from those flows. Corporations can, have, and do borrow money for no purpose other than to distribute as dividends to shareholders.

The shareholders get some cash and the company is more highly leveraged which, within reason, can be a good thing.

All of this means the oft-repeated dividend narrative about management discipline and reliable signaling has a big hole in it.

PJW

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nedsaid
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Joined: Fri Nov 23, 2012 12:33 pm

Re: Over the last 40 years, 71% of the stock market's return came from dividends, not capital appreciation,"

Post by nedsaid » Sun Dec 18, 2016 2:41 pm

misterno wrote:http://www.forbes.com/sites/steveschaef ... 08df442ba1

So what does this mean? Allocate more of the dividend paying stocks to capture more value?

Is there a research out tthere that shows that dividend paying stocks returm more than S&P 500 index?
It seems that 40% to 50% of the historical return from stocks came from dividends. The problem is that dividend yield is down from 4% or so down to about 2%. Not even the most pessimistic among us is predicting 4% returns from stocks. I question the 71% figure and wonder how the author calculated it or what source he got this from.

Doing what the author has suggested is not a bad way to go. The prospect of an income stream from dividend paying stocks that beats inflation is an attractive one. This is one reason I have not given up on my individual stocks, nearly all of which pay a dividend. Something about those dividends hitting your account that feels good.

My prediction, for whatever it is worth, is that dividend stocks, particularly the high dividend yield stocks will have sub-par performance as interest rates rise. It is becoming clear to me that the Federal Reserve Bank wants to end the era of unnaturally low interest rates. People will go from the bond substitutes back to bonds. Dividends and anything resembling yield have been extremely popular and I believe that the Belle of the Ball will go back to being the wallflower again. When dividend strategies become unpopular, that is the time to pursue the strategy. We aren't there yet.

Just for fun, try the new Nedsaid Larry Swedroe Anti-Dividend threads indicator. When Larry stops bashing dividend strategies with new threads, it will be time to buy in. Larry feels duty bound to bash these strategies as investors have been chasing yields and chasing them hard for eight years. As I said, the yield and dividend chasers will be in for some disappointment for a while. Watch the threads start to pop up as those who faithfully followed dividend strategies for years start posting threads that say something like, "Dividends, what the heck was I thinking?" Better yet, when Business Week runs a cover article declaring the "Death of Dividends", that will be your all in buy signal.

My new indicator is still flashing red as Larry continues his holy mission to bash dividend investing and there are still yield chasers out there. The Fed is doing its best to correct the situation but it will be a while. Just be patient.
A fool and his money are good for business.

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