Dividend Misunderstandings & Only Spend Return

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gilgamesh
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Re: Dividend Misunderstandings & Only Spend Return

Postby gilgamesh » Sun Jul 16, 2017 8:46 am

DonCamillo wrote:I like dividends on a (relatively small) portion of my investments.

I used to collect dividend paying stocks. I saw that as an alternative to collecting beer cans, corvettes, impressionist paintings, stamps, Matchbox cars or vacation homes. My preference was to buy stocks that I would see often in my daily life (such as Waste Management and Sysco trucks on the highway, or CSX trains) and to buy enough of each stock to pay me about $2,000 a year (roughly $5 a day) in dividends. It is fun to see a train go by and think that it is paying me $5 a day. For a while, I used the dividends to buy other dividend stocks, but now that I am retired, I just let the dividends stack up in my brokerage account, and then take a vacation with the money.

I retired on January 1st of this year. Since then I have been to Mexico, Costa Rica, Nicaragua, Panama, Columbia, Aruba, Portugal, Sweden, Norway, Netherlands, Poland, Lithuania, Latvia, Estonia, Finland, and Iceland, with upcoming trips back to Portugal, Morocco, the Canary Islands and St. Marten. Most of the money I remove from my portfolio is interest and dividends. Part of my reason is that money is going to be taxed anyway, so I can spend it without creating another taxable event. I do some tax-loss harvesting as well to offset capital gains plus $3,000 each year.

But I also monitor my portfolio to ensure that it continues to grow in retirement. If the market takes a turn for the worse, I will reinvest more of the dividends and interest. I live on pensions and social security. I play with dividends and interest. I think of only spending returns as a harmless game. But I also realize that I was very fortunate that I could work into my 70s and save most of my income until then. If I had retired at 62, I would be struggling to pay my bills. If I had retired at 66, I would be comfortable, but would be living on half my current income.


I am not saying you are, but I hear a lot of investors who view dividend as free income or guaranteed income or something more special than total return always highlight the financial successes they've had in terms of what they were able to do....it's so hard to argue against that....if only they knew total return would have done at least equally well, or probably better.

P.S: My office manager just met with a consultant and now have all of their Investement dollars in about 20 dividend paying stocks. Now, they hate mutual funds and ETFs as they don't return as much and moved all their funds. They need to reach their million before they retire and dividend income will guarantee that....there is a great divide...finance brings out interesting personalities....in a way it's very fascinating - to observe the human behavior around financing.

jbolden1517
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Re: Dividend Misunderstandings & Only Spend Return

Postby jbolden1517 » Sun Jul 16, 2017 9:07 am

gilgamesh wrote: I am not saying you are, but I hear a lot of investors who view dividend as free income or guaranteed income or something more special than total return always highlight the financial successes they've had in terms of what they were able to do....it's so hard to argue against that....if only they knew total return would have done at least equally well, or probably better.


I'm one of those guys. I would argue that total return is volatile. For an investor holding a company that isn't being bought the stock's total return can be broken into two components:

annual total return = dividend yield + annual capital gain
annual capital gain is a highly volatile asset while dividend yield is mostly low volatility decreasing very infrequently. Dividend yield while not perfectly adjusted for inflation tends to increase at least at the speed of inflation (and usually substantially more) over periods as short as 5 years. So in other words total return looks like a portfolio of a risky asset and a low risk asset. Low risk assets, assets having lower volatility, have expected serial returns closer to their expected returns; while high risk assets have serial returns much lower than their expected returns.

Thus in choosing stocks all things being equal the higher percentage of the return that comes in the form of dividend yield the higher the serial return. Even if it were the case that higher dividend returns diminished the total return because of the lower volatility it would often be the case that dividend paying stocks can be held on more leverage than dividend paying stocks and thus achieving a higher serial return.

Your turn.

Nate79
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Re: Dividend Misunderstandings & Only Spend Return

Postby Nate79 » Sun Jul 16, 2017 9:26 am

The idea that dividend return is low volatile and capital return is volatile is just a trick of the mind.

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Sun Jul 16, 2017 9:28 am

Sunday morning in Bogleland...

All of the Finance Professors & Mutual Fund Companies do all
kinds of studies on investments. Most of the studies I've seen
show that dividend investing over a long period of time will out
perform total return investing, (dividends have added 71% to the
total return of the s & p 500 over the last 50-60 years).

For my "psychology"... would you rather have a battleship cruising
through the ocean waves...or a little speed boat in the ocean
that is being battered by every little wave. Personally I love
big battleships...I compare my fund to the s & p 500 in terms
of performance. It's going to take "a lot" to bring down this
battleship, especially over the next 40,50,60 years.

jcerickson
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Re: Dividend Misunderstandings & Only Spend Return

Postby jcerickson » Sun Jul 16, 2017 12:08 pm

"For my "psychology"... would you rather have a battleships...or a little speed boat in the ocean"

If your dividend fund is the battleship, the Total Stock Market fund is the aircraft carrier!

"You sank my battleship"... couldn't resist! :wink:

Stryker
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Re: Dividend Misunderstandings & Only Spend Return

Postby Stryker » Sun Jul 16, 2017 12:16 pm

A little more than half of our combined portfolios are in individual Canadian dividend growth stocks and the rest in a global couch potato setup. My wife and I have been retired for a few years now, and so far haven't had to spend into our assets. Year by year our investment income from the dividend stocks keeps growing. The first twenty years of my investing was trying a little of this and a little of that and not really getting anywhere. The last fifteen years since we paid off our wee bungalow, I finally started to focus and for the most part our investment results improved. In my own home made dividend portfolio I can decide on sector diversification. I can't do that in a dividend ETF. My primary objective is the amount of growing dividend income at the end of the year by investing in stocks where the initial yield at purchase can range anywhere between about 1.5% to 5% so I'm not yield phobic.

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Phineas J. Whoopee
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Re: Dividend Misunderstandings & Only Spend Return

Postby Phineas J. Whoopee » Sun Jul 16, 2017 6:57 pm

jbolden1517 wrote:...
annual capital gain is a highly volatile asset while dividend yield is mostly low volatility decreasing very infrequently. Dividend yield while not perfectly adjusted for inflation tends to increase at least at the speed of inflation (and usually substantially more) over periods as short as 5 years. So in other words total return looks like a portfolio of a risky asset and a low risk asset. Low risk assets, assets having lower volatility, have expected serial returns closer to their expected returns; while high risk assets have serial returns much lower than their expected returns.
...
Your turn.

Setting aside the weak claim tends, and the too-short time period of five years, can you please provide a reference for your short-term weak claim? Thanks in advance.
PJW

jbolden1517
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Re: Dividend Misunderstandings & Only Spend Return

Postby jbolden1517 » Sun Jul 16, 2017 11:43 pm

Phineas J. Whoopee wrote:
jbolden1517 wrote:...
annual capital gain is a highly volatile asset while dividend yield is mostly low volatility decreasing very infrequently. Dividend yield while not perfectly adjusted for inflation tends to increase at least at the speed of inflation (and usually substantially more) over periods as short as 5 years. So in other words total return looks like a portfolio of a risky asset and a low risk asset. Low risk assets, assets having lower volatility, have expected serial returns closer to their expected returns; while high risk assets have serial returns much lower than their expected returns.
...
Your turn.

Setting aside the weak claim tends, and the too-short time period of five years, can you please provide a reference for your short-term weak claim? Thanks in advance.
PJW


The USA provides a good example. Note the rate of dividend growth during the last large inflation surge: (image won't load directly): http://static.seekingalpha.com/uploads/ ... 3038_0.png

80% of dividend growth comes from inflation with the other 20% being economic growth: http://www.nber.org/papers/w10263

In stagflation bond yields and stock yields head toward the rate of expected inflation: http://www.nber.org/papers/w15024 ; and mostly the same paper but this time endorsed by the Fed: http://www.frbsf.org/economic-research/ ... gstrom.pdf

I can keep going but I think this is enough to prove the point.

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Sun Jul 16, 2017 11:52 pm

Phineas,

Nice meeting you!

This article has a nice write up on dividends &
some interesting studies that you might enjoy.
"The Power Of Dividends".

Enjoy...

http://www.dividendladder.com/the-power-of-dividends/

Ragnoth
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Re: Dividend Misunderstandings & Only Spend Return

Postby Ragnoth » Mon Jul 17, 2017 1:38 am

Fuel for the fire:

https://institutional.vanguard.com/iam/ ... omain=true

One of the more recent Vanguard white papers on the merits of "dividends" as a strategy.

minimalistmarc
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Re: Dividend Misunderstandings & Only Spend Return

Postby minimalistmarc » Mon Jul 17, 2017 1:49 am

One of the dividend stalwarts of the FTSE100 just came out with bad news and the share price has tanked by 70% and the dividend cut.

It was popular in the UK with the dividend investor crowd, who were investing for it's 9% dividend.

This was a sizable company by UK standards with 45000 employees.

Carillion - CLLN.

I have seen many of the popular dividend stocks take a similar path in recent years.

In the UK, taxation of dvidends in taxable accounts has become much more unfavourable in recent years, used to be no tax for lower earners, now only 2k tax free from next year then 7%.

I think dividend investing will die out as a strategy in the coming years, at least in the UK, it makes no sense.

Stryker
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Re: Dividend Misunderstandings & Only Spend Return

Postby Stryker » Mon Jul 17, 2017 5:11 am

I don't know of any dividend investor who hasn't had his/her share of dividend cuts over time. Some years, I've had one or two, and other years I have no cuts. My personal rule has always been to either sell before a potential cut or always right after a company implements a dividend cut. During the financial crisis of 2008-09, here in Canada, in the financial sector, we had one dividend cut from an insurance company (Manulife) and that was it.

By the way, I only have a high school education and I'm mathematically challenged and yet I could grow this dividend portfolio over the decades. My parents didn't know anything about investing, so they were no help. I don't know where I got it from, but I was just determined and continuously plugged away at it. I now spend about as much time working on our Canadian dividend growth portfolio as I do on the index funds, which is not very much.

gilgamesh
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Re: Dividend Misunderstandings & Only Spend Return

Postby gilgamesh » Mon Jul 17, 2017 10:08 am

snarlyjack wrote: dividends have added 71% to the
total return of the s & p 500 over the last 50-60 years.


I am not going to waste my time explaining all the misunderstanding surrounding 'dividends'. I'll leave that to the OP. I just want to pick a few sentences here and there to try to make a point, ...hoping the light will go off at some point.

I haven't checked the stats but I assume it's correct....however, I hope you know how irrelevant this data is to the discussion at hand....no one is saying they don't care for the dividend portion of the overall return.
Last edited by gilgamesh on Mon Jul 17, 2017 10:31 am, edited 1 time in total.

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saltycaper
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Re: Dividend Misunderstandings & Only Spend Return

Postby saltycaper » Mon Jul 17, 2017 10:27 am

snarlyjack wrote:
For my "psychology"... would you rather have a battleship cruising
through the ocean waves...or a little speed boat in the ocean
that is being battered by every little wave. Personally I love
big battleships...I compare my fund to the s & p 500 in terms
of performance. It's going to take "a lot" to bring down this
battleship, especially over the next 40,50,60 years.


An analogy with two apt parts. The first, psychology, as dividend investing is driven primarily by psychology (and misunderstanding). The second, the battleship, a naval relic largely irrelevant today.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

TheDuker
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Re: Dividend Misunderstandings & Only Spend Return

Postby TheDuker » Mon Jul 17, 2017 12:01 pm

TheDuker wrote:Yes, dividend enthusiasts are more concerned with the number of shares than the value of those shares. During accumulation, they love to reinvest their dividends and see the number of shares climb. Then during distribution, they love to cash their dividend checks and see the number of shares remain the same.

Stryker wrote:A little more than half of our combined portfolios are in individual Canadian dividend growth stocks and the rest in a global couch potato setup. My wife and I have been retired for a few years now, and so far haven't had to spend into our assets. Year by year our investment income from the dividend stocks keeps growing.

With all due respect, if you are using dividends as income, you are "spending into your assets". That's the point of this thread.

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Abe
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Re: Dividend Misunderstandings & Only Spend Return

Postby Abe » Mon Jul 17, 2017 12:57 pm

TheDuker wrote:With all due respect, if you are using dividends as income, you are "spending into your assets". That's the point of this thread.


I don't know a lot about this stuff, so please correct me if I am wrong. Lets say I own a small corner grocery store and the profit it makes is $50k a year, and I take the $50k profit each year a spend it to live on. How is that different than a public company that has $50k in profit and it pays it out to its shareholders (the owners) as dividends? Is the value of the corner grocery store any less because the the owner spends the profit? I think I know the answer, but just curious what other say.
Slow and steady wins the race.

CantPassAgain
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Re: Dividend Misunderstandings & Only Spend Return

Postby CantPassAgain » Mon Jul 17, 2017 2:01 pm

Abe wrote:
TheDuker wrote:With all due respect, if you are using dividends as income, you are "spending into your assets". That's the point of this thread.


I don't know a lot about this stuff, so please correct me if I am wrong. Lets say I own a small corner grocery store and the profit it makes is $50k a year, and I take the $50k profit each year a spend it to live on. How is that different than a public company that has $50k in profit and it pays it out to its shareholders (the owners) as dividends? Is the value of the corner grocery store any less because the the owner spends the profit? I think I know the answer, but just curious what other say.


Yes, compared to not spending the profit (ie letting the cash sit in the store's bank account or reinvesting it back into the business).

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Mon Jul 17, 2017 2:15 pm

Abe,

This is a "cute" article that might answer your question.
"Dividends-Glorious-Dividends"

Enjoy...

http://www.millennial-revolution.com/in ... dividends/

TheDuker
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Re: Dividend Misunderstandings & Only Spend Return

Postby TheDuker » Mon Jul 17, 2017 4:03 pm

The problem with articles like that is they contribute to the belief that a dividend is some kind of bonus or reward you get just for holding the stock. There's no mention that the value of your holdings is reduced by the amount of the dividend. A dividend is nothing more than a slice of your equity being returned to you in the form of cash, whether you want it or not.

I found the following very enlightening when I first came across it several years ago (source: https://personal.vanguard.com/pdf/s557.pdf)

Image

The key takeaway is that whether it's 1000 shares at $27 or 900 shares at $30, the ending stock value is exactly the same. #NoFreeLunch

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Mon Jul 17, 2017 5:05 pm

TheDuker

Hi...

The article was a response to Abe's question of
"what a company can do with it's profit's"?

I wasn't even thinking of hostile takeover's or
Gordon Gecko situations...

Thanks...

gilgamesh
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Re: Dividend Misunderstandings & Only Spend Return

Postby gilgamesh » Wed Jul 19, 2017 7:41 am

jbolden1517 wrote:
Phineas J. Whoopee wrote:
jbolden1517 wrote:...
annual capital gain is a highly volatile asset while dividend yield is mostly low volatility decreasing very infrequently. Dividend yield while not perfectly adjusted for inflation tends to increase at least at the speed of inflation (and usually substantially more) over periods as short as 5 years. So in other words total return looks like a portfolio of a risky asset and a low risk asset. Low risk assets, assets having lower volatility, have expected serial returns closer to their expected returns; while high risk assets have serial returns much lower than their expected returns.
...
Your turn.

Setting aside the weak claim tends, and the too-short time period of five years, can you please provide a reference for your short-term weak claim? Thanks in advance.
PJW


The USA provides a good example. Note the rate of dividend growth during the last large inflation surge: (image won't load directly): http://static.seekingalpha.com/uploads/ ... 3038_0.png

80% of dividend growth comes from inflation with the other 20% being economic growth: http://www.nber.org/papers/w10263

In stagflation bond yields and stock yields head toward the rate of expected inflation: http://www.nber.org/papers/w15024 ; and mostly the same paper but this time endorsed by the Fed: http://www.frbsf.org/economic-research/ ... gstrom.pdf

I can keep going but I think this is enough to prove the point.


I was hoping OP would respond to your post as it is an excellent opportunity to highlight the misconceptions you have of the topic at hand. So, I will try to explain, the best I can.

No one is saying dividend is not important and no one in their right mind will say I will go without the dividend component of total return. Every one of us wants the four components of total return - capital gains, interest, dividends and distributions. The first is the capital appreciation part of gain, the latter 3 are income part of the gain. Gain being total return. Not all may apply.

I only read what you had written next to each article and didn't actually read the actual article, but from what you have written, you are showing the dividend component of total return to hold some very strong, desirable charecterestics. This does not however mean dividend paying companies/funds are better because they highlight the dividend component of the total return. All they are doing is taking the capital appreciation part of the total income (unrealized capital gains) and forcing it into the income component-dividends (realized income)...nothing else. (This last statement is kind of an oversimplification to convey a message, the exact terminology may not be appropriate).

That's the best I can do...peace out! :happy

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Wed Jul 19, 2017 9:12 am

Let's make a mental leap & put on our Warren Buffett hat.
(Remember their are lot's of roads to Dublin...Thanks Taylor).
(This is right down Boglehead road...Thanks Jack).

The Snowball...courtesy of Warren Buffett.

Here are a couple of interesting articles...that show how this works.

http://theconservativeincomeinvestor.co ... snowballs/

http://www.dividendmantra.com/2014/07/b ... -snowball/

A great book by the master himself...Warren Buffett.

https://www.amazon.com/Snowball-Warren- ... 0553384619

jbolden1517
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Re: Dividend Misunderstandings & Only Spend Return

Postby jbolden1517 » Fri Jul 21, 2017 6:01 am

gilgamesh wrote:I only read what you had written next to each article and didn't actually read the actual article, but from what you have written, you are showing the dividend component of total return to hold some very strong, desirable charecterestics. This does not however mean dividend paying companies/funds are better because they highlight the dividend component of the total return.


How do you define "better"?

gilgamesh wrote: All they are doing is taking the capital appreciation part of the total income (unrealized capital gains) and forcing it into the income component-dividends (realized income)...nothing else. (This last statement is kind of an oversimplification to convey a message, the exact terminology may not be appropriate).


Agreed. But by breaking apart the asset into a less stable and a more stable component they are allowing different classes of investors to more accurately target businesses which are more volatile. I agree they are creating a cheap derivative on their own stock for their investors. But so what? The derivative has desirable properties especially for income investors.

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Fri Jul 21, 2017 9:35 am

Switching "Gears" once again...

In my particular situation I like to read different articles &
think about how they relate to my life. And go hum mm...

This is a very good thought provoking article.

Enjoy!

http://theconservativeincomeinvestor.co ... dividends/

Can you say "autopilot"...

http://theconservativeincomeinvestor.co ... end-trees/

Bfwolf
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Re: Dividend Misunderstandings & Only Spend Return

Postby Bfwolf » Fri Jul 21, 2017 12:41 pm

jbolden1517 wrote:annual total return = dividend yield + annual capital gain
annual capital gain is a highly volatile asset while dividend yield is mostly low volatility decreasing very infrequently. Dividend yield while not perfectly adjusted for inflation tends to increase at least at the speed of inflation (and usually substantially more) over periods as short as 5 years. So in other words total return looks like a portfolio of a risky asset and a low risk asset. Low risk assets, assets having lower volatility, have expected serial returns closer to their expected returns; while high risk assets have serial returns much lower than their expected returns.

Thus in choosing stocks all things being equal the higher percentage of the return that comes in the form of dividend yield the higher the serial return. Even if it were the case that higher dividend returns diminished the total return because of the lower volatility it would often be the case that dividend paying stocks can be held on more leverage than dividend paying stocks and thus achieving a higher serial return.

Your turn.


This is an optical illusion. Your dividends reduce the value of the stock by the exact same amount. Thus, dividend stocks are not lower risk than non-dividend stocks. In fact, dividend stocks tend to be value stocks and thus are probably marginally higher risk than Total Market stocks, though also with likely marginally higher expected total returns to compensate for that risk.

Consider the example of owning 100 shares each of Stock A and Stock B. Each is worth $100 initially. Stock A pays out a $10 quarterly dividend (which is reinvested) while Stock B does not pay a dividend. Both stocks have no change in value in Quarter 1, lose 50% in quarter 2, and gain 20% in quarter 3.

OK, quarter 1 ends. Stock A is worth $100/share, but then it pays out a $10 dividend so now it's worth $90/share. The $1,000 dividend payment is reinvested...$1,000 dividend divided by $90/share = 11.111 shares. So you've got 111.111 shares of Stock A worth $90/share. Total value of Stock A = $1,000.

With Stock B, you stay at 100 shares each worth $100/share. Total value of Stock B = $1,000.

OK, quarter 2! The stock price goes down 50%. Stock A is now worth $45/share, but then it pays out a $10 dividend so now worth $35/share. The $1,111.11 dividend ($10 dividend times 111.111 shares) is reinvested....$1,111.11 divided by $35/share = 31.746 shares. So you've got 142.857 shares of Stock A worth $35/share. Total value of Stock A = $5,000.

With Stock B, you stay at 100 shares but with the 50% drop in stock price, they're now worth $50/share. Total value of Stock B = $5,000.

Quarter 3! The stock price goes up 20%. Stock A is now worth $42/share, but then it pays out a $10 dividend so now worth $32/share. The $1,428.57 dividend ($10 dividend times 142.857 shares) is reinvested...$1,428.57 divided by $32/share = 44.643 shares. So you've got 187.45 shares of Stock A worth $32/share. Total value of Stock A = $6,000.

With Stock B, you stay at 100 shares but with the 20% increase in stock price, they're now worth $60/share. Total value of Stock B = $6,000.

As you can see, while your dividend remained constant for Stock A even during a period of poor performance, this did nothing to improve your total return. The dividend remained constant at the expense of the stock price.

avalpert
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Re: Dividend Misunderstandings & Only Spend Return

Postby avalpert » Fri Jul 21, 2017 1:45 pm

snarlyjack wrote:Switching "Gears" once again...

In my particular situation I like to read different articles &
think about how they relate to my life. And go hum mm...

This is a very good thought provoking article.

Enjoy!

http://theconservativeincomeinvestor.co ... dividends/

Can you say "autopilot"...

http://theconservativeincomeinvestor.co ... end-trees/


I don't find either thought provoking so much as fallacious and misleading. They both rest on a fallacy of treating dividends as akin to a guaranteed annuity independent of stock appreciation.

In the first article all they are really saying is that the young woman has enough to withdraw ~2% from her portfolio in perpetuity - which is likely true but personally I wouldn't be comfortable being a net spender (instead of saver) with just $460k to fund my future spending desires. The second article is just a pure representation of the fallacy.

avalpert
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Re: Dividend Misunderstandings & Only Spend Return

Postby avalpert » Fri Jul 21, 2017 1:51 pm

Abe wrote:
TheDuker wrote:With all due respect, if you are using dividends as income, you are "spending into your assets". That's the point of this thread.


I don't know a lot about this stuff, so please correct me if I am wrong. Lets say I own a small corner grocery store and the profit it makes is $50k a year, and I take the $50k profit each year a spend it to live on. How is that different than a public company that has $50k in profit and it pays it out to its shareholders (the owners) as dividends? Is the value of the corner grocery store any less because the the owner spends the profit? I think I know the answer, but just curious what other say.

Yes, of course it is less valuable. In one scenario it is a grocery store with X in expected revenue, in the other it is a grocery store with X in expected revenue and $50k in cash - which is by definition worth $50k more even if the cash is just sitting there.

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saltycaper
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Re: Dividend Misunderstandings & Only Spend Return

Postby saltycaper » Fri Jul 21, 2017 1:54 pm

snarlyjack wrote:
In my particular situation I like to read different articles &
think about how they relate to my life. And go hum mm...


It's hard to put it lightly that the articles you are sharing are direct examples of the types of errors made by dividend-focused investors. Their primary message is antithetical to the subject of this thread.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

avalpert
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Re: Dividend Misunderstandings & Only Spend Return

Postby avalpert » Fri Jul 21, 2017 1:57 pm

snarlyjack wrote:Phineas,

Nice meeting you!

This article has a nice write up on dividends &
some interesting studies that you might enjoy.
"The Power Of Dividends".

Enjoy...

http://www.dividendladder.com/the-power-of-dividends/


That second chart is one of the best examples I've ever come across of disingenuous misuse of axis scales in chart - very impressive.

Nate79
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Re: Dividend Misunderstandings & Only Spend Return

Postby Nate79 » Fri Jul 21, 2017 2:11 pm

I have yet to see someone post a dividend fund that doesn't track extremely closely to TSM or S&P500. All of this talk about reduced volatility doesn't pan out in a real world fund.

CantPassAgain
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Re: Dividend Misunderstandings & Only Spend Return

Postby CantPassAgain » Fri Jul 21, 2017 2:14 pm

Nate79 wrote:I have yet to see someone post a dividend fund that doesn't track extremely closely to TSM or S&P500. All of this talk about reduced volatility doesn't pan out in a real world fund.


Same experience here.

FactualFran
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Joined: Sat Feb 21, 2015 2:29 pm

Re: Dividend Misunderstandings & Only Spend Return

Postby FactualFran » Fri Jul 21, 2017 2:51 pm

Nate79 wrote:I have yet to see someone post a dividend fund that doesn't track extremely closely to TSM or S&P500. All of this talk about reduced volatility doesn't pan out in a real world fund.

The Morningstar Ratings and Risk page for the PowerShares S&P 500® High Dividend Low Volatility Portfolio (SPHD) gives the 3-year R-squared versus the S&P 500 total return index as 56.68. That R-squared value indicates that the dividend fund has not tracked the S&P 500 extremely closely. The fund has not been around long enough to have a 5-year statistics.

snarlyjack
Posts: 285
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Fri Jul 21, 2017 5:07 pm

Late Friday afternoon & I just got off work.

Bogleheads is heating up (which is good) &
were getting into the meat of this subject.

The topic is: "Dividend Misunderstandings &
Only Spend Return".

One more article to see what your thoughts
are on this way of looking at things.

"Dividends Are My Fruit".

Enjoy...

http://www.dividendmantra.com/2012/08/d ... -my-fruit/

snarlyjack
Posts: 285
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Fri Jul 21, 2017 5:14 pm

Nate,

Here is a chart of Vanguard dividend growth fund vs. the S & P 500.
Hope this helps you...

http://www.morningstar.com/funds/XNAS/VDIGX/quote.html

Bfwolf
Posts: 1550
Joined: Thu Oct 14, 2010 11:19 am

Re: Dividend Misunderstandings & Only Spend Return

Postby Bfwolf » Fri Jul 21, 2017 5:54 pm

snarlyjack wrote:Nate,

Here is a chart of Vanguard dividend growth fund vs. the S & P 500.
Hope this helps you...

http://www.morningstar.com/funds/XNAS/VDIGX/quote.html


Ha! You have cherry picked an actively managed fund that isn't even high dividend. It has a yield of 2% vs Total Stock Market Index of 1.92%. It is, of course, easy to pick actively managed funds that have outperformed index funds in the past.

Now, if you'd like to actually compare a high dividend index fund with the S&P 500 and a TSM fund, here you go. I think you'll agree that there is little difference.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

UKFred
Posts: 2
Joined: Thu Apr 20, 2017 9:58 am
Location: UK

Re: Dividend Misunderstandings & Only Spend Return

Postby UKFred » Fri Jul 21, 2017 6:01 pm

I think that this bias towards spending just the dividends arose because every asset class, be it land, property, bonds etc., that arose before stocks has a clear distinction between the capital investment and the income return. And it persists because there ARE advantages to spending only dividends:
1. The average dividend yield of stocks is about 2 or 2.5%. When you withdraw only this from your portfolio each year, it is very safe and will last pretty much indefinitely.
2. It is an easy rule to follow and imposes an automatic self-control on spending. This may not be important to most bogleheads, but is quite important for the general public.
3. People who have spent years accumulating, feel a certain amount of angst in their decumulation phase when they see their assets decreasing. This rule avoids that.

Nevertheless, there are real reasons why this is not an ideal rule:
1. You are letting the board of a company, with no knowledge or care of your spending needs, decide how much you can spend.
2. Dividends are not as tax efficient as capital gains.
3. Last, but I believe the most important reason is that it skews your mind towards only investing in high-yield stocks instead of searching across the entire universe of stocks for the best investment.

Zea Mays
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Joined: Sun May 28, 2017 10:20 am

Re: Dividend Misunderstandings & Only Spend Return

Postby Zea Mays » Fri Jul 21, 2017 6:29 pm

No one has mentioned this: reinvested divvies are purchases on the regular dips. Yes, you get your own back, but you buy new shares at a discount, usually the same % as the divvie. In a large, stable company, the price tends to rise by at least the same amount by the next divvie cycle. Over decades, the discounts add up. Can any one compare this benefit with the downsides you mention? I don't have tools or time to do the comparison math.
To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from wealth. Plus healthcare.

jbolden1517
Posts: 200
Joined: Sun Jul 09, 2017 2:53 pm

Re: Dividend Misunderstandings & Only Spend Return

Postby jbolden1517 » Fri Jul 21, 2017 6:52 pm

avalpert wrote:I don't find either thought provoking so much as fallacious and misleading. They both rest on a fallacy of treating dividends as akin to a guaranteed annuity independent of stock appreciation.


You assert that's a fallacy you don't prove it.

avalpert wrote: In the first article all they are really saying is that the young woman has enough to withdraw ~2% from her portfolio in perpetuity - which is likely true but personally I wouldn't be comfortable being a net spender (instead of saver) with just $460k to fund my future spending desires. The second article is just a pure representation of the fallacy.


Not sure if it is the number $460k you are unhappy with or the basic idea. Income investing by definition is being a net spender. The goal is that the assets last you until you die, not that they get bigger during the income phase.

Bfwolf
Posts: 1550
Joined: Thu Oct 14, 2010 11:19 am

Re: Dividend Misunderstandings & Only Spend Return

Postby Bfwolf » Fri Jul 21, 2017 7:00 pm

Zea Mays wrote:No one has mentioned this: reinvested divvies are purchases on the regular dips. Yes, you get your own back, but you buy new shares at a discount, usually the same % as the divvie. In a large, stable company, the price tends to rise by at least the same amount by the next divvie cycle. Over decades, the discounts add up. Can any one compare this benefit with the downsides you mention? I don't have tools or time to do the comparison math.


This isn't true. Please go and read my example a few posts above this. Despite reinvesting the dividends at the lower stock price due to the dividend being paid out, you don't end up with an investment worth more money. The stock prices goes down when the dividend is paid out because the company is worth less when the dividend is paid out. It's not a free discount.

jbolden1517
Posts: 200
Joined: Sun Jul 09, 2017 2:53 pm

Re: Dividend Misunderstandings & Only Spend Return

Postby jbolden1517 » Fri Jul 21, 2017 7:01 pm

Zea Mays wrote:No one has mentioned this: reinvested divvies are purchases on the regular dips. Yes, you get your own back, but you buy new shares at a discount, usually the same % as the divvie. In a large, stable company, the price tends to rise by at least the same amount by the next divvie cycle. Over decades, the discounts add up. Can any one compare this benefit with the downsides you mention? I don't have tools or time to do the comparison math.


That's different than the income scenario I was talking about but you are quite correct it make a difference in terms of serial return.

So take assets I'll use Bernstein's model:
X either goes +30 or -10 each year. Serial return 8.16%
Y pays out 5%. It goes either +25 ,-15 each year. With the buyback you end up at +29, -9 (i.e. total portfolio is slightly less volatile with the same return). That less volatility boosts the serial return to 8.34%.

I don't buy that simple math though. In reality it is a bit more complex. High dividend stocks are value stock. Value stocks and growth stocks comparisons require more assumptions to really work. Once the dividend is stripped out the remaining part of the company is even more volatile. But since dividends are stable that would be an advantage to a long term investor. Of course dividends mean revert much faster than growth stocks....

jbolden1517
Posts: 200
Joined: Sun Jul 09, 2017 2:53 pm

Re: Dividend Misunderstandings & Only Spend Return

Postby jbolden1517 » Fri Jul 21, 2017 7:13 pm

Bfwolf wrote:This is an optical illusion. Your dividends reduce the value of the stock by the exact same amount. Thus, dividend stocks are not lower risk than non-dividend stocks. In fact, dividend stocks tend to be value stocks and thus are probably marginally higher risk than Total Market stocks, though also with likely marginally higher expected total returns to compensate for that risk.

Consider the example of owning 100 shares each of Stock A and Stock B. Each is worth $100 initially. Stock A pays out a $10 quarterly dividend (which is reinvested) while Stock B does not pay a dividend. Both stocks have no change in value in Quarter 1, lose 50% in quarter 2, and gain 20% in quarter 3.


I'm just going to comment that a stock paying out a $40 / yr dividend that just lost 50% is now yielding 80%. Your numbers seem a bit high but I'll go with it.

Bfwolf wrote:As you can see, while your dividend remained constant for Stock A even during a period of poor performance, this did nothing to improve your total return. The dividend remained constant at the expense of the stock price.


Work through you scenario where you are steadily pulling out $200 each quarter from the fund (I have to compensate for the crazy yield). During that 50% off quarter you do much more damage.

avalpert
Posts: 5193
Joined: Sat Mar 22, 2008 4:58 pm

Re: Dividend Misunderstandings & Only Spend Return

Postby avalpert » Fri Jul 21, 2017 7:40 pm

jbolden1517 wrote:
avalpert wrote:I don't find either thought provoking so much as fallacious and misleading. They both rest on a fallacy of treating dividends as akin to a guaranteed annuity independent of stock appreciation.


You assert that's a fallacy you don't prove it.


The fallacy has been explained repeatedly not just in this thread - those who can't recognize it by now aren't going to after one more time through.

avalpert wrote: In the first article all they are really saying is that the young woman has enough to withdraw ~2% from her portfolio in perpetuity - which is likely true but personally I wouldn't be comfortable being a net spender (instead of saver) with just $460k to fund my future spending desires. The second article is just a pure representation of the fallacy.


Not sure if it is the number $460k you are unhappy with or the basic idea. Income investing by definition is being a net spender. The goal is that the assets last you until you die, not that they get bigger during the income phase.

And if you are a net spender instead of a net saver at 25 when your safe withdrawal from your portfolio is less than $20k you are making a big financial mistake and not setting yourself up for comfortable life after working. It is a great example of how 'income investing' leads to horrible recommendation and poor financial decisions.

RAchip
Posts: 149
Joined: Sat May 07, 2016 7:31 pm

Re: Dividend Misunderstandings & Only Spend Return

Postby RAchip » Fri Jul 21, 2017 7:42 pm

I dont accept the contention that cash retained in a company is always equal to or better than cash distributed to me via dividends. I can understand why a finance professor would say they are equal as an academic matter, but in the real world retained earnings might or might not increase the value of my stock in the long run dependeing on what is done with those earnings. I prefer companies who distribute their excess earnings to me.

Bfwolf
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Joined: Thu Oct 14, 2010 11:19 am

Re: Dividend Misunderstandings & Only Spend Return

Postby Bfwolf » Fri Jul 21, 2017 7:43 pm

jbolden1517 wrote:Work through you scenario where you are steadily pulling out $200 each quarter from the fund (I have to compensate for the crazy yield). During that 50% off quarter you do much more damage.


Nope, you'll end up in the exact same place whether the fund pays a dividend or not. You do the math this time--I did it last time.

Nate79
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Location: Portland, OR

Re: Dividend Misunderstandings & Only Spend Return

Postby Nate79 » Fri Jul 21, 2017 7:49 pm

snarlyjack wrote:Nate,

Here is a chart of Vanguard dividend growth fund vs. the S & P 500.
Hope this helps you...

http://www.morningstar.com/funds/XNAS/VDIGX/quote.html


You found a fund that tracks very closely Vanguard growth index which has a 1.32% yield.

Oops.....

Bfwolf
Posts: 1550
Joined: Thu Oct 14, 2010 11:19 am

Re: Dividend Misunderstandings & Only Spend Return

Postby Bfwolf » Fri Jul 21, 2017 7:54 pm

RAchip wrote:I dont accept the contention that cash retained in a company is always equal to or better than cash distributed to me via dividends. I can understand why a finance professor would say they are equal as an academic matter, but in the real world retained earnings might or might not increase the value of my stock in the long run dependeing on what is done with those earnings. I prefer companies who distribute their excess earnings to me.


You are right not to accept that contention. But I don't think anybody is making that contention.

If a company cannot expect risk adjusted returns with "excess" cash that are better than what it's investors could expect from choosing different investments if the money were returned to them, then the company needs to return that cash to shareholders. This money can be returned through dividends or by stock buyback. No company should be holding onto cash it doesn't need just to avoid paying dividends.

snarlyjack
Posts: 285
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Location: Montana

Re: Dividend Misunderstandings & Only Spend Return

Postby snarlyjack » Fri Jul 21, 2017 10:18 pm

Here is a short video from Kevin O'Leary, "Mr. Wonderful...Of Shark Tank".

I' am NOT suggesting that you invest in his ETF's but his video
& thought process is interesting...(His ETF's ER are very expensive).

Remember...The topic is: Dividend Misunderstandings & Only Spend Return.

Enjoy...

https://www.bing.com/videos/search?q=ke ... ORM=VRDGAR

avalpert
Posts: 5193
Joined: Sat Mar 22, 2008 4:58 pm

Re: Dividend Misunderstandings & Only Spend Return

Postby avalpert » Sat Jul 22, 2017 12:02 am

snarlyjack wrote:Here is a short video from Kevin O'Leary, "Mr. Wonderful...Of Shark Tank".

I' am NOT suggesting that you invest in his ETF's but his video
& thought process is interesting...(His ETF's ER are very expensive).

Remember...The topic is: Dividend Misunderstandings & Only Spend Return.

Enjoy...

https://www.bing.com/videos/search?q=ke ... ORM=VRDGAR

A great example of why you shouldn't look to business celebrities and salesman for investing advice - but they do tend to be great storytellers

jbolden1517
Posts: 200
Joined: Sun Jul 09, 2017 2:53 pm

Re: Dividend Misunderstandings & Only Spend Return

Postby jbolden1517 » Sat Jul 22, 2017 5:54 am

Bfwolf wrote:This is an optical illusion. Your dividends reduce the value of the stock by the exact same amount. Thus, dividend stocks are not lower risk than non-dividend stocks. In fact, dividend stocks tend to be value stocks and thus are probably marginally higher risk than Total Market stocks, though also with likely marginally higher expected total returns to compensate for that risk.

Consider the example of owning 100 shares each of Stock A and Stock B. Each is worth $100 initially. Stock A pays out a $10 quarterly dividend (which is reinvested) while Stock B does not pay a dividend. Both stocks have no change in value in Quarter 1, lose 50% in quarter 2, and gain 20% in quarter 3.

OK, quarter 1 ends. Stock A is worth $100/share, but then it pays out a $10 dividend so now it's worth $90/share. The $1,000 dividend payment is reinvested...$1,000 dividend divided by $90/share = 11.111 shares. So you've got 111.111 shares of Stock A worth $90/share. Total value of Stock A = $1,000.

With Stock B, you stay at 100 shares each worth $100/share. Total value of Stock B = $1,000.

OK, quarter 2! The stock price goes down 50%. Stock A is now worth $45/share, but then it pays out a $10 dividend so now worth $35/share. The $1,111.11 dividend ($10 dividend times 111.111 shares) is reinvested....$1,111.11 divided by $35/share = 31.746 shares. So you've got 142.857 shares of Stock A worth $35/share. Total value of Stock A = $5,000.

With Stock B, you stay at 100 shares but with the 50% drop in stock price, they're now worth $50/share. Total value of Stock B = $5,000.

Quarter 3! The stock price goes up 20%. Stock A is now worth $42/share, but then it pays out a $10 dividend so now worth $32/share. The $1,428.57 dividend ($10 dividend times 142.857 shares) is reinvested...$1,428.57 divided by $32/share = 44.643 shares. So you've got 187.45 shares of Stock A worth $32/share. Total value of Stock A = $6,000.

With Stock B, you stay at 100 shares but with the 20% increase in stock price, they're now worth $60/share. Total value of Stock B = $6,000.

As you can see, while your dividend remained constant for Stock A even during a period of poor performance, this did nothing to improve your total return. The dividend remained constant at the expense of the stock price.


I kept the example above. This time what we are going to do is have A's intrinsic price stay flat during the bear and B's increase by 10% per. Note this stock is yielding 40% (as per the example of the high dividend above). So this is a very high yield world in the original example. In keeping with that let's spend the yield and withdraw $1000 / quarter and see what happens.

Quarter 1
A you get the $100 dividend and sell nothing. You have 100 shares @ $100 = $10000 at market and at intrinsic value.
B increases to $110 / share. You sell off 9.09 of you shares. You have 90.91 shares $110 = $10000 at market and at intrinsic value.
Everything is equal which is the argument people keep making above. But watch what happens next quarter.

Quarter 2 we have the nasty bear market in this high yield world like the example above. Both stocks drop 50%. You then have to withdraw $100.
A pays the $100 dividend dropping to $50 / share: 100 shares @ $50 = $5000 at market ($10k intrinsic)
B your shares have an intrinsic value of $121 off the next 10% growth. But their price got cut in half so they are at $60.50 You have to sell 16.52 of them. 74.39 shares @ 60.50 = $4500.59 at market ($9001.19 intrinsic)
(note the difference dividend stability made in the bear).

Quarter 3 both stocks increase in price by 20%. Partial recovery from the bear.
A you get the $100 dividend and sell nothing. 100 shares @ $60 = $6000 at market. ($10k intrinsic)
B you get the 10% growth and the 20% price appreciation and your shares go to $79.86. You have to sell 12.52 of them to meet your payout. 61.87 shares @ $79.86 = $4940.94 at market ($8234.90 intrinsic)

B is well on his way to going broke.

A has 100 shares with an intrinsic value of $100 / share = $10000
B has 61.87 shares with an intrinsic value of $133.10 / share = $8234.90
Had B been able to sell at intrinsic value and not market price everything would have been equal, he would still be at 75.13 shares. But he wasn't able to sell for intrinsic value. He had to sell below intrinsic value and thus lost principle permanently. His remaining stock of shares won't return his draw. So even if the price full recovers in quarter 4 the damage is done. He'll be depleting quite rapidly.

Volatility matters. Non-volatile assets have larger serial returns.
Last edited by jbolden1517 on Sat Jul 22, 2017 8:11 am, edited 1 time in total.

scottinmet
Posts: 17
Joined: Fri Dec 25, 2015 11:27 am

Re: Dividend Misunderstandings & Only Spend Return

Postby scottinmet » Sat Jul 22, 2017 8:10 am

Quarter 2 we have the nasty bear market in this high yield world like the example above. Both stocks drop 50%. You then have to withdraw $100.
A pays the $100 dividend dropping to $50 / share: 100 shares @ $50 = $5000 at market ($10k intrinsic)
B your shares have an intrinsic value of $121 off the next 10% growth. But their price got cut in half so they are at $60.50 You have to sell 16.52 of them. 74.39 shares @ 60.50 = $4500.59 at market ($9001.19 intrinsic)
(note the difference dividend stability made in the bear).


jbolden, I'm trying to understand this. If A drops to $50/share after taking a $1/share dividend ($1/share*100 shares= $100 dividend), then is it fair to say that the market drop was 49/100 = 49%?

Then, to compare apples to apples, B would have a 49% drop from $110/share, so now it is worth $56.10/share. Now for the person to take the same $100 as in A, he would sell 1.78 shares, reducing his total shares held to 90.91 - 1.78 = 89.12 shares. He now owns $5000.00 total in fund B, the same amount as company A, and has $100 in his pocket.

It seems to me you are short changing the dividend-less fund B and that if this happened in the real world everybody would own dividend yielding stocks to protect against bear markets.


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