Dividend Misunderstandings & Only Spend Return

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snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Sat Jul 22, 2017 4:57 pm

My interest in this whole subject is with, both of my parents are gone.
It's not like I can go to my Dad or Mom in an emergency & borrow
some money from them. I consider myself on my own. (But I
do have some money, 100% invested in VHDYX & cd's).

So for my own "psychological" reasons I prefer knowing in the
back of my mind that if a emergency happens/or an opportunity, I have a
quarterly dividend coming up. So far I have reinvested all of
my distributions. But I also don't want to sell anything.
(I realize it's all psychological...but it is what it is). So in these
charts my answer lies...which is the best fund, they are all different?

Thanks everyone for your help!

https://personal.vanguard.com/us/funds/ ... tingFrom=2

Chart didn't work, they are:

High Dividend Yield Fund.
S & P 500
Dividend Appreciation Fund.
Equity Income Fund.
The Dividend Growth Fund & Dividend Appreciation Fund should
be the same chart over a long period of time (Vanguard just replaced
Wellington with a index fund vs. a managed fund, but it's approximately
the same thing).
Last edited by snarlyjack on Sat Jul 22, 2017 5:06 pm, edited 3 times in total.

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willthrill81
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Re: Dividend Misunderstandings & Only Spend Return

Post by willthrill81 » Sat Jul 22, 2017 5:01 pm

snarlyjack wrote:My interest in this whole subject is with, both of my parents are gone.
It's not like I can go to my Dad or Mom in an emergency & borrow
some money from them. I consider myself on my own. (But I
do have some money, 100% invested in VHSYX & cd's.

So for my own "psychological" reasons I prefer knowing in the
back of my mind that if a emergency happens/or an opportunity, I have a
quarterly dividend coming up. So far I have reinvested all of
my distributions. But I also don't want to sell anything.
(I realize it's all psychological...but it is what it is). So in these
charts my answer lies...which is the best fund, they are all different?

Thanks everyone for your help!

https://personal.vanguard.com/us/funds/ ... tingFrom=2
If you really just want stability and security with decent growth, buy Vanguard's Wellesley Income fund. It's more stable than a stock heavy dividend fund. It's trailed the S&P 500 by less than half a percent over the last 47 years and yet has only lost money, less than 10%, in six of those years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Sat Jul 22, 2017 5:05 pm

Thank you Willthrill81,

I like Wellington & Wellesley funds & have/would
consider them. I prefer index funds but hey...
I' am only 23 years old so I consider myself pretty
young for a lot of bonds, I would like good growth.

Growth & income...The perfect balance...

Thanks for your help & suggestions!
Last edited by snarlyjack on Sat Jul 22, 2017 5:14 pm, edited 2 times in total.

jbolden1517
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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 5:13 pm

Ketawa wrote:
saltycaper wrote:
jbolden1517 wrote:
In your example both A and B trade at intrinsic value the entire time. In which case, yes the return is equal.
Other tangential topics may deserve consideration, but the main point of this thread was conceded here.
Yeah, seriously. If only we knew which companies would pay a 10% dividend in perpetuity, so we could accurately evaluate the intrinsic value and pick stocks successfully!
It really isn't that hard to figure out which companies have a reliable yield and choose companies based their ability to provide the dividend. Yield plus quality screens would give you many many companies with a reliable dividend. Which incidentally also outperform the market and at lower risk.

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willthrill81
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Re: Dividend Misunderstandings & Only Spend Return

Post by willthrill81 » Sat Jul 22, 2017 5:20 pm

jbolden1517 wrote:
Ketawa wrote:
saltycaper wrote:
jbolden1517 wrote:
In your example both A and B trade at intrinsic value the entire time. In which case, yes the return is equal.
Other tangential topics may deserve consideration, but the main point of this thread was conceded here.
Yeah, seriously. If only we knew which companies would pay a 10% dividend in perpetuity, so we could accurately evaluate the intrinsic value and pick stocks successfully!
It really isn't that hard to figure out which companies have a reliable yield and choose companies based their ability to provide the dividend. Yield plus quality screens would give you many many companies with a reliable dividend. Which incidentally also outperform the market and at lower risk.
It's interesting that no one in the years before now has noticed that companies with reliable dividends outperform the TSM. :P It's even more interesting that mutual funds comprised of such companies have actually underperformed the TSM.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Dividend Misunderstandings & Only Spend Return

Post by JFP_SF » Sat Jul 22, 2017 5:24 pm

jbolden1517 wrote:
Ketawa wrote:
saltycaper wrote:
jbolden1517 wrote:
In your example both A and B trade at intrinsic value the entire time. In which case, yes the return is equal.
Other tangential topics may deserve consideration, but the main point of this thread was conceded here.
Yeah, seriously. If only we knew which companies would pay a 10% dividend in perpetuity, so we could accurately evaluate the intrinsic value and pick stocks successfully!
It really isn't that hard to figure out which companies have a reliable yield and choose companies based their ability to provide the dividend. Yield plus quality screens would give you many many companies with a reliable dividend. Which incidentally also outperform the market and at lower risk.
Is there a fund that follows this strategy for those of us who don't want to pick individual stocks?

jbolden1517
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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 5:43 pm

snarlyjack wrote: High Dividend Yield Fund.
S & P 500
Dividend Appreciation Fund.
Equity Income Fund.
The Dividend Growth Fund & Dividend Appreciation Fund should
be the same chart over a long period of time (Vanguard just replaced
Wellington with a index fund vs. a managed fund, but it's approximately
the same thing).
FWIW some unsolicited advice. I think you have a different problem than an income investor. You have a need for a short spurt of spending that is unlikely to last long but could hit hard for a limited time (like 18 mo unemployment). I suspect if you just had a diversified growth portfolio (not growth stocks but stuff that is designed to maximize return) you would have stuff you could sell and you are giving up both diversification and return in exchange for an income you are going to use. My advice to you would be to do something like BlackRock Global Allocation. You probably just need more stability not perfect stability if you had to sell and could benefit from more diversification. Now to answer the question of what those things are.

High Dividend Yield Fund -- VHDYX -- lots of very large cap high yield stocks. .15 ER (very good). Yield is a bit low but many of these stocks are more what I'd call income growth (i.e. they produce income and grow the income). Good choice though I think the large capness could reduce total return (like a lot of Vanguard's offerings). Also is an index fund.

S & P 500 -- Large cap growth index used by everyone filled with many overvalued stocks. Takes most of the downsides of YHDYX and makes them worse. Also will correlate wonderfully with international so diminishes the value of many other low cost diversifiers. If you are the sort of investor who wants value avoid or use as a satellite holding. However, you could replace this with its sectors for a sector rotation strategy and get a decent yield plus some returns and isolate much of the worst that's in this fund. In short use with some caution or not at all.

Dividend Appreciation Fund -- This is a garp fund not an income fund. Again too large cap for my taste but the ER is very good. If you want growthy but sane not a bad choice at all.

Wellington (VWELX) -- A classic. This fund has both bonds and stocks. It is meant as an all in one buy this fund hold for life and don't worry type fund. There is a lot to love about this fund. It has many of Vanguard's best characteristics (integrity, low cost) while avoiding the ideological extremism and low cost at the expense of return. If you are the sort of person to read an investing board though I think you can do better. But you'll never make too big a mistake with Wellington.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Bfwolf » Sat Jul 22, 2017 5:52 pm

jbolden1517 wrote:It really isn't that hard to figure out which companies have a reliable yield and choose companies based their ability to provide the dividend. Yield plus quality screens would give you many many companies with a reliable dividend. Which incidentally also outperform the market and at lower risk.
Please select 10 companies that have reliably high yields (> 3%) that will outperform the market and at lower risk. We'll start tracking from day end of when you select the companies.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 6:02 pm

willthrill81 wrote:
It's interesting that no one in the years before now has noticed that companies with reliable dividends outperform the TSM. :P It's even more interesting that mutual funds comprised of such companies have actually underperformed the TSM.
Addressed in this thread: viewtopic.php?f=10&t=222746&start=150#p3460391

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 6:12 pm

Bfwolf wrote:
jbolden1517 wrote:It really isn't that hard to figure out which companies have a reliable yield and choose companies based their ability to provide the dividend. Yield plus quality screens would give you many many companies with a reliable dividend. Which incidentally also outperform the market and at lower risk.
Please select 10 companies that have reliably high yields (> 3%) that will outperform the market and at lower risk. We'll start tracking from day end of when you select the companies.
I'll do you one better I'll list stocks I'm in.

INTC
LAND
GAIN
GMLP
ADC
CTL
TNH
SXCP
VZ
NNA
OHI
(11 in case you want to disqualify)
And I'll add a growth stock which is technically not quite over 3% but was when I bought
GILD

nexchap
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Re: Dividend Misunderstandings & Only Spend Return

Post by nexchap » Sat Jul 22, 2017 6:14 pm

Although the length of this thread would argue that everything that can, or should, be said on the topic has been covered, there is one point that I didn’t see anywhere as I was skimming (if its already been made -- my apologies!). I think its worth pointing out, because it gets to why two very logical, mathematically literate, bias-free investors could wind up with very different dividend exposures in their portfolios.

Although the dollar bill received from a dividend payment looks just like the dollar bill received from a stock sale, the two transactions have little in common and each provides the recipient with a very different set of valuable intangibles.

A dividend payment is a transfer (in the normal case) from a company’s checking account to a shareholder’s checking account. It’s typically achieved without liquidating businesses, or other income producing assets, so it’s somewhat insulated from the externalities of the market. So while it gives the recipient 1) a dollar bill, it also provides 2) a dividend taxable event, 3) information about the company’s view of their future cash generation ability (and some certainty about future returns), and 4) information about the company’s reinvestment options. All 4 of those items have value.

The payment from a stock sale, on the other hand, comes from what another buyer chooses to believe the stock is worth. The stock you’re selling is not just a claim on the company’s checking account. It’s also a claim on all the potential upside (and downside) or every line of business the company is in. So a sale gives the seller a very different set of stuff: 1) a dollar bill, 2) a capital gain/loss taxable event, 3) protection against a downward revision in the company’s market cap, and 4) the loss of a claim on any upward revision in the company’s market cap. All 4 of those items have value, too, and only 1 of them appears on both lists.

So while there’s lots of bad reasons, biases, and blatant misunderstandings, that lead some investors to tilt their portfolios towards dividend yield, it’s a mistake to conclude that there are no good reasons to tilt towards, or away, from dividends. Investors can rationally assign very different values to the other items on those lists, and wind up with different assets allocations as a result.

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Tyler Aspect
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Re: Dividend Misunderstandings & Only Spend Return

Post by Tyler Aspect » Sat Jul 22, 2017 6:27 pm

I met a fellow the other day that said he plans his retirement with dividend paying stocks. He had the idea if he only used the dividends for living expense, then he will be fine for the retirement. I checked that high dividend stock index is paying 3% dividend at this moment. However, if the stock market crashed by half, then the same dividend yield of 3% even if were it to remain the same will only provide half of the dividend amount pre-crash. (dividend amount = net asset value * dividend yield)

I see this dividend-only concept as a major trap in leading investors into risky portfolio compositions. Typically there are two symptoms: a 100% stock position of dividend paying stocks, or a big portion of high-yield bond funds.
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jbolden1517
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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 6:29 pm

JFP_SF wrote: Is there a fund that follows this strategy for those of us who don't want to pick individual stocks?
QDF
SCHD
DLN, DEW, DGRW -- meant to be GARP.
OFDIX -- high ER but is the fund described in that long article
DJD

Just google "quality dividend". The desire for companies that aren't at insane multiples and can pay out that aren't distressed is not rare. You'll find tons to choose from.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 6:33 pm

Tyler Aspect wrote:I met a fellow the other day that said he plans his retirement with dividend paying stocks. He had the idea if he only used the dividends for living expense, then he will be fine for the retirement. I checked that high dividend stock index is paying 3% dividend at this moment. However, if the stock market crashed by half, then the same dividend yield of 3% even if were it to remain the same will only provide half of the dividend amount pre-crash. (dividend amount = net asset value * dividend yield)

I see this dividend-only concept as a major trap in leading investors into risky portfolio compositions. Typically there are two symptoms: a 100% stock position of dividend paying stocks, or a big portion of high-yield bond funds.
His idea is a good one and he's right. BTW the yield isn't constant. If the stock market crashed by 1/2 the yield goes up to 6%. Now in reality it is likely to go down a bit the year after a 50% stock crash. So his stocks would probably cut dividends 15-20%. So the yields is probably more like 5%. But he's doing a lot better than the people selling stocks at 1/2 off to make ends meat.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Nate79 » Sat Jul 22, 2017 7:01 pm

jbolden1517 wrote:
JFP_SF wrote: Is there a fund that follows this strategy for those of us who don't want to pick individual stocks?
QDF
SCHD
DLN, DEW, DGRW -- meant to be GARP.
OFDIX -- high ER but is the fund described in that long article
DJD

Just google "quality dividend". The desire for companies that aren't at insane multiples and can pay out that aren't distressed is not rare. You'll find tons to choose from.
So I plotted all these in M* total return vs VTSAX. A few have very short track record, track VTSAX very closely, underperformed, and one had horrible underperformance.

So one could have pulled out the same value from VTSAX as any of these funds (either as dividends or sell share value) and either be ahead or the same position.

So instead of getting the market return you can roll the dice or play dart board with your list of funds, potentially having significant lower performance or at best just matching.

There is no magic here.

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willthrill81
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Re: Dividend Misunderstandings & Only Spend Return

Post by willthrill81 » Sat Jul 22, 2017 7:16 pm

jbolden1517 wrote:
willthrill81 wrote:
It's interesting that no one in the years before now has noticed that companies with reliable dividends outperform the TSM. :P It's even more interesting that mutual funds comprised of such companies have actually underperformed the TSM.
Addressed in this thread: viewtopic.php?f=10&t=222746&start=150#p3460391
That thread is this thread.

Why in the ten years since has no investment group created a mutual fund employing the particular strategy you cite, which isn't difficult to employ at all, if it's so reliably successful?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Dividend Misunderstandings & Only Spend Return

Post by patrick013 » Sat Jul 22, 2017 7:29 pm

Nate79 wrote:
jbolden1517 wrote:
JFP_SF wrote: Is there a fund that follows this strategy for those of us who don't want to pick individual stocks?
QDF
SCHD
DLN, DEW, DGRW -- meant to be GARP.
OFDIX -- high ER but is the fund described in that long article
DJD

Just google "quality dividend". The desire for companies that aren't at insane multiples and can pay out that aren't distressed is not rare. You'll find tons to choose from.
So I plotted all these in M* total return vs VTSAX. A few have very short track record, track VTSAX very closely, underperformed, and one had horrible underperformance.

So one could have pulled out the same value from VTSAX as any of these funds (either as dividends or sell share value) and either be ahead or the same position.

So instead of getting the market return you can roll the dice or play dart board with your list of funds, potentially having significant lower performance or at best just matching.

There is no magic here.
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http://myphotos.mypclinuxos.com/images/ ... ne2017.png

One thing people forget is that the indexes in the studies are not the
ones used in most funds. To get the best performance yield or equal
weighting of the dividend stocks needs to be used. I think ticker
SPHD or SPYD would be good dividend tilts with a good entry point.
They don't have decades of history but try to be similar to the studies
a bit more. There's an article on Morningstar right now suggesting
a total return with also an income approach or AA.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 7:53 pm

Nate79 wrote: So instead of getting the market return you can roll the dice or play dart board with your list of funds, potentially having significant lower performance or at best just matching.

There is no magic here.
As we've said 100x in this thread. No you couldn't have just pulled money out of VTSAX and kept alive. Try running it (you can use the SP500, mostly the same fund) starting in 1973 with a 4% inflation adjusted annual draw. Your draw will be way too fast by the 1980s bull for it to matter anymore. You go broke but a lot slower with a 3% inflation adjusted draw.

As for performance. XIV is crushing VTSAX this year. VTSAX is short volatility in the same ratios, this all comes down to trading strategy. They bet on contango you didn't. Does your logic imply that VTSAX "underperformed" this year by hundreds of percent? Why did you do so badly in comparison?

There are always funds that do better than any fund. Value investors don't like holding their portfolio in overpriced stocks getting high returns until the day of reckoning. Over the long haul (and usually not very long) they do well. But they always under perform the hot funds. VTSAX just drives up prices and then gets mauled when the flow of money slows even a little. Everyone got nailed in 2008. But what's the excuse for 2000? Why did you go from 16% technology to being over 30% right before the technology bear? 2000 bear I was way up smooth sailing. But I was 0% (actually slightly short) tech.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 8:04 pm

willthrill81 wrote:
jbolden1517 wrote:
willthrill81 wrote:
It's interesting that no one in the years before now has noticed that companies with reliable dividends outperform the TSM. :P It's even more interesting that mutual funds comprised of such companies have actually underperformed the TSM.
Addressed in this thread: viewtopic.php?f=10&t=222746&start=150#p3460391
That thread is this thread.

Why in the ten years since has no investment group created a mutual fund employing the particular strategy you cite, which isn't difficult to employ at all, if it's so reliably successful?
Huh? Vanguard has created equity income funds in the last 10 years. We are in triple digits for number of funds created in the last 10 years that use a quality dividend strategy. If we are in quadruple digits I wouldn't be too shocked.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Ketawa » Sat Jul 22, 2017 8:50 pm

jbolden1517 wrote:
JFP_SF wrote: Is there a fund that follows this strategy for those of us who don't want to pick individual stocks?
QDF
SCHD
DLN, DEW, DGRW -- meant to be GARP.
OFDIX -- high ER but is the fund described in that long article
DJD

Just google "quality dividend". The desire for companies that aren't at insane multiples and can pay out that aren't distressed is not rare. You'll find tons to choose from.
Honestly people, judge for yourself the performance of these funds that are supposedly lower risk and/or higher return than the total stock market, simply from using a high dividend and quality screen. I'm not going to screenshot every Morningstar chart because my time has some value, but the evidence is pretty damning. I used the longest time period available for every fund except DEW, since Vanguard Total World Stock Index Fund (VTWSX or VT) had a later date of inception.

QDF, basically the same performance as VTSAX: link

SCHD, worse than VTSAX: link

DLN, worse than VTSAX: link

DEW, which is a global fund, abysmal compared to VTWSX: link

DGRW, basically the same as VTSAX: link

OFDIX, which is a global fund, abysmal compared to VT: link

DJD, basically the same performance as VTSAX: link

Full disclosure: I'm not arguing in good faith here because any strategy can have periods of underperformance over short time periods. I actually invest in several AQR funds that passively target risk factors like value, momentum, profitability, carry, and defensive, and some of these have done poorly recently when compared to a total stock market fund. That does not invalidate the strategy, but it should give people pause. Note that the academic research has never concluded that dividend strategy on its own is a worthwhile factor for explaining investment returns. It is mainly a proxy for value, and a poor one, as Larry Swedroe has written extensively.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Nate79 » Sat Jul 22, 2017 9:08 pm

jbolden1517 wrote:
Nate79 wrote: So instead of getting the market return you can roll the dice or play dart board with your list of funds, potentially having significant lower performance or at best just matching.

There is no magic here.
As we've said 100x in this thread. No you couldn't have just pulled money out of VTSAX and kept alive. Try running it (you can use the SP500, mostly the same fund) starting in 1973 with a 4% inflation adjusted annual draw. Your draw will be way too fast by the 1980s bull for it to matter anymore. You go broke but a lot slower with a 3% inflation adjusted draw.

As for performance. XIV is crushing VTSAX this year. VTSAX is short volatility in the same ratios, this all comes down to trading strategy. They bet on contango you didn't. Does your logic imply that VTSAX "underperformed" this year by hundreds of percent? Why did you do so badly in comparison?

There are always funds that do better than any fund. Value investors don't like holding their portfolio in overpriced stocks getting high returns until the day of reckoning. Over the long haul (and usually not very long) they do well. But they always under perform the hot funds. VTSAX just drives up prices and then gets mauled when the flow of money slows even a little. Everyone got nailed in 2008. But what's the excuse for 2000? Why did you go from 16% technology to being over 30% right before the technology bear? 2000 bear I was way up smooth sailing. But I was 0% (actually slightly short) tech.
Yes, things have been repeated over and over. And yet when actual funds are given as examples it turns out it was a whole lot of hot air.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 9:39 pm

Nate79 wrote:
Yes, things have been repeated over and over. And yet when actual funds are given as examples it turns out it was a whole lot of hot air.
Yeah you definitely showed a lot of examples of TSM doing better in a period of high inflation. We are talking about a strategy designed to perform well against inflation risk. You compare it during a period of essentially no inflation to a bubble fund and it underperforms barely. Brilliant argument.

And not only that, you still haven't told me why your strategy underperformed XIV by 100s of percent this year holding essentially the same asset. Or does this stupid fund comparison argument only work in one direction? Is the TSM strategy disproven by the existence of even hotter fund holding essentially the same asset that did so much better?

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Re: Dividend Misunderstandings & Only Spend Return

Post by Ketawa » Sat Jul 22, 2017 10:15 pm

jbolden1517 wrote:Yeah you definitely showed a lot of examples of TSM doing better in a period of high inflation. We are talking about a strategy designed to perform well against inflation risk. You compare it during a period of essentially no inflation to a bubble fund and it underperforms barely. Brilliant argument.
VTSAX is not a "bubble fund". It represents the total stock market, by definition, and includes both growth and value stocks at their appropriate market weight.
jbolden1517 wrote:And not only that, you still haven't told me why your strategy underperformed XIV by 100s of percent this year holding essentially the same asset. Or does this stupid fund comparison argument only work in one direction? Is the TSM strategy disproven by the existence of even hotter fund holding essentially the same asset that did so much better?
It should be pretty obvious that on the Bogleheads forum, a total stock market fund would be the basis for comparison for any alternative investment strategy. How is an investment in the total stock market anything like an investment that is designed to do well when volatility is low?

I hope other readers of the thread are not taking these arguments seriously. Here is what XIV does according to this article: How Does XIV Work?.
VelocityShares’ XIV and its sister fund ZIV are designed to go up when the volatility of the S&P 500 goes down.

...

Unlike stocks, owning XIV does not give you a share of a corporation. There are no sales, no quarterly reports, no profit/loss, no PE ratio, and no prospect of ever getting dividends. Forget about doing fundamental style analysis on XIV. While you’re at it forget about technical style analysis too, the price of XIV is not driven by its supply and demand—it is a small tail on the medium sized VIX futures dog, which itself is dominated by SPX options (notional value > $100 billion).

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Re: Dividend Misunderstandings & Only Spend Return

Post by willthrill81 » Sat Jul 22, 2017 11:06 pm

Ketawa wrote:It should be pretty obvious that on the Bogleheads forum, a total stock market fund would be the basis for comparison for any alternative investment strategy. How is an investment in the total stock market anything like an investment that is designed to do well when volatility is low?

I hope other readers of the thread are not taking these arguments seriously. Here is what XIV does according to this article: How Does XIV Work?.
VelocityShares’ XIV and its sister fund ZIV are designed to go up when the volatility of the S&P 500 goes down.

...

Unlike stocks, owning XIV does not give you a share of a corporation. There are no sales, no quarterly reports, no profit/loss, no PE ratio, and no prospect of ever getting dividends. Forget about doing fundamental style analysis on XIV. While you’re at it forget about technical style analysis too, the price of XIV is not driven by its supply and demand—it is a small tail on the medium sized VIX futures dog, which itself is dominated by SPX options (notional value > $100 billion).
How on earth did we get from investors misunderstanding what dividends are to XIV? :confused
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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 11:07 pm

Ketawa wrote:
jbolden1517 wrote:Yeah you definitely showed a lot of examples of TSM doing better in a period of high inflation. We are talking about a strategy designed to perform well against inflation risk. You compare it during a period of essentially no inflation to a bubble fund and it underperforms barely. Brilliant argument.
VTSAX is not a "bubble fund". It represents the total stock market, by definition, and includes both growth and value stocks at their appropriate market weight.
First off. The choice of the USA is clearly exclusionary. Something like VTWSX or an MSCI World Index would be "stocks". Picking VTSAX is cherrypicking a particular country fund.

But there is something more important. An index fund by definition holds a percentage of the float for all stocks. That is it treats float as the determiner for buy/sells buying dilution and selling concentration. That's a trading strategy. It is a weird trading strategy but a trading strategy none the less. Any trading strategy with lots of money behind it generates good returns when inflows are high. So right now high P/B stocks benefit from creating sequestered float using indexers as a form of cheap equity financing. Companies trying to do buybacks find they run into a wall of selling which makes buybacks less effective in raising share prices. Those aren't things that index investors are neutrally responding to, those are things that indexing as a trading strategy are doing to the market and thus introducing distortion in the prices that would otherwise exist. Float based trading will generate lots of paper profits as long as substantial new money goes into float based trading.

Certainly from a CAPM perspective VTSAX is one of the canonical assets. That doesn't change the fact that outside the CAPM world it is just another fund. But there are other canonical assets that are much more fundamental.
Ketawa wrote:
jbolden1517 wrote:And not only that, you still haven't told me why your strategy underperformed XIV by 100s of percent this year holding essentially the same asset. Or does this stupid fund comparison argument only work in one direction? Is the TSM strategy disproven by the existence of even hotter fund holding essentially the same asset that did so much better?
It should be pretty obvious that on the Bogleheads forum, a total stock market fund would be the basis for comparison for any alternative investment strategy. How is an investment in the total stock market anything like an investment that is designed to do well when volatility is low?
As the options expression goes, "volatility is the only asset class". For any asset you get the risk free return plus the compensation for carrying risk. A short on volatility earns about 8% / yr in exchange for taking on stock risk. Stocks once you tear off the outer layers of cash consisting of the cost of carrying the stocks and the dividend yield is just a rolling 1-day volatility short. Volatility is the canonical asset, looked at the right way stocks and bonds are just messy combinations of derivatives.

And of course TSM is approximately SP500. Or if you prefer we could imagine all these computations being done on TSM in 20 years not SP500.

XIV is a short position on unit SP500 volatility but with a different trading strategy than you all use. Up to cash and some interest its the same fund as an SP500 index fund but with a very different trading strategy. The difference in trading strategy is TSM/SP50 realizes the change in SP500 price daily (i.e. has a short term strategy realizing 0 month volatility) while XIV takes on 1 yr from now volatility risk and buys back the risk when we get within a month: realizing the volatility from 12 to 1 months out but not the 0 month. They have a long term volatility trading strategy and thus benefit from contango. You have a short term trading strategy and don't benefit. And that's why VTSAX underperformed another index fund carrying the same asset but with a better trading strategy.

I don't see any reason to pick your bubble fund as the basis for comparison when there are much better bubble funds like XIV I could pick that are far purer.

Or we can deal in the world of reality. XIV is a terrific vehicle for holding stock risk at good returns as a short term holding. But it doesn't serve the purpose of a long term portfolio because it too frequently will go to 0 and thus can't produce good serial returns. TSM is a terrific vehicle for holding stock risk with much better serial returns, but it doesn't serve the purpose of a long term income investor because it still fluctuates too much in particular it doesn't work as an inflation shield nearly as effectively as other funds. Dividend stocks work well as a source of income and perform particularly well in inflation. But they do a lousy job of allowing options traders to offset highly leveraged options positions so don't act as a good surrogate for VIX.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Ketawa » Sat Jul 22, 2017 11:14 pm

jbolden1517 wrote:
Ketawa wrote:VTSAX is not a "bubble fund". It represents the total stock market, by definition, and includes both growth and value stocks at their appropriate market weight.
First off. The choice of the USA is clearly exclusionary. Something like VTWSX or an MSCI World Index would be "stocks". Picking VTSAX is cherrypicking a particular country fund.
You recommended several funds to implement a high dividend and quality strategy. I compared the U.S. only funds that you recommended to VTSAX, a U.S. only total stock market fund. I compared the global funds that you recommended to VTWSX or VT, which are different share classes of a global total stock market fund.

:oops:

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sat Jul 22, 2017 11:18 pm

willthrill81 wrote:
How on earth did we get from investors misunderstanding what dividends are to XIV? :confused
A "hey look at my hot fund. Why doesn't your strategy do as well as the fund of the week is doing?" type argument that seems to come up rather regularly. Its been a while since I've been on a mutual fund board. Brill (this board's grandfather) isn't still online so I can't link to people saying the same thing about QQQ (or Janus) whenever anyone would talk about different mutual fund strategies two decades ago. I'm not sure it works as well though because understanding the connection between XIV and TSM is likely too theoretical. But the link might not work either since most of the people here don't remember Brill.

I've never been good at dispelling the hot fund argument. I didn't have a good counter to QQQ in the 1990s other than valuations matter. The QQQ investors didn't believe it then and the TSM investors don't believe it now. Any advice?

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Re: Dividend Misunderstandings & Only Spend Return

Post by willthrill81 » Sat Jul 22, 2017 11:24 pm

jbolden1517 wrote:I don't see any reason to pick your bubble fund as the basis for comparison when there are much better bubble funds like XIV I could pick that are far purer.

Or we can deal in the world of reality.
I know you're new around here, but when you say that owning a market-cap weighted fund with $581 billion in it which comprises the entire U.S. stock market, approximately half of all equities on the planet, is a "bubble fund," don't expect anybody to listen to your arguments. There are many people smarter than you and me who have studied investing not only for their lifetimes, but they have studied others' lifetime work on the same subject, and many of them have concluded that owning the entire U.S. stock market in a cap-weighted, ultra-low cost index is the way to go. Deriding it and their work isn't going to get far around here.
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Re: Dividend Misunderstandings & Only Spend Return

Post by edge » Sun Jul 23, 2017 12:03 am

Yet another flaw in your fantasy. No one in retirement should be selling stocks after a 50% market crash. They would be selling their bonds.

Calling the 'total market' the 'hot fund of the week' is astounding. You need to re-examine your thinking. The total market is the benchmark, hence why it is always used for comparison when some 'genius' comes with their back-tested master formula.
jbolden1517 wrote:
Tyler Aspect wrote:I met a fellow the other day that said he plans his retirement with dividend paying stocks. He had the idea if he only used the dividends for living expense, then he will be fine for the retirement. I checked that high dividend stock index is paying 3% dividend at this moment. However, if the stock market crashed by half, then the same dividend yield of 3% even if were it to remain the same will only provide half of the dividend amount pre-crash. (dividend amount = net asset value * dividend yield)

I see this dividend-only concept as a major trap in leading investors into risky portfolio compositions. Typically there are two symptoms: a 100% stock position of dividend paying stocks, or a big portion of high-yield bond funds.
His idea is a good one and he's right. BTW the yield isn't constant. If the stock market crashed by 1/2 the yield goes up to 6%. Now in reality it is likely to go down a bit the year after a 50% stock crash. So his stocks would probably cut dividends 15-20%. So the yields is probably more like 5%. But he's doing a lot better than the people selling stocks at 1/2 off to make ends meat.
Last edited by edge on Sun Jul 23, 2017 12:16 am, edited 2 times in total.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Bfwolf » Sun Jul 23, 2017 12:06 am

jbolden1517 wrote:
Bfwolf wrote:
jbolden1517 wrote:It really isn't that hard to figure out which companies have a reliable yield and choose companies based their ability to provide the dividend. Yield plus quality screens would give you many many companies with a reliable dividend. Which incidentally also outperform the market and at lower risk.
Please select 10 companies that have reliably high yields (> 3%) that will outperform the market and at lower risk. We'll start tracking from day end of when you select the companies.
I'll do you one better I'll list stocks I'm in.

INTC
LAND
GAIN
GMLP
ADC
CTL
TNH
SXCP
VZ
NNA
OHI
(11 in case you want to disqualify)
And I'll add a growth stock which is technically not quite over 3% but was when I bought
GILD
Excellent! We'll take the starting place as the stock price as of end of day Monday 7/24/17 and go from there.

Let's eliminate GMLP (headquartered in Bermuda) and NNA (headquartered in Greece) so we can keep it to all US stocks which we can compare against the US stock market. Still leaves us with 10 stocks (we'll include GILD).

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 12:08 am

willthrill81 wrote:
jbolden1517 wrote:I don't see any reason to pick your bubble fund as the basis for comparison when there are much better bubble funds like XIV I could pick that are far purer.

Or we can deal in the world of reality.
I know you're new around here, but when you say that owning a market-cap weighted fund with $581 billion in it which comprises the entire U.S. stock market, approximately half of all equities on the planet, is a "bubble fund," don't expect anybody to listen to your arguments. There are many people smarter than you and me who have studied investing not only for their lifetimes, but they have studied others' lifetime work on the same subject, and many of them have concluded that owning the entire U.S. stock market in a cap-weighted, ultra-low cost index is the way to go. Deriding it and their work isn't going to get far around here.
I'm well aware Vanguard is pulling in over $1b / day in new assets. Reading your response I'm a little unclear what part of it you don't see as supporting it being a bubble. Lots of establishment endorsement, extremely popular with masses of new investors, dogmatic supporters... Will, that's what bubbles look like. And let me just add indifferent to valuation often combined with strong belief in market efficiency, increasingly hostile to math and contemptuous of counter strategies.

My only problem with the bubble theory is that while USA stocks are high and there are certainly some that are ridiculously overpriced I don't feel that way about the USA market as a whole. I'm getting increasingly sure we are in an ETF/Index fund bubble. I can see that playing out on the margins when I look at individual stocks. But stocks in general aren't exhibiting the kind of crazy you see with bond indexes. So... still haven't made up my mind.

I get that it won't go far around here discussing anything but the fund de jure. It never does. I likely am going to take off. The topic I originally dropped in for isn't being discussed. You might be right and it will be 5 years till we can have a reasonable conversation.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 12:12 am

Bfwolf wrote:
jbolden1517 wrote:
Bfwolf wrote:
jbolden1517 wrote:It really isn't that hard to figure out which companies have a reliable yield and choose companies based their ability to provide the dividend. Yield plus quality screens would give you many many companies with a reliable dividend. Which incidentally also outperform the market and at lower risk.
Please select 10 companies that have reliably high yields (> 3%) that will outperform the market and at lower risk. We'll start tracking from day end of when you select the companies.
I'll do you one better I'll list stocks I'm in.

INTC
LAND
GAIN
GMLP
ADC
CTL
TNH
SXCP
VZ
NNA
OHI
(11 in case you want to disqualify)
And I'll add a growth stock which is technically not quite over 3% but was when I bought
GILD
Excellent! We'll take the starting place as the stock price as of end of day Monday 7/24/17 and go from there.

Let's eliminate GMLP (headquartered in Bermuda) and NNA (headquartered in Greece) so we can keep it to all US stocks which we can compare against the US stock market. Still leaves us with 10 stocks (we'll include GILD).
NNA and GMLP I want for diversification. This is already rather concentrated I don't want to lose yet another industry. They are going to correlate strongly with USA shipping, they are both global providers.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 12:14 am

edge wrote:Yet another flaw in your fantasy. No one in retirement should be selling stocks after a 50% market crash. They would be selling their bonds.
Then you don't get to compare the returns to TSM. You have to compare equity income to a TSM / bond mixture. Different argument entirely.

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Re: Dividend Misunderstandings & Only Spend Return

Post by edge » Sun Jul 23, 2017 12:17 am

Um....so are you advocating that people hold 100% dividend stocks in retirement and...hopefully the dividend carries the day as stocks plummet by half? Your initial psuedo-science posts belied the nuttiness to come!

It is perfectly normal to compare distinct components of a portfolio. The problem is you started to introduce behaviors like 'selling in a crash' that are completely irrelevant.
jbolden1517 wrote:
edge wrote:Yet another flaw in your fantasy. No one in retirement should be selling stocks after a 50% market crash. They would be selling their bonds.
Then you don't get to compare the returns to TSM. You have to compare equity income to a TSM / bond mixture. Different argument entirely.

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Re: Dividend Misunderstandings & Only Spend Return

Post by saltycaper » Sun Jul 23, 2017 12:47 am

jbolden1517 wrote:
I get that it won't go far around here discussing anything but the fund de jure.
I'm not sure if it's the fund de jure, but it is the fund de facto. It can't be the fund du jour because it never runs out.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 6:56 am

edge wrote:Um....so are you advocating that people hold 100% dividend stocks in retirement and...hopefully the dividend carries the day as stocks plummet by half? Your initial psuedo-science posts belied the nuttiness to come!
We tested that in the last bear. In 2008 stocks went down by 56% in the last bear. Dividends dropped by 21% for 2009. Anyone who had established their draw prior to 2006 wasn't seeing a drop in draw. Dividends recovered about 18 months earlier than stock prices. That is the track record. As for psuedo-science and nuttiness, if you are going to use name calling this discussion is over. I don't discuss investing with 3rd graders.

As for the strategy I'm arguing the dividend stocks allow the investor to stay in equity longer. The entire game is to postpone the depletion years as long as possible. The reason people go broke in retirement is they are depleting their assets as the same time they are being hit with inflation and so their draw increases. Their percentage draw jumps sharply. Virtually no portfolio can tolerate a large percentage draw and their income portfolio doesn't last until death. The goal is not to maximize return under all market conditions. The goal is not to feel good. The goal is to avoid the most serious tail risk that income investors actually face, depleting their income before they die. Believing all investors have the same risk profile and thus should be carrying the same stock portfolio is the "nuttiness". Why would you expect investors with different investment objectives to be served by the same portfolio (and no adjusting your percentage of cash like bonds isn't meaningfully changing the risk profile of a portfolio).

If a 30% equity income allows them to hold the other 70% in a balanced growth portfolio, terrific that increases their safety. It probably increases their safety so much that they have almost a 0% chance of not making it across the finish line. If they have to be 90% dividend stocks and only 10% high yield bonds that's a heck of a lot safer then than 40% TSM, 60% high yield bonds to get to the same draw. And certainly much safer than a 3 fund 30% TSM, 20% International index, 50% bonds that act like enhanced cash selling 5% of the portfolio every year on top of whatever the market does.

The type of bonds the 3 fund portfolio uses are low risk very low return. They don't perform well under any circumstances. They do perform quite safely under most circumstances. Which means that if the equity component does badly an investor drawing from the portfolio is going to be rapidly depleting their savings. The portfolios get compared to one another not the components of the portfolios. Equity income allows people to hold a higher percentage of income at lower volatility of return.
edge wrote: It is perfectly normal to compare distinct components of a portfolio. The problem is you started to introduce behaviors like 'selling in a crash' that are completely irrelevant.
How is that irrelevant? The need income they sell under all conditions if their portfolio doesn't generate enough income. The draw is from the portfolio.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 6:57 am

saltycaper wrote:
jbolden1517 wrote:
I get that it won't go far around here discussing anything but the fund de jure.
I'm not sure if it's the fund de jure, but it is the fund de facto. It can't be the fund du jour because it never runs out.
Sorry I'm not sure what that means.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 6:59 am

Ketawa wrote: You recommended several funds to implement a high dividend and quality strategy. I compared the U.S. only funds that you recommended to VTSAX, a U.S. only total stock market fund. I compared the global funds that you recommended to VTWSX or VT, which are different share classes of a global total stock market fund.
No you didn't. You didn't pick periods of poor performance, especially poor performance due to inflation. You didn't include the a high bond mixture, if you agree with edge's point (and its fine if you don't prior to this we were discussing selling equity vs. dividends) and you didn't include the draw's effect on performance which is going to punish volatility more severely. What you demonstrated was that when growth stocks are hot, especially float growing growth stocks, then float based growth stock strategies do better than a value tilt.

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Re: Dividend Misunderstandings & Only Spend Return

Post by edge » Sun Jul 23, 2017 7:10 am

It is irrelevant because if you designed your portfolio such that you are forced to sell equities during a downturn, then you did it wrong.

Anyone who creates fantasies like you have earlier in the thread with make-believe math should get some thicker skin.

Summary of argument:

1). Create pseudo math to show dividend stocks perform better in a made up scenario that didn't happen
2). Others show that this performance example isn't real
3). Now the TSM is a 'hot fund' and it isn't performance that is important, it is not having to sell in a downturn.
4). Cannot produce a real scenario that shows having to sell in a downturn.

If you can't see how irritating it is to deal with shifting slippery ever changing and continually misguided reasoning there is no helping it.

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Re: Dividend Misunderstandings & Only Spend Return

Post by edge » Sun Jul 23, 2017 7:22 am

Having cake and eating it too? I believe this timeframe included the financial crisis - which is the time period that you used in other examples to show the superiority of your approach.

Now suddenly it is a 'cherry picked' time scale (which I believe was simply ten years)?
jbolden1517 wrote:
Ketawa wrote: You recommended several funds to implement a high dividend and quality strategy. I compared the U.S. only funds that you recommended to VTSAX, a U.S. only total stock market fund. I compared the global funds that you recommended to VTWSX or VT, which are different share classes of a global total stock market fund.
No you didn't. You didn't pick periods of poor performance, especially poor performance due to inflation. You didn't include the a high bond mixture, if you agree with edge's point (and its fine if you don't prior to this we were discussing selling equity vs. dividends) and you didn't include the draw's effect on performance which is going to punish volatility more severely. What you demonstrated was that when growth stocks are hot, especially float growing growth stocks, then float based growth stock strategies do better than a value tilt.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 8:25 am

edge wrote:Having cake and eating it too? I believe this timeframe included the financial crisis - which is the time period that you used in other examples to show the superiority of your approach.

Now suddenly it is a 'cherry picked' time scale (which I believe was simply ten years)?
That timeframe was the period of time when the united states experienced a surge in inflation. The last 10 years what not such a time frame. If we are discussing how a portfolio does under a particular economic threat, the most serious common economic threat for income investors, you want to look at periods where that threat was occurring not timeframes when it wasn't. You are picking a timeframe when value is likely to do badly since interest rates have been low and stable.
http://www.efficientfrontier.com/ef/701/value.gif

That would be like someone in 1980 talking about how collectables outperform stocks by looking at the last 10 years.

Earning a little extra on your portfolio during good time is nice. Always good to pass some money on to the grandkids. Losing a chance of that doesn't compensate for having your portfolio run out before you die and living out your last decade in grinding poverty. If you want to talk about dividend strategies compare them to TSM at times where they are doing what they need to do, shield income investors from bankruptcy during inflation surges. The 1940s are also fine. The Inflation after 1896 is fine. But the last decade is not because we didn't have an inflation surge.

The fact that the portfolios did almost as well as TSM in a market condition for which they weren't designed to thrive is a tribute to how robust they are. Your evidence is proving the opposite of what you think it does.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 9:07 am

edge wrote:It is irrelevant because if you designed your portfolio such that you are forced to sell equities during a downturn, then you did it wrong.

Anyone who creates fantasies like you have earlier in the thread with make-believe math should get some thicker skin.

Summary of argument:

1). Create pseudo math to show dividend stocks perform better in a made up scenario that didn't happen
2). Others show that this performance example isn't real
3). Now the TSM is a 'hot fund' and it isn't performance that is important, it is not having to sell in a downturn.
4). Cannot produce a real scenario that shows having to sell in a downturn.

If you can't see how irritating it is to deal with shifting slippery ever changing and continually misguided reasoning there is no helping it.
Edge you have crossed over into deliberate dishonesty. The math showed exactly what happens in real life. Dividend stability generates higher total return. The pseudo math was treating stocks like a bank account and pretending that companies don't make money so a dividend just subtracts forever from the stock price. The last version of the math showed the one day price drop didn't change the scenario.

The performance gain for value stocks doesn't occur in every decade. No one ever argued it did. Dividends by themselves are a bad proxy for value. Generally dividend strategies to work for total return require other factors. This keeps getting argued and conceded as if it were some new point.

I most definitely assert that TSM is a particularly bad choice because right now it is the hot fund. That biases the data. If you insist on an index use a different index that's more interesting. VPACX is a nice Vanguard index fund that has had terrible performance. What would be happening to a Japanese investor who followed your advice living off out their retirement years holding the market portfolio? But not only are you insisting on a particular index you are insisting on a particular time period where the events that cause dividend stability to be important aren't happening. And then arguing, "see they don't happen". We haven't had severe wars recently that doesn't mean that an investor doesn't need to consider how their portfolio performs in war, because over the course of a retirement war is a real threat.

As for a real scenario. One that happened to many people. The 1973-4 bear and the years after where assets didn't keep up. Stocks go -50%+ inflation adjusted. Bonds don't keep up with inflation. Dividend investors are +17% during those 2 years and trail inflation by 1%. 2008, was also was a good demonstration because TSM as a fund existed. TSM down 56%. Dividends are down 21%. Dividends recover 18 months sooner. The dividend investor does less damage to their portfolio by selling than the TSM investor. Even with your rules about only looking at the latest time period and only looking at the hottest index your argument still runs into the fact that dividends proved their relative value. Now in the years after that, everything does well so the damage wouldn't have mattered much almost regardless of strategy. We didn't have a repeat of the 1930s where the depression in investments lasted a decade. Had we though, your TSM investor has gone broke. Their semi-safe 4% draw has turned into a devastating 8% draw for years.


As for slippery there is nothing slippery about the argument. Its been the same arguments for this entire thread.
  1. Dividend payments are more stable than stock prices. Getting a dependable stable income from dividends is so much safer than getting a dependable stable income from selling non-dividend paying growth stocks.
  2. Safety, lower volatility, translates into a higher possible safe draw.
  3. The higher the safe draw the lower the tail risk on a lower fixed draw of a portfolio not lasting till death.
If you want to turn this into testable math, utility is a log function on annual spending. Your goal is to maximize average utility not maximize average return. Test against your cap weighted portfolio using rolling 30 year time periods.
Last edited by jbolden1517 on Sun Jul 23, 2017 9:13 am, edited 1 time in total.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Bfwolf » Sun Jul 23, 2017 9:10 am

jbolden1517 wrote:NNA and GMLP I want for diversification. This is already rather concentrated I don't want to lose yet another industry. They are going to correlate strongly with USA shipping, they are both global providers.
How about you pick 2 other stocks HQed in the USA then? We don't need currency fluctuations gumming up the works.

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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Sun Jul 23, 2017 9:32 am

VHDYX (Vanguard High Dividend Yield Index Fund) sold off in 2008.
Just as badly as the TSM & S & P 500 Funds. In researching why, I
found out that their sector diversification was off. Financial sector %
was way to high of a mix. (Vanguard has since fixed this problem &
brought down their Finance sector %). That said, in the next recession
I don't think it will sell off as much? And hopefully the dividend cushion
will protect the fund better?

I would not recommend 100% VHDYX. Maybe the perfect mix (AA)
would be 60/40, 70/30 maybe 80/20. Everyone is different. All
Boglehead rules still apply! As a whole...Big Blue Chip stocks
(Hugh Valuation), VHDYX is a very practical fund.

You could make this a Jack Bogle approved "Balance Fund". This
has Boglehead written all over it. Basically you would be designing
your own "Wellington Fund", using your specific AA instead of
Wellington's 63/37 AA. You would be using 2 index funds. VHDYX
+ your bond index fund to make a balanced fund only of
dividend paying blue chip stocks.

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 10:06 am

Bfwolf wrote:
jbolden1517 wrote:NNA and GMLP I want for diversification. This is already rather concentrated I don't want to lose yet another industry. They are going to correlate strongly with USA shipping, they are both global providers.
How about you pick 2 other stocks HQed in the USA then? We don't need currency fluctuations gumming up the works.
USA has a different shipping structure than international which leads to different dividend payouts. I can't just find equivalent USA stocks. Same reason I'm 100% in American pipeline companies and not any Russian ones. You are (maybe) testing my stock picking and I avoid industries for decades at a time and then dive in heavy when I like the stocks. I'm not looking for best in sector like a mutual fund would (and rightfully so if I'm paying them 1% part of what I'm paying for is diversification that would be annoying to do on my own). I probably could find more USA dividend stocks, but I'm not that invested in this test.

Moreover, I'm not sure exactly what we are testing here. Mostly I figured we were testing a dividend strategy. Given a portfolio this non-diversified (I'm not running a mutual fund) and there are only about 4 industries you are going to have all sorts of issues gumming up the works. Particular litigation could move an equal weighted portfolio like this 15%. A single M&A could be +8%. The pipeline guys are going to swing wildly with 2019 energy prices. If those come high especially if 2020 look similar they take off like a rocket and they might not have better than a 3% yield anymore. If next year I get 100+% return off changes in pipeline demand I beat TSM for sure. But is that really a fair test? If those come in too low they might not be able to maintain the dividend in 2018 and disqualify in the other direction, USA pipeline capacity is way above current demand that's why I picked them up cheap. I'm sure if they crash and burn you'll consider that a fair test. :D Gilead scientific goes up another 15% and I'll look for a spot to sell off my upside (covered call). At that point do I just tell you what I got and the price or do you want to shadow trade the option? Verizon is not going to be a long term holding I don't think. When I sell what do you do? Some of these companies are too small for mutual funds to even invest in. This is way more large cap than normal because of Gilead, Verizon, Century Link and Intel. But that's chance because of when you asked the question. The small cap bias is likely to reassert itself in coming months. How much small cap vs. large cap is gumming up your test?

Currency fluctuations are the least of your problems for running this test. You have non systematic stuff gumming up the works everywhere confusing the discussion of what you want to test with my personal taste in stocks (I like depressed hard assets with lots of debt where I don't think the bondholders are marking the assets at full value for buyout, with a high chance of an earnings spike in out-of-favor industries). A lot of those stocks happen to have high dividends and certainly I consider the dividend to be a sign of insider confidence. If I can justify their confidence, its a buy. Many of these companies are too small for a mutual fund. You want to track this portfolio, you'll get to see how value works. But don't think you have any chance for controlling for random variables. The final result over any sane timeframe is a crap shoot.

This isn't diversified. The non systematic risk doesn't bother me because it is unlikely to correlate with the other non-systematic risks I'm taking all over the rest of the portfolio investing in many other things. After all, while this thread is about income investors, I'm not one. And for reasons I'm not getting into I may never be one. So if we are doing this. What is it you are testing?

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Ketawa
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Re: Dividend Misunderstandings & Only Spend Return

Post by Ketawa » Sun Jul 23, 2017 10:43 am

jbolden1517 wrote:Moreover, I'm not sure exactly what we are testing here. Mostly I figured we were testing a dividend strategy. Given a portfolio this non-diversified (I'm not running a mutual fund) and there are only about 4 industries you are going to have all sorts of issues gumming up the works.

...

This isn't diversified. The non systematic risk doesn't bother me because it is unlikely to correlate with the other non-systematic risks I'm taking all over the rest of the portfolio investing in many other things. After all, while this thread is about income investors, I'm not one. And for reasons I'm not getting into I may never be one. So if we are doing this. What is it you are testing?
I agree, this isn't a useful exercise.

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Ketawa
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Re: Dividend Misunderstandings & Only Spend Return

Post by Ketawa » Sun Jul 23, 2017 11:01 am

jbolden1517 wrote:2008, was also was a good demonstration because TSM as a fund existed. TSM down 56%. Dividends are down 21%. Dividends recover 18 months sooner. The dividend investor does less damage to their portfolio by selling than the TSM investor. Even with your rules about only looking at the latest time period and only looking at the hottest index your argument still runs into the fact that dividends proved their relative value. Now in the years after that, everything does well so the damage wouldn't have mattered much almost regardless of strategy. We didn't have a repeat of the 1930s where the depression in investments lasted a decade. Had we though, your TSM investor has gone broke. Their semi-safe 4% draw has turned into a devastating 8% draw for years.
I don't really understand how you can make this argument, while simultaneously saying this in another thread.
jbolden1517 wrote:The price for a stock is ultimately the discounted value of its stream of future dividends (including a final M&A payout as a dividend). Stocks that never pay dividends are worth $0. Investors in the aggregate have already lost whatever the current market cap of that company, they just haven't realized those loses yet. The only question is how those loses are going to be distributed among investors.
The whole point of this thread is that looking at dividends alone is a logical fallacy. In the 2008 downturn, I'll take it on faith that dividend payments themselves were only down 21%. However, if the price of a stock is the discounted value of its stream of future dividends, then you also have to take the market price into account, because that is telling you very valuable information about what the market thinks about the ability of those high dividend paying companies to continue paying the dividend. As you stated, investors in the aggregate have already lost whatever the current market cap of that company, they just haven't realized those loses yet. That is true for companies that will never return value to shareholders (but who cares, it's impossible to know ex ante), and it's true for companies that the market thinks will not be able to keep up their dividend payments.

Here are some results comparing Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) to Vanguard Equity Income Fund Admiral Shares (VEIRX).

Link to Portfolio Visualizer

Max drawdown (both November 2007 to February 2009)
VTSAX: -51%
VEIRX: -49%
VEIRX recovered by January 2012, a whole 1 month earlier than VTSAX in February 2012.

The market as a whole valued the future income stream as basically the same as the total stock market. A difference in drawdown of 2% (in this one, who knows what the next one holds) does not make a dividend or income strategy more resilient enough to counter the lower diversification and decreased tax efficiency over the very long term. For investors interested in a value strategy, it would be better to invest in an actual value fund rather than a dividend fund.

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patrick013
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Re: Dividend Misunderstandings & Only Spend Return

Post by patrick013 » Sun Jul 23, 2017 11:24 am

Ketawa wrote:Honestly people, judge for yourself the performance of these funds that are supposedly lower risk and/or higher return than the total stock market, simply from using a high dividend and quality screen.
I base my optimism on several things. Yield weighted or equal weighted funds
and not so much the dividend size weighted funds, and definitely not the cap
weighted as all the VG dividend funds are AFAIK.

So I have a 50 plus year study and current 10 year figures on certain indexes. And
once again, the yield and equal weighted dividend indexes are doing just fine when
50 year and 10 year total returns are tabulated and compared to TSM or the 500.

SCHD has 100 stocks and should perform well.
SPYD is new but is one of the closest at replicating studies.

NOBL is a surprise and has a built in quality factor not specified in any study
and should keep strong value in anybody's portfolio.
SPHD is new and has good weighting, low volatility for diversification, and it's
index has beat the 500 by over 4% the last 10 years. So I'm looking for a good
entry point to buy that someday.

So like I said I'm basing my optimism on 50 and 10 year TR and also on how close
a fund replicates the original dividend stock studies. Have to buy these long term
as in and out won't make it right. In an investment grade portfolio I'd tilt one of
them 10% with a good entry point. Not hedging anything just buy and hold. :)
age in bonds, buy-and-hold, 10 year business cycle

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Re: Dividend Misunderstandings & Only Spend Return

Post by jbolden1517 » Sun Jul 23, 2017 11:38 am

snarlyjack wrote:VHDYX (Vanguard High Dividend Yield Index Fund) sold off in 2008.
Just as badly as the TSM & S & P 500 Funds.
For the first 3 quarters of 2008 it paid .14 / share
The next two years dividend averaged .093 dividend was down 1/3rd. That's much worse than average but you aren't guaranteed you will only lose the average in a bear market. The share price was down about 50% worse than average for value but not much worse. Over the next year the dividend rapidly recovered and by 4Q2011 it was over .14/share. 2012 the average payout per quarter is over .15. 2013 it skyrockets and an investor is getting well over .17 / share.... So an income investor in this fund had to make up a shortfall of income of 1/3rd for 2 years and after that they were made more than whole. Interestingly the stock price for this fund recovered faster than average for equity income and by mid 2011 it was back where it had been prefall. So VHDYX demonstrates:

a) You can have real differences with the market (your point about the financial sector explains it, that was the sector at the center of the bear).
b) The stability of dividend yield relative to share-price even in this case. The yield was more stable. The share price recovered on this fund so much faster than average that it beat the dividend. This is a counter example of the general trend.
snarlyjack wrote: In researching why, I found out that their sector diversification was off. Financial sector %
was way to high of a mix. (Vanguard has since fixed this problem & brought down their Finance sector %). That said, in the next recession I don't think it will sell off as much? And hopefully the dividend cushion will protect the fund better?)
Depends on the type of recession. An inflationary one yes, a deflationary one like 2008, no. Remember equity income is designed to protect income not total return. In a deflationary recession elderly people are experiencing a decline in cost of living. That's not a serious threat to them. What is a serious threat is a sudden surge in cost of living.
snarlyjack wrote: You could make this a Jack Bogle approved "Balance Fund". This has Boglehead written all over it. Basically you would be designing your own "Wellington Fund", using your specific AA instead of Wellington's 63/37 AA. You would be using 2 index funds. VHDYX + your bond index fund to make a balanced fund only of dividend paying blue chip stocks.
The typical Boglehead bond position are intermediate term high quality bonds. These bonds are essentially better cash with a little bit of duration risk and credit risk (the duration risk and credit risk are grossly overpriced so makes sense to take them which is why I call it better cash). In an inflation these bonds will drag as cost of living increases. Not by much but a slight negative real return or just better than breaking year after year after year. In normal times they don't do much better than cash and the low returns drag. 2% / yr over 20 years knocks the portfolio down by 1/3rd. And in deflation when your equity income is in real danger they don't skyrocket. This gets off the topic of dividends and into the topic of portfolio theory but these types of bonds make no sense.

If you are going to build your own asset allocation I'd pick better bonds with higher yield and less stability designed to complement the risk associated with equity income. The intermediate bond index fund won't do that. Like cash it dilutes it doesn't diversify. For a long term investor a substantial holding in high quality intermediates is bad in all situations.

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Re: Dividend Misunderstandings & Only Spend Return

Post by edge » Sun Jul 23, 2017 12:23 pm

Ehhh. No. If by 'real life' you mean 'a scenario you invented' then fine.

You created a straw man where if two investors had 100% equities then the TSM investor would have had to sell more in a downturn. And the response is that this is a very bad strawman. In a major downturn the fixed income of a portfolio would be the component getting sold since it would be overweight.

I concede that if a typical retiree was going to be borderline insane and have an equities only portfolio then a dividend one might be better.

Btw, building a portfolio on the 1970s is probably a terrible idea.

Re your last comments - good luck as a bond trader. LOL. If so much of your advice boils down to 'picking the right Individual securities ' it is going to engender a raft of LOLs.

jbolden1517 wrote:
edge wrote:It is irrelevant because if you designed your portfolio such that you are forced to sell equities during a downturn, then you did it wrong.

Anyone who creates fantasies like you have earlier in the thread with make-believe math should get some thicker skin.

Summary of argument:

1). Create pseudo math to show dividend stocks perform better in a made up scenario that didn't happen
2). Others show that this performance example isn't real
3). Now the TSM is a 'hot fund' and it isn't performance that is important, it is not having to sell in a downturn.
4). Cannot produce a real scenario that shows having to sell in a downturn.

If you can't see how irritating it is to deal with shifting slippery ever changing and continually misguided reasoning there is no helping it.
Edge you have crossed over into deliberate dishonesty. The math showed exactly what happens in real life. Dividend stability generates higher total return. The pseudo math was treating stocks like a bank account and pretending that companies don't make money so a dividend just subtracts forever from the stock price. The last version of the math showed the one day price drop didn't change the scenario.

The performance gain for value stocks doesn't occur in every decade. No one ever argued it did. Dividends by themselves are a bad proxy for value. Generally dividend strategies to work for total return require other factors. This keeps getting argued and conceded as if it were some new point.

I most definitely assert that TSM is a particularly bad choice because right now it is the hot fund. That biases the data. If you insist on an index use a different index that's more interesting. VPACX is a nice Vanguard index fund that has had terrible performance. What would be happening to a Japanese investor who followed your advice living off out their retirement years holding the market portfolio? But not only are you insisting on a particular index you are insisting on a particular time period where the events that cause dividend stability to be important aren't happening. And then arguing, "see they don't happen". We haven't had severe wars recently that doesn't mean that an investor doesn't need to consider how their portfolio performs in war, because over the course of a retirement war is a real threat.

As for a real scenario. One that happened to many people. The 1973-4 bear and the years after where assets didn't keep up. Stocks go -50%+ inflation adjusted. Bonds don't keep up with inflation. Dividend investors are +17% during those 2 years and trail inflation by 1%. 2008, was also was a good demonstration because TSM as a fund existed. TSM down 56%. Dividends are down 21%. Dividends recover 18 months sooner. The dividend investor does less damage to their portfolio by selling than the TSM investor. Even with your rules about only looking at the latest time period and only looking at the hottest index your argument still runs into the fact that dividends proved their relative value. Now in the years after that, everything does well so the damage wouldn't have mattered much almost regardless of strategy. We didn't have a repeat of the 1930s where the depression in investments lasted a decade. Had we though, your TSM investor has gone broke. Their semi-safe 4% draw has turned into a devastating 8% draw for years.


As for slippery there is nothing slippery about the argument. Its been the same arguments for this entire thread.
  1. Dividend payments are more stable than stock prices. Getting a dependable stable income from dividends is so much safer than getting a dependable stable income from selling non-dividend paying growth stocks.
  2. Safety, lower volatility, translates into a higher possible safe draw.
  3. The higher the safe draw the lower the tail risk on a lower fixed draw of a portfolio not lasting till death.
If you want to turn this into testable math, utility is a log function on annual spending. Your goal is to maximize average utility not maximize average return. Test against your cap weighted portfolio using rolling 30 year time periods.

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