Living Off Dividends

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
CantPassAgain
Posts: 432
Joined: Fri Mar 15, 2013 8:49 pm

Re: Living Off Dividends

Post by CantPassAgain » Mon Jul 31, 2017 4:03 pm

TJSI wrote:Generally, corporations are not valued by cash on hand. It is the ability to generate revenue, earnings, and cash that gives a corporation value. Only if the divided payment impairs this ability does it reduce value . If a corporation makes the correct capital budget decisions, dividends don't reduce value.

In the case of bankruptcy, takeovers, and dissolution cash on hand will effect valuation. And there is special case where a company has such a hoard of excess cash that the potential of something happening will effect valuation--in a positive manner.

It is either the payment of dividends or the potential payment which gives value.

TJSI

(nasaid, I am glad that the transmutation is not complete. But check carefully before you go to bed at night for pods as Larry is very persistent.)
There are lots of ways to value a company, and yes, cash on the books should be counted towards that value. Along with PP&E, inventory, goodwill, and all of the other assets on the balance sheet minus liabilities.

Now I am not saying that GAAP book value is exactly appropriate but surely one can see that a company that has 5 billion in cash is worth more than a company that has a couple million, all else being equal.

User avatar
patrick013
Posts: 1889
Joined: Mon Jul 13, 2015 7:49 pm

Re: Living Off Dividends

Post by patrick013 » Mon Jul 31, 2017 4:28 pm

CantPassAgain wrote:
patrick013 wrote:
CantPassAgain wrote:
So anyone with any sense should know the company is now worth whatever it was before, minus the dividend payment.

This is independent of anything else going on with the earnings of the company.
The payout ratio is less than total cash flow or earnings so the wealth of the
shareholder increases.
Company book worth still increases by the amount
of profits not paid out as a dividend. The value of the company's production
has not decreased supporting the share price. The company is not crippled in
any way. It's in the annual plan and 5 year plan for the company to perform a
dividend policy. If all goes well the stock price will reflect the dividend and
on going production value in it's price above book value. Either kept or retained
the investors got the amount of the dividend as return.
Obviously if earnings are greater then the dividend then there will be a net equity increase and increase in shareholder value. No one is arguing that. Let me ask you a question about your hypothetical above: what if the company retained the dividend instead of paying it out?
Assuming it's a value stock assign a PE accomodative for a value stock. Perhaps 15 PE.
Slightly more for a quality balance sheet (AA bond rating) and slightly less for a BBB bond
rating. Just using bond ratings for quality examples. The investor has actually lost
a large part of the return but with low growth the PE needs to stay low. The PE - earnings
relationship is very strong and pretends to value the company at a proper price as tho
an PV discount calc was applied. Ongoing programs that adjust cash up or down don't
make alot of difference as long as earnings and cash progress is being made. Whether you're
at the start of infinity or the end of infinity that's the price today in the current market of
the company with $$$ so much earnings and future growth.

A stock with zero or less earnings actually has zero value except for scrap or liquidation
value per share.
age in bonds, buy-and-hold, 10 year business cycle

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Living Off Dividends

Post by avalpert » Mon Jul 31, 2017 5:15 pm

patrick013 wrote:
CantPassAgain wrote:
patrick013 wrote:
CantPassAgain wrote:
So anyone with any sense should know the company is now worth whatever it was before, minus the dividend payment.

This is independent of anything else going on with the earnings of the company.
The payout ratio is less than total cash flow or earnings so the wealth of the
shareholder increases.
Company book worth still increases by the amount
of profits not paid out as a dividend. The value of the company's production
has not decreased supporting the share price. The company is not crippled in
any way. It's in the annual plan and 5 year plan for the company to perform a
dividend policy. If all goes well the stock price will reflect the dividend and
on going production value in it's price above book value. Either kept or retained
the investors got the amount of the dividend as return.
Obviously if earnings are greater then the dividend then there will be a net equity increase and increase in shareholder value. No one is arguing that. Let me ask you a question about your hypothetical above: what if the company retained the dividend instead of paying it out?
Assuming it's a value stock assign a PE accomodative for a value stock. Perhaps 15 PE.
Slightly more for a quality balance sheet (AA bond rating) and slightly less for a BBB bond
rating. Just using bond ratings for quality examples. The investor has actually lost
a large part of the return but with low growth the PE needs to stay low. The PE - earnings
relationship is very strong and pretends to value the company at a proper price as tho
an PV discount calc was applied. Ongoing programs that adjust cash up or down don't
make alot of difference as long as earnings and cash progress is being made. Whether you're
at the start of infinity or the end of infinity that's the price today in the current market of
the company with $$$ so much earnings and future growth.

A stock with zero or less earnings actually has zero value except for scrap or liquidation
value per share.
We are now in the reification fallacy stage of the proceedings.

I never cease to be amazed that intelligent people can actually buy this. They are essentially saying if a company that sold widgets happened to own a trillion dollars in gold bricks, their stock value wouldn't change if they handed those bricks out to strangers on the street because it doesn't impact their widget earnings...

Bfwolf
Posts: 1645
Joined: Thu Oct 14, 2010 11:19 am

Re: Living Off Dividends

Post by Bfwolf » Mon Jul 31, 2017 5:51 pm

patrick013 wrote:
Bfwolf wrote:
patrick013 wrote:
nedsaid wrote:A dividend payment represents a liquidation of company assets and the market knows that.
Some people say a stock is devalued by dividends but the dividend is either
paid out of retained earnings or some payout ratio of current earnings so
the stock is really at a stable value cash wise and has earnings power supporting
it's current price.
This is not a "some people say" thing. This is how it works. A company with a million less dollars due to a dividend distribution is worth a million dollars less when valued by the stock market.
Not so at all, it might even be worth more.
Why don't you give me a million dollars then? It won't impact your ability to earn more money with your human capital (the core of the patrick013 company). You might be worth more after you give me a million dollars!

TropikThunder
Posts: 647
Joined: Sun Apr 03, 2016 5:41 pm

Re: Living Off Dividends

Post by TropikThunder » Mon Jul 31, 2017 6:14 pm

mega317 wrote:I'm sorry I can't find it to link, but someone in a recent dividend thread showed the NAV an index fund decreasing by more than the index it tracks by exactly the magnitude of the dividend.
That was me. :D
TropikThunder wrote:
Phineas J. Whoopee wrote: It must be, and in fact is, the case that on the ex-dividend date the price falls by the amount of the dividend, even though other market movements may make it hard to see.
PJW
It's actually not that hard to see, as I showed in my example for VTSAX. You can tease out the Dividend (posted on the mutual fund site) and the Capital Appreciation (shown by the daily change in the index tracked) and they are clearly additive.
TropikThunder wrote:
  • - Close 06-20 (Tue): VTSAX $60.77 (-$0.72, -1.17%) ............................................... CSRP 1,809.69 (-12.86, -0.71%)
    - Close 06-20 (Tue): VTSAX $60.77 [-$0.28 div, -0.46%] + [-$0.44 capital, -0.72%]............CSRP 1,809.69 (-12.86, -0.71%)
The closer the fund tracks its index (tracking error), the more clearly you can see the Capital Appreciation portion.
I was about to chime in in response to another with the above info when I saw your post.
patrick013 wrote: That's because the money was put in and taken out usually in what ? a 45 day period. Doesn't address the value of the stocks in the fund otherwise and their increase in value due to price appreciation.
It absolutely DOES address this. The NAV of a fund is based on the stock prices of the underlying holdings (obviously). In my example above, none of the stocks in VTSAX paid a dividend on June 20th, but the FUND did (distributing the collected dividends that the constituent companies distributed that quarter). Therefore, the CSRP index reflects the aggregate change in stock price of all the companies in the index (in this case, -0.71%). The FUND however, reflects both the change in stock price of the constituent companies (-0.71%) plus the change in NAV of the fund itself due to the dividend (-0.46%) to give the overall change in NAV for the fund (-1.17%).
  • - Stock pays a dividend, stock price declines by dividend amount at open (and changes during the day due to regular market forces.
    - Fund pays a dividend, fund NAV declines by dividend amount at open (and changes during the day due to regular market forces.
It really is that simple.

TropikThunder
Posts: 647
Joined: Sun Apr 03, 2016 5:41 pm

Re: Living Off Dividends

Post by TropikThunder » Mon Jul 31, 2017 6:27 pm

CantPassAgain wrote: Obviously if earnings are greater than the dividend then there will be a net equity increase and increase in shareholder value. No one is arguing that. Let me ask you a question about your hypothetical above: what if the company retained the dividend instead of paying it out?
I'm trying to find a way to chart the total return of a fund that pays a dividend (VTSAX) vs the exact same fund without the dividend (Total Stock Market Index Trust) but I can't find a ticker for the CIT version (cuz they don't have tickers :| ). It's my understanding though that they track the same except for ER.

User avatar
nedsaid
Posts: 8858
Joined: Fri Nov 23, 2012 12:33 pm

Re: Living Off Dividends

Post by nedsaid » Mon Jul 31, 2017 6:34 pm

Let me try one more time. Companies are primarily valued as a multiple of their earnings streams. The market also looks at the balance sheet as a secondary consideration, items like cash. If the market "forgot" about past dividends paid then higher cash levels would not tend towards higher P/E's. In other words, stock price takes into consideration the amount of cash on the balance sheet.

If a company has a market price of $10.00 a share, and the stock goes ex-dividend at $0.50 a share; all other things being equal, the stock price should drop to $9.50 a share. The market does not "forget" about the $0.50 dividend per share that was paid. If there was great news about the company on that day, the stock might shoot up from $10.00 a share to $11.00 a share. Even with the great news, the price would have ended at $11.50 a share had there been no dividend.

I used to believe that after a while the market would "forget" about past dividends and focus on earnings and thus the earnings multiple. What swung me around was that higher levels of cash on the balance sheet tend towards higher P/E ratios. The market puts a multiple on the earnings and then takes into consideration the cash (and other assets) on the balance sheet. Again, the more cash on the balance sheet, the higher the P/E ratio tends to be. Markets are pretty darned smart. A dividend is not "free money."
A fool and his money are good for business.

CantPassAgain
Posts: 432
Joined: Fri Mar 15, 2013 8:49 pm

Re: Living Off Dividends

Post by CantPassAgain » Mon Jul 31, 2017 6:34 pm

Bfwolf wrote:Why don't you give me a million dollars then? It won't impact your ability to earn more money with your human capital (the core of the patrick013 company). You might be worth more after you give me a million dollars!
It's magic! :mrgreen:

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Mon Jul 31, 2017 6:37 pm

TropikThunder wrote:- Stock pays a dividend, stock price declines by dividend amount at open (and changes during the day due to regular market forces.
- Fund pays a dividend, fund NAV declines by dividend amount at open (and changes during the day due to regular market forces.[/list]
It really is that simple.
No it isn't that simple. That's one of the big mistakes the anti-dividend crowd makes thinking of dividends like drawing money from a savings account. Of course the day the dividend is paid, that's pretty much what happens. The company has accumulated money and then day of dividend creates a liability that is mostly cleared within a few days by an extraction of cash.

But when dividend people talk about the advantages of dividends that's not what they are talking about. What they are talking about is how a company structures its business operations and liabilities over the years to make that accumulation of money a stable and growing phenomenon. Companies that structure themselves so that they can pay a substantial dividend are different than companies that don't structure themselves in this way. They have to manage their cashflow much more conservatively. And that much more conservative management of their cashflow makes the company's cashflow more stable (not shockingly). That more stable cashflow allows the company to slash the annual return volatility of the stock by converting a highly volatile asset (the future earnings yield as an estimate of future dividend yield) into a much less volatile asset (current yield).

TropikThunder
Posts: 647
Joined: Sun Apr 03, 2016 5:41 pm

Re: Living Off Dividends

Post by TropikThunder » Mon Jul 31, 2017 6:55 pm

jbolden1517 wrote: But when SOME dividend people talk about the advantages of dividends that's not what they are talking about. What they are talking about is how a company structures its business operations and liabilities over the years to make that accumulation of money a stable and growing phenomenon. Companies that structure themselves so that they can pay a substantial dividend are different than companies that don't structure themselves in this way. They have to manage their cashflow much more conservatively. And that much more conservative management of their cashflow makes the company's cashflow more stable (not shockingly). That more stable cashflow allows the company to slash the annual return volatility of the stock by converting a highly volatile asset (the future earnings yield as an estimate of future dividend yield) into a much less volatile asset (current yield).
I completely accept this pro-dividend argument (I really don't like "pro-dividend" v "anti-dividend", I prefer "dividend-rational" v "dividend-irrational") in that some companies that pay a consistent dividend effectively structure their cash flow and management to insure the funds to pay the dividend are available. I think this is the best description I've read of how dividend payers are different, and how that contributes to their value. I separate this rational, reasoned analysis from the "dividend-irrational" argument that focuses on yield and yield alone without any regard for the fundamentals of the underlying companies. That irrational argument posits that regardless of any other differences between two funds, the one with the higher yield is better as if the dividend itself was the factor, not the underlying value or quality.

My mathematical example was more intended to counter the argument that you can't see the effect of the dividend amongst the noise of daily price fluctuations. jbolden1517, I must admit, I don't understand a lot of your posts (and don't agree with some of the ones I do), but your rigor and thoroughness are a benefit to this forum and I hope even those who disagree with you can see that.

User avatar
patrick013
Posts: 1889
Joined: Mon Jul 13, 2015 7:49 pm

Re: Living Off Dividends

Post by patrick013 » Mon Jul 31, 2017 7:02 pm

CantPassAgain wrote:
Bfwolf wrote:Why don't you give me a million dollars then? It won't impact your ability to earn more money with your human capital (the core of the patrick013 company). You might be worth more after you give me a million dollars!
It's magic! :mrgreen:
I'll just declare a liquidating dividend per share. Can't price it on output
just some quick assets per share.

:)

But I don't think we need to run away from dividends for a price increase and
decrease lasting a very short time. When they declare the dividend doesn't
the price increase before it decreases. It used to.
age in bonds, buy-and-hold, 10 year business cycle

CantPassAgain
Posts: 432
Joined: Fri Mar 15, 2013 8:49 pm

Re: Living Off Dividends

Post by CantPassAgain » Mon Jul 31, 2017 7:09 pm

patrick013 wrote:When they declare the dividend doesn't
the price increase before it decreases. It used to.
No

User avatar
nedsaid
Posts: 8858
Joined: Fri Nov 23, 2012 12:33 pm

Re: Living Off Dividends

Post by nedsaid » Mon Jul 31, 2017 7:14 pm

jbolden1517 wrote:
TropikThunder wrote:- Stock pays a dividend, stock price declines by dividend amount at open (and changes during the day due to regular market forces.
- Fund pays a dividend, fund NAV declines by dividend amount at open (and changes during the day due to regular market forces.[/list]
It really is that simple.
No it isn't that simple. That's one of the big mistakes the anti-dividend crowd makes thinking of dividends like drawing money from a savings account. Of course the day the dividend is paid, that's pretty much what happens. The company has accumulated money and then day of dividend creates a liability that is mostly cleared within a few days by an extraction of cash.

But when dividend people talk about the advantages of dividends that's not what they are talking about. What they are talking about is how a company structures its business operations and liabilities over the years to make that accumulation of money a stable and growing phenomenon. Companies that structure themselves so that they can pay a substantial dividend are different than companies that don't structure themselves in this way. They have to manage their cashflow much more conservatively. And that much more conservative management of their cashflow makes the company's cashflow more stable (not shockingly). That more stable cashflow allows the company to slash the annual return volatility of the stock by converting a highly volatile asset (the future earnings yield as an estimate of future dividend yield) into a much less volatile asset (current yield).
Pretty much, companies that pay consistent and growing dividends exercise greater fiscal discipline. They reinvest whatever cash is needed to grow the business and then consider what is left over as potentially available for dividends. If too much cash piles up on the balance sheet, the company is tempted to make foolish acquisitions. You will find that many corporate acquisitions don't work out and might actually destroy value rather than create it. How many times have I read about an acquisition that was later sold for less than the purchase price? The fiscal discipline argument is a pretty good one.

What often happens is that companies "diworseify", that is they buy businesses that are outside management's expertise to run. The theory is that adding lines of business adds diversification, in practice, it often just spreads management's time thinner and thinner and poor decisions are made because of lack of knowledge of how to run the acquired business. Thus management becomes unfocused.

If a company piles up too much cash, the low returns on cash investments might actually become a drag on earnings. Cash earning 1% can be profitably invested for greater return, normally the best return is investing back into the business. But there gets to be a point of diminishing returns for reinvestment of earnings. At some point, it is just better to give excess cash to the shareholders.
A fool and his money are good for business.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Living Off Dividends

Post by avalpert » Mon Jul 31, 2017 7:38 pm

nedsaid wrote:
jbolden1517 wrote:
TropikThunder wrote:- Stock pays a dividend, stock price declines by dividend amount at open (and changes during the day due to regular market forces.
- Fund pays a dividend, fund NAV declines by dividend amount at open (and changes during the day due to regular market forces.[/list]
It really is that simple.
No it isn't that simple. That's one of the big mistakes the anti-dividend crowd makes thinking of dividends like drawing money from a savings account. Of course the day the dividend is paid, that's pretty much what happens. The company has accumulated money and then day of dividend creates a liability that is mostly cleared within a few days by an extraction of cash.

But when dividend people talk about the advantages of dividends that's not what they are talking about. What they are talking about is how a company structures its business operations and liabilities over the years to make that accumulation of money a stable and growing phenomenon. Companies that structure themselves so that they can pay a substantial dividend are different than companies that don't structure themselves in this way. They have to manage their cashflow much more conservatively. And that much more conservative management of their cashflow makes the company's cashflow more stable (not shockingly). That more stable cashflow allows the company to slash the annual return volatility of the stock by converting a highly volatile asset (the future earnings yield as an estimate of future dividend yield) into a much less volatile asset (current yield).
Pretty much, companies that pay consistent and growing dividends exercise greater fiscal discipline. They reinvest whatever cash is needed to grow the business and then consider what is left over as potentially available for dividends. If too much cash piles up on the balance sheet, the company is tempted to make foolish acquisitions. You will find that many corporate acquisitions don't work out and might actually destroy value rather than create it. How many times have I read about an acquisition that was later sold for less than the purchase price? The fiscal discipline argument is a pretty good one.

What often happens is that companies "diworseify", that is they buy businesses that are outside management's expertise to run. The theory is that adding lines of business adds diversification, in practice, it often just spreads management's time thinner and thinner and poor decisions are made because of lack of knowledge of how to run the acquired business. Thus management becomes unfocused.

If a company piles up too much cash, the low returns on cash investments might actually become a drag on earnings. Cash earning 1% can be profitably invested for greater return, normally the best return is investing back into the business. But there gets to be a point of diminishing returns for reinvestment of earnings. At some point, it is just better to give excess cash to the shareholders.
If dividends were a consistent signal of good management practice then it may make sense to value those companies more highly (note that still wouldn't mean you should expect a higher return as that management bonus should be priced in). But, if it ever was true, there are many reasons to think it wouldn't be true today and, in a theoretical sense shouldn't persist anyway. From a theoretical perspective it is essentially a lemon problem - once the signal is known poor managers will fake the signal (which can be overcome to a degree by screening for 'quality of dividend'). But beyond the theoretical in the practical world, tax considerations and investor preference has changed over time and the preference between dividends and share repurchases as a means of returning money is not static regardless of management quality.

Having worked with many finance functions across companies (CFOs, Treasures and their Boards) including on discussions of dividend policy I can personally attest that ultimate dividend decision is at best a weak indicator of management quality - I've seen them from all sides.

User avatar
patrick013
Posts: 1889
Joined: Mon Jul 13, 2015 7:49 pm

Re: Living Off Dividends

Post by patrick013 » Mon Jul 31, 2017 7:51 pm

Clearing this up a bit.

Mutual fund receives a dividend so fund value goes up. Fund value
now is value of stocks in the fund plus cash dividend received but unpaid.
When dividend is paid in cash fund value goes down leaving value of
stocks in the fund only. Same as before dividend was rec'd.

Individual stocks declare a dividend.....here's some comments from a
study.
.....the stock prices usually went up on the day of the dividend announcement.
.....stock prices do not “adjust” by the amount of the dividend when the dividend
is paid out. That’s an old wives’ tale.

One dividend was paid to a mutual fund the other paid directly to shareholders.
age in bonds, buy-and-hold, 10 year business cycle

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Mon Jul 31, 2017 8:16 pm

nedsaid wrote: Pretty much, companies that pay consistent and growing dividends exercise greater fiscal discipline. They reinvest whatever cash is needed to grow the business and then consider what is left over as potentially available for dividends. If too much cash piles up on the balance sheet, the company is tempted to make foolish acquisitions. You will find that many corporate acquisitions don't work out and might actually destroy value rather than create it. How many times have I read about an acquisition that was later sold for less than the purchase price? The fiscal discipline argument is a pretty good one.

What often happens is that companies "diworseify", that is they buy businesses that are outside management's expertise to run. The theory is that adding lines of business adds diversification, in practice, it often just spreads management's time thinner and thinner and poor decisions are made because of lack of knowledge of how to run the acquired business. Thus management becomes unfocused.

If a company piles up too much cash, the low returns on cash investments might actually become a drag on earnings. Cash earning 1% can be profitably invested for greater return, normally the best return is investing back into the business. But there gets to be a point of diminishing returns for reinvestment of earnings. At some point, it is just better to give excess cash to the shareholders.
Good point. But even worse than that, this problem is structural with the USA economy. During the Bush-43 administration we structured the tax code to shift towards the wealthy and towards corporate profits. Image

The net result is that corporations have a huge percentage of gdp they need to find ways to invest. Excess corporate investment is going to boost gdp faster than it would otherwise grow but only at the expense of having low returns. Corporate profits in the aggregate can't for too long grow faster than gdp. That is essentially what happened in the 1990s with the tech sector. Stock investors force fed the tech sector enormous quantities of cash, that were invested in low returning technology assets, but in the aggregate that permanently boosted the size of the USA's tech sector which allows us to be the dominant technology player in the world. Stock investors want a return much higher than gdp growth, and certainly not a lower return. The obvious from a societal standpoint to put the money would be public investment which is starving and would have a much higher gdp boosting effect (higher taxes, higher spending). But that isn't happening. So either the money goes abroad and searches out high returns, which is happening. Or it goes into financial engineering which because they are unsupported by the real economy creates bubbles or it gets returned to shareholders which at least on the individual company level solves the problem.

Quite simply we should expect retained earnings to have a very low long term return. Right now interest rates are low so investors can boost returns via. leverage which is happening: Image

As interest rates rise their will be an easy source of return in paying down debt. But for now getting a good return on investment without a high dividend is going to require a highly leveraged company reinvesting. So if you aren't seeing a high yield, you aren't seeing lots of leverage and you don't think the industry is growing rapidly... the stock probably doesn't have the long term growth that's priced in.

snarlyjack
Posts: 507
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Living Off Dividends

Post by snarlyjack » Mon Jul 31, 2017 8:25 pm

As you can see there is different part's to this dividend conservation,
(accounting, price movement, dividend payout, p/e ratio's, price of dividend, etc.)

When I was studying (1) Warren Buffett (2) The Janitor Door, Ronald Read
(3) The Millionaire who gave away his Walgreen's stock & (4) Kevin O'Leary.
What intrigued me is what they did with their dividends. They were investing in
individual stocks we're investing in index funds/mutual funds.
Somewhat different but somewhat the same...

The most intriguing is Warren Buffett & the book "The Snowball"... but they all did this.

They are investing in dividend paying stocks (cash cow). Then taking
the dividends & reinvest into a different stock. This diversifies
out their holdings. From what I can tell they invest in different
dividend paying stocks thus (snowballing) their dividends. But in theory
it could be any investment. All of these guy's are multi millionaires
and very successful investors.


I find the concept very interesting (cash cow) and (snowballing)...
Dividend on dividend on dividend on dividend...compounding out...
The 8th wonder of the world!
Last edited by snarlyjack on Mon Jul 31, 2017 9:58 pm, edited 3 times in total.

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Mon Jul 31, 2017 8:40 pm

TropikThunder wrote: (order of sentences changed) jbolden1517, I must admit, I don't understand a lot of your posts (and don't agree with some of the ones I do), but your rigor and thoroughness are a benefit to this forum and I hope even those who disagree with you can see that.
Thank you. Very nice of you to say! Much appreciated.
TropikThunder wrote: My mathematical example was more intended to counter the argument that you can't see the effect of the dividend amongst the noise of daily price fluctuations.
Well I'd agree that's a bad argument. You can see the effects of most things like interest rates or profitability among the noise of daily price fluctuations. But the effect of the random fluctuations increase at the square root of time while the effects of the structural aspects grow geometrically with time. In the end valuation dominates noise.
TropikThunder wrote: I completely accept this pro-dividend argument (I really don't like "pro-dividend" v "anti-dividend", I prefer "dividend-rational" v "dividend-irrational") in that some companies that pay a consistent dividend effectively structure their cash flow and management to insure the funds to pay the dividend are available. I think this is the best description I've read of how dividend payers are different, and how that contributes to their value. I separate this rational, reasoned analysis from the "dividend-irrational" argument that focuses on yield and yield alone without any regard for the fundamentals of the underlying companies. That irrational argument posits that regardless of any other differences between two funds, the one with the higher yield is better as if the dividend itself was the factor, not the underlying value or quality.
I would agree there are dumb arguments coming from the pro-dividend side on this. It does seem like the mirror image of the treating dividends as if they are being pulled from a bank account without taking into account how they got into the bank account. I can see how those two arguments countering each other feel fruitless. I wish that the basic concept: dividend yield is less volatile than earnings growth hence paid out earnings increase returns all other things being equal was just accepted. Then we could have a rational discussion about all the ways in which all other things aren't equal. :happy

This group tends to focus a lot on retirement planning and equity income along with other low volatility equity strategies deserve to be discussed without all the noise created by these misunderstandings.

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Mon Jul 31, 2017 8:52 pm

avalpert wrote:If dividends were a consistent signal of good management practice then it may make sense to value those companies more highly (note that still wouldn't mean you should expect a higher return as that management bonus should be priced in). But, if it ever was true, there are many reasons to think it wouldn't be true today and, in a theoretical sense shouldn't persist anyway. From a theoretical perspective it is essentially a lemon problem - once the signal is known poor managers will fake the signal (which can be overcome to a degree by screening for 'quality of dividend'). But beyond the theoretical in the practical world, tax considerations and investor preference has changed over time and the preference between dividends and share repurchases as a means of returning money is not static regardless of management quality.
I hear this argument a lot. It is dated. You all are used to being minority voices, you aren't anymore. Indexing because it sells concentration and thus makes buybacks less effective changed this. Payout rates have been edging up steadily since 2012 and the percentage of companies paying a dividend in the SP500 (just to pick an index) is up from the low 70s to low 80s. Dividends are back in fashion.
avalpert wrote: Having worked with many finance functions across companies (CFOs, Treasures and their Boards) including on discussions of dividend policy I can personally attest that ultimate dividend decision is at best a weak indicator of management quality - I've seen them from all sides.
It may seem that way from the inside. But remember this slight change in making the payment compounds overtime and through many of the boards, CFOs... Taking 20% of earnings vs. 0% and paying them out might now seem like much but to an investor compounded and diversified it means a lot. Similarly taking 50% of earnings vs. 20%... Just think how moderated the stock market would be if every investor had to rationally defend the price of the stock based on their opinion of the dividend growth rate with a 10 year maximum horizon. :idea:

User avatar
nedsaid
Posts: 8858
Joined: Fri Nov 23, 2012 12:33 pm

Re: Living Off Dividends

Post by nedsaid » Mon Jul 31, 2017 9:00 pm

avalpert wrote: If dividends were a consistent signal of good management practice then it may make sense to value those companies more highly (note that still wouldn't mean you should expect a higher return as that management bonus should be priced in). But, if it ever was true, there are many reasons to think it wouldn't be true today and, in a theoretical sense shouldn't persist anyway. From a theoretical perspective it is essentially a lemon problem - once the signal is known poor managers will fake the signal (which can be overcome to a degree by screening for 'quality of dividend'). But beyond the theoretical in the practical world, tax considerations and investor preference has changed over time and the preference between dividends and share repurchases as a means of returning money is not static regardless of management quality.

Having worked with many finance functions across companies (CFOs, Treasures and their Boards) including on discussions of dividend policy I can personally attest that ultimate dividend decision is at best a weak indicator of management quality - I've seen them from all sides.
Dividends are less popular as a method of returning cash to shareholders, there seems to be more emphasis upon share buybacks. Thus I would expect whatever signals that corporate dividend policy would send to be weaker today than let's say 30 years ago. The message once sent by increasing the dividend is more often now sent by share buybacks. So this is a good point.

Ultimately the best signal of management strength is consistently growing earnings. Consistently growing earnings are assigned a higher multiple than more volatile earnings. Wall Street loves predictability. Growing dividends should be, but are not always, a signal that earnings are growing too. The vote by the Board of Directors to increase dividends are indeed a vote of confidence in the future of the company and its ability to increase earnings. But dividends are not the tail wagging the earnings dog. Dividends are a reflection of earnings. As I said companies are mostly valued at a multiple of their earnings, the "E" is what is all important. We should not lose sight of that.

Other good indicators of management strength are the strength of the corporate balance sheet and how well the management is investing its cash. Is the balance sheet becoming stronger or weaker? Are corporate investments adding value? Pretty much return on investment.

During the time of very low interest rates, it makes sense for a company to add debt to the balance sheet. My argument is that there is a cost of capital to the equity side of the balance sheet as well as the debt side of the balance sheet. By adding debt, a company might be actually reducing its cost of capital. Shareholders of the company stock will expect equity-like returns of 9% to 10% and not just the yield from dividends. Bond holders are only expecting 3% to 5% returns, that is for companies with good credit. In the cases where the stock has a higher yield than its bonds, adding debt to retire stock would actually increase cash flow too.

Again, dividends are an element of return. If stocks historically return 9% to 10% a year and dividend yield is 2%, it is fair to say that at least 20% of the returns of stocks are from dividends. You could also say that capital gains are about 80% of the remaining return from stocks. But what really drives the returns of stocks is the earnings growth of corporate America. The dividends themselves don't cause the historical 9% to 10% return of US stocks.
A fool and his money are good for business.

User avatar
patrick013
Posts: 1889
Joined: Mon Jul 13, 2015 7:49 pm

Re: Living Off Dividends

Post by patrick013 » Tue Aug 01, 2017 12:33 pm

nedsaid wrote:Ultimately the best signal of management strength is consistently growing earnings.
If I was a CFO I would love to tell the Directors that EPS grew at some
great per cent the last 5 years and it was all to my credit. Anyway....

So if I took earnings and had an earnings retention policy such that
1/3 was put in an operating reserve for serious sales declines,
1/3 was put in reserve for capital improvements or research and development, and
1/3 paid to stockholders as common dividends,
I don't think anybody would be too unhappy.

Reserves invested in a variety of mostly short and some IT bonds. Some zero
coupon. Any stock invested in related businesses protected by LEAP put options.

Kinda basic but workable, including the sizable dividend policy.
age in bonds, buy-and-hold, 10 year business cycle

not4me
Posts: 181
Joined: Thu May 25, 2017 3:08 pm

Re: Living Off Dividends

Post by not4me » Tue Aug 01, 2017 12:55 pm

patrick013 wrote:
CantPassAgain wrote:
Bfwolf wrote:Why don't you give me a million dollars then? It won't impact your ability to earn more money with your human capital (the core of the patrick013 company). You might be worth more after you give me a million dollars!
It's magic! :mrgreen:
I'll just declare a liquidating dividend per share. Can't price it on output
just some quick assets per share.

:)

But I don't think we need to run away from dividends for a price increase and
decrease lasting a very short time. When they declare the dividend doesn't
the price increase before it decreases. It used to.
I get that the original offer to accept a million was said tongue in cheek & lightened things up some. But it clicked with me as a good example to illustrate one of the basics that gets glossed over in some of these discussions.

Let's say the offer was not in jest, but serious. Most of us reading it would read it in context of our personal situations -- a million is a big deal to give away. But what if we put it in context of a real & serious business opportunity?

Another disclaimer -- there are many ways to value a stock & which ever one I choose to illustrate will bring detractors. Don't focus on the number as much as the idea. Since many involved in this seemed to like having price equal book value, I'll use that with the acknowledgment that isn't realistic &, if anything, understates the point. I'll also assume the million is a quarterly dividend.

Of course, the business doesn't start with the paying of a dividend...That's a piece glossed over before. I might be willing to send the million dollar dividend, but first my enterprise needs to be capitalized...to the tune of $200 million....& that is understating it....& it'll still be a few years before the dividend is paid...

The dividend isn't paid to a anonymous, random poster on the internet. It is paid to an owner. An owner who, in all likelihood, became an owner to get a return on their investment. Obviously some say they can sell their shares & accomplish the same thing as a dividend...but again only if you gloss over the ownership change. If stocks are seen as "pieces of paper" & not representative of ownership, some of the attitudes expressed are easier understood.

Another point of confusion is thinking that open-end mutual funds and individual stocks work the same way. So many of this forum are very used to funds and not used to individual stocks. They don't work the same in regards to dividends, yet many of these posts have confused that

User avatar
patrick013
Posts: 1889
Joined: Mon Jul 13, 2015 7:49 pm

Re: Living Off Dividends

Post by patrick013 » Tue Aug 01, 2017 1:06 pm

not4me wrote:
Of course, the business doesn't start with the paying of a dividend...That's a piece glossed over before. I might be willing to send the million dollar dividend, but first my enterprise needs to be capitalized...to the tune of $200 million....& that is understating it....& it'll still be a few years before the dividend is paid...
Start your own ETF. Pick 50 high dividend stocks and have somebody underwrite it for
200 million. When you get 1 billion is assets resign. You did a good enough job.
age in bonds, buy-and-hold, 10 year business cycle

not4me
Posts: 181
Joined: Thu May 25, 2017 3:08 pm

Re: Living Off Dividends

Post by not4me » Tue Aug 01, 2017 2:03 pm

patrick013 wrote:
not4me wrote:
Of course, the business doesn't start with the paying of a dividend...That's a piece glossed over before. I might be willing to send the million dollar dividend, but first my enterprise needs to be capitalized...to the tune of $200 million....& that is understating it....& it'll still be a few years before the dividend is paid...
Start your own ETF. Pick 50 high dividend stocks and have somebody underwrite it for
200 million. When you get 1 billion is assets resign. You did a good enough job.
Just to be clear & trying to avoid spreading the confusion I mentioned in prior post....IF I were to start an ETF, then ramp up time would be much less. I'd need some expertise in running an etf, marketing it, etc. The dividend size would be determined by the stocks I pick. My example was intended to be a company that paid its shareholders a million in dividends each quarter. Some one has to put capital at risk & be patient....etc. Company management has to do a good job of obtaining appropriate capital at a good cost of capital. Part of that decision has to do with the amount of money to be paid in dividends; but it should be part of an overall strategy for capital. IF the owner specified they wanted a million dollars even every quarter, then management would try to manage to that...but first owners have to kick in capital

Bfwolf
Posts: 1645
Joined: Thu Oct 14, 2010 11:19 am

Re: Living Off Dividends

Post by Bfwolf » Tue Aug 01, 2017 2:23 pm

not4me wrote:I get that the original offer to accept a million was said tongue in cheek
I want to be 100% crystal clear that I will absolutely accept a million dollars from patrick013. Since he said it might make him worth more, it's a win-win.

chinto
Posts: 297
Joined: Wed Jan 04, 2017 7:39 pm

Re: Living Off Dividends

Post by chinto » Tue Aug 01, 2017 11:06 pm

willthrill81 wrote:
2pedals wrote:You should consider this post by Larry Swedroe. Irrelevance Of Dividends He makes the point that in this environment investors should not have a preference for dividend stocks.
That's a great article from Larry. Here's a snippet from it that's highly relevant.
"Hersh Shefrin and Meir Statman, two leaders in the field of behavioral finance, attempted to explain the preference for the cash dividends anomaly in their 1984 paper, “Explaining Investor Preference for Cash Dividends.” They offered the following explanations.

First, in terms of their ability to control spending, investors may recognize they have problems with the inability to delay gratification. To address this problem, they adapt a “cash flow” approach to spending, meaning they limit their spending only to the interest and dividends from their investment portfolio.

A “total return” approach that used self-created dividends would not address the conflict created by the individual who wishes to deny himself or herself a present indulgence, yet is unable to resist the temptation. While the preference for dividends might not be optimal (for tax reasons), by addressing the behavioral issue, it could be said to be rational. In other words, the investor has a desire to defer spending, but knows he doesn’t have the will, so he creates a situation that limits his opportunities and, thus, reduces the temptations.

The second explanation is based on “prospect theory” (also referred to as loss aversion), which states that investors value gains and losses differently. As such, they will base decisions on perceived gains rather than on perceived losses.

So, if someone were given two equal choices, one expressed in terms of possible gains and the other in terms of possible losses, people would choose the former. Because taking dividends doesn’t involve the sale of stock, it’s preferred to a total-return approach that may require self-created dividends through sales. Sales might involve the realization of losses, which are too painful for people to accept (they exhibit loss aversion).

What they fail to realize is that a cash dividend is the perfect substitute for the sale of an equal amount of stock, whether the market is up or down, or whether the stock is sold at a gain or a loss. It makes absolutely no difference. It’s just a matter of how the problem is framed. It’s essentially form over substance."
What I find bizarre in the above is the concluding paragraph. After going to the trouble to outline to very plausible reason for the observed investor behavior, then it is concluded that they are acting out of a form of ignorance. But yet we know, this actively discussed on the Boglehead forum and many have a preference for dividends, ad is not because they do not grasp the concept being discussed, but it is, most likely a preference, pne not base don ignorance, but rather on sentiment or visceral impulses.

snarlyjack
Posts: 507
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Living Off Dividends

Post by snarlyjack » Wed Aug 02, 2017 6:11 am

Chinto,

I totality agree with you!

I think we are very informed investors & know exactly what were doing!

Their are just to many examples of millionaires & very successful investors
that are using a dividend strategy for them to say were all a bunch
uninformed investors, that don't know what were doing...

Their are to many University Professors teaching dividends in Finance classes,
their are to many mutual funds (money managers) using dividend strategy's,
their are to many millionaires using a dividend strategy & successful investors
using a dividend strategy not to mention our buddy Warren Buffett and
Grandma & Grandpa.

Even Jack Bogle like's dividends. He goes out to his mail box every month &
get's his checks & has publically stated that investors need & want income,
just like he does...

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Wed Aug 02, 2017 7:12 am

nedsaid wrote: Again, dividends are an element of return. If stocks historically return 9% to 10% a year and dividend yield is 2%, it is fair to say that at least 20% of the returns of stocks are from dividends. You could also say that capital gains are about 80% of the remaining return from stocks. But what really drives the returns of stocks is the earnings growth of corporate America. The dividends themselves don't cause the historical 9% to 10% return of US stocks.
FWIW they pretty much do. Dividends + inflation is about 85% of your long term return from broad stock market portfolios. Dividend yield is usually higher than 2% and likely heading higher as payout ratios increases. Pretty much if you exclude the volatility of crappy overpriced growth stocks that are mostly going to crash anyway, and thus have no positive impact on long term return you get:
return = dividends + dividend growth = dividends + economic growth = dividends + inflation + real economic growth
with inflation counting for 80% of the dividend growth and real economic growth the other 20%.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Living Off Dividends

Post by avalpert » Wed Aug 02, 2017 9:19 am

nedsaid wrote:Again, dividends are an element of return. If stocks historically return 9% to 10% a year and dividend yield is 2%, it is fair to say that at least 20% of the returns of stocks are from dividends.
Actually, I disagree. I don't think it is fair to say that and I think that formulation captures the root of the error made by many of the dividend-chasers that lead otherwise knowledgeable people astray (as seen in posters in this thread).

I think it would be fair to say that 20% of returns are distributed to stockholders as dividends - but the returns don't come from dividends, they come from (as you note) earnings growth of corporate America. And that is the key distinction - if all companies decided to use buybacks in place of dividends, in theory, it shouldn't change returns it just changes how they are distributed (or realized if you like) by shareholders. It is only when people confuse the act of issuing the dividend for the business conditions that drove growth that they lionize yield.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Living Off Dividends

Post by avalpert » Wed Aug 02, 2017 9:23 am

snarlyjack wrote:Chinto,

I totality agree with you!

I think we are very informed investors & know exactly what were doing!

Their are just to many examples of millionaires & very successful investors
that are using a dividend strategy for them to say were all a bunch
uninformed investors, that don't know what were doing...
There are too many examples of millionaires & very successful 'investors' using all sorts of gambling techniques too - doesn't mean we can't point out that they don't know what they are doing and their strategy has little to do with their success.
Their are to many University Professors teaching dividends in Finance classes,
What do you think the professors say when they teach about dividends? Do you know what prevailing academic theory says about the relevance of dividends?
their are to many mutual funds (money managers) using dividend strategy's,
This is the funniest ones - mutual funds/money managers pick strategies that sell, not strategies that work.

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Wed Aug 02, 2017 9:27 am

avalpert wrote:if all companies decided to use buybacks in place of dividends, in theory, it shouldn't change returns it just changes how they are distributed (or realized if you like) by shareholders. It is only when people confuse the act of issuing the dividend for the business conditions that drove growth that they lionize yield.
Actually it would massively change the returns realized by passive shareholders. We first have to ignore the issue of the internal structure of dividend paying companies vs. buyback companies (which lower the volatility of the business and thus the volatility of the stock). But even then it would work worse. If the company simply allocated a percentage to buying back stock you would end up with a much lower return because they would be buying back when earnings are strong and share prices are high mostly. If they focused their buys on when the stock was depressed you would end up with much lower ROE since most successful companies, and thus the bulk of a passive holding like TSM would be sitting on large cash positions most of the time.

And I don't get why this argument keeps circling around pointlessly. Companies are not savings accounts. Their share-price relative to their intrinsic value varies. Volatility is very bad for compound returns. Reducing volatility is good. Dividend payouts are more stable than share prices and thus result in higher compound returns.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Living Off Dividends

Post by avalpert » Wed Aug 02, 2017 9:37 am

jbolden1517 wrote:
avalpert wrote:if all companies decided to use buybacks in place of dividends, in theory, it shouldn't change returns it just changes how they are distributed (or realized if you like) by shareholders. It is only when people confuse the act of issuing the dividend for the business conditions that drove growth that they lionize yield.
Actually it would massively change the returns realized by passive shareholders. We first have to ignore the issue of the internal structure of dividend paying companies vs. buyback companies (which lower the volatility of the business and thus the volatility of the stock). But even then it would work worse. If the company simply allocated a percentage to buying back stock you would end up with a much lower return because they would be buying back when earnings are strong and share prices are high mostly. If they focused their buys on when the stock was depressed you would end up with much lower ROE since most successful companies, and thus the bulk of a passive holding like TSM would be sitting on large cash positions most of the time.
Yes, you are exhibit number one of confusing dividend distributions for the business itself.
And I don't get why this argument keeps circling around pointlessly. Companies are not savings accounts. Their share-price relative to their intrinsic value varies.
Intrinsic value doesn't exist - it is an individual opinion held by every investor valuing a company. Share price varies because the opinions vary over time as new information is integrated into the opinions.

Nobody thinks companies are savings accounts - but the dividend-chasers pretend that dividends are like bank interest.
Volatility is very bad for compound returns. Reducing volatility is good. Dividend payouts are more stable than share prices and thus result in higher compound returns.
Dividends don't decrease volatility - this would be obvious if you weren't looking at the company as a savings account but instead as a business...

Companies set dividend payouts that they have high confidence they can maintain because of the signalling effect of lowering dividends, so the portion of returns that they would allow to be distributed as dividends are at the very left end of the distribution of possible returns. So yeah, the volatility is more on the right side of the distribution curve, but that isn't caused by the dividends, it is inherent to the business and if the company wasn't offering the dividend the volatility overall wouldn't change (in theory at least, we can argue about whether there isn't a feedback effect on management decisions but having seen those decisions being made I don't really buy it).

User avatar
willthrill81
Posts: 2369
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Living Off Dividends

Post by willthrill81 » Wed Aug 02, 2017 9:43 am

FactualFran wrote:
willthrill81 wrote:
msk wrote:Indeed dividends are a distraction. I checked the history of the SP500 for 50 years between 1966 and 2016. My conclusion: you can withdraw 5% of the portfolio value (including the previous year's dividends minus 15% tax) annually and your portfolio should survive 50 years more or less intact, inflation adjusted, i.e. in real terms. Throughout the 50 years your 5% withdrawals will trend upwards keeping up with inflation.
That strategy would indeed never have run out of money, but in the majority of the historical 30 year periods, your inflation-adjusted balance would have either remained remained flat or shrunk a bit. At the end of 30 years, you would have had a smaller inflation-adjusted balance about one-third of the time, though that's not a huge problem as retirees' spending tends to drop 1-2% annually in real terms from 65 until death.
Doing the calculations using the total returns of the Vanguard 500 Index fund, there have been times that the approach would have run out of money. Someone who started at the end of 1999, made a 5% withdrawal at that time, made a withdrawal adjusted for inflation at the end of each later year, and reinvested all distributions,would have run out of money at the end of 2015. A strategy that has been successful for 16 years may be a good enough for some.
You are thinking of a 5% fixed withdrawal rate (most add in CPI every year as well to maintain constant real dollars). That is not what I was referring to, which was a fixed withdrawal percentage of 5%. From Jan., 2000, until now, had a 5% withdrawal percentage (i.e. 5% of the portfolio's balance at the end of the year, so the first withdrawal would be at the end of 2000) been used with VTSMX (VTSAX didn't exist back then), you would currently have 5% more (total) in the portfolio than you started with. After adjusting for inflation, you would have a 28% drop in the real value of the portfolio, but over a rough 17 year period for stocks, that's not too bad for such an aggressive strategy.

Interestingly, had a 5% fixed plus CPI withdrawal rate been used, the portfolio would now be worth about 11% of your original portfolio value (7.7% after inflation), meaning you would have enough to make this year's withdrawal (assuming the market doesn't tank between now and Dec.), and then your portfolio would be pretty much completely done, surviving just 18 years.

And Dave Ramsey recommends an 8% withdrawal rate. :oops:
“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

not4me
Posts: 181
Joined: Thu May 25, 2017 3:08 pm

Re: Living Off Dividends

Post by not4me » Wed Aug 02, 2017 9:52 am

jbolden1517 wrote: Their share-price relative to their intrinsic value varies.
I realized sometime back that this is not understood & that some hold the view that stock price works the same as NAV for a open-end mutual fund & that it moves in lock step to book value. When the dividend is paid, the cash in hand no longer is subject to 'market sentiment', whereas it is in the case of buybacks or retained earnings. But if you are a 'denyer' when it comes to stock price being other than book value, it is a one-for-one...

User avatar
nedsaid
Posts: 8858
Joined: Fri Nov 23, 2012 12:33 pm

Re: Living Off Dividends

Post by nedsaid » Wed Aug 02, 2017 10:02 am

avalpert wrote:
nedsaid wrote:Again, dividends are an element of return. If stocks historically return 9% to 10% a year and dividend yield is 2%, it is fair to say that at least 20% of the returns of stocks are from dividends.
Actually, I disagree. I don't think it is fair to say that and I think that formulation captures the root of the error made by many of the dividend-chasers that lead otherwise knowledgeable people astray (as seen in posters in this thread).

I think it would be fair to say that 20% of returns are distributed to stockholders as dividends - but the returns don't come from dividends, they come from (as you note) earnings growth of corporate America. And that is the key distinction - if all companies decided to use buybacks in place of dividends, in theory, it shouldn't change returns it just changes how they are distributed (or realized if you like) by shareholders. It is only when people confuse the act of issuing the dividend for the business conditions that drove growth that they lionize yield.
Not really disagreeing here. Again, I have said that the underlying factors are what drive return. High Dividend is associated with Value and Dividend Growth is associated with Quality. Again, I am saying that dividends are a component of return and not a source of return. Don't know how many times I have to say it. In theory, it should make no difference whether investors receive cash through dividends or share buy backs. The thing is, beliefs are a stubborn thing regardless of what the academics say. I have a preference for dividends and always have, as I am getting older I am more and more interested in the cash income created by my investments. To me, the quality of the business and the characteristics of the stock are the most important thing, dividends have always been a secondary consideration. I look for quality companies that I can buy at good prices and hold for a long time. I never have bought a dividend stock for dividend's sake. I bought the business.

I think the remaining issue is whether dividends affect volatility. The reputation of dividend stocks is that they weather bear markets with lower volatility than the market. There is a big overlap between low volatility stocks and dividends. So here is a question: are dividend stocks really less volatile?
A fool and his money are good for business.

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Wed Aug 02, 2017 10:06 am

not4me wrote:
jbolden1517 wrote: Their share-price relative to their intrinsic value varies.
I realized sometime back that this is not understood & that some hold the view that stock price works the same as NAV for a open-end mutual fund & that it moves in lock step to book value. When the dividend is paid, the cash in hand no longer is subject to 'market sentiment', whereas it is in the case of buybacks or retained earnings. But if you are a 'denyer' when it comes to stock price being other than book value, it is a one-for-one...
Exactly! Well put. Investors demand a higher return on high volatility assets than on cash, because volatility reduces serial returns. I really do agree that there seems to be a general sentiment of treating dividends like open ended mutual fund distributions here by the anti-dividend crowd.

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Wed Aug 02, 2017 10:09 am

nedsaid wrote: I think the remaining issue is whether dividends affect volatility. The reputation of dividend stocks is that they weather bear markets with lower volatility than the market. There is a big overlap between low volatility stocks and dividends. So here is a question: are dividend stocks really less volatile?
No their share prices aren't less volatile. But their returns are less volatile because of the dividend component. Which means for an income investor the safe draw percentage increases. Moreover their volatility is in the right direction for income investors who are holding bonds since high dividend stocks tend to have lots of debt (be short bonds). Dividend paying stock returns strongly anti-correlate with bond market returns, which is not true for non-dividend paying stocks. And that makes the whole portfolio safer.
Last edited by jbolden1517 on Wed Aug 02, 2017 10:11 am, edited 2 times in total.

User avatar
nedsaid
Posts: 8858
Joined: Fri Nov 23, 2012 12:33 pm

Re: Living Off Dividends

Post by nedsaid » Wed Aug 02, 2017 10:09 am

jbolden1517 wrote:
avalpert wrote:if all companies decided to use buybacks in place of dividends, in theory, it shouldn't change returns it just changes how they are distributed (or realized if you like) by shareholders. It is only when people confuse the act of issuing the dividend for the business conditions that drove growth that they lionize yield.
Actually it would massively change the returns realized by passive shareholders. We first have to ignore the issue of the internal structure of dividend paying companies vs. buyback companies (which lower the volatility of the business and thus the volatility of the stock). But even then it would work worse. If the company simply allocated a percentage to buying back stock you would end up with a much lower return because they would be buying back when earnings are strong and share prices are high mostly. If they focused their buys on when the stock was depressed you would end up with much lower ROE since most successful companies, and thus the bulk of a passive holding like TSM would be sitting on large cash positions most of the time.

And I don't get why this argument keeps circling around pointlessly. Companies are not savings accounts. Their share-price relative to their intrinsic value varies. Volatility is very bad for compound returns. Reducing volatility is good. Dividend payouts are more stable than share prices and thus result in higher compound returns.
You have raised a good question. Do companies that pay dividends structure themselves differently? I haven't seen any research on this. This is something that I have never asserted myself in defense of dividends. Mostly I have said that I would rather receive dividends than see my company make foolish acquisitions with excess cash. This might be what you are driving at. I would also say that acquisitions can make earnings growth seem to be faster than it really is, pretty much you get the effect from laying off employees, the promised synergies often do not happen. Quite often, it is just financial engineering to convince shareholders that a mature business is still a growth company. Carried to extremes, this can lead to outright fraud, which is why the CEOs of Tyco and Worldcomm went to jail.
A fool and his money are good for business.

User avatar
nedsaid
Posts: 8858
Joined: Fri Nov 23, 2012 12:33 pm

Re: Living Off Dividends

Post by nedsaid » Wed Aug 02, 2017 10:13 am

jbolden1517 wrote:
nedsaid wrote: Again, dividends are an element of return. If stocks historically return 9% to 10% a year and dividend yield is 2%, it is fair to say that at least 20% of the returns of stocks are from dividends. You could also say that capital gains are about 80% of the remaining return from stocks. But what really drives the returns of stocks is the earnings growth of corporate America. The dividends themselves don't cause the historical 9% to 10% return of US stocks.
FWIW they pretty much do. Dividends + inflation is about 85% of your long term return from broad stock market portfolios. Dividend yield is usually higher than 2% and likely heading higher as payout ratios increases. Pretty much if you exclude the volatility of crappy overpriced growth stocks that are mostly going to crash anyway, and thus have no positive impact on long term return you get:
return = dividends + dividend growth = dividends + economic growth = dividends + inflation + real economic growth
with inflation counting for 80% of the dividend growth and real economic growth the other 20%.
Bogle's formula is corporate earnings growth plus dividends to estimate future returns from the stock market. He then takes into account P/E contraction or expansion. This would imply 7% future expected returns for the US Stock Market but he believes P/E ratios will contract which then reduces nominal returns to 4%. I use a similar model except I use nominal economic growth in lieu of corporate earnings growth, the numbers should be about the same.
A fool and his money are good for business.

User avatar
willthrill81
Posts: 2369
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Living Off Dividends

Post by willthrill81 » Wed Aug 02, 2017 10:16 am

nedsaid wrote:
jbolden1517 wrote:
avalpert wrote:if all companies decided to use buybacks in place of dividends, in theory, it shouldn't change returns it just changes how they are distributed (or realized if you like) by shareholders. It is only when people confuse the act of issuing the dividend for the business conditions that drove growth that they lionize yield.
Actually it would massively change the returns realized by passive shareholders. We first have to ignore the issue of the internal structure of dividend paying companies vs. buyback companies (which lower the volatility of the business and thus the volatility of the stock). But even then it would work worse. If the company simply allocated a percentage to buying back stock you would end up with a much lower return because they would be buying back when earnings are strong and share prices are high mostly. If they focused their buys on when the stock was depressed you would end up with much lower ROE since most successful companies, and thus the bulk of a passive holding like TSM would be sitting on large cash positions most of the time.

And I don't get why this argument keeps circling around pointlessly. Companies are not savings accounts. Their share-price relative to their intrinsic value varies. Volatility is very bad for compound returns. Reducing volatility is good. Dividend payouts are more stable than share prices and thus result in higher compound returns.
You have raised a good question. Do companies that pay dividends structure themselves differently? I haven't seen any research on this. This is something that I have never asserted myself in defense of dividends. Mostly I have said that I would rather receive dividends than see my company make foolish acquisitions with excess cash. This might be what you are driving at. I would also say that acquisitions can make earnings growth seem to be faster than it really is, pretty much you get the effect from laying off employees, the promised synergies often do not happen. Quite often, it is just financial engineering to convince shareholders that a mature business is still a growth company. Carried to extremes, this can lead to outright fraud, which is why the CEOs of Tyco and Worldcomm went to jail.
With the volumes of research done on the topic, if dividend-focused companies did indeed structure themselves in a meaningfully different way, that should have an impact on their long-term returns. The research has concluded that dividend-focused companies, once you remove the impact of factors, don't have higher returns, so even if they used a different structure, it doesn't seem to have really changed anything.

I find it interesting that jbolden is arguing that dividends reduce a stock's volatility but not at the expense of annual returns so that the CAGR is higher because of reduced volatility drag. The problem with that argument is that the stock market takes reduced volatility into account (who doesn't like smooth returns?) and values them more highly. So over time, a stock with lower volatility should logically be expected to have a lower annual return and CAGR than a more volatile one.
“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

User avatar
willthrill81
Posts: 2369
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Living Off Dividends

Post by willthrill81 » Wed Aug 02, 2017 10:17 am

nedsaid wrote:
jbolden1517 wrote:
nedsaid wrote: Again, dividends are an element of return. If stocks historically return 9% to 10% a year and dividend yield is 2%, it is fair to say that at least 20% of the returns of stocks are from dividends. You could also say that capital gains are about 80% of the remaining return from stocks. But what really drives the returns of stocks is the earnings growth of corporate America. The dividends themselves don't cause the historical 9% to 10% return of US stocks.
FWIW they pretty much do. Dividends + inflation is about 85% of your long term return from broad stock market portfolios. Dividend yield is usually higher than 2% and likely heading higher as payout ratios increases. Pretty much if you exclude the volatility of crappy overpriced growth stocks that are mostly going to crash anyway, and thus have no positive impact on long term return you get:
return = dividends + dividend growth = dividends + economic growth = dividends + inflation + real economic growth
with inflation counting for 80% of the dividend growth and real economic growth the other 20%.
Bogle's formula is corporate earnings growth plus dividends to estimate future returns from the stock market. He then takes into account P/E contraction or expansion. This would imply 7% future expected returns for the US Stock Market but he believes P/E ratios will contract which then reduces nominal returns to 4%. I use a similar model except I use nominal economic growth in lieu of corporate earnings growth, the numbers should be about the same.
After I've read some of Larry Swedroe's research into why valuations are (and should be) higher today than their historical average, I'm not convinced that P/E ratios will just 'naturally' contract over time unless interest rates rise significantly, causing bonds to look more favorably than they do today.
“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

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Wed Aug 02, 2017 10:20 am

nedsaid wrote:You have raised a good question. Do companies that pay dividends structure themselves differently? I haven't seen any research on this. This is something that I have never asserted myself in defense of dividends. Mostly I have said that I would rather receive dividends than see my company make foolish acquisitions with excess cash. This might be what you are driving at. I would also say that acquisitions can make earnings growth seem to be faster than it really is, pretty much you get the effect from laying off employees, the promised synergies often do not happen. Quite often, it is just financial engineering to convince shareholders that a mature business is still a growth company. Carried to extremes, this can lead to outright fraud, which is why the CEOs of Tyco and Worldcomm went to jail.
Agree with you on M&A. Whenever I see heavy M&A I take it as a possible sell signal and look closely. If I'm not high probability its a good move, then I'm out.

As far as structure think of it this way. The big question for income is always what is the safe inflation adjusted draw? Especially in the early years before it makes sense to sell a lot of the portfolio to buy an inflation adjusted annuity. With a high dividend stock you have the control investors in the company, who have far more knowledge telling you what the safe inflation adjusted draw percentage from your equity in their business is.

The best way to know that they structure themselves differently is notice the stability of dividends vs. the instability of buybacks. In 2009, a deflationary bear the worst case, dividends went -21%. In 2009 buybacks went something like -130% (companies were desperately selling equity into a depressed market). In the 1973 an inflationary bear the best case for dividends, inflation was 18% dividends payouts were +17%. Even with a severe contraction with real economic growth dropping from 5% to -.5%. The companies were right that they could easily maintain their inflation adjusted draw.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Living Off Dividends

Post by avalpert » Wed Aug 02, 2017 10:38 am

nedsaid wrote:
jbolden1517 wrote:
avalpert wrote:if all companies decided to use buybacks in place of dividends, in theory, it shouldn't change returns it just changes how they are distributed (or realized if you like) by shareholders. It is only when people confuse the act of issuing the dividend for the business conditions that drove growth that they lionize yield.
Actually it would massively change the returns realized by passive shareholders. We first have to ignore the issue of the internal structure of dividend paying companies vs. buyback companies (which lower the volatility of the business and thus the volatility of the stock). But even then it would work worse. If the company simply allocated a percentage to buying back stock you would end up with a much lower return because they would be buying back when earnings are strong and share prices are high mostly. If they focused their buys on when the stock was depressed you would end up with much lower ROE since most successful companies, and thus the bulk of a passive holding like TSM would be sitting on large cash positions most of the time.

And I don't get why this argument keeps circling around pointlessly. Companies are not savings accounts. Their share-price relative to their intrinsic value varies. Volatility is very bad for compound returns. Reducing volatility is good. Dividend payouts are more stable than share prices and thus result in higher compound returns.
You have raised a good question. Do companies that pay dividends structure themselves differently? I haven't seen any research on this. This is something that I have never asserted myself in defense of dividends. Mostly I have said that I would rather receive dividends than see my company make foolish acquisitions with excess cash. This might be what you are driving at. I would also say that acquisitions can make earnings growth seem to be faster than it really is, pretty much you get the effect from laying off employees, the promised synergies often do not happen. Quite often, it is just financial engineering to convince shareholders that a mature business is still a growth company. Carried to extremes, this can lead to outright fraud, which is why the CEOs of Tyco and Worldcomm went to jail.
Worldcomm and Enron paid dividends right to their (very) bloody ends.

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Wed Aug 02, 2017 10:40 am

nedsaid wrote:
jbolden1517 wrote:
FWIW they pretty much do. Dividends + inflation is about 85% of your long term return from broad stock market portfolios. Dividend yield is usually higher than 2% and likely heading higher as payout ratios increases. Pretty much if you exclude the volatility of crappy overpriced growth stocks that are mostly going to crash anyway, and thus have no positive impact on long term return you get:
return = dividends + dividend growth = dividends + economic growth = dividends + inflation + real economic growth
with inflation counting for 80% of the dividend growth and real economic growth the other 20%.
Bogle's formula is corporate earnings growth plus dividends to estimate future returns from the stock market. He then takes into account P/E contraction or expansion. This would imply 7% future expected returns for the US Stock Market. but he believes P/E ratios will contract which then reduces nominal returns to 4%. I use a similar model except I use nominal economic growth in lieu of corporate earnings growth, the numbers should be about the same.
How is he getting 7%? 2% dividends, 2% inflation (which might be high the Fed is having trouble hitting that target) and 3% real economic growth?
I'd probably be more like (bond bull): 2.2% dividends + 1.5% inflation + 2% real economic growth = 6.8%
(bond mild bear): 2.2% dividends + 3% inflation + 3% real economic growth = 7.2%
(bond medium bear): 2.2% dividends + 5% inflation + 4.5% real economic growth = 8.7%

That bond medium bear is one of the reasons I'm comfortable holding USA equity at all. I think Americans are getting increasingly unwilling to accept a low growth mildly deflationary economy. But I could be wrong

(bond mild bull): 2.2% dividends + 1% real economic growth + .5% inflation = 3.7%
And bond yields end the decade at 2%
nedsaid wrote: but he believes P/E ratios will contract which then reduces nominal returns to 4%. I use a similar model except I use nominal economic growth in lieu of corporate earnings growth, the numbers should be about the same.
Agree they are close. Their might be a shift away from corporate profits and more towards the economy benefitting the population. But even if that happens I suspect bond holders bear the brunt of it, and they are only off by 1% or so. I'd also expect to see contraction though. OTOH I'd expect to see it later in the cycle. Bonds will take time to fully price in growing inflation and growth. Relative to bonds I think stocks will be quite attractive. I'm usually a bear, and I'm just seeing too much upside in the USA right now. Might be a contrarian indicator.

User avatar
nedsaid
Posts: 8858
Joined: Fri Nov 23, 2012 12:33 pm

Re: Living Off Dividends

Post by nedsaid » Wed Aug 02, 2017 10:43 am

Corporate earnings growth is historically about 5%. Dividend yield is about 2%. That is how Bogle gets his 7% number.
A fool and his money are good for business.

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Living Off Dividends

Post by jbolden1517 » Wed Aug 02, 2017 10:45 am

willthrill81 wrote: With the volumes of research done on the topic, if dividend-focused companies did indeed structure themselves in a meaningfully different way, that should have an impact on their long-term returns. The research has concluded that dividend-focused companies, once you remove the impact of factors, don't have higher returns, so even if they used a different structure, it doesn't seem to have really changed anything.
Once you remove the factors you remove the structuring difference. Dividends are a value factor. Remove the value factor you discount the effect of dividends.
willthrill81 wrote: I find it interesting that jbolden is arguing that dividends reduce a stock's volatility but not at the expense of annual returns so that the CAGR is higher because of reduced volatility drag. The problem with that argument is that the stock market takes reduced volatility into account (who doesn't like smooth returns?) and values them more highly. So over time, a stock with lower volatility should logically be expected to have a lower annual return and CAGR than a more volatile one.
Which they do. Equity income stocks underperform during bulls. There are more bullish months than bearish months. Dividends in general (now incidentally being an exception where there are fantastic dividend stocks in some sectors) are not a means to higher returns for accumulation investors who can average out sequences of returns. They are a means to higher draw rates for income investors who can't.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Living Off Dividends

Post by avalpert » Wed Aug 02, 2017 10:47 am

nedsaid wrote:
avalpert wrote:
nedsaid wrote:Again, dividends are an element of return. If stocks historically return 9% to 10% a year and dividend yield is 2%, it is fair to say that at least 20% of the returns of stocks are from dividends.
Actually, I disagree. I don't think it is fair to say that and I think that formulation captures the root of the error made by many of the dividend-chasers that lead otherwise knowledgeable people astray (as seen in posters in this thread).

I think it would be fair to say that 20% of returns are distributed to stockholders as dividends - but the returns don't come from dividends, they come from (as you note) earnings growth of corporate America. And that is the key distinction - if all companies decided to use buybacks in place of dividends, in theory, it shouldn't change returns it just changes how they are distributed (or realized if you like) by shareholders. It is only when people confuse the act of issuing the dividend for the business conditions that drove growth that they lionize yield.
Not really disagreeing here. Again, I have said that the underlying factors are what drive return. High Dividend is associated with Value and Dividend Growth is associated with Quality. Again, I am saying that dividends are a component of return and not a source of return.
I agree you aren't intending to disagree - but how you formulate it matters. Returns don't come 'from' dividends - when people start internalizing that language they start to think that 'dividends' and 'price appreciation' are independent forms of return and if I'm content with my 'dividend' portion the 'price appreciation' portion doesn't matter any more.
I think the remaining issue is whether dividends affect volatility. The reputation of dividend stocks is that they weather bear markets with lower volatility than the market. There is a big overlap between low volatility stocks and dividends. So here is a question: are dividend stocks really less volatile?
I will have to dig up the research but I am pretty sure that when you control for factors in the four factor model the answer is no - which is just another way of saying that other factors of a stock (such as its size, book/price etc.) do a better job at explaining returns than dividends.

User avatar
nedsaid
Posts: 8858
Joined: Fri Nov 23, 2012 12:33 pm

Re: Living Off Dividends

Post by nedsaid » Wed Aug 02, 2017 11:09 am

My guess is that dividend stocks are less volatile than the market itself but the difference in volatility is due to factors and not the dividends themselves. It has been conventional wisdom on Wall Street that dividends are a cushion in bear markets, Jeremy Siegel has this view. The thing is, does this actually hold up under rigorous analysis?
A fool and his money are good for business.

snarlyjack
Posts: 507
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Living Off Dividends

Post by snarlyjack » Wed Aug 02, 2017 11:48 am

Let's face it, we Bogleheads love our research papers.
Here is one of the latest white papers from "Wisdomtree Research 2017" about dividends.

Enjoy...

https://www.wisdomtree.com/-/media/us-m ... proach.pdf

User avatar
Ketawa
Posts: 1888
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

Re: Living Off Dividends

Post by Ketawa » Wed Aug 02, 2017 11:48 am

nedsaid wrote:My guess is that dividend stocks are less volatile than the market itself but the difference in volatility is due to factors and not the dividends themselves. It has been conventional wisdom on Wall Street that dividends are a cushion in bear markets, Jeremy Siegel has this view. The thing is, does this actually hold up under rigorous analysis?
It doesn't hold up or even really matter, and I think you are confusing things yourself by comparing how much dividends payments hold up in a bear market to the overall market return. For another example, jbolden1517 has repeatedly stated that dividends were down only 21% in the great recession, but the stock market as a whole dropped over 50%, therefore dividends allow for a higher sustainable withdrawal rate in retirement or more resilient portfolio. This viewpoint is also common among other posters who advocate for dividends.

However, dividend proponents then turn around and say things like this (from the recently locked 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.
How can one simultaneously believe all of these things?

1. Dividend stocks are better in a bear market because the dividend payments do not drop much.
2. The market price of a stock is the discounted value of future dividends.
3. The market price does not matter in a bear market.

Because when you look at how much dividend stocks dropped in the Great Recession, it's obvious that the market didn't think those dividend companies were going to be any better at paying dividends in the future than the market as a whole.

The conversation then turns to "intrinsic value", which is a fancy way of saying "stock picking".

Post Reply