One answer to the Dividend stocks puzzle from behavioral finance

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livesoft
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One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Sun Dec 03, 2017 3:26 pm

I am reading Meir Statman's "Finance for Normal People" published a few months ago which is an up-to-date compendium of many of the interesting findings from behavioral finance research. I recommend folks who enjoyed Kahneman's Thinking, Fast & Slow and Zweig's "Your Money and Your Brain" to pick up a copy and read it. I am going to read other works of Statman, too.

There is a chapter on some puzzles in finance including why some investors prefer to get dividends and want to own dividend-paying stocks when others know there is really no extra benefit to such stocks. Here's a couple paragraphs explaining a possible reason from page 140 of Statman.

Basically, company paid dividends "are less likely to inflict regret" because they do not create responsibility for personal choices and self control that selling shares do to raise money.

This was also discussed in a previous thread: viewtopic.php?t=227153

Anyways, I post this because there are a couple of "I want dividends" threads currently active. Now folks can understand why these folks might adhere to the "I want dividends" theme.

Statman himself quoted his book in this WSJ article: https://www.wsj.com/articles/the-mental ... 1492999921
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Snowjob
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Snowjob » Sun Dec 03, 2017 4:53 pm

Just another form of -- live off the dividends and interest strategy just a lower (stock selection) level. Makes sense to me.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Sun Dec 03, 2017 5:39 pm

Some good articles referenced.I was once a big believer in the magic of dividend stocks.I subscribed to newsletters and the whole deal.I fully understand the points about total return and dividends paid out lower the value of the stock,etc.I think most people who go the dividend route mentally at some level do not see or refuse to believe that the stocks value has been reduced,but see it more like a CD paying interest.It is also simpler than selling shares along with the other points the author pointed out.The psychology is actually pretty complex and obviously is different for each individual.Another factor which the author did not address is that how a person is first introduced to investing also carries a lot of weight regarding their ability to change.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Sun Dec 03, 2017 5:52 pm

hoops777 wrote:
Sun Dec 03, 2017 5:39 pm
Another factor which the author did not address is that how a person is first introduced to investing also carries a lot of weight regarding their ability to change.
That is quite an interesting observation. Do you know of any articles about it?
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by dbr » Sun Dec 03, 2017 6:01 pm

livesoft wrote:
Sun Dec 03, 2017 5:52 pm
hoops777 wrote:
Sun Dec 03, 2017 5:39 pm
Another factor which the author did not address is that how a person is first introduced to investing also carries a lot of weight regarding their ability to change.
That is quite an interesting observation. Do you know of any articles about it?
I don't know about that as a data driven observation but an anecdotal observation here on the forum is that some misunderstandings by some posters do arise from a "bank account with interest" model for stock investing, and that model is too simple. There are also occasional postings of the "spend the interest and don't invade the principal" variety. I am not really sure where those come from, but my theory is that a lot of people parrot things they have heard and don't understand more than they propose things they really believe. This is true in my opinion about almost all the threads on DCA and increasingly whenever "sequence of returns risk" is mentioned. In fact the latter may well be the current idee fixe on the forum.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Monster99 » Sun Dec 03, 2017 6:01 pm

Times change and strategies change - The internet and low-cost brokers are relatively new, as it used to be difficult and expensive to purchase MF's and stocks. Dividend reinvestment programs (DRIP's) were an inexpensive and effective way to increase wealth and participate in the market.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Sun Dec 03, 2017 6:05 pm

dbr wrote:
Sun Dec 03, 2017 6:01 pm
This is true in my opinion about almost all the threads on DCA and increasingly whenever "sequence of returns risk" is mentioned. In fact the latter may well be the current idee fixe on the forum.
The DCA vs LS puzzle is the third Behavioral Finance puzzle (after the Dividend Puzzle and the Disposition Puzzle) discussed in Chapter 7 of Statman's book. Basically, there can be little regret for something out of your control and DRIPs once set up are out of one's control and responsibility.

@Monster99, but DRIPs would lead to people not spending the dividend and buying additional shares. This is discussed in the Statman book as well.
Last edited by livesoft on Sun Dec 03, 2017 6:10 pm, edited 1 time in total.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by randomizer » Sun Dec 03, 2017 6:08 pm

I don't want no stinkin' dividends.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by dbr » Sun Dec 03, 2017 6:13 pm

Monster99 wrote:
Sun Dec 03, 2017 6:01 pm
Times change and strategies change - The internet and low-cost brokers are relatively new, as it used to be difficult and expensive to purchase MF's and stocks. Dividend reinvestment programs (DRIP's) were an inexpensive and effective way to increase wealth and participate in the market.
It is certainly true that "creating one's own dividend" by selling shares was less practical some decades ago, probably when the parents of many of today's investors were involved. This raises the question of whether a lot of mental habits are historical remnants rather than behavioral issues. People will remember what they heard from their parents. Maybe people are still envisioning upper class life in a Jane Austen novel where wealth was measured as an "income" and that was based on investment in gilt-edged secuities of the British government or on income from land holdings that would not be broken up and in fact were often entailed.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by TomatoTomahto » Sun Dec 03, 2017 6:16 pm

randomizer wrote:
Sun Dec 03, 2017 6:08 pm
I don't want no stinkin' dividends.
Yeah! Bartender, another round of BRK for the crowd.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by dbr » Sun Dec 03, 2017 6:17 pm

livesoft wrote:
Sun Dec 03, 2017 6:05 pm
dbr wrote:
Sun Dec 03, 2017 6:01 pm
This is true in my opinion about almost all the threads on DCA and increasingly whenever "sequence of returns risk" is mentioned. In fact the latter may well be the current idee fixe on the forum.
The DCA vs LS puzzle is the third Behavioral Finance puzzle (after the Dividend Puzzle and the Disposition Puzzle) discussed in Chapter 7 of Statman's book. Basically, there can be little regret for something out of your control and DRIPs once set up are out of one's control and responsibility.

@Monster99, but DRIPs would lead to people not spending the dividend and buying additional shares. This is discussed in the Statman book as well.
To the extent behavioral dilemmas are about the anxiety of having control, we would also expect high anxiety about choices, especially choices that make no difference, because if there is no difference then there is no way to get external resolution of the dilemma. We see a lot of that here. There must be a special art to being comfortable with any of equivalent choices as opposed to paralysis when facing equivalent choices. I know people I can't accompany to a restaurant that has one of those ten page menus with forty choices on it. It works well if such a person will take the prix fixe, but that is not so common in the US.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Monster99 » Sun Dec 03, 2017 6:22 pm

dbr wrote:
Sun Dec 03, 2017 6:13 pm
Monster99 wrote:
Sun Dec 03, 2017 6:01 pm
Times change and strategies change - The internet and low-cost brokers are relatively new, as it used to be difficult and expensive to purchase MF's and stocks. Dividend reinvestment programs (DRIP's) were an inexpensive and effective way to increase wealth and participate in the market.
It is certainly true that "creating one's own dividend" by selling shares was less practical some decades ago, probably when the parents of many of today's investors were involved. This raises the question of whether a lot of mental habits are historical remnants rather than behavioral issues. People will remember what they heard from their parents. Maybe people are still envisioning upper class life in a Jane Austen novel where wealth was measured as an "income" and that was based on investment in gilt-edged secuities of the British government or on income from land holdings that would not be broken up and in fact were often entailed.
Quite possible that it is learned behavior from the parents, especially if the parents were successful at accumulation of wealth....

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Sun Dec 03, 2017 7:14 pm

livesoft wrote:
Sun Dec 03, 2017 5:52 pm
hoops777 wrote:
Sun Dec 03, 2017 5:39 pm
Another factor which the author did not address is that how a person is first introduced to investing also carries a lot of weight regarding their ability to change.
That is quite an interesting observation. Do you know of any articles about it?
Just my opinion,and I am just talking about someone who really gets in to it,not a brief exposure.You have seen countless threads arguing about dividends with posters unwilling to accept the logical arguments presented.How do you think they arrived at that point?Just like anything else when someone constantly listens to the same point of view day after day for years.Once it becomes a belief it is more difficult to change.On a personal note,I use to believe in the dividend method and still have difficulty dismissing it.I am psychologically damaged for life :D
One of the best and richest players in the NBA believes the earth is flat,so there you go.
Last edited by hoops777 on Sun Dec 03, 2017 10:18 pm, edited 1 time in total.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by pkcrafter » Sun Dec 03, 2017 8:48 pm

Statman's book is impressive. It is detailed and thoroughly researched. There are hundreds of references listed.

More from Statman-- (earlier post)

viewtopic.php?f=10&t=229121&p=3576574&h ... e#p3576574

Hoops wrote: Another factor which the author did not address is that how a person is first introduced to investing also carries a lot of weight regarding their ability to change.
This is probably true for some investors who never bother to educate themselves, and maybe it's willingness rather than ability.


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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Sun Dec 03, 2017 9:00 pm

@pkcrafter, thanks for the link to that thread (I was out of town the days that thread was active and missed it).

And yes, Statman's book has a lot of stuff in it with many one or two sentence nuggets. I've got a library book, so I cannot highlight all the goodies and have already probably forgotten more than half of them.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by alex_686 » Sun Dec 03, 2017 9:34 pm

hoops777 wrote:
Sun Dec 03, 2017 5:39 pm
Another factor which the author did not address is that how a person is first introduced to investing also carries a lot of weight regarding their ability to change.
I don't know of any studies on how people were introduced to investing per se. There are articles out there that people who started investing during a bull market have a greater willingness to take risk 30 years on. There are other articles out there that indicating that if your first trip to Las Vegas is successful - as in winning money - one is more inclined to come back again. So I think it is a reasonable assumption.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by nedsaid » Sun Dec 03, 2017 10:23 pm

randomizer wrote:
Sun Dec 03, 2017 6:08 pm
I don't want no stinkin' dividends.
If you don't want them, you can send them to me.
A fool and his money are good for business.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by RAchip » Sun Dec 03, 2017 10:51 pm

So many here dont like dividends. You are the VAST minority. Every single company in the DJIA and 80+% of of companies in the s&p 500 pay dividends. Why? The VAST majority of investors want them. They create value for investors.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by fennewaldaj » Sun Dec 03, 2017 10:59 pm

At a base level isn't the point of stock to receive dividends or capital return through share buy back. It seems reasonable that some people would prefer the stocks of companies that are already at this stage than one that do not currently pay dividends or do buy backs. That is the intrinsic value of your share seems less speculative.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by WildBill » Sun Dec 03, 2017 11:34 pm

livesoft wrote:
Sun Dec 03, 2017 3:26 pm
I am reading Meir Statman's "Finance for Normal People" published a few months ago which is an up-to-date compendium of many of the interesting findings from behavioral finance research. I recommend folks who enjoyed Kahneman's Thinking, Fast & Slow and Zweig's "Your Money and Your Brain" to pick up a copy and read it. I am going to read other works of Statman, too.

There is a chapter on some puzzles in finance including why some investors prefer to get dividends and want to own dividend-paying stocks when others know there is really no extra benefit to such stocks. Here's a couple paragraphs explaining a possible reason from page 140 of Statman.

Basically, company paid dividends "are less likely to inflict regret" because they do not create responsibility for personal choices and self control that selling shares do to raise money.

This was also discussed in a previous thread: viewtopic.php?t=227153

Anyways, I post this because there are a couple of "I want dividends" threads currently active. Now folks can understand why these folks might adhere to the "I want dividends" theme.

Statman himself quoted his book in this WSJ article: https://www.wsj.com/articles/the-mental ... 1492999921
Howdy

A bunch of fancy language, concealing the truth that dividends appeal to our innate sloth and laziness.

If I need cash to pay for the groceries, a total return strategy would force me to reach out from the couch, pick up some electronic device, log in, figure out what to sell, possibly transfer money (gasp!!) between accounts, potentially some other tedious associated chores.

With dividends the money just shows up and I can continue my nap without interruption

Come on guys, I did not retire in order to take up another form of back breaking labor!

And thanks to livesoft’s wise counsel I can do it tax free!

Happy dividends

W B
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by brad.clarkston » Sun Dec 03, 2017 11:40 pm

RAchip wrote:
Sun Dec 03, 2017 10:51 pm
So many here dont like dividends. You are the VAST minority. Every single company in the DJIA and 80+% of of companies in the s&p 500 pay dividends. Why? The VAST majority of investors want them. They create value for investors.
I wouldn't say "many here don't like dividends" its more like "the vocal minority doesn't like dividends".

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by aj76er » Sun Dec 03, 2017 11:41 pm

Thanks for the reference, Livesoft! I've added to my reading list at the library :happy

I notice a lot of folks on this forum aim for a 2-2.5% SWR, which is essentially the current dividend yield of global equities.
Despite espousing a total return strategy, I wonder if there is a common psychology at play here.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by randomizer » Sun Dec 03, 2017 11:44 pm

RAchip wrote:
Sun Dec 03, 2017 10:51 pm
So many here dont like dividends. You are the VAST minority. Every single company in the DJIA and 80+% of of companies in the s&p 500 pay dividends. Why? The VAST majority of investors want them. They create value for investors.
Actually, they create unwanted taxable events for investors. If you want dividends and you hold a stock that doesn't pay them, just sell some with your own desired timing and quantity.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by cinghiale » Mon Dec 04, 2017 2:18 am

Good thread. One question about the book. Has anyone read Statman’s earlier (2010) book, What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions? See at: https://www.amazon.com/What-Investors-R ... ir+statman. I wonder how much new ground the new book plows. This earlier work also gets very positive reviews on Amazon. If the content of the two books is distinct, readers may want to take a look at Statman’s earlier work.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Monster99 » Mon Dec 04, 2017 7:17 am

Just finishing McClung's book on retirement spending. Will add these to my winter reading list. Thanks!

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by bertilak » Mon Dec 04, 2017 7:51 am

It is interesting that there are a number of funds that focus on dividend paying stocks. If that's such a bad idea, how many here would buy the opposite: funds that avoid dividend paying stocks? Would that be growth funds?

My argument FOR dividend stocks is summarized by this quote from Investopedia:
  • Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock. Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
I appreciate the following:
  • steady: Dividends are much less volatile than prices. To the extent I can rely on dividends I do not need to sell depreciated shares and thereby miss out on some of any future recovery from bad times.
  • strength: Even if dividends are cut in bad times, a strong company is more likely to restore them or, better yet, not cut them in the first place.
  • management expectations: Talk about variable withdrawal. Who better to evaluate when to be conservative and when to be bold than the people with insider knowledge of a company's prospects?
I say the argument that dividend investors are too irrational to realize that dividends come right out of a company's NAV is a straw-man argument. I think the points made in that quote are valid. They are, however, not strong enough to make me seek out dividend stocks (or funds). I would rather put my trust in diversity and lower tax costs.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by dbr » Mon Dec 04, 2017 9:34 am

brad.clarkston wrote:
Sun Dec 03, 2017 11:40 pm
RAchip wrote:
Sun Dec 03, 2017 10:51 pm
So many here dont like dividends. You are the VAST minority. Every single company in the DJIA and 80+% of of companies in the s&p 500 pay dividends. Why? The VAST majority of investors want them. They create value for investors.
I wouldn't say "many here don't like dividends" its more like "the vocal minority doesn't like dividends".
There is a big difference between "don't like dividends" and advising people who have a mistaken idea that dividends offer a large advantage. There are still people posting here from time to time who seem to have the misunderstanding that dividends are free money. I doubt anyone in the "dividends are nothing special" crowd is really all that bothered to take 2% on the total stock market and instead is running around holding only stocks that don't pay dividends. There is BRK afterall.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by dbr » Mon Dec 04, 2017 9:38 am

aj76er wrote:
Sun Dec 03, 2017 11:41 pm
Thanks for the reference, Livesoft! I've added to my reading list at the library :happy

I notice a lot of folks on this forum aim for a 2-2.5% SWR, which is essentially the current dividend yield of global equities.
Despite espousing a total return strategy, I wonder if there is a common psychology at play here.
Dividend investing often coincides with taking a very conservative rate of withdrawal, but it doesn't have to, especially if a person buys investments for risky high levels of payout. People can be right for the wrong reason, but that is never a good thing. The irony is that in today's conditions the person who sets rate of spending at dividends may be living at a lower standard of living than might otherwise be sustained -- not that there is anything wrong with that, as Seinfeld would say.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Mon Dec 04, 2017 10:00 am

bertilak wrote:
Mon Dec 04, 2017 7:51 am
It is interesting that there are a number of funds that focus on dividend paying stocks. If that's such a bad idea, how many here would buy the opposite: funds that avoid dividend paying stocks? Would that be growth funds?

My argument FOR dividend stocks is summarized by this quote from Investopedia:
  • Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock. Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
I appreciate the following:
  • steady: Dividends are much less volatile than prices. To the extent I can rely on dividends I do not need to sell depreciated shares and thereby miss out on some of any future recovery from bad times.
  • strength: Even if dividends are cut in bad times, a strong company is more likely to restore them or, better yet, not cut them in the first place.
  • management expectations: Talk about variable withdrawal. Who better to evaluate when to be conservative and when to be bold than the people with insider knowledge of a company's prospects?
I say the argument that dividend investors are too irrational to realize that dividends come right out of a company's NAV is a straw-man argument. I think the points made in that quote are valid. They are, however, not strong enough to make me seek out dividend stocks (or funds). I would rather put my trust in diversity and lower tax costs.
What about this?
  • Many investors like the steady income associated with dividends stock buybacks, so they will be more likely to buy that company's stock. Investors also see a dividend payment stock buyback as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
This is what is meant by "dividend irrelevance". It isn't that those items you mentioned aren't unappreciated it is that the same argument applies to other means of returning capital to investors.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Mon Dec 04, 2017 10:02 am

And instead of a cash dividend, a stock dividend could be made which warps people's minds even more. :twisted:
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by dbr » Mon Dec 04, 2017 10:04 am

One of the larger "windfalls" I got was when a holding (in those days I had some individual stocks) was bought out by a private group. The stock jumped about 20% nearly overnight.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Lynette » Mon Dec 04, 2017 10:11 am

nedsaid wrote:
Sun Dec 03, 2017 10:23 pm
randomizer wrote:
Sun Dec 03, 2017 6:08 pm
I don't want no stinkin' dividends.
If you don't want them, you can send them to me.
:D :D Problem is I have to pay tax on them.

I don't want them as it is messing up my tax planning. I have to pay taxes on dividends whether I need them or not. At this stage of my life, I'm living on pensions and SS and I also have RMDs that I make or may not spend. I need to limit my Modified AGI to keep in a lower bracket for Medicare IRMAA and I'm annoyed that I get dividends whether I need them or not.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by RAchip » Mon Dec 04, 2017 11:43 am

"There are still people posting here from time to time who seem to have the misunderstanding that dividends are free money."

Dividends are not "free" money, THEY ARE GUARANTEED MONEY. If the cash stays in the company you may or may not realize that money when you sell your stock at some point in the future. It depends what the company does with the cash if it doesn't dividend it out.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Mon Dec 04, 2017 12:05 pm

triceratop wrote:
Mon Dec 04, 2017 10:00 am
bertilak wrote:
Mon Dec 04, 2017 7:51 am
It is interesting that there are a number of funds that focus on dividend paying stocks. If that's such a bad idea, how many here would buy the opposite: funds that avoid dividend paying stocks? Would that be growth funds?

My argument FOR dividend stocks is summarized by this quote from Investopedia:
  • Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock. Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
I appreciate the following:
  • steady: Dividends are much less volatile than prices. To the extent I can rely on dividends I do not need to sell depreciated shares and thereby miss out on some of any future recovery from bad times.
  • strength: Even if dividends are cut in bad times, a strong company is more likely to restore them or, better yet, not cut them in the first place.
  • management expectations: Talk about variable withdrawal. Who better to evaluate when to be conservative and when to be bold than the people with insider knowledge of a company's prospects?
I say the argument that dividend investors are too irrational to realize that dividends come right out of a company's NAV is a straw-man argument. I think the points made in that quote are valid. They are, however, not strong enough to make me seek out dividend stocks (or funds). I would rather put my trust in diversity and lower tax costs.
What about this?
  • Many investors like the steady income associated with dividends stock buybacks, so they will be more likely to buy that company's stock. Investors also see a dividend payment stock buyback as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
This is what is meant by "dividend irrelevance". It isn't that those items you mentioned aren't unappreciated it is that the same argument applies to other means of returning capital to investors.
Do you have any data on the pct of companies that do stock buybacks vs companies that pay dividends?I would assume the dividend payers are a much higher pct of the stock universe,but have no idea.I did do a little reading on the subject and stock buybacks are not always positive for a company or it’s shareholders.They can have negative consequences but I will leave that to others to discern.Of course the same can be said for dividends,so there is no perfect answer.
Last edited by hoops777 on Mon Dec 04, 2017 12:18 pm, edited 1 time in total.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Mon Dec 04, 2017 12:15 pm

hoops777 wrote:
Mon Dec 04, 2017 12:05 pm
triceratop wrote:
Mon Dec 04, 2017 10:00 am
bertilak wrote:
Mon Dec 04, 2017 7:51 am
It is interesting that there are a number of funds that focus on dividend paying stocks. If that's such a bad idea, how many here would buy the opposite: funds that avoid dividend paying stocks? Would that be growth funds?

My argument FOR dividend stocks is summarized by this quote from Investopedia:
  • Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock. Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
I appreciate the following:
  • steady: Dividends are much less volatile than prices. To the extent I can rely on dividends I do not need to sell depreciated shares and thereby miss out on some of any future recovery from bad times.
  • strength: Even if dividends are cut in bad times, a strong company is more likely to restore them or, better yet, not cut them in the first place.
  • management expectations: Talk about variable withdrawal. Who better to evaluate when to be conservative and when to be bold than the people with insider knowledge of a company's prospects?
I say the argument that dividend investors are too irrational to realize that dividends come right out of a company's NAV is a straw-man argument. I think the points made in that quote are valid. They are, however, not strong enough to make me seek out dividend stocks (or funds). I would rather put my trust in diversity and lower tax costs.
What about this?
  • Many investors like the steady income associated with dividends stock buybacks, so they will be more likely to buy that company's stock. Investors also see a dividend payment stock buyback as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
This is what is meant by "dividend irrelevance". It isn't that those items you mentioned aren't unappreciated it is that the same argument applies to other means of returning capital to investors.
Do you have any data on the pct of companies that do stock buybacks vs companies that pay dividends?I would assume the dividend payers are a much higher pct of the stock universe.
I'm not sure the percent of companies is at all the correct metric, but my preferred answer is to the slightly different question: what percentage of total return of capital is dividends?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Mon Dec 04, 2017 12:18 pm

Companies are aware of the dividend stock puzzle and take advantage of investors with their knowledge.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Mon Dec 04, 2017 12:21 pm

triceratop wrote:
Mon Dec 04, 2017 12:15 pm
hoops777 wrote:
Mon Dec 04, 2017 12:05 pm
triceratop wrote:
Mon Dec 04, 2017 10:00 am
bertilak wrote:
Mon Dec 04, 2017 7:51 am
It is interesting that there are a number of funds that focus on dividend paying stocks. If that's such a bad idea, how many here would buy the opposite: funds that avoid dividend paying stocks? Would that be growth funds?

My argument FOR dividend stocks is summarized by this quote from Investopedia:
  • Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock. Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
I appreciate the following:
  • steady: Dividends are much less volatile than prices. To the extent I can rely on dividends I do not need to sell depreciated shares and thereby miss out on some of any future recovery from bad times.
  • strength: Even if dividends are cut in bad times, a strong company is more likely to restore them or, better yet, not cut them in the first place.
  • management expectations: Talk about variable withdrawal. Who better to evaluate when to be conservative and when to be bold than the people with insider knowledge of a company's prospects?
I say the argument that dividend investors are too irrational to realize that dividends come right out of a company's NAV is a straw-man argument. I think the points made in that quote are valid. They are, however, not strong enough to make me seek out dividend stocks (or funds). I would rather put my trust in diversity and lower tax costs.
What about this?
  • Many investors like the steady income associated with dividends stock buybacks, so they will be more likely to buy that company's stock. Investors also see a dividend payment stock buyback as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. [My bold]
This is what is meant by "dividend irrelevance". It isn't that those items you mentioned aren't unappreciated it is that the same argument applies to other means of returning capital to investors.
Do you have any data on the pct of companies that do stock buybacks vs companies that pay dividends?I would assume the dividend payers are a much higher pct of the stock universe.
I'm not sure the percent of companies is at all the correct metric, but my preferred answer is to the slightly different question: what percentage of total return of capital is dividends?
I edited my prior post before your post.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Mon Dec 04, 2017 12:23 pm

(I see; my response would not differ)
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Mon Dec 04, 2017 12:45 pm

triceratop wrote:
Mon Dec 04, 2017 12:23 pm
(I see; my response would not differ)
I read the article and I do not see how it changes anything.I invite you to read the comments on the site at the end of the article and would like your response to those,because they come from people who have some knowledge on the subject,not hoops777 :D
K.I.S.S........so easy to say so difficult to do.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by not4me » Mon Dec 04, 2017 1:01 pm

bertilak wrote:
Mon Dec 04, 2017 7:51 am
It is interesting that there are a number of funds that focus on dividend paying stocks. If that's such a bad idea, how many here would buy the opposite: funds that avoid dividend paying stocks? Would that be growth funds?

I would rather put my trust in diversity and lower tax costs.
The absence of investment vehicles that avoid dividends has come up before & you can rest assured if there was a market for that, someone would have offered it. Several approximate it. But if you look at most -- like the growth funds you cited -- they still have dividends to a degree.

To me, retaining earnings, cash dividends, buybacks, stock dividends (trying to list all I've seen mentioned above) are all tools in a tool box the management I pay as a company owner (that is, stockholder) have to use as appropriate. They each have advantages & disadvantages. If I don't trust them to make the decision, I should either fire them or sell my ownership stake.

I would compare it to eating at a restaurant that has essentially every type of food. Each type of food will have advocates and detractors. Perhaps in my condition I have an allergy that really makes a certain food toxic -- others need that food. There may be studies in place that show why I order the food I do....& if you agree with that choice, you'll cite that study & ignore the counter studies....Someone can order something off the menu that they know will bring certain consequences & then complain when those come.

Meanwhile, I want a balanced diet that I select & I will simply not order that which I don't want.....

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Mon Dec 04, 2017 1:13 pm

hoops777 wrote:
Mon Dec 04, 2017 12:45 pm
triceratop wrote:
Mon Dec 04, 2017 12:23 pm
(I see; my response would not differ)
I read the article and I do not see how it changes anything.I invite you to read the comments on the site at the end of the article and would like your response to those,because they come from people who have some knowledge on the subject,not hoops777 :D
Okay my responses to the "knowledgeable" comments:

Here is one comment:
Dividends are generally considered to be reflective of underlying value, that is forward cash flow. No such logic for buybacks, which are merely manipulation of the EPS denominator in order to create and illusion of progress (besides which, buying back shares when it is the best time in history to ISSUE shares is to put it politely, counterintuitive.
"generally considered" and "logic" do not seem compatible. Seems like a behavorial error, mistaking investor sentiment for reality. Not sure how to even respond to this comment, but instead it looks like a good example for livesoft's point!

And the other comment:
This might be a reasonable way to view yield in the world of finance textbooks. In the real world, companies offset much of their buybacks by granting large numbers of stock options and restricted shares, so the increase in EPS is much less than the dollars allocated to buybacks would suggest. Moreover, the obvious attraction of buybacks to management is the artificial increase in EPS they create, resulting in increased bonus payments to management based on the increase in stock prices. Any rational taxpaying investor would prefer cash dividends, which he can use as he pleases, rather than an uncertain gain (in amount and in timing) from a share buyback.
1) As pointed out in the response to the comment, this is spoken from ignorance since the original study focused on Net Issuance (NI), that is, after options and RSUs.

2) "any rational taxpaying investor would prefer cash dividends" -- total nonsense. The preference should be for buybacks for better tax treatment. Yes, there are tax-advantaged accounts, but it was the commenter who specified "taxpaying".

Not a very knowledgeable comment, or comments overall.

Anything else?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Mon Dec 04, 2017 1:54 pm

triceratop wrote:
Mon Dec 04, 2017 1:13 pm
hoops777 wrote:
Mon Dec 04, 2017 12:45 pm
triceratop wrote:
Mon Dec 04, 2017 12:23 pm
(I see; my response would not differ)
I read the article and I do not see how it changes anything.I invite you to read the comments on the site at the end of the article and would like your response to those,because they come from people who have some knowledge on the subject,not hoops777 :D
Okay my responses to the "knowledgeable" comments:

Here is one comment:
Dividends are generally considered to be reflective of underlying value, that is forward cash flow. No such logic for buybacks, which are merely manipulation of the EPS denominator in order to create and illusion of progress (besides which, buying back shares when it is the best time in history to ISSUE shares is to put it politely, counterintuitive.
"generally considered" and "logic" do not seem compatible. Seems like a behavorial error, mistaking investor sentiment for reality. Not sure how to even respond to this comment, but instead it looks like a good example for livesoft's point!

And the other comment:
This might be a reasonable way to view yield in the world of finance textbooks. In the real world, companies offset much of their buybacks by granting large numbers of stock options and restricted shares, so the increase in EPS is much less than the dollars allocated to buybacks would suggest. Moreover, the obvious attraction of buybacks to management is the artificial increase in EPS they create, resulting in increased bonus payments to management based on the increase in stock prices. Any rational taxpaying investor would prefer cash dividends, which he can use as he pleases, rather than an uncertain gain (in amount and in timing) from a share buyback.
1) As pointed out in the response to the comment, this is spoken from ignorance since the original study focused on Net Issuance (NI), that is, after options and RSUs.

2) "any rational taxpaying investor would prefer cash dividends" -- total nonsense. The preference should be for buybacks for better tax treatment. Yes, there are tax-advantaged accounts, but it was the commenter who specified "taxpaying".

Not a very knowledgeable comment, or comments overall.

Anything else?
Yes.You have proven to be quite a believer in buybacks.You do realize there are a lot of very intelligent,educated people who do not see it exactly like you do.I also would like to share a saying from the book of hoops.....very smart people who practice humility are better liked than those who do not.
K.I.S.S........so easy to say so difficult to do.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Mon Dec 04, 2017 1:56 pm

Taking my comments to be an endorsement of buybacks is incorrect. I do not "believe in them"; there is nothing to believe or disbelieve.

I am simply saying that before taxes, dividend policy is irrelevant. I would also add, that article I linked to substantiates my point. And the commenters on the article do not come close to critiquing the article, only what they think the article is about, which is not the same.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by magneto » Mon Dec 04, 2017 2:00 pm

In common with so many other dividend-allergic threads, left wondering why there is so much vehemence expressed against dividends. :?:

Those in favour of dividends would welcome a 50% stock set-back, the dividend averse would presumably not?

Might the plethora of anti-dividend sentiment be anything to do with the current starved income stream due to elevated stock valuations; a clutching at straws?
Maybe the dividend averse would be happier with bitcoin type assets?
No dividends there :!:

The 'Gordon Equation' gives investors an indication of expected returns.
Take the dividends away and how then do we value stocks?
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Mon Dec 04, 2017 2:07 pm

magneto wrote:
Mon Dec 04, 2017 2:00 pm
In common with so many other dividend-allergic threads, left wondering why there is so much vehemence expressed against dividends. :?:

Those in favour of dividends would welcome a 50% stock set-back, the dividend averse would presumably not?

Might the plethora of anti-dividend sentiment be anything to do with the current starved income stream due to elevated stock valuations; a clutching at straws?
Maybe the dividend averse would be happier with bitcoin type assets?
No dividends there :!:

The 'Gordon Equation' gives investors an indication of expected returns.
Take the dividends away and how then do we value stocks?
There is not an aversion to dividends expressed in this thread; rather an aversion to incorrect thinking about dividends.

"Might the plethora of anti-dividend sentiment be anything to do with the current starved income stream due to elevated stock valuations; a clutching at straws?"

No. If anything, this should be an indication to those who prefer dividends that the prices may have been bid up by those reaching for yield. That is a behavorial error, to keep this thread on-topic.

"Maybe the dividend averse would be happier with bitcoin type assets?"

No, no source of expected return, either: corporate profits.

"The 'Gordon Equation' gives investors an indication of expected returns.
Take the dividends away and how then do we value stocks?"

The gordon equation is normalized for stock buybacks: that is, all quantities are already per share.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Mon Dec 04, 2017 2:11 pm

The Statman book has made me see why many investors like to get dividends, but I would still prefer not to get them.

But clearly, dividends are a fact of life when investing for many people. If I get a dividend from a fund held in a tax-advantaged account and just have the dividend automatically reinvested at NAV, then that's pretty much like not getting a dividend in the first place, so no harm and no foul as far as I am concerned.

It is a somewhat different matter in a taxable account, but except for some tricky trades, I have to just go along with the crowd.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by not4me » Mon Dec 04, 2017 2:15 pm

triceratop wrote:
Mon Dec 04, 2017 1:56 pm

I am simply saying that before taxes, dividend policy is irrelevant.
I'm curious. From whose perspective do you believe it to be "irrelevant"? CFO/CEO/Board of Directors? individual investor? institutional investor? bond holder? all the above? none of the above? write-in candidate(s)?

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Mon Dec 04, 2017 2:20 pm

triceratop wrote:
Mon Dec 04, 2017 1:56 pm
Taking my comments to be an endorsement of buybacks is incorrect. I do not "believe in them"; there is nothing to believe or disbelieve.

I am simply saying that before taxes, dividend policy is irrelevant. I would also add, that article I linked to substantiates my point. And the commenters on the article do not come close to critiquing the article, only what they think the article is about, which is not the same.
Hey,if that is what you believe.My humble apology.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Mon Dec 04, 2017 2:23 pm

not4me wrote:
Mon Dec 04, 2017 2:15 pm
triceratop wrote:
Mon Dec 04, 2017 1:56 pm

I am simply saying that before taxes, dividend policy is irrelevant.
I'm curious. From whose perspective do you believe it to be "irrelevant"? CFO/CEO/Board of Directors? individual investor? institutional investor? bond holder? all the above? none of the above? write-in candidate(s)?
I am referring to the Modigliani-Miller Theorem. I didn't present my statements as opinions but as facts; subject to the assumptions (feel free to critique these, but few do!) the result follows mathematically.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Phineas J. Whoopee » Mon Dec 04, 2017 2:40 pm

If I may echo and perhaps even amplify triceratop's voice:

We are not against dividends. We are only against misconceptions about dividends.

PJW
Last edited by Phineas J. Whoopee on Mon Dec 04, 2017 3:02 pm, edited 1 time in total.

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