One answer to the Dividend stocks puzzle from behavioral finance

[not4me]

facts; subject to the assumptions

Not an opinion .... just something 'subject to assumptions'? Hmmm....don't guess I have follow-up questions!!!

Happy holidays!!!

[packet]

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 learned this from VictoriaF...

The most important choice is the first choice. People tend to stick with their initial choices. A Behavioral Economist Dan Ariely calls this "arbitrary coherence." ...

Cheers,
packet

[hoops777]

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 learned this from VictoriaF...

The most important choice is the first choice. People tend to stick with their initial choices. A Behavioral Economist Dan Ariely calls this "arbitrary coherence." ...

Cheers,
packet

You see livesoft.I bet you thought I was just making this up

[triceratop]

facts; subject to the assumptions

Not an opinion .... just something 'subject to assumptions'? Hmmm....don't guess I have follow-up questions!!!

Happy holidays!!!

Are mathematical theorems not true because they all rely on axioms? That would be news to mathematicians!

[WildBill]

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

You posted this deliberately to instigate another highly entertaining dividends “good/bad/tax drag/etc. proponents of dividends delusional /etc./. etc/ and so on”

Troublemaker

W B

[RAchip]

To echo and perhaps even amplify triceratop's voice:

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

PJW

I think it is you who misunderstand dividends. A finance professor performing an academic valuation would say that keeping the cash in the company increases the value of the stock, which is true from a pure academic perspective. But that's not the way it works in the real world. Cash held in a company gets used eventually. And it may be used in a good way or a bad way. Most investors feel that unless a company has a specific need for excess earnings, those earnings should be paid out to stockholders. Holding cash in a company (or using that cash for buy-backs) only produces value for investors if new investors think that strategy increases the value of the stock and are willing to buy at higher prices. Dividends don't depend on other people being willing to pay a higher price for the stock. Dividends are guaranteed money in your pocket. As I have said before, people who really understand investing understand this. Dividends create value. In the end, stock is like any other commodity. Price is determined by demand for the stock. The reason that every single company in the DJIA pays dividends is because investors want them and are willing to pay to get them.

[livesoft]

You posted this deliberately to instigate another highly entertaining dividends “good/bad/tax drag/etc. proponents of dividends delusional /etc./. etc/ and so on”

Troublemaker

Of course. And the book has some things to say about DCA vs Lump Sum. In particular, that Constantinides paper always cited to prove LS is better than DCA has an assumption that does not apply to my standard answer on the DCA vs LS puzzle. The same defect feature is found in all the other studies by Vanguard and others.

[LRonHalfelven]

(quoting Investopedia) "Many investors like the steady income associated with dividends..."

This quote illustrates part of the problem: we're not all using words the same way. I'm used to thinking of "income" as the money you take out of your portfolio in order to spend it; since this quantity is entirely under your control, it makes no sense to talk about its "steadiness", as if it weren't.

[triceratop]

To echo and perhaps even amplify triceratop's voice:

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

PJW

I think it is you who misunderstand dividends. A finance professor performing an academic valuation would say that keeping the cash in the company increases the value of the stock, which is true from a pure academic perspective. But that's not the way it works in the real world. Cash held in a company gets used eventually. And it may be used in a good way or a bad way. Most investors feel that unless a company has a specific need for excess earnings, those earnings should be paid out to stockholders. Holding cash in a company (or using that cash for buy-backs) only produces value for investors if new investors think that strategy increases the value of the stock and are willing to buy at higher prices. Dividends don't depend on other people being willing to pay a higher price for the stock. Dividends are guaranteed money in your pocket. As I have said before, people who really understand investing understand this. Dividends create value. In the end, stock is like any other commodity. Price is determined by demand for the stock. The reason that every single company in the DJIA pays dividends is because investors want them and are willing to pay to get them.

"Dividends create value."

Berkshire investors disagree, I am sure. Having never paid a dividend, why is its share price not $0.00? Rather, it is corporate profits which are the source of value.

" In the end, stock is like any other commodity. Price is determined by demand for the stock."

No, prices are determined by market participants on an assessment of correct value.

"The reason that every single company in the DJIA pays dividends is because investors want them and are willing to pay to get them."

The rules for computing the DJIA are so dumb that they exclude one of the largest non-dividend-paying stocks. If Berkshire Hathaway were included, because its price is so high the DJIA would become a meaningless number. For that reason, I don't find this argument very convincing.

[RAchip]

"Berkshire investors disagree"

This and your other arguments are speculation. I think that is Berkshire started paying a dividend there would be even more demand for its stock and the price would rise, not fall.

The market price of stock is determined by supply and demand. The market price is not an academic valuation.

[triceratop]

"Berkshire investors disagree"

This and your other arguments are speculation. I think that is Berkshire started paying a dividend there would be even more demand for its stock and the price would rise, not fall.

The market price of stock is determined by supply and demand. The market price is not an academic valuation.

If the number of shares of a company are fixed in a trading day, why does its share price fluctuate? Every seller sells to a buyer, no?

[spdoublebass]

Thanks for this thread Livesoft. I find the excerpts in the book really interesting. I want to order it.

As mentioned above, about how you are introduced to investing, I agree that this stays with you.
I had many preconceived "truths" passed on to me that this forum has helped me overcome.

I am still in my first year investing, I cannot imagine how much longer those influences would have lingered if I would not have found this forum within weeks of starting out.

Another behavioral error that people make that Livesoft posted about on another thread is regarding gifted shares. If you receive a gifted share you should not feel any attachment to it at all. This impacts me directly in that I might be getting gifted some shares of DTE (Detroit Edison Stock) from my grandmother. There is a part of me that is emotionally attached to them because my grandfather is deceased and retired from that company. I know now to treat it as anything else and sell it and stay the course with my IPS.

[chisey]

I think it is you who misunderstand dividends. A finance professor performing an academic valuation would say that keeping the cash in the company increases the value of the stock, which is true from a pure academic perspective. But that's not the way it works in the real world. Cash held in a company gets used eventually. And it may be used in a good way or a bad way. Most investors feel that unless a company has a specific need for excess earnings, those earnings should be paid out to stockholders. Holding cash in a company (or using that cash for buy-backs) only produces value for investors if new investors think that strategy increases the value of the stock and are willing to buy at higher prices. Dividends don't depend on other people being willing to pay a higher price for the stock. Dividends are guaranteed money in your pocket. As I have said before, people who really understand investing understand this. Dividends create value. In the end, stock is like any other commodity. Price is determined by demand for the stock. The reason that every single company in the DJIA pays dividends is because investors want them and are willing to pay to get them.

If you believe cash has more value in your pocket than it does reinvested in a company, then why would you invest in that company to begin with?

[livesoft]

Thanks for this thread Livesoft. I find the excerpts in the book really interesting. I want to order it.

You are welcome. But just a warning: If you have not read Kahneman's "Thinking, Fast & Slow", then I think the Statman book will be a hard slog.

[Da5id]

Holding cash in a company (or using that cash for buy-backs) only produces value for investors if new investors think that strategy increases the value of the stock and are willing to buy at higher prices.

Huh. Buybacks are comparable to dividends in many ways. Some people object a bit at the edges (buybacks may have some bad incentives, e.g. helping a CEO get his options to vest), but they are very different than retaining cash for investment in growth. A buyback in fact returns cash to the investors who chose to sell their shares, and gives the other investors a greater ownership in the company. You can self-dividend after a buyback (e.g. buy selling some stock) and own as much of the company as you did before the buyback.

[Phineas J. Whoopee]

To echo and perhaps even amplify triceratop's voice:

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

PJW

I think it is you who misunderstand dividends. ...

We are not against dividends.

PJW

[rkhusky]

If you believe cash has more value in your pocket than it does reinvested in a company, then why would you invest in that company to begin with?

To get more dividends I presume. Take a mature company that has a good product that people want. They've expanded as much as they plan to and now they just sell their product and make money. It seems like passing a portion of the profits to their investors is the right thing to do, rather than, for example, building more palatial offices for their executives. That being said, I don't look for dividends and dislike paying the tax on them every year. Perhaps companies that aren't using their profits to expand and/or innovate will lose market share and gradually go out of business. I prefer to just invest in the market and let others make the call on the goodness/badness of dividends.

[Da5id]

If you believe cash has more value in your pocket than it does reinvested in a company, then why would you invest in that company to begin with?

Some companies are mature. They produce cash, but can't reasonably deploy all (or maybe any) of the cash produced to grow the business. In that case, they should return the cash to their owners (aka investors). The cash can be returned as a cash dividend or by buying back shares. If a company is to return the cash to its owners, at least most of us who are allegedly arguing the "anti-dividend" side are fans of buybacks in our taxable accounts and don't care how the cash is returned to us in our tax advantaged accounts.

[chisey]

If you believe cash has more value in your pocket than it does reinvested in a company, then why would you invest in that company to begin with?

Some companies are mature. They produce cash, but can't reasonably deploy all (or maybe any) of the cash produced to grow the business. In that case, they should return the cash to their owners (aka investors). The cash can be returned as a cash dividend or by buying back shares. If a company is to return the cash to its owners, at least most of us who are allegedly arguing the "anti-dividend" side are fans of buybacks in our taxable accounts and don't care how the cash is returned to us in our tax advantaged accounts.

Yes, but I'm asking why you'd keep dividends rather than reinvesting them in the same companies to generate more future return, which is presumably the only reason to prefer dividends over buybacks.

[hoops777]

To echo and perhaps even amplify triceratop's voice:

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

PJW

I think it is you who misunderstand dividends. A finance professor performing an academic valuation would say that keeping the cash in the company increases the value of the stock, which is true from a pure academic perspective. But that's not the way it works in the real world. Cash held in a company gets used eventually. And it may be used in a good way or a bad way. Most investors feel that unless a company has a specific need for excess earnings, those earnings should be paid out to stockholders. Holding cash in a company (or using that cash for buy-backs) only produces value for investors if new investors think that strategy increases the value of the stock and are willing to buy at higher prices. Dividends don't depend on other people being willing to pay a higher price for the stock. Dividends are guaranteed money in your pocket. As I have said before, people who really understand investing understand this. Dividends create value. In the end, stock is like any other commodity. Price is determined by demand for the stock. The reason that every single company in the DJIA pays dividends is because investors want them and are willing to pay to get them.

"Dividends create value."

Berkshire investors disagree, I am sure. Having never paid a dividend, why is its share price not $0.00? Rather, it is corporate profits which are the source of value.

" In the end, stock is like any other commodity. Price is determined by demand for the stock."

No, prices are determined by market participants on an assessment of correct value.

"The reason that every single company in the DJIA pays dividends is because investors want them and are willing to pay to get them."

The rules for computing the DJIA are so dumb that they exclude one of the largest non-dividend-paying stocks. If Berkshire Hathaway were included, because its price is so high the DJIA would become a meaningless number. For that reason, I don't find this argument very convincing.
[/quote


There are 30 companies in the Dow.They all pay dividends.Berkshire’s exclusion makes the fact the other 30 paying dividends is meaningless?1 out of 31.I find that argument very unconvincing.

[bertilak]

(quoting Investopedia) "Many investors like the steady income associated with dividends..."

This quote illustrates part of the problem: we're not all using words the same way. I'm used to thinking of "income" as the money you take out of your portfolio in order to spend it; since this quantity is entirely under your control, it makes no sense to talk about its "steadiness", as if it weren't.

If you look at dividends paid by companies you well see that the dividends are less volatile than stock quotes. Stock prices jump around daily but dividends rarely change. We are talking quarters or years instead of days. I hope we can agree on that much.

Labeling everything you spend out of an investment portfolio as income obscures the point. The reliability of the income source counts. Dividends are less volatile and therefore (perhaps even by definition) more reliable than stock prices, which have an element of speculation.

The steadiness (negative volatility?) of one's withdrawal does not speak to the steadiness of one's income source which is the important thing to some -- those who rely on the income, however defined.

This is a form of the "bird in the hand" aspect of dividends.

This is not a "misconception" as per ...

We are only against misconceptions about dividends.

[dbr]

"Berkshire investors disagree"

This and your other arguments are speculation. I think that is Berkshire started paying a dividend there would be even more demand for its stock and the price would rise, not fall.

The market price of stock is determined by supply and demand. The market price is not an academic valuation.

If the number of shares of a company are fixed in a trading day, why does its share price fluctuate? Every seller sells to a buyer, no?

It doesn't mean supply and demand in the sense of supply chain of a commodity. It means relative desire to own one of the shares that exists. Note desire is actually a behavioral variable.

[dbr]

(quoting Investopedia) "Many investors like the steady income associated with dividends..."

This quote illustrates part of the problem: we're not all using words the same way. I'm used to thinking of "income" as the money you take out of your portfolio in order to spend it; since this quantity is entirely under your control, it makes no sense to talk about its "steadiness", as if it weren't.

If you look at dividends paid by companies you well see that the dividends are less volatile than stock quotes. Stock prices jump around daily but dividends rarely change. We are talking quarters or years instead of days. I hope we can agree on that much.

Labeling everything you spend out of an investment portfolio as income obscures the point. The reliability of the income source counts. Dividends are less volatile and therefore (perhaps even by definition) more reliable than stock prices, which have an element of speculation.

The steadiness (negative volatility?) of one's withdrawal does not speak to the steadiness of one's income source which is the important thing to some -- those who rely on the income, however defined.

This is a form of the "bird in the hand" aspect of dividends.

This is not a "misconception" as per ...

We are only against misconceptions about dividends.

It is in fact a misconception about income, one which is common to this discussion.

[saltycaper]

Of course. And the book has some things to say about DCA vs Lump Sum. In particular, that Constantinides paper always cited to prove LS is better than DCA has an assumption that does not apply to my standard answer on the DCA vs LS puzzle. The same defect feature is found in all the other studies by Vanguard and others.

Another thanks for the book recommendation.

Not to derail the thread, which will happen in due time anyway, but are you referring to Constantinides' "A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy"? A little dense for me, but I don't believe it argues for lump sum. It only argues against DCA. "We criticized DCA policies as suboptimal policies, but we had nothing to say regarding gradual policies [in general]."

A pedantic distinction perhaps...

But hey, speaking of the importance of precision when defining an argument, and bringing it back to the topic at hand:

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

This is a good example of why there is not vehemence for dividends but rather a sharp reaction against certain claims surrounding dividends. Whether your stocks pay dividends or not, if they suffer a 50% set-back, you have lost 50% of your money. Those "in favor of dividends" should not welcome this anymore than those who are dividend agnostic.

[Da5id]

If you believe cash has more value in your pocket than it does reinvested in a company, then why would you invest in that company to begin with?

Some companies are mature. They produce cash, but can't reasonably deploy all (or maybe any) of the cash produced to grow the business. In that case, they should return the cash to their owners (aka investors). The cash can be returned as a cash dividend or by buying back shares. If a company is to return the cash to its owners, at least most of us who are allegedly arguing the "anti-dividend" side are fans of buybacks in our taxable accounts and don't care how the cash is returned to us in our tax advantaged accounts.

Yes, but I'm asking why you'd keep dividends rather than reinvesting them in the same companies to generate more future return, which is presumably the only reason to prefer dividends over buybacks.

Your question didn't make that obvious, at least to me. And as it happens, I don't reinvest dividends in taxable mutual funds. Not because I don't "like" the mutual fund, but because it provides a convenient opportunity to nudge my asset allocation towards balance. And there are a number of behavioral/convenience reasons people like/prefer dividends. People just need to recognize that dividends aren't magic and investing for total return is the way to go. IMHO of course.

[SGM]

I enjoyed the book, but it is not well organized. I started out 40 years ago with inexpensive DRIPs. I realize that dividends are a drag on returns long term in a taxable account. I am neutral concerning dividends in tax advantaged accounts. I prefer capital gains in taxable that I can take when I need to cash out of a position in taxable. However, I mostly spend dividends as they are damn convenient and cannot be avoided in a diversified portfolio.

Stock buybacks are often a way the company buys high. It seems that Buffet can find better ways to use Berkshire's extra cash other than in buybacks and dividends. Not all companies use buybacks wisely.

[hoops777]

I enjoyed the book, but it is not well organized. I started out 40 years ago with inexpensive DRIPs. I realize that dividends are a drag on returns long term in a taxable account. I am neutral concerning dividends in tax advantaged accounts. I prefer capital gains in taxable that I can take when I need to cash out of a position in taxable. However, I mostly spend dividends as they are damn convenient and cannot be avoided in a diversified portfolio.

Stock buybacks are often a way the company buys high. It seems that Buffet can find better ways to use Berkshire's extra cash other than in buybacks and dividends. Not all companies use buybacks wisely.

That was the one thing about buybacks that was conveniently left out.

[livesoft]

The book title is "Finance for Normal People." The folks in this thread who really like dividends are the "Normal People" that Statman is referring to. The folks who do not see benefit of dividends under most circumstances are "rational people" and the book can help rational people understand Normal People.

[LRonHalfelven]

(quoting Investopedia) "Many investors like the steady income associated with dividends..."

This quote illustrates part of the problem: we're not all using words the same way. I'm used to thinking of "income" as the money you take out of your portfolio in order to spend it; since this quantity is entirely under your control, it makes no sense to talk about its "steadiness", as if it weren't.

If you look at dividends paid by companies you well see that the dividends are less volatile than stock quotes. Stock prices jump around daily but dividends rarely change. We are talking quarters or years instead of days. I hope we can agree on that much.

We can, but it's an irrelevancy: stock prices aren't income by anyone's definition. Sure, someone who held non-dividend stocks and sold off a fixed percentage of them every year would have a more volatile income stream, but no one does that.

[WildBill]

The book title is "Finance for Normal People." The folks in this thread who really like dividends are the "Normal People" that Statman is referring to. The folks who do not see benefit of dividends under most circumstances are "rational people" and the book can help rational people understand Normal People.

Howdy

There you go again. Gasoline on the fire.

First dibs on the “Abnormal” and “Irrational” quadrants of the 2x2.

W B

[Artsdoctor]

The book title is "Finance for Normal People." The folks in this thread who really like dividends are the "Normal People" that Statman is referring to. The folks who do not see benefit of dividends under most circumstances are "rational people" and the book can help rational people understand Normal People.

You are such a troublemaker.

[soupcxan]

[deleted]

[SeeMoe]

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

Yes, me too. Like to see the end of year dividends and gains coming in to our folios. Makes me feel like investing is working for us, and it is ,far as I can tell, buying more shares. Been doing it this way for 35 years and it works out fine!

SeeMoe..

[umk]

(quoting Investopedia) "Many investors like the steady income associated with dividends..."

This quote illustrates part of the problem: we're not all using words the same way. I'm used to thinking of "income" as the money you take out of your portfolio in order to spend it; since this quantity is entirely under your control, it makes no sense to talk about its "steadiness", as if it weren't.

If you think that income is not appropriate,then consider it as follows:
"Many investors like the steady cashflow associated with dividends..."

[triceratop]

Yes, me too. Like to see the end of year dividends and gains coming in to our folios. Makes me feel like investing is working for us, and it is ,far as I can tell, buying more shares. Been doing it this way for 35 years and it works out fine!

SeeMoe..

I highlighted the behavorial aspects of the dividend stocks puzzle already discussed in this thread.

Thanks livesoft!

And to packet, who specifically noted part of this earlier in the thread:

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 learned this from VictoriaF...

The most important choice is the first choice. People tend to stick with their initial choices. A Behavioral Economist Dan Ariely calls this "arbitrary coherence." ...

Cheers,
packet

[EyeYield]

To echo and perhaps even amplify triceratop's voice:

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

PJW

I think it is you who misunderstand dividends. A finance professor performing an academic valuation would say that keeping the cash in the company increases the value of the stock, which is true from a pure academic perspective. But that's not the way it works in the real world. Cash held in a company gets used eventually. And it may be used in a good way or a bad way. Most investors feel that unless a company has a specific need for excess earnings, those earnings should be paid out to stockholders. Holding cash in a company (or using that cash for buy-backs) only produces value for investors if new investors think that strategy increases the value of the stock and are willing to buy at higher prices. Dividends don't depend on other people being willing to pay a higher price for the stock. Dividends are guaranteed money in your pocket. As I have said before, people who really understand investing understand this. Dividends create value. In the end, stock is like any other commodity. Price is determined by demand for the stock. The reason that every single company in the DJIA pays dividends is because investors want them and are willing to pay to get them.

Highlighted is a misconception that I never thought anyone misconceived.
Dividends are NOT guaranteed.

Look at all the dividend stocks throughout 2009. On example, Vulcan Materials (VMC), slashed their divvy to 0.25 from 0.49 in 2009 and to 0.01 from 0.25 in 2011. And VMC wasn't some high yielding REIT or BDC either; it was paying 3.6% if memory serves.
Lots and lots of other examples. There is nothing guaranteed about dividends.

[hoops777]

The book title is "Finance for Normal People." The folks in this thread who really like dividends are the "Normal People" that Statman is referring to. The folks who do not see benefit of dividends under most circumstances are "rational people" and the book can help rational people understand Normal People.

You are such a troublemaker.

No he is just entertaining the boglehead upper crust..Thats ok though.I doubt if the normal people could really understand what he really meant by the remark

[fennewaldaj]

Is there somewhere one can look up buy back yield for mutual funds? I noticed morningstar has it for individual stocks but not funds. Is that a premium detail for funds?

[magneto]

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.

Don't forget the choice is left under the control of the investor (auto-reinvest apart), as to where that dividend cash-flow might best be directed.

[SGM]

Dividends are part of total return, but are the part of total return that is taxed every year in my taxable account. I much prefer to have the dividend than to have an insurance product that is tied to the S&P 500 but does not include the dividend. There are several things that erode the value of my non-Roth portfolio including expenses, inflation and ongoing taxes. The value of my Roth account is eroded by inflation and expenses.

Just say someone wanted to have $1 million portfolio to hand down to future generations and it had a tax of only 1% per year. Over 70 years the portfolio would have been assessed $1 million in taxes. Time works to the advantage and disadvantage of a portfolio. In other words compounding works both ways.

[Da5id]

Is there somewhere one can look up buy back yield for mutual funds? I noticed morningstar has it for individual stocks but not funds. Is that a premium detail for funds?

I don't know where to find it either, would be kind of interesting to see buybacks (or sum of buybacks and dividends), but maybe they don't bother tracking that for mutual funds? This recent WSJ article https://www.wsj.com/articles/saying-bye ... 1511438400 (paywall) shows the annual buyback yield of S&P 500, and shows it is projected to drop in 2017.

[Da5id]

The book title is "Finance for Normal People." The folks in this thread who really like dividends are the "Normal People" that Statman is referring to. The folks who do not see benefit of dividends under most circumstances are "rational people" and the book can help rational people understand Normal People.

You are such a troublemaker.

No he is just entertaining the boglehead upper crust..Thats ok though.I doubt if the normal people could really understand what he really meant by the remark

The dividend topic seems rather like the international investing one, with the matadors waving the red cape at the bulls and pulling it aside. Or something like that.

[CyclingDuo]

The dividend topic seems rather like the international investing one, with the matadors waving the red cape at the bulls and pulling it aside. Or something like that.

George Schneider - who writes for Seeking Alpha and set up a Fill The Gap Portfolio at the end of December 2014 - has used matadors with the red cape in photos for several of his articles.

Maybe the game of Monopoly and those Bank Pays you Dividend cards did it to many of us.

I've enjoyed reading and following along with Schneider's articles. I am not a subscriber to his FTG portfolio, but just stumbled on reading about it on their website, and have been following along for fun (I set up the hypothetical portfolio at Yahoo Finance and make changes when additional shares are added). Why do we follow it? Mainly for the reason of thinking through various strategies for years down the road when retirement arrives. SPIA's, pensions, Social Security, Index Funds, Bond Funds, Growth, Dividend, SWR's and on and on.

His original premise can be found here: https://seekingalpha.com/article/277963 ... -portfolio

Defined benefit pensions are a thing of the past.

Not planning for our retirements; what were we thinking?

We can dig out of this gaping hole and fill in the gap.

His premise was using a working couple who needed $50K per year in expenses to live on, had no DB plan, and needed to fill the gap between what they would bring in from Social Security which is where the dividend paying Fill the Gap Portfolio comes into play for his particular strategy. It assumes a working couple, near or just starting in retirement, even after all the spending, has managed to squirrel away around $400,000 over their working lives.

It's been fun to watch how he has built the portfolio with the initial $411,600 and how it is performing. Three years into it come the end of this month, the underlying equities are currently worth $563,577.10 and it is throwing off $31,160.58 annually in dividends.

Recent subsequent articles with regard to the FTG portfolio (including your matador and red cape pictures):

https://seekingalpha.com/article/412227 ... -help-will
https://seekingalpha.com/article/411389 ... ash-part-1
https://seekingalpha.com/article/411614 ... ash-part-2

None of that is to be confused with the discussion of dividends being part of the total return on an investment. It just came to mind in response to some of the posts in this thread that sometimes there is, or could be a dividend strategy that is set up in a sound manner that works. Our preference would be, between now and our retirement date that is waiting for us probably 8-11 years from now, take advantage of a bear market sell off in the future to initiate a portion of our current assets in a dividend portfolio filled with 15-20 quality names with regard to dividends for the long haul that we could build for a few years with additional share purchases using the dividend stream during the recovery years, and utilize that portion of our portfolio going into retirement as one of our streams of "Fill the Gap" income.

[Da5id]

Recent subsequent articles with regard to the FTG portfolio (including your matador and red cape pictures):

I looked at the links. To me they seemed like typical pundit stuff (which is to say, IMHO, mostly without value). And political to boot. YMMV.

[livesoft]

..., or could be a dividend strategy that is set up in a sound manner that works. Our preference would be, between now and our retirement date that is waiting for us probably 8-11 years from now, take advantage of a bear market sell off in the future to initiate a portion of our current assets in a dividend portfolio filled with 15-20 quality names with regard to dividends for the long haul that we could build for a few years with additional share purchases using the dividend stream during the recovery years, and utilize that portion of our portfolio going into retirement as one of our streams of "Fill the Gap" income.

Now who is flashing the red cape?

[dbr]

It's been fun to watch how he has built the portfolio with the initial $411,600 and how it is performing. Three years into it come the end of this month, the underlying equities are currently worth $545,986 and it is throwing off $31,160.58 annually in dividends.

That withdrawal is more than 7% of the initial portfolio value. Everything we know about what will happen to portfolios over time says there is a large chance this portfolio will not last thirty years or whatever. When you start the portfolio just before a strong climb in the stock market everything is going to look hunky-dory but that does not mean it will stay there.

The one single real danger of a dividend strategy is that it might cause the investor to withdraw too much from the portfolio. That increases the chances of eventual failure avoided only by cutting back on withdrawals. After withdrawals the outcome is driven more than anything else by the luck of when the retirement starts. It could be that 2014 is a lucky year, but no one knows that yet.

In FireCalc the 30 year failure rate of a 100% stock portfolio at 7% withdrawal is more than 50%. If you want to account for the three year run-up you could start at the current withdrawal rate of 5.7% and a time span of 27 years. Now the failure rate is only 30%.

I think these issues are deserving enough of serious discussion that red capes have nothing to do with it.

[CyclingDuo]

It's been fun to watch how he has built the portfolio with the initial $411,600 and how it is performing. Three years into it come the end of this month, the underlying equities are currently worth $545,986 and it is throwing off $31,160.58 annually in dividends.

That withdrawal is more than 7% of the initial portfolio value. Everything we know about what will happen to portfolios over time says there is a large chance this portfolio will not last thirty years or whatever. When you start the portfolio just before a strong climb in the stock market everything is going to look hunky-dory but that does not mean it will stay there.

Agreed. We should add that the portfolio went through the bear market phase of mid-2015 to mid-2016 along with everything else that suffered in that corrective period. Hence, my preference to begin such a portfolio for our own retirement in the throws of panic/fear/bear market. The author's selection of stocks, and continuation of increasing the number of shares with excess dividends is his strategy to prepare the portfolio for a bear market upcoming. Dividends are not guaranteed, but the stock selection he is using is designed to protect as well as possible a dividend stream that will meet the couple's needs during the contraction periods.

The one single real danger of a dividend strategy is that it might cause the investor to withdraw too much from the portfolio. That increases the chances of eventual failure avoided only by cutting back on withdrawals. After withdrawals the outcome is driven more than anything else by the luck of when the retirement starts. It could be that 2014 is a lucky year, but no one knows that yet.

In FireCalc the 30 year failure rate of a 100% stock portfolio at 7% withdrawal is more than 50%. If you want to account for the three year run-up you could start at the current withdrawal rate of 5.7% and a time span of 27 years. Now the failure rate is only 30%.

I think these issues are deserving enough of serious discussion that red capes have nothing to do with it.

Yes, but if you read the premise of the portfolio in the original article, the goal was to supplement the Social Security the couple would be receiving. They were receiving $28,800 annually from Social Security and needed $50K a year to cover all of their expenses. The portfolio only needed to fill the gap of $21,200. Anything beyond that throw of $21.2K has been thrown back into purchasing more shares, as well as additional equities to provide diversity. Keep in mind, this is a hypothetical couple nearing or just starting retirement. It makes obvious sense to us, that starting this sort of portfolio several years in advance has the potential to have it set up to hit the ground running come retirement when that supplemental - fill the gap - income will be required.

So the need for only $21,200 of the current portfolio's dividends is 3.8%, not the 7% you quote of the dividends it is generating. The remainder ($9960 not withdrawn) is continually invested into more shares at opportune times (he recently added more T when it was down), according to the author of the article to prepare it for the future.

You are correct, it is a strategy worthy of discussion and the withdrawal rate is part of that. I just wanted to clarify, that the withdrawal rate for this hypothetical portfolio is currently lower than the amount of dividends being generated.

Does anybody know what $411,600 invested in a SPIA would provide per year for this hypothetical couple needing $21,200 annually to fill the gap between SS and their expenses?

[dbr]

You are correct, it is a strategy worthy of discussion and the withdrawal rate is part of that. I just wanted to clarify, that the withdrawal rate for this hypothetical portfolio is currently lower than the amount of dividends being generated.

In that case the amount of the dividend and the strategy of investing in dividend stocks is irrelevant. I can't read the article because you have to subscribe, but it looks to me like one more piece of investment shilling/pornography pending someone finding a truly helpful point to it.

[Da5id]

You are correct, it is a strategy worthy of discussion and the withdrawal rate is part of that. I just wanted to clarify, that the withdrawal rate for this hypothetical portfolio is currently lower than the amount of dividends being generated.

If the dividends are in taxable, to the extent that the dividends are in excess of the amount needed they are possibly a tax drag on performance or take up space in a tax bracket that might otherwise help with ACA/roth conversions/etc. And to the extent that the portfolio is designed by chasing dividend yielding stocks, they represent a distortion.

[CyclingDuo]

If the dividends are in taxable, to the extent that the dividends are in excess of the amount needed they are possibly a tax drag on performance or take up space in a tax bracket that might otherwise help with ACA/roth conversions/etc. And to the extent that the portfolio is designed by chasing dividend yielding stocks, they represent a distortion.

Agreed, that using tax advantaged accounts - since not all of the dividends would be required each year - would soften a portion of the tax drag.

Not sure the author was chasing dividend yielding stocks per se, but thought out a very diversified portfolio to soften the underperformance of a name or two in the portfolio. Here's his portfolio...



I would expect with the recent weakness in Omega Healthcare Investors REIT, that additional shares will be added by the author - just as he did on recent weakness in AT & T. I didn't realize one had to subscribe to the site to read the articles (I guess I am since it is free). It's not the only dividend portfolio I follow (and I don't have the paid subscription for it, so have no idea what the author is doing on a more frequent basis). I only read his occasional articles on the FTG Portfolio after he set it up in 2014.

I also follow one of the dividend portfolios at The Motley Fool, and two others that I track at Yahoo Finance. Again - all as part of a learning process for the future with retirement coming up in a decade or so.