Why dividend paying stocks?

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PiperWarrior
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Why dividend paying stocks?

Post by PiperWarrior » Fri Oct 03, 2008 8:22 am

These days I see several funds that are collections of dividend paying stocks like:

Vanguard Dividend Appreciation Idx Inv (VDAIX) (0.40%)
Vanguard High Dividend Yield Index Inv (VHDYX) (0.40%)
iShares Dow Jones Select Dividend Index (DVY) (0.40%)
The whole range of WisdomTree products

What role do these have in a portfolio?

I hear that the dividend yield has a rather weak link to P/B, so they are not quite a substitute for value stocks.

If a retiree is looking for income and hesitates to realize capital gains (to preserve "principal" or minimize transaction costs like brokerage commissions, spreads, etc), then I can sort of understand that.

Other than that, I cannot think of anything.

Is there a study that says that dividend paying stocks have certain characteristics good for investors? Are they expected to do any good to the total return, assuming dividend themselves don't kill you? (That is, you can hold these funds in a tax-advantaged account or that you are in a very low tax bracket if you are in the accumulation phase.)

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Re: Why dividend paying stocks?

Post by dumbmoney » Fri Oct 03, 2008 8:30 am

PiperWarrior wrote:If a retiree is looking for income and hesitates to realize capital gains (to preserve "principal" or minimize transaction costs like brokerage commissions, spreads, etc), then I can sort of understand that.
That's a completely bogus reason - there are no commissions or spreads with conventional mutual funds.

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Re: Why dividend paying stocks?

Post by nisiprius » Fri Oct 03, 2008 8:48 am

PiperWarrior wrote:If a retiree is looking for income and hesitates to realize capital gains (to preserve "principal" or minimize transaction costs like brokerage commissions, spreads, etc), then I can sort of understand that.
From postings here I believe there are some investors that follow the good old-fashioned "withdrawal strategy" of "don't invade the principal," i.e. use the income, but only the income, generated by a portfolio; interest in the case of bonds, dividends in the case of stocks.

Of course, even this would have been frowned upon by the plutocrats of the gilded age, who aimed to live on "the interest on the interest."

I call it "old-fashioned" because the specifics ("spend only interest and dividends," as opposed to "spend some conservatively calculated amount based on total earnings") might be a holdover from time when a typical portfolio consisted of individual stocks and bonds, and high commissions made it uneconomical to buy and sell small amounts of either, this was the only way to generate an income stream. Obviously this only works if the stocks pay dividends, and creates a preference for stocks that pay higher and more reliable dividends.

"Spend only interest and dividends" has an appealing simplicity and safety to it.
Is there a study that says that dividend paying stocks have certain characteristics good for investors?
One could take dividend generation as a mark of companies whose stock valuation is less likely to include a speculative component, or of companies that have a conservative business philosophy. And it could involve a semi-rational belief that these are fundamental characteristics that must eventually show up in the long run, regardless of numbers or studies.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Post by dbr » Fri Oct 03, 2008 9:00 am

The theory I think I hear most often voiced is that stock dividends tend to be less volatile than stock prices and have a general overall upward trend. Therefore, for a person in retirement a dividend income stream should be a reliable stream of increasing income that is "decoupled" from the volatility of asset prices. The idea is to allow the investor to avoid selling assets when prices are down. Note in this model asset wealth is measured in shares rather than in value of shares.

While we have models for retirement asset survival based on total return concepts, I am not sure anyone has written a comparable model for retirement income stream survival based on spending dividends but not invading principal.

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Post by stratton » Fri Oct 03, 2008 9:02 am

We've had financial institutions cutting dividends because income is too low. I saw an article claiming dividend cuts will be coming soon because of cash flow issues because companies can't get loans. Income is good, but high loan interest rates make cash from sales very *valuable* so dividends are on the temporary suspension list.

Dividend stocks tend to be value oriented.

Paul

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Post by mephistophles » Fri Oct 03, 2008 10:34 am

I see nothing wrong in having part of one's portfolio in assets that have a long history of paying consistent dividends and who also grow dividends. I have some of these. I also have assets in the growth area where and inbetween these area. I own large, midcap, small and foreign stocks. I own bonds, CD's, money markets, and some gold. Also some real estate.

As long as one diversifies, keeps costs low, rebalances, keeps an eye on taxes one should do O.K.

I realize that my portfolio would not make headlines in an academic, risk-adjusted approach, but it suits me just fine.

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Post by InvestingMom » Fri Oct 03, 2008 10:39 am

I think that one of my very first posts on Morningstar (which is how I found the bogleheads and have not really been back since) about a year or so ago related to this exact topic.

Average Annual Returns are what matters. It does not matter if it comes from dividends or stock appreciation. Many of the above posters have given good reasons as to why many people choose dividend stock/funds, I think it is mostly a psychological thing and/or simply not understanding. That being said, there is something nice about getting a distribution when everything seems to be going to hell in a hand basket. :wink:

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Post by stratton » Fri Oct 03, 2008 10:44 am

InvestingMom wrote:Average Annual Returns are what matters. It does not matter if it comes from dividends or stock appreciation. Many of the above posters have given good reasons as to why many people choose dividend stock/funds, I think it is mostly a psychological thing and/or simply not understanding. That being said, there is something nice about getting a distribution when everything seems to be going to hell in a hand basket. :wink:
The folks in the Morningstar Income & Dividend Investing forum will vehemiently disagree. :o

Paul

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Post by HomerJ » Fri Oct 03, 2008 10:55 am

In the old days, the main reason to own a stock was the dividends...

Think about it... The point of owning stock was to be a part-owner of a business... And then, as part owner, you got a part of the profits as well (dividends).

Yes, it's a good idea for up-and-coming companies to reinvest all profits back in the company... and then if the stock goes up you can make the same (or more) money than you would have gotten by getting the dividends...

But what if companies waste the money (CEO salaries, bonuses to consultants, wasteful spending on lavish offices)? Or what if the company is established and not growing (utilities) or growing slowly (Coke, Budweiser. Microsoft)...

I highly prefer dividend-paying stocks over pure growth stocks... When the markets go down, at least I'm still getting that dividend... and reinvesting it at lower prices...

When a growth stock drops 20%, I'm just sitting there waiting for it to come back... When a dividend stock drops 20%, I'm re-investing my dividends at a lower price and getting more shares.. When the stock price finally comes back, I'll be up instead of even...

Now, the pure growth stock may get back to even and then up faster than the dividend stock because it keeps ALL it's profits to grow the business...

So maybe growth stock is a smarter move... I like the dividend stocks... If PFizer drops 20%, I like knowing I got a 7% dividend coming this year... that helps a lot...

I don't remember the exact numbers, but when people tout the 10% average stock appreciation over the last 100 years, don't dividends make up 4-5% of that? (Back in the past dividends were much more common).

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Re: Why dividend paying stocks?

Post by bilperk » Fri Oct 03, 2008 11:04 am

PiperWarrior wrote:


Is there a study that says that dividend paying stocks have certain characteristics good for investors? Are they expected to do any good to the total return, assuming dividend themselves don't kill you? (That is, you can hold these funds in a tax-advantaged account or that you are in a very low tax bracket if you are in the accumulation phase.)
David Dreman has presented data in his book "Contrarian Investment Strategies" that shows from 1970-1996 ( book published in 1998), that the lowest and second lowest price/dividend quintiles beat the market by two full percentage points per year (16.8 to 14.9) I would guess the story only got better in the last 10 years.

The very best performing stocks were the lowest quintile by Price/Earnings, with a 19% return.

Of course, some will say that they are riskier.

best,
Bill

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Post by G12 » Fri Oct 03, 2008 11:17 am

I am similar in holdings to Meph and share rrosen's outlook. Since June I have been buying additional VTV, Equity Income, and hold Dividend Appreciation Index (this is not high yield, rather companies which continue to increase dividends YOY) when large downturns occurred. YTD as of 10/2 returns are -16.4% Div. Apprec. Index, -17.75 Equity Income, -21.94% VTV as compared to -22.9% for the S&P 500. The best performing holding I have is PGN, a utility, which is up significantly since 3/13 purchase. I like the additional cash flow, reinvested dividends are painless and I don't have to come up with additional cash to purchase. All are in tax deferred or Roth with the exception of PGN. I am also up on DRE, a REIT purchased on 3/13. Both DRE (8.1%) and PGN (5.6%) pay substantial dividends. I have also added to other positions, ie VEU, VWO, and VBR, as I am seeking total return over the long run and equities are 70/30 domestic/international. The dividend holdings help me maintain a higher equity exposure than I otherwise might, and I also hold significant cash, TIPs, treasuries, muni's, silver, and small interests in two cash flow positive commercial properties.

Then again, I am one of the crazy investors who has slowly started buying into LSBRX with its recent poor performance. :wink:

To each his own, I am currently taking a beat down on my CHK holdings, but am not selling.

Total equity portfolio is slightly value overweighted, more significantly to small, less significantly to large, underweight midcap. I was underweighted large until buying over the past 3 months or so.
Last edited by G12 on Fri Oct 03, 2008 11:38 am, edited 1 time in total.

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Re: Why dividend paying stocks?

Post by InvestingMom » Fri Oct 03, 2008 11:28 am

bilperk wrote:
PiperWarrior wrote:


Is there a study that says that dividend paying stocks have certain characteristics good for investors? Are they expected to do any good to the total return, assuming dividend themselves don't kill you? (That is, you can hold these funds in a tax-advantaged account or that you are in a very low tax bracket if you are in the accumulation phase.)
David Dreman has presented data in his book "Contrarian Investment Strategies" that shows from 1970-1996 ( book published in 1998), that the lowest and second lowest price/dividend quintiles beat the market by two full percentage points per year (16.8 to 14.9) I would guess the story only got better in the last 10 years.

The very best performing stocks were the lowest quintile by Price/Earnings, with a 19% return.

Of course, some will say that they are riskier.

best,
I would expect that the best performing stocks had the lower price/earnings. I am a value tilter myself. However, I would argue that the fact that these stocks perform better is because of the undervalued price. That being said, you cannot discount the fact that some of the stock prices are undervalued when you consider the dividends they are paying. My main point though is that in the end, what matters is total return. It is simple math. So if you are trying to choose between two stocks or two funds, you should choose the one that has the best chance for generating the best total returns. I believe that many folks...many retirees.....choose stocks and funds because they are paying higer dividends and I believe that this is a mistake.

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Post by savermike » Fri Oct 03, 2008 11:30 am

InvestingMom wrote:Average Annual Returns are what matters. It does not matter if it comes from dividends or stock appreciation.
It's annualized returns that matter, not average (i.e. add each year's percentage and divide by number of years) returns. After all if you have a year up 33% then a year down 33%, the average is 0, but your annualized return is -5.6%.

Mike

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Post by InvestingMom » Fri Oct 03, 2008 2:00 pm

savermike wrote:
InvestingMom wrote:Average Annual Returns are what matters. It does not matter if it comes from dividends or stock appreciation.
It's annualized returns that matter, not average (i.e. add each year's percentage and divide by number of years) returns. After all if you have a year up 33% then a year down 33%, the average is 0, but your annualized return is -5.6%.

Mike
Hmmm. I suppose it is important to be very exact although I was using the same language that Vanguard uses. Perhaps a better not too technical description would be total return. Or to be more technical the internal rate of return. In any case, I believe that my point was understood which was that it is important to look at the total rather than just the components of return.

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Post by snowman9000 » Fri Oct 03, 2008 2:40 pm

Dividends are about the only thing that can't be faked, massaged, or manipulated in favor of the managers when it comes to stocks.

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Post by HomerJ » Fri Oct 03, 2008 3:34 pm

snowman9000 wrote:Dividends are about the only thing that can't be faked, massaged, or manipulated in favor of the managers when it comes to stocks.
QFT... I wrote that down on my whiteboard at work. Excellent post.

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Post by linenfort » Fri Oct 03, 2008 4:11 pm

I just received a copy of The Coffehouse Investor today and I opened
it to see if the author had anything to say about dividends, but there's
no index. What kind of investing book doesn't have an index?

I like dividends because they tend to go up, unlike share values
which tend to go up AND DOWN. Every year (every quarter if you
have many of these dividend raisers), I feel like I'm getting a raise.

Most dividend investors are probably unaware of the tax inefficiency,
unless they come to this forum.

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Post by swyck » Sat Oct 04, 2008 11:36 am

[quote="linenfort"
I like dividends because they tend to go up, unlike share values
which tend to go up AND DOWN. Every year (every quarter if you
have many of these dividend raisers), I feel like I'm getting a raise.

Most dividend investors are probably unaware of the tax inefficiency,
unless they come to this forum.[/quote]

The only way to get away with not paying taxes is to never cash in. I'm fine with paying taxes on my dividends, though I may not be as happy about it down the road if the taxes are raised.

IMO dividend is how you should be paid for an investment. Realizing your cap gains means you've sold your investment off.

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Post by Gregory » Sat Oct 04, 2008 12:01 pm

swyck wrote:[quote="linenfort"
I like dividends because they tend to go up, unlike share values
which tend to go up AND DOWN. Every year (every quarter if you
have many of these dividend raisers), I feel like I'm getting a raise.

Most dividend investors are probably unaware of the tax inefficiency,
unless they come to this forum.
The only way to get away with not paying taxes is to never cash in. I'm fine with paying taxes on my dividends, though I may not be as happy about it down the road if the taxes are raised.

IMO dividend is how you should be paid for an investment. Realizing your cap gains means you've sold your investment off.[/quote]

Those who say that "dividends don't matter" are now in the position to do what they've said they've no problem doing: "sell off some shares" because of all the capital appreciation we've come to expect from our equity markets. After all, they've argued, dividends are an inefficient way to return value to the stock investor: corporate profit is either mailed out as a dividend, or efficiently reinvested to grow the corporation, right? :wink:
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Post by cheapskate » Sat Oct 04, 2008 12:16 pm

rrosenkoetter wrote:
But what if companies waste the money (CEO salaries, bonuses to consultants, wasteful spending on lavish offices)? Or what if the company is established and not growing (utilities) or growing slowly (Coke, Budweiser. Microsoft)...
This pretty much hits the nail on the head.

Dividends are an excellent way to enforce good corporate governance and good corporate behavior.

In the absence of dividends, the temptation to squander away shareholder cash in all sorts of grandiose plans, and mostly on further enrichment of the management is just too great.

I work in the tech sector, which for the most part does not pay dividends. I continue to see cases where technology companies continously siphon off money from shareholders to enrich the management (as Buffett puts it, most technology companies make money off the shareholders rather than for the shareholders).

On example of this is a very large and very profitable networking/telecom equipment maker. This company has regular stock buyback programs. The stock retired is immediately issued back to the management by way of stock options and restricted stock grants. And the company has used stock to make a ton of acquisitions (seriously diluting the shareholder). The company has a 0% dividend yield and is down about 75% since 2000. The past 5 years has resulted in 0% appreciation for the shareholder.

Eliminating such companies from your portfolio results in a significant improvement in overall return, IMO.

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Post by Gregory » Sat Oct 04, 2008 5:38 pm

You might remember this thread: http://tinyurl.com/3v8wxf

I was surprised to read one poster (who usually makes very good posts) write the following: "Some companies are smart enough to realize what you pointed out in the OP: that dividends are completely meaningless in the real world, but cause higher taxes and other transaction costs. Others are not that smart (or think their shareholders aren't)."

Well, everyone who finds stock dividends "completely meaningless" now has a golden opportunity to liquidate shares, which they claim is more tax-effient anyway. What's too bad is that the major stock index funds aren't terribly cooperative these days when it comes to NAV.

TSM http://tinyurl.com/ytmww7
VG Tot Int'l http://tinyurl.com/3pwqr8

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Post by Wagnerjb » Sat Oct 04, 2008 6:38 pm

Gregory wrote:
Well, everyone who finds stock dividends "completely meaningless" now has a golden opportunity to liquidate shares, which they claim is more tax-effient anyway. What's too bad is that the major stock index funds aren't terribly cooperative these days when it comes to NAV.
Why would people be liquidating shares in equities today? Disciplined investors are rebalancing by selling fixed income and either a) using those proceeds for spending or b) adding to equities.

The total return strategy doesn't force an investor to sell when the markets are down. Rather, the opposite.

Personally, I purchased Emerging Markets small caps last week as part of my rebalancing.

Best wishes.
Andy

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Post by stratton » Sat Oct 04, 2008 6:47 pm

Wagnerjb wrote:Why would people be liquidating shares in equities today? Disciplined investors are rebalancing by selling fixed income and either a) using those proceeds for spending or b) adding to equities.

The total return strategy doesn't force an investor to sell when the markets are down. Rather, the opposite.
This is a main argument theme quite a fiew dividend investors on the M* make. It's totally bogus. The dividends are the only honest return is a much better one in my opinion.

Of course, if you're 100% in a tax advantaged account it almost doesn't matter because you don't have to worry about paying marginal tax rates on dividends.

Paul

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Post by Gregory » Sat Oct 04, 2008 7:03 pm

Wagnerjb wrote:
Gregory wrote:
Well, everyone who finds stock dividends "completely meaningless" now has a golden opportunity to liquidate shares, which they claim is more tax-effient anyway. What's too bad is that the major stock index funds aren't terribly cooperative these days when it comes to NAV.
Why would people be liquidating shares in equities today?
For those who are retired and subscribe to "dividends are completely meaningless" and their bond coupons alone (coupled with the weak TSM-type dividends -- less than 2% yield until the market took a dive and lower NAV drove up the % div yield) won't put bread on the table, they can now fulfill the "total return investors" dictum and liquidate equities; after all, corporations have wisely reinvested all of the monies that could have distributed to shareholders through prudent corporate growth, right? :wink:
Last edited by Gregory on Sun Oct 05, 2008 12:16 pm, edited 2 times in total.
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Post by Gregory » Sat Oct 04, 2008 7:07 pm

Wagnerjb wrote:
Gregory wrote:
Well, everyone who finds stock dividends "completely meaningless" now has a golden opportunity to liquidate shares, which they claim is more tax-effient anyway. What's too bad is that the major stock index funds aren't terribly cooperative these days when it comes to NAV.
Disciplined investors are rebalancing by selling fixed income and either a) using those proceeds for spending or b) adding to equities.
Selling off fixed income means lower bond income with the next round of coupons -- shares you won't get back until equities rise to the point where you can sell those and buy more bonds; that could be a long wait.
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus

Sidney
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Post by Sidney » Sat Oct 04, 2008 7:59 pm

I like dividends because they tend to go up, unlike share values
which tend to go up AND DOWN. Every year (every quarter if you
have many of these dividend raisers), I feel like I'm getting a raise.
don't be shocked if dividends go down in the next few quarters. Recession, inability to borrow will mean many companies are faced with liquidity issues and will look to cut or eliminate dividends. Add this to the financial industry where many banks are vaporizing and will no longer even exist.

TSM dividend for September was down from September 2007. More to come.
I always wanted to be a procrastinator.

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Post by linenfort » Sat Oct 04, 2008 8:31 pm

don't be shocked if dividends go down in the next few quarters.
I won't be, Sidney. I'm surprised they've held up this long,
considering the mess we're in. Then again, McDonald's just
raised theirs a hefty 33%.

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To Eat

Post by DaveS » Sat Oct 04, 2008 8:31 pm

This question has been answered many times. I use dividends to buy food to eat. I am retired. Someday you may use them to. Dave

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PiperWarrior
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Re: Why dividend paying stocks?

Post by PiperWarrior » Sat Oct 04, 2008 10:21 pm

Thank you everybody for responses so far.
bilperk wrote:David Dreman has presented data in his book "Contrarian Investment Strategies" that shows from 1970-1996 ( book published in 1998), that the lowest and second lowest price/dividend quintiles beat the market by two full percentage points per year (16.8 to 14.9) I would guess the story only got better in the last 10 years.
Thank you for the quote. I just took a quick look at "domestic small cap value" - "domestic market" over 1972-1996 using Simba's data, and the excess return was 3.63%. The excess return for large-cap value was 2.73% over the same period. I guess the converse of "value stocks tend to pay more dividends", namely "dividend paying stocks tend to be value stocks", may not be too bad after all although I don't know how much overlap there was between value stocks and the lowest and second lowest P/D quantiles.

I just looked at the TOC of the book. It looks interesting. I put that in the queue of books I want to read.

Speaking of the last 10 years, the only dividend index data I can find at the moment is the 10-year performance of Dow Jones Select Dividend Index, which DVY from iShares tracks. Its 10-year annualized return is 8.63%, which falls right between Vanguard Value Index and Small-Cap Value Index. According to the M* xray, DVY looks like a multi-cap value fund. No wonder.

By the way, I wonder what "contrarian" means these days. Is indexing contrarian? Is investing in value stocks contrarian? Is following academics contrarian? It's not that I care too much about the answers, but I am curious.

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Post by ken250 » Sat Oct 04, 2008 10:39 pm

nsiprius, thanks for the history lesson.

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Post by ken250 » Sat Oct 04, 2008 10:52 pm

stratton,

There have been a number of high profile div cuts over the last year.

This should be expected if the price drop of a stock is directly related to that stock as opposed to the overall market...bad volatility vs good volatility. If the moat is wide enough though, the div cut and price drop may end up generating roughly the same yield. The hope is that earnings will recover, bringing both the price and dividend back up, and bolstering growth and the dividend.

I don't think it takes a genius to predict more div cuts are coming, the current crisis is intimately tied to the financial sector and that sector tends to have many div payers.

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Post by ken250 » Sat Oct 04, 2008 11:02 pm

Andy,

The weak point in your argument is that you expect a quick recovery for growth. If that doesn't occur you will trading income producing bonds for stocks that ain't going anywhere, how long do you think the average retiree can play that game...decreasing income teamed up with a growth sinkhole. Inflation?...ouch.

Of course, a prolonged period of low or no earnings growth could encourage low div payers to increase their div. That would be a first step toward reversing the trend of the last 50 years of decreasing divs...IMO a good thing, because then we'll all be total return investors.

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ken250
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Post by ken250 » Sat Oct 04, 2008 11:09 pm

dbr,

There haven't been any studies based on div-oriented portfolios because it's not necessary to test portfolio survivability if one needs 4%/year and the portfolio generates 5% in dividends.

I'm simplifying the situation for the sake of discussion.

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Post by ken250 » Sat Oct 04, 2008 11:12 pm

InvestingMom,

Annual returns are important and divs are part of it; however, I think retirees will say that the income production capability of their portfolios is important too.

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Post by ken250 » Sat Oct 04, 2008 11:38 pm

rrosenkoetter, I'm glad to see we have more in common than I previously thought. Good Luck.

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Post by ken250 » Sat Oct 04, 2008 11:49 pm

Before anybody goes prancing off to the bank, ready to deposit yet received divs...

I believe corporations get a major tax break on divs received from investing in other corps, if that tax bene were to be erased....

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Post by dbr » Sun Oct 05, 2008 12:07 am

ken250 wrote:dbr,

There haven't been any studies based on div-oriented portfolios because it's not necessary to test portfolio survivability if one needs 4%/year and the portfolio generates 5% in dividends.

I'm simplifying the situation for the sake of discussion.
Please note the study I was suggesting re dividends was a study of the trajectory of the income stream not of the portfolio. The idea is that if one changes the basis of discussion from return driven assets to yield driven dividends, then the analogy to portfolio trajectory is income stream trajectory.

Put more succinctly, has anyone observed how well actual dividend portfolios succeed at providing adequate dividends in real dollars over long time periods, especially with respect to what one should expect over the next 20-30-40 years. That study would be analagous to the type of thing an application such as FireCalc attempts with respect to portfolio survival. Note that many statements about dividend investing are circular arguments which basically assert that an adequate and growing stream of dividends will be an adequate and growing stream of dividends, which is not informative.

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Post by Sidney » Sun Oct 05, 2008 12:09 am

Then again, McDonald's just
raised theirs a hefty 33%.
This doesn't surprise me. Unless they hit an unpredictable snag, they should do OK. They sell "inferior" goods which tend to do well in recessions.
The problem is you can't build a safe portfolio on one or even twenty stocks and it is likely some will be forced to adjust their dividends.

My only point is that people who have dividends as a dominant source of their liquidity need to be prepared to deal with the likely drop in cash flow either by cutting back their expenses or getting cash somewhere else.

rgds,

Sid.
I always wanted to be a procrastinator.

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ken250
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Post by ken250 » Sun Oct 05, 2008 12:55 am

dbr,

I don't think I've actually seen such results, or I don't remember them. This may be due to the historical record of dividends outpacing inflation. I would hate to think that the advisor industry has never considered such a possibility... :(

My approach (ie, 90% of my portfolio) is geared toward generating income based on multiple classes, with dividend growth part of the plan. I don't know what you're refering to with your reference to circular arguments.

What I have done is demonstrated to myself that a fund like VWINX has a high (97%+) of meeting the 4% WR in a 3% inflation environment. I recall the success % for 5% WR and 4% inflation also being high, offhand I don't recall the %.

I really don't see what the problem is if the portfolio generates a 4% WR adjusted for inflation if the income and/or growth exceeds inflation. Not only will the real income need be met but there will be some left over for reinvestment. WADR, I don't need to run such a portfolio through it's paces. the only way it's going to fail is if inflation stays high for a long time.

(If you are a retiree and you want to leave your beneficiaries a portfolio with equivalent purchasing power as your portfolio has now I may be able to help.)

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Post by dbr » Sun Oct 05, 2008 10:40 am

The circularity comes from saying something like " . . .I really don't see what the problem is if the portfolio generates a 4% WR adjusted for inflation if the income and/or growth exceeds inflation. . . ." when the point is to establish how one knows for sure that the income and growth WILL exceed inflation for any particular dividend investment selection. The VWINX example would be supporting data if one can believe that the result is not cherry picking from a very favorable historical sequence that may not be predictive of possible future outcomes. The point of the methodology on the total return side used in such examples as FireCalc or going back to the Trinity study was trying to ferret out the worst cases and estimate how frequently such outcomes might occur.

It is entirely possible the investment selections and management process called "dividend investing" are a reliable guide to retirement success, but I think the advocates need much more data and a tighter argument to establish that.

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Dividend stocks

Post by pkcrafter » Sun Oct 05, 2008 10:41 am

Here is a link to a recent T. Rowe Price Report (Summer 2008) on the role of dividends in a retirement portfolio.

PDF file—see page 10

http://www.troweprice.com/gcFiles/pdf/0 ... 7949&ft=SR

In his book Bogle on Mutual Funds, Mr. Bogle recommends a fund such as Equity Income as part of a retiree's portfolio.

As a retiree, my approach is to hold 60% of large cap in a dividend-paying fund. I question the idea of 100% in dividend paying funds simply because it tends to push toward all value, which violates the rule of being fully diversified.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Dividend stocks

Post by dbr » Sun Oct 05, 2008 10:52 am

pkcrafter wrote:Here is a link to a recent T. Rowe Price Report (Summer 2008) on the role of dividends in a retirement portfolio.

PDF file—see page 10

http://www.troweprice.com/gcFiles/pdf/0 ... 7949&ft=SR

In his book Bogle on Mutual Funds, Mr. Bogle recommends a fund such as Equity Income as part of a retiree's portfolio.

As a retiree, my approach is to hold 60% of large cap in a dividend-paying fund. I question the idea of 100% in dividend paying funds simply because it tends to push toward all value, which violates the rule of being fully diversified.


Paul
Paul, doesn't an investor in total stock market hold a large allocation to large cap dividend paying stocks? VTI currently pays a yield of 2.54% and has as largest holdings the likes of XOM, CVX, T, JNJ, PG, etc.?

Also, aren't there many gurus who, while not advocating all value, strenuously advocate some drastically value and small tilted portfolios. Admittedly small tilt would not result from dividend tilt.

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Post by Gregory » Sun Oct 05, 2008 11:20 am

The only reason VTI's % dividend yield (not actual dollars paid to investors) is up, is due of course to the dramatic drop in NAV.

Here are VTI's dividend distributions: http://tinyurl.com/6yegey
Here's the distribution history for the [likely more widely held, at this point anyway] VTSMX: http://tinyurl.com/4rsuam

In terms of raw numbers (actual dollars paid) it's rather paltry, esp. by historical standards.

But no matter, right? We've seen on this forum many statements that "dividends don't matter," and that corporations are going to reinvest those dollars not paid out in dividends to prudently grow the corporations. (Just like this use of corporate profits: http://money.cnn.com/2003/10/28/news/co ... /index.htm )

Let's take an investor holding the widely discussed 4-fund portfolio (a Money-Market Fund,Total Stock Market Fund, Total International Fund, Total Bond Market Fund). We've heard it's the most efficient way to invest http://tinyurl.com/nyfbb Because "dividends are an inefficient way to return value to investors," and because corporations have wisely reinvested those dollars (eschewing unreasonable corporate officer pay, corporate jets, and corporate largess in general :roll: ) the currently retired (or soon-to-be retired) "total return investor" can feel comfortable knowing that "corporate value" is there for him/her as they begin to invade equities by chipping away at TSM and Total Int'l.
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus

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Post by dbr » Sun Oct 05, 2008 11:35 am

Gregory wrote:The only reason VTI's % dividend yield (not actual dollars paid to investors) is up, is due of course to the dramatic drop in NAV.

Here are VTI's dividend distributions: http://tinyurl.com/6yegey
Here's the distribution history for the [likely more widely held, at this point anyway] VTSMX: http://tinyurl.com/4rsuam

In terms of raw numbers (actual dollars paid) it's rather paltry, esp. by historical standards.

But no matter, right? We've seen on this forum many statements that "dividends don't matter," and that corporations are going to reinvest those dollars not paid out in dividends to prudently grow the corporations. (Just like this use of corporate profits: http://money.cnn.com/2003/10/28/news/co ... /index.htm )

Let's take an investor holding the widely discussed 4-fund portfolio (a Money-Market Fund,Total Stock Market Fund, Total International Fund, Total Bond Market Fund). We've heard it's the most efficient way to invest http://tinyurl.com/nyfbb Because "dividends are an inefficient way to return value to investors," and because corporations have wisely reinvested those dollars (eschewing unreasonable corporate officer pay, corporate jets, and corporate largess in general :roll: ) the currently retired (or soon-to-be retired) "total return investor" can feel comfortable knowing that "corporate value" is there for him/her as they begin to invade equities by chipping away at TSM and Total Int'l.
Gregroy, please, I am not making some claim that VTI is some marvelous dividend machine, and of course I know the yield is up because the price is down. That wasn't the point. The posting was a response to Paul's note that one might specifically include some dividend paying fund in an AA and I was only suggesting that it would be difficult to not include at least some dividend paying stocks in a diversified AA. The fact that the TSM yield is indeed paltry is exactly why it is interesting to look at what kind of investment selection a successful dividend investor would have to make and what properties such an investment selection actually has.

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Re: Dividend stocks

Post by dbr » Sun Oct 05, 2008 12:52 pm

pkcrafter wrote:Here is a link to a recent T. Rowe Price Report (Summer 2008) on the role of dividends in a retirement portfolio.

PDF file—see page 10

http://www.troweprice.com/gcFiles/pdf/0 ... 7949&ft=SR

In his book Bogle on Mutual Funds, Mr. Bogle recommends a fund such as Equity Income as part of a retiree's portfolio.

As a retiree, my approach is to hold 60% of large cap in a dividend-paying fund. I question the idea of 100% in dividend paying funds simply because it tends to push toward all value, which violates the rule of being fully diversified.


Paul
Thanks, Paul, this data is a helpful example of the kind of thing one would want to see. Of course, the portfolio analysis violated one of the rules of "dividend investing" in that it did not establish as a ground rule that withdrawals would never involve selling shares. We don't know if the hypothetical investor would or would not have sold shares to maintain the indexed 4.5% withdrawal. The income chart shown is possibly more supportive of the benefits of dividend investing. I would say overall the one point that jumps out is the success of the strategy during the greatest of bull markets ever seen and the flattening of the results after 1998. The poor results of the S&P 500 comparison are striking. Is this to be attributed to the superior returns of value stocks or are dividend stock selections truly a different animal from value tilt?

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dividends

Post by pkcrafter » Sun Oct 05, 2008 1:05 pm

Gregory wrote:
......and that corporations are going to reinvest those dollars not paid out in dividends to prudently grow the corporations.
If you believe that I've got a bridge to sell you. :wink:

Seriously, I've heard what a good deal this is for investors and I just don't believe it. It isn't dividends, so who knows where that money is spent. I don't think it's a substitute for dividend payouts.

dbr wrote:
Paul, doesn't an investor in total stock market hold a large allocation to large cap dividend paying stocks? VTI currently pays a yield of 2.54% and has as largest holdings the likes of XOM, CVX, T, JNJ, PG, etc.?
I guess I would not say it's a large allocation, in other words it's not overweight. A dividend seeker intentionally overweights dividend paying stocks be adding something like Equity Income, which has a current yield of 3.67%
Also, aren't there many gurus who, while not advocating all value, strenuously advocate some drastically value and small tilted portfolios. Admittedly small tilt would not result from dividend tilt.
Yes, but that's different. I like to use the un-scientific distinction of calling funds like Equity Income soft value because a fund like this does not provide much at all in the way of value loading, so there is practically no value premium. Really distressed value stocks may not provide a dividend at all.


Paul
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Post by Kenster1 » Sun Oct 05, 2008 3:04 pm

Just an interesting FYI ---

The SPDR S&P Dividend ETF (SDY) which invests in the strengths of companies that have increased dividends every year for at least the past 25 consecutive years is down only 8.67% YTD
SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

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Post by stratton » Sun Oct 05, 2008 8:17 pm

In another thread Valuethinker made a comment about recapitalizing banks where one way would be for the Fed to order financial institutions to stop paying dividends. This removes the stigma of any individual stock stopping dividends and protects them from the adverse stock drop that comes with lowering dividends.

Considering our current credit crises its best to be prepared for anything and everything when it comes to dividends and regulators.

Paul

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Post by ken250 » Sun Oct 05, 2008 9:43 pm

dbr,

What do you think is going to happen if inflation is 8% and you're only pulling in 4 or 5% in income from your portfolio?

You will be losing on a real basis, do you need a MCS to demonstrate that to you? And just what do think the effect of such inflation is going to be on a traditional approach?

Again, if the portfolio meets income needs and has a little extra growth and/or income to grow the portfolio enough to meet the next year's inflation adjustment that's the end of the story...no analysis needed. If there's a shortfall the investor/retiree has to adjust. You can run your portfolio through a million MCS runs, and what will you do when reality dumps on you and your plan begins to fail...you're going to adjust.

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Post by InvestingMom » Mon Oct 06, 2008 12:14 pm

ken250 wrote:InvestingMom,

Annual returns are important and divs are part of it; however, I think retirees will say that the income production capability of their portfolios is important too.
I sort of feel like I am arguing a meaningless point since I believe dividend paying stocks tend to be value stocks which I believe will result in the higher total returns over time...but I cannot help but to expand on your point as follows:

Capital gain is income. Total return includes dividends and capital gains. Based on that one should be choosing a stock/fund that one feels will have the best total return. The only thing that matters is what the total value of your portfolio is and it does not matter how it got there. It does not matter if you are retired or not. What matters more if you are retired is preservation of capital which I believe can best be accomplished through a conservative asset allocation (ie more bonds.)

That all being said, "to each his/her own" and one should do what they are most comfortable with and what they best understand.

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