Why not aim for a HIGH YIELDING portfolio?

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JimmyJammy
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Why not aim for a HIGH YIELDING portfolio?

Post by JimmyJammy »

Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
dbr
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by dbr »

It doesn't make sense because you have to pay attention to return, which is the sum of yield and capital gain. Return determines whether or not your investment will survive after withdrawing the yield. High return is hard to find and available only by taking risk, meaning the promised return may well not appear. In general high yielding investments do not have higher return than similar investments of lower yield. You can take the high yield and pay the price in less capital gains while also engaging in more risk than you may want.
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fortfun
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by fortfun »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
An 80/20 (total stocks/bonds) should allow you do a 4% drawdown. You'd just need 2M in that case.
https://www.madfientist.com/safe-withdrawal-rate/
dbr
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by dbr »

fortfun wrote: Mon Jul 29, 2019 9:51 am
JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
An 80/20 (total stocks/bonds) should allow you do a 4% drawdown. You'd just need 2M in that case.
https://www.madfientist.com/safe-withdrawal-rate/
This is an important point. Retirement planning that you can read about in the above reference is based on modeling a portfolio with a certain return (return not yield) with certain withdrawals and looking at how sustainable that is. For the pure retiree the withdrawal rate is safe if the retiree spends down the portfolio without actually running out of money. After all, the money was saved to be spent in retirement. For the retiree who wants to die with more money than he started with the model can be adjusted to figure out how much can be spent to do that.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by willthrill81 »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
Because you don't need any dividends at all to live off of a portfolio in perpetuity.

It doesn't matter whether your returns are coming from capital appreciation or dividends except from a tax perspective, when capital appreciation is preferred.
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MotoTrojan
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by MotoTrojan »

This. Dividends aren't free money.

Total Return is all that matters.
ernieM
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by ernieM »

Most of my retirement portfolio is invested in funds (e.g., Wellesley Income, Price Dividend Growth) that invest in dividend-paying companies/stocks (or those with appreciating dividends).....not necessarily because I want the dividend, but because those are the types of companies I want to invest in (and am comfortable with).....I at least somewhat understand the business models, and it tends to keep me away from some of the high-fliers that do not pay dividends and that I do not care to invest in [though it may cost me in total return, I can live with that). My taxable portfolio is much less focused on dividend-paying funds, though they are not without dividends. It's my understanding (which may not be accurate) that companies that pay the highest dividends are not necessarily the 'best' companies [i.e., high dividends, but fall short on total return].
Last edited by ernieM on Mon Jul 29, 2019 11:30 am, edited 1 time in total.
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nedsaid
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by nedsaid »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
Don't do this please. Nothing wrong with reaching for yield a little bit, our mentor John Bogle frequently discussion how to do this. Perhaps sell a slice of your Total Stock Market Index fund and buy Vanguard High Dividend Index. Probably wouldn't do this with more than 30% of your stocks. Then you could sell a portion of Total Bond Market Index, maybe 30%, and buy a US Corporate Bond Index.

I would not load up on such things as Preferred Stocks, Master Limited Partnerships, and High Yield Bonds. Too often these can be sort of self liquidating assets, great yield but quite often the price just keeps dropping. High Yield Bonds are sort of like stocks in drag, though they are bonds, you take a lot of equity-like risk. Master Limited Partnerships are often energy based, a few of these famously went bankrupt when oil prices dropped significantly. You are taking on additional risk to get that yield.

The old saying is that more money has been lost chasing yield than at the point of a gun. Not only that, but interest rates have been low for just over a decade now, you aren't the only one to notice. Higher yielding investments have been chased pretty hard and they are not exactly bargains.

Don't do this.
A fool and his money are good for business.
dbr
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by dbr »

I would add the point that this question comes up frequently on the forum and has been discussed in thousands of posts:

https://www.google.com/search?sitesearc ... =dividends
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by Grt2bOutdoors »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
No free lunch. You can earn 9.5% on $842,105 but you will be taking extremely high risk to do so including full loss of principal to get there. More money has been lost chasing yield than at the point of a gun - (some examples, Century Telephone, Frontier Telecommunications - high dividends until its cut or eliminated, the telephone companies are famous for this Or the banks in 2009 - BofA, Wachovia, Wells Fargo, Citibank, and a dozen or more others, the dividends per share are just starting to get back to where they were, for some of the banks they still aren't there yet) OR, you can invest in the market, take what it gives less a very small expense ratio and use total return (interest + capital gains) to withdraw the same amount.

I have relatives who withdraw dividends only as their retirement portfolio, the difference between them and I - they started investing right after WWII when most of Europe and the Pacific was rebuilding. But it's taken them 60+ years to reap those now large dividends. No different than what you may need to do, basically invest over an entire lifetime to realize the "dividends".
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WhiteMaxima
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by WhiteMaxima »

Only in tax deferred account orRoth. You can still use Drip to reinvest your dividend back to stock.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by iamlucky13 »

JimmyJammy - are you familiar with the concept of a safe withdrawal rate?

If not, I think it is worth spending some time reading and thinking about it, including why it is normally examined based on total return, rather than solely dividend yield.

Also, if you're retiring around the normal retirement age, you should also factor in social security as part of your income.

https://www.bogleheads.org/wiki/Safe_withdrawal_rates

If you truly do for some reason want to focus on yield rather than total return, it seems to me your portfolio should be heavily weighted towards bonds rather than stocks.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by Wakefield1 »

nedsaid wrote: Mon Jul 29, 2019 11:29 am
JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
Don't do this please. Nothing wrong with reaching for yield a little bit, our mentor John Bogle frequently discussion how to do this. Perhaps sell a slice of your Total Stock Market Index fund and buy Vanguard High Dividend Index. Probably wouldn't do this with more than 30% of your stocks. Then you could sell a portion of Total Bond Market Index, maybe 30%, and buy a US Corporate Bond Index.

I would not load up on such things as Preferred Stocks, Master Limited Partnerships, and High Yield Bonds. Too often these can be sort of self liquidating assets, great yield but quite often the price just keeps dropping. High Yield Bonds are sort of like stocks in drag, though they are bonds, you take a lot of equity-like risk. Master Limited Partnerships are often energy based, a few of these famously went bankrupt when oil prices dropped significantly. You are taking on additional risk to get that yield.

The old saying is that more money has been lost chasing yield than at the point of a gun. Not only that, but interest rates have been low for just over a decade now, you aren't the only one to notice. Higher yielding investments have been chased pretty hard and they are not exactly bargains.

Don't do this.
Isn't there a High Dividend Yield Index that has recently been producing nearly the same Total return as Total Stock Market (if taxes are not figured into the calculation) ? Might not make a whole lot of difference if O.P. is going to use the money as income (spend it soon)? (Avoiding the whole issue that bonds are not like stocks) (And don't have that "Qualified Dividend" tax treatment)
Risk level between that index and Total Stock might vary-I don't know whether more or less
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by WhiteMaxima »

MotoTrojan wrote: Mon Jul 29, 2019 11:24 am
This. Dividends aren't free money.

Total Return is all that matters.
Depend on your withdraw timing. What if you retired in 1929 or 2008. The purpose of invest in a company is the profit dividend. The company will pay % to shareholders and re-invest the rest of profit back to grow company. A dividend is a must. You could decide if you want to spend it or re-invest dividend back or into new company. Of course,all this should be in a tax deferred account to avoid dividend tax.
Last edited by WhiteMaxima on Mon Jul 29, 2019 1:16 pm, edited 1 time in total.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by nisiprius »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am...Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?...
Problem number one: verb tense. There is no such thing as a portfolio that "has" a higher yield than index funds. There are only two things:

1) Portfolios that have had a higher yield than index funds in the past.

2) Portfolios that will have a higher yield than index funds in the future.

Type 1 portfolios are easy to find. Dime a dozen. Unfortunately, past performance is no sure guide to future results.

Problem number two: failure to consider risk. You can define risk any way you like, and you can take it into account any way you like, but if you compare two portfolios without considering risk, you are a patsy, ready to be gulled by any fund manager or advisor who shows you return without showing you risk.

Just because you are risk tolerant, that does not mean you should accept more risk unless it is paying you enough to be worth it.

One of the astonishingly common things in investing is that, with the single exception of the "Larry portfolio," people presenting the "case" for some strategy or portfolio almost never equalize the risk between the portfolios they are comparing. The allegedly superior portfolio almost always has slightly higher risk as well as slightly higher return.

The "superior" portfolio could be adjusted, by changing asset allocations slightly, to have the same risk as the baseline portfolio. In some cases this would still show higher return--but often the difference becomes so small as to be unconvincing.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by Taylor Larimore »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
JimmyJammy:
“More money has been lost reaching for yield than at the point of a gun.” – Raymond DeVoe Jr.
It is Total Return (dividends PLUS capital-gains) that counts. Not only dividend-yield.

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "The worst thing you can do is reach for more yield. You just have to save more.”
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by wolf359 »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
The initial premise is flawed. If you want to safely pull $80,000 out of a portfolio, you don't need $4.2 million. You could probably do it for 30 years with a $2 million. If you want to do it indefinitely, you probably only need $2.3 million.

Yes, dividend investing is a popular investment strategy with retirees. It is not recommended by Bogleheads, who prefer to use a "Total Return" approach.

Let's explore why by actually constructing a portfolio yielding 9.5%. What are the implications?

1. Individual stock risk. There are no index funds with this type of yield. You will need to buy individual stocks, which mean that you may risk losing a significant proportion of your net worth if any one company goes bankrupt.

2. Riskier stocks. If the company is doing well, people will buy its stock, driving the price up. This drives its yield down. If the price crashes, it's yield increases. High yield stocks may be companies that are performing poorly, and whose stocks everybody is selling. Essentially, you are buying value stocks.

3. Lack of diversification. Most high yielding stocks are concentrated around a few industries, such as real estate investment trusts, utilities, consumer staples, and industrials. They are primarily mature companies in older industries. If you buy only high yield stocks, your portfolio will not reflect the broad economy. Your portfolio will be more cyclical in nature, and may not benefit if the market's growth concentrates in one of the industries that you are not holding.

4. Lack of growth. What do you think of Google? Amazon? Netflix? Facebook? Apple? Do you think they are well-run companies that are doing well? This strategy will never hold them, because they generally don't pay dividends. Those that do, still don't pay anywhere close to 9%. Growth companies emphasize growth, not yield.

5. Lack of income diversification. Yields are not guaranteed. Since the high dividend payers are concentrated in the same industry, they all tend to reduce dividends at the same time.

6.a. Tax inefficiency (in a taxable account). You are taxed on dividends when they are paid. If you do not need the dividend to live on, then you will be paying taxes on a high percentage of your portfolio for years. Even though qualified dividends are capped at ~15% tax rate, this will create a tax drag on your account.

6.b. Tax inefficiency (in a tax deferred account.) Qualified dividends in a taxable account are capped at ~15% tax rate. They accumulate tax free in a tax deferred account. However, tax deferred withdrawals are taxed at the potentially higher ordinary income tax rates, regardless of whether they came from principal, dividends, or capital gains.

7. You have to monitor your stocks and pick them carefully. A more effective dividend strategy is to focus on the quality of the company and its ability to continue to pay dividends, and not just the absolute yield. It takes more effort than index fund investing, and the consequences of a mistake are greater.

8. Drag on growth of the stock price. Essentially, dividends are like a forced sale of the stocks. Although you have the same number of shares, dividends still reduce the stock price by the amount paid out. This acts as a drag on the growth of the stock price.

9. (Pro) Produces income without having to sell the stock. This used to be more important when commissions were high. This also means you don't reduce the number of shares (although the remaining shares are worth less as per #8).

10. (Pro) Produces passive income. If you want, you can simply get a check in the mail. No timing decisions are required.

I am not specifically opposed to dividend investing. But I do not have a place for it while I am accumulating assets. I may take some of my funds and buy some REITs after I retire. But a high yield dividend strategy (and especially this high) may be too risky.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by All Seasons »

Going against the grain a bit. There is good research from outfits such as AQR demonstrating that dividend investing will generate higher returns even after taking into account taxes and factor exposure.

https://poseidon01.ssrn.com/delivery.ph ... 28&EXT=pdf

Additionally, while it is true that a stock's price will decrease by the amount of a dividend, what people conveniently leave out is the fact that a stock's price increases in the time leading up to the dividend. As per below:

Image
The market portfolio is always a legitimate portfolio.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by nedsaid »

Wakefield1 wrote: Mon Jul 29, 2019 1:06 pm
nedsaid wrote: Mon Jul 29, 2019 11:29 am
JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
Don't do this please. Nothing wrong with reaching for yield a little bit, our mentor John Bogle frequently discussion how to do this. Perhaps sell a slice of your Total Stock Market Index fund and buy Vanguard High Dividend Index. Probably wouldn't do this with more than 30% of your stocks. Then you could sell a portion of Total Bond Market Index, maybe 30%, and buy a US Corporate Bond Index.

I would not load up on such things as Preferred Stocks, Master Limited Partnerships, and High Yield Bonds. Too often these can be sort of self liquidating assets, great yield but quite often the price just keeps dropping. High Yield Bonds are sort of like stocks in drag, though they are bonds, you take a lot of equity-like risk. Master Limited Partnerships are often energy based, a few of these famously went bankrupt when oil prices dropped significantly. You are taking on additional risk to get that yield.

The old saying is that more money has been lost chasing yield than at the point of a gun. Not only that, but interest rates have been low for just over a decade now, you aren't the only one to notice. Higher yielding investments have been chased pretty hard and they are not exactly bargains.

Don't do this.
Isn't there a High Dividend Yield Index that has recently been producing nearly the same Total return as Total Stock Market (if taxes are not figured into the calculation) ? Might not make a whole lot of difference if O.P. is going to use the money as income (spend it soon)? (Avoiding the whole issue that bonds are not like stocks) (And don't have that "Qualified Dividend" tax treatment)
Risk level between that index and Total Stock might vary-I don't know whether more or less
Yes, Vanguard has a High Dividend Index product. The stocks are familiar blue chip names. Last I looked, High Dividend nearly matched the returns of the S&P 500. The dividends will be qualified dividends, Vanguard should provide how much is qualified, should be almost all of it. As far as risk level, High Dividend should be a little less volatile than Total Stock Market Index or the S&P 500. Last I looked, the yield was about 3%.
A fool and his money are good for business.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by MotoTrojan »

All Seasons wrote: Mon Jul 29, 2019 1:37 pm Going against the grain a bit. There is good research from outfits such as AQR demonstrating that dividend investing will generate higher returns even after taking into account taxes and factor exposure.

https://poseidon01.ssrn.com/delivery.ph ... 28&EXT=pdf

Additionally, while it is true that a stock's price will decrease by the amount of a dividend, what people conveniently leave out is the fact that a stock's price increases in the time leading up to the dividend. As per below:

Image
Looks like a pretty poorly performing stock right there. Price never exceeds $100 and I keep paying tax on the $0.50 every quarter :). What magic rule ensures it’s price to increase each quarter as your verbiage alludes to?
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by iamlucky13 »

All Seasons wrote: Mon Jul 29, 2019 1:37 pm Going against the grain a bit. There is good research from outfits such as AQR demonstrating that dividend investing will generate higher returns even after taking into account taxes and factor exposure.
I think your point is in line with what nedsaid posted about reaching for yield. However, the example given in the original post is constructed around depending on yield only, not yield as a component of total return.

I think getting clarity about the different between dividends and capital gains will help the OP understand the answers being given.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by dbr »

Once one has the right mathematical picture in mind these questions seem simple and obvious. Yet, for example, there is not a Wiki article on the topic of return and I am not sure where I remember actually reading on the topic in any specific place. It is kind of like not remembering learning the alphabet or the times table.

This Wikipedia article contains some of the necessary information but is not the easiest to read: https://en.wikipedia.org/wiki/Rate_of_return

This article is helpful: https://en.wikipedia.org/wiki/Total_return

A more difficult topic that is probably easiest to understand if you already understand it (meaning people experience in statistical models immediately see what this is about and others may not): https://en.wikipedia.org/wiki/Expected_return

On the topic of risk and return (but unreadable without a background in where the mathematics is coming from): https://en.wikipedia.org/wiki/Modern_portfolio_theory

If someone has a link or a reading reference to the basic concept I'm sure that would be helpful. Books by Swedroe and Ferri might be a good start.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by Greenman72 »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am
If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
I can think of two reasons off the bat:
1. High yield does not equal high return. If you get a 10% yield and a 95% unrealized capital loss, then what is your total return? (Ask investors in Legacy Reserves.)
2. Yield is realized income, and is therefore taxed as such. Unrealized capital gains are not taxed.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by All Seasons »

MotoTrojan wrote: Mon Jul 29, 2019 3:33 pm
All Seasons wrote: Mon Jul 29, 2019 1:37 pm Going against the grain a bit. There is good research from outfits such as AQR demonstrating that dividend investing will generate higher returns even after taking into account taxes and factor exposure.

https://poseidon01.ssrn.com/delivery.ph ... 28&EXT=pdf

Additionally, while it is true that a stock's price will decrease by the amount of a dividend, what people conveniently leave out is the fact that a stock's price increases in the time leading up to the dividend. As per below:

Image
Looks like a pretty poorly performing stock right there. Price never exceeds $100 and I keep paying tax on the $0.50 every quarter :). What magic rule ensures it’s price to increase each quarter as your verbiage alludes to?
A stock's price will always rise by the amount of the announced dividend leading up to the ex-dividend date. When that date passes the stock price immediately falls by the amount of the dividend.

That's why I was pointing out that the argument that receiving a dividend is the same thing as selling shares is not a good argument. Yes, the stock price falls by the amount of the dividend, but since the price rose leading up to the ex-dividend date, it can't really be considered the equivalent of just selling shares.
The market portfolio is always a legitimate portfolio.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by MotoTrojan »

All Seasons wrote: Mon Jul 29, 2019 6:21 pm

A stock's price will always rise by the amount of the announced dividend leading up to the ex-dividend date. When that date passes the stock price immediately falls by the amount of the dividend.

That's why I was pointing out that the argument that receiving a dividend is the same thing as selling shares is not a good argument. Yes, the stock price falls by the amount of the dividend, but since the price rose leading up to the ex-dividend date, it can't really be considered the equivalent of just selling shares.
I would greatly appreciate proof to the bold statement as this seems egregiously misunderstood. A stocks price will reflect the expectation of dividends but I do not believe/agree that the price will increase at the announcement of the dividend proportional to the dividend. I do know that the price will drop after ex-div, which is quite intuitive.

With all due respect, it is the same as selling shares. I disagree and believe most members of this forum would too.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by ThrustVectoring »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
If you buy $100 of assets today, would you rather have $103 of assets + $2 of cash next year, or $100 of assets and $5 of cash?

If the choices have the same total return, that's what the choice of different yields does. Total return is what matters to me - I don't particularly care whether the investment gives me cash back or becomes more valuable. In fact, in taxable accounts, becoming more valuable has advantageous tax treatment over receiving a cash yield.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by texas lawdog »

I just happened to see that article posted today on Seeking Alpha by Rida Morwa with the same numbers you quote.

Of course, at the end of his article asking about yield he offers a solution with some steep prices...
First 50 members get a chance to join HDO for 20% off or just $407 annually!
Next 50 members get a chance to join HDO for 15% off or only $433 annually!
Last 100 members get a chance to join HDO for 10% off or only $458 annually!
Join us today and get instant access to our model portfolio targeting 9-10% yield, our preferred stock portfolio, our bond portfolio, and income tracking tools.

I didn't really pay attention too much to his claim or his solution.
My first response to your question is because high yield generally correlates with high risk.

Good luck
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by All Seasons »

MotoTrojan wrote: Mon Jul 29, 2019 6:40 pm
All Seasons wrote: Mon Jul 29, 2019 6:21 pm

A stock's price will always rise by the amount of the announced dividend leading up to the ex-dividend date. When that date passes the stock price immediately falls by the amount of the dividend.

That's why I was pointing out that the argument that receiving a dividend is the same thing as selling shares is not a good argument. Yes, the stock price falls by the amount of the dividend, but since the price rose leading up to the ex-dividend date, it can't really be considered the equivalent of just selling shares.
I would greatly appreciate proof to the bold statement as this seems egregiously misunderstood. A stocks price will reflect the expectation of dividends but I do not believe/agree that the price will increase at the announcement of the dividend proportional to the dividend. I do know that the price will drop after ex-div, which is quite intuitive.

With all due respect, it is the same as selling shares. I disagree and believe most members of this forum would too.
It's not bold. :|

It's mainstream economic theory. It was in the CFA curriculum when I studied it. It was in my finance classes in college.

:confused I mean, here's literally the first Google result:

"The declaration of a dividend naturally encourages investors to purchase stock. Because investors know that they will receive a dividend if they purchase the stock before the ex-dividend date, they are willing to pay a premium. This causes the price of a stock to increase in the days leading up to the ex-dividend date."

https://www.investopedia.com/articles/i ... prices.asp
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by permport »

All Seasons wrote: Mon Jul 29, 2019 7:10 pm
It's not bold. :|

It's mainstream economic theory. It was in the CFA curriculum when I studied it. It was in my finance classes in college.

:confused I mean, here's literally the first Google result:

"The declaration of a dividend naturally encourages investors to purchase stock. Because investors know that they will receive a dividend if they purchase the stock before the ex-dividend date, they are willing to pay a premium. This causes the price of a stock to increase in the days leading up to the ex-dividend date."

https://www.investopedia.com/articles/i ... prices.asp
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by arcticpineapplecorp. »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?
This is the part that got me. Maybe the OP isn't aware of the connection between risk and return. So let's review:

Q. Why do some assets provide higher yield?
A. Because they carry more risk.

Q. What assets provide lower yield?
A. Those that are reasonably safe/reliable.

See?

You're wanting the ol' high return/low risk that everyone wants, but doesn't exist. If you want high return, you have to accept the high risk that goes with high returns. If you want safety, you have to settle for the lower returns that go with safety. There's no way around that, but people keep wanting it to be so.

You're probably thinking "relatively safe" means blue chip stocks. Have you seen what's happened to the ol' blue chip GE? How about GM in 2008-2009? Kodak was once a blue chip. Sears too. And so on. There's nothing inherently safe about a blue chip stock. Sometimes the larger they are the harder they fall.

When we think of safety or your term "reliable" that means bonds (and high quality at that). Why? Because they pay reliable coupons, provided they don't default (but that's why you reduce the default risk by buying high quality bonds). But buying bonds provides lower returns. That's because they're safer, not risky, which gets us back to my original point.

questions?

by the way, retirees or pre-retirees do all sorts of things. I don't think you can lump them all in one basket as if they're a borg or something. In fact, most seniors don't search for higher yield (some do, I'll get to that in a sec) but rather have conservative portfolios, which means holding mostly bonds with fewer stocks. Many seniors hold between 30%-50% in stocks and the rest in bonds. That's not risky, like you're suggesting.

However, from time to time, some seniors do "stretch for yield". This happened after the last recession because bonds (and fixed income, safer assets in general) paid paltry returns. So some seniors bought high yield bonds (these are called junk bonds in the industry for good reason). And the reason junk bonds/high yield bonds pay more is because...you guessed it, the higher risk. Our close friends again, ol' risk and return (they're so close, they're inextricably linked).

Some bought high dividend stocks (Suze Orman recommended that one on occasion). Problem is stocks can cut their dividends and/or go out of business. Then you not only lost your dividend, but your principal as well.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by MotoTrojan »

All Seasons wrote: Mon Jul 29, 2019 7:10 pm
MotoTrojan wrote: Mon Jul 29, 2019 6:40 pm
All Seasons wrote: Mon Jul 29, 2019 6:21 pm

A stock's price will always rise by the amount of the announced dividend leading up to the ex-dividend date. When that date passes the stock price immediately falls by the amount of the dividend.

That's why I was pointing out that the argument that receiving a dividend is the same thing as selling shares is not a good argument. Yes, the stock price falls by the amount of the dividend, but since the price rose leading up to the ex-dividend date, it can't really be considered the equivalent of just selling shares.
I would greatly appreciate proof to the bold statement as this seems egregiously misunderstood. A stocks price will reflect the expectation of dividends but I do not believe/agree that the price will increase at the announcement of the dividend proportional to the dividend. I do know that the price will drop after ex-div, which is quite intuitive.

With all due respect, it is the same as selling shares. I disagree and believe most members of this forum would too.
It's not bold. :|

It's mainstream economic theory. It was in the CFA curriculum when I studied it. It was in my finance classes in college.

:confused I mean, here's literally the first Google result:

"The declaration of a dividend naturally encourages investors to purchase stock. Because investors know that they will receive a dividend if they purchase the stock before the ex-dividend date, they are willing to pay a premium. This causes the price of a stock to increase in the days leading up to the ex-dividend date."

https://www.investopedia.com/articles/i ... prices.asp
Wasn't saying your statement was bold, simply that I bolded that portion :).

I can understand an irrational reason for people to rush into a stock after the dividend has been declared, thinking a dividend is free money, but I can't see any fundamental reason for this effect to compound into additional growth and offset the dividend in the long-run, compared to the company just holding it as cash. I suppose if you are the 1st person to buy in before the crowd drives it up, and then you sell just before ex-div (or take your dividend) then you could arbitrage a small profit.

If what you are saying is true, why couldn't someone just buy stock systematically (to reduce single-stock risk) days/minutes before/after the dividend is announced, and then sell just before ex-div? Should be free money!
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by abuss368 »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
One can also invest in Total Stock and add Total International, US REITs, and International REITs to increase yield. Combined with bonds this would provide a higher yield.

Be aware that higher yield usually means higher risk.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by Small Savanna »

It's going to be very difficult to find anything (stock, bond, or REIT) that yields 9.5% that doesn't also have a lot of risk. For stocks, the risk is that the dividend is unsustainable; the market knows that, depressing the stock price and driving up the yield. You buy what you think is a great bargain, but then the dividend gets cut and the stock price falls even more. I've been lured in that direction before...
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by RAchip »

You can build a very reasonable common stock portfolio that yields around 4% and maybe a little more (no REIT's, MLP's or preferreds). As with all common stock, there is always downside risk but there is also a likelihood of significant upside appreciation over the long term. And there is a strong likelihood that the dividends will grow over time also. You cannot build a reasonable common stock portfolio that yields 8% or more.

The claim that "dividends come out of the stock price" is misguided. Dividends are cash payments a company makes from its bank account to its stockholders. The market price of stock is set based on supply and demand in the market. The idea that you can determine why the market price of a particular stock is what it is any given time is just silly. I agree that GENERALLY the market price of a stock goes up when a dividend is declared and down when the dividend is effectively paid (ex-dividend day) but there are so many other factors that go into determining what willing buyers will pay and what willing sellers will accept for any given stock at any given time that it isn't possible to quantify exactly what role dividends play in the supply and demand process.

The argument that "dividends come out of the stock price" is also flawed because it would mean that dividends are of no benefit (provide no value to stockholders). The idea that 80% of the companies in the S&P 500 go through the trouble to do something that provides no value to stockholders is just not realistic.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by venkman »

All Seasons wrote: Mon Jul 29, 2019 7:10 pm "The declaration of a dividend naturally encourages investors to purchase stock. Because investors know that they will receive a dividend if they purchase the stock before the ex-dividend date, they are willing to pay a premium. This causes the price of a stock to increase in the days leading up to the ex-dividend date."
If this were true, to the extent that it produced a predictable pattern of stock prices rising in the lead-up to the ex-dividend date, then savvy investors would attempt to exploit it by buying the stock before the run-up. Then, savvier investors would try to exploit it by buying even earlier, and the process would continue all the way back to the most recent ex-dividend date.

I would argue that the actual declaration of a dividend is only relevant to the extent that it differs from what the market was already expecting. If a company has been paying regular dividends, the assumption that those dividend payments will continue at about the same rate is already priced into the stock, whether or not the company has officially declared the next one yet.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by Sandtrap »

ernieM wrote: Mon Jul 29, 2019 11:28 am Most of my retirement portfolio is invested in funds (e.g., Wellesley Income, Price Dividend Growth) that invest in dividend-paying companies/stocks (or those with appreciating dividends).....not necessarily because I want the dividend, but because those are the types of companies I want to invest in (and am comfortable with).....I at least somewhat understand the business models, and it tends to keep me away from some of the high-fliers that do not pay dividends and that I do not care to invest in [though it may cost me in total return, I can live with that). My taxable portfolio is much less focused on dividend-paying funds, though they are not without dividends. It's my understanding (which may not be accurate) that companies that pay the highest dividends are not necessarily the 'best' companies [i.e., high dividends, but fall short on total return].
Your thoughts then on "Dividend Aristocrats"??
From "seeking alpha".
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by MotoTrojan »

venkman wrote: Mon Jul 29, 2019 9:32 pm
All Seasons wrote: Mon Jul 29, 2019 7:10 pm "The declaration of a dividend naturally encourages investors to purchase stock. Because investors know that they will receive a dividend if they purchase the stock before the ex-dividend date, they are willing to pay a premium. This causes the price of a stock to increase in the days leading up to the ex-dividend date."
If this were true, to the extent that it produced a predictable pattern of stock prices rising in the lead-up to the ex-dividend date, then savvy investors would attempt to exploit it by buying the stock before the run-up. Then, savvier investors would try to exploit it by buying even earlier, and the process would continue all the way back to the most recent ex-dividend date.

I would argue that the actual declaration of a dividend is only relevant to the extent that it differs from what the market was already expecting. If a company has been paying regular dividends, the assumption that those dividend payments will continue at about the same rate is already priced into the stock, whether or not the company has officially declared the next one yet.
Well said. There is just no logical reason for it, while ex-div has a clear quantitative rationale for it reducing the NAV. Finance class curriculum or not, I’m not buying it.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by Sandtrap »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 am Isn't there a case to be made to construct a portfolio that has a higher yield than what index funds pay?

VTSAX pays only 1.84%.

If I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.

Of course, you'd need to load up on high-yielding stocks and other high-yield assets that are reasonably safe/reliable. Don't a lot of retirees or near-retirees do that kind of thing?

What are the pros and cons?
Lot's of in depth answers to your questions in the book, "Rational Expectations" by William Bernstein.
https://smile.amazon.com/Rational-Expec ... 221&sr=8-1
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by tibbitts »

I see the opportunity for fund companies to market a series of high-dividend funds/ETFs here, sort of like target-date funds, except you get to pick S&P yield +2%, +4%, etc. Not something I'd be interested in, but judging by this thread, the market would be there.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by jatwell »

FYI, looks like the OP came directly from this article:

https://seekingalpha.com/amp/article/42 ... eed-retire
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by mcraepat9 »

I must be dense - I’ve never heard this “point of a gun” reference before and now seemingly everyone is quoting it? Where have I been??
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by Dialectical Investor »

MotoTrojan wrote: Mon Jul 29, 2019 9:42 pm
venkman wrote: Mon Jul 29, 2019 9:32 pm
All Seasons wrote: Mon Jul 29, 2019 7:10 pm "The declaration of a dividend naturally encourages investors to purchase stock. Because investors know that they will receive a dividend if they purchase the stock before the ex-dividend date, they are willing to pay a premium. This causes the price of a stock to increase in the days leading up to the ex-dividend date."
If this were true, to the extent that it produced a predictable pattern of stock prices rising in the lead-up to the ex-dividend date, then savvy investors would attempt to exploit it by buying the stock before the run-up. Then, savvier investors would try to exploit it by buying even earlier, and the process would continue all the way back to the most recent ex-dividend date.

I would argue that the actual declaration of a dividend is only relevant to the extent that it differs from what the market was already expecting. If a company has been paying regular dividends, the assumption that those dividend payments will continue at about the same rate is already priced into the stock, whether or not the company has officially declared the next one yet.
Well said. There is just no logical reason for it, while ex-div has a clear quantitative rationale for it reducing the NAV. Finance class curriculum or not, I’m not buying it.
The logical reason is, in one model at least, the value of the company is the present value of a perpetuity or annuity with a cash flow that is the dividend. In either a perpetuity or annuity, the formulae are based on payments starting not today, but rather, one period from today. An imminent dividend (as in, tomorrow) would not be discounted, but added to the present value calculated from the annuity/perpetuity. Or, to look at it a different way, to include an imminent dividend, you calculate the present value using formulae for an "annuity due"--starting today--compared to one starting one period from today.

We also must remember that "priced in" does not mean the price will not change even if events happen as expected, and not only because of probabilistic considerations. The mere passage of time is sufficient to cause price fluctuations due to discounting, as may be easier seen in bonds.

(I should add, I am not trying to argue exactly when the price increase will occur or can be witnessed and do not necessarily agree with all references above.)
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by FrankLUSMC »

MotoTrojan wrote: Mon Jul 29, 2019 6:40 pm
All Seasons wrote: Mon Jul 29, 2019 6:21 pm

A stock's price will always rise by the amount of the announced dividend leading up to the ex-dividend date. When that date passes the stock price immediately falls by the amount of the dividend.

That's why I was pointing out that the argument that receiving a dividend is the same thing as selling shares is not a good argument. Yes, the stock price falls by the amount of the dividend, but since the price rose leading up to the ex-dividend date, it can't really be considered the equivalent of just selling shares.
I would greatly appreciate proof to the bold statement as this seems egregiously misunderstood. A stocks price will reflect the expectation of dividends but I do not believe/agree that the price will increase at the announcement of the dividend proportional to the dividend. I do know that the price will drop after ex-div, which is quite intuitive.

With all due respect, it is the same as selling shares. I disagree and believe most members of this forum would too.
If you want to see a failure of the stock always rising pre-dividend check out COP, just sayin.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by FrankLUSMC »

In a taxable portfolio, my experience has been that buying a high yield security usually give lots of tax loss harvesting opportunity. 8-)
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by firebirdparts »

I am a little disturbed about the level of discussion about stockholders arbitraging out the price of the stock before and after the ex dividend date. So I will ignore that. It's not an interesting process. The dividend money comes out of the bank. Again, not an interesting process.

If a company has "high dividends" then that simply means people (like myself) are not inclined to pay 30X or 40X for that revenue stream. People are not stupid; they have good reasons they don't want to pay more. They don't think it's sustainable.

The OP's question might lead us to discuss whether or not anybody offers a managed fund for companies that pays "high dividends" and if so, how did they decide just how high they wanted that to be. Vanguard offers one named "High Dividend Yield" and it has a yield of 3.3%, which to me is not "high" so they were pretty cautious when they picked out those stocks. It's better than zero yield (you know who you are).

If you take a big database and look for companies that have really high dividends, you'll see a lot of companies in a death spiral. Then on the raggedy edge you might see a few companies with 6% or 8% yield that might have a chance to survive while.

Here is something fun:
https://finance.yahoo.com/news/10-highe ... 00705.html
Last edited by firebirdparts on Tue Jul 30, 2019 10:32 am, edited 2 times in total.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by firebirdparts »

FrankLUSMC wrote: Tue Jul 30, 2019 9:42 am In a taxable portfolio, my experience has been that buying a high yield security usually give lots of tax loss harvesting opportunity. 8-)
Yes!
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by willthrill81 »

And the OP has left the building...
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by David Jay »

JimmyJammy wrote: Mon Jul 29, 2019 9:37 amIf I wanted an annual income of $80,000 I'd need $4.2 million in a portfolio yielding 1.9%. But you'd only need $842,105 from a portfolio yielding 9.5%.
By this logic, one could never get $80,000 of retirement income if their only holding was Berkshire Hathaway. Even if they owned a thousand shares of BRKA. [edit: worth about $300 million]
Last edited by David Jay on Wed Jul 31, 2019 3:25 pm, edited 1 time in total.
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Re: Why not aim for a HIGH YIELDING portfolio?

Post by vineviz »

RAchip wrote: Mon Jul 29, 2019 9:08 pm The claim that "dividends come out of the stock price" is misguided. Dividends are cash payments a company makes from its bank account to its stockholders. The market price of stock is set based on supply and demand in the market. The idea that you can determine why the market price of a particular stock is what it is any given time is just silly.
This seems to be a pair of non-sequiturs.

The second and third sentences are true: dividends are cash payments, and the market price is set by supply and demand. But the first and fourth sentences don't follow from the other two.

The price of a stock is set by the market as the aggregate PV of future cash flows from that stock. Prior to the ex-dividend date, that price can be characterized as representing the PV of two different cash flows: one is the impending dividend, and the other is the sum of all other cash flows. Once the ex-dividend date arrives, the stock prices drops because the PV of the dividend to the stockholder becomes zero. And it drops by the amount the cash value of the dividend: what remains is the PV of still-future cash flows. This is what is meant by "dividends come out of the stock price", a statement which is both theoretically and empirically unassailable.

Now obviously this residual value (the "PV of still-future cash flows") remains subject to the same supply and demand forces that always apply. This also is both theoretically and empirically unassailable. Stocks without dividends routinely open at a different price from the closing price on the day before, so it should be no surprise (nor is it contradictory evidence) that an ex-dividend stock might open at a different price from the "closing price minus dividend".

It remains true that the ex-dividend stock will see its price set at a level that is lower than it otherwise would have been set if not for the paid dividend. And it will be lower than this "if not for the dividend price" by an amount precisely equal to the cash value of the dividend.
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