Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

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TN_Boy
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by TN_Boy »

AlohaJoe wrote: Thu Aug 08, 2019 9:02 pm
TN_Boy wrote: Thu Aug 08, 2019 10:02 am How often does dividend yield in the broader indexes change by 50% in dollar amount?
A quick look at Shiller's data says that 56 times the nominal dividend has been 40% different than what it was 24 months previous, though that often runs in clusters. The clusters are 1880, 1900, 1917, 1932, 1936, and 1950.

Looks like the standard deviation of change is 13%. Going by the 68-95-99.7 rule that implies that 1/3rd of the time dividends change by more than 13% over a 24-month period. 5% of the time they change by more than 26% over a 24-month period. And 1% of the time they change by more than 39% over a 24-month period.
Okay that's interesting. Though I personally don't pay much attention to data before the 1930s (my completely arbitrary "anything older the world was way too different" dividing line).
JustinR
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by JustinR »

S_Track wrote: Thu Aug 08, 2019 9:16 pm
willthrill81 wrote: Thu Aug 08, 2019 8:29 pm Here's the best way that I can think of to describe why dividends are not 'free money'.

Imagine that you are the sole owner of a business that has $10,000 in its checking account. You transfer that $10,000 into your personal checking account. Has your net worth increased at all? No, because you owned the $10,000 the entire time.

The same is true of a company paying dividends. Before they pay dividends, you own your share of the entire company, including the cash they use to pay the dividends. When they proceed to pay you your share of that cash, your net worth does not change because you owned your share of that cash the entire time.
I like this. In fact what you describe here I thought was pretty much accepted. Basically NAV drops when dividend is paid. What I thought I would read from the other camp, is more about how dividend companies are mature, history of being successful, strong management teams, valued by other investors, ....which may give them a slight edge and make them good bets. In addition using dividends in retirement help you establish a very conservative SWR. I could understand that, but have trouble with the free money stuff.

That aside, what still amazes me is how the price drop is actually assigned when a dividend is paid. Without a central authority the market must be pretty smart. Company X pays a dividend, everyone wakes up the next morning and knows to lower their bid rate for company X.
No, somebody does lower it.

The exchange adjusts it the night before the ex-dividend date.

Go to Yahoo and type in any stock:
https://finance.yahoo.com/quote/VTSAX/history?p=VTSAX
https://finance.yahoo.com/quote/PG/history?p=PG
https://finance.yahoo.com/quote/KO/history?p=KO

Look for the first dividend row*, and then look at the day below it.

Look at the last two columns. The adjusted closing price (for the night right before the dividend is paid out) will be the Closing Price minus the exact value of the dividend.


*only look at the latest dividend, previous dividend closing prices on Yahoo will be further adjusted for the current dividend so it won't show you what I'm illustrating here
Last edited by JustinR on Thu Aug 08, 2019 10:36 pm, edited 4 times in total.
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willthrill81
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

Riprap wrote: Thu Aug 08, 2019 9:13 pm
willthrill81 wrote: Thu Aug 08, 2019 8:29 pm Here's the best way that I can think of to describe why dividends are not 'free money'.

Imagine that you are the sole owner of a business that has $10,000 in its checking account. You transfer that $10,000 into your personal checking account. Has your net worth increased at all? No, because you owned the $10,000 the entire time.

The same is true of a company paying dividends. Before they pay dividends, you own your share of the entire company, including the cash they use to pay the dividends. When they proceed to pay you your share of that cash, your net worth does not change because you owned your share of that cash the entire time.
This may be true, but you glaze over who controls the money.

Shareholders rely on management to put their equity to work. Sometimes they have a good use for it, other times they don't.

IF management doesn't have a productive use of capital, wouldn't you rather be in control of YOUR money and have it returned to YOU to use as you see fit? I think this is why corporate governance is so important. Making sure shareholder's interests come first.

In your example, you're in control of both the business checking account and the personal checking account. Who controls the business checking account in a publicly traded corporation?

I guess I'm straying from the OP's question though.
Yes, you don't personally control the cash held by the corporation. And yes, cash held by the corporation can potentially be used effectively to help the business grow or returned to shareholders in the form of dividends or, increasingly, share buybacks. But the latter is not necessarily more effective than the latter; it is situation dependent. Amazon has grown to dizzying heights and generated ridiculous levels of wealth for many shareholders without every paying a cent in dividends.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Dialectical Investor
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Dialectical Investor »

Phineas J. Whoopee wrote: Thu Aug 08, 2019 7:00 pm
Over time the corporation may or may not have positive earnings. That's what you get when you invest. Dividends usually, but don't always have to, come out of earnings. Corporations can, and do, borrow money for the express purpose of paying it out as dividends. They do the same with asset sales.
As I understand it, dividends must come out of earnings. Perhaps you mean to say that dividends do not need to come out of current earnings and may instead come from previous earnings. In other words, dividends come out of retained earnings, and a corporation generally cannot pay a dividend if they have an accumulated deficit. Of course, how much cash the corporation has is a separate matter, and debt may be issued to raise cash, which subsequently may be used to pay a dividend, regardless of whether or not there were any earnings in the concurrent period.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by MathIsMyWayr »

Riprap wrote: Thu Aug 08, 2019 9:13 pm This may be true, but you glaze over who controls the money.

Shareholders rely on management to put their equity to work. Sometimes they have a good use for it, other times they don't.

IF management doesn't have a productive use of capital, wouldn't you rather be in control of YOUR money and have it returned to YOU to use as you see fit? I think this is why corporate governance is so important. Making sure shareholder's interests come first.

In your example, you're in control of both the business checking account and the personal checking account. Who controls the business checking account in a publicly traded corporation?

I guess I'm straying from the OP's question though.
+1. Dividends received by shareholders are not free money, but dividends not paid are free money for the officers of the company to waste. Things are not so simple or black and white in real life.
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Dialectical Investor
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Dialectical Investor »

cbeck wrote: Thu Aug 08, 2019 6:41 pm
So your theory is that dividends payouts are basically a liquidation of the company? That's why Coca Cola which must have paid out more than its share price over the years is now trading at zero. Really?
In fact, a dividend is exactly that: a partial liquidation of the company. Liquidation usually refers to assets though, not share price. The company literally shrinks when a paying a dividend, with a decrease in assets and equity, all else equal (no stock or debt issuance, without regard to future earnings, etc.).
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YRT70
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by YRT70 »

Miriam2 wrote: Thu Aug 08, 2019 6:21 pm
YRT70 wrote: Perhaps there is a psychological advantage?
First of all, let me start this section by saying that it is not true that dividend growth investors do not care at all about capital appreciation (Total Return). In truth, they care very much, and who doesn’t enjoy seeing the value of their stock holdings appreciate over time. However, the competent dividend growth investor attempts to build a dividend paying portfolio that will support their retirement needs without ever having to harvest any of their principal. Therefore, as long as their income is not affected by price volatility, they can calmly and intelligently ignore volatile market actions. This is a great and powerful advantage.
https://www.fastgraphs.com/why-accompli ... olatility/
I read this article you posted and I assume that Fastgraphs website is where you are getting your information and arguments from in this BH thread.
I wasn't getting information from this site. Someone else posted this article in the thread. See: viewtopic.php?p=4678350#p4678350

But you're right in one regard: my friend also believes in buying individual stocks as opposed to high dividend ETFs.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by rossington »

**Regarding the statements that a dividend reduces the stock price by an equal amount at ex dividend and the effect on the stock valuation.**
Can anyone here please provide absolute proof that a company's stock price beyond it's ex dividend dates has any additional relationship with those payouts?
For example, is the value of JNJ's (or pick a company) stock price today lower than it should be because of the annually increasing dividends it has paid for decades?
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Northern Flicker
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Northern Flicker »

Someone could just sell the shares in your tax-advantaged account and them immediately repurchase them in a taxable account.
If you hold individual dividend stocks in an IRA (which you should not, but if you nonetheless do) an RMD where you wish to continue holding the stock would be taken as an in-kind distribution. No reason to incur the transaction cost of selling the shares and buying them again.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Northern Flicker »

If a company has a book value of $1B and they distribute a 1% dividend, then $10M of cash flows out of the company, lowering its book value to $990M. The only way the price can stay the same is if the market simultaneously decides that a higher price:book ratio is fair value for the company.
SGM
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by SGM »

During the crash of 2008 dividends of financial stocks were cut. Some of the companies went out of business. In retirement I tend to spend my dividends as they are already taxed as opposed to selling positions which increases my taxes. My index funds have dividends. Unless I put everything into individual stocks that don't pay dividends then I am stuck with them.


When I was accumulating stock I reinvested the dividends. The value of my accounts didn't go down except that I had to pay taxes on the dividends in my taxable accounts.

In retirement I have arranged to have other sources of income outside of my portfolio. I certainly could get by most of the time wihtout selling any of my stock positions. I realize dividends come out of principal. Now I either spend dividends or reallocate them. I always was aware of total return of which dividends are a part of.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by BeBH65 »

rossington wrote: Fri Aug 09, 2019 3:14 am **Regarding the statements that a dividend reduces the stock price by an equal amount at ex dividend and the effect on the stock valuation.**
Can anyone here please provide absolute proof that a company's stock price beyond it's ex dividend dates has any additional relationship with those payouts?
This post a few pages back seemed to make a good point.
S_Track wrote: Thu Aug 08, 2019 6:02 am I believe the mathematics in this discussion center around the NAV being reduced when the dividend is distributed? It amazes me the market is able to do that so accurately without a central pricing authority of some sort. DBR gave me a link a while back in another thread that explains this in more detail. I just reread it, Interestingly they do talk about stock market specialists changing the price per share at open. I wonder who they are?

"Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend. For example, if a stock trades at $50 per share and pays out a $0.25 quarterly dividend, the stock will be marked down to open at $49.75 per share."

https://finance.zacks.com/stock-price-c ... -3571.html




rossington wrote: Fri Aug 09, 2019 3:14 am For example, is the value of JNJ's (or pick a company) stock price today lower than it should be because of the annually increasing dividends it has paid for decades?
Buyers and sellers determine what the stock price is. There is no "should be" on what the price should be.

Image 2 companies C1 and C2 who are in exactly the exactly the same business.
Imagine they both have 10000 shares.
Imagine the stock price at the start of the quarter is $100.
Both companies area hence valued at $1,000,000


Imagine the earnings during the quarter are $20000. Imagine the market know this and prices this correctly. The stockprice of both companies would then be $102.

Now assume C1 does not distribute a dividend - Stockprice C1 remains at $102
Assume C2 does distribute a dividend of $1. $10000 is removed from the company value. It seems logical that the next share transaction would set the price to $101.

Now repeat this the next quarter. Earnings of $20000.
Assuming again full market knowledge, then C1 stockprice would raise to with $2 to $104
Assuming again full market knowledge, then C2 stockprice would raise to with $2 to $103
If C1 does not distribute a dividend the stock price will remain on $104.
Assume C2 does distribute a dividend of $1. $10000 is again removed from the company value. It seems logical that the next share transaction would set the price to $102.


Should there be reason why the stock prices of C1 and C2 would be different then above?
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
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S_Track
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by S_Track »

JustinR wrote: Thu Aug 08, 2019 10:13 pm
S_Track wrote: Thu Aug 08, 2019 9:16 pm
willthrill81 wrote: Thu Aug 08, 2019 8:29 pm Here's the best way that I can think of to describe why dividends are not 'free money'.

Imagine that you are the sole owner of a business that has $10,000 in its checking account. You transfer that $10,000 into your personal checking account. Has your net worth increased at all? No, because you owned the $10,000 the entire time.

The same is true of a company paying dividends. Before they pay dividends, you own your share of the entire company, including the cash they use to pay the dividends. When they proceed to pay you your share of that cash, your net worth does not change because you owned your share of that cash the entire time.
I like this. In fact what you describe here I thought was pretty much accepted. Basically NAV drops when dividend is paid. What I thought I would read from the other camp, is more about how dividend companies are mature, history of being successful, strong management teams, valued by other investors, ....which may give them a slight edge and make them good bets. In addition using dividends in retirement help you establish a very conservative SWR. I could understand that, but have trouble with the free money stuff.

That aside, what still amazes me is how the price drop is actually assigned when a dividend is paid. Without a central authority the market must be pretty smart. Company X pays a dividend, everyone wakes up the next morning and knows to lower their bid rate for company X.
No, somebody does lower it.

The exchange adjusts it the night before the ex-dividend date.

Go to Yahoo and type in any stock:
https://finance.yahoo.com/quote/VTSAX/history?p=VTSAX
https://finance.yahoo.com/quote/PG/history?p=PG
https://finance.yahoo.com/quote/KO/history?p=KO

Look for the first dividend row*, and then look at the day below it.

Look at the last two columns. The adjusted closing price (for the night right before the dividend is paid out) will be the Closing Price minus the exact value of the dividend.


*only look at the latest dividend, previous dividend closing prices on Yahoo will be further adjusted for the current dividend so it won't show you what I'm illustrating here
So it is the exchange that does the adjustment, thanks for clearing that up.
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BeBH65
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by BeBH65 »

grayfox wrote: Fri Aug 09, 2019 5:46 am
YRT70 wrote: Sun Aug 04, 2019 1:06 pm I was having a discussion with my friend. He says: if you live off dividends, a crash in stock prices doesn't matter.

This seems like an odd claim to me but I know very little of the topic. Is my friend right?
Suppose you own shares and collect the dividend to live off of and pay your bills. You set to up so that the dividends are automatically deposited into you bank account every quarter. And further, let's say you lived far out in the woods, had no internet, no TV, no radio, no newspapers, no news, no people, only moose, deer and bear. Once a year, you went into town, withdrew month from your bank account to buy provisions and ammo for the next year.

:idea: If the stock market crashed, how would it affect you? How would you even know about it? The stock price won't matter to you. All that matter is that the dividend is paid and in your bank account when you go to make your annual withdrawal.
Already presented above. Dividends are not constant.
JoMoney wrote: Mon Aug 05, 2019 8:18 am Chart of S&P 500 dividends
Image
Lots of hits can be seen where one would have to take a big hair-cut on their income. Not necessarily easy to do if that's your only source of income.
Looks to me like that period from 1966 - 1989 would have been especially rough, not only would your income be steadily declining, that was a period of especially high inflation so your cost of living would be skyrocketing.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by BeBH65 »

Well the contraint was that the person living in the woods only looks at his dividends. :-).

Here are graphs that show that dividends and stock prices are linked.

1. Stock prices rise, dividends rise. Stock prices decline, dividends decline and certainly do not follow inflation.
Image
from: https://risingdividendinvesting.blogspo ... stock.html

2. ratio price/dividend: during the crashes of 2000 en 2008 declined significantly.
Image
from: http://observationsandnotes.blogspot.co ... story.html
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by firebirdparts »

Northern Flicker wrote: Fri Aug 09, 2019 3:33 am If a company has a book value of $1B and they distribute a 1% dividend, then $10M of cash flows out of the company, lowering its book value to $990M. The only way the price can stay the same is if the market simultaneously decides that a higher price:book ratio is fair value for the company.
If that was the only $10 million that company is ever going to have, then looking at it this way would make a ton of sense. but in reality, they do this every 90 days. Better figure out where that money is coming from.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by David Jay »

YRT70 wrote: Sun Aug 04, 2019 1:54 pm Yes I know a simple 60/40 portfolio will more than likely work. It's actually what I do.
If you have a 60/40 portfolio and live on a 3% withdrawal, a crash in stock prices doesn’t matter (any more than it does with a dividend strategy- either way your net worth takes a hit). You have 13+ years of bonds that you can withdraw without selling a single stock.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by bradpevans »

TN_Boy wrote: Thu Aug 08, 2019 8:51 am
bradpevans wrote: Thu Aug 08, 2019 7:09 am if people are "allowed" to pay off a low rate mortgage so they "sleep better at night" it seems they should be able to "live off dividends" so they DON'T have to make decisions about what to sell when
I don't think anybody disagrees with the assertion that living off dividends is *simple*.

But if you can live off your portfolio by only spending the dividends, you have a low withdrawal rate (generally between 2 and 3%) and pretty much everybody that has studied withdrawal rates thinks you can sleep very soundly with such a low withdrawal rate using a total return.

But most of the pro-dividend people go beyond the simplicity argument, I think. If you stick with "I can live off 2% to 3% withdrawal via dividends (with variations as dividends go up and down)" because I have a really big portfolio, I really don't think anybody will say that's wrong.
I tend to agree: by selling or by collecting dividends, the withdraw rate is not that high, so "it works:

For those that chase dividends, the yield is probably greater than 2-3% (of course there may not be much price appreciation)
See: https://www.dividendgrowthinvestor.com/ ... crats.html

and even ticker NOBL, if you want to buy a fund of dividend stocks
https://finance.yahoo.com/quote/NOBL/
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YRT70
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by YRT70 »

David Jay wrote: Fri Aug 09, 2019 9:31 am
YRT70 wrote: Sun Aug 04, 2019 1:54 pm Yes I know a simple 60/40 portfolio will more than likely work. It's actually what I do.
If you have a 60/40 portfolio and live on a 3% withdrawal, a crash in stock prices doesn’t matter (any more than it does with a dividend strategy- either way your net worth takes a hit). You have 13+ years of bonds that you can withdraw without selling a single stock.
Yeah I agree. I think there's only a potential psychological benefit: not being worried much by fluctuations in stock prices.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by rasta »

BeBH65 wrote: Fri Aug 09, 2019 4:24 am
rossington wrote: Fri Aug 09, 2019 3:14 am **Regarding the statements that a dividend reduces the stock price by an equal amount at ex dividend and the effect on the stock valuation.**
Can anyone here please provide absolute proof that a company's stock price beyond it's ex dividend dates has any additional relationship with those payouts?
This post a few pages back seemed to make a good point.
S_Track wrote: Thu Aug 08, 2019 6:02 am I believe the mathematics in this discussion center around the NAV being reduced when the dividend is distributed? It amazes me the market is able to do that so accurately without a central pricing authority of some sort. DBR gave me a link a while back in another thread that explains this in more detail. I just reread it, Interestingly they do talk about stock market specialists changing the price per share at open. I wonder who they are?

"Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend. For example, if a stock trades at $50 per share and pays out a $0.25 quarterly dividend, the stock will be marked down to open at $49.75 per share."

https://finance.zacks.com/stock-price-c ... -3571.html




rossington wrote: Fri Aug 09, 2019 3:14 am For example, is the value of JNJ's (or pick a company) stock price today lower than it should be because of the annually increasing dividends it has paid for decades?
Buyers and sellers determine what the stock price is. There is no "should be" on what the price should be.

Image 2 companies C1 and C2 who are in exactly the exactly the same business.
Imagine they both have 10000 shares.
Imagine the stock price at the start of the quarter is $100.
Both companies area hence valued at $1,000,000


Imagine the earnings during the quarter are $20000. Imagine the market know this and prices this correctly. The stockprice of both companies would then be $102.

Now assume C1 does not distribute a dividend - Stockprice C1 remains at $102
Assume C2 does distribute a dividend of $1. $10000 is removed from the company value. It seems logical that the next share transaction would set the price to $101.

Now repeat this the next quarter. Earnings of $20000.
Assuming again full market knowledge, then C1 stockprice would raise to with $2 to $104
Assuming again full market knowledge, then C2 stockprice would raise to with $2 to $103
If C1 does not distribute a dividend the stock price will remain on $104.
Assume C2 does distribute a dividend of $1. $10000 is again removed from the company value. It seems logical that the next share transaction would set the price to $102.


Should there be reason why the stock prices of C1 and C2 would be different then above?
after the 1st dividend payment, these are no longer the exact same companies now are they, one now has more cash on its balance sheet.

what value does the market place on excess cash sitting on a balance sheet? both companies keep earning $8/sh but now C1 trades at a higher
pe/ratio than C2. are investors automatically going to pay a higher pe for c1 than c2? at the end of one year under you logic, c1 would trade
at a pe of 13.5x and c2 would trade at a pe of 13. how long are investors going to pay a higher pe for a company that doesn't distribute its excess
cash back to investors?
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by rossington »

rasta wrote: Fri Aug 09, 2019 10:04 am
BeBH65 wrote: Fri Aug 09, 2019 4:24 am
rossington wrote: Fri Aug 09, 2019 3:14 am **Regarding the statements that a dividend reduces the stock price by an equal amount at ex dividend and the effect on the stock valuation.**
Can anyone here please provide absolute proof that a company's stock price beyond it's ex dividend dates has any additional relationship with those payouts?
This post a few pages back seemed to make a good point.
S_Track wrote: Thu Aug 08, 2019 6:02 am I believe the mathematics in this discussion center around the NAV being reduced when the dividend is distributed? It amazes me the market is able to do that so accurately without a central pricing authority of some sort. DBR gave me a link a while back in another thread that explains this in more detail. I just reread it, Interestingly they do talk about stock market specialists changing the price per share at open. I wonder who they are?

"Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend. For example, if a stock trades at $50 per share and pays out a $0.25 quarterly dividend, the stock will be marked down to open at $49.75 per share."

https://finance.zacks.com/stock-price-c ... -3571.html




rossington wrote: Fri Aug 09, 2019 3:14 am For example, is the value of JNJ's (or pick a company) stock price today lower than it should be because of the annually increasing dividends it has paid for decades?
Buyers and sellers determine what the stock price is. There is no "should be" on what the price should be.

Image 2 companies C1 and C2 who are in exactly the exactly the same business.
Imagine they both have 10000 shares.
Imagine the stock price at the start of the quarter is $100.
Both companies area hence valued at $1,000,000


Imagine the earnings during the quarter are $20000. Imagine the market know this and prices this correctly. The stockprice of both companies would then be $102.

Now assume C1 does not distribute a dividend - Stockprice C1 remains at $102
Assume C2 does distribute a dividend of $1. $10000 is removed from the company value. It seems logical that the next share transaction would set the price to $101.

Now repeat this the next quarter. Earnings of $20000.
Assuming again full market knowledge, then C1 stockprice would raise to with $2 to $104
Assuming again full market knowledge, then C2 stockprice would raise to with $2 to $103
If C1 does not distribute a dividend the stock price will remain on $104.
Assume C2 does distribute a dividend of $1. $10000 is again removed from the company value. It seems logical that the next share transaction would set the price to $102.


Should there be reason why the stock prices of C1 and C2 would be different then above?
after the 1st dividend payment, these are no longer the exact same companies now are they, one now has more cash on its balance sheet.

what value does the market place on excess cash sitting on a balance sheet? both companies keep earning $8/sh but now C1 trades at a higher
pe/ratio than C2. are investors automatically going to pay a higher pe for c1 than c2? at the end of one year under you logic, c1 would trade
at a pe of 13.5x and c2 would trade at a pe of 13. how long are investors going to pay a higher pe for a company that doesn't distribute its excess
cash back to investors?
That was my point. The dividend only has a direct impact on the stock price at ex dividend. After that it doesn't factor in anymore until 90 days later.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by David Jay »

YRT70 wrote: Fri Aug 09, 2019 9:36 am
David Jay wrote: Fri Aug 09, 2019 9:31 am
YRT70 wrote: Sun Aug 04, 2019 1:54 pm Yes I know a simple 60/40 portfolio will more than likely work. It's actually what I do.
If you have a 60/40 portfolio and live on a 3% withdrawal, a crash in stock prices doesn’t matter (any more than it does with a dividend strategy- either way your net worth takes a hit). You have 13+ years of bonds that you can withdraw without selling a single stock.
Yeah I agree. I think there's only a potential psychological benefit: not being worried much by fluctuations in stock prices.
I’m in this exact stage of life, this is my first year of retirement. I have living expenses to start of SS (tentatively age 68-70) in bonds, so I have no worry about stock fluctuation. I would have more worry if I was trying to live off of dividends and I was spending 90+ percent of my dividend income. A 2007 type downturn would devastate my dividend income.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Phineas J. Whoopee »

Dialectical Investor wrote: Thu Aug 08, 2019 10:28 pm ...
As I understand it, dividends must come out of earnings. Perhaps you mean to say that dividends do not need to come out of current earnings and may instead come from previous earnings. In other words, dividends come out of retained earnings, and a corporation generally cannot pay a dividend if they have an accumulated deficit. Of course, how much cash the corporation has is a separate matter, and debt may be issued to raise cash, which subsequently may be used to pay a dividend, regardless of whether or not there were any earnings in the concurrent period.
Your understanding in the first underlined sentence is incorrect, and in the second correct. There is no legal nor accounting standard that limits where a company can get cash to pay a cash dividend, as long as it can get any at all. Of course if public it has to disclose what it did. A company with consistently negative earnings can pay dividends if it wishes. That may or may not be a good business decision, but it can do so.

Here's a Quora page covering some reasons a corporation might borrow to pay dividends.

Here's a Wikipedia article about Dividend Recapitalization, in which borrowed money goes to shareholders to change the capital structure of the corporation.

Please also note companies can pay dividends as shares, rather than cash. That doesn't require them to have any surplus money.

PJW
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Dialectical Investor »

Phineas J. Whoopee wrote: Fri Aug 09, 2019 1:46 pm
Dialectical Investor wrote: Thu Aug 08, 2019 10:28 pm ...
As I understand it, dividends must come out of earnings. Perhaps you mean to say that dividends do not need to come out of current earnings and may instead come from previous earnings. In other words, dividends come out of retained earnings, and a corporation generally cannot pay a dividend if they have an accumulated deficit. Of course, how much cash the corporation has is a separate matter, and debt may be issued to raise cash, which subsequently may be used to pay a dividend, regardless of whether or not there were any earnings in the concurrent period.
Your understanding in the first underlined sentence is incorrect, and in the second correct. There is no legal nor accounting standard that limits where a company can get cash to pay a cash dividend, as long as it can get any at all. Of course if public it has to disclose what it did. A company with consistently negative earnings can pay dividends if it wishes. That may or may not be a good business decision, but it can do so.

Here's a Quora page covering some reasons a corporation might borrow to pay dividends.

Here's a Wikipedia article about Dividend Recapitalization, in which borrowed money goes to shareholders to change the capital structure of the corporation.

Please also note companies can pay dividends as shares, rather than cash. That doesn't require them to have any surplus money.

PJW
You're right it's possible to pay a dividend with an accumulated deficit--not sure where I got that from--but there can be legal limitations based on capital structure to protect senior security holders from the common shareholders taking the money and running. So there is more to it than obtaining cash. Most companies do treat retained earnings as the limit.

Yes, there are those bizarre stock dividends. There retained earnings is capitalized.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by patrick013 »

Northern Flicker wrote: Thu Aug 08, 2019 12:53 pm
Sustainable dividends are paid from corporate profits. If profit declines significantly, a company with a robust dividend will have no choice but to reduce it. If investors demand a 4% yield from a stock and the dividend is cut in half, the market will cut the price in half too.


In the interest of wide diversification any portfolio that "lives off of dividends" should have the TRSY allocation like any other portfolio. TSM plus a dividend fund plus a TRSY fund or ladder would surely generate better cash flow thru the years and thru a market crash. The top 2 tables portray the decline in dividend payments in the last crash. The bottom table is a utility fund. Dividend payments for this fund actually increased thru the 2008-2009 crash.

So don't be left out of good returns or a stable income flow for lack of info. :)


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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by cbeck »

nisiprius wrote: Thu Aug 08, 2019 8:46 pm That's why Coca Cola which must have paid out more than its share price over the years is now trading at zero. Really?
No, because Coca-Cola has earnings.
[/quote]

Exactly right. Coca Cola has earnings. It paid the dividend from prior earnings and is likely to have earnings in the future, which is why the payment of a dividend is rarely, if ever, a permanent reduction in the stock price making that issue a red herring. The stock price dips for a few days, which is irrelevant for buy-and-holders.

If the dividend has to come from somewhere it must also go somewhere if it is not paid out. So, is a company that retains its free cash flow worth more to an investor? Not necessarily. Is the holder of Berkshire Hathaway better off from its $122 billion cash hoard? In my opinion they are decidedly worse off, because the company is admitting that it cannot fulfill its main function by investing those funds in its business to increase shareholder value and therefore should have an obligation to pay the money out to shareholders.

Although everyone here seems to be focused exclusively on stock dividends, my own interest is in dividends from bond funds, i.e. interest as in living on interest. It can hardly be argued that interest payments reduce the value of a bond since the principal will be returned.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by firebirdparts »

Bonds pay interest, and so therefore are quite different from stocks. You can call a bond fund payout a dividend, but the underlying bonds don't pay dividends they pay interest.

Since stocks pay dividends based on who owned the stock just 4 days a year, the stock price has to be affected 4 time a year. Otherwise, we'd all be idiots, and we're not all idiots.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by CyclingDuo »

David Jay wrote: Fri Aug 09, 2019 9:31 am
YRT70 wrote: Sun Aug 04, 2019 1:54 pm Yes I know a simple 60/40 portfolio will more than likely work. It's actually what I do.
If you have a 60/40 portfolio and live on a 3% withdrawal, a crash in stock prices doesn’t matter (any more than it does with a dividend strategy- either way your net worth takes a hit). You have 13+ years of bonds that you can withdraw without selling a single stock.
No argument from us with regard to the importance of building up a diversity of income streams to be used in retirement. Be that via stocks, bonds, dividends, interest, rental income, Social Security, pension, SPIA's, oil & gas, farm land, small business ownership, part-time income/consulting, or other things. We all have quite a few ways to develop diversity of income to be used in retirement through our decades of preparation.

Speaking of preparation....using the decades to build some diversity of income involves choices and planning. Even if it is as simple as solely being based on a large enough 50/50 to 60/40 portfolio of mutual funds as a starting point to fund the golden years, or all the way to more complexity that involves other items on the diversity of income list above to help fund one's retirement - the option to position one's retirement income to best navigate economic slumps is prudent.

As mentioned upthread, this household remains more agnostic with regard to where the income comes from because we will not solely be relying on one source (such as the OP's topic of dividends that his "friend" mentioned). The OP didn't mention, but we have to assume his friend would also have SS and perhaps bonds as well to combine with the dividend income. OP? Does your friend have other streams of income besides dividends?

As we all know, building a large enough asset base to fund one's retirement takes a very long time (decades) of accumulating assets. The circular argument these dividend threads always devolve into by comparing two well known strategies of accumulation during the working career and subsequent decumulation in retirement through investing via index funds vs. dividend investing reminds me of the age old argument of which team is better, the Red Sox or the Yankees. The baseball argument regarding those two teams has been going on for decades and decades. In other words - both investing strategies are pretty good in spite of pointing out all the pros and cons of each. With regard to investing, we could be arguing about a lot of other strategies that are lower on the list of being successful than the two that are being argued and pitting them against each other. Either strategy, or a mix of both strategies can be successful. In either strategy, one is not going to beat the market over the long haul. And there is nothing wrong with that.

Obviously, being the BH forums - the tilt is in favor of supporting the strategy of index investing only via total market, international, and bond funds (with plenty of side discussion on tilts). And for good reason. One can go on any dividend investing forum and mention the value and benefit of index fund investing as well vs. dividend investing. The discussions are equally as productive. 8-)
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

cbeck wrote: Fri Aug 09, 2019 8:04 pm
Exactly right. Coca Cola has earnings. It paid the dividend from prior earnings and is likely to have earnings in the future, which is why the payment of a dividend is rarely, if ever, a permanent reduction in the stock price making that issue a red herring. The stock price dips for a few days, which is irrelevant for buy-and-holders.

If the dividend has to come from somewhere it must also go somewhere if it is not paid out. So, is a company that retains its free cash flow worth more to an investor? Not necessarily. Is the holder of Berkshire Hathaway better off from its $122 billion cash hoard? In my opinion they are decidedly worse off, because the company is admitting that it cannot fulfill its main function by investing those funds in its business to increase shareholder value and therefore should have an obligation to pay the money out to shareholders.

Although everyone here seems to be focused exclusively on stock dividends, my own interest is in dividends from bond funds, i.e. interest as in living on interest. It can hardly be argued that interest payments reduce the value of a bond since the principal will be returned.
So Berkshire Hathaway as a company is not $122 billion more valuable due to their cash reserve? Are you implying that the market completely discounts their cash reserve?

That might be your opinion, but it's objectively wrong.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by usagi »

grayfox wrote: Fri Aug 09, 2019 5:46 am
...let's say you lived far out in the woods, had no internet, no TV, no radio, no newspapers, no news, no people, only moose, deer and bear. Once a year, you went into town, withdrew money from your bank account to buy provisions and ammo for the next year.
Wow, I wasn't aware that I told you about my plan for retirement.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by rossington »

firebirdparts wrote: Fri Aug 09, 2019 9:47 pm Bonds pay interest, and so therefore are quite different from stocks. You can call a bond fund payout a dividend, but the underlying bonds don't pay dividends they pay interest.

Since stocks pay dividends based on who owned the stock just 4 days a year, the stock price has to be affected 4 time a year. Otherwise, we'd all be idiots, and we're not all idiots.
According to Vanguard our bond funds pay dividends monthly due to aggregate earnings not just interest. Our stocks pay dividends from earnings quarterly.
Not quite sure what you are impyling here:
Otherwise, we'd all be idiots, and we're not all idiots.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by rossington »

willthrill81 wrote: Sat Aug 10, 2019 12:28 am
cbeck wrote: Fri Aug 09, 2019 8:04 pm
Exactly right. Coca Cola has earnings. It paid the dividend from prior earnings and is likely to have earnings in the future, which is why the payment of a dividend is rarely, if ever, a permanent reduction in the stock price making that issue a red herring. The stock price dips for a few days, which is irrelevant for buy-and-holders.

If the dividend has to come from somewhere it must also go somewhere if it is not paid out. So, is a company that retains its free cash flow worth more to an investor? Not necessarily. Is the holder of Berkshire Hathaway better off from its $122 billion cash hoard? In my opinion they are decidedly worse off, because the company is admitting that it cannot fulfill its main function by investing those funds in its business to increase shareholder value and therefore should have an obligation to pay the money out to shareholders.

Although everyone here seems to be focused exclusively on stock dividends, my own interest is in dividends from bond funds, i.e. interest as in living on interest. It can hardly be argued that interest payments reduce the value of a bond since the principal will be returned.
So Berkshire Hathaway as a company is not $122 billion more valuable due to their cash reserve? Are you implying that the market completely discounts their cash reserve?

That might be your opinion, but it's objectively wrong.
I disagree that the opinion is objectively wrong. There is no way for one to determine that the value of Berkshire Hathaway's stock has completely factored in the 122 billion retained earnings in only a positive way. The cash reserve is likely due to reduced opportunities to reinvest for growth. Conversely, the stock price may actually be discounted due to pressure from shareholders now desiring to receive a dividend.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by usagi »

CyclingDuo wrote: Fri Aug 09, 2019 10:51 pm ...
As we all know, building a large enough asset base to fund one's retirement takes a very long time (decades) of accumulating assets...
No, we do not all know that but I understand why it may be a valid point to most. Not to snipe (that is not my intention), but for those who are outside the mainstream or immigrants, this is not necessarily true. I live in an immigrant and illegal alien community, I know perhaps 13 people(all legal immigrants) who did it in around one decade, having come here with nothing and without knowing English (refugees).

In my case, it took me 12 years to hit 30x expenses(note I am U.S. born).

It really is a mind set and about lifestyle choices. My children (the eldest of which is 25), are all already between 6x and 13x expense (we do quarterly balance sheets as a family). If you control your expenses, develop a fulfilling lifestyle around low cost activities, prodigiously save (without impacting the quality of your life) it is ridiculously easy to do in this great nation(as the financial markets and political system is so stable when contrasted to many others places in the world).

I will readily admit your comments are very applicable to most Americans, as the culture is predominately driven by conspicuous consumption, hence the reason some people from different cultures are often able to thrive in the same environment that native born citizens flounder in. One of the keys is realizing that the capital markets are a far better mechanism to preserve the wealth you have already created verses attempting to utilize them to build wealth (which as you noted can take decades). You can readily see this mindset manifest itself in many immigrant communities where they tend to see banks and the financial markets as a way to diversify and preserve what they have generated verses waiting for the markets to generate wealth for them.

I just mention this because I managed to break the cycle of multi-generational poverty in my family and so far my children have all managed to perpetuate a different paradigm. But once again, we are living outside the endemic consumer culture though still adhering to the standard paradigm of work, save, and invest, the difference being the savings rate augmented by lifestyle choices.

It is very difficult to witness, as we see our children's friends/peers struggle, when to our eyes we see opportunity and abundance all around. They grew up as neighbors, friends, members of a community and yet the outcomes are so different and the reasons so obvious.

Cheers.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Phineas J. Whoopee »

cbeck wrote: Fri Aug 09, 2019 8:04 pm ...
Although everyone here seems to be focused exclusively on stock dividends, my own interest is in dividends from bond funds, i.e. interest as in living on interest. It can hardly be argued that interest payments reduce the value of a bond since the principal will be returned.
Most, but not all, bond funds work the way you say. They accumulate interest but don't include it in net asset value, then distribute it per schedule. That doesn't necessarily mean they build up piles of physical currency with mayflies charmingly flitting by. :happy

The reason it's that way is because of how the bond market itself works. When there's a transaction between coupon payment dates, the buyer pays the seller both the agreed-upon price, and the prorated coupon that's coming up. Once the coupon is paid the buyer is whole.

PJW
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

rossington wrote: Sat Aug 10, 2019 5:24 am
willthrill81 wrote: Sat Aug 10, 2019 12:28 am
cbeck wrote: Fri Aug 09, 2019 8:04 pm
Exactly right. Coca Cola has earnings. It paid the dividend from prior earnings and is likely to have earnings in the future, which is why the payment of a dividend is rarely, if ever, a permanent reduction in the stock price making that issue a red herring. The stock price dips for a few days, which is irrelevant for buy-and-holders.

If the dividend has to come from somewhere it must also go somewhere if it is not paid out. So, is a company that retains its free cash flow worth more to an investor? Not necessarily. Is the holder of Berkshire Hathaway better off from its $122 billion cash hoard? In my opinion they are decidedly worse off, because the company is admitting that it cannot fulfill its main function by investing those funds in its business to increase shareholder value and therefore should have an obligation to pay the money out to shareholders.

Although everyone here seems to be focused exclusively on stock dividends, my own interest is in dividends from bond funds, i.e. interest as in living on interest. It can hardly be argued that interest payments reduce the value of a bond since the principal will be returned.
So Berkshire Hathaway as a company is not $122 billion more valuable due to their cash reserve? Are you implying that the market completely discounts their cash reserve?

That might be your opinion, but it's objectively wrong.
I disagree that the opinion is objectively wrong. There is no way for one to determine that the value of Berkshire Hathaway's stock has completely factored in the 122 billion retained earnings in only a positive way. The cash reserve is likely due to reduced opportunities to reinvest for growth. Conversely, the stock price may actually be discounted due to pressure from shareholders now desiring to receive a dividend.
It's demonstrably wrong. Examine what happens to a stock's market price when it pays a dividend (i.e. reduces its cash reserves).
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by rasta »

when a stock trades ex-dividend, there are three possible outcomes to its price
1>stock price stays the same
2>stock price declines
3>stock price increases

buyers and sellers set the market price. dividend policy does not.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Phineas J. Whoopee »

rasta wrote: Sat Aug 10, 2019 4:31 pm when a stock trades ex-dividend, there are three possible outcomes to its price
1>stock price stays the same
2>stock price declines
3>stock price increases

buyers and sellers set the market price. dividend policy does not.
Buyers and sellers are aware that a share of stock plus $10 is worth $10 more than the very same share of stock without the $10. They place their limit orders accordingly.

PJW
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by cbeck »

willthrill81 wrote: Sat Aug 10, 2019 12:28 am
cbeck wrote: Fri Aug 09, 2019 8:04 pm
Exactly right. Coca Cola has earnings. It paid the dividend from prior earnings and is likely to have earnings in the future, which is why the payment of a dividend is rarely, if ever, a permanent reduction in the stock price making that issue a red herring. The stock price dips for a few days, which is irrelevant for buy-and-holders.

If the dividend has to come from somewhere it must also go somewhere if it is not paid out. So, is a company that retains its free cash flow worth more to an investor? Not necessarily. Is the holder of Berkshire Hathaway better off from its $122 billion cash hoard? In my opinion they are decidedly worse off, because the company is admitting that it cannot fulfill its main function by investing those funds in its business to increase shareholder value and therefore should have an obligation to pay the money out to shareholders.

Although everyone here seems to be focused exclusively on stock dividends, my own interest is in dividends from bond funds, i.e. interest as in living on interest. It can hardly be argued that interest payments reduce the value of a bond since the principal will be returned.
So Berkshire Hathaway as a company is not $122 billion more valuable due to their cash reserve? Are you implying that the market completely discounts their cash reserve?

That might be your opinion, but it's objectively wrong.
Here's a thought experiment for you. How about if Warren Buffet announced a $5 billion dividend today with an ex-date today also. Would the stock price go or down? I think it would shoot up, because it would signal the likelihood of future dividends paid to shareholders.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

cbeck wrote: Sat Aug 10, 2019 7:28 pmHere's a thought experiment for you. How about if Warren Buffet announced a $5 billion dividend today with an ex-date today also. Would the stock price go or down? I think it would shoot up, because it would signal the likelihood of future dividends paid to shareholders.
Maybe, but even if it occurred as you say (i.e. stock price go up in respond to a strategic change), I can think that we would both admit that it would almost certainly be a 'one-off' event. It could just as easily have as much or more to do with the change in strategy than receiving a dividend.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by cbeck »

willthrill81 wrote: Sat Aug 10, 2019 7:30 pm
cbeck wrote: Sat Aug 10, 2019 7:28 pmHere's a thought experiment for you. How about if Warren Buffet announced a $5 billion dividend today with an ex-date today also. Would the stock price go or down? I think it would shoot up, because it would signal the likelihood of future dividends paid to shareholders.
Maybe, but even if it occurred as you say (i.e. stock price go up in respond to a strategic change), I can think that we would both admit that it would almost certainly be a 'one-off' event. It could just as easily have as much or more to do with the change in strategy than receiving a dividend.
Sure, but if investors believed it was a genuine change in dividend policy, for instance if the announcement came instead from Buffet's successor, and not a one-off event then the stock price would go up. In that case investors would be putting a low (and in my opinion, justified) view on the value to the company of a dead pile of $122 billion in Treasuries.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

cbeck wrote: Sat Aug 10, 2019 7:37 pm
willthrill81 wrote: Sat Aug 10, 2019 7:30 pm
cbeck wrote: Sat Aug 10, 2019 7:28 pmHere's a thought experiment for you. How about if Warren Buffet announced a $5 billion dividend today with an ex-date today also. Would the stock price go or down? I think it would shoot up, because it would signal the likelihood of future dividends paid to shareholders.
Maybe, but even if it occurred as you say (i.e. stock price go up in respond to a strategic change), I can think that we would both admit that it would almost certainly be a 'one-off' event. It could just as easily have as much or more to do with the change in strategy than receiving a dividend.
Sure, but if investors believed it was a genuine change in dividend policy, for instance if the announcement came instead from Buffet's successor, and not a one-off event then the stock price would go up.
That's far from certain. The price could easily go down because investors might believe that if BRK is paying a dividend, it is doing so because management no longer believes that they can put the funds to good use over the long-term, causing investors to have a more pessimistic long-term view of the company's profitability.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by cbeck »

willthrill81 wrote: Sat Aug 10, 2019 7:40 pm
cbeck wrote: Sat Aug 10, 2019 7:37 pm
willthrill81 wrote: Sat Aug 10, 2019 7:30 pm
cbeck wrote: Sat Aug 10, 2019 7:28 pmHere's a thought experiment for you. How about if Warren Buffet announced a $5 billion dividend today with an ex-date today also. Would the stock price go or down? I think it would shoot up, because it would signal the likelihood of future dividends paid to shareholders.
Maybe, but even if it occurred as you say (i.e. stock price go up in respond to a strategic change), I can think that we would both admit that it would almost certainly be a 'one-off' event. It could just as easily have as much or more to do with the change in strategy than receiving a dividend.
Sure, but if investors believed it was a genuine change in dividend policy, for instance if the announcement came instead from Buffet's successor, and not a one-off event then the stock price would go up.
That's far from certain. The price could easily go down because investors might believe that if BRK is paying a dividend, it is doing so because management no longer believes that they can put the funds to good use over the long-term, causing investors to have a more pessimistic long-term view of the company's profitability.
Only investors who haven't been paying attention, since the very accumulation of that hoard is proof positive that management has no idea how to use it to grow their business. Buffett himself is forever saying he can't find a business to buy.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by CyclingDuo »

cbeck wrote: Sat Aug 10, 2019 7:37 pmSure, but if investors believed it was a genuine change in dividend policy, for instance if the announcement came instead from Buffet's successor, and not a one-off event then the stock price would go up. In that case investors would be putting a low (and in my opinion, justified) view on the value to the company of a dead pile of $122 billion in Treasuries.
Hopefully investors are in tune with how much money they have just made on that "dead pile" with declining yields and rising price over the past year. I doubt they could have received that kind of return on any other investment. :beer
"Save like a pessimist, invest like an optimist." - Morgan Housel
cbeck
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by cbeck »

CyclingDuo wrote: Sun Aug 11, 2019 9:13 am
cbeck wrote: Sat Aug 10, 2019 7:37 pmSure, but if investors believed it was a genuine change in dividend policy, for instance if the announcement came instead from Buffet's successor, and not a one-off event then the stock price would go up. In that case investors would be putting a low (and in my opinion, justified) view on the value to the company of a dead pile of $122 billion in Treasuries.
Hopefully investors are in tune with how much money they have just made on that "dead pile" with declining yields and rising price over the past year. I doubt they could have received that kind of return on any other investment. :beer
Would be surprising, if true. I don't know what Treasuries Berkshire Hathaway holds, but, for comparison's sake, consider the returns on Vanguard Intermediate-Term Treasury Fund Investor Shares (VFITX):

Inter-Term Treasury Inv

1-yr 3-yr 5-yr 10-yr Since inception
10/28/1991
7.94% 1.19% 2.45% 3.16% 5.57%

You really don't think there is any other investment that has received that kind of return?
restingonmylaurels
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by restingonmylaurels »

Valuethinker wrote: Mon Aug 05, 2019 7:14 am BP of course paid 25 per cent of all dividends by total value in the UK market. It's not as if as big and global a company as BP could suffer a big enough reverse to force it to cut its dividend.

Royal Dutch Shell now pays 40 per cent by value of all dividends from FTSE index. It is unimaginable that the business of selling oil and gas could ever change in ways that would force them to cut the dividend.
Was reading through an older thread and saw your post. Was wondering if you still held by this view, considering https://citywire.co.uk/funds-insider/ne ... s/a1348945?
restingonmylaurels
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by restingonmylaurels »

cbeck wrote: Tue Aug 06, 2019 9:09 pm What I notice in this discussion is a sly trick by those who are against the live-off-dividends strategy. The goal of the strategy to provide an adequate income while reducing the very substantial risk of a market crash, particularly early in retirement, that adversely and permanently affects portfolio longevity. The trick that the opponents use is to assert that total return is better. Perhaps it may be, but that is not the goal sought by the proponents, which is to minimize worst case risk, not to maximize return. If your goal is to reduce risk then your strategy should be evaluated only against that goal, not someone else's favorite objective. It might be more appropriate to compare the live-off-income method to buying an annuity than to investing in the S&P 500 Index.

I myself do subscribe to the live-off-income method, but in my opinion the better solution than dividends is bonds. In particular, the best fund for this purpose is the Vanguard High Yield Bond Fund Admiral Shares. Sounds crazy, because everyone knows that junk bonds are the first class to default in a recession, right? Generally true, but VWEAX has been an exception. For one thing, unlike other junk bond funds, it doesn't use leverage to goose up returns and they claim to hold the best of the junk. At the beginning of the Great Recession VWEAX was trading at $5.91/share. It twice hit bottom at $3.91/share before the recession ended in June, 2009. So, the hit to market value was -33%, which compares favorably to the -57% hit to stocks at the time.

During that time the fund never missed a monthly payout, although the amount of the payout did decline from about $0.038/share to $0.026/share. Both the price and the payout subsequently recovered.

The High Yield Fund opened on the heels of the 2001 recession, so the only worst-case experience so far is the Great Recession, which we know we cannot regard as the worst possible case. It must be noted that prevailing interest rates have been declining during the period, but VWEAX still provided a yield higher than dividends, investment grade bonds, or most other options.

So, my opinion is that living-off-income can be realistic in particular to address the deadly market-crash-early-in-retirement problem that retirees face, but with some caveats. It is safer with another income stream such as SS. Inflation is a theoretical risk that is overemphasized by my generation which was scarred by the high inflation of the 70's in the same way that my parents' generation was scarred by the Great Depression. I don't see any basis for a fear of the return of high inflation which we haven't had for 40 years. Quite the opposite. We remain in a period of global capital abundance and consequently persistent low inflation. If inflation were to rise interest rates would rise, although there would certainly be a hit to the market values of bond funds until they were able to catch up to prevailing rate levels.

But even with low inflation some provision has to be made because of the cumulative effects over a long retirement period. So, I think the method only works if not all the income is withdraw, but some is reinvested to cover inflation.
+1.

SORR is a big reason for those of us entering the SS gap years. Right now would be a good example.

I know the traditional BH answer is to have a low-yield fund set aside to draw on in the SS gap years, so that is certainly another valid approach.

I am using both approaches. I start off using dividends/interest payments first to cover opex and if for some reason these are not sufficient then can turn to drawing down the lowest yielding fund.
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