What’s the problem with dividends?

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CyclingDuo
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Re: What’s the problem with dividends?

Post by CyclingDuo »

Astones wrote: Thu Apr 15, 2021 6:20 pmBesides, you can arbitrarily decide to convert part of your shares into cash whenever you want, by simply selling some of your stocks. The main difference is that in the case of dividends you don't have the choice.
Sure you do. You can choose to simply have your individual ETFs and or stocks set to automatically reinvest the dividends back into the asset. DRIP investing these days has no fees associated with it. You could also choose to pool your dividends from various assets to purchase additional shares of other assets.

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Re: What’s the problem with dividends?

Post by Astones »

CyclingDuo wrote: Fri Apr 16, 2021 7:13 am
Astones wrote: Thu Apr 15, 2021 6:20 pmBesides, you can arbitrarily decide to convert part of your shares into cash whenever you want, by simply selling some of your stocks. The main difference is that in the case of dividends you don't have the choice.
Sure you do. You can choose to simply have your individual ETFs and or stocks set to automatically reinvest the dividends back into the asset. DRIP investing these days has no fees associated with it. You could also choose to pool your dividends from various assets to purchase additional shares of other assets.

CyclingDuo
If you get the dividends and you reinvest them into the same company, it means that you have lost the money you paid in the taxes on the dividends. If you don't receive the dividends, everything else being equal, you are keeping those money.

I hope we can at least agree on this, that reinvesting dividends is less efficient than not receiving them.
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Re: What’s the problem with dividends?

Post by CyclingDuo »

burritoLover wrote: Thu Apr 15, 2021 11:40 amIf you believe that not to be true, then you can simply buy the stock or stock fund paying a dividend the day before the ex-div day and sell immediately the morning of the ex-div and pocket the FULL dividend. So, for holding the stock or stock fund for less than 4 trading days a year, you can collect the full dividend as if you owned that stock or stock fund all year long. So you could do this with a high dividend stock fund and get 4% for holding it for less than 4 trading days a year with very little risk. Or you could stagger this with a number of individual high dividend stocks with different ex-div dates and collect even more. If you don't believe that the aggregate of all your dividend paying stocks does not drop by the amount of the dividends, then this strategy should be golden for you.
I would not advocate that strategy in a taxable account as you would not have held the underlying security long enough for the dividend to count as a qualified dividend. It would be non-qualified and taxed at your ordinary income rate. If it is a non-qualified dividend to begin with (REITs), then have at it.

Although the Dividend Capture Strategy is mostly populated by day traders and traders of options - it is a very active part of the market that accounts for the price swings around declaration date, ex-dividend date, date of record, and pay date. Lots of birds going for the crumbs all at once...

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CyclingDuo
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Re: What’s the problem with dividends?

Post by CyclingDuo »

Astones wrote: Fri Apr 16, 2021 7:25 am
CyclingDuo wrote: Fri Apr 16, 2021 7:13 am
Astones wrote: Thu Apr 15, 2021 6:20 pmBesides, you can arbitrarily decide to convert part of your shares into cash whenever you want, by simply selling some of your stocks. The main difference is that in the case of dividends you don't have the choice.
Sure you do. You can choose to simply have your individual ETFs and or stocks set to automatically reinvest the dividends back into the asset. DRIP investing these days has no fees associated with it. You could also choose to pool your dividends from various assets to purchase additional shares of other assets.

CyclingDuo
If you get the dividends and you reinvest them into the same company, it means that you have lost the money you paid in the taxes on the dividends. If you don't receive the dividends, everything else being equal, you are keeping those money.

I hope we can at least agree on this, that reinvesting dividends is less efficient than not receiving them.
See my post earlier in the thread regarding how we (and many others) pay $0 tax on our dividends in our taxable accounts. In other accounts - Roth and Traditional - your comment does not apply.

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Re: What’s the problem with dividends?

Post by Call_Me_Op »

MapleSyrup wrote: Wed Apr 14, 2021 10:11 pm Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
Simple - you need to pay taxes on dividends as they are paid out. Capital gains only are taxed if you sell. If you don't need all of the capital gains, you can let them ride - so better tax efficiency.
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Re: What’s the problem with dividends?

Post by burritoLover »

CyclingDuo wrote: Fri Apr 16, 2021 7:29 am
burritoLover wrote: Thu Apr 15, 2021 11:40 amIf you believe that not to be true, then you can simply buy the stock or stock fund paying a dividend the day before the ex-div day and sell immediately the morning of the ex-div and pocket the FULL dividend. So, for holding the stock or stock fund for less than 4 trading days a year, you can collect the full dividend as if you owned that stock or stock fund all year long. So you could do this with a high dividend stock fund and get 4% for holding it for less than 4 trading days a year with very little risk. Or you could stagger this with a number of individual high dividend stocks with different ex-div dates and collect even more. If you don't believe that the aggregate of all your dividend paying stocks does not drop by the amount of the dividends, then this strategy should be golden for you.
I would not advocate that strategy in a taxable account as you would not have held the underlying security long enough for the dividend to count as a qualified dividend. It would be non-qualified and taxed at your ordinary income rate. If it is a non-qualified dividend to begin with (REITs), then have at it.

Although the Dividend Capture Strategy is mostly populated by day traders and traders of options - it is a very active part of the market that accounts for the price swings around declaration date, ex-dividend date, date of record, and pay date. Lots of birds going for the crumbs all at once...

CyclingDuo
It doesn't work - it is a thought exercise. If it did work - if you are pulling in 4+% for holding a stock or fund for less than 4 trading days, you don't care if that is a qualified dividend or not (and you could stagger this across different securities and make even more). The point of mentioning this strategy is if you believe the relative price of stock or stock fund does NOT drop on the ex-div date and that you are increasing your net worth by the amount of the dividend, then you should be all over this strategy which would be extremely low risk for the return you are getting.

It doesn't work because the market is efficient enough that this opportunity is arbitraged away. Which means, this idea that dividends are adding to your wealth is a fantasy.
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Re: What’s the problem with dividends?

Post by Da5id »

Riprap wrote: Thu Apr 15, 2021 11:31 am
ipdiddly wrote: Thu Apr 15, 2021 11:20 amJust because a company does not pay a dividend does not mean that the company will spend its retained earnings wisely.
I've found that most Bogleheads cannot grasp (or choose to ignore) this concept. They are blind to value vs price when the conversation inevitably turns to stock buybacks. It's as if they believe management always operates rationally and efficiently.

It's truly baffling to me, yet amusing at the same time. All the chest thumping why dividends don't matter.
Clearly somebody can't grasp something. Which side of the rather religious dividends vs total return argument can't grasp something I leave as an exercise for the reader.

My take: dividends are totally fine in my tax sheltered accounts. I'd prefer buybacks in my taxable stock holdings (as deferring taxes is good) if the company wants to return capital rather than reinvest. But I don't take steps to avoid them anyway, I'll take what TSM gives.

I'm not fond of fetishizing dividends.
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Re: What’s the problem with dividends?

Post by CyclingDuo »

burritoLover wrote: Fri Apr 16, 2021 8:03 am
CyclingDuo wrote: Fri Apr 16, 2021 7:29 am
burritoLover wrote: Thu Apr 15, 2021 11:40 amIf you believe that not to be true, then you can simply buy the stock or stock fund paying a dividend the day before the ex-div day and sell immediately the morning of the ex-div and pocket the FULL dividend. So, for holding the stock or stock fund for less than 4 trading days a year, you can collect the full dividend as if you owned that stock or stock fund all year long. So you could do this with a high dividend stock fund and get 4% for holding it for less than 4 trading days a year with very little risk. Or you could stagger this with a number of individual high dividend stocks with different ex-div dates and collect even more. If you don't believe that the aggregate of all your dividend paying stocks does not drop by the amount of the dividends, then this strategy should be golden for you.
I would not advocate that strategy in a taxable account as you would not have held the underlying security long enough for the dividend to count as a qualified dividend. It would be non-qualified and taxed at your ordinary income rate. If it is a non-qualified dividend to begin with (REITs), then have at it.

Although the Dividend Capture Strategy is mostly populated by day traders and traders of options - it is a very active part of the market that accounts for the price swings around declaration date, ex-dividend date, date of record, and pay date. Lots of birds going for the crumbs all at once...

CyclingDuo
It doesn't work - it is a thought exercise. If it did work - if you are pulling in 4+% for holding a stock or fund for less than 4 trading days, you don't care if that is a qualified dividend or not (and you could stagger this across different securities and make even more). The point of mentioning this strategy is if you believe the relative price of stock or stock fund does NOT drop on the ex-div date and that you are increasing your net worth by the amount of the dividend, then you should be all over this strategy which would be extremely low risk for the return you are getting.

It doesn't work because the market is efficient enough that this opportunity is arbitraged away. Which means, this idea that dividends are adding to your wealth is a fantasy.
I don't know anyone's rate of success or failure regarding shorter term trading strategies regarding dividend capture. So I guess I neither agree or disagree regarding dividend capture strategy. I certainly don't engage in it. I was just commenting that regarding taxes in a taxable account, I would not advocate it due to the taxes alone.

In terms of total return investing, the annual dividends are all a part of the process.

Excellent thought provoking paper entitled Portfolios for long-term investors by John Cochrane here on some issues raised in this thread, as well as perpetuity:

https://static1.squarespace.com/static/ ... _paper.pdf

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Re: What’s the problem with dividends?

Post by Riprap »

Da5id wrote: Fri Apr 16, 2021 8:18 amClearly somebody can't grasp something.
I guess this is directed at me. :mrgreen:

I'm not sure what I'm not grasping. In the idealized world of academic finance, I can understand the argument that capital gains are superior to dividends. In theory, it should work well in practice. In practice, it doesn't always work like theory says it should.

We live in an imperfect world. People are flawed. A lot of people, especially politicians, suffer from OPM Syndrome. That's Other People's Money Syndrome. It's characterized by people being careless spending Other People's Money.

Real life business owners who have structured their businesses as C Corps want to get cash out of a corporation. A return of equity through a dividend is how it's done.

I think people forget that when they buy a share of stock, they are becoming a partner in a business. When you buy a share of a mutual fund, you are becoming a partial owner in many businesses. You must accept that the large voting blocks in any business are always going to make decisions that fit their interests, not the interests of some minute fractional owner in an index fund. The large blocks of ownership are not going to sell shares to get cash and lose control of their voting rights. This is fantasy. When you buy shares in a public company, you're giving up control. You're essentially a silent partner.

If you don't like the return of equity in your business, I don't know what to say.
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Re: What’s the problem with dividends?

Post by Da5id »

Riprap wrote: Fri Apr 16, 2021 8:57 am
Da5id wrote: Fri Apr 16, 2021 8:18 amClearly somebody can't grasp something.
I guess this is directed at me. :mrgreen:
To cut to the chase, your superior risk adjusted strategy that takes the (to you) patently obvious superiority of dividend paying stocks into account is what *exactly*? And if there is no such obvious to implement strategy, what precisely do all the words you say mean in practical terms?
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Re: What’s the problem with dividends?

Post by TN_Boy »

Riprap wrote: Fri Apr 16, 2021 8:57 am
Da5id wrote: Fri Apr 16, 2021 8:18 amClearly somebody can't grasp something.
I guess this is directed at me. :mrgreen:

I'm not sure what I'm not grasping. In the idealized world of academic finance, I can understand the argument that capital gains are superior to dividends. In theory, it should work well in practice. In practice, it doesn't always work like theory says it should.

We live in an imperfect world. People are flawed. A lot of people, especially politicians, suffer from OPM Syndrome. That's Other People's Money Syndrome. It's characterized by people being careless spending Other People's Money.

Real life business owners who have structured their businesses as C Corps want to get cash out of a corporation. A return of equity through a dividend is how it's done.

I think people forget that when they buy a share of stock, they are becoming a partner in a business. When you buy a share of a mutual fund, you are becoming a partial owner in many businesses. You must accept that the large voting blocks in any business are always going to make decisions that fit their interests, not the interests of some minute fractional owner in an index fund. The large blocks of ownership are not going to sell shares to get cash and lose control of their voting rights. This is fantasy. When you buy shares in a public company, you're giving up control. You're essentially a silent partner.

If you don't like the return of equity in your business, I don't know what to say.
I think the biggest problem (nitpick?) I have with the pro-dividend point of view is that I don't see the dividends as a useful constraint upon management idiocy. The money paid out as a dividend is money that the company can't use in other ways, ways which might actually be wise ....or not. But there is still lots of ways to waste money. Companies that pay out dividends set excessive CEO compensation, make bad acquisitions, execute plans poorly, hire foolishly, etc. But if indeed the company is well run, and especially if still growing, paying a dividend might be a bad idea.

That said, once retired and living off the portfolio, then getting the money from the business does have appeal. But during accumulation, most people reinvest dividends, so it kinda doesn't make any difference then it seems (if one accepts my view, based on what I've seen in the corporate world ...) that companies will do smart or dumb things at about the same rate whether they pay dividends or not.

CyclingDuo's post about the taxation of dividends in taxable accounts is useful. Because of our particular tax situation, there is a bit of a disadvantage to us in dividend payouts, but it is not a huge issue. But understanding how the taxation works is important.
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Re: What’s the problem with dividends?

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Da5id wrote: Fri Apr 16, 2021 9:26 am To cut to the chase, your superior risk adjusted strategy that takes the (to you) patently obvious superiority of dividend paying stocks into account is what *exactly*? And if there is no such obvious to implement strategy, what precisely do all the words you say mean in practical terms?
I never said dividend paying stocks are superior, whatever that means. My position is that dividends aren't problematic in keeping with OP's post.

In practical terms, be thankful for a return of capital instead of evaporation of it.

I guess I don't have anything useful to add except, dividends aren't the magic secret sauce for extraordinary returns, but they're not bad either.
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Re: What’s the problem with dividends?

Post by Da5id »

Riprap wrote: Fri Apr 16, 2021 9:43 am
Da5id wrote: Fri Apr 16, 2021 9:26 am To cut to the chase, your superior risk adjusted strategy that takes the (to you) patently obvious superiority of dividend paying stocks into account is what *exactly*? And if there is no such obvious to implement strategy, what precisely do all the words you say mean in practical terms?
I never said dividend paying stocks are superior, whatever that means. My position is that dividends aren't problematic in keeping with OP's post.

In practical terms, be thankful for a return of capital instead of evaporation of it.
You waxed lyrical about the beauties of your companies paying you cash. But you don't think that companies that do so are better investments. I'm baffled by what you are saying, don't you buy stocks/mutual funds as an investment?

As to why dividends are problematic, I think the tax argument is quite compelling. I'd rather not get dividends (or capital gains distributions) in taxable stock holdings in an ideal world. Other than that, I'm perfectly happy with use of dividends to return capital to investors when the company doesn't see good growth opportunities.
Last edited by Da5id on Fri Apr 16, 2021 9:50 am, edited 2 times in total.
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Re: What’s the problem with dividends?

Post by abuss368 »

That’s just it! There is no “problem” with dividends!

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Re: What’s the problem with dividends?

Post by Riprap »

Da5id wrote: Fri Apr 16, 2021 9:49 amYou waxed lyrical
Nobody has ever said this about me. I'm usually plain spoken. I'll take a compliment when I can get it. :beer
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Re: What’s the problem with dividends?

Post by SeasOfCheese »

Astones wrote: Fri Apr 16, 2021 7:25 am I hope we can at least agree on this, that reinvesting dividends is less efficient than not receiving them.
I don't agree.

Corporations have a great track record of buying back their shares when times are great and their stock prices high. I generally think they suck at it. This could easily prove less efficient than any temporary tax advantages. You've got to pay taxes sometime, and nobody knows the rates in the future.

And it doesn't make any significant difference if your stock is tax advantaged.

If someone wants to buy stocks that don't pay dividends, feel free. It's your money. Just don't expect me to believe that it's the slam-dunk panacea of outperformance that most Boglehead posters seem to assert.
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Re: What’s the problem with dividends?

Post by Da5id »

SeasOfCheese wrote: Fri Apr 16, 2021 10:27 am If someone wants to buy stocks that don't pay dividends, feel free. It's your money. Just don't expect me to believe that it's the slam-dunk panacea of outperformance that most Boglehead posters seem to assert.
Look in the dictionary under "straw man" and you will literally see the post above. Go check. It is there.

Forget "most". Can you find a few examples where Bogleheads claim that non-dividend stocks *outperform* dividend stocks? I think the main gripe about dividends is taxation now vs later.
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Re: What’s the problem with dividends?

Post by ipdiddly »

Da5id wrote: Fri Apr 16, 2021 8:18 am My take: dividends are totally fine in my tax sheltered accounts.
One observation: While some BHers complain about the tax inefficiency of dividends when held in a taxable account, it seems counterintuitive that they then are OK with holding dividend payers in a tax sheltered (IRA) account. While such a strategy may avoid the immediate tax impact, it strikes me as tax inefficient to convert a dividend that is taxed at a favorable rate in a taxable account to ordinary income (tax unfavorable) in an IRA account. You may have delayed the tax, but you've converted it to a higher tax.
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Re: What’s the problem with dividends?

Post by Seasonal »

arcticpineapplecorp. wrote: Fri Apr 16, 2021 7:08 am
Seasonal wrote: Fri Apr 16, 2021 6:46 am
abuss368 wrote: Thu Apr 15, 2021 7:07 pm...
I also have family with total market index funds. The dividend income is more than enough to retire from.
...
The yield on total market index fund is about 1.3%. If you can live on a 1.3% withdrawal rate, just about any strategy will work.
this is only true if you assume:
1. you never withdrawal the principal only the dividends
2. 0% growth on stock price in perpetuity (i.e., even if you withdraw principal, your balance grows larger if companies become more valuable as stock price rises with appreciation of value creation)

if you assumed either above, why would you want to have any money in stocks??
Is this directed at Tony or at me?

In any event, I interpreted his post as meaning his family member could live solely on dividends, which currently means a 1.3% withdrawal rate. I'd imagine that this amount could increase with inflation, although the ride can be bumpy.

Why invest in stocks if you're happy with 1.3%? One reason might be you've held a long time in taxable and the tax cost of selling to change your allocation is too high. A retiree is likely to have at least some stock they've held a rather long time.

If I've misinterpreted either of your comments, I trust someone will correct me.
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Re: What’s the problem with dividends?

Post by Da5id »

ipdiddly wrote: Fri Apr 16, 2021 10:53 am
Da5id wrote: Fri Apr 16, 2021 8:18 am My take: dividends are totally fine in my tax sheltered accounts.
One observation: While some BHers complain about the tax inefficiency of dividends when held in a taxable account, it seems counterintuitive that they then are OK with holding dividend payers in a tax sheltered (IRA) account. While such a strategy may avoid the immediate tax impact, it strikes me as tax inefficient to convert a dividend that is taxed at a favorable rate in a taxable account to ordinary income (tax unfavorable) in an IRA account. You may have delayed the tax, but you've converted it to a higher tax.
I have lots of Roth space so all my stock in retirement accounts is there. It is a trade-off in tax deferred accounts between compounding growth vs loss of qualifed dividend tax rate, so clearly depends on scenario.
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Re: What’s the problem with dividends?

Post by SeasOfCheese »

Da5id wrote: Fri Apr 16, 2021 10:40 am
SeasOfCheese wrote: Fri Apr 16, 2021 10:27 am If someone wants to buy stocks that don't pay dividends, feel free. It's your money. Just don't expect me to believe that it's the slam-dunk panacea of outperformance that most Boglehead posters seem to assert.
Look in the dictionary under "straw man" and you will literally see the post above. Go check. It is there.

Forget "most". Can you find a few examples where Bogleheads claim that non-dividend stocks *outperform* dividend stocks? I think the main gripe about dividends is taxation now vs later.
Did you not read the quote I was responding to:
Astones wrote: Fri Apr 16, 2021 7:25 am I hope we can at least agree on this, that reinvesting dividends is less efficient than not receiving them.
And I do not agree that not paying dividends is necessarily (or even generally) better than paying dividends. Better would imply outperformance. Some times and circumstances, yes. Others, no.

And I looked (https://www.merriam-webster.com/dictionary/straw%20man). I did not literally see my post.
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Re: What’s the problem with dividends?

Post by Soon2BXProgrammer »

MapleSyrup wrote: Wed Apr 14, 2021 10:11 pm Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
I don't buy a company for its dividend.. I buy for total return. I don't care if it is in capital appreciation or dividend.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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Re: What’s the problem with dividends?

Post by RAchip »

dukeblue219 wrote: Thu Apr 15, 2021 8:00 am
dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
How recently? Would seem that so much of the market gains since 1995 have been AMZN, TSLA, NFLX, MSFT, AAPL, GOOG, FB, etc. A couple of those pay token dividends but overall I'd be hard pressed to agree that investors pay a premium for dividend payers in 2021.
I bought a bunch of MSFT in 2014 for around $40/sh because it was paying a 3% dividend and had announced a policy to grow its dividend every year. Now MSFT pays me more than double the dividend it paid me originally and the stock I bought is up 7x. If I had to rely on selling MSFT stock to produce income from my investment (rather than being able to draw income via dividends) I would have lost out on HUGE gains on all those shares I would have sold.
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Re: What’s the problem with dividends?

Post by Da5id »

SeasOfCheese wrote: Fri Apr 16, 2021 11:11 am
Da5id wrote: Fri Apr 16, 2021 10:40 am
SeasOfCheese wrote: Fri Apr 16, 2021 10:27 am If someone wants to buy stocks that don't pay dividends, feel free. It's your money. Just don't expect me to believe that it's the slam-dunk panacea of outperformance that most Boglehead posters seem to assert.
Look in the dictionary under "straw man" and you will literally see the post above. Go check. It is there.

Forget "most". Can you find a few examples where Bogleheads claim that non-dividend stocks *outperform* dividend stocks? I think the main gripe about dividends is taxation now vs later.
Did you not read the quote I was responding to:
Astones wrote: Fri Apr 16, 2021 7:25 am I hope we can at least agree on this, that reinvesting dividends is less efficient than not receiving them.
And I do not agree that not paying dividends is necessarily (or even generally) better than paying dividends. Better would imply outperformance. Some times and circumstances, yes. Others, no.

And I looked (https://www.merriam-webster.com/dictionary/straw%20man). I did not literally see my post.
It is in most dictionaries. My "most" is at least as accurate as yours.

As to the statement you were quoting, He doesn't say what you claim he said. He didn't say that non-dividend stocks outperform, or are a panacea, or anything. He was arguing that if you are going to reinvest the dividend (and be taxed on it), you are better off not getting it and not generating the taxable event. This is an argument about deferring a taxable event.
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Re: What’s the problem with dividends?

Post by Astones »

SeasOfCheese wrote: Fri Apr 16, 2021 10:27 am If someone wants to buy stocks that don't pay dividends, feel free. It's your money. Just don't expect me to believe that it's the slam-dunk panacea of outperformance that most Boglehead posters seem to assert.
Nobody said that. This is an obvious straw man, as other people pointed out.
SeasOfCheese wrote: Fri Apr 16, 2021 11:11 am And I do not agree that not paying dividends is necessarily (or even generally) better than paying dividends. Better would imply outperformance. Some times and circumstances, yes. Others, no.
This is not an agreeing vs disagreeing situation, I'm talking about a trivial mathematical equivalence: the money you pay in taxes over the dividends are removed from your returns. Everything else being equal, by not paying those taxes you're better off. In this thought experiment of almost identical companies with dividend policy being the only difference, the value of your portfolio after you reinvest the dividends is going to be equal to the one in which you didn't receive them minus the taxes you paid.
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Re: What’s the problem with dividends?

Post by retire57 »

No problem at all with dividends. In fact, we love 'em!

From my perspective- someone who is actually retired - dividends from taxable MFs are a great source of income. Dividends are taxed no matter what, so why not spend them rather than selling shares?

It's not that complicated.
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Re: What’s the problem with dividends?

Post by Da5id »

retire57 wrote: Fri Apr 16, 2021 11:33 am No problem at all with dividends. In fact, we love 'em!

From my perspective- someone who is actually retired - dividends from taxable MFs are a great source of income. Dividends are taxed no matter what, so why not spend them rather than selling shares?
If you actually need the dividend money as part of your budget, dividends are of course fine. Qualified dividends are taxed favorably, and are thus pretty efficient. I'm an early retiree, and the RMDs of my inherited IRAs are currently rather more than I need to live on. So the dividends on my taxable stock holdings just raise my tax bill, which is already pretty high due to those RMDs.
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Re: What’s the problem with dividends?

Post by CuriousTacos »

RAchip wrote: Fri Apr 16, 2021 11:25 am I bought a bunch of MSFT in 2014 for around $40/sh because it was paying a 3% dividend and had announced a policy to grow its dividend every year. Now MSFT pays me more than double the dividend it paid me originally and the stock I bought is up 7x. If I had to rely on selling MSFT stock to produce income from my investment (rather than being able to draw income via dividends) I would have lost out on HUGE gains on all those shares I would have sold.
Not true. If Microsoft had instead done stock buybacks (of the same amount and at the same time as their dividends were issued), and you had sold shares at those times to receive the same amount as the dividends you received, then the share price would have increased even more, such that the value of your remaining shares would be about the same as the value of the shares you hold today.

And if this is in a taxable account, you would be even better off in the buyback scenario because you would have paid less taxes along the way.

The only way dividends are superior to buybacks is if you believe the arguments about poor buyback timing of management. While this sounds like a plausible theory, the studies I have seen suggest that dividend yield is a worse indicator of excess total return than the value factor.
Astones
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Re: What’s the problem with dividends?

Post by Astones »

RAchip wrote: Fri Apr 16, 2021 11:25 am I bought a bunch of MSFT in 2014 for around $40/sh because it was paying a 3% dividend and had announced a policy to grow its dividend every year. Now MSFT pays me more than double the dividend it paid me originally and the stock I bought is up 7x. If I had to rely on selling MSFT stock to produce income from my investment (rather than being able to draw income via dividends) I would have lost out on HUGE gains on all those shares I would have sold.

If MSFT didn't give you 3% in the form of dividends per year, that 3% would not magically vanish, it would have been part of your stock returns. When you sell 3% of your stocks in this imaginary scenario, those stocks would be 3% more valuable then in the case with dividends and the net result would have been the same.

Practical example: you have 100 shares worth $1 each.
After getting 3% in dividends you are left with 3$ cash and 100 shares with price $ 0.97 each.

If the company doesn't give dividends, but you still want those 3 dollars cash, you'd sell 3 shares, ending up with 97 shares whose value is still $1 each, because the company didn't distribute part of its value.

In both cases you're left with $97 in stocks and $3 cash.
RAchip
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Re: What’s the problem with dividends?

Post by RAchip »

Astones wrote: Fri Apr 16, 2021 2:56 pm
RAchip wrote: Fri Apr 16, 2021 11:25 am I bought a bunch of MSFT in 2014 for around $40/sh because it was paying a 3% dividend and had announced a policy to grow its dividend every year. Now MSFT pays me more than double the dividend it paid me originally and the stock I bought is up 7x. If I had to rely on selling MSFT stock to produce income from my investment (rather than being able to draw income via dividends) I would have lost out on HUGE gains on all those shares I would have sold.

If MSFT didn't give you 3% in the form of dividends per year, that 3% would not magically vanish, it would have been part of your stock returns. When you sell 3% of your stocks in this imaginary scenario, those stocks would be 3% more valuable then in the case with dividends and the net result would have been the same.

Practical example: you have 100 shares worth $1 each.
After getting 3% in dividends you are left with 3$ cash and 100 shares with price $ 0.97 each.

If the company doesn't give dividends, but you still want those 3 dollars cash, you'd sell 3 shares, ending up with 97 shares whose value is still $1 each, because the company didn't distribute part of its value.

In both cases you're left with $97 in stocks and $3 cash.
I disagree. You dont know what will happen to cash if a company does not dividend it out. It may be wasted. Even if it just sits there it does not magically translate into higher market value. Stocks are normally valued based on the present value of expected future free cash flows. Under that valuation theory or model it is just assumed that cash in the company will be used to generate the expected future cash flows. It does not get a separate additional value. But even if it should create additive value, what is a dollar sitting in a company that will never be distributed worth? Not very much. Finally, nobody knows what any stock will trade for at any given time; market price is set by supply and demand.
CuriousTacos
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Re: What’s the problem with dividends?

Post by CuriousTacos »

RAchip wrote: Fri Apr 16, 2021 3:13 pm
Astones wrote: Fri Apr 16, 2021 2:56 pm If MSFT didn't give you 3% in the form of dividends per year, that 3% would not magically vanish, it would have been part of your stock returns. When you sell 3% of your stocks in this imaginary scenario, those stocks would be 3% more valuable then in the case with dividends and the net result would have been the same.

Practical example: you have 100 shares worth $1 each.
After getting 3% in dividends you are left with 3$ cash and 100 shares with price $ 0.97 each.

If the company doesn't give dividends, but you still want those 3 dollars cash, you'd sell 3 shares, ending up with 97 shares whose value is still $1 each, because the company didn't distribute part of its value.

In both cases you're left with $97 in stocks and $3 cash.
I disagree. You dont know what will happen to cash if a company does not dividend it out. It may be wasted. Even if it just sits there it does not magically translate into higher market value. Stocks are normally valued based on the present value of expected future free cash flows. Under that valuation theory or model it is just assumed that cash in the company will be used to generate the expected future cash flows. It does not get a separate additional value. But even if it should create additive value, what is a dollar sitting in a company that will never be distributed worth? Not very much. Finally, nobody knows what any stock will trade for at any given time; market price is set by supply and demand.
If they sit on the cash, then I agree that's probably a drag on the company's stock performance over time. But see my above response where they do stock buybacks rather than dividends or sitting on the cash.
Astones
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Re: What’s the problem with dividends?

Post by Astones »

RAchip wrote: Fri Apr 16, 2021 3:13 pm I disagree. You dont know what will happen to cash if a company does not dividend it out. It may be wasted. Even if it just sits there it does not magically translate into higher market value. Stocks are normally valued based on the present value of expected future free cash flows. Under that valuation theory or model it is just assumed that cash in the company will be used to generate the expected future cash flows. It does not get a separate additional value. But even if it should create additive value, what is a dollar sitting in a company that will never be distributed worth? Not very much. Finally, nobody knows what any stock will trade for at any given time; market price is set by supply and demand.
There is no need for magic, the money you get in the form of dividends are taken from the company's value. If this was not the case, you'd be creating value out of nothing. Fluctuations of the share price happen regardless of the dividend policy, and the same is true for mismanagement.

If your confidence in the company's ability to make profit is low enough for you to believe that your bank account is a better place for your money than the company, you should not invest in the company at all.
Last edited by Astones on Fri Apr 16, 2021 3:32 pm, edited 1 time in total.
RAchip
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Re: What’s the problem with dividends?

Post by RAchip »

CuriousTacos wrote: Fri Apr 16, 2021 2:34 pm
RAchip wrote: Fri Apr 16, 2021 11:25 am I bought a bunch of MSFT in 2014 for around $40/sh because it was paying a 3% dividend and had announced a policy to grow its dividend every year. Now MSFT pays me more than double the dividend it paid me originally and the stock I bought is up 7x. If I had to rely on selling MSFT stock to produce income from my investment (rather than being able to draw income via dividends) I would have lost out on HUGE gains on all those shares I would have sold.
Not true. If Microsoft had instead done stock buybacks (of the same amount and at the same time as their dividends were issued), and you had sold shares at those times to receive the same amount as the dividends you received, then the share price would have increased even more, such that the value of your remaining shares would be about the same as the value of the shares you hold today.

And if this is in a taxable account, you would be even better off in the buyback scenario because you would have paid less taxes along the way.

The only way dividends are superior to buybacks is if you believe the arguments about poor buyback timing of management. While this sounds like a plausible theory, the studies I have seen suggest that dividend yield is a worse indicator of excess total return than the value factor.
I was just pointing out how, IF YOU NEED SOME INCOME, dividends may be better than selling shares because selling shares reduces your participation in future stock price appreciation. The same is true for buybacks. If I need income and MSFT did not pay dividends and did buybacks instead, I would have had to sell shares. Maybe the stock price would be higher now because of buybacks, maybe not. Nobody can say for sure. But I would have less shares today and forever into the future
therefore missing out on gains through today and into the future. That loss is incalculable.
Astones
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Re: What’s the problem with dividends?

Post by Astones »

RAchip wrote: Fri Apr 16, 2021 3:32 pm
I was just pointing out how, IF YOU NEED SOME INCOME, dividends may be better than selling shares because selling shares reduces your participation in future stock price appreciation.
Unfortunately, this is factually incorrect. Selling shares does not reduce your participation in future price appreciation more than dividends do.
CuriousTacos
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Re: What’s the problem with dividends?

Post by CuriousTacos »

RAchip wrote: Fri Apr 16, 2021 3:32 pm I was just pointing out how, IF YOU NEED SOME INCOME, dividends may be better than selling shares because selling shares reduces your participation in future stock price appreciation. The same is true for buybacks. If I need income and MSFT did not pay dividends and did buybacks instead, I would have had to sell shares. Maybe the stock price would be higher now because of buybacks, maybe not. Nobody can say for sure. But I would have less shares today and forever into the future
therefore missing out on gains through today and into the future. That loss is incalculable.
If MSFT buys back shares, then there are fewer total shares. If you sell the same proportion of your shares, then your shares after selling are the same % of the company as you held before. Those who do not sell shares end up with a higher % of the company (identical to the reinvesting dividends situation). Buybacks and dividends are mathematically identical (aside from the tax benefit of buybacks) unless you believe management times their buybacks poorly.
RAchip
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Re: What’s the problem with dividends?

Post by RAchip »

“Buybacks and dividends are mathematically identical”

Wrong.

With dividends I get a known amount of cash and keep the same amount of shares and nobody knows what price those shares will trade for in the near, medium or far future.

With buybacks, (1) if I dont sell I have no cash and the same amount of shares and nobody knows what price those shares will trade for in the near, medium or far future or (2) if I sell during a buyback I get cash based on market price and I have fewer shares and nobody knows what price those fewer shares will trade for in the near, medium or far future.

The flaw in many arguments above is people assume they know what price stocks will trade for into perpetuity after a dividend or buyback. Nobody knows that.
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Re: What’s the problem with dividends?

Post by Da5id »

RAchip wrote: Fri Apr 16, 2021 3:52 pm “Buybacks and dividends are mathematically identical”

Wrong.
If you have $100 in shares, and there is a $2 dividend, you have $98 worth of shares and $2 cash
If you have $100 in shares and there is a buyback, and you choose to sell $2 worth of shares, you have $98 worth of shares and $2 cash

Of course if you don't sell to the buyback, it is like you reinvested your dividend.
Astones
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Re: What’s the problem with dividends?

Post by Astones »

RAchip wrote: Fri Apr 16, 2021 3:52 pm
The flaw in many arguments above is people assume they know what price stocks will trade for into perpetuity after a dividend or buyback. Nobody knows that.
The price fluctuations and the deviation of the share price from the company's intrinsic value can go in both directions, it happens regardless of the dividend policy and it has nothing to do with what we are discussing here. If a company gives away $ 100, that company is worth $100 less. You can't escape this mathematical fact.
CuriousTacos
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Re: What’s the problem with dividends?

Post by CuriousTacos »

RAchip wrote: Fri Apr 16, 2021 3:52 pm “Buybacks and dividends are mathematically identical”

Wrong.
You did not quote my entire statement, which was: "Buybacks and dividends are mathematically identical (aside from the tax benefit of buybacks) unless you believe management times their buybacks poorly."

It sounds like you believe management would time their buybacks poorly.

Hypothetically, if MSFT repurchases shares at the close price on the day the ex-dividend date would have been, and you sell a proportional amount of your shares at that price, then the buyback is certainly identical to a dividend (taxes aside). Sure, in practice MSFT might buy them at a higher price or lower price, and you might sell yours at a higher price or lower price. And MSFT might not follow through with their repurchasing since that allows more flexibility than dividends do. But I haven't found any compelling research that suggests this is significant either way. Please share if you have.

I will again refer back to the research behind factors. Dividend yield is not a factor according to any of the common frameworks, and it often isn't even part of the criteria for the value factor even though there is some correlation between the two. So in practice, I don't see any well-research argument that companies with high dividend yields are better investments than otherwise similar companies with low dividend yields.
RAchip
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Re: What’s the problem with dividends?

Post by RAchip »

Astones wrote: Fri Apr 16, 2021 4:20 pm
RAchip wrote: Fri Apr 16, 2021 3:52 pm
The flaw in many arguments above is people assume they know what price stocks will trade for into perpetuity after a dividend or buyback. Nobody knows that.
The price fluctuations and the deviation of the share price from the company's intrinsic value can go in both directions, it happens regardless of the dividend policy and it has nothing to do with what we are discussing here. If a company gives away $ 100, that company is worth $100 less. You can't escape this mathematical fact.
This is wrong. You are mixing up academic valuation (so called intrinsic value) and market value. Market value is not calculated by any formula. Market value is based entirely on supply and demand. Reasonable people can differ on what “intrinsic value” is applying generally accepted valuation techniques. What is cash held by a company worth where that cash is not needed to produce expected future cash flows and may never be distributed? A colorable argument can be made that it is worthless to a minority stockholder. It certainly does not have a dollar-for-dollar value. Nobody pays a dollar to get a dollar even if is a sure thing. How much would you pay for an unquantifiable possibility of possibly getting a dollar at some unknown date in the future? Probably not very much.
gtrplayer
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Re: What’s the problem with dividends?

Post by gtrplayer »

Da5id wrote: Fri Apr 16, 2021 4:01 pm
RAchip wrote: Fri Apr 16, 2021 3:52 pm “Buybacks and dividends are mathematically identical”

Wrong.
If you have $100 in shares, and there is a $2 dividend, you have $98 worth of shares and $2 cash
If you have $100 in shares and there is a buyback, and you choose to sell $2 worth of shares, you have $98 worth of shares and $2 cash

Of course if you don't sell to the buyback, it is like you reinvested your dividend.
I don’t believe the argument that stock prices are so inherently tied to the intrinsic value of a company that a dividend payment drops the price exactly by the amount of the dividend. That sounds correct academically but the market is based on emotion and speculation in addition to academics.

To the other poster’s point about Microsoft, he only bought the stock because of the 3% dividend. If the dividend didn’t exist, he wouldn’t have bought the stock. Had he not chosen to buy, the stock price would have been slightly lower because of his choice. The impact of the dividend was that it led to more purchasers of the stock, such as the poster, which led to higher prices of the stock. The dividend didn’t lower the stock price, it was a catalyst for a higher stock price.
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Re: What’s the problem with dividends?

Post by RAchip »

CuriousTacos wrote: Fri Apr 16, 2021 5:03 pm
RAchip wrote: Fri Apr 16, 2021 3:52 pm “Buybacks and dividends are mathematically identical”

Wrong.
You did not quote my entire statement, which was: "Buybacks and dividends are mathematically identical (aside from the tax benefit of buybacks) unless you believe management times their buybacks poorly."

It sounds like you believe management would time their buybacks poorly.

Hypothetically, if MSFT repurchases shares at the close price on the day the ex-dividend date would have been, and you sell a proportional amount of your shares at that price, then the buyback is certainly identical to a dividend (taxes aside). Sure, in practice MSFT might buy them at a higher price or lower price, and you might sell yours at a higher price or lower price. And MSFT might not follow through with their repurchasing since that allows more flexibility than dividends do. But I haven't found any compelling research that suggests this is significant either way. Please share if you have.

I will again refer back to the research behind factors. Dividend yield is not a factor according to any of the common frameworks, and it often isn't even part of the criteria for the value factor even though there is some correlation between the two. So in practice, I don't see any well-research argument that companies with high dividend yields are better investments than otherwise similar companies with low dividend yields.

No. Saying dividends and buybacks are the same assumes you can predict market price after dividends and buybacks. Nobody can do that.
Astones
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Re: What’s the problem with dividends?

Post by Astones »

RAchip wrote: Fri Apr 16, 2021 5:07 pm
This is wrong.
I give up. At this point all I can do is to suggest you to have this conversation with someone of whom you deeply trust the expertise in this field and let them explain it to you. They will tell you what I tried to tell you, maybe doing a better job than I did.
CuriousTacos
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Re: What’s the problem with dividends?

Post by CuriousTacos »

RAchip wrote: Fri Apr 16, 2021 5:16 pm
CuriousTacos wrote: Fri Apr 16, 2021 5:03 pm
Hypothetically, if MSFT repurchases shares at the close price on the day the ex-dividend date would have been, and you sell a proportional amount of your shares at that price, then the buyback is certainly identical to a dividend (taxes aside). Sure, in practice MSFT might buy them at a higher price or lower price, and you might sell yours at a higher price or lower price. And MSFT might not follow through with their repurchasing since that allows more flexibility than dividends do. But I haven't found any compelling research that suggests this is significant either way. Please share if you have.
No. Saying dividends and buybacks are the same assumes you can predict market price after dividends and buybacks. Nobody can do that.
What could possibly be different between the two hypothetical scenarios? The company has distributed the exact same amount of money in both scenarios, the shareholders who wanted the cash sold the appropriate proportion of their shares such that their ownership % remains unchanged (like those receiving dividends), and those who did not want cash held their shares and now own slightly more of the company (like those reinvesting dividends).

If you think there are any significant differences in this tightly controlled hypothetical comparison, then I think it's fair to expect some research to support this, and can't find any. If this is your opinion, that's fair, but let's leave it at that.
RAchip
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Re: What’s the problem with dividends?

Post by RAchip »

Astones wrote: Fri Apr 16, 2021 4:20 pm
RAchip wrote: Fri Apr 16, 2021 3:52 pm
The flaw in many arguments above is people assume they know what price stocks will trade for into perpetuity after a dividend or buyback. Nobody knows that.
The price fluctuations and the deviation of the share price from the company's intrinsic value can go in both directions, it happens regardless of the dividend policy and it has nothing to do with what we are discussing here. If a company gives away $ 100, that company is worth $100 less. You can't escape this mathematical fact.
This argument is based on a lack of understanding of modern business valuation theory. What does “worth” mean? The only real “worth” is market value because that is the only worth that can be realized. If you hold an extra $100 in a going concern business, that may have no impact on what willing buyers will pay willing sellers (because that is money they have no claim to and may never get). Why willing buyers/sellers buy/sell at the prices they do is not calculable and is based on many different factors, many of which have nothing to do with academic valuation. Stocks can trade at inexplicable market prices (GME is an extreme example).

Even under academic valuation theory you are invoking an asset value approach. Asset value is a theoretical liquidation value which has virtually no relevance to valuing a going concern business that plans to operate into perpetuity. Even in a liquidation, owners normally realize much less than asset value due to the costs associated with liquidation.
Da5id
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Re: What’s the problem with dividends?

Post by Da5id »

gtrplayer wrote: Fri Apr 16, 2021 5:15 pm I don’t believe the argument that stock prices are so inherently tied to the intrinsic value of a company that a dividend payment drops the price exactly by the amount of the dividend. That sounds correct academically but the market is based on emotion and speculation in addition to academics.

To the other poster’s point about Microsoft, he only bought the stock because of the 3% dividend. If the dividend didn’t exist, he wouldn’t have bought the stock. Had he not chosen to buy, the stock price would have been slightly lower because of his choice. The impact of the dividend was that it led to more purchasers of the stock, such as the poster, which led to higher prices of the stock. The dividend didn’t lower the stock price, it was a catalyst for a higher stock price.
As to the stock falling the amount of the dividend, https://www.finra.org/rules-guidance/ru ... rules/5330 says (bold added by me)
Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.
And it is simple common sense that this is the case. Value of company should fall by the amount of retained earnings distributed.
RAchip
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Re: What’s the problem with dividends?

Post by RAchip »

CuriousTacos wrote: Fri Apr 16, 2021 5:46 pm
RAchip wrote: Fri Apr 16, 2021 5:16 pm
CuriousTacos wrote: Fri Apr 16, 2021 5:03 pm
Hypothetically, if MSFT repurchases shares at the close price on the day the ex-dividend date would have been, and you sell a proportional amount of your shares at that price, then the buyback is certainly identical to a dividend (taxes aside). Sure, in practice MSFT might buy them at a higher price or lower price, and you might sell yours at a higher price or lower price. And MSFT might not follow through with their repurchasing since that allows more flexibility than dividends do. But I haven't found any compelling research that suggests this is significant either way. Please share if you have.
No. Saying dividends and buybacks are the same assumes you can predict market price after dividends and buybacks. Nobody can do that.
What could possibly be different between the two hypothetical scenarios? The company has distributed the exact same amount of money in both scenarios, the shareholders who wanted the cash sold the appropriate proportion of their shares such that their ownership % remains unchanged (like those receiving dividends), and those who did not want cash held their shares and now own slightly more of the company (like those reinvesting dividends).

If you think there are any significant differences in this tightly controlled hypothetical comparison, then I think it's fair to expect some research to support this, and can't find any. If this is your opinion, that's fair, but let's leave it at that.

My last effort: you are assuming you know the market price after the dividend and after the buyback. You are assuming that after the dividend my same number of shares drops and stays down forever by the amount of the dividend and that after a buyback that I dont sell into the market price goes up by the exact amount paid out to sellers. A distribution of cash (a dividend) and a repurchase of shares are as a matter of law, different transactions. They are not “the same.” What you are arguing is that from an economic perspective they identical to stockholders. Whether that is true depends on the market price after those transactions which is unknown.
ruud
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Re: What’s the problem with dividends?

Post by ruud »

gtrplayer wrote: Fri Apr 16, 2021 5:15 pm I don’t believe the argument that stock prices are so inherently tied to the intrinsic value of a company that a dividend payment drops the price exactly by the amount of the dividend.
If it didn't, it would be immediately arbitraged away by traders buying the stock immediately before the dividend payout and selling immediately after.
.
CuriousTacos
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Re: What’s the problem with dividends?

Post by CuriousTacos »

RAchip wrote: Fri Apr 16, 2021 5:58 pm This argument is based on a lack of understanding of modern business valuation theory. What does “worth” mean? The only real “worth” is market value because that is the only worth that can be realized. If you hold an extra $100 in a going concern business, that may have no impact on what willing buyers will pay willing sellers (because that is money they have no claim to and may never get). Why willing buyers/sellers buy/sell at the prices they do is not calculable and is based on many different factors, many of which have nothing to do with academic valuation. Stocks can trade at inexplicable market prices (GME is an extreme example).

Even under academic valuation theory you are invoking an asset value approach. Asset value is a theoretical liquidation value which has virtually no relevance to valuing a going concern business that plans to operate into perpetuity. Even in a liquidation, owners normally realize much less than asset value due to the costs associated with liquidation.
I agree with RAchip that a dividend is not equivalent to the company holding the cash. One logical explanation for this is that investors may think the company has no good growth options and fear that the company would squander the cash. Once the dividend is announced, that fear may go away, so we would reasonably expect the share price to be reduced by the dividend amount (all else equal) on the ex-div date.
RAchip
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Re: What’s the problem with dividends?

Post by RAchip »

Da5id wrote: Fri Apr 16, 2021 6:04 pm
gtrplayer wrote: Fri Apr 16, 2021 5:15 pm I don’t believe the argument that stock prices are so inherently tied to the intrinsic value of a company that a dividend payment drops the price exactly by the amount of the dividend. That sounds correct academically but the market is based on emotion and speculation in addition to academics.

To the other poster’s point about Microsoft, he only bought the stock because of the 3% dividend. If the dividend didn’t exist, he wouldn’t have bought the stock. Had he not chosen to buy, the stock price would have been slightly lower because of his choice. The impact of the dividend was that it led to more purchasers of the stock, such as the poster, which led to higher prices of the stock. The dividend didn’t lower the stock price, it was a catalyst for a higher stock price.
As to the stock falling the amount of the dividend, https://www.finra.org/rules-guidance/ru ... rules/5330 says (bold added by me)
Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.
And it is simple common sense that this is the case. Value of company should fall by the amount of retained earnings distributed.

That applies only to OPEN ORDER PRICES as of ex dividend day. None of those orders may even be filled. Market price quickly adjusts to whatever supply and demand drives it to. This seems to be the source of much confusion here.
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