Confused about dividend investing, market downturns and early retirement

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seajay
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Re: Confused about dividend investing, market downturns and early retirement

Post by seajay »

CuriousTacos wrote: Sun Jul 25, 2021 9:56 pm
seajay wrote: Sun Jul 25, 2021 7:42 pm Trick 1 : 4% SWR was derived from the worst peak to trough 30 year period. So instead of lumping in, run two sets, half started straight away, another run a year later, and the average of the two will be better than the worst alone. Bumps SWR from 4 to 4.4
Would you mind sharing your source/data for this? Maybe I misunderstood what you are trying to say, but I tried it at cFireSim and I'm not seeing that this strategy helps:

Start with 500k. Add 500k (inflation adjusted) after 1 year. Withdraw 44k (inflation adjusted) each year:
100% stocks: 92.6% success
80% stocks: 90.9% success
60% stocks: 88.4% success

And for comparison, using the same withdrawal rate but investing the full amount at the start:
100% stocks: 92.6% success
80% stocks: 91.7% success
60% stocks: 90.1% success

Setting aside half your money for the first year doesn't appear to increase the success rate for any of 100%, 80%, or 60% stock allocations over a 30 year horizon. And the above simulations generously assume that uninvested half can keep up with inflation for that first year despite current negative real yields on TIPS, CDs, savings accounts, etc. Taking away that inflation adjustment would result in 90.9%, 88.4%, and 84.3% success rate for the 100%, 80%, and 60% stock allocations, respectively.
Identify the start year that induced 0% remaining (lowest SWR), and average that with either of the adjacent start years 30 year run and revise the SWR upward until that average = 0% remained.
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Re: Confused about dividend investing, market downturns and early retirement

Post by CuriousTacos »

seajay wrote: Mon Jul 26, 2021 3:31 am
CuriousTacos wrote: Sun Jul 25, 2021 9:56 pm
seajay wrote: Sun Jul 25, 2021 7:42 pm Trick 1 : 4% SWR was derived from the worst peak to trough 30 year period. So instead of lumping in, run two sets, half started straight away, another run a year later, and the average of the two will be better than the worst alone. Bumps SWR from 4 to 4.4
Would you mind sharing your source/data for this? Maybe I misunderstood what you are trying to say, but I tried it at cFireSim and I'm not seeing that this strategy helps:

Start with 500k. Add 500k (inflation adjusted) after 1 year. Withdraw 44k (inflation adjusted) each year:
100% stocks: 92.6% success
80% stocks: 90.9% success
60% stocks: 88.4% success

And for comparison, using the same withdrawal rate but investing the full amount at the start:
100% stocks: 92.6% success
80% stocks: 91.7% success
60% stocks: 90.1% success

Setting aside half your money for the first year doesn't appear to increase the success rate for any of 100%, 80%, or 60% stock allocations over a 30 year horizon. And the above simulations generously assume that uninvested half can keep up with inflation for that first year despite current negative real yields on TIPS, CDs, savings accounts, etc. Taking away that inflation adjustment would result in 90.9%, 88.4%, and 84.3% success rate for the 100%, 80%, and 60% stock allocations, respectively.
Identify the start year that induced 0% remaining (lowest SWR), and average that with either of the adjacent start years 30 year run and revise the SWR upward until that average = 0% remained.
While that sounds like a simple way to evaluate this strategy, it does not provide the correct answer because simply averaging adjacent start years assumes you live off half your portfolio (and thus half your withdrawal) in that first year. Perhaps you took this into account, but it's impossible to know without more detail.

Either way, I don't get anywhere close to what you are claiming (all the following ignore fees because I can't replicate cFireSim's fee calculations in a spreadsheet)...
A fully invested 60/40 portfolio just barely supported a 3.62% withdrawal rate, with 1966 being the worst start year (link).

If I ignore the first year issue I raised above and assume the uninvested amount grows with inflation:
A 60/40 portfolio (with half uninvested in year 1) just barely supported a 3.70% withdrawal rate, with 1965 being the worst start year. I can't provide a link because cFireSim doesn't show negative values, which are necessary for this calculation.

If I do not ignore the first year issue and assume the uninvested amount grows with inflation:
A 60/40 portfolio (with half uninvested in year 1) just barely supported a 3.63% withdrawal rate, with 1965 being the worst start year.

For a sanity check, a fully invested 60/40 portfolio just barely supported a 3.72% withdrawal rate with a 1965 start year. That first year saw positive real returns, so we should expect a lower safe withdrawal rate if any amount was uninvested that first year.

If you still think there's some benefit to this strategy, would you mind sharing your source or data?
7eight9
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Re: Confused about dividend investing, market downturns and early retirement

Post by 7eight9 »

Financologist wrote: Sat Jul 24, 2021 3:39 pm
7eight9 wrote: Sat Jul 24, 2021 1:02 pm
Financologist wrote: Sat Jul 24, 2021 12:13 am
7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
Please expand on your statement that Non-dividend paying stocks are not that different from bitcoin.

Who cares whether a stock pays a dividend or not? You can sell traded stocks when you like..
Non-dividend paying stocks rely on the Greater Fool theory.
Respectfully disagree. If I'm looking at Apple stock, there is cash on the balance sheet. There is debt. There is revenue and cost. Etc.. When I purchase Apple stock It's not in hopes there is a greater fool waiting in the wings. It's in hopes the company will grow profits and enhance its prospects so that a smart person down the road is willing to pay me more than I paid the the shares.
Apple stock appears to currently pay a dividend so I'm not sure of your point.

AAPL Dividend History --- https://www.nasdaq.com/market-activity/ ... nd-history

I was speaking specifically about non-dividend paying stocks and how they rely on the Greater Fool Theory.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ThereAreNoGurus »

JoMoney wrote: Sun Jul 25, 2021 2:13 pm I was browsing through Mr. Bogle's book "Bogle On Mutual Funds", and ran across the below paragraph that reminded me of some of the argument in this thread:
John Bogle in his book Bogle on Mutual Funds, section Total Return on Common Stocks wrote:... I want to emphasize that stock returns are driven by two critical factors: dividends and earnings. Without dividends, which are made possible by earnings, an investment in any stock would be purely speculative in nature. Why are dividends and earnings so vital to stock returns? The most basic way to answer that question is to recall that a share of company stock represents a share in a business firm. If you are considering purchasing shares in a firm, you have two broad expectations for that firm: (1) it will pay annual dividends and the amount of these dividends will grow over time; or (2) rather than paying dividends, it will retain its earnings so as to build the business.
While the second expectation suggests that dividends need not always be a critical determinant of the returns on stocks, even when a company
does not pay a dividend, investors implicitly value the firm’s stock based on the presumption of future dividends. When the earnings of a business
are retained each year, investors expect that the earnings will increase over time, resulting in future dividends that will be higher than if they had been distributed currently. In sum, while the consideration of stock returns may encompass any number of qualitative and quantitative factors, any valuation judgment must ultimately rely on dividends and earnings.
This is so obviously wrong. I don't care who said it.

Publicly traded shares that have voting rights represent ownership in a company.

JoMoney, are you telling me you would not want to own a company that never paid a dividend, took in billions of dollars and whose share price was way below the company's net worth? You'd be nuts not to buy it, assuming you had the bucks. It's not only the possibility of future dividends that drives the value of a stock.

Absurd example, but it illustrates the point... if you could own Microsoft for $1,000, you'd probably buy it. You could pay yourself a big fat salary off the company's earnings. The value you pay for the company has nothing to do with future dividends.

If a stock's price drops below its business value, somebody is usually going to buy the company. It's valuation is not necessarily based on a dividend stream. The assets could have value, or its earnings themselves may be valuable.

This is why claiming a company that does not pay dividends is like a collectible is completely fallacious (I know you did not make that claim), but the point is it's not dividends or their anticipation, thereof, that necessarily drive a stock's value.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Financologist »

7eight9 wrote: Mon Jul 26, 2021 11:37 pm
Financologist wrote: Sat Jul 24, 2021 3:39 pm
7eight9 wrote: Sat Jul 24, 2021 1:02 pm
Financologist wrote: Sat Jul 24, 2021 12:13 am
7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
Please expand on your statement that Non-dividend paying stocks are not that different from bitcoin.

Who cares whether a stock pays a dividend or not? You can sell traded stocks when you like..
Non-dividend paying stocks rely on the Greater Fool theory.
Respectfully disagree. If I'm looking at Apple stock, there is cash on the balance sheet. There is debt. There is revenue and cost. Etc.. When I purchase Apple stock It's not in hopes there is a greater fool waiting in the wings. It's in hopes the company will grow profits and enhance its prospects so that a smart person down the road is willing to pay me more than I paid the the shares.
Apple stock appears to currently pay a dividend so I'm not sure of your point.

AAPL Dividend History --- https://www.nasdaq.com/market-activity/ ... nd-history

I was speaking specifically about non-dividend paying stocks and how they rely on the Greater Fool Theory.
The point in regards to Apple stock is that it that whether or not it pays a dividend doesn't determine whether the purchase of it is a greater fool's game. It delivers earnings.. and whether it pays them out or retains them, the stock owner owns her stake.

Conclusion: there is much more of a greater fool's aspect to bitcoin "investing" vs. Investing in companies that consistently deliver earnings. There is little in the way of fundamental basis of bitcoin's value.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Financologist »

7eight9 wrote: Mon Jul 26, 2021 11:37 pm
Financologist wrote: Sat Jul 24, 2021 3:39 pm
7eight9 wrote: Sat Jul 24, 2021 1:02 pm
Financologist wrote: Sat Jul 24, 2021 12:13 am
7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
Please expand on your statement that Non-dividend paying stocks are not that different from bitcoin.

Who cares whether a stock pays a dividend or not? You can sell traded stocks when you like..
Non-dividend paying stocks rely on the Greater Fool theory.
Respectfully disagree. If I'm looking at Apple stock, there is cash on the balance sheet. There is debt. There is revenue and cost. Etc.. When I purchase Apple stock It's not in hopes there is a greater fool waiting in the wings. It's in hopes the company will grow profits and enhance its prospects so that a smart person down the road is willing to pay me more than I paid the the shares.
Apple stock appears to currently pay a dividend so I'm not sure of your point.

AAPL Dividend History --- https://www.nasdaq.com/market-activity/ ... nd-history

I was speaking specifically about non-dividend paying stocks and how they rely on the Greater Fool Theory.
One other thought is that while companies that currently pay a dividend are more likely to pay a dividendIs next quarter vs. companies that don't, there is no guarantee that a so called dividend paying stock will continue to do so. So whether a company pays 1 or 2% each year doesn't persuade me one way or another on its greater fool characteristics.
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Re: Confused about dividend investing, market downturns and early retirement

Post by reln »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.

Anyway, she talked a lot in the book about the Trinity study and using a 4% SWR. She said that she would have a 95% chance of not depleting her funds if she had a 4% withdrawal rate, but 95% wasn’t enough for her to feel secure. The 5% failure rate would usually occur because of sequence of returns risk - in situations where someone retired and then the market crashed and you had to sell equities during a downturn. If this happens during the first 5 years of retirement, early retirement can fail. In order to counter this, she said she implemented a “cash cushion” and a “yield shield” during her first 5 years of retirement. Basically, she keeps two years of expenses in cash and keeps her equities in index ETFs that throw off a lot of dividends. She said that even if there was a market downturn, she can just live off her dividends and cash until the market recovers, So she wouldn’t be forced to sell in a downturn. She acknowledged that the high-yield ETFs are not as diversified as total stock market indexes, but accepted the lower diversification in exchange for sequence of returns protection during the first 5 years of her retirement.

Initially I thought this whole concept sounded great. However I’ve been researching further, and I don’t get how the yield shield actually protects someone in a market downturn. If you are invested in a higher-yield ETF like VYM, and there is a market downturn, you will still get a dividend. But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
You thought right.
1) Yield shield is nonsense. It's just an example of how misunderstood dividends are.
2) Cash cushion is an illusion. It's just a very expensive (opportunity cost) way to create a buffer asset.
3) Trinity study's 95% chance of success doesn't apply for an age 35. It applies (although with major caveats) to an age 65. It's a common error promoted often by the misinformed FIRE crowed.
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Re: Confused about dividend investing, market downturns and early retirement

Post by LadyGeek »

Financologist wrote: Tue Jul 27, 2021 7:21 am The point in regards to Apple stock is that it that whether or not it pays a dividend doesn't determine whether the purchase of it is a greater fool's game. It delivers earnings.. and whether it pays them out or retains them, the stock owner owns her stake.

Conclusion: there is much more of a greater fool's aspect to bitcoin "investing" vs. Investing in companies that consistently deliver earnings. There is little in the way of fundamental basis of bitcoin's value.
To new investors, Financologist is making an important point. Stocks are a Capital Investment - you're investing in the company and this makes you an owner.

The amount of available capital goes down when the dividend is paid and the stock price goes down as a result.

It's why members always ask "Why did my fund unexpectedly drop in value?" Because dividends were paid. (The wiki is referring to a fund, but it's the same concept.)

This is a totally separate concept than the price of the stock moving due to buying and selling on the market. Investors will see both effects when dividends are distributed because the market is trading at that time.

Update: Clarified wording, see below.
Update 2: Clarified wording.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Da5id »

LadyGeek wrote: Tue Jul 27, 2021 7:40 am Dividends are also called "return of capital" - the company is giving some of that ownership back to you. Less people own it than before the dividend was paid and the price of the stock goes down.
While I understand how dividends work and agree with the general point, I find the statement above rather a confusing way to formulate what is going on. What does "Less people own it" mean here? The same number of people own the stock before and after a dividend. The shares are worth less because money has been moved from the companies balance sheet to the owners personal accounts.
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Re: Confused about dividend investing, market downturns and early retirement

Post by LadyGeek »

^^^ Thanks, I fixed my post.
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Re: Confused about dividend investing, market downturns and early retirement

Post by JoMoney »

reln wrote: Tue Jul 27, 2021 7:40 am...
3) Trinity study's 95% chance of success doesn't apply for an age 35. It applies (although with major caveats) to an age 65. It's a common error promoted often by the misinformed FIRE crowed.
The Trinity study looked at historical 30 year time periods. From age 35 to age 65 would be a 30 year time period.
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Re: Confused about dividend investing, market downturns and early retirement

Post by lostdog »

Dividend investing is good for people that want a purely passive solution. They either get it or don't get it when it comes to math and share depreciation.

Some get it and do it anyway and others are in denial.

Dividend investing is good for marketing the purely passive solution. Those marketing this solution most likely understand the math but sell the idea anyway. Similar to a snake oil salesman.
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Re: Confused about dividend investing, market downturns and early retirement

Post by CyclingDuo »

Fat Tails wrote: Mon Jul 26, 2021 1:18 am
climber2020 wrote: Fri May 07, 2021 9:11 am
7eight9 wrote: Fri May 07, 2021 8:56 am Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.
Are you asserting that Berkshire Hathaway stock is equivalent to investing in Pokemon Cards?
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Re: Confused about dividend investing, market downturns and early retirement

Post by JackoC »

ThereAreNoGurus wrote: Tue Jul 27, 2021 12:17 am
JoMoney wrote: Sun Jul 25, 2021 2:13 pm I was browsing through Mr. Bogle's book "Bogle On Mutual Funds", and ran across the below paragraph that reminded me of some of the argument in this thread:
John Bogle in his book Bogle on Mutual Funds, section Total Return on Common Stocks wrote:...even when a company
does not pay a dividend, investors implicitly value the firm’s stock based on the presumption of future dividends.
This is so obviously wrong. I don't care who said it.

Publicly traded shares that have voting rights represent ownership in a company.

JoMoney, are you telling me you would not want to own a company that never paid a dividend, took in billions of dollars and whose share price was way below the company's net worth? You'd be nuts not to buy it, assuming you had the bucks. It's not only the possibility of future dividends that drives the value of a stock.

Absurd example, but it illustrates the point... if you could own Microsoft for $1,000, you'd probably buy it. You could pay yourself a big fat salary off the company's earnings. The value you pay for the company has nothing to do with future dividends.

If a stock's price drops below its business value, somebody is usually going to buy the company. It's valuation is not necessarily based on a dividend stream. The assets could have value, or its earnings themselves may be valuable.

This is why claiming a company that does not pay dividends is like a collectible is completely fallacious (I know you did not make that claim), but the point is it's not dividends or their anticipation, thereof, that necessarily drive a stock's value.
It's really not 'obviously wrong'. It's a well accepted framework of looking at individual stock (and moreover, stock index) value: it's the present value of all future dividends. Even if a stock isn't paying dividends now, nobody would pay anything for a non-controlling interest in a company that was *never* going to pay dividends. Whereas if you have control, you can make it pay dividends.

You've given the one potentially valid exception to this: *if* the company could be liquidated for a value greater than the present value of the future dividend stream as a going concern. But that's rare in practice, and getting rarer as market caps have grown larger compared to book value of equity. The 'Tobin Q' of the S&P, (equity market value+liabilities)/(equity book value+liabilities) is now around 1.7, and book value itself an optimistic estimate of liquidation value practically speaking. So we can generally ignore the case where liquidation value exceeds the PV of future dividend stream: where it happens it's overwhelmingly with failed/failing companies a naturally small % of total market value.

The other cases you've given are where you gain personal control of the company, and essentially turn it into something other than a public stock company. I don't think we need to belabor why that's not directly relevant to valuation of public stock companies. And even in those cases, 'I gain control of MSFT and redirect the potential dividend stream as my salary', or more realistically I run a private equity fund and take companies private, there is still a cash flow stream I can take out of the company while sustaining its 'ultimate' business (I may take out less now to build the business to that ultimate level: the level where there's no further opportunity to get an internal return>cost of capital) as a going concern, but that's basically a description of the ultimate dividend stream of a public stock company.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ThereAreNoGurus »

JackoC wrote: Tue Jul 27, 2021 9:15 am but that's basically a description of the dividend stream of a public stock company.
I disagree. It's basically a description of what a company is worth. Dividends are normally paid from earnings and you folks have confused what actually drives the value of a company. In the case you describe it's the earnings. And in some cases those earnings are paid as dividends and in others they are retained or re-invested. In some cases, as stated previously it's the assets. Those other examples are not dividends. It's simply incorrect to say the value of a publicly traded company is the future value of its dividend payments. That's why we get folks on here asking why a company has any value that does not pay a dividend. If you want to call it a cash-flow stream, at least that's a tad more precise.

As further evidence of this, if companies were valued strictly by their dividend payments, stocks with the same prospects for earnings growth that pay dividends should be valued way higher than stocks that do not.
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Re: Confused about dividend investing, market downturns and early retirement

Post by BGeste »

abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
My portfolio is primarily in broad market index funds. However, I do have significant tilt towards dividend paying / value ETFs. I bought a significant amount of SPYD last April when I tax loss harvested my dividend paying individual stocks and converted them into dividend paying ETFs. I have been very pleased with the dividend payments and the capital appreciation of SPYD.
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Re: Confused about dividend investing, market downturns and early retirement

Post by CuriousTacos »

JackoC wrote: Tue Jul 27, 2021 9:15 am nobody would pay anything for a non-controlling interest in a company that was *never* going to pay dividends
If you change that to say "nobody would pay anything for a non-controlling interest in a company that was *guaranteed never* to pay dividends, or conduct buybacks, or consider a merger or being acquired or going private or any other possible way companies can return profits to investors" then it would be more reasonable, but also much more hypothetical.
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Re: Confused about dividend investing, market downturns and early retirement

Post by reln »

JoMoney wrote: Tue Jul 27, 2021 7:54 am
reln wrote: Tue Jul 27, 2021 7:40 am...
3) Trinity study's 95% chance of success doesn't apply for an age 35. It applies (although with major caveats) to an age 65. It's a common error promoted often by the misinformed FIRE crowed.
The Trinity study looked at historical 30 year time periods. From age 35 to age 65 would be a 30 year time period.
Exactly. So it doesn't apply to a 35 year old retiree because a 35 year old has around a 55 year life expectancy.
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Re: Confused about dividend investing, market downturns and early retirement

Post by JackoC »

CuriousTacos wrote: Tue Jul 27, 2021 10:35 am
JackoC wrote: Tue Jul 27, 2021 9:15 am nobody would pay anything for a non-controlling interest in a company that was *never* going to pay dividends
If you change that to say "nobody would pay anything for a non-controlling interest in a company that was *guaranteed never* to pay dividends, or conduct buybacks, or consider a merger or being acquired or going private or any other possible way companies can return profits to investors" then it would be more reasonable, but also much more hypothetical.
But that change would just show why Bogle's statement was correct to begin with. Anybody saying it's wrong is actually assuming that there will eventually be dividends. Or if not dividends, other corporate action equivalent to them. Buybacks were not mentioned previously but it's well known in the *absolutely standard* approach to stock valuation as PV of eventual dividends that net anti-dilutive (buybacks that aren't offset by dilution, a lot of US corporate buybacks are at least offset by dilution like grants to employees, but that's another topic) are to be counted as dividends. A merger OTOH is not any different from individual shareholder POV that selling the shares. It's covered in Bogle's original statement that the acquirer is also expected dividends eventually. Likewise as I already covered wrt going private, and can be true of some mergers, that's changing the form of the company. But in any case the value to the private owner is the PV of the cash flows the new owner can take out of the company while sustaining its business at it's ultimate size (as previously defined). That's equivalent to dividends.

So the valuation of the company can be expressed as PV of all future dividends, an absolutely standard, Corp Finance 101 concept.
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Re: Confused about dividend investing, market downturns and early retirement

Post by JackoC »

ThereAreNoGurus wrote: Tue Jul 27, 2021 9:31 am
JackoC wrote: Tue Jul 27, 2021 9:15 am but that's basically a description of the dividend stream of a public stock company.
I disagree. It's basically a description of what a company is worth. Dividends are normally paid from earnings and you folks have confused what actually drives the value of a company. In the case you describe it's the earnings. And in some cases those earnings are paid as dividends and in others they are retained or re-invested. In some cases, as stated previously it's the assets. Those other examples are not dividends. It's simply incorrect to say the value of a publicly traded company is the future value of its dividend payments. That's why we get folks on here asking why a company has any value that does not pay a dividend. If you want to call it a cash-flow stream, at least that's a tad more precise.

As further evidence of this, if companies were valued strictly by their dividend payments, stocks with the same prospects for earnings growth that pay dividends should be valued way higher than stocks that do not.
You are the one confused, on a very elementary concept of corporate finance. The value of the stock can be expressed as P=D/(r-g), current dividend divided by excess of the risky discount rate over the dividend growth rate, equation for a perpetuity. Which just simplifies the real world case where dividend could grow at other than a steady rate. Please re-read Bogle, and my explanation. Nobody is saying the company's value is a deterministic function of the *current* dividend, but the PV of all dividends indefinitely into the future. Non dividend paying companies have value because, and only if, investors assume they will eventually pay dividends.

Which gets back to another point from the opening chapters of any Corp Fin 101 book. The company should reinvest profit on which it can earn a return greater than its weighted average cost of capital, and pay out as dividends earnings it cannot reinvest at a higher return than it cost of capital. Eventually every company will reach a size where it cannot reinvest all earnings at return>cost of capital. The rest will be paid out (by rational management) in the form of dividends. The PV of that stream is the ultimate value of the company. Buybacks are the same thing as dividends under certain assumptions*.

That an acquirer might buy the whole company, or another individual buy your shares in the market, doesn't meant mean the ultimate source of value has changed. And as I already explained, net liquidation value would only exceed PV of all future dividends for a very small % of the total valuation of all companies, those companies on the brink of failure.

*they don't necessarily amount to anything if offset by dilution, like buying back shares to give them in compensation packages to senior employees; nor if they are generated by changing the leverage ratio of the company, borrowing to fund buybacks. Everyone accepts that the equation given would be corrected for buybacks a) to the extent net anti-dilutive and b) not funded by shifting the capital structure of the company toward debt.
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Re: Confused about dividend investing, market downturns and early retirement

Post by CuriousTacos »

JackoC wrote: Tue Jul 27, 2021 1:43 pm
CuriousTacos wrote: Tue Jul 27, 2021 10:35 am
JackoC wrote: Tue Jul 27, 2021 9:15 am nobody would pay anything for a non-controlling interest in a company that was *never* going to pay dividends
If you change that to say "nobody would pay anything for a non-controlling interest in a company that was *guaranteed never* to pay dividends, or conduct buybacks, or consider a merger or being acquired or going private or any other possible way companies can return profits to investors" then it would be more reasonable, but also much more hypothetical.
But that change would just show why Bogle's statement was correct to begin with. Anybody saying it's wrong is actually assuming that there will eventually be dividends. Or if not dividends, other corporate action equivalent to them. Buybacks were not mentioned previously but it's well known in the *absolutely standard* approach to stock valuation as PV of eventual dividends that net anti-dilutive (buybacks that aren't offset by dilution, a lot of US corporate buybacks are at least offset by dilution like grants to employees, but that's another topic) are to be counted as dividends. A merger OTOH is not any different from individual shareholder POV that selling the shares. It's covered in Bogle's original statement that the acquirer is also expected dividends eventually. Likewise as I already covered wrt going private, and can be true of some mergers, that's changing the form of the company. But in any case the value to the private owner is the PV of the cash flows the new owner can take out of the company while sustaining its business at it's ultimate size (as previously defined). That's equivalent to dividends.

So the valuation of the company can be expressed as PV of all future dividends, an absolutely standard, Corp Finance 101 concept.
Well then it would appear that we agree in principle, but merely have different assumptions about the scope of the term "dividends". You are free to use that in a more inclusive way, but I think many will misunderstand you if you do.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ThereAreNoGurus »

JackoC wrote: Tue Jul 27, 2021 2:13 pm Please re-read Bogle, and my explanation. Nobody is saying the company's value is a deterministic function of the *current* dividend, but the PV of all dividends indefinitely into the future. Non dividend paying companies have value because, and only if, investors assume they will eventually pay dividends.
Again... totally ridiculous. That theory does not explain what I posted above. Two publicly traded companies with similar growth prospects. One pays a dividend, the other does not. The non-dividend company should have a way lower market capitalization. But it doesn't.

JackoC wrote: Tue Jul 27, 2021 2:13 pm That an acquirer might buy the whole company, or another individual buy your shares in the market, doesn't meant mean the ultimate source of value has changed.
I think this is incorrect. It's not a dividend as normally understood. If I takeover a company and pay myself a big salary that is not a dividend payment as it is normally understood. If I takeover a company and sell pieces of it, that is not a dividend as normally understood. If you want to refer to all forms of monetization as a dividend then that is a different story. And again that is why we get posters wondering why non-dividend stocks have "high" valuations versus dividend paying stocks. It is not because some day the non-dividend paying company will pay a dividend to shareholders (as the term is normally understood and used).
Trade the news and you will lose.
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Re: Confused about dividend investing, market downturns and early retirement

Post by abuss368 »

BGeste wrote: Tue Jul 27, 2021 10:12 am
abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
My portfolio is primarily in broad market index funds. However, I do have significant tilt towards dividend paying / value ETFs. I bought a significant amount of SPYD last April when I tax loss harvested my dividend paying individual stocks and converted them into dividend paying ETFs. I have been very pleased with the dividend payments and the capital appreciation of SPYD.
I agree. It is all about the passive income stream! I have family and friends retired from dividend stream with total funds, dividend funds, and REITs. It works and I am following their lead. More than one road to Rome as my Italian relatives would say!


Check out Vanguard US High Dividend and Vanguard International High Dividend.

Are you in REITs?

https://www.financialsamurai.com/rankin ... vestments/

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Confused about dividend investing, market downturns and early retirement

Post by patrick013 »

BGeste wrote: Tue Jul 27, 2021 10:12 am
abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
My portfolio is primarily in broad market index funds. However, I do have significant tilt towards dividend paying / value ETFs. I bought a significant amount of SPYD last April when I tax loss harvested my dividend paying individual stocks and converted them into dividend paying ETFs. I have been very pleased with the dividend payments and the capital appreciation of SPYD.
Dividend investing is long term and looks best
in a Roth. Smaller concentrated indexes provide total return, lower beta to the portfolio, and variability of returns. They can provide excess returns when other funds have
stalled and have long histories of doing so.

They look better priced today than the very
high PE's of those large caps while AAPL walks
all over the market with high earnings.

Future interest rate hikes will stall the general
market and no surprise lower dividend stocks
somewhat also.

So I like a 10% tilt to my portfolio and will always have at least that amounted invested
in SPYD or QDIV. Like a good race horse I
have confidence long term in their potential
total returns.
age in bonds, buy-and-hold, 10 year business cycle
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Re: Confused about dividend investing, market downturns and early retirement

Post by ThereAreNoGurus »

JackoC wrote: Tue Jul 27, 2021 2:13 pm Please re-read Bogle, and my explanation. Nobody is saying the company's value is a deterministic function of the *current* dividend, but the PV of all dividends indefinitely into the future. Non dividend paying companies have value because, and only if, investors assume they will eventually pay dividends.
I'm going to try to explain again, a bit more clearly the utter fallacy of that last statement.

Investors do not get any extra income when they receive a dividend. As I'm sure or hope you realize the price of a stock is reduced by the dividend amount, so there is no extra income provided when comparing a dividend versus a non-dividend paying stock. An investor can receive the same "income" from a non-dividend paying stock by selling an equivalent amount of shares.

Now instead of saying companies have value because they will eventually pay a dividend, one says companies have value because that value can be monetized (in various ways), again, different story. But not all forms of monetization are a dividend in the normal sense of the word and thus confusion can be avoided by not equating all forms of monetization with dividends.
Trade the news and you will lose.
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Re: Confused about dividend investing, market downturns and early retirement

Post by JoMoney »

ThereAreNoGurus wrote: Wed Jul 28, 2021 8:34 am
JackoC wrote: Tue Jul 27, 2021 2:13 pm Please re-read Bogle, and my explanation. Nobody is saying the company's value is a deterministic function of the *current* dividend, but the PV of all dividends indefinitely into the future. Non dividend paying companies have value because, and only if, investors assume they will eventually pay dividends.
I'm going to try to explain again, a bit more clearly the utter fallacy of that last statement.

Investors do not get any extra income when they receive a dividend. As I'm sure or hope you realize the price of a stock is reduced by the dividend amount, so there is no extra income provided when comparing a dividend versus a non-dividend paying stock. An investor can receive the same "income" from a non-dividend paying stock by selling an equivalent amount of shares.

Now instead of saying companies have value because they will eventually pay a dividend, one says companies have value because that value can be monetized (in various ways), again, different story. But not all forms of monetization are a dividend in the normal sense of the word and thus confusion can be avoided by not equating all forms of monetization with dividends.
The Dividend Discount Model continues to be a pretty well respected and widely used model for explaining stock market returns. Calling it a "fallacy" doesn't persuade people to use whatever model you prefer any more so then people who insist dividends are the "ONLY" determinant of value (it's not).
But I have to agree with those that say an investment in something that will never have a payout is pretty "speculative". That said, selling the business for it to go private would result in a special one time dividend to dissolve the public company but is still a dividend... and individual shareholders have the ability to do that at any time on a fractional basis to sell their fractional share.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Confused about dividend investing, market downturns and early retirement

Post by BGeste »

abuss368 wrote: Tue Jul 27, 2021 7:07 pm
BGeste wrote: Tue Jul 27, 2021 10:12 am
abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
My portfolio is primarily in broad market index funds. However, I do have significant tilt towards dividend paying / value ETFs. I bought a significant amount of SPYD last April when I tax loss harvested my dividend paying individual stocks and converted them into dividend paying ETFs. I have been very pleased with the dividend payments and the capital appreciation of SPYD.
I agree. It is all about the passive income stream! I have family and friends retired from dividend stream with total funds, dividend funds, and REITs. It works and I am following their lead. More than one road to Rome as my Italian relatives would say!


Check out Vanguard US High Dividend and Vanguard International High Dividend.

Are you in REITs?

https://www.financialsamurai.com/rankin ... vestments/

Tony
I also hold VYM and VYMI. For real estate exposure I have held Vanguard's Real Estate Index fund for almost 20 years. I am very pleased with the capital appreciation of these funds and the distributions. The last twelve months have been especially outstanding for value / dividend funds.

Bottom line: If your portfolio is large enough and designed well, you can live very comfortably on just distributions while also growing your overall capital.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ThereAreNoGurus »

JoMoney wrote: Wed Jul 28, 2021 8:49 am
ThereAreNoGurus wrote: Wed Jul 28, 2021 8:34 am
JackoC wrote: Tue Jul 27, 2021 2:13 pm Please re-read Bogle, and my explanation. Nobody is saying the company's value is a deterministic function of the *current* dividend, but the PV of all dividends indefinitely into the future. Non dividend paying companies have value because, and only if, investors assume they will eventually pay dividends.
I'm going to try to explain again, a bit more clearly the utter fallacy of that last statement.

Investors do not get any extra income when they receive a dividend. As I'm sure or hope you realize the price of a stock is reduced by the dividend amount, so there is no extra income provided when comparing a dividend versus a non-dividend paying stock. An investor can receive the same "income" from a non-dividend paying stock by selling an equivalent amount of shares.

Now instead of saying companies have value because they will eventually pay a dividend, one says companies have value because that value can be monetized (in various ways), again, different story. But not all forms of monetization are a dividend in the normal sense of the word and thus confusion can be avoided by not equating all forms of monetization with dividends.
The Dividend Discount Model continues to be a pretty well respected and widely used model for explaining stock market returns. Calling it a "fallacy" doesn't persuade people to use whatever model you prefer any more so then people who insist dividends are the "ONLY" determinant of value (it's not).
But I have to agree with those that say an investment in something that will never have a payout is pretty "speculative". That said, selling the business for it to go private would result in a special one time dividend to dissolve the public company but is still a dividend... and individual shareholders have the ability to do that at any time on a fractional basis to sell their fractional share.
As I explained in my post, above, claiming that, "Non dividend paying companies have value because, and only if, investors assume they will eventually pay dividends," is misleading at best. I'd call it a fallacy, as I explained above, since investors can pay themselves a dividend from a non-dividend paying stock. So yeah, it is misleading to compare a dividend paying stock to a non-dividend paying stock by claiming that some day the non-dividend paying stock must pay a dividend to have value. It does not matter whether a dividend is currently being paid.

It is much clearer to say a public company's value is driven by its net-worth or PV of its cash flow just the same as a private business. Using the word dividend muddies the waters. Dividends are normally a subset of earnings.

So once a again, if you are using the term dividend to mean any kind of eventual payout/monetization, fine, but then there is no need to compare a non-dividend vs dividend paying stock in the context it was mentioned on this thread because both the non-dividend and dividend paying stocks must have that "extra" payout to fully recognize the value of a company.
Trade the news and you will lose.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Riprap »

ThereAreNoGurus wrote: Wed Jul 28, 2021 9:39 amIt is much clearer to say a public company's value is driven by its net-worth or PV of its cash flow just the same as a private business. Using the word dividend muddies the waters. Dividends are normally a subset of earnings.
Public companies don't last forever. With a dividend stream that increases faster than inflation, at least you get a return of your investment capital. Ideally you will have been made whole BEFORE the inevitable earnings stream dries up or changes in such a way as to significantly lower the inflation adjusted valuation of the the company. A bird in hand is worth two in the bush conservatism approach.

If you invest in individual stocks, how do you time the "make your own dividend" sales to compensate for the lack of a dividend? At what point are those sales started? If you time sales only when you need cash in the name of tax efficiency, are you sacrificing anything like the total destruction of the value of a business? Dividends are sort of an insurance policy in case your analysis is wrong.

I concede making your own dividend can be sensible for total market index fund investors.

No one ever knows what the optimal strategy will be in advance.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ThereAreNoGurus »

Riprap wrote: Wed Jul 28, 2021 10:18 am
ThereAreNoGurus wrote: Wed Jul 28, 2021 9:39 amIt is much clearer to say a public company's value is driven by its net-worth or PV of its cash flow just the same as a private business. Using the word dividend muddies the waters. Dividends are normally a subset of earnings.
Public companies don't last forever. With a dividend stream that increases faster than inflation, at least you get a return of your investment capital. Ideally you will have been made whole BEFORE the inevitable earnings stream dries up or changes in such a way as to significantly lower the inflation adjusted valuation of the the company. A bird in hand is worth two in the bush conservatism approach.

If you invest in individual stocks, how do you time the "make your own dividend" sales to compensate for the lack of a dividend? At what point are those sales started? If you time sales only when you need cash in the name of tax efficiency, are you sacrificing anything like the total destruction of the value of a business? Dividends are sort of an insurance policy in case your analysis is wrong.

I concede making your own dividend can be sensible for total market index fund investors.

No one ever knows what the optimal strategy will be in advance.
True public companies do not last forever.

However as you acknowledge you can pay yourself a dividend from a non-dividend paying stock.

And as you know investors can choose to re-invest their dividends, so, obviously investors doing so face the same risks as investors holding non-dividend paying stocks that don't "self-dividend."

As for the timing of selling shares for dividends one could simply do it on a quarterly schedule. If the stocks are held in taxable accounts it can be more advantageous to sell stock than receive a dividend. But none of this is really relevant when speaking of theoretical valuations for a company.

Again context... when comparing a non-dividend versus dividend paying stock and claiming that some day the non-dividend paying stock must pay a dividend is extremely misleading (see above posts).

Don't misunderstand, if folks want dividend stocks for the right reasons (eg., very convenient), fine have at it. But, for example, to claim a non-dividend paying stock (with voting rights) is no different from a collectible is ridiculous.
Trade the news and you will lose.
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Re: Confused about dividend investing, market downturns and early retirement

Post by abuss368 »

BGeste wrote: Wed Jul 28, 2021 9:31 am
abuss368 wrote: Tue Jul 27, 2021 7:07 pm
BGeste wrote: Tue Jul 27, 2021 10:12 am
abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
My portfolio is primarily in broad market index funds. However, I do have significant tilt towards dividend paying / value ETFs. I bought a significant amount of SPYD last April when I tax loss harvested my dividend paying individual stocks and converted them into dividend paying ETFs. I have been very pleased with the dividend payments and the capital appreciation of SPYD.
I agree. It is all about the passive income stream! I have family and friends retired from dividend stream with total funds, dividend funds, and REITs. It works and I am following their lead. More than one road to Rome as my Italian relatives would say!


Check out Vanguard US High Dividend and Vanguard International High Dividend.

Are you in REITs?

https://www.financialsamurai.com/rankin ... vestments/

Tony
I also hold VYM and VYMI. For real estate exposure I have held Vanguard's Real Estate Index fund for almost 20 years. I am very pleased with the capital appreciation of these funds and the distributions. The last twelve months have been especially outstanding for value / dividend funds.

Bottom line: If your portfolio is large enough and designed well, you can live very comfortably on just distributions while also growing your overall capital.
Your post speaks to me and is the roadmap I have been following!

Tony 🚀
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Confused about dividend investing, market downturns and early retirement

Post by JackoC »

ThereAreNoGurus wrote: Wed Jul 28, 2021 8:34 am
JackoC wrote: Tue Jul 27, 2021 2:13 pm Please re-read Bogle, and my explanation. Nobody is saying the company's value is a deterministic function of the *current* dividend, but the PV of all dividends indefinitely into the future. Non dividend paying companies have value because, and only if, investors assume they will eventually pay dividends.
I'm going to try to explain again, a bit more clearly the utter fallacy of that last statement.

Investors do not get any extra income when they receive a dividend. As I'm sure or hope you realize the price of a stock is reduced by the dividend amount, so there is no extra income provided when comparing a dividend versus a non-dividend paying stock. An investor can receive the same "income" from a non-dividend paying stock by selling an equivalent amount of shares.

Now instead of saying companies have value because they will eventually pay a dividend, one says companies have value because that value can be monetized (in various ways), again, different story. But not all forms of monetization are a dividend in the normal sense of the word and thus confusion can be avoided by not equating all forms of monetization with dividends.
"As I'm sure or hope you realize the price of a stock is reduced by the dividend amount" right...because the value of the stock can be expressed as the PV of all future dividends. Once the current one is paid out, the price goes down by that amount, because that dividend is no longer 'future'. :happy

I believe you will be too stubborn in the mistake you've made in your self-taught understanding of stock. So the following is mainly directed at those who realize or are willing to consider that the Dividend Discount Model of stock valuation is entirely standard in the literature. I'll explain again why.

The possibility of sale of your shares has no effect on the concept. Buyer 1 sells to buyer 2 sells to buyer 3...sells to buyer n. But they all value the stock the same way. Likewise any entity (merger, private equity) that would buy everyone's shares. The fact you can sell the shares has no effect on the source of their value. Think of a bond. It's nonsensical to say the value is not the PV of all the remaining coupons plus the principal repayment 'because I could sell it to somebody else today'. That buyer, obviously, is valuing it as the sum of those future cash flows. Extend it further to a perpetual bond (once common though not as much nowadays). The value is the PV of all the coupons to be paid forever, P=C/r, coupon divided by yield. The only difference between a perpetual bond and a stock is uncertainty of the future dividends*, unlike fixed bond coupons. But again if we simplistically assumed a current dividend D, and an annual % growth rate g, P=D/(r-g), the stock a perpetuity paying an increasing dividend. In the real world there isn't a steady g, and D *right now* could be zero, but that doesn't invalidate the concept.

It's difficult, obviously, to practically value this stock vs. that stock by estimating their future dividend paying practices. But the concept still gives us an important insight. Which is that the value of the stock depends on what % of cumulative future earnings management can pay out as dividends while following the other basic pillar of Corp Fin 101 I mentioned (it was ignored, but it's key). Management should reinvest any portion of earnings for which it has internal projects which return > company's cost of capital, but it should pay out any portion of earnings for which it cannot find internal projects that earn > company's cost of capital. That stream of future payouts is the value of the company. It's not the PV of all earnings, because that assumes a company would ever reach a point where *all* earnings could be paid out as dividends, but still maintain the company (at some future larger size it will attain by reinvesting earnings at return> cost of capital). But in reality, historically, companies have had to reinvest some earnings (or issue additional stock, ie dilute existing holders) just to maintain themselves without growth in earnings. That portion of earnings can never be monetized by investors. The dividend discount model of stock valuation helps us think about that.

*again, 'dividend' need only be expanded slightly to include both cash dividends and the *anti-dilutive* portion of any buybacks (buybacks used to make stock grants to employees or offset secondary stock issuance are not equivalent to dividends, and can be a significant proportion). Also as mentioned before, the concept assumes a constant capital structure: neither dividends nor buybacks generated from increasing the debt ratio add directly to value, and again those can both be significant in the real world. But the DDM is not a 'theory of everything', it just points to an important basic reality of corporate finance which Bogle was correct to try to educate his readers about.
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Re: Confused about dividend investing, market downturns and early retirement

Post by patrick013 »

Dividend Irrelevance Theory

The M&M theory as it is sometimes referred to used to be popular and
included in finance textbooks.

Ability to earn rather than payout of excess cash or involuntary buybacks
was most important to the value of any firm.

None of these theories seem to be 100% complete.
age in bonds, buy-and-hold, 10 year business cycle
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Re: Confused about dividend investing, market downturns and early retirement

Post by ThereAreNoGurus »

JackoC wrote: Fri Jul 30, 2021 9:20 am
ThereAreNoGurus wrote: Wed Jul 28, 2021 8:34 am
JackoC wrote: Tue Jul 27, 2021 2:13 pm Please re-read Bogle, and my explanation. Nobody is saying the company's value is a deterministic function of the *current* dividend, but the PV of all dividends indefinitely into the future. Non dividend paying companies have value because, and only if, investors assume they will eventually pay dividends.
I'm going to try to explain again, a bit more clearly the utter fallacy of that last statement.

Investors do not get any extra income when they receive a dividend. As I'm sure or hope you realize the price of a stock is reduced by the dividend amount, so there is no extra income provided when comparing a dividend versus a non-dividend paying stock. An investor can receive the same "income" from a non-dividend paying stock by selling an equivalent amount of shares.

Now instead of saying companies have value because they will eventually pay a dividend, one says companies have value because that value can be monetized (in various ways), again, different story. But not all forms of monetization are a dividend in the normal sense of the word and thus confusion can be avoided by not equating all forms of monetization with dividends.
"As I'm sure or hope you realize the price of a stock is reduced by the dividend amount" right...because the value of the stock can be expressed as the PV of all future dividends. Once the current one is paid out, the price goes down by that amount, because that dividend is no longer 'future'. :happy
Same consequence when I sell shares from a non-dividend paying stock. :happy

You continue to ignore the fact that a non-dividend paying stock with similar earnings prospects will be valued relatively the same as a dividend paying stock.

This is why future earnings PLUS dividends must be included when attempting to calculate a PV.
JackoC wrote: Fri Jul 30, 2021 9:20 am I believe you will be too stubborn in the mistake you've made in your self-taught understanding of stock.
See above as an example of projection. You still have not refuted anything I've said, so I will not repeat it here except for:

Sure if one equates every eventual payout with a dividend and includes future earnings estimates and sale of assets (or liquidation to net worth), then a valuation model makes sense. Rather than call every form of payout a dividend it is much easier to understand that businesses are valued based on their assets, net worth, cash flow, etc. (assuming the proceeds from a merger or buyout are distributed to shareholders).

So in other words if the DDM model includes projected earnings and treats a non-dividend paying stock the same as a dividend paying stock, then I would say the model is reasonable.
Trade the news and you will lose.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ThereAreNoGurus »

patrick013 wrote: Fri Jul 30, 2021 10:53 am Dividend Irrelevance Theory

The M&M theory as it is sometimes referred to used to be popular and
included in finance textbooks.

Ability to earn rather than payout of excess cash or involuntary buybacks
was most important to the value of any firm.


None of these theories seem to be 100% complete.
Exactly and more succinctly stated than I did. Thanks.
Trade the news and you will lose.
seajay
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Re: Confused about dividend investing, market downturns and early retirement

Post by seajay »

CuriousTacos wrote: Mon Jul 26, 2021 1:21 pm
seajay wrote: Mon Jul 26, 2021 3:31 am
CuriousTacos wrote: Sun Jul 25, 2021 9:56 pm
seajay wrote: Sun Jul 25, 2021 7:42 pm Trick 1 : 4% SWR was derived from the worst peak to trough 30 year period. So instead of lumping in, run two sets, half started straight away, another run a year later, and the average of the two will be better than the worst alone. Bumps SWR from 4 to 4.4
Would you mind sharing your source/data for this? Maybe I misunderstood what you are trying to say, but I tried it at cFireSim and I'm not seeing that this strategy helps:

Start with 500k. Add 500k (inflation adjusted) after 1 year. Withdraw 44k (inflation adjusted) each year:
100% stocks: 92.6% success
80% stocks: 90.9% success
60% stocks: 88.4% success

And for comparison, using the same withdrawal rate but investing the full amount at the start:
100% stocks: 92.6% success
80% stocks: 91.7% success
60% stocks: 90.1% success

Setting aside half your money for the first year doesn't appear to increase the success rate for any of 100%, 80%, or 60% stock allocations over a 30 year horizon. And the above simulations generously assume that uninvested half can keep up with inflation for that first year despite current negative real yields on TIPS, CDs, savings accounts, etc. Taking away that inflation adjustment would result in 90.9%, 88.4%, and 84.3% success rate for the 100%, 80%, and 60% stock allocations, respectively.
Identify the start year that induced 0% remaining (lowest SWR), and average that with either of the adjacent start years 30 year run and revise the SWR upward until that average = 0% remained.
While that sounds like a simple way to evaluate this strategy, it does not provide the correct answer because simply averaging adjacent start years assumes you live off half your portfolio (and thus half your withdrawal) in that first year. Perhaps you took this into account, but it's impossible to know without more detail.

Either way, I don't get anywhere close to what you are claiming (all the following ignore fees because I can't replicate cFireSim's fee calculations in a spreadsheet)...
A fully invested 60/40 portfolio just barely supported a 3.62% withdrawal rate, with 1966 being the worst start year (link).

If I ignore the first year issue I raised above and assume the uninvested amount grows with inflation:
A 60/40 portfolio (with half uninvested in year 1) just barely supported a 3.70% withdrawal rate, with 1965 being the worst start year. I can't provide a link because cFireSim doesn't show negative values, which are necessary for this calculation.

If I do not ignore the first year issue and assume the uninvested amount grows with inflation:
A 60/40 portfolio (with half uninvested in year 1) just barely supported a 3.63% withdrawal rate, with 1965 being the worst start year.

For a sanity check, a fully invested 60/40 portfolio just barely supported a 3.72% withdrawal rate with a 1965 start year. That first year saw positive real returns, so we should expect a lower safe withdrawal rate if any amount was uninvested that first year.

If you still think there's some benefit to this strategy, would you mind sharing your source or data?
Took me a while because I don't use googledrive that often nowadays and my regular OS/browser etc. are apparently no longer compatible.

Try this link

ods (libreoffice) saved as a .xls and uploaded to googledrive and shared (view only).

Uses simba backtest spreadsheet data (extracted US stock and inflation figures for years since 1871) and running all 30 year SWR's to identify the worst case (lowest SWR) indicated 1929 start year (for all-stock) and a 3.6% SWR. The worst adjacent start year to that was 1930 start year, so combining those as two separate runs and the combination uplifted SWR to 3.9%. Whist that failed for the 1929 start year around 7 years too early the 1930 start year run picked up/filled-in the missing years (for the years where the 1929 run had failed I double loaded withdrawals from the 1930 run).

For that I assumed all of each years income was drawn at the start of year, and for the second 1930 run that after its share of the total SWR value had been drawn for 1929 the remainder just sat idle for that year (in practice that capital might have been deposited into a cash deposit to have earned some interest).

The method I use is to inflation adjusted stock total returns each year, so that simplifies SWR withdrawals to being just the same constant percentage amount deducted from that.

Doing similar for 1966 start date year, that had a 4% SWR, but when blended with 1967 in the same manner as above then that increased to a 4.4% SWR.
seajay
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Joined: Sat May 01, 2021 3:26 pm
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Re: Confused about dividend investing, market downturns and early retirement

Post by seajay »

For those close to the wire I suspect that going for 6% SWR is not that unreasonable when combined with elements of averaging in (as outlined in prior posts), appropriate asset allocations/diversity and elements of relative valuation adjustments to weightings over time. 1980 for instance when the Dow/Gold ratio was down at near 1.0 levels ... reducing gold weighting. 1999 when Dow/Gold was high ... reducing stock weighting. Diversifying across two stock indexes instead of a single stock index also helped historically. Single stock index is a concentration of risk that can endure more extremes than the average of two indexes. Perhaps S&P500 and midcaps for instance, 50/50. Less concentration risk into single sector risk that can at times occur. Recently such concentration risk has been a positive (techie sector), at other times it can be a negative (maybe financials during the 2009 financial crisis period, or the techie sector across the dot com 2000-2003 bubble burst).

Fundamentally the 'average' is good enough and diluting/diversifying/averaging is more inclined to achieve that 'average', even though the better case periods might see lower rewards (and equally the bad periods might see less downside).

Even when SWR runs failed they still got a long way down the road before failure, perhaps 25 years instead of 30 years, and for a 65 year old retiree the odds of seeing another 25 years are perhaps worse. And where in the average (median) case after successful 30 year SWR's there was still around two thirds of the inflation adjusted start date capital still available. Even if a 65 year old retiree did get to 90 and their capital had been exhausted, that might be a point in life when perhaps their home value was being liquidated in order to cover care home costs and where the absence of prior regular investment income might be less relevant.

You only get one crack at life and nothing is totally risk-free. If you 2% SWR to minimize risk to the extreme then likely heirs might be thankful for your sacrifice and you may be the richest corpse in the graveyard, but having had deep death-bed regrets at having been so cautious/frugal.
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