What's the deal with dividend funds?

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martincmartin
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What's the deal with dividend funds?

Post by martincmartin »

Why do funds like SCHD, which tracks the Dow Jones U.S. Dividend 100 Index? Why do I care whether I get my money from (qualified?) dividends or long term capital gains? Are these for people who don't want to track their investments, figure out what to sell, and instead just live on dividends? Is that even a viable strategy for your hypothetical 4% WR retiree? Are they for people who are into actively managed stuff and so don't have long term capital gains?

As a Boglehead, should I consider Dividend funds?
invest4
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Re: What's the deal with dividend funds?

Post by invest4 »

A number of my relatives in retirement highlighted the virtues of dividend producing companies to provide income during their retirement.

Those who promote it suggest there are companies who have a strong history of steady dividend payments and less risky than the overall market.

For myself, I don’t wish to slice and dice my portfolio like this and continue to stick with TSM US / INTL.
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anon_investor
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Re: What's the deal with dividend funds?

Post by anon_investor »

invest4 wrote: Sun Jun 19, 2022 11:08 am A number of my relatives in retirement highlighted the virtues of dividend producing companies to provide income during their retirement.

Those who promote it suggest there are companies who have a strong history of steady dividend payments and less risky than the overall market.

For myself, I don’t wish to slice and dice my portfolio like this and continue to stick with TSM US / INTL.
They may have the mistalen belief that such companies will not cut their dividends in a downturn. Such companies may not have in the past, but there is no guarantee they will not in the future...
exodusNH
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Re: What's the deal with dividend funds?

Post by exodusNH »

martincmartin wrote: Sun Jun 19, 2022 10:53 am Why do funds like SCHD, which tracks the Dow Jones U.S. Dividend 100 Index? Why do I care whether I get my money from (qualified?) dividends or long term capital gains? Are these for people who don't want to track their investments, figure out what to sell, and instead just live on dividends? Is that even a viable strategy for your hypothetical 4% WR retiree? Are they for people who are into actively managed stuff and so don't have long term capital gains?

As a Boglehead, should I consider Dividend funds?
You have inadvertently trammeled into what is essentially a holy war.

A rational investor should be indifferent to how you get your return. People aren't rational and have reasons to prefer them, some that make sense, others that are purely emotional (which is valid!), and others that are due to misunderstanding the nature of stock dividends.

Ben Felix on YouTube sums it up nicely.

https://youtu.be/f5j9v9dfinQ

And a recent follow up

https://youtu.be/4iNOtVtNKuU

If you haven't heard of him, he's a portfolio manager for a Canadian investment firm that focuses on low-cost funds. His research and explanatory capabilities are impressive.
Big Dog
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Re: What's the deal with dividend funds?

Post by Big Dog »

It's primarily psychological/ease of administration. Folks would rather receive quarterly checks automatically than decide which stock(s) to sell to pay expenses. And they believe/feel that selling equities is living off of principal.

That said, you are correct: Finance 101 says the rational investor should be indifferent.
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Re: What's the deal with dividend funds?

Post by AerialWombat »

I think part of it has to do with the modern ease and zero-cost of selling shares. This is a recent-ish phenomenon. Forty years ago, brokerage commissions were quite expensive, and selling small batches of equities at a time didn’t make financial sense because of those fees. But dividend checks had no fees. I think this was the practical reason for the preference back then.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
jebmke
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Re: What's the deal with dividend funds?

Post by jebmke »

exodusNH wrote: Sun Jun 19, 2022 11:12 am You have inadvertently trammeled into what is essentially a holy war.
heh, heh; now that we are no longer allowed to burn heretics at the stake we have to have something to quibble about. :P
When you discover that you are riding a dead horse, the best strategy is to dismount.
alex_686
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Re: What's the deal with dividend funds?

Post by alex_686 »

invest4 wrote: Sun Jun 19, 2022 11:08 am Those who promote it suggest there are companies who have a strong history of steady dividend payments and less risky than the overall market.
It should be noted that this is not supported by historical analysis nor any investment theory.

The reality is that it addresses behavioral and cognitive errors. Thinking about Total Returns and risk is complex and thus cognitively hard. Dividends are a temping shortcut, much like the theory that heavy objects fall faster then light ones.

In short you really shouldn’t care where you returns come from. A dollar from capital gains buys just as much as a dollar from dividends.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
gougou
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Re: What's the deal with dividend funds?

Post by gougou »

SCHD has slightly outperformed S&P 500 in the past 10 years. That 3.2% dividend yield with growth also looks nice.

Personally I think it’s completely fine to have some or all of your equity allocation into SCHD. It’s diversified enough that you aren’t taking much risk. It won’t give you the same return as the market but some people are OK with that.
Statistical
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Re: What's the deal with dividend funds?

Post by Statistical »

gougou wrote: Sun Jun 19, 2022 11:34 am SCHD has slightly outperformed S&P 500 in the past 10 years. That 3.2% dividend yield with growth also looks nice.

Personally I think it’s completely fine to have some or all of your equity allocation into SCHD. It’s diversified enough that you aren’t taking much risk. It won’t give you the same return as the market but some people are OK with that.
I don't really consider 100 large cap companies picked for yield to be diversified.

Sure a small allocation in SCHD likely isn't a big risk it also wouldn't be a big impact either.
Statistical
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Re: What's the deal with dividend funds?

Post by Statistical »

AerialWombat wrote: Sun Jun 19, 2022 11:20 am I think part of it has to do with the modern ease and zero-cost of selling shares. This is a recent-ish phenomenon. Forty years ago, brokerage commissions were quite expensive, and selling small batches of equities at a time didn’t make financial sense because of those fees. But dividend checks had no fees. I think this was the practical reason for the preference back then.
That is an interesting aspect I hadn't considered.

It is similar to how income is more important in real estate. Principal gains are hard to access but net income is available continually.
Corvidae
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Re: What's the deal with dividend funds?

Post by Corvidae »

Proxy for value. Plus, even those who "know" a dividend is not free money may still act as if it is.
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AerialWombat
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Re: What's the deal with dividend funds?

Post by AerialWombat »

Statistical wrote: Sun Jun 19, 2022 11:44 am
AerialWombat wrote: Sun Jun 19, 2022 11:20 am I think part of it has to do with the modern ease and zero-cost of selling shares. This is a recent-ish phenomenon. Forty years ago, brokerage commissions were quite expensive, and selling small batches of equities at a time didn’t make financial sense because of those fees. But dividend checks had no fees. I think this was the practical reason for the preference back then.
That is an interesting aspect I hadn't considered.

It is similar to how income is more important in real estate. Principal gains are hard to access but net income is available continually.
Correct. I just sold one of my rental properties, and it cost me 8.5% of the sale price to access that equity. I include these costs when calculating my net equity, so I’m aware, but it still stings.
Last edited by AerialWombat on Sun Jun 19, 2022 11:50 am, edited 1 time in total.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
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arcticpineapplecorp.
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Re: What's the deal with dividend funds?

Post by arcticpineapplecorp. »

I hear Jerry Seinfeld's voice in my head asking "Whaaat's the deal with dividend funds??"

chasing dividends is a mistake:
read this article by Larry Swedroe titled, "The Irrelevance of Dividends"

http://www.etf.com/sections/index-inves ... nopaging=1

He makes the argument that you should only care about total return and whether or not a company pays a dividend makes absolutely no difference to the stock's total return. This is so hard to fathom that there was a very long running post of Larry's (I'm sorry I can't find it. Perhaps someone can provide the link) on bogleheads within the past year that people had a hard time believing it. But in this day and age, many people for some reason have a hard time separating fact from fiction.

Here's some other articles, one that makes the case "not to rely on dividend strategies to pick stocks":
http://www.cbsnews.com/news/dont-rely-o ... ck-stocks/

Here's "Why chasing dividends is a mistake":
http://www.cbsnews.com/news/why-chasing ... a-mistake/

and finally, "Should you follow a high dividend stock strategy?":
http://www.cbsnews.com/news/should-you- ... -strategy/

It's total return that matters and whether a dividend (which is a part of earnings) is paid out to investors or reinvested by the business makes no difference in the end result. Think about it. If two companies both earn 8% a year but the first company pays no dividend and the second company pays a 4% dividend, then the first company's stock price appreciates at 8% while the second company's stock price appreciates at 4% (because you got the other 4% as a dividend). That's how dividends and stock prices work. When a dividend is paid the stock price drops in the amount of the dividend that was paid. So the first stock is appreciating at 8% a year and the second at 4% a year + the 4% in dividends you received. See how your total return is the same either way?

Here Larry talks about investors "odd affection for dividends":
https://www.etf.com/sections/index-inve ... nopaging=1

In their 1961 paper, “Dividend Policy, Growth, and the Valuation of Shares,” (https://www.jstor.org/stable/2351143?seq=1) Merton Miller and Franco Modigliani famously established that dividend policy should be irrelevant to stock returns.
source: https://www.etf.com/sections/index-inve ... nopaging=1

Here he says dividends are an "illogical preference":
https://www.etf.com/sections/index-inve ... nopaging=1

Here's a boglehead post referencing a Swedroe article where Larry "slaughter's the high dividend sacred cow":
viewtopic.php?t=231661
actual article by Swedroe:
https://www.advisorperspectives.com/art ... sacred-cow

Here's a lively debate at bogleheads about Larry's article on the "dividend myth":
viewtopic.php?t=227902

Thus, a dividend-paying strategy has become less and less diversified. In 1991, creating a portfolio that captured 50 percent of global dividends required about 320 companies. By 2012, that figure had dropped to just 220. By comparison, the Vanguard Total Stock Market Index Fund (VTSMX) had more than 3,200 stocks at the end of February, and the Vanguard Total International Stock Index Fund (VGTSX) had more than 6,100 stocks.

Although less volatile than the capital gain component of stock returns, the aggregate stream of dividend payments is subject to the same broad, macroeconomic risks that affect capital gains. For example, in 2009, 14 percent of firms around the world eliminated their dividend, and 43 percent reduced their dividend.

The evidence makes clear that there are no advantages in terms of returns to a strategy of investing in dividend-paying stocks. In addition, such a strategy sacrifices diversification benefits. More importantly, as we have shown in prior posts, neither a strategy of investing in high-yielding stocks or the stocks of companies that have shown a high growth in dividends has proven to be an efficient means of improving returns.

https://www.cbsnews.com/news/why-chasin ... a-mistake/
Thus, a dividend-paying strategy has become less and less diversified. In 1991, creating a portfolio that captured 50 percent of global dividends required about 320 companies. By 2012, that figure had dropped to just 220. By comparison, the Vanguard Total Stock Market Index Fund (VTSMX) had more than 3,200 stocks at the end of February, and the Vanguard Total International Stock Index Fund (VGTSX) had more than 6,100 stocks.

Although less volatile than the capital gain component of stock returns, the aggregate stream of dividend payments is subject to the same broad, macroeconomic risks that affect capital gains. For example, in 2009, 14 percent of firms around the world eliminated their dividend, and 43 percent reduced their dividend.

The evidence makes clear that there are no advantages in terms of returns to a strategy of investing in dividend-paying stocks. In addition, such a strategy sacrifices diversification benefits. More importantly, as we have shown in prior posts, neither a strategy of investing in high-yielding stocks or the stocks of companies that have shown a high growth in dividends has proven to be an efficient means of improving returns.

https://www.etf.com/sections/index-inve ... nopaging=1
Separate Mental Accounts
These results provide direct evidence that investors do, in fact, treat dividends in a more naive way than predicted by financial theory, creating separate mental accounts for them. The findings are also consistent with prior research, which has shown that investors prefer to consume out of their dividends.

Hartzmark and Solomon concluded that “the free dividends fallacy not only explains psychologically why dividends may be desirable, but also why the shifting attractiveness of dividends and capital gains can generate time-varying demand for dividends which firms respond to.” For example, as I’ve written about before, it has been well-documented that some mutual funds “juice” their dividends by buying stocks just before the ex-dividend date.

In addition, research has shown that firms tend to increase their dividends when dividends are more overvalued. The authors added that the mental accounting of dividends as an income stream can also explain the documented preference among older investors for dividends.

Another important finding involved investor preference for dividends during periods of high demand (low interest rates and bear markets), causing them to be relatively overpriced (which shows up in higher price-to-book value). This negatively impacted returns by 2% to 4%, resulting in a significant loss of the equity risk premium. Unfortunately, this isn’t the only negative impact of the preference for dividends.

https://www.etf.com/sections/index-inve ... nopaging=1
mental accounting. one of the many cognitive biases:
https://www.visualcapitalist.com/every- ... tive-bias/
No Tax Or Income Justification

While fund manager behavior is consistent with an underlying investor demand for dividends, it cannot be explained by either taxes or the need for income. Funds can generate equivalent tax-free distributions by returning capital instead of acquiring and then distributing dividends.

Similarly, investors in individual stocks can generate self-dividends by selling shares. If investors sell shares, generating the same proceeds that a dividend would have paid, they will end up with an identical amount of dollars invested in the company’s stock as they would have had if they’d kept all of their shares and the company instead had paid a dividend. This occurs because the company’s share price would drop, reflecting the dividend that has reduced the company’s assets.

However, while distributing cash to fund shareholders is easy, such distributions can only be labeled as “dividends” if they correspond to dividends received by the fund on its underlying securities. As a result, mutual funds must hold dividend-paying securities in order to pay out dividends themselves.

There are two ways a mutual fund can meet investors’ desire for large dividend payments. Either it can buy high-dividend-yield securities, or it can artificially increase their dividend yields by “buying the dividends” (or “juicing” them). The process involves purchasing stocks before the day on which the dividend will accrue to investors (known as the “ex-dividend day”), collecting the dividend and then selling the stock afterward.

https://www.etf.com/sections/index-inve ... nopaging=1
In his post, Larry Swedroe writes that Vanguard debunked the dividend myth:
Both theory and historical evidence demonstrate there isn’t anything unique about dividends. They are just another source of profit, along with capital gains. Yet many investors treat these two sources of profit very differently, with negative consequences in terms of lower returns, greater risks and less diversified portfolios.
source: https://www.etf.com/sections/index-inve ... nopaging=1
But Larry says (tongue in cheek):
Vanguard’s conclusion that a total-return approach is superior to one that focuses on dividend strategies is interesting in light of the fact that they offer dividend strategy funds: the Vanguard Dividend Appreciation ETF (VIG) and its mutual fund counterpart, the Vanguard Dividend Appreciation Index Fund (VDADX), as well as the actively managed Vanguard Dividend Growth Fund (VDIGX).
source: https://www.etf.com/sections/index-inve ... nopaging=1
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CyclingDuo
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Re: What's the deal with dividend funds?

Post by CyclingDuo »

martincmartin wrote: Sun Jun 19, 2022 10:53 am Why do funds like SCHD, which tracks the Dow Jones U.S. Dividend 100 Index? Why do I care whether I get my money from (qualified?) dividends or long term capital gains? Are these for people who don't want to track their investments, figure out what to sell, and instead just live on dividends? Is that even a viable strategy for your hypothetical 4% WR retiree? Are they for people who are into actively managed stuff and so don't have long term capital gains?

As a Boglehead, should I consider Dividend funds?
There are worse investment strategies, but you should consider that the Total Stock Market Index pays dividends, and Total International as well. VXUS (international index) has a current dividend yield of 3.8%, and VTI (US index) has a current dividend yield of 1.39%. SCHD has a current dividend yield of 3.1%, and Vanguard's High Dividend Yield Index Fund is at 2.72%. So Vanguard Total International is yielding a better dividend than the Schwab or Vanguard dividend funds. :beer

Regarding dividend cuts, here is the post WWII history of dividends including the 2020 Covid year. Note that the dividend cuts in the GFC of 2008-09 were deeper than any prior bear market due to the financial stocks.

Image
Image

We don't mind dividends being at least one part of our strategy. JPMorgan's Annual Guide to Retirement lists dividends as part of one's portfolio structure in the bridge between stable and variable spending in the graphic below...

Image

Either way, whether it is LTCG or dividends coming from a taxable account - it's all good and can be used as part of one's portfolio structure and spending.

CyclingDuo
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burritoLover
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Re: What's the deal with dividend funds?

Post by burritoLover »

Dividends don’t increase your net worth. Receiving a dividend is not any more beneficial than selling the same amount (regardless of market conditions) EXCEPT if dividends help you behaviorally stay the course - that’s it - that’s the only reason.
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Riprap
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Re: What's the deal with dividend funds?

Post by Riprap »

Peter Lynch supposedly wrote this:

In the "Stocks I'd Avoid" chapter of "One Up On Wall Street", Lynch used the term "diworseification" in describing companies blowing their money on foolish acquisitions: "The dedicated diworseifier seeks out Fthat is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximized."

A cash dividend ensures you at least get some return. Reduces the foolishness. A stock buyback at elevated prices is also foolish.
Charles Joseph
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Re: What's the deal with dividend funds?

Post by Charles Joseph »

martincmartin wrote: Sun Jun 19, 2022 10:53 am Why do funds like SCHD, which tracks the Dow Jones U.S. Dividend 100 Index? Why do I care whether I get my money from (qualified?) dividends or long term capital gains? Are these for people who don't want to track their investments, figure out what to sell, and instead just live on dividends? Is that even a viable strategy for your hypothetical 4% WR retiree? Are they for people who are into actively managed stuff and so don't have long term capital gains?

As a Boglehead, should I consider Dividend funds?
Call it psychological. Call it incorrect mathematics. Call it whatever you want. I'll be glad to be getting paid by SCHD and Wellesley Income Fund at the end of this month. Two great funds, and the dividends help me psychologically during downturns.

Also, it's been nice to be titled toward value during this recent adjustment of tech valuations.
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Re: What's the deal with dividend funds?

Post by Tamalak »

Dividends are a far more intuitive benefit than "the price of the stock keeps going up". The latter sounds like it could be a ponzi scheme. Instinctively, I want my investment to produce resources, not just a constantly heightening price.

I'm still debating with myself over this, in fact. If a company lasts 100 years before bankruptcy, and in those 100 years it produces solid dividends, then the average investor in that company will gain value even though the stock is eventually going to zero (I am thinking of Sears).

But if that same company distributes earnings in the form of buybacks, not dividends, then does it produce any value at all in its 100 years?
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Re: What's the deal with dividend funds?

Post by gougou »

Tamalak wrote: Sun Jun 19, 2022 1:16 pm
But if that same company distributes earnings in the form of buybacks, not dividends, then does it produce any value at all in its 100 years?
If the company buys back 5% of its stocks every year, you could sell 5% of your holdings every year and still own the same percentage of the business. You are effectively getting 5% yield.
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Re: What's the deal with dividend funds?

Post by topper1296 »

gougou wrote: Sun Jun 19, 2022 1:24 pm
Tamalak wrote: Sun Jun 19, 2022 1:16 pm
But if that same company distributes earnings in the form of buybacks, not dividends, then does it produce any value at all in its 100 years?
If the company buys back 5% of its stocks every year, you could sell 5% of your holdings every year and still own the same percentage of the business. You are effectively getting 5% yield.
What if you still need money after 20 years once the entire position was sold at yearly 5% increments?
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Re: What's the deal with dividend funds?

Post by gougou »

topper1296 wrote: Sun Jun 19, 2022 1:34 pm
gougou wrote: Sun Jun 19, 2022 1:24 pm
Tamalak wrote: Sun Jun 19, 2022 1:16 pm
But if that same company distributes earnings in the form of buybacks, not dividends, then does it produce any value at all in its 100 years?
If the company buys back 5% of its stocks every year, you could sell 5% of your holdings every year and still own the same percentage of the business. You are effectively getting 5% yield.
What if you still need money after 20 years once the entire position was sold at yearly 5% increments?
1st year you sell 5% you have 95% left. 2nd year you sell 5% you have 0.95 x 0.95 = 90.25% left. You’ll never sell all of your shares and you still own the same percentage of the business.
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arcticpineapplecorp.
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Re: What's the deal with dividend funds?

Post by arcticpineapplecorp. »

Riprap wrote: Sun Jun 19, 2022 12:30 pm Peter Lynch supposedly wrote this:

In the "Stocks I'd Avoid" chapter of "One Up On Wall Street", Lynch used the term "diworseification" in describing companies blowing their money on foolish acquisitions: "The dedicated diworseifier seeks out Fthat is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximized."

A cash dividend ensures you at least get some return. Reduces the foolishness. A stock buyback at elevated prices is also foolish.
An exposition, if I may...

1. A few years ago I think it might have been Jonathan Clements who wrote about a now bankrupt company that paid dividends over the years before it went bankrupt. The takeaway was that at least you got your money back over time (and maybe made money on top depending on how long your holding period was). So it's as if Clements was saying, dividends can be good as a form of insurance in the event a company goes bankrupt and you lose your principal.

That may be true if you're buying individual stocks, but who says you have to buy individual stocks?

2. Now onto the point about companies wasting shareholder money.

I don't disagree that sometimes companies do blow money.

And sometimes they don't.

Berkshire Hathaway only paid a dividend once in its long history (Buffett says he must have been in the bathroom when the board decided that because he wouldn't have gone along). Berkshire shareholders have been happy to NOT receive a dividend because of the immense value that Buffett was able to bring to the company's share price by making good investments with that money. The shareholders likely would have either spent it, put it in savings not earning what Berkshire did, or investing in other companies (with likely a less favorable outcome than Berkshire's).

So now the issue is how do you know when the company you're investing will do right by you (like Berkshire, when they keep those dividends in the company) and when they won't (so you want the company to pay out a dividend)?

therein lies the rub.

the truth is you can't know this really. And oftentimes companies that didn't pay out dividends for years (think tech companies) which was fine with shareholders, start paying out dividends usually when the company couldn't find good uses for the profits and/or wasn't coming up with new ideas (to use the money for reinvestment in R&D, etc). By then, the company had languished which is why the shareholders start demanding a dividend.

So ask yourself if you want the dividends but understand:

A. the company you're invested in may have its best days behind it otherwise it would want to use that cash to grow the business.
B. if you want the dividends because you don't trust the company to use that cash wisely, why are you investing in a company that you don't trust?
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Re: What's the deal with dividend funds?

Post by Grt2bOutdoors »

There’s a saying: There are many roads to Dublin. One can talk till they are blue in the face about which is the best route to take. In the end, all that matters is you reach your final destination. End of story.

Full disclosure - I own some individual dividend paying companies, of the ones I own, 2 of them cut dividends in 2008-2009, which have since been restored and then some.
Last edited by Grt2bOutdoors on Sun Jun 19, 2022 2:00 pm, edited 1 time in total.
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JoMoney
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Re: What's the deal with dividend funds?

Post by JoMoney »

People have different preferences and strategies when it comes to stock investing.
Some people will tilt to momentum, value, REITs, and a multitude of different styles or strategies.
If it's reasonably diversified, done in a low-cost way, suits ones preferences in a way that helps them "stay the course", I don't see it as being anti-Boglehead.
There are a variety of different dividend strategies, so it's not even a fair comparison to lump them all together as if the funds, or the people that use them, have the same objective.
A dividend growth style has very different characteristics than a high-dividend yield style.
Vanguard's High Dividend Yield Index fund (VYM) has lower turnover than it's Value Index fund (VTV) with a very similar loading on the HmL "factor."
If you don't know why any particular strategy might appeal to you, probably better to avoid it. Low cost, and broad diversification are probably more important objectives.
"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: What's the deal with dividend funds?

Post by AerialWombat »

Charles Joseph wrote: Sun Jun 19, 2022 1:13 pm
martincmartin wrote: Sun Jun 19, 2022 10:53 am Why do funds like SCHD, which tracks the Dow Jones U.S. Dividend 100 Index? Why do I care whether I get my money from (qualified?) dividends or long term capital gains? Are these for people who don't want to track their investments, figure out what to sell, and instead just live on dividends? Is that even a viable strategy for your hypothetical 4% WR retiree? Are they for people who are into actively managed stuff and so don't have long term capital gains?

As a Boglehead, should I consider Dividend funds?
Call it psychological. Call it incorrect mathematics. Call it whatever you want. I'll be glad to be getting paid by SCHD and Wellesley Income Fund at the end of this month. Two great funds, and the dividends help me psychologically during downturns.

Also, it's been nice to be titled toward value during this recent adjustment of tech valuations.
Wellesley is about 1/3 of my securities portfolio. The value tilt had nothing to do with me choosing the fund when I started investing four years ago, but you are absolutely correct in that it’s been a nice byproduct of holding the fund.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
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Re: What's the deal with dividend funds?

Post by Northern Flicker »

martincmartin wrote: Sun Jun 19, 2022 10:53 am Why do I care whether I get my money from (qualified?) dividends or long term capital gains?

As a Boglehead, should I consider Dividend funds?
You do not need stocks selected for their dividend history or projected dividend growth, but holding a fund like SCHD or VIG will not be harmful as long as you stay the course.

Here you can see that these are basically plays on the quality factor:

https://www.portfoliovisualizer.com/fac ... sion=false

Exposure to the market is reduced (betas less than one), so the hope would be that volatility is dampened a little and the lessened return from exposure to the market factor would be replaced by return from exposure to the quality factor(s).

The dividend stocks have a shorter duration than growth stocks— you get the revenue returned to you sooner. This means that, all else equal, they would overperform when inflation accelerates. But all else is not equal— the dividend portfolios have different sector exposures and different sectors will respond differently to inflation from a business perspective— does demand for products drive pricing power? Do they have large appetites for energy or raw materials/commodities? Dividend stocks are an imperfect inflation hedge at best.

VIG has a slight growth tilt. SCHD had a mild value tilt. Here you can see that it probably was the value factor exposure of SCHD that helped it overperform since 2021:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

From a tax perspective, you likely should prefer LTCG’s to qualified dividends in a taxable account. When you withdraw from a mutual fund or sell shares of an ETF, the basis being non-zero means that some of the cash received is return of principal and some is a LTCG, but all of a dividend is a dividend. If your state taxes income and/or the dividend income extends beyond the zero federal bracket, a LTCG + return of principal is more tax-efficient than a qualified dividend.
Last edited by Northern Flicker on Sun Jun 19, 2022 8:30 pm, edited 1 time in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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JazzTime
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Re: What's the deal with dividend funds?

Post by JazzTime »

It can be a personal choice that provides a psychological cushion during a market downturn.

So just ask yourself these questions: If you are holding FB (META) and it's down 30%, how do you feel about selling shares at today's depreciated price to realize cash, leaving you with fewer shares for future growth. Now what if you own PG and feeling miserable that it is down 20%. Are you happy to hold it and collect the dividend for cash?

At the moment, my portfolio is down a few million. I'm not happy. But my six figure dividend income keeps rolling in. No problemo. I don't need to do anything. Just sit quiet and wait for the recovery.

Money is money and math is math. Psychology is a whole other kettle of fish. But it's a personal decision that one can decide for him/herself.
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Re: What's the deal with dividend funds?

Post by exodusNH »

Tamalak wrote: Sun Jun 19, 2022 1:16 pm Dividends are a far more intuitive benefit than "the price of the stock keeps going up". The latter sounds like it could be a ponzi scheme. Instinctively, I want my investment to produce resources, not just a constantly heightening price.

I'm still debating with myself over this, in fact. If a company lasts 100 years before bankruptcy, and in those 100 years it produces solid dividends, then the average investor in that company will gain value even though the stock is eventually going to zero (I am thinking of Sears).

But if that same company distributes earnings in the form of buybacks, not dividends, then does it produce any value at all in its 100 years?
Only if you keep the dividends as cash. Each dividend reduces the value of the company. Mathematically, it can't be any other way. If they pay out $5B in dividends, they are worth $5B less. If they borrowed $5B to pay out dividends, they have a liability which reduces the company by $5B. FINRA even has a rule that reduces the price of open orders by the amount of the dividend.

If this weren't true, you could buy the stock on the day before the ex-dividend date, collect the dividend, then sell the stock. That clearly doesn't happen.

On a non-dividend stock, you can achieve the same result by selling some stock when you need the money, since that is exactly what the dividend is. You just have no control over the timing or amount.
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Re: What's the deal with dividend funds?

Post by JazzTime »

exodusNH wrote: Sun Jun 19, 2022 3:55 pm Each dividend reduces the value of the company. Mathematically, it can't be any other way. If they pay out $5B in dividends, they are worth $5B less.
And if management pays out $5B in bonuses/stock options to all the officers or blows $5B on some pie-in-the-sky acquisition that goes bust, it is also worth $5B less. I'd rather they paid the $5B to us shareholders. A dollar in hand is worth two in the bush. There is no guarantee that a company that spends $5B will be worth more down the road. Hope is not a plan.
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Re: What's the deal with dividend funds?

Post by 7eight9 »

You should absolutely consider dividend funds. As many investors know, non-dividend paying stock isn't really all that different from 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
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Re: What's the deal with dividend funds?

Post by Grt2bOutdoors »

JazzTime wrote: Sun Jun 19, 2022 6:38 pm
exodusNH wrote: Sun Jun 19, 2022 3:55 pm Each dividend reduces the value of the company. Mathematically, it can't be any other way. If they pay out $5B in dividends, they are worth $5B less.
And if management pays out $5B in bonuses/stock options to all the officers or blows $5B on some pie-in-the-sky acquisition that goes bust, it is also worth $5B less. I'd rather they paid the $5B to us shareholders. A dollar in hand is worth two in the bush. There is no guarantee that a company that spends $5B will be worth more down the road. Hope is not a plan.
+1. And for those who like to point out Warren Buffett as not liking dividends, I beg to differ. Warren certainly likes them but only for him to collect through complete ownership of the company or through collecting large sums of dividend income and/or equity income.
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Re: What's the deal with dividend funds?

Post by Jack FFR1846 »

Looking at a business, if they can't figure out how to take cash and use it in their business to generate more cash, then they're inept and shouldn't be running a business. Giving out cash in the form of dividends is one sign of this. The other is buying back your own stock.

From the investor side, in taxable accounts, dividends give you periodic taxable events whether you want them or not. Sure, you can reinvest these dividends, but then you've just bought stock with a new purchase date to keep track of. If the stock does not pay a dividend, you don't have any tax until you decide to sell. You're totally in control.
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Re: What's the deal with dividend funds?

Post by Trance »

I think its got two reasons for it. First is a type of growth investing. Where investors see these companies that are able to sustain these high dividends as a sign of a more successful, healthly company that in turn will pay off long term.

The second reason is for people that intend to retire and live off the dividends. So they see no reason to invest in companies that won't pay well anyways.
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Re: What's the deal with dividend funds?

Post by Corvidae »

JazzTime wrote: Sun Jun 19, 2022 6:38 pm
exodusNH wrote: Sun Jun 19, 2022 3:55 pm Each dividend reduces the value of the company. Mathematically, it can't be any other way. If they pay out $5B in dividends, they are worth $5B less.
And if management pays out $5B in bonuses/stock options to all the officers or blows $5B on some pie-in-the-sky acquisition that goes bust, it is also worth $5B less. I'd rather they paid the $5B to us shareholders. A dollar in hand is worth two in the bush. There is no guarantee that a company that spends $5B will be worth more down the road. Hope is not a plan.
A dividend is not necessary to keep management from wasting cash on acquisitions or other projects. They could buy back stock instead, returning the $5 billion in value to shareholders.
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Re: What's the deal with dividend funds?

Post by Corvidae »

7eight9 wrote: Sun Jun 19, 2022 6:51 pm You should absolutely consider dividend funds. As many investors know, non-dividend paying stock isn't really all that different from 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
Greater fool theory rests on the premise that the purchaser considers the asset to have no value, or to be overvalued, but they purchase it anyway under the assumption another buyer will pay a higher price. Investing in non-dividend stocks in general does not rely on greater fool theory, though investing in any particular stock, dividend paying or not, might.
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Re: What's the deal with dividend funds?

Post by Northern Flicker »

JazzTime wrote: Sun Jun 19, 2022 6:38 pm
exodusNH wrote: Sun Jun 19, 2022 3:55 pm Each dividend reduces the value of the company. Mathematically, it can't be any other way. If they pay out $5B in dividends, they are worth $5B less.
And if management pays out $5B in bonuses/stock options to all the officers or blows $5B on some pie-in-the-sky acquisition that goes bust, it is also worth $5B less.
Sure, but how does the dividend history or projected future dividend growth prevent a company from doing those things?
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Re: What's the deal with dividend funds?

Post by Northern Flicker »

7eight9 wrote: Sun Jun 19, 2022 6:51 pm You should absolutely consider dividend funds. As many investors know, non-dividend paying stock isn't really all that different from 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
Companies report their revenue quarterly. Shares of a stock are claims on the value added by the future revenue. This is not by itself grounds for classifying it as a speculation.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: What's the deal with dividend funds?

Post by gougou »

Jack FFR1846 wrote: Sun Jun 19, 2022 9:21 pm Looking at a business, if they can't figure out how to take cash and use it in their business to generate more cash, then they're inept and shouldn't be running a business. Giving out cash in the form of dividends is one sign of this. The other is buying back your own stock.
Looking at a business, if a business never pays dividends nor buys back stocks, it tells you the management doesn’t care about shareholders. They’ll spend the money on their own compensation packages or corporate jets, or blow up the money in a new venture. A company that never returns cash to shareholders is worth exactly 0.
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Re: What's the deal with dividend funds?

Post by billaster »

Jack FFR1846 wrote: Sun Jun 19, 2022 9:21 pm From the investor side, in taxable accounts, dividends give you periodic taxable events whether you want them or not. Sure, you can reinvest these dividends, but then you've just bought stock with a new purchase date to keep track of. If the stock does not pay a dividend, you don't have any tax until you decide to sell. You're totally in control.
Not totally. The CEO, who has run out of good ideas to grow the business, instead takes your dividend and reinvests it in the stock market, all in one stock, which happens to be their own, at a time and price of their choosing. You can think of the CEO as a market timing investment adviser who bets everything on one stock.

Note that the CEO, often compensated in stock options, cannot collect dividends for their options. They do make money by pumping up the value of their options, even at the cost of ill-advised buybacks. So they have a distortionary incentive to do buybacks instead of dividends, even at elevated prices.

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Re: What's the deal with dividend funds?

Post by jebmke »

Northern Flicker wrote: Sun Jun 19, 2022 10:24 pm
JazzTime wrote: Sun Jun 19, 2022 6:38 pm
exodusNH wrote: Sun Jun 19, 2022 3:55 pm Each dividend reduces the value of the company. Mathematically, it can't be any other way. If they pay out $5B in dividends, they are worth $5B less.
And if management pays out $5B in bonuses/stock options to all the officers or blows $5B on some pie-in-the-sky acquisition that goes bust, it is also worth $5B less.
Sure, but how does the dividend history or projected future dividend growth prevent a company from doing those things?
It doesn’t.
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Re: What's the deal with dividend funds?

Post by anon_investor »

jebmke wrote: Mon Jun 20, 2022 6:39 am
Northern Flicker wrote: Sun Jun 19, 2022 10:24 pm
JazzTime wrote: Sun Jun 19, 2022 6:38 pm
exodusNH wrote: Sun Jun 19, 2022 3:55 pm Each dividend reduces the value of the company. Mathematically, it can't be any other way. If they pay out $5B in dividends, they are worth $5B less.
And if management pays out $5B in bonuses/stock options to all the officers or blows $5B on some pie-in-the-sky acquisition that goes bust, it is also worth $5B less.
Sure, but how does the dividend history or projected future dividend growth prevent a company from doing those things?
It doesn’t.
I think dividend growth funds are an imperfect proxy for the quality factor. Maybe better to just buy a quality factor fund.
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Re: What's the deal with dividend funds?

Post by burritoLover »

Oh, the-money-is-better-spent-in-my-pocket-than-the-companies fallacy. Any dumb spending/investment by the company will reflect poorly in the stock price - the market doesn't just sit there and ignore this. It goes both ways as well. Imagine if Tesla today announced they were going to return all their profits as a dividend going forward - the stock price would plummet because investors are expecting them to grow the company at this stage.
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Re: What's the deal with dividend funds?

Post by jebmke »

burritoLover wrote: Mon Jun 20, 2022 7:17 am Oh, the-money-is-better-spent-in-my-pocket-than-the-companies fallacy. Any dumb spending/investment by the company will reflect poorly in the stock price - the market doesn't just sit there and ignore this. It goes both ways as well. Imagine if Tesla today announced they were going to return all their profits as a dividend going forward - the stock price would plummet because investors are expecting them to grow the company at this stage.
Companies are have many imaginative ways to finance dumb spending without impairing dividend payments. It may all play out in the end but a dividend policy isn't going to inhibit mismanagement.
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Re: What's the deal with dividend funds?

Post by burritoLover »

jebmke wrote: Mon Jun 20, 2022 7:27 am
burritoLover wrote: Mon Jun 20, 2022 7:17 am Oh, the-money-is-better-spent-in-my-pocket-than-the-companies fallacy. Any dumb spending/investment by the company will reflect poorly in the stock price - the market doesn't just sit there and ignore this. It goes both ways as well. Imagine if Tesla today announced they were going to return all their profits as a dividend going forward - the stock price would plummet because investors are expecting them to grow the company at this stage.
Companies are have many imaginative ways to finance dumb spending without impairing dividend payments. It may all play out in the end but a dividend policy isn't going to inhibit mismanagement.
Then it would be a company taking on additional debt or issuing more shares to keep the same level of investment. So what do you think will happen to the share price then? Imagine a company that decides to start paying dividends via issuing more shares? Dividend proponents would say the stock price would go up because investors prefer dividends despite share dilution which makes no sense.
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Re: What's the deal with dividend funds?

Post by jebmke »

burritoLover wrote: Mon Jun 20, 2022 7:36 am
jebmke wrote: Mon Jun 20, 2022 7:27 am
burritoLover wrote: Mon Jun 20, 2022 7:17 am Oh, the-money-is-better-spent-in-my-pocket-than-the-companies fallacy. Any dumb spending/investment by the company will reflect poorly in the stock price - the market doesn't just sit there and ignore this. It goes both ways as well. Imagine if Tesla today announced they were going to return all their profits as a dividend going forward - the stock price would plummet because investors are expecting them to grow the company at this stage.
Companies are have many imaginative ways to finance dumb spending without impairing dividend payments. It may all play out in the end but a dividend policy isn't going to inhibit mismanagement.
Then it would be a company taking on additional debt or issuing more shares to keep the same level of investment. So what do you think will happen to the share price then? Imagine a company that decides to start paying dividends via issuing more shares? Dividend proponents would say the stock price would go up because investors prefer dividends despite share dilution which makes no sense.
indeed; I was agreeing with you. Dividends don't generate value, per se.
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Re: What's the deal with dividend funds?

Post by Da5id »

This figure from EarlyRetirementNow summarizes my thinking:

Image

If dividend stocks provide better return, or better risk adjusted return for that matter, well, easy enough to capture that premium. So efficient markets could be expected to eliminate it. If the argument then becomes "just buy the *good* dividend stocks", figuring out the "good" stocks is the trick there. And most of us broad index focused bogleheads don't roll that way.

That said, to OP, SCHD is a fine fund. It has a low expense ratio. If one simply prefers to get dividends, say due to psychological comfort some derive from getting capital return from income rather than selling shares, and the tax issues are not unreasonable, go to it.
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Re: What's the deal with dividend funds?

Post by firebirdparts »

martincmartin wrote: Sun Jun 19, 2022 10:53 am Why do funds like SCHD, which tracks the Dow Jones U.S. Dividend 100 Index? Why do I care whether I get my money from (qualified?) dividends or long term capital gains? Are these for people who don't want to track their investments, figure out what to sell, and instead just live on dividends? Is that even a viable strategy for your hypothetical 4% WR retiree? Are they for people who are into actively managed stuff and so don't have long term capital gains?

As a Boglehead, should I consider Dividend funds?
I don't think you should, unless you just want something to produce cash when you're retired. Otherwise I wouldn't.

This is a huge troll topic, as you know, and the problem with trolling over it is simply this: There are 4 things that could happen if the company keeps money that are in contrast to the dividend. There may be more, but these are the biggies:
1. The company gives the money away (not to shareholders)
2. The stock will have a capital gain equal to the amount of the money or maybe even more. I'll lump buy-backs in with this.
3. The company will destroy the money by non-value-adding mergers, acquisitions, and divestitures
4. The company becomes a takeover target, successfully, of someone who simply wants to steal the money.

I suppose every industry is different. In my industry, companies are really careful to stay in debt due to #4. Some companies get beyond this, of course, like Apple. They have money, but nobody can buy them. Too big.

So anyway, like they say in American football, when you throw the ball, 3 things can happen and two of them are bad. FWIW. There are some concerns and you need to take a balanced approach to what you think about them. It's more complex than just troll blather.
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Re: What's the deal with dividend funds?

Post by alex_686 »

Tamalak wrote: Sun Jun 19, 2022 1:16 pm I'm still debating with myself over this, in fact. If a company lasts 100 years before bankruptcy, and in those 100 years it produces solid dividends, then the average investor in that company will gain value even though the stock is eventually going to zero (I am thinking of Sears).

But if that same company distributes earnings in the form of buybacks, not dividends, then does it produce any value at all in its 100 years?
If you are a passive investor then the answer is obviously yes. The company issues a 5% dividend, you take the cash and reinvest into the index. If a company buys back 5% of its stock you sell 5% of your holdings - it is the only way to maintain the free float cap weighted index - and reinvest the cash back into the index. From a accounting viewpoint dividends and buybacks are equivalent actions.

Or you could invert the question and see if you get a different answer. Let's say you did buy Sears 100 years ago and reinvested all dividends back into Sears. Did Sears generate any value over those 100 years? What would your answer here be? Does the shareholder's rebalancing and reinvestment plan have any impact on the economic return of Sears? I would say no.
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Re: What's the deal with dividend funds?

Post by dbr »

martincmartin wrote: Sun Jun 19, 2022 10:53 am Why do funds like SCHD, which tracks the Dow Jones U.S. Dividend 100 Index? Why do I care whether I get my money from (qualified?) dividends or long term capital gains? Are these for people who don't want to track their investments, figure out what to sell, and instead just live on dividends? Is that even a viable strategy for your hypothetical 4% WR retiree? Are they for people who are into actively managed stuff and so don't have long term capital gains?

As a Boglehead, should I consider Dividend funds?
The deal with dividends is that a whole bunch of people don't understand how stocks work, a whole bunch of other people want to set them straight, usually someone who doesn't understand thinks he does and won't quit, some people understand perfectly well and just prefer getting dividends or have other good reasons, someplace down in there might be an actual difference that doesn't matter enough to care, and the forum chooses to keep answering and discussing questions rather than banning the topic, possibly by running a bot that automatically deletes any post that contains the word "dividend." The same bot would automatically delete any posts containing the words "safe" or "risk."
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