Thank you for your clear and helpful answers. I will look into the research, (Modigliani and Miller's Dividend Policy, Growth, and the Valuation of Shares) and see if that helps.avalpert wrote: ↑Sat Oct 07, 2017 10:04 pmIf a company goes bankrupt the only people who will have received something from their investment are people who withdrew their earnings from the investment along the way - whether that withdrawal was via dividend distributions or share sales is irrelevant. Someone who reinvested dividends is in the same position as someone who didn't sell their shares in a share repurchase (or other transaction).TD2626 wrote: ↑Sat Oct 07, 2017 9:45 pmHow exactly would this work? If a company never pays a dividend, and goes bankrupt after decades of buybacks, aren't the only people who earned money those who sold to "greater fools"?avalpert wrote: ↑Sat Oct 07, 2017 9:33 pmLook at Berkshire Hathaway - they are committed to never returning cash to shareholders via dividends - has it been worth it to own the stock and do you think it will continue to be?TD2626 wrote: ↑Sat Oct 07, 2017 9:16 pmSome funds distribute capital gains and you have to pay taxes on those too. Selecting funds that trade infrequently or using Vanguard funds that funnel gains to in-kind etf redemptions can limit distributions. However, broad index funds (such as those at Fidelity) can distribute capital gains.
I agree that there is little short-term difference between a reinvested dividend and a share buyback. Over the long run, though, people invest in companies with an expectation of a return. I realize growth companies can grow and you get returns from rising share prices. But investors are assuming the company will eventually stop growing and start paying out, and isn't valuation predicated on that? If a company was committed to never paying a dividend untill bankruptcy, would it be worth it to own the stock? Or am I mistaken?
Real valuation is not predicated on returning cash via actual 'dividend payments' - there are other ways to return value to shareholders.
It amounts to a fractional ownership of the cash, even though that ownership doesn't include ultimate control. We can place a value on that ownership based on our expectations of what those who do control it will do (and earn) with that cash. That those expectations may not be realized doesn't invalidate the value today - if it did we wouldn't be investing in equities at all as even future dividend payments are predicated on our expectations of what those who control the asset will be able to do with it. This is of course why equity investments are risky.I know it is worth something to own a fraction of an entity that has a lot of cash sitting around - but if that cash is only yours in theory, and will never be distributed in practice, what does that ownership amount to?
I hope not, they have been pretty clear about that so anyone basing their valuation on that possibility seems to be divorced from reality (I suppose it is possible that Buffet and Munger's successor will have a different perspective on that but I wouldn't place a bet on it).I know Berkshire's total return history, and it's of course impressive - but aren't investors just valuing things based on the possibility that a distribution might be made in the future?
I wish I did, I don't know how you like to learn but the chapter in any Intro to Corporate Finance textbook that covers capital structure and dividend policy in particular should give it to you. If you want to dive into the research I think the best place to start is still with Modigliani and Miller's Dividend Policy, Growth, and the Valuation of Shares.Are there any good articles or research papers that you would recommend for learning more about the mechanics of how things work?
My current feeling is that investors need to be aware of the tax drag of dividend investing but may consider it if they feel the perceived benefits (a simple withdrawal strategy without the hassle of sales, behavioral benefits, a value tilt, etc) outweigh the tax drag based on their tax rates/situations. I think that most people would be best served with a "Total World" type allocation that is indifferent to dividends vs capital gains, but in some (uncommon) situations a tilt toward a low-cost, broadly diversified dividend fund may be reasonable. To make it clear, investors need to remain diversified whatever they do - and investing in only high dividend companies (or the opposite, only non-dividend-payers) isn't diversified enough - which is why a tilt one way or the other would be what I feel may be reasonable. Investors who need the safety of bonds shouldn't take the risks of equities in order to reach for higher payouts. Further, while investing in a large number of companies like AT&T that have large, steady high dividend payouts of a few % more than the average company may be somewhat reasonable, investing in something with an unusually high yield (8%, 15%, 20%, etc) is extremely risky and that payout is almost certainly unsustainable - the "4% Safe Withdrawal Rate" approximation still applies.
By the way - as a hypothetical... say a hypothetical investor put money in high-yield bond funds and high dividend yield stock funds such that their portfolio income was 5%. If a sustainable real withdrawal rate is 3%, wouldn't the portfolio be expected to loose 2% (real)? (Note that this is a hypothetical portfolio for the sake of debate only, in this market a portfolio paying out 5% is likely not diversified enough and too risky.)