One answer to the Dividend stocks puzzle from behavioral finance

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Da5id
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Da5id » Tue Dec 05, 2017 10:43 am

CyclingDuo wrote:
Tue Dec 05, 2017 10:35 am
Not sure the author was chasing dividend yielding stocks per se, but thought out a very diversified portfolio to soften the underperformance of a name or two in the portfolio. Here's his portfolio...
I don't buy or evaluate individual stocks, not interested in this guy or his strategy for myself. But to these words, "very diversified", not buying that either. Also not sure I can buy "thought out" unless you think the guy is Peter Lynch or Warren Buffett, as I have no faith that anyone prospectively can pick a portfolio. But then that's why I'm a boglehead...

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Dandy » Tue Dec 05, 2017 10:46 am

I think there is an emotional attachment to dividends that can be misleading. But, I think the case against them is often overdone. Some of the case against dividends is negated if the fund is held in a tax advantaged account since all withdrawals are ordinary income -- and that location is where most Bogleheads would have any high dividend funds/stocks if they had a choice.

An advantage of a "high" dividend stock is fairly steady income which if reinvested acts a bit like a DCA or if kept as cash can avoid selling the stock when it is depressed or buying more of it if it is considered overvalued. Minor advantages usually.

The advantage of a no/low dividend stock is that the money that would be used to provide dividends can be invested to promote further growth of the company and stock providing longer term benefits to the share owners. Of course that investment may or may not turn out to boost earnings/stock price. M&A, share buybacks, business expansion, higher stock incentives for executives, etc. sometimes work and sometimes don't. Also, having lots of idle money has at least two dangers, 1. it increases the urge to spend it as opposed to having it sit idle. 2. If you are looking to buy something everyone knows you have lots of idle cash so maybe that increases the price of, say, an acquisition.

On balance you would hope that a good company has good management and will make good decisions. Lots of people like share buybacks -- which only make long term sense if it significantly reduces the total amount of shares outstanding. Not sure I remember that goal being announced when the buyback is announced.

We have all seen examples of CEOs doing a poor job but getting tens of millions in golden parachutes. Or firms overpaying for a a company that doesn't work out. So investing the extra cash it might be more of a hit or miss decision than a mostly good idea.

Investors that like low/no dividend stocks are more aggressive growth oriented than those who have some tilt toward dividends who are more income/asset preservation oriented.

The theory tilts toward looking for lower dividends but what actually happens in real life may not fully measure up to the theory.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by pkcrafter » Tue Dec 05, 2017 11:22 am

mageto wrote:
Those in favour of dividends would welcome a 50% stock set-back, the dividend averse would presumably not?
Dividends aren't really a bonus, they are a withdrawal of your money, and as everyone here knows you don't want to withdraw from stocks when they are down by 50%. This would be the optimal time to reinvest the dividends to purchase more share at a low price.

Image

Sure, if you are in retirement you do need to withdraw, but by reinvesting the dividends you can make the choice of when and from where to make withdrawals.

The dividend idea appeared a long time ago, before mutual funds and low trading costs. Dividends in those days were a great way to attract investors. Investors could get dividends in the 4-5% range without incurring sell commissions. That was an obvious benefit, but today the benefit of automatic withdrawals without choice just isn't optimal, at least for me. That is not to say that owning high dividend yield funds is also not a good idea in a tax-deferred account.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by aj76er » Tue Dec 05, 2017 11:28 am

livesoft wrote:
Mon Dec 04, 2017 10:02 am
And instead of a cash dividend, a stock dividend could be made which warps people's minds even more. :twisted:
Some company ESPP plans are setup this way (including my own). I've also worked for companies that pay dividends as a "return on capital" and are not taxed. For the record, I'm not a fan of either of these :)
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by MP173 » Tue Dec 05, 2017 11:43 am

Yet another discussion on dividends.

Why do I own dividend stocks? Back when I started getting serious about investing (1994) DRP programs were a low cost (but clumsy) method of investing in individual stocks for people that had small amounts of $$$ to invest on a regular basis. Sure, mutual funds were available and I took advantage of those, but (pre-Boglehead days) silly me thought I could possibly beat the S&P....so I purchased individual stocks thru DRP programs. Note that these were "Dividend Re-investment Program" stocks. Hence, the "dividends". So on a quarterly basis the dividend payout would be re-invested and if I had personal free cash flow (PFC) I could allocate those funds (in those days usually a couple hundred bucks a month) into the DRP program stocks.

Fast forward 20+ years and I still hold these DRP stocks. Why would I subject myself to the inefficient tax burden of keeping these dividend paying stocks?

Simple...to sell these stocks would incur a massive tax obligation due to the returns of these securities. I simply do not wish to pay capital gains at this time. Luckily for the most part, I picked good stocks (thanks Warren Buffett for the suggestions, based on your holdings in BRK...I kinda piggybacked on his research and ideas).

BTW, almost all of these stocks participate in buy back programs.

Perhaps I have my cake and am eating it too.

Now, am I "normal" or "rational"?

Ed

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Tue Dec 05, 2017 11:47 am

MP173 wrote:
Tue Dec 05, 2017 11:43 am
Perhaps I have my cake and am eating it too.

Now, am I "normal" or "rational"?

Ed
You have to read the book to find out if you are normal or rational. :)

Also, you are not eating your cake until you sell some of those shares.
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hoops777
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Tue Dec 05, 2017 12:45 pm

I never thought I would see this on the Bogleheads.This guy George is a classic Seeking Alpha dividend growth investor.The basic idea many of these investors follow goes something like this.
Buy a group of quality dividend stocks across all sectors for some diversification.They usually have a yield they are seeking,like at least 2.75 pct or more for each stock for example.
Hold these stocks for 15,20 years or until you retire.
If the starting yield is say 3 pct for the portfolio,or 20,000,upon retirement maybe it will be 30,000 or 35,000 after years of dividend growth and compounding.
Tax sheltered accounts are preferred.
When they are ready to kick the bucket,their original investment has huge capital gains to leave to their heirs,but they never sold a share and lived off the dividends and SS.

This is the type of formula that a lot of dividend gurus preach with newsletters to of course help you pick the best stocks with the safest dividends,based of course on their expert research delving deeply into the individual companies. :happy

To a “normal person” who does not read academic journals and delve into research,this sounds very reasonable as a way to invest.I will say that all “behavioral errors and incorrect thinking” aside,it ain’t bad if they only buy high quality companies,when you get right down to it.
Years ago I was very interested in this,but I personally do not partake.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Tue Dec 05, 2017 12:49 pm

To a “normal person” who does not read academic journals and delve into research,this sounds very reasonable as a way to invest.I will say that all “behavioral errors and incorrect thinking” aside,it ain’t bad if they only buy high quality companies,when you get right down to it.
Years ago I was very interested in this,but I personally do not partake.
"Other than that, Mrs. Lincoln, how was the play?"

The entire point of this thread is that it is irrational and a behavorial error in nature. We shouldn't put that to the side by saying the idea makes intuitive sense to a normal investor.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by itstoomuch » Tue Dec 05, 2017 1:49 pm

Dividend stocks in our Discretionary Taxable is one way to get some form of returns. I 've sold off the long-term stocks for a down payment & tax harvest the LTCG, What is remaining are STCG stocks with big gains and yielding good yet "unqualified" dividends. Dividends are held as cash. I'd like to buy more of what I got but the current valuations are very high for the amount of dividends.
Ymmv :mrgreen: :?
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Tue Dec 05, 2017 2:22 pm

triceratop wrote:
Tue Dec 05, 2017 12:49 pm
To a “normal person” who does not read academic journals and delve into research,this sounds very reasonable as a way to invest.I will say that all “behavioral errors and incorrect thinking” aside,it ain’t bad if they only buy high quality companies,when you get right down to it.
Years ago I was very interested in this,but I personally do not partake.
"Other than that, Mrs. Lincoln, how was the play?"

The entire point of this thread is that it is irrational and a behavorial error in nature. We shouldn't put that to the side by saying the idea makes intuitive sense to a normal investor.
Well,Mrs.Lincoln lost a husband so now I guess you are saying these “behavioral errors”are tragic.
There you go again with the irrational card.What percentage of the investing public would you say is irrational?
No,the point of this thread was for people like you to understand why everyday investors are drawn to dividends,not for you to correct them,once again,from high up above.
Maybe a better approach, in people 101 ,would be to say that you now have a better understanding of why normal investors are drawn to dividends and can see why they are attractive to them.You could then throw in that you disagree with their investment choice without calling them irrational or suffering from behavioral error.
“Other than that,triceratop,how is your education progressing?”
K.I.S.S........so easy to say so difficult to do.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Da5id » Tue Dec 05, 2017 2:45 pm

hoops777 wrote:
Tue Dec 05, 2017 2:22 pm
There you go again with the irrational card.What percentage of the investing public would you say is irrational?
Do you believe that the percentage of people doing a particular behavior or sharing a belief in any way defines whether it is rational? I think "irrational" isn't the insult you take it to be, but I guess we each get to decide where to take offense. I believe all humans are irrational about certain things, me and no doubt triceratop included. I also think you may have missed the satirical nature of the original post and purpose of the thread, or I've misinterpreted it badly myself (livesoft sort of says midthread it is a bit of a troll).

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by katon » Tue Dec 05, 2017 2:52 pm

CyclingDuo wrote:
Tue Dec 05, 2017 10:35 am
Da5id wrote:
Tue Dec 05, 2017 10:21 am
If the dividends are in taxable, to the extent that the dividends are in excess of the amount needed they are possibly a tax drag on performance or take up space in a tax bracket that might otherwise help with ACA/roth conversions/etc. And to the extent that the portfolio is designed by chasing dividend yielding stocks, they represent a distortion.
Agreed, that using tax advantaged accounts - since not all of the dividends would be required each year - would soften a portion of the tax drag.

Not sure the author was chasing dividend yielding stocks per se, but thought out a very diversified portfolio to soften the underperformance of a name or two in the portfolio. Here's his portfolio...

Image

I would expect with the recent weakness in Omega Healthcare Investors REIT, that additional shares will be added by the author - just as he did on recent weakness in AT & T. I didn't realize one had to subscribe to the site to read the articles (I guess I am since it is free). It's not the only dividend portfolio I follow (and I don't have the paid subscription for it, so have no idea what the author is doing on a more frequent basis). I only read his occasional articles on the FTG Portfolio after he set it up in 2014.

I also follow one of the dividend portfolios at The Motley Fool, and two others that I track at Yahoo Finance. Again - all as part of a learning process for the future with retirement coming up in a decade or so.
Excellent thread.
I am using Dividend Growth Investing also for the long term retirement but also interested in early retirement with dividends...this is very difficult because i also would like to purchase a property to live in. For doing this i will probably need to sell a big part of the portfolio.
I am an international investor based in Israel and invested in US dividend stocks. I am very interested in non-US dividend stocks but their disadvantage is that they don't grow the dividend consistently.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Tue Dec 05, 2017 3:11 pm

Da5id wrote:
Tue Dec 05, 2017 2:45 pm
hoops777 wrote:
Tue Dec 05, 2017 2:22 pm
There you go again with the irrational card.What percentage of the investing public would you say is irrational?
Do you believe that the percentage of people doing a particular behavior or sharing a belief in any way defines whether it is rational? I think "irrational" isn't the insult you take it to be, but I guess we each get to decide where to take offense. I believe all humans are irrational about certain things, me and no doubt triceratop included. I also think you may have missed the satirical nature of the original post and purpose of the thread, or I've misinterpreted it badly myself.
Well,I actually thought livesoft was trying to understand people’s fascination with dividends and was not being satirical.I may have misread his intention.
No,the percentage does not define whether it is actually rational.I think when someone feels they are being lectured to about incorrect thinking,behavioral error and irrationally in a certain tone it can be interpreted as an insult.
This subject will always go round and round and round and the problem is closely tied to what is generally going on in the real world,and I will leave it at that.
Last edited by hoops777 on Tue Dec 05, 2017 3:22 pm, edited 1 time in total.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Tue Dec 05, 2017 3:13 pm

Statman is pretty careful not to apply the word "irrational" to normal people.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by snarlyjack » Tue Dec 05, 2017 3:29 pm

To me what is interesting is...

Here is a "guy" that writes this web-site "10! Factorial Rocks" or TFR.
Guess what...he has a PHD in Engineering & MBA Degree. 2nd guess...
he is a big time dividend investor with all kinds of studies.

What I' am trying to say is that some of these dividend investors are
highly educated investors (with PHD's & mathematical backgrounds)
that do crunch numbers.

I don't think they are "irrational or making behavioral errors" at all.
I think they know exactly what they are doing & why they are doing it.

http://tenfactorialrocks.com/about-tfr/

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Tue Dec 05, 2017 3:57 pm

snarlyjack wrote:
Tue Dec 05, 2017 3:29 pm
To me what is interesting is...

Here is a "guy" that writes this web-site "10! Factorial Rocks" or TFR.
Guess what...he has a PHD in Engineering & MBA Degree. 2nd guess...
he is a big time dividend investor with all kinds of studies.

What I' am trying to say is that some of these dividend investors are
highly educated investors (with PHD's & mathematical backgrounds)
that do crunch numbers.

I don't think they are "irrational or making behavioral errors" at all.
I think they know exactly what they are doing & why they are doing it.

http://tenfactorialrocks.com/about-tfr/
There are many Bogleheads with advanced technical training, myself and livesoft included, and some with highly mathematical backgrounds. I wouldn't rely on that as a signal for anything. Evaluate ideas on the merits.

This website doesn't look very well researched or substantive. The guy looks like a huckster to me. A question for you, snarlyjack: why do you read these sites? They seem devoid of actual substance and are eager to sell you a product.

Here's a bright flashing warning sign (it isn't true):
Growth, keeping up with inflation or going beyond it, can only happen if the business you are investing is stable.
:oops: :shock:
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Chip » Tue Dec 05, 2017 4:05 pm

snarlyjack wrote:
Tue Dec 05, 2017 3:29 pm
To me what is interesting is...

Here is a "guy" that writes this web-site "10! Factorial Rocks" or TFR.
Guess what...he has a PHD in Engineering & MBA Degree. 2nd guess...
he is a big time dividend investor with all kinds of studies.

What I' am trying to say is that some of these dividend investors are
highly educated investors (with PHD's & mathematical backgrounds)
that do crunch numbers.

I don't think they are "irrational or making behavioral errors" at all.
I think they know exactly what they are doing & why they are doing it.

http://tenfactorialrocks.com/about-tfr/
Did you notice that he recommends that "working investors" (like you) invest in index funds like Vanguard Total Stock Market, so as to avoid the extra taxes that dividend-focused investing produces?

From http://tenfactorialrocks.com/dividend-i ... ng-part-4/:
Tax optimization. By earning the highest you possibly can, you are likely to be in higher tax brackets in any country you work. So, investing in index funds limits the dividend income your portfolio generates compared to a dividend-focused investing. This helps in reducing marginal taxes, as every dividend dollar you earn will be taxed at a higher rate if you already have sizable work earnings. Indexes are, therefore, a tax-efficient way to build wealth and provide ample diversification for a ‘buy and forget’ investor.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Tue Dec 05, 2017 4:14 pm

livesoft wrote:
Tue Dec 05, 2017 3:13 pm
Statman is pretty careful not to apply the word "irrational" to normal people.
A wise man who understands how to communicate.
K.I.S.S........so easy to say so difficult to do.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by snarlyjack » Tue Dec 05, 2017 4:15 pm

Triceratop,

Since I have a B.S. Degree in Finance and I' am interested in
Early Retirement (FIRE) I like reading these articles. Some
people read "Playboy" I read Finance articles.

To be fair, this guy has a PHD in Economics & has some
very interesting studies on the 4% guidelines (you should
read them). He is not a dividend investor.

I don't have a "bone" in this conversation. I was just pointing
out that their are very educated investors with PHD's on both
side of the coin, that can & do crunch numbers.

https://earlyretirementnow.com/start-here/

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by WildBill » Tue Dec 05, 2017 5:01 pm

Howdy

This whole thread is amazing. I’m still not sure what the debate is about. The only thing that is sure is that dividends impose a tax drag on a taxable account.

A liking of dividends may be “Irrational” due to this tax drag, but this seems a purely theoretical argument. In practice, an investor in equities is going to receive dividend income unless they contort their equity investments somehow to only include non-dividend paying issues. This is arguably, and in my opinion certainly, a cure worse than the disease. Even VTSAX pays out circa 2%. Dividends are a fact of life for an equity investor, be she rational, Irrational or some other category.

And the purpose of investing is to postpone consumption into the future. And to consume your equity investments you either take dividends or capital gains, both taxable events. To take the “rational” argument to its apotheosis - The ideal “rational” scenario is to invest only in BRK, die, and pass it on to your heirs at a stepped up basis. Then they will have the burden of “Irrationaly” consuming it. 8-)

Kudos to livesoft’s for instigating such a fine debate!

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by patrick013 » Tue Dec 05, 2017 5:15 pm

If the market has positive returns tax efficiency can be better
but even then excess returns can be seen with the dividend
payers. If the market has negative returns for several years
then dividend payers will at least supply some return in the
form of dividends.

Dividends are a sign of corporate profits. In a downturn there
will still be companies that generate profits, cash, and dividends
and they can be found in a dividend index fund.
age in bonds, buy-and-hold, 10 year business cycle

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by saltycaper » Tue Dec 05, 2017 5:24 pm

pkcrafter wrote:
Tue Dec 05, 2017 11:22 am

That is not to say that owning high dividend yield funds is also not a good idea in a tax-deferred account.

Paul
You said you are not saying it's not a good idea. But, would you go so far as to say it is a good idea? A preferable idea?
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by dbr » Tue Dec 05, 2017 6:01 pm

WildBill wrote:
Tue Dec 05, 2017 5:01 pm
Howdy

This whole thread is amazing. I’m still not sure what the debate is about. The only thing that is sure is that dividends impose a tax drag on a taxable account.
The debate is about the validity, rationality, or practicality of any of the following things:

1. Dividends are good because you get money while your investment grows as fast as it otherwise would without dividends, aka the "dividends are free money" fallacy.

2. Selecting for higher dividend payments means holding investments that have higher returns, or higher returns for the risk taken, aka dividends are worth pursuing as a factor or selecting for dividends selects for "quality."

3. Dividends allow you to derive income from your investment while "not touching" the principal.

4. Dividends are the means by which a portfolio enables a person to have income. The income is whatever one can arrange in terms of dividends.

5. In the case of 4., taking that income so defined is "safe," meaning especially that one does not have to sell shares when values are down. This may also be a combination with 3.

6. Dividends are a convenient way to take withdrawals from a portfolio because they are relatively stable (compared to stock prices though how that is relevant is mysterious) and paid on a regular schedule, unfortunately not usually monthly.

7. Getting dividends feels good.

There may be others, but the discussion divides between disabusing people of obvious errors such as 1., or misunderstandings such as 3. or 5., or debating whether 2. or 4. is really true, or asking why 7. or 6. should matter.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Tue Dec 05, 2017 7:19 pm

dbr wrote:
Tue Dec 05, 2017 6:01 pm
WildBill wrote:
Tue Dec 05, 2017 5:01 pm
Howdy

This whole thread is amazing. I’m still not sure what the debate is about. The only thing that is sure is that dividends impose a tax drag on a taxable account.
The debate is about the validity, rationality, or practicality of any of the following things:

1. Dividends are good because you get money while your investment grows as fast as it otherwise would without dividends, aka the "dividends are free money" fallacy.

2. Selecting for higher dividend payments means holding investments that have higher returns, or higher returns for the risk taken, aka dividends are worth pursuing as a factor or selecting for dividends selects for "quality."

3. Dividends allow you to derive income from your investment while "not touching" the principal.

4. Dividends are the means by which a portfolio enables a person to have income. The income is whatever one can arrange in terms of dividends.

5. In the case of 4., taking that income so defined is "safe," meaning especially that one does not have to sell shares when values are down. This may also be a combination with 3.

6. Dividends are a convenient way to take withdrawals from a portfolio because they are relatively stable (compared to stock prices though how that is relevant is mysterious) and paid on a regular schedule, unfortunately not usually monthly.

7. Getting dividends feels good.

There may be others, but the discussion divides between disabusing people of obvious errors such as 1., or misunderstandings such as 3. or 5., or debating whether 2. or 4. is really true, or asking why 7. or 6. should matter.
8.Do not make the assumption that dividend stock investors believe most or even any of this.There are very sophisticated investors who prefer dividend stocks for their reasons and of course there are some who make no effort to understand anything about investing.Most people who actually can be called investors have their own preferences either way.
Swedroe has his Larry Portfolio.Based on a lot of sophisticated research it has the same return for less risk.Seems like a very rational way to invest.How many here prefer to invest in a way that has more risk for the same expected return,because you prefer it?
K.I.S.S........so easy to say so difficult to do.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by itstoomuch » Tue Dec 05, 2017 7:24 pm

^ :beer
May I add #9
Dividend stocks in Disceretionary Taxable keeps me from trading this account. I may have a turnover of 50% :D and I look for total returns of 10% :happy
In contrast, the Discretionary Qualified acct s, I trade regardless of dividends, or dividend payer. My turnover is about 500% (2017) and I look for total returns of 10% :D I am about +18% LtD and mostly holding large cash amounts in "retreat to cash" (see thread) and partly to anticipate extra funds for a retirement home purchase.
We are in retirement mode. Discretionary is discretionary.
Ymmv :sharebeer
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by dbr » Tue Dec 05, 2017 7:29 pm

Thanks for the additions.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Tue Dec 05, 2017 7:31 pm

Where is stlutz when you definitely need him? :)
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Tue Dec 05, 2017 7:32 pm

livesoft wrote:
Tue Dec 05, 2017 7:31 pm
Where is stlutz when you definitely need him? :)
He definitively should stop by.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by nedsaid » Tue Dec 05, 2017 8:31 pm

Lynette wrote:
Mon Dec 04, 2017 10:11 am
nedsaid wrote:
Sun Dec 03, 2017 10:23 pm
randomizer wrote:
Sun Dec 03, 2017 6:08 pm
I don't want no stinkin' dividends.
If you don't want them, you can send them to me.
:D :D Problem is I have to pay tax on them.

I don't want them as it is messing up my tax planning. I have to pay taxes on dividends whether I need them or not. At this stage of my life, I'm living on pensions and SS and I also have RMDs that I make or may not spend. I need to limit my Modified AGI to keep in a lower bracket for Medicare IRMAA and I'm annoyed that I get dividends whether I need them or not.
Well, it would also affect the taxability of Social Security.

As for me, my concern is obtaining enough income to comfortably retire on. I suppose paying tax on too much income is a problem I would be delighted to have. But yes, this can get pretty complex for people with lots of income in retirement, all kinds of little gotchas. Tax planning is an important aspect of retirement planning that is sometimes overlooked.
A fool and his money are good for business.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by itstoomuch » Tue Dec 05, 2017 9:11 pm

^ nedsaid,
Which is the reason that I (we) maintain trading accounts... hopefully to lose wealth for TLH. :annoyed :wink: :oops:
Ymmv :moneybag
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by technovelist » Tue Dec 05, 2017 9:19 pm

nedsaid wrote:
Tue Dec 05, 2017 8:31 pm
Lynette wrote:
Mon Dec 04, 2017 10:11 am
nedsaid wrote:
Sun Dec 03, 2017 10:23 pm
randomizer wrote:
Sun Dec 03, 2017 6:08 pm
I don't want no stinkin' dividends.
If you don't want them, you can send them to me.
:D :D Problem is I have to pay tax on them.

I don't want them as it is messing up my tax planning. I have to pay taxes on dividends whether I need them or not. At this stage of my life, I'm living on pensions and SS and I also have RMDs that I make or may not spend. I need to limit my Modified AGI to keep in a lower bracket for Medicare IRMAA and I'm annoyed that I get dividends whether I need them or not.
Well, it would also affect the taxability of Social Security.

As for me, my concern is obtaining enough income to comfortably retire on. I suppose paying tax on too much income is a problem I would be delighted to have. But yes, this can get pretty complex for people with lots of income in retirement, all kinds of little gotchas. Tax planning is an important aspect of retirement planning that is sometimes overlooked.
Yes, it certainly is. Everyone is happy to tell you to take money out of your accounts in a tax efficient manner.

They just never tell you how to do that.

That's why I wrote my own retirement income analyzer, which produced some results that I would never have predicted in advance.
In theory, theory and practice are identical. In practice, they often differ.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by pkcrafter » Tue Dec 05, 2017 10:42 pm

saltycaper wrote:
Tue Dec 05, 2017 5:24 pm
pkcrafter wrote:
Tue Dec 05, 2017 11:22 am

That is not to say that owning high dividend yield funds is also not a good idea in a tax-deferred account.

Paul
You said you are not saying it's not a good idea. But, would you go so far as to say it is a good idea? A preferable idea?
Here's what snarly said: Here is a "guy" that writes this web-site "10! Factorial Rocks" or TFR.
Guess what...he has a PHD in Engineering & MBA Degree. 2nd guess...
he is a big time dividend investor with all kinds of studies.
I read the article, and while "the guy" invests in dividend paying stocks or funds, no where does it say he takes the dividends.

Vanguard Dividend Appreciation has a beta of 0.87, Dividend growth as a beta of 0.85. Dividend appreciation has slightly beaten S&P500 for 10 years and Div. growth has tied. That is the point the guy was trying to make--lower volatility, good returns. I think it might be fine in a T-A (tax-advantaged) account for some investors who are more comfortable with a somewhat smoother ride. Of course, an investor can hold these funds for growth, taking the divys isn't mandatory.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Tue Dec 05, 2017 10:44 pm

My point about the Larry Portfolio was that it is a well researched way to invest earning an equal return with less risk,yet probably none of you use it or a version of it.Why not?Because you have your own preferences and level of comfort with your choices.
Many dividend investors prefer dividend stocks for their own reasons and not the ones the bh gang loves to mock them for.
Why don’t you debate Richard Young.He had quite a successful career in the investment world.He had a newsletter for many years and maybe still does in his 80’s.His family firm also manages a lot of money for people with a minimum of 1 million dollars.His newsletter was always at or near the top of the Hulbert ratings.He was very much in favor of conservative dividend paying companies along with Vanguard bond funds.He was very bogleheadish except he established a portfolio of dividend stocks,very conservative ones instead of index funds.He had his reasons and was more concerned with wealth preservation than making a killing in the market.His pet saying was the magic of compounding.I remember he had a chart showing how much money one would have if they had invested a small amount in Coca Cola in 1920 or so and reinvested dividends until 2005 or whatever year it was then.Anyway,he was making a point about buying good companies and holding long term.
So he had a preference for conservative dividend stocks and he was a very accomplished,well educated investor who I would consider quite rational and skilled enough to have a successful 50 plus year career managing large sums of other peoples money along with his newsletter.He also use to publish the performance of his dividend compounders portfolio.
Last edited by hoops777 on Tue Dec 05, 2017 11:33 pm, edited 1 time in total.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by snarlyjack » Tue Dec 05, 2017 10:53 pm

Paul,

The other site (ERN) the PHD in economics, has new updated
studies on the "Withdrawal Rates" or the old Trinity Study.
The new studies are very informative & interesting. It's about
19 articles but very informative. They build on one another.
Read #1...#19. It will be well worth your time, I learned a lot.

https://earlyretirementnow.com/start-here/

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by siamond » Tue Dec 05, 2017 11:52 pm

livesoft wrote:
Sun Dec 03, 2017 3:26 pm
Basically, company paid dividends "are less likely to inflict regret" because they do not create responsibility for personal choices and self control that selling shares do to raise money.
Didn't notice this thread until now. That is a very convincing explanation. Thanks for sharing.
WildBill wrote:
Sun Dec 03, 2017 11:34 pm
A bunch of fancy language, concealing the truth that dividends appeal to our innate sloth and laziness.
That's true too, although 'regrets' isn't the same thing as 'laziness'.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Da5id » Wed Dec 06, 2017 8:42 am

hoops777 wrote:
Tue Dec 05, 2017 10:44 pm

Why don’t you debate Richard Young.He had quite a successful career in the investment world.He had a newsletter for many years and maybe still does in his 80’s.His family firm also manages a lot of money for people with a minimum of 1 million dollars.
Why is management of money for people with a minimum of 1 million dollars relevant? Note that hedge funds have usually rather higher minimums, and are run by very smart, sophisticated, and probably brilliant folks. Despite that, hedge funds mostly have done poorly for some time.

As to Mr. Young, don't know about his philosophy, but the 0.8% AUM fee (and possible additional fees) means you likely lose there too compared to an index portfolio. But at least their fees are below average, and they post them very up front on their web page, so they absolutely get points for honesty -- I'd run from any investment adviser that doesn't make their fee schedule easy to find. If one wanted an adviser (a good idea for some people), I'd guess you could do far far worse than Mr. Young. But that is only a guess.

I really don't see anyone making a good case for dividend focused investing. Maybe I'm blind. Could certainly be, an irrational human tendency is to judge things that agree with our prejudices as having higher credibility, and magnify the flaws of the other side. But IMHO a good case should include numbers, it should include a testable theory, it should respect and answer the best case of the other side. I see lots of slaying of straw men, lots of ignoring fact that stock buybacks are in many ways similar to dividends, etc. But like the "international investing" question, seems like few minds are changed by these discussions.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by livesoft » Wed Dec 06, 2017 9:15 am

I didn't expect any minds to be changed by this discussion. I will just say that the book taught me that people like dividends because they can't help themselves from liking dividends. It is the way their minds are wired. We all accept that investors have different need, ability, and willingness to accept risk and different levels of loss aversion and avoidance of regrets. (They also mix up words like averse and adverse all the time.) Their affinity to dividends is where all this can manifest itself.

It's just the way they we are and it would be rare for them us to change.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by KlangFool » Wed Dec 06, 2017 9:26 am

livesoft wrote:
Wed Dec 06, 2017 9:15 am
I didn't expect any minds to be changed by this discussion. I will just say that the book taught me that people like dividends because they can't help themselves from liking dividends. It is the way their minds are wired. We all accept that investors have different need, ability, and willingness to accept risk and different levels of loss aversion and avoidance of regrets. (They also mix up words like averse and adverse all the time.) Their affinity to dividends is where all this can manifest itself.

It's just the way they we are and it would be rare for them us to change.
+1000.

Those are wise words.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by naha66 » Wed Dec 06, 2017 10:27 am

hoops777 wrote:
Tue Dec 05, 2017 7:19 pm
dbr wrote:
Tue Dec 05, 2017 6:01 pm
WildBill wrote:
Tue Dec 05, 2017 5:01 pm
Howdy

This whole thread is amazing. I’m still not sure what the debate is about. The only thing that is sure is that dividends impose a tax drag on a taxable account.
The debate is about the validity, rationality, or practicality of any of the following things:

1. Dividends are good because you get money while your investment grows as fast as it otherwise would without dividends, aka the "dividends are free money" fallacy.

2. Selecting for higher dividend payments means holding investments that have higher returns, or higher returns for the risk taken, aka dividends are worth pursuing as a factor or selecting for dividends selects for "quality."

3. Dividends allow you to derive income from your investment while "not touching" the principal.

4. Dividends are the means by which a portfolio enables a person to have income. The income is whatever one can arrange in terms of dividends.

5. In the case of 4., taking that income so defined is "safe," meaning especially that one does not have to sell shares when values are down. This may also be a combination with 3.

6. Dividends are a convenient way to take withdrawals from a portfolio because they are relatively stable (compared to stock prices though how that is relevant is mysterious) and paid on a regular schedule, unfortunately not usually monthly.

7. Getting dividends feels good.

There may be others, but the discussion divides between disabusing people of obvious errors such as 1., or misunderstandings such as 3. or 5., or debating whether 2. or 4. is really true, or asking why 7. or 6. should matter.
8.Do not make the assumption that dividend stock investors believe most or even any of this.There are very sophisticated investors who prefer dividend stocks for their reasons and of course there are some who make no effort to understand anything about investing.Most people who actually can be called investors have their own preferences either way.
Swedroe has his Larry Portfolio.Based on a lot of sophisticated research it has the same return for less risk.Seems like a very rational way to invest.How many here prefer to invest in a way that has more risk for the same expected return,because you prefer it?
Why invest in the Larrys Portfolio? Wellesley(vwinx) which is also about 30/70 has killed the Larry Portfolio. Its max one year drawdown was 23.4 vs Larry's portfolio 18.5. since 1994 thru 2 market blowups. Wellesley is ahead 609,500 to 501,750 starting with 100k. i used DFSVX,FEMKX and VFITX for Larry's Portfolio. Oh and by the way Vanguard touts Wellesley equity side "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends."

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by CyclingDuo » Wed Dec 06, 2017 10:35 am

naha66 wrote:
Wed Dec 06, 2017 10:27 am
Oh and by the way Vanguard touts Wellesley equity side "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends."
Careful now, you're going to stir the pot again. 8-)

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by triceratop » Wed Dec 06, 2017 10:41 am

Why invest in the Larrys Portfolio? Wellesley(vwinx) which is also about 30/70 has killed the Larry Portfolio. Its max one year drawdown was 23.4 vs Larry's portfolio 18.5. since 1994 thru 2 market blowups. Wellesley is ahead 609,500 to 501,750 starting with 100k. i used DFSVX,FEMKX and VFITX for Larry's Portfolio. Oh and by the way Vanguard touts Wellesley equity side "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends."
Some people prefer to avoid active management and instead use index funds to earn the market (whatever market they are in) return before costs. Manager risk is something you have not accounted for: what if Wellesley's managers had done poorly? Yes, I realize DFA funds are not index funds, but you do not need DFA funds to implement such a portfolio.

I notice you have also used a very high cost emerging markets fund.

Disclosure: I do not use the Larry portfolio.
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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by KlangFool » Wed Dec 06, 2017 10:44 am

Folks,

I am willing to admit that I am not totally rational in my investing style.

1) 40% of my portfolio is in Wellington Fund. I like the active management and Value/Dividend focus

2) 16% of my portfolio is in Larry Portfolio

3) 44% is in 3 funds style.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Wed Dec 06, 2017 10:45 am

Da5id wrote:
Wed Dec 06, 2017 8:42 am
hoops777 wrote:
Tue Dec 05, 2017 10:44 pm

Why don’t you debate Richard Young.He had quite a successful career in the investment world.He had a newsletter for many years and maybe still does in his 80’s.His family firm also manages a lot of money for people with a minimum of 1 million dollars.
Why is management of money for people with a minimum of 1 million dollars relevant? Note that hedge funds have usually rather higher minimums, and are run by very smart, sophisticated, and probably brilliant folks. Despite that, hedge funds mostly have done poorly for some time.

As to Mr. Young, don't know about his philosophy, but the 0.8% AUM fee (and possible additional fees) means you likely lose there too compared to an index portfolio. But at least their fees are below average, and they post them very up front on their web page, so they absolutely get points for honesty -- I'd run from any investment adviser that doesn't make their fee schedule easy to find. If one wanted an adviser (a good idea for some people), I'd guess you could do far far worse than Mr. Young. But that is only a guess.

I really don't see anyone making a good case for dividend focused investing. Maybe I'm blind. Could certainly be, an irrational human tendency is to judge things that agree with our prejudices as having higher credibility, and magnify the flaws of the other side. But IMHO a good case should include numbers, it should include a testable theory, it should respect and answer the best case of the other side. I see lots of slaying of straw men, lots of ignoring fact that stock buybacks are in many ways similar to dividends, etc. But like the "international investing" question, seems like few minds are changed by these discussions.
I was simply using him as an example to show that there are very experienced professionals who prefer dividend stocks that obviously understand the negative points made here,but prefer them for their own reasons.
Thank you for the very thoughtful post.
Last edited by hoops777 on Wed Dec 06, 2017 10:52 am, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Da5id » Wed Dec 06, 2017 10:49 am

triceratop wrote:
Wed Dec 06, 2017 10:41 am
Why invest in the Larrys Portfolio? Wellesley(vwinx) which is also about 30/70 has killed the Larry Portfolio. Its max one year drawdown was 23.4 vs Larry's portfolio 18.5. since 1994 thru 2 market blowups. Wellesley is ahead 609,500 to 501,750 starting with 100k. i used DFSVX,FEMKX and VFITX for Larry's Portfolio. Oh and by the way Vanguard touts Wellesley equity side "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends."
Some people prefer to avoid active management and instead use index funds to earn the market (whatever market they are in) return before costs. Manager risk is something you have not accounted for: what if Wellesley's managers had done poorly?
Moreover, what assurance do you have that Wellesley's outperformance will continue into the future? While the persistence of factors, or even stock market equity risk premium is also not "guaranteed", IMHO both of those have more basis to project into the future than Wellesley's outperformance. Not disrespecting Wellesley, not at all, they have had a long good run and with a 0.15% expense ratio (Admiral) and low turnover they are an example of a well managed active fund that is a perfectly good choice for those who want such. I do think Wellesley is a questionable holding in your taxable account though. But using an example (Wellesley) to make an argument about dividends is to me unconvincing. YMMV.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Artsdoctor » Fri Dec 08, 2017 2:52 pm

hoops777 wrote:
Wed Dec 06, 2017 10:45 am

I was simply using him as an example to show that there are very experienced professionals who prefer dividend stocks that obviously understand the negative points made here,but prefer them for their own reasons.
Hoops,

This probably doesn't apply to you, but just a word of caution when mentioning "experienced professionals." Sometimes, it's helpful to define that term just so there's no misunderstanding.

An experienced professional could include your portfolio manager. The portfolio manager is mostly concerned about return and not taxes. Dividends stocks are often value stocks and may have a slightly greater pre-tax return; however, you may wind up paying for those dividends in the form of higher taxes. While every investor should be concerned about after-tax return and not pre-tax, the portfolio manager (the experienced professional) may have no interest in thinking about taxes.

These are generalities of course, but just bear in mind that there may be a conflict here. Most portfolio managers are going to charge you based on the balance, and taxes will not influence his/her fees.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Fri Dec 08, 2017 3:09 pm

Artsdoctor wrote:
Fri Dec 08, 2017 2:52 pm
hoops777 wrote:
Wed Dec 06, 2017 10:45 am

I was simply using him as an example to show that there are very experienced professionals who prefer dividend stocks that obviously understand the negative points made here,but prefer them for their own reasons.
Hoops,

This probably doesn't apply to you, but just a word of caution when mentioning "experienced professionals." Sometimes, it's helpful to define that term just so there's no misunderstanding.

An experienced professional could include your portfolio manager. The portfolio manager is mostly concerned about return and not taxes. Dividends stocks are often value stocks and may have a slightly greater pre-tax return; however, you may wind up paying for those dividends in the form of higher taxes. While every investor should be concerned about after-tax return and not pre-tax, the portfolio manager (the experienced professional) may have no interest in thinking about taxes.

These are generalities of course, but just bear in mind that there may be a conflict here. Most portfolio managers are going to charge you based on the balance, and taxes will not influence his/her fees.
Good point,thank you.
K.I.S.S........so easy to say so difficult to do.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by jadd806 » Fri Dec 08, 2017 5:00 pm

RAchip wrote:
Mon Dec 04, 2017 11:43 am
"There are still people posting here from time to time who seem to have the misunderstanding that dividends are free money."

Dividends are not "free" money, THEY ARE GUARANTEED MONEY. If the cash stays in the company you may or may not realize that money when you sell your stock at some point in the future. It depends what the company does with the cash if it doesn't dividend it out.
Why not liquidate your entire portfolio right now? After all, it's guaranteed money.

What do most people do with dividends? Either reinvest them - in which case you have paid unnecessary taxes, and your money is back in the hands of a company where you "may not realize" it - or use them as an income stream, in which case selling shares led to an equivalent outcome.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by snarlyjack » Fri Dec 08, 2017 5:38 pm

I' am not under the illusion that dividends are guaranteed
or even free money (gotta pay those taxes).

But I do like my dividends. I' am looking forward to my
Christmas dividend. I look at dividends as penny's from
heaven (penny's from my deceased Mom...thanks Mom)!
(Their's some psychology for you...from the grave to me).

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by hoops777 » Fri Dec 08, 2017 5:52 pm

snarlyjack wrote:
Fri Dec 08, 2017 5:38 pm
I' am not under the illusion that dividends are guaranteed
or even free money (gotta pay those taxes).

But I do like my dividends. I' am looking forward to my
Christmas dividend. I look at dividends as penny's from
heaven (penny's from my deceased Mom...thanks Mom)!
(Their's some psychology for you...from the grave to me).
This is a grave behavioral error :D
K.I.S.S........so easy to say so difficult to do.

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Re: One answer to the Dividend stocks puzzle from behavioral finance

Post by Artsdoctor » Fri Dec 08, 2017 6:04 pm

snarlyjack wrote:
Fri Dec 08, 2017 5:38 pm
I' am not under the illusion that dividends are guaranteed
or even free money (gotta pay those taxes).

But I do like my dividends. I' am looking forward to my
Christmas dividend. I look at dividends as penny's from
heaven (penny's from my deceased Mom...thanks Mom)!
(Their's some psychology for you...from the grave to me).
Very, very well put. And this is the crux of the entire argument.

The dividends are indeed emotional. They don't really make a lot of sense from a strictly monetary point of view, but your emotional attachment to them is exactly what they're all about. I believe this gets back to the original post, three pages paper.

There are many things we do which really don't make sense. I like to have a cash buffer which many here would disagree with, and I realize that I'm most likely giving up return. But I freely acknowledge it.

I don't think that there is any shame in making a financial decision that is emotionally-based, and I suspect that if everyone here were totally honest, we'd all have our own idiosyncrasies. The problem ultimately is when one tries to remove the emotional justification and argue it as fact.

Was it Moynihan that said, "everyone is entitled to his own opinion, but not his own facts"?

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