Dividend Only Investing Analyzed (latest ERN article)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
geerhardusvos
Posts: 1129
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by geerhardusvos »

hoops777 wrote: Fri Oct 16, 2020 10:14 pm
geerhardusvos wrote: Fri Oct 16, 2020 9:07 pm
Scooter57 wrote: Fri Oct 16, 2020 8:33 pm
willthrill81 wrote: Fri Oct 16, 2020 6:35 pm
So the key to higher total returns is to pursue a high dividends approach? I wonder why the finance academics hadn't come up with that one already...
A dividends strategy is a way to hedge your investments. Just as is the case with diversification, which Bogleheads love, and which usually lowers total return, a dividend strategy at times gives up some of the gain from rampant speculation markets in favor of a stream of income paid by companies that are earning and sharing actual profits.

Re Finance Academics, Burton Malkiel is a very distinguished Finance Professor and was a long time crony of Bogle. he has been actively promoting dividend strategies ever since rates collapsed. He is not alone. Given the poor performance of the factor strategies of the academics that are so beloved here, your appeal to authority seems unfortunate. Academics mostly excel at backtesting, which other academics have proven is a very poor way to make investment decisions.
Hedge against what? Are most dividend portfolio is doing better in total returns when compared to the S&P 500 over the last 50 years?

Answer: No
Like everything else it depends on the portfolio. Believe it or not,people actually care about things you do not care about.
Everyone cares about financial security. Most people don’t understand what gets that done most efficiently when owning stocks. That’s why we’re here!
VTSAX and chill
tibbitts
Posts: 11886
Joined: Tue Feb 27, 2007 6:50 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by tibbitts »

Scooter57 wrote: Fri Oct 16, 2020 8:33 pm Re Finance Academics, Burton Malkiel is a very distinguished Finance Professor and was a long time crony of Bogle. he has been actively promoting dividend strategies ever since rates collapsed. He is not alone. Given the poor performance of the factor strategies of the academics that are so beloved here, your appeal to authority seems unfortunate. Academics mostly excel at backtesting, which other academics have proven is a very poor way to make investment decisions.
I thought he was promoting dividend stocks only as an alternative to bonds, though, not to the traditional equity portion of the portfolio. Not saying that's a good idea, but that's what I thought his point was.
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

geerhardusvos wrote: Fri Oct 16, 2020 10:22 pm
hoops777 wrote: Fri Oct 16, 2020 10:14 pm
geerhardusvos wrote: Fri Oct 16, 2020 9:07 pm
Scooter57 wrote: Fri Oct 16, 2020 8:33 pm
willthrill81 wrote: Fri Oct 16, 2020 6:35 pm
So the key to higher total returns is to pursue a high dividends approach? I wonder why the finance academics hadn't come up with that one already...
A dividends strategy is a way to hedge your investments. Just as is the case with diversification, which Bogleheads love, and which usually lowers total return, a dividend strategy at times gives up some of the gain from rampant speculation markets in favor of a stream of income paid by companies that are earning and sharing actual profits.

Re Finance Academics, Burton Malkiel is a very distinguished Finance Professor and was a long time crony of Bogle. he has been actively promoting dividend strategies ever since rates collapsed. He is not alone. Given the poor performance of the factor strategies of the academics that are so beloved here, your appeal to authority seems unfortunate. Academics mostly excel at backtesting, which other academics have proven is a very poor way to make investment decisions.
Hedge against what? Are most dividend portfolio is doing better in total returns when compared to the S&P 500 over the last 50 years?

Answer: No
Like everything else it depends on the portfolio. Believe it or not,people actually care about things you do not care about.
Everyone cares about financial security. Most people don’t understand what gets that done most efficiently when owning stocks. That’s why we’re here!
Well thank you for having the only answers to financial security !
Hey,this forum is awesome without a doubt. The arrogance of some just needs to be dialed down a touch in my humble opinion. Have a good evening.
K.I.S.S........so easy to say so difficult to do.
YRT70
Posts: 684
Joined: Sat Apr 27, 2019 8:51 am

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by YRT70 »

Schlabba wrote: Thu Oct 15, 2020 2:58 pm You don’t need to sector/stock pick to get to a safe-withdrawal-rate-yield. Like the article mentions, there are funds that do that for you like the “VYM: Vanguard High Dividend Yield Index Fund ETF. Currently a yield around 3.5%” and the one I hold, “ FTSE All-World High Dividend Yield UCITS ETF”.
I looked up VYM, as could be expected it's got quite the value tilt. https://www.morningstar.com/etfs/arcx/vym/portfolio

Your profile says you're from the Netherlands (as am I). Where do you hold FTSE All-World High Dividend Yield UCITS ETF? As far as I know for Dutch people it would come with quite significant loss of dividend tax.
User avatar
Schlabba
Posts: 624
Joined: Sat May 11, 2019 9:14 am
Location: Netherlands

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by Schlabba »

YRT70 wrote: Sat Oct 17, 2020 7:49 am
Schlabba wrote: Thu Oct 15, 2020 2:58 pm You don’t need to sector/stock pick to get to a safe-withdrawal-rate-yield. Like the article mentions, there are funds that do that for you like the “VYM: Vanguard High Dividend Yield Index Fund ETF. Currently a yield around 3.5%” and the one I hold, “ FTSE All-World High Dividend Yield UCITS ETF”.
I looked up VYM, as could be expected it's got quite the value tilt. https://www.morningstar.com/etfs/arcx/vym/portfolio

Your profile says you're from the Netherlands (as am I). Where do you hold FTSE All-World High Dividend Yield UCITS ETF? As far as I know for Dutch people it would come with quite significant loss of dividend tax.
I am OK with the value tilt. As we don't have dividend tax (between an Ireland domiciled fund and NL), no matter in what kind of account I hold it the tax paid is the same. Dividend leakage is probably greater for a higher yielding fund than for a lower yielding fund though.*

I don't hold anything in a tax-advantaged account ("lijfrente") because I don't agree with the conditions.

I'm actually in the process of migrating to a country with dividend tax so the rules will change for me. That might be a reason to switch tactics, but I have to investigate their tax system first before changing anything.

* https://www.financieelonafhankelijkblog ... dbelasting Comparing the yields of the FTSE All-World UCITS ETF vs the FTSE All-World High Dividend Yield UCITS ETF the difference in yield is 1.63%. So with a leakage of (probably slightly less than) 11.6% that would result in a higher cost of 0.18%.
Secretly a dividend investor. Feel free to ask why.
YRT70
Posts: 684
Joined: Sat Apr 27, 2019 8:51 am

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by YRT70 »

Schlabba wrote: Sat Oct 17, 2020 9:16 am
YRT70 wrote: Sat Oct 17, 2020 7:49 am
Schlabba wrote: Thu Oct 15, 2020 2:58 pm You don’t need to sector/stock pick to get to a safe-withdrawal-rate-yield. Like the article mentions, there are funds that do that for you like the “VYM: Vanguard High Dividend Yield Index Fund ETF. Currently a yield around 3.5%” and the one I hold, “ FTSE All-World High Dividend Yield UCITS ETF”.
I looked up VYM, as could be expected it's got quite the value tilt. https://www.morningstar.com/etfs/arcx/vym/portfolio

Your profile says you're from the Netherlands (as am I). Where do you hold FTSE All-World High Dividend Yield UCITS ETF? As far as I know for Dutch people it would come with quite significant loss of dividend tax.
I am OK with the value tilt. As we don't have dividend tax (between an Ireland domiciled fund and NL), no matter in what kind of account I hold it the tax paid is the same. Dividend leakage is probably greater for a higher yielding fund than for a lower yielding fund though.*

I don't hold anything in a tax-advantaged account ("lijfrente") because I don't agree with the conditions.

I'm actually in the process of migrating to a country with dividend tax so the rules will change for me. That might be a reason to switch tactics, but I have to investigate their tax system first before changing anything.

* https://www.financieelonafhankelijkblog ... dbelasting Comparing the yields of the FTSE All-World UCITS ETF vs the FTSE All-World High Dividend Yield UCITS ETF the difference in yield is 1.63%. So with a leakage of (probably slightly less than) 11.6% that would result in a higher cost of 0.18%.
This is what I gathered: for VWRL the total costs were about 0.57% including dividend leakage *. VHYL has a 0.04 higher TER than VWRL had there. With ~0.18% more dividend leakage the total costs would ad up to around 0.79%. With these costs compounding year on year I think it makes quite the difference. There are cheaper ways to invest, even if one wants to target dividend. For example Van Eck TDIV is NL domiciled so no dividend leakage. Northern Trust has a cheaper high dividend NL domiciled fund, although I'm not sure at what banks it's available, and bank costs would have to be added. Still cheaper than VHYL though.

* source: https://www.reddit.com/r/DutchFIRE/comm ... e_fondsen/

I don't mind the value tilt either but as I believe the evidence behind the value premium is real I would rather target value directly.
TN_Boy
Posts: 1877
Joined: Sat Jan 17, 2009 12:51 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by TN_Boy »

Schlabba wrote: Fri Oct 16, 2020 11:28 am
JustinR wrote: Thu Oct 15, 2020 10:30 pm bunch of stuff deleted ...

Getting a dividend at low prices is exactly the same as selling at low prices, but if spending this much time here hasn't convinced you of that yet, then nothing will.
Part of the stock market is speculation. Selling shares at 100 P/E like Japan in 1989 is very different from selling shares at 10 P/E after a bursting bubble. Dividends don't have this effect because they are simply a bank transfer. But if spending this much time here hasn't convinced you of that yet, then nothing will.

Everything else deleted ...
I've been trying really hard to avoid posting in this thread, since as best I can tell, nobody ever convinces the other side of well, anything, in these dividend threads. But I had to bite on this one. In particular:
Dividends don't have this effect because they are simply a bank transfer. But if spending this much time here hasn't convinced you of that yet, then nothing will.
Because I truly can't see how one can think of dividends that way.

A stock/funds total return is price appreciation and dividends, and total return calculations assume dividends are reinvested.

If the stock market crashes and you spend the dividends rather than re-investing them to buy more shares, it is *exactly* the same as selling shares at a low. Selling existing shares or not buying more shares with dividends ... same result. You have fewer shares than you would otherwise.

Just as selling shares when the market is low means you didn't buy at a discount (to be rewarded when the market goes back up) not reinvesting dividends when the market is low has the same effect; you didn't pick up more shares when things were on sale.
Mike Scott
Posts: 1406
Joined: Fri Jul 19, 2013 2:45 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by Mike Scott »

I believe the biggest difference and what is often the unspoken point of contention in these discussions is pointed out near the end of the linked article and it highlights a forward looking behavioral/emotional bias in investors. I'm not using any numbers to highlight the differences in perspectives.

To simplify and paraphrase...
The various withdrawal models (4% or otherwise) are based on the consumption of investments to the $0 mark. That's not what always happens but that is how you benchmark failure. The advantages are needing less $$ as an attainable safe beginning point and some potential tax advantage in withdrawing from taxable accounts. This is probably more "efficient".

If you don't want to "eat your seed", dividends are the way to go. You probably need more $$ at the beginning and you may pay more taxes along the way. Needing to sell any of the investment beyond dividends is a failure of your method. You almost certainly end up with a legacy estate if it works. Perhaps not as "efficient" but you do end up with a big pile of $$.

As a forward looking investor, is your investing goal to get "enough" or is it to create a "personal perpetual endowment"?
What allows you to feel "safe" or is there never enough to feel "safe".
What path do you choose when you think you will never be able to get to "safe"?

All of which leaves plenty of room for individual choices and arguing with strangers on the internet.
TN_Boy
Posts: 1877
Joined: Sat Jan 17, 2009 12:51 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by TN_Boy »

Mike Scott wrote: Sat Oct 17, 2020 10:57 am I believe the biggest difference and what is often the unspoken point of contention in these discussions is pointed out near the end of the linked article and it highlights a forward looking behavioral/emotional bias in investors. I'm not using any numbers to highlight the differences in perspectives.

To simplify and paraphrase...
The various withdrawal models (4% or otherwise) are based on the consumption of investments to the $0 mark. That's not what always happens but that is how you benchmark failure. The advantages are needing less $$ as an attainable safe beginning point and some potential tax advantage in withdrawing from taxable accounts. This is probably more "efficient".

If you don't want to "eat your seed", dividends are the way to go. You probably need more $$ at the beginning and you may pay more taxes along the way. Needing to sell any of the investment beyond dividends is a failure of your method. You almost certainly end up with a legacy estate if it works. Perhaps not as "efficient" but you do end up with a big pile of $$.

As a forward looking investor, is your investing goal to get "enough" or is it to create a "personal perpetual endowment"?
What allows you to feel "safe" or is there never enough to feel "safe".
What path do you choose when you think you will never be able to get to "safe"?

All of which leaves plenty of room for individual choices and arguing with strangers on the internet.
The safe way to preserve a bigger pile of money at the end is to use a lower withdrawal rate. You can do that with a dividend strategy or a total return strategy.
case_of_ennui
Posts: 33
Joined: Mon Aug 17, 2020 5:07 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by case_of_ennui »

If you don't want to "eat your seed", dividends are the way to go.


I still don't understand this line of thinking. Even if one is selling shares of a non-dividend paying growth stock to cover income, if the value of the remaining shares is growing each year how are you "eating the seed" Even though you have less shares in year 2 than in year 1, those shares have all appreciated in value and the portfolio value remains the same (So long as you aren't selling faster than the stock is growing, which would be the same thing as a dividend stock paying out an unsustainably high dividend) Why should I care about how many shares I have instead of caring about the total value of those shares? What am I missing?
RAchip
Posts: 429
Joined: Sat May 07, 2016 7:31 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by RAchip »

“total return calculations assume dividends are reinvested“

Who announced that “rule”? I dont know how that would even work because even if dividends are reinvested, how do you know WHEN they are reinvested? I consider annual total return to be the increase in the stock price as of 12/31 (or another end date) plus dividends paid during the year (or other applicable period) divided by the beginning stock price on 1/1 (or another beginning date).

So if I own a stock with a market price of $100/share on 1/1 and it pays annual dividends of $4/share ($1/share quarterly) and the stock price is $105/share on 12/31 my total return for the year was 9% (4+5/100). What you do with the dividends is your business.
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

Just out of curiosity I decided to try a little something on portfolio visualizer.
They limit 25 inputs.
I quickly picked 24 well known blue chip dividend stocks. JNJ KO VZ WMT MCD PG,etc.
I put them up against Vanguard total market fund which goes back to 1993.
The results were a bit surprising
From 1993 to now a 10,000 investment in the 24 stocks resulted in 259,075.
Total market .................................................................,129,651
Obviously there was something odd about starting it in 1993 but that is as far back as the fund goes.

In the last year the total mkt was up 14.88 vs 5.08 for the 24 stocks
The last 10 years total mkt 13.3 vs 11.8 for the 24 stocks.

Since 1993 the worst year was -18.27 for the 24 stocks
..........>......................... -37.04 for the market

My take on this is there is nothing irrational about investing in blue chip dividend stocks. The recent results have been obviously skewered by the FAANG stocks.
What does the future hold? Easy to imagine big tech dominating. Who knows.
Certainly not irrational to prefer a dividend approach if that what keeps one invested and content.
Something unforeseen could cause big tech to crash too,which would devastate the total market. Maybe some government regulations. There is a great documentary film on Netflix called The Social Dilemma. Watch it and see how you feel about Google and Facebook and the rest.
K.I.S.S........so easy to say so difficult to do.
YRT70
Posts: 684
Joined: Sat Apr 27, 2019 8:51 am

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by YRT70 »

hoops777 wrote: Sat Oct 17, 2020 12:55 pm Just out of curiosity I decided to try a little something on portfolio visualizer.
They limit 25 inputs.
I quickly picked 24 well known blue chip dividend stocks. JNJ KO VZ WMT MCD PG,etc.
I put them up against Vanguard total market fund which goes back to 1993.
The results were a bit surprising
From 1993 to now a 10,000 investment in the 24 stocks resulted in 259,075.
Total market .................................................................,129,651
Obviously there was something odd about starting it in 1993 but that is as far back as the fund goes.
Your experiment is skewed by survivorship bias. You picked funds that are well known stable dividend payers now, you didn't select the names that dropped out a long the way.

Imagine having to pick 25 stocks in 1993.
TN_Boy
Posts: 1877
Joined: Sat Jan 17, 2009 12:51 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by TN_Boy »

RAchip wrote: Sat Oct 17, 2020 12:26 pm “total return calculations assume dividends are reinvested“

Who announced that “rule”? I dont know how that would even work because even if dividends are reinvested, how do you know WHEN they are reinvested? I consider annual total return to be the increase in the stock price as of 12/31 (or another end date) plus dividends paid during the year (or other applicable period) divided by the beginning stock price on 1/1 (or another beginning date).

So if I own a stock with a market price of $100/share on 1/1 and it pays annual dividends of $4/share ($1/share quarterly) and the stock price is $105/share on 12/31 my total return for the year was 9% (4+5/100). What you do with the dividends is your business.
That "rule" is the definition of total return.

https://www.investopedia.com/terms/t/totalreturn.asp

https://en.wikipedia.org/wiki/Total_return

https://www.morningstar.com/InvGlossary ... at_is.aspx
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

YRT70 wrote: Sat Oct 17, 2020 1:08 pm
hoops777 wrote: Sat Oct 17, 2020 12:55 pm Just out of curiosity I decided to try a little something on portfolio visualizer.
They limit 25 inputs.
I quickly picked 24 well known blue chip dividend stocks. JNJ KO VZ WMT MCD PG,etc.
I put them up against Vanguard total market fund which goes back to 1993.
The results were a bit surprising
From 1993 to now a 10,000 investment in the 24 stocks resulted in 259,075.
Total market .................................................................,129,651
Obviously there was something odd about starting it in 1993 but that is as far back as the fund goes.
Your experiment is skewed by survivorship bias. You picked funds that are well known stable dividend payers now, you didn't select the names that dropped out a long the way.
Bias? Well excuse me but those are exactly the type of companies I would personally invest in.I do not think McDonalds,Walmart,JNJ and the like are going away anytime soon.Yes Proctor and Gamble or 3M could possibly go under. The total market could return minus 10 pct the next 20 years too.
Yep,who knows what can happen. You also have the ability to sell an individual stock anytime you choose.
K.I.S.S........so easy to say so difficult to do.
YRT70
Posts: 684
Joined: Sat Apr 27, 2019 8:51 am

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by YRT70 »

hoops777 wrote: Sat Oct 17, 2020 1:21 pm
YRT70 wrote: Sat Oct 17, 2020 1:08 pm
hoops777 wrote: Sat Oct 17, 2020 12:55 pm Just out of curiosity I decided to try a little something on portfolio visualizer.
They limit 25 inputs.
I quickly picked 24 well known blue chip dividend stocks. JNJ KO VZ WMT MCD PG,etc.
I put them up against Vanguard total market fund which goes back to 1993.
The results were a bit surprising
From 1993 to now a 10,000 investment in the 24 stocks resulted in 259,075.
Total market .................................................................,129,651
Obviously there was something odd about starting it in 1993 but that is as far back as the fund goes.
Your experiment is skewed by survivorship bias. You picked funds that are well known stable dividend payers now, you didn't select the names that dropped out a long the way.
Bias? Well excuse me but those are exactly the type of companies I would personally invest in.I do not think McDonalds,Walmart,JNJ and the like are going away anytime soon.
I understand. But the problem is that you picked these names in 2020 and not in 1993. It would have been interesting to know what names you would have picked in 1993.
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

YRT70 wrote: Sat Oct 17, 2020 1:30 pm
hoops777 wrote: Sat Oct 17, 2020 1:21 pm
YRT70 wrote: Sat Oct 17, 2020 1:08 pm
hoops777 wrote: Sat Oct 17, 2020 12:55 pm Just out of curiosity I decided to try a little something on portfolio visualizer.
They limit 25 inputs.
I quickly picked 24 well known blue chip dividend stocks. JNJ KO VZ WMT MCD PG,etc.
I put them up against Vanguard total market fund which goes back to 1993.
The results were a bit surprising
From 1993 to now a 10,000 investment in the 24 stocks resulted in 259,075.
Total market .................................................................,129,651
Obviously there was something odd about starting it in 1993 but that is as far back as the fund goes.
Your experiment is skewed by survivorship bias. You picked funds that are well known stable dividend payers now, you didn't select the names that dropped out a long the way.
Bias? Well excuse me but those are exactly the type of companies I would personally invest in.I do not think McDonalds,Walmart,JNJ and the like are going away anytime soon.
I understand. But the problem is that you picked these names in 2020 and not in 1993. It would have been interesting to know what names you would have picked in 1993.
[/

I would pick the same names today,that is the point. Solid,blue chip companies mostly with a long history. Mostly boring,dependable. They were all well established in 1993. I did not check even one for what their returns were. I just know they are iconic names paying dividends that on a quick evaluation average a little over 3 pct in total.
K.I.S.S........so easy to say so difficult to do.
case_of_ennui
Posts: 33
Joined: Mon Aug 17, 2020 5:07 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by case_of_ennui »

Hoops, but that's with you actively selecting which stocks you're invested in. You could have chosen Enron or GE...which for many people may have fit the criteria of "exactly the type of companies I would personally invest in" at some point. You've chosen those 24 stocks because of your current knowledge that they've done well in the past, you don't know how they will do in the future. What if instead of comparing total market vs your hand picked 24 blue chip stocks you instead compared total market to a dividend paying fund or ETF? Run those numbers again for VTSAX (total US market) vs VIG (Vanguard Dividend Appreciation ETF) or a similar dividend fund. Are the results the same?
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

case_of_ennui wrote: Sat Oct 17, 2020 1:41 pm Hoops, but that's with you actively selecting which stocks you're invested in. You could have chosen Enron or GE...which for many people may have fit the criteria of "exactly the type of companies I would personally invest in" at some point. You've chosen those 24 stocks because of your current knowledge that they've done well in the past, you don't know how they will do in the future. What if instead of comparing total market vs your hand picked 24 blue chip stocks you instead compared total market to a dividend paying fund or ETF? Run those numbers again for VTSAX (total US market) vs VIG (Vanguard Dividend Appreciation ETF) or a similar dividend fund. Are the results the same?
I understand what you are saying.
I am just making the point that investing in high quality blue chip stocks like the ones mentioned is not irrational.That is all.
I know people love to pick out GE and Enron.
I will point out the total market is now beholden to a handful of tech giants for its gains. How stable is that? Is it really the TOTAL MARKET that is up this year? Technically yes,no pun intended.
K.I.S.S........so easy to say so difficult to do.
case_of_ennui
Posts: 33
Joined: Mon Aug 17, 2020 5:07 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by case_of_ennui »

I don't believe it's irrational, you could do far far worse. I just think there are better options. Past a certain point investing is personal :sharebeer
JustinR
Posts: 1356
Joined: Tue Apr 27, 2010 11:43 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by JustinR »

Mike Scott wrote: Sat Oct 17, 2020 10:57 am If you don't want to "eat your seed", dividends are the way to go. You probably need more $$ at the beginning and you may pay more taxes along the way. Needing to sell any of the investment beyond dividends is a failure of your method. You almost certainly end up with a legacy estate if it works. Perhaps not as "efficient" but you do end up with a big pile of $$.
Dividend investing is based on two misconceptions:
  1. To avoid "Eating your seed"
  2. That it's free money
1 is completely irrelevant. The number of shares you own doesn't matter at all, only the total value.
2 is completely untrue. The value of your shares drops by the exact amount of a dividend when it's issued.


If this forum (and real life) auto-replaced the word "dividend" with "random forced taxable withdrawal", then dividend strategies wouldn't be a thing and we wouldn't be having this conversation.

The only reason we are is because 99% of investors, including some people in this thread, simply can't or won't comprehend how dividends work.
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

case_of_ennui wrote: Sat Oct 17, 2020 2:01 pm I don't believe it's irrational, you could do far far worse. I just think there are better options. Past a certain point investing is personal :sharebeer
I actually agree.
I just get annoyed at some attitudes.
You can certainly do far worse and investing is very personal to most people. :sharebeer
K.I.S.S........so easy to say so difficult to do.
Jwulgaru
Posts: 22
Joined: Fri Jun 22, 2018 1:28 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by Jwulgaru »

I invest a sizable portion in both total return and also dividend-focused investments. That way I can hit both.

I'm not going to pick either one as my hill to die on and spend any portion of my life arguing about it on the internet.
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

JustinR wrote: Sat Oct 17, 2020 2:24 pm
Mike Scott wrote: Sat Oct 17, 2020 10:57 am If you don't want to "eat your seed", dividends are the way to go. You probably need more $$ at the beginning and you may pay more taxes along the way. Needing to sell any of the investment beyond dividends is a failure of your method. You almost certainly end up with a legacy estate if it works. Perhaps not as "efficient" but you do end up with a big pile of $$.
Dividend investing is based on two misconceptions:
  1. To avoid "Eating your seed"
  2. That it's free money
1 is completely irrelevant. The number of shares you own doesn't matter at all, only the total value.
2 is completely untrue. The value of your shares drops by the exact amount of a dividend when it's issued.


If this forum (and real life) auto-replaced the word "dividend" with "random forced taxable withdrawal", then dividend strategies wouldn't be a thing and we wouldn't be having this conversation.

The only reason we are is because 99% of investors, including some people in this thread, simply can't or won't comprehend how dividends work.
You see,this is where you and many others here are mistaken.
You assume for some reason that all people who invest in dividend stocks believe your comments about free money and eating your seed.
That is simply false.
The arrogance is that you assume why I or Sam or Mary would invest in some dividend stocks.
I find it interesting that you feel 99 pct of people are unable to understand how dividends work, when you cannot even understand how foolish it is to think you know what all dividend investors know,think and comprehend. Wow.

I am done here and it is time to hopefully close this thread.
K.I.S.S........so easy to say so difficult to do.
User avatar
Schlabba
Posts: 624
Joined: Sat May 11, 2019 9:14 am
Location: Netherlands

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by Schlabba »

TN_Boy wrote: Sat Oct 17, 2020 10:17 am
Schlabba wrote: Fri Oct 16, 2020 11:28 am
JustinR wrote: Thu Oct 15, 2020 10:30 pm bunch of stuff deleted ...

Getting a dividend at low prices is exactly the same as selling at low prices, but if spending this much time here hasn't convinced you of that yet, then nothing will.
Part of the stock market is speculation. Selling shares at 100 P/E like Japan in 1989 is very different from selling shares at 10 P/E after a bursting bubble. Dividends don't have this effect because they are simply a bank transfer. But if spending this much time here hasn't convinced you of that yet, then nothing will.

Everything else deleted ...
I've been trying really hard to avoid posting in this thread, since as best I can tell, nobody ever convinces the other side of well, anything, in these dividend threads. But I had to bite on this one. In particular:
Dividends don't have this effect because they are simply a bank transfer. But if spending this much time here hasn't convinced you of that yet, then nothing will.
Because I truly can't see how one can think of dividends that way.

A stock/funds total return is price appreciation and dividends, and total return calculations assume dividends are reinvested.

If the stock market crashes and you spend the dividends rather than re-investing them to buy more shares, it is *exactly* the same as selling shares at a low. Selling existing shares or not buying more shares with dividends ... same result. You have fewer shares than you would otherwise.

Just as selling shares when the market is low means you didn't buy at a discount (to be rewarded when the market goes back up) not reinvesting dividends when the market is low has the same effect; you didn't pick up more shares when things were on sale.
Lets see where I am wrong in my thinking.

If you own 100$ worth of shares and there is 1$ paid out, you own 99$ worth of shares + 1$ dividend.
If you own 100$ worth of shares, the shares swing wildly to half of their value and back, when everything is back to normal in the end having 1$ paid out will result in an end result of 99$ owned and 1$ dividend. Paying out 1$ is independent of whether the share price is 50$ or 100$. It always subtracts 1$.

If you during the 50% downturn sell 1$ worth, you'd end up with 98$ because you sold cheaply and that 1$ sold won't grow back to its original value.

So in that way, the best time for dividends to be paid out / having share-buybacks is when stocks are cheap.
Secretly a dividend investor. Feel free to ask why.
TN_Boy
Posts: 1877
Joined: Sat Jan 17, 2009 12:51 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by TN_Boy »

Schlabba wrote: Sat Oct 17, 2020 3:54 pm
TN_Boy wrote: Sat Oct 17, 2020 10:17 am
Schlabba wrote: Fri Oct 16, 2020 11:28 am
JustinR wrote: Thu Oct 15, 2020 10:30 pm bunch of stuff deleted ...

Getting a dividend at low prices is exactly the same as selling at low prices, but if spending this much time here hasn't convinced you of that yet, then nothing will.
Part of the stock market is speculation. Selling shares at 100 P/E like Japan in 1989 is very different from selling shares at 10 P/E after a bursting bubble. Dividends don't have this effect because they are simply a bank transfer. But if spending this much time here hasn't convinced you of that yet, then nothing will.

Everything else deleted ...
I've been trying really hard to avoid posting in this thread, since as best I can tell, nobody ever convinces the other side of well, anything, in these dividend threads. But I had to bite on this one. In particular:
Dividends don't have this effect because they are simply a bank transfer. But if spending this much time here hasn't convinced you of that yet, then nothing will.
Because I truly can't see how one can think of dividends that way.

A stock/funds total return is price appreciation and dividends, and total return calculations assume dividends are reinvested.

If the stock market crashes and you spend the dividends rather than re-investing them to buy more shares, it is *exactly* the same as selling shares at a low. Selling existing shares or not buying more shares with dividends ... same result. You have fewer shares than you would otherwise.

Just as selling shares when the market is low means you didn't buy at a discount (to be rewarded when the market goes back up) not reinvesting dividends when the market is low has the same effect; you didn't pick up more shares when things were on sale.
Lets see where I am wrong in my thinking.

If you own 100$ worth of shares and there is 1$ paid out, you own 99$ worth of shares + 1$ dividend.
If you own 100$ worth of shares, the shares swing wildly to half of their value and back, when everything is back to normal in the end having 1$ paid out will result in an end result of 99$ owned and 1$ dividend. Paying out 1$ is independent of whether the share price is 50$ or 100$. It always subtracts 1$.

If you during the 50% downturn sell 1$ worth, you'd end up with 98$ because you sold cheaply and that 1$ sold won't grow back to its original value.

So in that way, the best time for dividends to be paid out / having share-buybacks is when stocks are cheap.
How do you know the shares will "swing wildly in value?" They might go up. They might go down. All we know is that spending the dividend means you have less shares than if you reinvested it.

The best time for buybacks and dividend reinvestment is when the shares are cheap. For any $ amount, you get more shares that way.

[Edited to add]. I realize I didn't directly answer part of your question. Here is another way to think about this.

1) I have $10,000 in stock. It pays out a 1% dividend. The value of the stock drops by 1%, so now I own $9,900 of stock. And I have $100 in cash.

Or

2) I have $10,000 in stock. I sell 1% of it. Now I have $9,900 in stock. And $100 in cash.

The stock now goes up or down by any amount you pick. And in either scenario, you will have exactly the same amount of money in that stock. And the $100 in cash.

The focus needs to be on the $$ amount owned of the stock.
User avatar
Topic Author
geerhardusvos
Posts: 1129
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by geerhardusvos »

Dividend stocks need not be avoided completely. In fact, I essentially own all of the dividend-paying stocks in the world via total market index funds.

Nisiprius sums its up well as usual:
viewtopic.php?p=4824247#p4824247
VTSAX and chill
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

geerhardusvos wrote: Sat Oct 17, 2020 7:10 pm Dividend stocks need not be avoided completely. In fact, I essentially own all of the dividend-paying stocks in the world via total market index funds.

Nisiprius sums its up well as usual:
viewtopic.php?p=4824247#p4824247
Good to know that it is actually ok to own a stock that pays dividends.

Nisprius post once again telling people who like dividend stocks that,he,Nisprius,really knows why they are buying them and they do not know their own reasons.
Amazing how some here just seem to know how millions of different investors all seem to have the same exact thought process and reason for buying a dividend stock.
K.I.S.S........so easy to say so difficult to do.
Scooter57
Posts: 1473
Joined: Thu Jan 24, 2013 9:20 am

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by Scooter57 »

geerhardusvos wrote: Fri Oct 16, 2020 9:07 pm Are most dividend portfolios doing better in total returns when compared to the S&P 500 over the last 50 years?

Answer: No
Your carefully reasoned, well supported argument has totally changed my mind.

Not.

Define "dividend portfolios", "most," and how someone would have invested in the S&P500 50 years ago before there were index funds and when a brokerage transaction fee for buying one stock could be hundreds of dollars.

The investors I knew in 1970 loved dividends and bought stocks that paid them because otherwise their investments yielded little return. Returns in the 60s and 70s were very poor except for dividends.

At times income oriented portfolios outperform, at other times they don't. The risk they hedge against is a "lost decade" or two, which we have had twice in my lifetime, periods when stock prices stagnate and share price appreciation does not contribute to total return.

Methinks you are the victim of recency bias as growth has been all the rage of late. But the last time this happened, in the late 90s, it did not end well..
RAchip
Posts: 429
Joined: Sat May 07, 2016 7:31 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by RAchip »

The contention above that "The value of your shares drops by the exact amount of a dividend when it's issued" is not correct.

I don't know for sure what the poster meant by "value of your shares." However, the only "value" that is relevant is market value because that is the only value that owners of shares can obtain. To the extent that "value" meant intrinsic value (theoretical value opined on by a professor etc) I dont consider that relevant because an owner of stock has no entitlement to be paid that. They can only realize what they can sell their stock for in the market.

The market price of stock is determined by supply and demand. It is true that on the morning of ex-dividend day, any previously outstanding buy orders (bids) are normally marked down by the amount of the dividend by a specialist. But there may be only a few trades or no trades at all at that price depending on what sellers are willing to sell for (ask). The bid and ask can and usually does fluctuate minute by minute, hour by hour and day by day. Market price always tends to move to a level where there are an equal amount of buyers and sellers. Why particular sellers are willing to sell at a given price and why buyers are wiling to buy at a given price is unknown. Price is set by supply and demand at any given time not by any mathematical formula that takes into account "the exact amount of a dividend when it's issued."

We know there are often many buyers in the market who are buying at "market" (the lowest current ask) without reference to what the stock is theoretically worth. For example, short sellers may need to cover, index funds have inflows and need to buy, dividend reinvestment buys happen automatically if it is turned on, etc. The example people often repeat about a stock worth $10 pays a dividend of $1 so it has to be worth $9 after simply has no bearing on or relevance to what happens in stock trades of large public companies. If I put in an ask for a particular stock on exdividend day that was the closing price the day before, my order may or may not get filled. Whether it does depends only on whether there is someone willing to buy for that price. If someone wans to buy and my ask is the lowest, my order will be filled.

In any event, dividends DO NOT DRIVE DOWN STOCK PRICE OVER TIME. They normally stimulate demand which DRIVES UP STOCK PRICE OVER TIME. Over 80% of the companies in the S&P 500 pay dividends. They do that because the vast majority of investors want to be paid sustainable growing dividends. Boards of directors take actions they believe will increase stock price over time. Paying dividends makes stocks more attractive to most investors which stimulates demand for a company's stock. More demand normally means the rice goes up. That is why 80% of the S&P 500 pays dividends.

The contention ultimately boils down to the claim that if a company were to hold on to its cash it simply must to be worth more. This is wrong. Most standard valuation techniques focus on future earnings and assume that all cash in the company will be used to generate the projected future earnings. So having a little more cash normally would not increase a company's going concern value. In any event, if a company has $10 per share in cash, would you pay $10 per share for it? Why? You already have $10 in cash. Buyers are trying to make money. People don't pay a dollar to get a dollar. Cash held in a company is money you may never realize. Buyers don't pay dollar for dollar to acquire cash they have no right to ever be paid.
User avatar
Topic Author
geerhardusvos
Posts: 1129
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by geerhardusvos »

Scooter57 wrote: Sat Oct 17, 2020 8:02 pm
geerhardusvos wrote: Fri Oct 16, 2020 9:07 pm Are most dividend portfolios doing better in total returns when compared to the S&P 500 over the last 50 years?

Answer: No
Your carefully reasoned, well supported argument has totally changed my mind.

Not.

Define "dividend portfolios", "most," and how someone would have invested in the S&P500 50 years ago before there were index funds and when a brokerage transaction fee for buying one stock could be hundreds of dollars.

The investors I knew in 1970 loved dividends and bought stocks that paid them because otherwise their investments yielded little return. Returns in the 60s and 70s were very poor except for dividends.

At times income oriented portfolios outperform, at other times they don't. The risk they hedge against is a "lost decade" or two, which we have had twice in my lifetime, periods when stock prices stagnate and share price appreciation does not contribute to total return.

Methinks you are the victim of recency bias as growth has been all the rage of late. But the last time this happened, in the late 90s, it did not end well..
Nothing like good old market timing and sector chasing as a winning strategy! :oops:

Did you know that for a 100% total US market portfolio a 4% Withdrawal rate held up for most retirements starting in the 1960s and 70s? You don’t need to hedge or be scared if you have the right withdraw rate and portfolio.

Whatever your plan, stick to it forever, and make sure it’s tax efficient, low cost, and diversified. And if you’re going for a dividend strategy, you will very likely have to accumulate more than you actually need, and you will likely sacrifice total returns.
VTSAX and chill
TropikThunder
Posts: 2539
Joined: Sun Apr 03, 2016 5:41 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by TropikThunder »

Schlabba wrote: Sat Oct 17, 2020 3:54 pm Lets see where I am wrong in my thinking.

If you own 100$ worth of shares and there is 1$ paid out, you own 99$ worth of shares + 1$ dividend.
If you own 100$ worth of shares, the shares swing wildly to half of their value and back, when everything is back to normal in the end having 1$ paid out will result in an end result of 99$ owned and 1$ dividend. Paying out 1$ is independent of whether the share price is 50$ or 100$. It always subtracts 1$.

If you during the 50% downturn sell 1$ worth, you'd end up with 98$ because you sold cheaply and that 1$ sold won't grow back to its original value.

So in that way, the best time for dividends to be paid out / having share-buybacks is when stocks are cheap.
In your scenario, the price drop only affects the seller, not the dividend collector. That's not a good comparison. If the dividend was paid out during that same decline, you'd end up at the same $98 since as you said it always subtracts $1, and the $1 you took as a dividend won't grow back any more than the $1 I got from selling. At least I can choose when to sell, dividends are paid on a schedule.
Scooter57
Posts: 1473
Joined: Thu Jan 24, 2013 9:20 am

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by Scooter57 »

geerhardusvos wrote: Sat Oct 17, 2020 9:11 pm
Scooter57 wrote: Sat Oct 17, 2020 8:02 pm
geerhardusvos wrote: Fri Oct 16, 2020 9:07 pm Are most dividend portfolios doing better in total returns when compared to the S&P 500 over the last 50 years?

Answer: No
Your carefully reasoned, well supported argument has totally changed my mind.

Not.

Define "dividend portfolios", "most," and how someone would have invested in the S&P500 50 years ago before there were index funds and when a brokerage transaction fee for buying one stock could be hundreds of dollars.

The investors I knew in 1970 loved dividends and bought stocks that paid them because otherwise their investments yielded little return. Returns in the 60s and 70s were very poor except for dividends.

At times income oriented portfolios outperform, at other times they don't. The risk they hedge against is a "lost decade" or two, which we have had twice in my lifetime, periods when stock prices stagnate and share price appreciation does not contribute to total return.

Methinks you are the victim of recency bias as growth has been all the rage of late. But the last time this happened, in the late 90s, it did not end well..
Nothing like good old market timing and sector chasing as a winning strategy! :oops:

Did you know that for a 100% total US market portfolio a 4% Withdrawal rate held up for most retirements starting in the 1960s and 70s? You don’t need to hedge or be scared if you have the right withdraw rate and portfolio.

Whatever your plan, stick to it forever, and make sure it’s tax efficient, low cost, and diversified. And if you’re going for a dividend strategy, you will very likely have to accumulate more than you actually need, and you will likely sacrifice total returns.
The 4% withdrawal rate held up because it was easy to get completely safe fixed income yields over 7%--sometimes a lot over-- in the 70s and 80s and some of the 90s. You are way too influenced by back testing. It is very unlikely to be possible going forward now with the kinds of portfolios that relied on bond interest for much of that 4% in the past.

The people using dividend strategies tend to be retirees who are no longer accumulating and depend on their portfolios for income. With today's safe rates you are looking at a 1% withdrawal ratemor less, or else if selling shares, assuming that a market with a P/E in the mid 20s will just continue to see prices rising even with shocking levels of unemployment and business failure. (The average P/E was 15 in your backtest period.)

There has never been a period before when market back testing was so dangerous to future planning.
User avatar
Topic Author
geerhardusvos
Posts: 1129
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by geerhardusvos »

Scooter57 wrote: Sat Oct 17, 2020 9:56 pm
geerhardusvos wrote: Sat Oct 17, 2020 9:11 pm Nothing like good old market timing and sector chasing as a winning strategy! :oops:

Did you know that for a 100% total US market portfolio a 4% Withdrawal rate held up for most retirements starting in the 1960s and 70s? You don’t need to hedge or be scared if you have the right withdraw rate and portfolio.

Whatever your plan, stick to it forever, and make sure it’s tax efficient, low cost, and diversified. And if you’re going for a dividend strategy, you will very likely have to accumulate more than you actually need, and you will likely sacrifice total returns.
The 4% withdrawal rate held up because it was easy to get completely safe fixed income yields over 7%--sometimes a lot over-- in the 70s and 80s and some of the 90s. You are way too influenced by back testing. It is very unlikely to be possible going forward now with the kinds of portfolios that relied on bond interest for much of that 4% in the past.

The people using dividend strategies tend to be retirees who are no longer accumulating and depend on their portfolios for income. With today's safe rates you are looking at a 1% withdrawal ratemor less, or else if selling shares, assuming that a market with a P/E in the mid 20s will just continue to see prices rising even with shocking levels of unemployment and business failure. (The average P/E was 15 in your backtest period.)

There has never been a period before when market back testing was so dangerous to future planning.
Ah. Sounds like you need some data as a reality check (6.5 million possible scenarios with available US data in chart below). Why did higher equity portfolios almost always do better than bond heavy ones? Lookie lookie, 100% stock portfolios (total market / sp500) had the best success. What’s that about needing bonds again? What data are you using?

Image

Also, saying that “there has never been a period before when market back testing was so dangerous to future planning” is fear mongering and unfounded. There is never a better or worst time to use back testing. We all know the economy goes through cycles, and so far in the long run they always end up better than before in this country and most major economies.
Last edited by geerhardusvos on Sun Oct 18, 2020 12:15 am, edited 1 time in total.
VTSAX and chill
luckyducky99
Posts: 98
Joined: Sun Dec 15, 2019 7:47 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by luckyducky99 »

Scooter57 wrote: Sat Oct 17, 2020 9:56 pm The 4% withdrawal rate held up because it was easy to get completely safe fixed income yields over 7%--sometimes a lot over-- in the 70s and 80s and some of the 90s.
The studies that found the 4% withdrawal rate safe used inflation adjusted withdrawals, so a 7% yield in presence of 7% inflation isn't very different from where we are now. Real yields are what matter. And there were extended periods of low and negative real yields on the bonds those studies used during the periods those studies covered, and they still found 4% to be safe.
User avatar
willthrill81
Posts: 20876
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by willthrill81 »

luckyducky99 wrote: Sat Oct 17, 2020 11:04 pm
Scooter57 wrote: Sat Oct 17, 2020 9:56 pm The 4% withdrawal rate held up because it was easy to get completely safe fixed income yields over 7%--sometimes a lot over-- in the 70s and 80s and some of the 90s.
The studies that found the 4% withdrawal rate safe used inflation adjusted withdrawals, so a 7% yield in presence of 7% inflation isn't very different from where we are now. Real yields are what matter. And there were extended periods of low and negative real yields on the bonds those studies used during the periods those studies covered, and they still found 4% to be safe.
Exactly. From 1941-1981, intermediate-term Treasuries lost about -1.6% annually in real dollars. That's right, bonds lost buying power for more than 40 years, yet the '4% rule' held up throughout (well, 3.8% in 1966).

There is a pervasive myth that today's negative real rates on bonds are something new. They are not, whatsoever.

Further, we only know in hindsight that 1982 was the start of the greatest bond bull market in U.S. history. At that time, you could a long-term CD paying 15% nominal interest, but many were fearful of locking up money at that rate for fear that inflation would be even higher. The long-term Treasuries that wound up beating stocks over the next 30 years had lost 46.5% of their inflation-adjusted value in the prior four years alone (i.e. 1978-1981). Consequently, I'm dubious that many individual investors were backing up the truck to buy them in 1982.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
vineviz
Posts: 7815
Joined: Tue May 15, 2018 1:55 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by vineviz »

MathIsMyWayr wrote: Thu Oct 15, 2020 4:34 pm Are they naive or stupid? No.
An investor who manages their portfolio with a goal of maintaining a fixed percentage ownership of the market falls into at least one of your two categories.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
LadyGeek
Site Admin
Posts: 66350
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by LadyGeek »

I removed an off-topic post. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
JustinR
Posts: 1356
Joined: Tue Apr 27, 2010 11:43 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by JustinR »

Schlabba wrote: Sun Oct 18, 2020 2:36 am
TN_Boy wrote: Sat Oct 17, 2020 5:35 pm ...
1) I have $10,000 in stock. It pays out a 1% dividend. The value of the stock drops by 1%, so now I own $9,900 of stock. And I have $100 in cash.

Or

2) I have $10,000 in stock. I sell 1% of it. Now I have $9,900 in stock. And $100 in cash.

The stock now goes up or down by any amount you pick. And in either scenario, you will have exactly the same amount of money in that stock. And the $100 in cash.

The focus needs to be on the $$ amount owned of the stock.
Thundertopik sums it up nicely for me:
TropikThunder wrote: Sat Oct 17, 2020 9:29 pm
Schlabba wrote: Sat Oct 17, 2020 3:54 pm Lets see where I am wrong in my thinking.

If you own 100$ worth of shares and there is 1$ paid out, you own 99$ worth of shares + 1$ dividend.
If you own 100$ worth of shares, the shares swing wildly to half of their value and back, when everything is back to normal in the end having 1$ paid out will result in an end result of 99$ owned and 1$ dividend. Paying out 1$ is independent of whether the share price is 50$ or 100$. It always subtracts 1$.

If you during the 50% downturn sell 1$ worth, you'd end up with 98$ because you sold cheaply and that 1$ sold won't grow back to its original value.

So in that way, the best time for dividends to be paid out / having share-buybacks is when stocks are cheap.
In your scenario, the price drop only affects the seller, not the dividend collector....
Yes that is what I was saying. If the shares go from ‘normal’ to ‘depressed’ and back to ‘normal’, and if a 1$ dividend is paid out along the way (whether during the initial normal or depressed phase) I’m saying that it ends as normal-1.
When you sell, it depends on when exactly you sell.

Because dividends are a bank transfer and selling price is based on trading, so it can be ‘sold cheap’. So its like saying dividends paid out are independent of the current valuation of the company, which selling shares depending on the current trading price. I don't think its the case that having 1$ paid out when the share prices are low is worse for the total company value than having 1$ paid out when having share prices at a high level. Both cases subtract 1$.

Logically that also means that if we re-invest dividend when the market is at ‘depressed’ prices, we’d end up with a larger gain than when we re-invest dividends at the ‘normal’ prices.

I’m glad now we understand eachother so I’ll stop posting about it. I’ll probably google a bit to find out which line of thinking is correct.

Edit: As a final analogy for the concept I am trying to explain, is it worse for Microsoft to pay their electricity bill when their share price is low or when their share price is high? I don't think it matters, they pay the bill.
If they sell a share to pay that bill, then it matters :D
You're not understanding anyone who's replying to you, including TropikThunder. They are not agreeing with you.

It makes absolutely no difference what the prices are. At any given price, receiving a dividend is EXACTLY the same as selling the same amount yourself. It doesn't matter what happens before or after. It is the same thing.
  • If the market drops 50% and you receive a dividend or sell some shares, then it doubles, both end up with $98 in stocks and $1 in cash
  • If the market stays at $100 and you receive a dividend or sell some shares, then it doubles, both end up with $198 in stocks and $1 in cash
  • If the market stays at $100 and you receive a dividend or sell some shares, then it halves, both end up with $49.50 in stocks and $1 in cash
  • If the market doubles and you receive a dividend or sell some shares, then it halves, both end up with $99.50 in stocks and $1 in cash

This is basic math and investing, not some complex topic that nobody's been able to figure out yet.

Several people have explained this to you already. Is there something that's not clicking for you?
Scooter57
Posts: 1473
Joined: Thu Jan 24, 2013 9:20 am

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by Scooter57 »

Backtesters answer every response with more backtesting.

The market today has changed from the markets of the '50s, '60s and 70's in ways that make conclusions drawn from them irrelevant. Pension funds and insurers were the main investors. Stocks and bonds were only accessible in significant amounts to the well-to-do. Mutual funds were uncommon and expensive. (My investor mom was excited when they emerged, but they cost enough you would only buy and hold them.) You only saw stock and fund prices once a day unless you were at a brokerage or phoned the salesmen brokers for info.

Our economy on the US was extremely different too. We were a top manufacturer in a world where competitors had devastated their economies with a brutal war We had a young population and lots of decent paying jobs. People were still very cautious with debt. You could finance a quality college education without loans.

The argument about dividends, stripped of all the backtestng, seems to be "you will make more money from selling your stock in speculative, often unprofitable companies that pay you nothing to a bigger fool for more than you paid for it than from investing in established, profitable companies that share their profits with you."

That has worked well when markets climbed relentlessly higher. Gamblers currently are setting the prices of the stocks dominating the S&P 500 and Nasdaq giving companies with no product-sale derived earnings bigger market caps than almost all the companies that actually sell stuff. But there is no guarantee that will continue.

I find it odd that the same Bogleheads who claim "nobody knows nothing" are so sure that they do know that the market will always go up over periods of several decades. Yes, it has, in the past. But remember your mantra. Nobody knows what the future will hold.
User avatar
vineviz
Posts: 7815
Joined: Tue May 15, 2018 1:55 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by vineviz »

JustinR wrote: Sun Oct 18, 2020 8:00 am This is basic math and investing, not some complex topic that nobody's been able to figure out yet.

Several people have explained this to you already. Is there something that's not clicking for you?
I really struggle to understand what about this topic is so confounding to so many investors.

• Investor A wakes up on Monday morning with $98 worth of stock and $2 worth of cash from a dividend paid on Friday .

• Investor B wakes up on Monday morning with $98 worth of stock and $2 worth of cash from stock they sold on Friday.

• Investor C wakes up on Monday morning with $100 worth of stock, having neither sold any stock nor received any dividend on Friday.

There is no rational reason that any of these investors should feel better or worse than any of the other investors: they all have exactly the same wealth at that moment on Monday and, in the modern era of commission-free trading of fractional shares, any investor could easily replicate the holdings of any other investor in an instant.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
burritoLover
Posts: 328
Joined: Sun Jul 05, 2020 12:13 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by burritoLover »

You're wasting your breath on the "live off the dividends" crowd. It doesn't matter how much evidence or rational thought you present to them, they will choose to believe what they want to believe.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
RAchip
Posts: 429
Joined: Sat May 07, 2016 7:31 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by RAchip »

“At any given price, receiving a dividend is EXACTLY the same as selling the same amount yourself. It doesn't matter what happens before or after. It is the same thing.“

Wrong. You are mistakenly assuming that the market price after a dividend falls and stays down by the amount of the dividend forever. If you have 100 shares and you get a dividend you still have 100 shares that are worth whatever the market price is. Lets say the shares trade for $10 per share. So you have shares with a market value of $1000. If the market price rises to $11 per share 2 weeks after a dividend you have (1) the dividend cash AND (2) 100 shares x $11 market value or $1,100. If you sell a share instead you have 99 shares worth $11 or only $1089. Dividends are certainly NOT “exactly the same as selling” shares. After a sale you have fewer shares and a lower interest in future stock price growth.
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

Deleted
Last edited by hoops777 on Sun Oct 18, 2020 10:24 pm, edited 2 times in total.
K.I.S.S........so easy to say so difficult to do.
User avatar
vineviz
Posts: 7815
Joined: Tue May 15, 2018 1:55 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by vineviz »

RAchip wrote: Sun Oct 18, 2020 11:12 am You are mistakenly assuming that the market price after a dividend falls and stays down by the amount of the dividend forever.
I hate to break it to you, but this is assumption is not mistaken. It's an incontrovertible truth, in fact.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
RAchip
Posts: 429
Joined: Sat May 07, 2016 7:31 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by RAchip »

vineviz wrote: Sun Oct 18, 2020 2:26 pm
RAchip wrote: Sun Oct 18, 2020 11:12 am You are mistakenly assuming that the market price after a dividend falls and stays down by the amount of the dividend forever.
I hate to break it to you, but this is assumption is not mistaken. It's an incontrovertible truth, in fact.
In March I bought more UPS at around $88 per share because that price seemed crazy cheap to me in view of the quarterly dividend of $1.01 per share. Since then I received several dividend payments of $1.01 per share and the stock price has nearly doubled (it is now around $175 per share). The stock price did not fall by the amount of the dividends and stay down forever. On the contrary, it rose dramatically.

The market price of stock is a function of supply and demand pure and simple. The impact of dividends on supply and demand cannot be calculated by any formula. The most reasonable argument is actually that dividends stimulate demand and drive up stock prices over time not reduce or depress them.
absolute zero
Posts: 501
Joined: Thu Dec 29, 2016 4:59 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by absolute zero »

RAchip wrote: Sun Oct 18, 2020 2:49 pm
vineviz wrote: Sun Oct 18, 2020 2:26 pm
RAchip wrote: Sun Oct 18, 2020 11:12 am You are mistakenly assuming that the market price after a dividend falls and stays down by the amount of the dividend forever.
I hate to break it to you, but this is assumption is not mistaken. It's an incontrovertible truth, in fact.
In March I bought more UPS at around $88 per share because that price seemed crazy cheap to me in view of the quarterly dividend of $1.01 per share. Since then I received several dividend payments of $1.01 per share and the stock price has nearly doubled (it is now around $175 per share). The stock price did not fall by the amount of the dividends and stay down forever. On the contrary, it rose dramatically.

The market price of stock is a function of supply and demand pure and simple. The impact of dividends on supply and demand cannot be calculated by any formula. The most reasonable argument is actually that dividends stimulate demand and drive up stock prices over time not reduce or depress them.
If UPS had not paid a dividend, its current price would be even higher than $175 per share. Do you think the market just ignores a company's balance sheet when valuing its shares?
Scooter57
Posts: 1473
Joined: Thu Jan 24, 2013 9:20 am

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by Scooter57 »

absolute zero wrote: Sun Oct 18, 2020 2:55 pm
If UPS had not paid a dividend, its current price would be even higher than $175 per share. Do you think the market just ignores a company's balance sheet when valuing its shares?
This is theory, but it presumes a level of investor awareness that simply is not there. Show me concrete evidence that investors lower their bids for shares of individual stocks after they have paid a dividend. Funds work differently because their NAV is adjusted down, but stocks don't have NAVs, they just have what people are willing to pay for them.

Have you noticed investors shunning Microsoft since it started paying a dividend? It has grown its dividend for 17 years. Apple pays a dividend now, too and has for eight years. Have these companies had less price appreciation than profitable companies with similar market caps that don't pay dividends. (The profitability factor excludes the companies selling hope and dreams.)

I can't figure out how to post images on this board, but if you go to Yahoo finance and type in the ticker for MSFT on a chart that has "events" selected as an option and select "dividends" you will see on the price chart where all the dividends are paid. There is no evidence that the price responds in any but the usual random way to the dividend payment.
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by hoops777 »

absolute zero wrote: Sun Oct 18, 2020 2:55 pm
RAchip wrote: Sun Oct 18, 2020 2:49 pm
vineviz wrote: Sun Oct 18, 2020 2:26 pm
RAchip wrote: Sun Oct 18, 2020 11:12 am You are mistakenly assuming that the market price after a dividend falls and stays down by the amount of the dividend forever.
I hate to break it to you, but this is assumption is not mistaken. It's an incontrovertible truth, in fact.
In March I bought more UPS at around $88 per share because that price seemed crazy cheap to me in view of the quarterly dividend of $1.01 per share. Since then I received several dividend payments of $1.01 per share and the stock price has nearly doubled (it is now around $175 per share). The stock price did not fall by the amount of the dividends and stay down forever. On the contrary, it rose dramatically.

The market price of stock is a function of supply and demand pure and simple. The impact of dividends on supply and demand cannot be calculated by any formula. The most reasonable argument is actually that dividends stimulate demand and drive up stock prices over time not reduce or depress them.
If UPS had not paid a dividend, its current price would be even higher than $175 per share. Do you think the market just ignores a company's balance sheet when valuing its shares?
Last edited by hoops777 on Sun Oct 18, 2020 3:53 pm, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.
RAchip
Posts: 429
Joined: Sat May 07, 2016 7:31 pm

Re: Dividend Only Investing Analyzed (latest ERN article)

Post by RAchip »

“If UPS had not paid a dividend, its current price would be even higher than $175 per share. Do you think the market just ignores a company's balance sheet when valuing its shares.”

That is total and complete speculation. Nobody knows or can prove that. Nobody can say the market price of “x” stock would now be “y” if something different happened. Nobody knows the factors each buyer considers in deciding what they are willing to pay. Some buyers dont consider anything because thwy are required to buy.

As I said, the more reasonable speculation is that dividends stimulate demand and drive up stock price over the long term. Your argument about the balance sheet is also misplaced. You cannot say that every buyer and seller looks at the balance sheet to see how much cash there is and everyone factors that in the exact same way. Actually, the balance sheet is only disclosed quarterly so buyers never know exactly how much cash a company has on any given day. And asset value is really theoretical liquidation value and has little to no bearing on the value of a going concern business. Under generally accepted valuation theory, stock valuation of a going concern company is based on expected future cash flows and cash in a company is simply assumed to be used to generate those cash flows and not separately factored in.

Here is another example. I bought a bunch of MSFT in 2014 for about $40 per share because its $.28 per quarter dividend ($1.12 per year) translated to a generous yield of close to 3%. Since then MSFT raised its dividend every year and it is has now almost doubled to $2.05 per year. I have been paid about $10 per share in dividends on an initial investment of $40 per share. And the share price did not go down by $10 and stay down. It skyrocketed by about 550% and is now over $200 per share.
Post Reply