What's the deal with dividend funds?

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alex_686
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Re: What's the deal with dividend funds?

Post by alex_686 »

incognito_man wrote: Tue Jun 21, 2022 3:34 pm I'm with Han Solo on this one. Everything they have been saying makes sense to me and I agree with it. I think it's a useful differentiator between dividend payers and non payers.
How so? To have a valid factor you need similar stocks to act like each other. Value stocks act like other value stocks. Momentum stocks act like other momentum stocks. Dividend stocks don't really act like other dividend stocks.
incognito_man wrote: Tue Jun 21, 2022 3:34 pm But that difference will only matter if the investor is taking the dividends out in cash and not re-investing (which is still obviously a useful distinction since many of those people exist).
I will seriously contest this last point. Why should people take out dividends? If they need money to spend why not take it out of the portfolio in general? Why this specific slice of return? Having done portfolio attribution professionally I can tell you there is no logical reasons. Every reason I have see - bar one - suffers from some combination of cognitive or behavioral error.

The one reason that I do think is valid is a behavioral error in that it is a external restrain on spending. The crux of the argument is that cost of such behavioral errors is lower than the cognitive load error. Note, the argument rests on individual investor behaviors not of the dividend payment behavior of the company.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
CuriousTacos
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Tue Jun 21, 2022 3:59 pm There are some people who make considerable effort to address the mechanics of how dividends work and their effects, while saying nothing about predictions. I was trying to respond in that context.
If you aren't prepared to address whether companies with certain dividend characteristics (high yield, stable, growing, etc), then this line of debate is not actionable or relevant in my opinion.
OK. Then the assertion I was examining wasn't actionable either.
Regardless of how we got here (I personally think you brought up the example that led to the discussion about dividend mechanics, but whatever), yes, I think that it is not actionable for anybody here to debate the mechanics of dividends without any regard for market efficiency and/or whether any of this affects expectations of future performance.

If dividend characteristics mean nothing for future performance, then what is it you're trying to argue? It really seems like you're hung up on something based on a misunderstanding of others' views.
billaster
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Re: What's the deal with dividend funds?

Post by billaster »

alex_686 wrote: Tue Jun 21, 2022 3:22 pm
billaster wrote: Mon Jun 20, 2022 7:21 pm A lot of people cite the Modigliani-Miller Theorem without ever having read the two papers it is based on. They might be surprised to learn that it is only a simplified model of corporate finance and a model based on a lot of assumptions of perfection. Ignoring those assumptions might lead to wrong conclusions.
How so? Because I really don't think this is a fair statement.

Perfectly spherical inelastic cows in a vacuum do not exist yet physics college books routinely make the assumption that they do. Yet no one denies that Newtonian laws of motion are fundamental. Yet introduce the concept of friction or elasticity does not make the core concepts fall apart.

Yes, introducing inefficiencies does make the conversation more nuanced and complex.

For M&M here are 2 examples. M&M does not consider the impact of the tax shield when corporations issue debt. Nor does it consider the cost to issue new capital and I will note that issuing new equity is expensive and is doubly so during time of stress when you really need that capital. Do either of these complexities invalidate M&M? No, quite the opposite. You start with M&M and add these complexities to your model.
Nobody is denying M&M. Just as nobody is denying Newtonian physics. But anyone who claims that dropping a bowling ball and dropping a feather are the same without taking into account air friction is going to come to a wrong conclusion. Likewise anyone who assumes that dividends and buybacks are equivalent without taking into account financial distortions is going to come to a wrong conclusion.
MtnRetreat
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Re: What's the deal with dividend funds?

Post by MtnRetreat »

Statistical wrote: Mon Jun 20, 2022 12:54 pm
MtnRetreat wrote: Mon Jun 20, 2022 11:56 am The goal of many is to not touch the principal, just live off of earnings. In a rising market one assumes maybe a 7% return, pull out 4%, and the 3% is lost to inflation. That's nice in a perfect world. But in a down market selling off assets is really painful.
Well no the idea would be a 10% return (7% real) on average including both up and down years. The average up year is going to be up a lot more than 7% nominal.
Diversification says only a portion of the portfolio should be dividend oriented, with some growth, some international, some bonds, some real estate, some cash, etc.
Wouldn't VTI for example be a mix of dividend, value, growth, large and small cap companies.

I am not saying SCHD is bad but the long term performance vs the broader markets is an unknown and if one makes SCHD (or another dividend ETF) a small portion of the portfolio then it has a small impact overall.
An average UP year may be more than 7%, but over a typical retirement of say 20 years the market will have DOWN years as well. Retirees are going to be more conservative to reduce risk, so they will not gain as much in the UP years but will avoid huge losses in the DOWN years.

There are a lot of ways to invest for dividends. Some prefer a fund, some prefer to pick their own basket of stocks. For retirees, I believe the idea behind dividend investing is that the price of the stock is essentially irrelevant, with dividend volatility being a lot lower. Even if the stock price drops 25%, if the dividend only drops 10% then the person only has to trim their spending a small amount. When the economy improves, the dividends return without long term losses. The goal isn't to maximize portfolio value, it is to generate $$ to live on with as little risk as possible. Short term monies need to be stable and safe.
MtnRetreat
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Re: What's the deal with dividend funds?

Post by MtnRetreat »

arcticpineapplecorp. wrote: Mon Jun 20, 2022 1:28 pm
MtnRetreat wrote: Mon Jun 20, 2022 11:56 am As a recent retiree and lifelong investor, I can tell you the worst feeling is seeing the portfolio value going down. High quality dividend stocks will be less volatile than other groups, so the downside pain is less. Also, they generally pay dividends even in a down market, so there is no need to sell the underlying stocks to access $$ to live off of. Remember, retirees have no paycheck to live off of, only a small Social Security and whatever we take out of our savings. At some future date those stocks will likely be higher in value, and can be sold at profit then, if needed.

The goal of many is to not touch the principal, just live off of earnings. In a rising market one assumes maybe a 7% return, pull out 4%, and the 3% is lost to inflation. That's nice in a perfect world. But in a down market selling off assets is really painful.

Diversification says only a portion of the portfolio should be dividend oriented, with some growth, some international, some bonds, some real estate, some cash, etc.
first of all, you can just as easily and in a more tax efficient manner sell shares of stock if you need money to live on. please re-read all the posts I linked regarding that.

second there's no such thing as a high quality stock. If you think there is, please define what you mean by "high quality". You think they are because they're "blue chip". But how many blue chips are no longer blue chip? too many to count.

Dividend stocks have become popular partially due to the fact that they are viewed as safe investments. Unfortunately in investing, there is always some risk involved.

Although many investors have been very successful with dividend stocks, others have lost money when share prices drop or dividends are cut. Since dividends are not guaranteed, if a company is experiencing problems, they often reduce or even completely suspend dividends.

Below we review 11 former big-time dividend players that imploded in recent years, sucking down billions of dollars in shareholder value along with them.

source: https://www.dividend.com/dividend-educa ... -all-time/
Some of those you might be familiar with:
GE
GM
Washington Mutual
JC Penney
Kodak
Barnes and Noble
Citigroup
Bank of America
Rite Aid
BP
AIG
Ford

Don't fool yourself into thinking your stocks are safe (from dividend cuts or cuts in price per share). they're not.
You are assuming that retirees are willing and able to actively manage their portfolios for maximum returns. I'm merely pointing out the reasons dividend investing is popular and viable for retirees. Generally speaking, companies with a long history of paying good dividends are stable and well managed, aka lower risk. A lot of retirees want low risk and they don't want to constantly monitor markets and economies. They want to get on a cruise ship for 2 weeks and not worry. They want the income stream to be consistent and without drama.

I remember the tech-wreck well, as I was in a lot of high fliers. Luckily I was in my 40's with a couple of decades to earn and save after that disaster! All that vaporware...

I don't believe any investment is safe. Not gold, not my home, not bonds, not tech stocks, not utility stocks. I diversify. I hedge. I pick carefully.
CuriousTacos
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

MtnRetreat wrote: Tue Jun 21, 2022 5:19 pm An average UP year may be more than 7%, but over a typical retirement of say 20 years the market will have DOWN years as well. Retirees are going to be more conservative to reduce risk, so they will not gain as much in the UP years but will avoid huge losses in the DOWN years.

There are a lot of ways to invest for dividends. Some prefer a fund, some prefer to pick their own basket of stocks. For retirees, I believe the idea behind dividend investing is that the price of the stock is essentially irrelevant, with dividend volatility being a lot lower. Even if the stock price drops 25%, if the dividend only drops 10% then the person only has to trim their spending a small amount. When the economy improves, the dividends return without long term losses. The goal isn't to maximize portfolio value, it is to generate $$ to live on with as little risk as possible. Short term monies need to be stable and safe.
If the total return chart (including reinvestment of dividends and/or equivalent stock sale/withdrawal amounts) of "dividend stocks" and the "total market" is identical through a downturn and recovery, then the journey and the end result are the exact same regardless of which you invest in.

In order for dividend stocks to be better, then:
- Their total return chart must show less of a drop but end up near the same
- Their total return chart must show a similar drop but a greater end result
- The investor is only concerned about the psychological benefit of receiving a dividend even though there's no tangible benefit

There is little evidence that the total return chart of dividend stocks shows consistently smaller drops or greater returns (at least after adjusting for risk and factors, i.e. you're better off with small value funds if you believe the research on such things). The third is very individual, but any argument based on that should, in my opinion, clearly state this as the reason and not imply anything about the other two.
Last edited by CuriousTacos on Tue Jun 21, 2022 5:37 pm, edited 1 time in total.
SeasOfCheese
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Re: What's the deal with dividend funds?

Post by SeasOfCheese »

I like dividends because it is like FREE MONEY every quarter! I mean, how cool is that?!?

And some of my stonks, like Big "O" aka Realty Income, send me FREE CASH MONEY every single month!!!

\m/ werd.















/strawman construction complete.

Peace. :sharebeer
Charles Joseph
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Re: What's the deal with dividend funds?

Post by Charles Joseph »

nisiprius wrote: Tue Jun 21, 2022 7:21 am I quoted a study--quoting a reference by the hosts of the Rational Reminder podcast:
In a 2019 paper, "The Dividend Disconnect," Hartzmark and Solomon find empirically through multiple empirical tests that investors view dividends as free money and account for them separately from capital gains.
The podcast, The Relevance of Dividend Irrelevance, is really excellent and has quite a bit more depth on dividend investors and their mental attitudes toward dividends.
1. You're offering hearsay. Have you actually read the study?

2. If you did, you'd know that the authors offered absolutely no evidence of anyone who claims that dividends are "free money." In fact it is the authors themselves who coin the phrase "Free Dividend Fallacy."

3. I know of no investor who does not recognize that dividends are part of total return. Where is the "group" you referred to that thinks dividends are free money? You still have not identified it.

4. When are members of this group going to stop hurling pejoratives and derogations at investors, many in retirement, who have a preference for dividends? (And I would be happy to provide a list upon request).
CuriousTacos
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

Charles Joseph wrote: Tue Jun 21, 2022 6:17 pm 3. I know of no investor who does not recognize that dividends are part of total return. Where is the "group" you referred to that thinks otherwise? You still have not identified it.
See this post:
MtnRetreat wrote: Tue Jun 21, 2022 5:19 pm For retirees, I believe the idea behind dividend investing is that the price of the stock is essentially irrelevant, with dividend volatility being a lot lower.
The poster above, in my opinion, speaks as though dividends are not merely a part of total return. Maybe they don't actually think that, in which case I think they should have worded this differently. The price cannot be "essentially irrelevant" without total return being "essentially irrelevant". You apparently don't agree with this poster either, which is great, but such posts are one of the reasons there's a debate.
Charles Joseph wrote: Tue Jun 21, 2022 6:17 pm 4. When are are members of this group going to stop hurling pejoratives and derogations at investors, many in retirement, who have a preference for dividends?
I don't think people here are saying there's anything wrong with a preference for dividends for purely behavioral reasons, as long as you know what you're getting into and still achieve proper diversification. And it isn't rude to point out that anything besides behavioral reasons is suspect. If you don't think there are non-behavioral reasons, then there's nothing for you to disagree with here and I don't understand why you seem offended; people weren't talking to you. If you do think there are non-behavioral reasons, then I don't understand why you think it's unreasonable for others to dispute those.
MtnRetreat
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Re: What's the deal with dividend funds?

Post by MtnRetreat »

exodusNH wrote: Mon Jun 20, 2022 4:55 pm
As others have said, we're not antidividend. Most people ascribe special significance to them. There is no theoretical model where they alone are a factor that should make a wiser investment. It's mostly mental accounting.

If you need the cash, you should be agnostic as to whether you get the cash as a dividend or by selling an equivalent amount of your shares. If you merely reinvest the dividends -- meaning you don't need the cash -- then your total holdings of the company have not changed value. But you've incurred a taxable event that will leave you less wealth this year.
Not quite true. First of all, much of retirement investing is done in retirement accounts, so no taxable event on any gains including dividends.

The other factor is what happens on the down side of the market. Remember that retirees are on short timelines with much of their assets, needing income immediately and only having 10 to 20 years of "long term" before that will have to be converted to short term.

Simple example - assume the market is flat, then in one day it drops 10% and stays there for 2 years, then in one day it rebounds 11.1% to bring it back up exactly where it was pre-dip.

A typical retired couple will have $40k-$60k of Social Security income. Let's take the midpoint at $50k. If they have $500k in dividend stocks paying out 5%, they are taking in $25k there, for a total annual income of $75k. Let's look at a 2 year market dip of 10% (pretty mild). Before this dip the couple would take in $150k over two years and their portfolio would remain steady at $500k. During the dip if dividends decrease by the same %, the couple takes in $145k over those two years. At the end of the dip their total income goes back to where it was, and their stocks are worth the full $500k again. They took a small temporary decrease in income for two years and then rebound to where they were before.

Now another couple with $500k investment who sell $25k of it each year, and the stock goes up $25k (assume no taxes and no inflation). Pre-dip their income is the same as the dividend couple, $75k per year or $150k over two years. During the dip they now have to choose A) sell $25k of stock or, B) sell 5%.

Option A results in a portfolio value at the end of the dip before the rise of 500k*90%-50k = $400k. During the dip they kept their income level for a total of $150k. Now the market rebounds the full 11.1% and they have $444.4k portfolio. Their 5% annual take is now only $22.22k. Their post-dip total income is permanently reduced by $2.78k. They kept income level during the dip but have lower income after.

Option B results in taking $22.5k in year 1 of the dip, and then $21.375k in year 2, for a total gross family income across the 2 year dip of $143,875. This is less than their pre-dip income, and less than the dividend couple takes in during the dip. At the end of the dip their portfolio is valued at $406,125. Then it rises the 11.1% to become $451,205 which is slightly more than Option A for them but still significantly less than the dividend couple.

If these couples had a much longer timeline and were not depending on monies from their investments for daily expenses, yes they might do better looking out 20, 30, 40, 50 years being in different investments. But in the near term they did better in the down market.
MtnRetreat
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Re: What's the deal with dividend funds?

Post by MtnRetreat »

CuriousTacos wrote: Tue Jun 21, 2022 6:52 pm
MtnRetreat wrote: Tue Jun 21, 2022 5:19 pm For retirees, I believe the idea behind dividend investing is that the price of the stock is essentially irrelevant, with dividend volatility being a lot lower.
The poster above, in my opinion, speaks as though dividends are not merely a part of total return. Maybe they don't actually think that, in which case I think they should have worded this differently. The price cannot be "essentially irrelevant" without total return being "essentially irrelevant". You apparently don't agree with this poster either, which is great, but such posts are one of the reasons there's a debate.
The quick response is that for many retirees the long term total return is in fact irrelevant regarding funding their living expenses. During retirement and in the continuing short term, reliability of income is being sought. The goal is not to accumulate many millions to pass on to the kids, but to fund ongoing retirement lifestyle with as little decrement during bad markets.

Other parts of the portfolio are aimed at growth looking out at 10-20 years, to hopefully counteract inflation and to help fund perhaps increased future medical and care costs.
CuriousTacos
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

MtnRetreat wrote: Tue Jun 21, 2022 7:02 pm Simple example - assume the market is flat, then in one day it drops 10% and stays there for 2 years, then in one day it rebounds 11.1% to bring it back up exactly where it was pre-dip.

A typical retired couple will have $40k-$60k of Social Security income. Let's take the midpoint at $50k. If they have $500k in dividend stocks paying out 5%, they are taking in $25k there, for a total annual income of $75k. Let's look at a 2 year market dip of 10% (pretty mild). Before this dip the couple would take in $150k over two years and their portfolio would remain steady at $500k. During the dip if dividends decrease by the same %, the couple takes in $145k over those two years. At the end of the dip their total income goes back to where it was, and their stocks are worth the full $500k again. They took a small temporary decrease in income for two years and then rebound to where they were before.

Now another couple with $500k investment who sell $25k of it each year, and the stock goes up $25k (assume no taxes and no inflation). Pre-dip their income is the same as the dividend couple, $75k per year or $150k over two years. During the dip they now have to choose A) sell $25k of stock or, B) sell 5%.

Option A results in a portfolio value at the end of the dip before the rise of 500k*90%-50k = $400k. During the dip they kept their income level for a total of $150k. Now the market rebounds the full 11.1% and they have $444.4k portfolio. Their 5% annual take is now only $22.22k. Their post-dip total income is permanently reduced by $2.78k. They kept income level during the dip but have lower income after.

Option B results in taking $22.5k in year 1 of the dip, and then $21.375k in year 2, for a total gross family income across the 2 year dip of $143,875. This is less than their pre-dip income, and less than the dividend couple takes in during the dip. At the end of the dip their portfolio is valued at $406,125. Then it rises the 11.1% to become $451,205 which is slightly more than Option A for them but still significantly less than the dividend couple.
In your example, you correctly maintain equivalency between the two options (dividend vs non-dividend) prior to the dip, but you neglected to do the same during the dip. The non-dividend stocks, in Option B, would have appreciated by 5% (just as the dividend-paying stocks provided a 5% dividend without the price falling further), in which case the investor could have withdrawn $22.5k in year 2, and had exactly the same income as the dividend investor.
Last edited by CuriousTacos on Tue Jun 21, 2022 7:22 pm, edited 1 time in total.
CuriousTacos
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

MtnRetreat wrote: Tue Jun 21, 2022 7:07 pm
CuriousTacos wrote: Tue Jun 21, 2022 6:52 pm
MtnRetreat wrote: Tue Jun 21, 2022 5:19 pm For retirees, I believe the idea behind dividend investing is that the price of the stock is essentially irrelevant, with dividend volatility being a lot lower.
The poster above, in my opinion, speaks as though dividends are not merely a part of total return. Maybe they don't actually think that, in which case I think they should have worded this differently. The price cannot be "essentially irrelevant" without total return being "essentially irrelevant". You apparently don't agree with this poster either, which is great, but such posts are one of the reasons there's a debate.
The quick response is that for many retirees the long term total return is in fact irrelevant regarding funding their living expenses. During retirement and in the continuing short term, reliability of income is being sought. The goal is not to accumulate many millions to pass on to the kids, but to fund ongoing retirement lifestyle with as little decrement during bad markets.

Other parts of the portfolio are aimed at growth looking out at 10-20 years, to hopefully counteract inflation and to help fund perhaps increased future medical and care costs.
Whatever length of time, the reliability of providing for withdrawals is what matters. Whether that comes from dividends, price appreciation, or any combination of the two is mathematically irrelevant, although perhaps not behaviorally irrelevant.

As I showed in my correction to your example above, if the chart of total return throughout a given time-frame is identical between dividend and total market funds, then there is no difference to the investor. Dividend funds must either drop less or gain more (when looking at total return) to be of any tangible benefit.

Edit: I think that when I say "you should only care about total return", you think I mean you should seek high-risk growth. That is incorrect; what I am saying is that when comparing dividend funds to total market funds, you should be looking at a total return chart, and you would need to see either less volatility or greater return (or more precisely, superior risk-adjusted return), otherwise there was no tangible benefit. The debate can only be about whether dividend funds did/will provide such a benefit (since we all allow for behavioral reasons). I think that they have/will not after adjusting for factors (such as size, value, profitability, quality, and momentum).
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arcticpineapplecorp.
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Re: What's the deal with dividend funds?

Post by arcticpineapplecorp. »

MtnRetreat wrote: Tue Jun 21, 2022 5:29 pm
arcticpineapplecorp. wrote: Mon Jun 20, 2022 1:28 pm
MtnRetreat wrote: Mon Jun 20, 2022 11:56 am As a recent retiree and lifelong investor, I can tell you the worst feeling is seeing the portfolio value going down. High quality dividend stocks will be less volatile than other groups, so the downside pain is less. Also, they generally pay dividends even in a down market, so there is no need to sell the underlying stocks to access $$ to live off of. Remember, retirees have no paycheck to live off of, only a small Social Security and whatever we take out of our savings. At some future date those stocks will likely be higher in value, and can be sold at profit then, if needed.

The goal of many is to not touch the principal, just live off of earnings. In a rising market one assumes maybe a 7% return, pull out 4%, and the 3% is lost to inflation. That's nice in a perfect world. But in a down market selling off assets is really painful.

Diversification says only a portion of the portfolio should be dividend oriented, with some growth, some international, some bonds, some real estate, some cash, etc.
first of all, you can just as easily and in a more tax efficient manner sell shares of stock if you need money to live on. please re-read all the posts I linked regarding that.

second there's no such thing as a high quality stock. If you think there is, please define what you mean by "high quality". You think they are because they're "blue chip". But how many blue chips are no longer blue chip? too many to count.

Dividend stocks have become popular partially due to the fact that they are viewed as safe investments. Unfortunately in investing, there is always some risk involved.

Although many investors have been very successful with dividend stocks, others have lost money when share prices drop or dividends are cut. Since dividends are not guaranteed, if a company is experiencing problems, they often reduce or even completely suspend dividends.

Below we review 11 former big-time dividend players that imploded in recent years, sucking down billions of dollars in shareholder value along with them.

source: https://www.dividend.com/dividend-educa ... -all-time/
Some of those you might be familiar with:
GE
GM
Washington Mutual
JC Penney
Kodak
Barnes and Noble
Citigroup
Bank of America
Rite Aid
BP
AIG
Ford

Don't fool yourself into thinking your stocks are safe (from dividend cuts or cuts in price per share). they're not.
You are assuming that retirees are willing and able to actively manage their portfolios for maximum returns. I'm merely pointing out the reasons dividend investing is popular and viable for retirees. Generally speaking, companies with a long history of paying good dividends are stable and well managed, aka lower risk. A lot of retirees want low risk and they don't want to constantly monitor markets and economies. They want to get on a cruise ship for 2 weeks and not worry. They want the income stream to be consistent and without drama.

I remember the tech-wreck well, as I was in a lot of high fliers. Luckily I was in my 40's with a couple of decades to earn and save after that disaster! All that vaporware...

I don't believe any investment is safe. Not gold, not my home, not bonds, not tech stocks, not utility stocks. I diversify. I hedge. I pick carefully.
1. retirees don't need to actively manage their portfolio for maximum returns or otherwise. A three fund portfolio or target date is passively managed (a three fund might require occasional rebalancing but that's the extent of the "active" managing).

2. just because some things are popular doesn't mean it's a good idea. As one recent example, the tide pod challenge was very popular on tik tok for a time.

3. if companies can go to $0 then there goes your dividend too. If you don't believe the entire market is going to $0, then you'll continue to get your dividends. Not true for individual companies, many of which do in fact go out of business, cut their dividends and so on.

4. you're confusing companies that have been around a long with being stable just because they might have been in the past. I've listed out several companies that were stable for many years, until they weren't. It's a mistake to assume companies will do well in the future based on how they fought past battles. Tomorrow's challenges are not yesterday's. GE is one of the best examples of this. Talk about drama for your mama. Wow, they used to pay .24 dividends, now they're paying .08 cents but they paid as little as .01 as recently as last year (source: https://www.streetinsider.com/dividend_history.php?q=GE). Nobody would have accused them of not being the blueist of blue chip stocks, until a little while ago.

5. who said anything about retirees (or anyone else for that matter) monitoring markets and economies? If you own the total market you get the return of the market. There's no following anything. If anything, you have to monitor your individual stocks if you own them much more than a passive, total market portfolio. If one company falls out of the market, another replaces it. I don't have to focus on anything. But individual stocks? Now that's a lot of work (and drama as you say).

6. Again, as for drama, you say the retirees don't want...most stocks are more volatile than the broad market. And I've already given you the example of the drama with dividends with GE for one instance.

7. when you say you "pick carefully" you're assuming that you'll never have any problems with any of the high dividend paying stocks you own. I ask if this is really true? Have you never had any company you've ever owned not lose value (principal) and/or had cuts to dividend income (even and especially during a crisis like 2008)?? I find that a little hard to believe. What's more is even if you're brilliant at picking consistent (never declining stock prices or dividends) companies, does that mean ALL retirees will be as lucky as you? What if they're not? Then they definitely are in for some drama, aren't they?
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Northern Flicker
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Re: What's the deal with dividend funds?

Post by Northern Flicker »

The problem with owning 1 share of BRK.A is its reduced liquidity. Sure, dividends are a way of getting cash out of investments when there are market problems with a stock, such as a private company with no market or a stock where the minimum sale is very high like BRK.A.

But these are corner cases that do not generalize to most other stocks and are not applicable to portfolios like that of SCHD or portfolios that would be of interest to people interested in “dividend stock” portfolios.

You can sell shares of stocks in a portfolio if you want to realize more income than is distributed by dividends, and you can reinvest some or all of the dividends if you want to realize less income than the dividend stream.

VFVA the Vanguard value factor fund has an SEC yield of 1.72%. Value stocks and “dividend” stocks are not synonymous terms.
Last edited by Northern Flicker on Wed Jun 22, 2022 2:41 am, edited 1 time in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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JoMoney
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Re: What's the deal with dividend funds?

Post by JoMoney »

Northern Flicker wrote: Tue Jun 21, 2022 10:39 pm...
VFVA the Vanguard value factor fund has an SEC yield of 1.72%. Value stocks and “dividend” stocks are not synonymous terms.
Even within "dividend" stocks there are different styles.
Vanguard's Dividend Appreciation Index fund (VIG), has a near 0 loading on "Value"/HmL and by a Morningstar style box standard, while predominately a "Blend", VIG has more on the "Growth" side than "Value"
Some dividend methodologies prefer to remove financials, REITs, or even utilities, while others emphasize them.
Lots of differences between "dividend funds"
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Re: What's the deal with dividend funds?

Post by burritoLover »

If I were forced to create a dividend-only portfolio and it consisted of only Vanguard funds, I would do something like the following. Certainly wouldn't attempt to pick individual dividend stocks - that's a fool's game.

Code: Select all

Alloc  ETF                                               Curr Div Yield
25%    VYM Vanguard High Dividend Yield                  3.17%
25%    VIG Vanguard Dividend Appreciation                2.03%
25%    VYMI Vanguard International High Dividend Yield   5.24%
25%    VIGI Vanguard International Dividend Appreciation 1.73%
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Re: What's the deal with dividend funds?

Post by incognito_man »

alex_686 wrote: Tue Jun 21, 2022 4:12 pm
incognito_man wrote: Tue Jun 21, 2022 3:34 pm I'm with Han Solo on this one. Everything they have been saying makes sense to me and I agree with it. I think it's a useful differentiator between dividend payers and non payers.
How so? To have a valid factor you need similar stocks to act like each other. Value stocks act like other value stocks. Momentum stocks act like other momentum stocks. Dividend stocks don't really act like other dividend stocks.
incognito_man wrote: Tue Jun 21, 2022 3:34 pm But that difference will only matter if the investor is taking the dividends out in cash and not re-investing (which is still obviously a useful distinction since many of those people exist).
I will seriously contest this last point. Why should people take out dividends? If they need money to spend why not take it out of the portfolio in general? Why this specific slice of return? Having done portfolio attribution professionally I can tell you there is no logical reasons. Every reason I have see - bar one - suffers from some combination of cognitive or behavioral error.

The one reason that I do think is valid is a behavioral error in that it is a external restrain on spending. The crux of the argument is that cost of such behavioral errors is lower than the cognitive load error. Note, the argument rests on individual investor behaviors not of the dividend payment behavior of the company.
You're right. I just ran the thought experiment out in actual numbers on a spreadsheet that I had and it turns out it's a complete wash. Which makes intuitive sense now that I think about it. No such thing as a free lunch!
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Re: What's the deal with dividend funds?

Post by firebirdparts »

dbr wrote: Mon Jun 20, 2022 11:39 am The deal with dividends is that a whole bunch of people don't understand how stocks work, a whole bunch of other people want to set them straight, usually someone who doesn't understand thinks he does and won't quit, some people understand perfectly well and just prefer getting dividends or have other good reasons, someplace down in there might be an actual difference that doesn't matter enough to care, and the forum chooses to keep answering and discussing questions rather than banning the topic, possibly by running a bot that automatically deletes any post that contains the word "dividend." The same bot would automatically delete any posts containing the words "safe" or "risk."
Honestly it seems to be getting worse all the time.

I'm a bit curious as to how people get this way. It is clearly a strong fascination. The "arguments" presented would not move anybody who has a shred of logic to them. And they've been posted over and over about once a month or so.
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Re: What's the deal with dividend funds?

Post by Corvidae »

HanSolo wrote: Tue Jun 21, 2022 3:06 pm
Corvidae wrote: Tue Jun 21, 2022 3:02 pm My full comment stated that your statement is a tautology. I included alternative ways to return value because you are saying, if we ignore these other ways (set them to zero), and set dividends to zero, and set terminal value to zero--that is, if we return nothing--then shareholders get nothing. This is true but not really saying anything. You also excluded "the market portfolio or any other common benchmark" from my comment. A model only concerned with stocks that have a terminal value of zero is not of general interest. Models are to be tested empirically. If you already set everything to zero, there is nothing to test.
My analysis involved the effect of dividends on the equity investment community over the entire life of a company. That's why the endpoint is zero.

If you want to examine other scenarios, that's fine with me.

In that case, we may find that sometimes dividends affect equity investor returns and sometimes they don't. I'm just saying that it's not true that they don't at all. I don't see why saying that is controversial.
I don't think it's controversial, it's just not actionable. You might be getting pushback on what you're saying because commenters worry some readers might mistakenly believe that what you are showing is relevant to how investors should construct their portfolios. Based on a few comments, I think their concern is warranted.
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Re: What's the deal with dividend funds?

Post by MtnRetreat »

CuriousTacos wrote: Tue Jun 21, 2022 7:16 pm
In your example, you correctly maintain equivalency between the two options (dividend vs non-dividend) prior to the dip, but you neglected to do the same during the dip. The non-dividend stocks, in Option B, would have appreciated by 5% (just as the dividend-paying stocks provided a 5% dividend without the price falling further), in which case the investor could have withdrawn $22.5k in year 2, and had exactly the same income as the dividend investor.
Not necessarily true. In my example the market is down 10% across the board. Dividend stocks frequently do not reduce dividends to zero, and many are loathe to reduce $/share at all. Now none of this is guaranteed, but in general good dividend stocks are less volatile than growth stocks, trading at more sane P/E than the riskier stocks. In a down market the non-dividend stocks may drop more than dividend stocks, not less.

In general then, dividend stocks are likely to produce lower overall volatility in value as well as more stability in income.
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Re: What's the deal with dividend funds?

Post by MtnRetreat »

CuriousTacos wrote: Tue Jun 21, 2022 7:20 pm

Whatever length of time, the reliability of providing for withdrawals is what matters. Whether that comes from dividends, price appreciation, or any combination of the two is mathematically irrelevant, although perhaps not behaviorally irrelevant.

As I showed in my correction to your example above, if the chart of total return throughout a given time-frame is identical between dividend and total market funds, then there is no difference to the investor. Dividend funds must either drop less or gain more (when looking at total return) to be of any tangible benefit.

Edit: I think that when I say "you should only care about total return", you think I mean you should seek high-risk growth. That is incorrect; what I am saying is that when comparing dividend funds to total market funds, you should be looking at a total return chart, and you would need to see either less volatility or greater return (or more precisely, superior risk-adjusted return), otherwise there was no tangible benefit. The debate can only be about whether dividend funds did/will provide such a benefit (since we all allow for behavioral reasons). I think that they have/will not after adjusting for factors (such as size, value, profitability, quality, and momentum).
Are you depending on your retirements for current living expense money? When reality arrives, the theoretical math is not a factor. Not in my example the retiree maintains a steadier stream of income with a lower decrement during the dip, and returns to pre-dip income afterwards. This assumes the retiree is looking at this portion of their portfolio for daily living $$. In theory the value of this portion of their portfolio could go to $0 as long as it continued to provide dividend income.
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

MtnRetreat wrote: Wed Jun 22, 2022 8:02 pm
CuriousTacos wrote: Tue Jun 21, 2022 7:16 pm
In your example, you correctly maintain equivalency between the two options (dividend vs non-dividend) prior to the dip, but you neglected to do the same during the dip. The non-dividend stocks, in Option B, would have appreciated by 5% (just as the dividend-paying stocks provided a 5% dividend without the price falling further), in which case the investor could have withdrawn $22.5k in year 2, and had exactly the same income as the dividend investor.
Not necessarily true. In my example the market is down 10% across the board. Dividend stocks frequently do not reduce dividends to zero, and many are loathe to reduce $/share at all. Now none of this is guaranteed, but in general good dividend stocks are less volatile than growth stocks, trading at more sane P/E than the riskier stocks.
You seem to have misunderstood my line of reasoning. I'll rephrase...

If a dividend fund pays a 5% dividend during the year, and the price is unchanged by the end of the year, then the total return that year is approximately 5%. If a total market fund pays no dividend, and the price is unchanged by the end of the year, then the total return for that year is 0%. So your example merely demonstrates that a fund with a better total return is better for retirees. Nobody is arguing that. We are arguing whether dividend funds actually provide a better total return; you indirectly said that total return is essentially irrelevant ("price is essentially irrelevant"); then you provided an example where the total return was greater and volatility was lower.

It all comes down to whether or not dividend funds actually have/will provide better risk adjusted returns over a long enough period of time to be meaningful. While they have done well in the last year, it was not so clear over long time periods, especially after comparing to similar size/value/quality/profitability factors (which have also done well lately).
MtnRetreat wrote: Wed Jun 22, 2022 8:02 pm In a down market the non-dividend stocks may drop more than dividend stocks, not less.
You stated this as if it is a fact that is always true, both for the past and future. It was not the case in 2020 or 2008 (or it was close, so it depends which fund you choose, but growth outperformed value in both), and it will almost certainly not be the case for some of the future downturns.
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

MtnRetreat wrote: Wed Jun 22, 2022 8:07 pm Are you depending on your retirements for current living expense money? When reality arrives, the theoretical math is not a factor.
I'm having trouble understanding exactly what you're trying to say, but math is certainly is relevant in comparing possibilities. If you're trying to say that, for two roughly equivalent options, the psychological boost from dividends is meaningful to you, then great, I have never meant to discredit that.
MtnRetreat wrote: Wed Jun 22, 2022 8:07 pm In theory the value of this portion of their portfolio could go to $0 as long as it continued to provide dividend income.
If the value of a dividend fund went to zero yet perpetually maintained roughly the same $/share of dividends, that would be a very very very wild scenario, and nothing even remotely like that has ever happened. I hope we can exclude such a possibility and stay in the realm of what has generally happened in the past, which is that their total return generally resembles the total market through downturns and recoveries.
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Re: What's the deal with dividend funds?

Post by JoMoney »

If a security's ultimate return to investors is the sum of all it's distributions from it's issue until it's ultimate maturity or dissolution/liquidation and distribution of the company's assets, then a stock that pays regular dividends thereby distributing some of the businesses assets sooner rather than later, should have a lower duration and the discounted value less impacted by changes in the discount rate relative to a security that's expected to withhold and compound that money further into the future.
It makes some sense to me, that someone in a distribution phase (or near it) that needs the income, might have a preference for investments that expect to return some of that value sooner. The market value of some growth stock that may not even be profitable for years to come but is valued at some future expectation, and it's market value at any particular point in time might have wilder swings someone looking for regular income may not like.

I don't know that it proves anything, but interesting to me look at the nature of different fund returns, with the data currently available in PortfolioVisualizer for Vanguard's Equity Income fund (VEIPX - a conservative 'dividend' fund) and Vanguard's Growth Index Fund (VIGRX)
Jan 1993 - May 2022
The total return for these funds is about the same over the period, the Growth Index fund actually has a slightly higher end total return.
PV Link

Vanguard Equity-Income CAGR: 10.21%
Vanguard Growth Index CAGR: 10.23%

If we change the scenario to someone making regular contributions over the period, the return for the "Growth" fund over the long period actually shows a slight increase in it's CAGR relative to the dividend fund:
PV Link

Vanguard Equity-Income CAGR: 11.91%
Vanguard Growth Index CAGR: 12.04%

But if we flip that scenario to someone making withdrawals of the same amount over the same period, it would seem to give a slight advantage to the dividend fund
PV Link
Vanguard Equity-Income CAGR: 7.13%
Vanguard Growth Index CAGR: 6.73%

Also interesting, is Mr. Bogle in his book "Bogle on Mutual Funds" made several model portfolios, which had younger investors in an accumulation phase potentially tilting towards growth, and investors in later distribution years tilting towards income... but even with the results above, the differences in return one way or the other are rather slight, and even Mr. Bogle in later retrospect suggested how well simply using a broad market low cost index fund would have performed over someones entire investment life span rather than his various modeled portfolios that changed based on investors stage.
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Re: What's the deal with dividend funds?

Post by Northern Flicker »

Janus887 wrote: Mon Jun 20, 2022 4:48 pm I suppose a more direct way to frame the question would be: in the absence of stock buybacks (a relatively recent corporate/investment phenomenon) is there any good way for a shareholder to receive ROI besides a dividend?

We need to take a step back. Stocks are businesses. When we buy stocks we become business owners. Businesses are started and operated to generate revenue for the owners as going concerns. A business that does not return capital to its owners in some form is a terrible business to own. And if you can't return capital via buybacks, how exactly do you propose to do it? Are you just going to continue investing in the business ad infinitum? Until your business grows larger than the entire world's GDP and you sell it to someone else? Surely we see the problem with this line of thinking?

The point here is that buybacks are (like so much else in modern society) a deviation from the historic norm, and not a good one (they introduce obvious perverse incentives to management). Thus stocks paying dividends should not be looked at as good or bad, but rather as something that just "is". Dividends are simply the default means of companies returning capital to shareholders. You own the company, you receive a portion of the profits every quarter. What could be simpler?
The vast majority of stocks pay dividends. Most of the stocks I hold through funds pay dividends. The question is not whether stocks should pay dividends. The question is whether stocks with a dividend history or projected future dividend stream meeting any of various conditions are superior investments.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: What's the deal with dividend funds?

Post by HanSolo »

CuriousTacos wrote: Tue Jun 21, 2022 4:39 pm
HanSolo wrote: Tue Jun 21, 2022 3:59 pm There are some people who make considerable effort to address the mechanics of how dividends work and their effects, while saying nothing about predictions. I was trying to respond in that context.
If you aren't prepared to address whether companies with certain dividend characteristics (high yield, stable, growing, etc), then this line of debate is not actionable or relevant in my opinion.
OK. Then the assertion I was examining wasn't actionable either.
Regardless of how we got here (I personally think you brought up the example that led to the discussion about dividend mechanics, but whatever), yes, I think that it is not actionable for anybody here to debate the mechanics of dividends without any regard for market efficiency and/or whether any of this affects expectations of future performance.

If dividend characteristics mean nothing for future performance, then what is it you're trying to argue? It really seems like you're hung up on something based on a misunderstanding of others' views.
I'm fine with your commentary. As you know (seeing that you quoted my earlier comment), I already conceded that perhaps this isn't actionable. Commenting further is probably redundant. But to give a direct answer to your question (since you asked): an assertion was made about the mechanics and/or effects of dividends (that assertion probably not being relevant to actionability), and I pointed out how that assertion was false (which is likewise no more or less actionable than the assertion being examined). That's all I was doing. I was not making a prediction or an investment recommendation. I hope that answers your question.
Corvidae wrote: Wed Jun 22, 2022 2:09 pm I don't think it's controversial, it's just not actionable. You might be getting pushback on what you're saying because commenters worry some readers might mistakenly believe that what you are showing is relevant to how investors should construct their portfolios. Based on a few comments, I think their concern is warranted.
That's fine. I made no claim about actionability. I just assumed that if a false assertion is made (that doesn't happen to be actionable) then a correction to that assertion is reasonable (that would therefore not be actionable either).
incognito_man wrote: Wed Jun 22, 2022 10:17 am You're right. I just ran the thought experiment out in actual numbers on a spreadsheet that I had and it turns out it's a complete wash. Which makes intuitive sense now that I think about it. No such thing as a free lunch!
Well, that also sounds fine to me. I agree that there cannot be a free lunch. Just one point of caution... if bondholders/creditors came out ahead in my case (a) (because they received cash they wouldn't have gotten in case (b)), then somebody else must have come out ahead in case (b). I hope your spreadsheet can identify who it was, because if that party can't be identified, then there's either free money showing up in case (a) (and we know free money is impossible) or disappearing money in case (b) (which presumably can't happen either).
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Re: What's the deal with dividend funds?

Post by nisiprius »

Northern Flicker wrote: Thu Jun 23, 2022 2:20 am...The vast majority of stocks pay dividends. Most of the stocks I hold through funds pay dividends. The question is not whether stocks should pay dividends. The question is whether stocks with a dividend history or projected future dividend stream meeting any of various conditions are superior investments...
+1

Ffrom the transcript of The Relevance of Dividend Irrelevance,
Now, this was shown, of course, theoretically by Miller and Modigliani in 1961, and Fama and French showed empirically in their 1993 paper common risk factors in the returns on stocks and bonds that portfolios formed based on their dividend yield to have three factor alphas that are statistically indistinguishable from zero. So, returns of a dividend portfolio are fully explained by market beta, company size, and relative price measured by book to market, in the case of Fama and French. So in other words, dividends don't contain additional information about expected returns when you're controlling for the exposures that I just mentioned.
In other words, dividend funds are not demonstrably superior to other funds in the same Morningstar style box. "Just as good as" and "friendlier to systematic withdrawals" might be a reason to prefer them, though.
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Re: What's the deal with dividend funds?

Post by burritoLover »

HanSolo wrote: Thu Jun 23, 2022 7:15 am
CuriousTacos wrote: Tue Jun 21, 2022 4:39 pm
HanSolo wrote: Tue Jun 21, 2022 3:59 pm There are some people who make considerable effort to address the mechanics of how dividends work and their effects, while saying nothing about predictions. I was trying to respond in that context.
If you aren't prepared to address whether companies with certain dividend characteristics (high yield, stable, growing, etc), then this line of debate is not actionable or relevant in my opinion.
OK. Then the assertion I was examining wasn't actionable either.
Regardless of how we got here (I personally think you brought up the example that led to the discussion about dividend mechanics, but whatever), yes, I think that it is not actionable for anybody here to debate the mechanics of dividends without any regard for market efficiency and/or whether any of this affects expectations of future performance.

If dividend characteristics mean nothing for future performance, then what is it you're trying to argue? It really seems like you're hung up on something based on a misunderstanding of others' views.
I'm fine with your commentary. As you know (seeing that you quoted my earlier comment), I already conceded that perhaps this isn't actionable. Commenting further is probably redundant. But to give a direct answer to your question (since you asked): an assertion was made about the mechanics and/or effects of dividends (that assertion probably not being relevant to actionability), and I pointed out how that assertion was false (which is likewise no more or less actionable than the assertion being examined). That's all I was doing. I was not making a prediction or an investment recommendation. I hope that answers your question.
Corvidae wrote: Wed Jun 22, 2022 2:09 pm I don't think it's controversial, it's just not actionable. You might be getting pushback on what you're saying because commenters worry some readers might mistakenly believe that what you are showing is relevant to how investors should construct their portfolios. Based on a few comments, I think their concern is warranted.
That's fine. I made no claim about actionability. I just assumed that if a false assertion is made (that doesn't happen to be actionable) then a correction to that assertion is reasonable (that would therefore not be actionable either).
incognito_man wrote: Wed Jun 22, 2022 10:17 am You're right. I just ran the thought experiment out in actual numbers on a spreadsheet that I had and it turns out it's a complete wash. Which makes intuitive sense now that I think about it. No such thing as a free lunch!
Well, that also sounds fine to me. I agree that there cannot be a free lunch. Just one point of caution... if bondholders/creditors came out ahead in my case (a) (because they received cash they wouldn't have gotten in case (b)), then somebody else must have come out ahead in case (b). I hope your spreadsheet can identify who it was, because if that party can't be identified, then there's either free money showing up in case (a) (and we know free money is impossible) or disappearing money in case (b) (which presumably can't happen either).
I still have no clue what you are trying to argue. Are you arguing that dividends are free money or sometimes free money? What is your "free money" position in regards to dividends? Either you agree that the market arbitrages away the dividend amount with a price drop in the stock or you don't. If you believe it does, then it can't be free money.
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Re: What's the deal with dividend funds?

Post by Nowizard »

Primarily, the issue is simply one that reflects there are multiple aspects of investing and differing philosophies that augment, contrast or even challenge the one so well represented and supported by most who post here.

Tim
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Re: What's the deal with dividend funds?

Post by HanSolo »

burritoLover wrote: Thu Jun 23, 2022 8:11 am I still have no clue what you are trying to argue.
As I said already, I know that.
Are you arguing that dividends are free money or sometimes free money?
No, I'm not. I didn't mean anything other than what I said. I never said the above. Did you read my post that you just quoted? It explicitly says "we know free money is impossible".
What is your "free money" position in regards to dividends?
I answered that question already. At the risk of being redundant, I'll answer it again: I do not believe in free money. As far as I can tell, nobody in this thread does.

Thanks for asking.
Last edited by HanSolo on Thu Jun 23, 2022 8:34 am, edited 1 time in total.
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Re: What's the deal with dividend funds?

Post by burritoLover »

Nowizard wrote: Thu Jun 23, 2022 8:13 am Primarily, the issue is simply one that reflects there are multiple aspects of investing and differing philosophies that augment, contrast or even challenge the one so well represented and supported by most who post here.

Tim
Not really in this case. A lot of the dividend focusers have fundamental misunderstandings about how the market works. If they understood how it works, they could have a more diversified portfolio if they want to. The big one to understand is that receiving a dividend has the same effect as selling the same amount, regardless of what the market is doing (up, down, sideways). This makes receiving the dividend a net nothing in regards to your net worth. I have yet to find anyone that understands how dividends work but choose to invest in an all-dividend portfolio anyway - this is the mythical unicorn that some seem to present as a commonplace.
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Re: What's the deal with dividend funds?

Post by burritoLover »

HanSolo wrote: Thu Jun 23, 2022 8:22 am
burritoLover wrote: Thu Jun 23, 2022 8:11 am I still have no clue what you are trying to argue.
As I said already, I know that.
Are you arguing that dividends are free money or sometimes free money?
No, I'm not. I didn't mean anything other than what I said. I never said the above. Did you read my post that you just quoted? It explicitly says "we know free money is impossible".
What is your "free money" position in regards to dividends?
I answered that question already. At the risk of being redundant, I'll answer it again: I do not believe in free money. As far as I can tell, nobody in this thread does.

Thanks for asking.
Ok, cool, I'm glad you've come to that realization. See we can teach people about dividends!
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Re: What's the deal with dividend funds?

Post by tibbitts »

MtnRetreat wrote: Wed Jun 22, 2022 8:02 pm Not necessarily true. In my example the market is down 10% across the board. Dividend stocks frequently do not reduce dividends to zero, and many are loathe to reduce $/share at all. Now none of this is guaranteed, but in general good dividend stocks are less volatile than growth stocks, trading at more sane P/E than the riskier stocks. In a down market the non-dividend stocks may drop more than dividend stocks, not less.

In general then, dividend stocks are likely to produce lower overall volatility in value as well as more stability in income.
The problem is that you're counting on identifying "good dividend stocks" in advance. Are you sure the difference in performance among funds (both passive and active) that focus on dividends isn't as substantial as the difference in performance (over time) between dividend and total-market approaches? Ultimately if you choose "good" equities of any variety you'll do well, whether they pay dividends or not.
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Re: What's the deal with dividend funds?

Post by Statistical »

tibbitts wrote: Thu Jun 23, 2022 8:38 am
MtnRetreat wrote: Wed Jun 22, 2022 8:02 pm Not necessarily true. In my example the market is down 10% across the board. Dividend stocks frequently do not reduce dividends to zero, and many are loathe to reduce $/share at all. Now none of this is guaranteed, but in general good dividend stocks are less volatile than growth stocks, trading at more sane P/E than the riskier stocks. In a down market the non-dividend stocks may drop more than dividend stocks, not less.

In general then, dividend stocks are likely to produce lower overall volatility in value as well as more stability in income.
The problem is that you're counting on identifying "good dividend stocks" in advance. Are you sure the difference in performance among funds (both passive and active) that focus on dividends isn't as substantial as the difference in performance (over time) between dividend and total-market approaches? Ultimately if you choose "good" equities of any variety you'll do well, whether they pay dividends or not.
Exactly. If we are into stock picking them just pick "good" stocks for the current environment regardless of what dividends they pay. Someone thinking they can't pick good growth stocks to beat the market but also thinking they can pick good dividend stocks is showing a logical fallacy.

I would point out that high dividend funds underperformed in the 2008 crash because high dividend focus ends up a bias towards financials which were what bore the brunt of the 2008 decline. How many people buying high dividend funds knew they of that risk concentration prior to the financial market meltdown.

Relative performance of VYM vs VTI between 2007 and 2010
https://www.portfoliovisualizer.com/fun ... F31%2F2010

VYM had a negative CAGR, roughly the same volatility, and a worse max drawdown than VTI.
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Re: What's the deal with dividend funds?

Post by HanSolo »

burritoLover wrote: Thu Jun 23, 2022 8:47 am
HanSolo wrote: Thu Jun 23, 2022 8:42 am
burritoLover wrote: Thu Jun 23, 2022 8:36 am Ok, cool, I'm glad you've come to that realization. See we can teach people about dividends!
I don't need to be taught anything by you. And my positions on this topic haven't changed. I understood dividends before ever participating in these discussions.
Ok, what do I need to learn specifically? What I am wrong about?
If you're interested in finding out about my position, you can refer to my previous posts. No need to repeat.
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Re: What's the deal with dividend funds?

Post by Riprap »

Part of the problem in this discussion is that posters are looking at the dividend question from two different angles:

1) At the fund level

2) At the company level

I thinks it us pretty well established that dividend paying funds are not superior in any meaningful way to total market index funds with regard to total return. I myself like cash dividends and don't consider the extra "tax drag" in taxable accounts to be detrimental. I don't invest in dividend funds myself rather index funds. I don't have a collection of dividend paying stocks because there will be a day that I won't be able to manage that nor would my spouse. So it's a mistake to go down that road in a mostly taxable account. I made that decision years ago.

However, at the company level during board room discussions, what to do about "excess cash"? My contention is that it should be returned to the shareholders primarily through a cash distribution. Stock buybacks are tax efficient and have the potential to enhance shareholder value. But frequently too high of a price is paid in buyback strategies making them a foolish investment for the shareholders. I do think return at the investor level could be enhanced if more companies paid cash dividends rather than undertake foolish acquisitions or other silly ventures. That's an opinion and I cannot quantify it but it's also an opinion shared by successful investors like the Warren Buffetts of the world. Think of it as an opportunity cost for an individual investor who might have otherwise deployed the cash in more productive ways.

In the long run, it is possible to have no return on an investment when there have been no dividends paid along the way.

So everytime I chime into dividend discussions, it's at the boardroom level, not the fund level. In case anyone cares. :D
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Re: What's the deal with dividend funds?

Post by TN_Boy »

tibbitts wrote: Thu Jun 23, 2022 8:38 am
MtnRetreat wrote: Wed Jun 22, 2022 8:02 pm Not necessarily true. In my example the market is down 10% across the board. Dividend stocks frequently do not reduce dividends to zero, and many are loathe to reduce $/share at all. Now none of this is guaranteed, but in general good dividend stocks are less volatile than growth stocks, trading at more sane P/E than the riskier stocks. In a down market the non-dividend stocks may drop more than dividend stocks, not less.

In general then, dividend stocks are likely to produce lower overall volatility in value as well as more stability in income.
The problem is that you're counting on identifying "good dividend stocks" in advance. Are you sure the difference in performance among funds (both passive and active) that focus on dividends isn't as substantial as the difference in performance (over time) between dividend and total-market approaches? Ultimately if you choose "good" equities of any variety you'll do well, whether they pay dividends or not.
To me it seems like "the problem" is MtnRetreat is asserting that of these two cases:

1) My stocks yield (a variable) 2.5% and I just spend whatever those dividends are.
2) I pull 2.5% from a portfolio via dividends and some stock sales

The key thing is, I pull the same amount of money out of the portfolio.

And MtnRetreat believes case 1) is safer. In other words, the portfolio survivorship is better. I don't see any other way to look at MtnRetreat's viewpoint. I'm sidestepping any concerns about picking "good dividend stocks" as I'm not a big believer in active stock picking, but that concern is mostly irrelevant. The argument appears to be that using a dividend stream only is safer than a mix of dividend and stock sales, given the same $$ withdrawal.

And I believe that argument is not backed up by any research.

MtnRetreat, feel free to correct me on my belief about your position.
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Re: What's the deal with dividend funds?

Post by dbr »

Riprap wrote: Thu Jun 23, 2022 9:15 am Part of the problem in this discussion is that posters are looking at the dividend question from two different angles:

1) At the fund level

2) At the company level

I thinks it us pretty well established that dividend paying funds are not superior in any meaningful way to total market index funds with regard to total return. I myself like cash dividends and don't consider the extra "tax drag" in taxable accounts to be detrimental. I don't invest in dividend funds myself rather index funds. I don't have a collection of dividend paying stocks because there will be a day that I won't be able to manage that nor would my spouse. So it's a mistake to go down that road in a mostly taxable account. I made that decision years ago.

However, at the company level during board room discussions, what to do about "excess cash"? My contention is that it should be returned to the shareholders primarily through a cash distribution. Stock buybacks are tax efficient and have the potential to enhance shareholder value. But frequently too high of a price is paid in buyback strategies making them a foolish investment for the shareholders. I do think return at the investor level could be enhanced if more companies paid cash dividends rather than undertake foolish acquisitions or other silly ventures. That's an opinion and I cannot quantify it but it's also an opinion shared by successful investors like the Warren Buffetts of the world.

In the long run, it is possible to have no return on an investment when there have been no dividends paid along the way.

So everytime I chime into dividend discussions, it's at the boardroom level, not the fund level. In case anyone cares. :D
This is important. Conversations about stock picking, corporate governance, and so on are very different from investment strategy for mutual fund investors. Not illegitimate, just different and not much related. Warren Buffett is probably an excellent example of a person that picks where to invest based on evaluation of corporate governance. Ironically he is also a person who discourages investing for dividends to the point that his own company does not pay them. If a person does want a Buffett style diversified investment maybe BRK is that investment.
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Re: What's the deal with dividend funds?

Post by TN_Boy »

dbr wrote: Thu Jun 23, 2022 9:21 am
Riprap wrote: Thu Jun 23, 2022 9:15 am Part of the problem in this discussion is that posters are looking at the dividend question from two different angles:

1) At the fund level

2) At the company level

I thinks it us pretty well established that dividend paying funds are not superior in any meaningful way to total market index funds with regard to total return. I myself like cash dividends and don't consider the extra "tax drag" in taxable accounts to be detrimental. I don't invest in dividend funds myself rather index funds. I don't have a collection of dividend paying stocks because there will be a day that I won't be able to manage that nor would my spouse. So it's a mistake to go down that road in a mostly taxable account. I made that decision years ago.

However, at the company level during board room discussions, what to do about "excess cash"? My contention is that it should be returned to the shareholders primarily through a cash distribution. Stock buybacks are tax efficient and have the potential to enhance shareholder value. But frequently too high of a price is paid in buyback strategies making them a foolish investment for the shareholders. I do think return at the investor level could be enhanced if more companies paid cash dividends rather than undertake foolish acquisitions or other silly ventures. That's an opinion and I cannot quantify it but it's also an opinion shared by successful investors like the Warren Buffetts of the world.

In the long run, it is possible to have no return on an investment when there have been no dividends paid along the way.

So everytime I chime into dividend discussions, it's at the boardroom level, not the fund level. In case anyone cares. :D
This is important. Conversations about stock picking, corporate governance, and so on are very different from investment strategy for mutual fund investors. Not illegitimate, just different and not much related. Warren Buffett is probably an excellent example of a person that picks where to invest based on evaluation of corporate governance. Ironically he is also a person who discourages investing for dividends to the point that his own company does not pay them. If a person does want a Buffett style diversified investment maybe BRK is that investment.
Also ironic is how long Buffett held on to Wells Fargo stock (finally divested the last of it this year) despite how important Buffett says corporate governance is. He did not, in fact, put his money where his mouth was in that situation.

To the larger point, I also agree that discussions of dividends at the boardroom level, while interesting, are more "investing theory" relevant than "where should I put my money" relevant.

Also in case anyone cares :-) from my time in the corporate world at companies ranging from huge dividend paying telcos to startups to fast growing post IPO growth companies, I think it a myth that dividends make it less likely that idiotic money decisions will be made. The exec team is good or it isn't (and that team will change). And, it is pretty hard to make good decisions all the time, given how difficult predicting the future is ....
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Re: What's the deal with dividend funds?

Post by exodusNH »

burritoLover wrote: Thu Jun 23, 2022 8:34 am
Nowizard wrote: Thu Jun 23, 2022 8:13 am Primarily, the issue is simply one that reflects there are multiple aspects of investing and differing philosophies that augment, contrast or even challenge the one so well represented and supported by most who post here.

Tim
Not really in this case. A lot of the dividend focusers have fundamental misunderstandings about how the market works. If they understood how it works, they could have a more diversified portfolio if they want to. The big one to understand is that receiving a dividend has the same effect as selling the same amount, regardless of what the market is doing (up, down, sideways). This makes receiving the dividend a net nothing in regards to your net worth. I have yet to find anyone that understands how dividends work but choose to invest in an all-dividend portfolio anyway - this is the mythical unicorn that some seem to present as a commonplace.
Like these:

https://time.com/nextadvisor/investing/ ... dividends/

https://time.com/nextadvisor/investing/ ... ocks-work/

The first one explicitly uses the term "free money". The second doesn't, but nothing in the text indicates that the dividend decreases the stock price. It, too, is focused on the "income" aspect.
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Re: What's the deal with dividend funds?

Post by dbr »

exodusNH wrote: Thu Jun 23, 2022 10:00 am
burritoLover wrote: Thu Jun 23, 2022 8:34 am
Nowizard wrote: Thu Jun 23, 2022 8:13 am Primarily, the issue is simply one that reflects there are multiple aspects of investing and differing philosophies that augment, contrast or even challenge the one so well represented and supported by most who post here.

Tim
Not really in this case. A lot of the dividend focusers have fundamental misunderstandings about how the market works. If they understood how it works, they could have a more diversified portfolio if they want to. The big one to understand is that receiving a dividend has the same effect as selling the same amount, regardless of what the market is doing (up, down, sideways). This makes receiving the dividend a net nothing in regards to your net worth. I have yet to find anyone that understands how dividends work but choose to invest in an all-dividend portfolio anyway - this is the mythical unicorn that some seem to present as a commonplace.
Like these:

https://time.com/nextadvisor/investing/ ... dividends/

https://time.com/nextadvisor/investing/ ... ocks-work/

The first one explicitly uses the term "free money". The second doesn't, but nothing in the text indicates that the dividend decreases the stock price. It, too, is focused on the "income" aspect.
People reading things like that would certainly explain the persistence of this topic. Heck, even Mr. Bogle was heard to say that dividends are one of the sources of retirement income.

Note the second article does say "Dividends are enticing. They offer investors a return on their investment every so often on top of appreciation from stocks." The next statement "But they have some limitations." will probably be ignored because the following explanation is complicated.
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Re: What's the deal with dividend funds?

Post by LadyGeek »

I removed a contentious interchange. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters.
Also bear in mind that discussions are not just between two members. Everyone reading this thread, from beginner to expert, is learning from the discussion.
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burritoLover
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Re: What's the deal with dividend funds?

Post by burritoLover »

exodusNH wrote: Thu Jun 23, 2022 10:00 am
burritoLover wrote: Thu Jun 23, 2022 8:34 am
Nowizard wrote: Thu Jun 23, 2022 8:13 am Primarily, the issue is simply one that reflects there are multiple aspects of investing and differing philosophies that augment, contrast or even challenge the one so well represented and supported by most who post here.

Tim
Not really in this case. A lot of the dividend focusers have fundamental misunderstandings about how the market works. If they understood how it works, they could have a more diversified portfolio if they want to. The big one to understand is that receiving a dividend has the same effect as selling the same amount, regardless of what the market is doing (up, down, sideways). This makes receiving the dividend a net nothing in regards to your net worth. I have yet to find anyone that understands how dividends work but choose to invest in an all-dividend portfolio anyway - this is the mythical unicorn that some seem to present as a commonplace.
Like these:

https://time.com/nextadvisor/investing/ ... dividends/

https://time.com/nextadvisor/investing/ ... ocks-work/

The first one explicitly uses the term "free money". The second doesn't, but nothing in the text indicates that the dividend decreases the stock price. It, too, is focused on the "income" aspect.
Yeah, this is the problem - there's ton of misinformation out there - some of it from seemingly reputable sources. Here's what US news and World Report says, for example, which implies that dividends work the same as bond interest:
Dividend stocks also often benefit from higher yields than bonds when interest rates are low, while simultaneously offering the potential for share price appreciation. Even if the price falls, the dividend can cushion a portfolio with steady income, and if you reinvest those dividends, a lower share price gets you more shares per dividend.
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Re: What's the deal with dividend funds?

Post by dbr »

burritoLover wrote: Thu Jun 23, 2022 10:11 am
exodusNH wrote: Thu Jun 23, 2022 10:00 am
burritoLover wrote: Thu Jun 23, 2022 8:34 am
Nowizard wrote: Thu Jun 23, 2022 8:13 am Primarily, the issue is simply one that reflects there are multiple aspects of investing and differing philosophies that augment, contrast or even challenge the one so well represented and supported by most who post here.

Tim
Not really in this case. A lot of the dividend focusers have fundamental misunderstandings about how the market works. If they understood how it works, they could have a more diversified portfolio if they want to. The big one to understand is that receiving a dividend has the same effect as selling the same amount, regardless of what the market is doing (up, down, sideways). This makes receiving the dividend a net nothing in regards to your net worth. I have yet to find anyone that understands how dividends work but choose to invest in an all-dividend portfolio anyway - this is the mythical unicorn that some seem to present as a commonplace.
Like these:

https://time.com/nextadvisor/investing/ ... dividends/

https://time.com/nextadvisor/investing/ ... ocks-work/

The first one explicitly uses the term "free money". The second doesn't, but nothing in the text indicates that the dividend decreases the stock price. It, too, is focused on the "income" aspect.
Yeah, this is the problem - there's ton of misinformation out there - some of it from seemingly reputable sources. Here's what US news and World Report says, for example, which implies that dividends work the same as bond interest:
Dividend stocks also often benefit from higher yields than bonds when interest rates are low, while simultaneously offering the potential for share price appreciation. Even if the price falls, the dividend can cushion a portfolio with steady income, and if you reinvest those dividends, a lower share price gets you more shares per dividend.
Trying to convey an understanding that the concept of return exists as a simple and unified structure for understanding investment behavior is very difficult. Separating dividends and price changes leads to all kinds of misconception. Mutual fund companies, perhaps kicked in the pants by the SEC, are not confused about this as they report fund performance by reporting return. Academic finance in its analysis of investment behavior also uses a return model for discussion, up to and including Modigliani-Miller. It might be that starting finance education with the simplified case of savings accounts with interest is a really bad idea. A better understanding of anything results from seeing examples as special cases of something more general rather than the other way around.

Here is a good article: https://learn.robinhood.com/articles/54 ... al-return/

"Total return matters because it gives a complete view of the return that an investment produces. Many securities provide value in multiple ways. For example, stocks can pay dividends and appreciate in value. Looking at just one form of return that a security gives doesn’t show the true value that the investment offers."
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Re: What's the deal with dividend funds?

Post by jhh9327 »

I'm apprenticing for an hourly only financial planner as I work towards my CFP hours and we are on the same page on the majority of topics. However, this topic is probably where we diverge the most. I'm a total return person, while my boss heavily focuses on the portfolio yield and it generating enough cash flow for our retiree clients. Not wanting to need to sell shares especially when they may be down is the main justification, but it's their show to run while I work here, so I go with it. I will say it is easier explaining to the average client what their dividend rate will provide in cash flow than it is trying to explain total return and how we need to sell shares to generate cash flow. As others have joked, dividends are often viewed as "free money."
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Re: What's the deal with dividend funds?

Post by Riprap »

TN_Boy wrote: Thu Jun 23, 2022 9:55 amAlso in case anyone cares :-) from my time in the corporate world at companies ranging from huge dividend paying telcos to startups to fast growing post IPO growth companies, I think it a myth that dividends make it less likely that idiotic money decisions will be made. The exec team is good or it isn't (and that team will change). And, it is pretty hard to make good decisions all the time, given how difficult predicting the future is ....
Sometimes a "bad exec team" seems good in the beginning. Sometimes it takes years for bad decisions to manifest themselves. Wonder what Neutron Jack's legacy will be for example?

Who knows? Apple's decision to buyback shares instead of paying a higher proportion of cash dividends might look like a blunder in retrospect twenty years from now when they have become a "buggy whip" company.

In the meantime the investor could have had an opportunity to deploy cash in other ways OR even purchase more Apple shares, at least the investor would have had more control.

I guess as others have said, this is more of a corporate governance question than it is a special secret sauce dividend question.

This is a topic I do have a strong opinion on but it's always a good idea to ask, "what if I'm wrong?"
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Re: What's the deal with dividend funds?

Post by Da5id »

Riprap wrote: Thu Jun 23, 2022 11:14 am In the meantime the investor could have had an opportunity to deploy cash in other ways OR even purchase more Apple shares, at least the investor would have had more control.
You are really denying the investor any agency here. They can at any point sell any fraction of their holdings ("create a dividend"). They have absolute control (assuming the stock is liquid of course) of the timing and amount. The amount of a dividend may be precisely the amount they want to redeploy, but that is surely an amazing coincidence rather than anything else.
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Re: What's the deal with dividend funds?

Post by Riprap »

Da5id wrote: Thu Jun 23, 2022 11:23 amYou are really denying the investor any agency here. They can at any point sell any fraction of their holdings ("create a dividend"). They have absolute control (assuming the stock is liquid of course) of the timing and amount. The amount of a dividend may be precisely the amount they want to redeploy, but that is surely an amazing coincidence rather than anything else.
The investor has zero control on how to deploy cash on the company's balance sheet, only the board of directors does. Selling a fraction of shares does not address what to do with idle cash.

Which, by the way, has nothing to do with OP's question. So I should refrain from further comment along these lines.
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

Riprap wrote: Thu Jun 23, 2022 11:29 am
Da5id wrote: Thu Jun 23, 2022 11:23 amYou are really denying the investor any agency here. They can at any point sell any fraction of their holdings ("create a dividend"). They have absolute control (assuming the stock is liquid of course) of the timing and amount. The amount of a dividend may be precisely the amount they want to redeploy, but that is surely an amazing coincidence rather than anything else.
The investor has zero control on how to deploy cash on the company's balance sheet, only the board of directors does. Selling a fraction of shares does not address what to do with idle cash.

Which, by the way, has nothing to do with OP's question. So I should refrain from further comment along these lines.
Yes, at the company level, there is a difference between distributing cash (I would argue that dividends and buybacks are interchangeable), hoarding cash, and investing cash in the business.

The market is efficient enough that this isn't actionable without a lot of supporting evidence demonstrating that this actually affects investor returns.
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