What's the deal with dividend funds?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
dbr
Posts: 41884
Joined: Sun Mar 04, 2007 9:50 am

Re: What's the deal with dividend funds?

Post by dbr »

CuriousTacos wrote: Fri Jun 24, 2022 1:16 pm

Are you insulted by me saying that behavioral or psychological benefits are valid reasons for choosing a dividend-heavy portfolio? If so, are there better phrases for describing these things?
Myself, I don't know about insults, but one can't claim that behavioral or psychological benefits are never valid. It is certainly fine and beneficial for people to arrange their affairs as they please, but it is unfortunate if in doing so they make an unnecessary and harmful mistake.

I think it is a mistake to characterize something as a bad idea by dismissing it as a behavioral or psychological benefit when the real problem is that the reasoning behind the idea is a misunderstanding of investments or a selection of a less effective idea arrived at in ignorance of better ideas.

This also comes back to the thought that arriving at an ok idea by wrong reasoning is not good if someone else uses the same wrong reasoning and ends up at a not so ok idea.

A discussion that takes all this into account is going to require lot of nuance.
User avatar
burritoLover
Posts: 2543
Joined: Sun Jul 05, 2020 12:13 pm

Re: What's the deal with dividend funds?

Post by burritoLover »

If you make up your own reality in relation to how the markets work and then lay those claims out as if they were facts here, others have the right to refute that in an effort to help you or, if you don't think you need any help, help others who might read your misconceptions as truths.
User avatar
topper1296
Posts: 830
Joined: Fri Apr 03, 2009 10:50 pm
Location: Nashville TN

Re: What's the deal with dividend funds?

Post by topper1296 »

Da5id wrote: Tue Jun 21, 2022 9:42 am
BGeste wrote: Tue Jun 21, 2022 9:36 am So you get the dividend and price appreciation outperformance as well.
Image

You are at least somewhat on team "left graph" apparently per the quoted statement?

Dividends are fine as a preference. And they are surely significant as a component of total return for stocks. But if you think beating the market on a total return basis is just as simple as "invest in stocks with dividends", seems like SPIVA would look better given the availability of such an easy to implement active strategy?
Something doesn't add up here. :oops:
Image
MtnRetreat
Posts: 27
Joined: Sat Jan 22, 2022 5:32 pm

Re: What's the deal with dividend funds?

Post by MtnRetreat »

CuriousTacos wrote: Thu Jun 23, 2022 3:54 pm
MtnRetreat wrote: Thu Jun 23, 2022 3:33 pm
CuriousTacos wrote: Thu Jun 23, 2022 2:24 pm The goal is the greatest return for a given amount of risk for the portfolio as a whole.
I just want to single this out as fundamentally incorrect for many retirees. The goal is not to generate maximum future returns for a particular perceived risk, but to secure what they have because they cannot likely work significantly in the future and don't want to take a reduction in lifestyle. The goal is to generate stable and predictable income from one part of the portfolio.

Some portion of the portfolio may be considered speculative into the more distant future with the hope of building more wealth, but that is not the dividend investment portion of the portfolio.
So if there are two portfolios with the same risk, you think retirees should choose the one with lower total returns (defined as the sum of the returns from income, interest, and capital gains)?
But there are not ever two different portfolios of same risk and different returns, where the risk is known absolutely and ahead of time.

Dividend investing is not simply putting together a pile of stocks that all happen to pay dividends. It is selecting stocks which pay good dividends consistently over many years, and which appear to have excellent future prospects of remaining so. Which means they are believed to be low risk individually as well as low risk grouped together. I contend in a volatile market that this basket will be lower volatility than "the entire market", whatever that is.

So the quality dividend portfolio necessarily contains boring companies with a good track record of stable performance, which are less likely to drop as much as various indices.

The portfolio which is predicted to return higher in the long run will be one that has a greater Beta, so in the up market it has extraordinary returns. It outperforms the indices. But it has higher risk in shorter time frames. Retirees are necessarily on shorter time frames, by decades.
MtnRetreat
Posts: 27
Joined: Sat Jan 22, 2022 5:32 pm

Re: What's the deal with dividend funds?

Post by MtnRetreat »

alex_686 wrote: Thu Jun 23, 2022 8:54 pm
Charles Joseph wrote: Thu Jun 23, 2022 4:47 pm This is mere gibberish to a retiree who, rather than rely on the market price of stocks, is looking for steady income in retirement. As John Bogle said, retirees should rely on dividends, not the market price. Whether this is "cognitive load error," "behavioral error," or some other such nonsense is absolutely meaningless to the retiree trying to keep the lights on and put food on the table.
I consider the following statement a very reasonable heuristic: 1 pound of lead falls faster than 1 bound of feathers because it is heavier.

It is light, intuitive, produces actionable data, and is generally right. Far faster and simpler than Newton's laws of motions. However, I am very aware of logical incoherence of the above sentence. You can't build off that theory.

To wit, this gibberish is absolutely critical for keeping the lights on and food on the table for retirees. I have seen too many cases where people were sold on the dividends and told they did not have to worry about price risk only for the underlying stock to blow up, the dividends to disappear, and see the whole thing to colipase. Sometimes this was done by slick salespeople selling inappropriate high risk investments. More often it was just plain ignorance.
Who here remembers the tech-wreck? Who here was actively investing at the time?

I watched my newly retired father lose half his retirement savings when all those glorious companies turned out to be creatively accounting and falsely claiming revenues. The company names were the ones all over the tv with their fabulous achievements. Had he been in the boring established dividend paying companies he would have been better off. Then again in 2008 his portfolio dropped enormously, pretty much leaving him with just a pension and Social Security to live on.

What it comes down to is every portfolio needs to be diversified and hedged, both in terms of investments and in strategy. Just dividend stocks is as logical as just tech high-fliers.
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Fri Jun 24, 2022 6:55 am JoMoney is one of the contributors to this thread whose posts have been ignored even though they're relevant to the discussion. Here's an example (excerpt):
JoMoney wrote: Wed Jun 22, 2022 10:35 pm 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.
Axiom #1 would discount that entire reasoning as flawed because it doesn't include a mathematical proof of outperformance. Axiom #2 would say, well, that may be a consideration for some investors, and there are ways to address that. There's no evidence that JoMoney's explanation is designed to placate some kind of psychological need.
I'll take a stab...

Stock duration and bond duration are very different things. JoMoney mentioned the sensitivity to interest rate changes, which is the bond modified duration, and the value tells you how much the price will change for a 1% change in that bond's yield (not the discount rate). So, first, we don't measure a bond's sensitivity to the discount rate. Thus, the corollary for a stock would its sensitivity to its own yield rather than the discount rate.

Second, when I look at a chart of long, intermediate, and short term treasury bonds, the difference in interest rate sensitivity is dramatic and obvious over any time period beyond a week or so as seen in their volatility. The same effect is certainly not strong enough to be obvious in the behavior of dividend vs total market funds (which, at a glance, look very similar). So even if this effect is present, it is dwarfed by things that influence the returns of all stocks similarly. This makes sense because, for treasuries, we're comparing instruments that, in addition to paying interest along the way, are guaranteed to return their entire principal at some time up to 30 years. That return of principal is a large determinant of the bond's duration. But for stocks, whether they pay a dividend or not, there is absolutely no future guarantee of principal (nor even the dividend payments themselves), so the difference between a dividend stock and the total market is not as large as it might seem even by this logic. If someone thinks there's reason to believe there's some tiny effect in there that can't be consistently measured or proved, or that they simply like this aspect of dividend funds even though they expect them to behave like total market funds, then they are unlikely to make any big mistakes based on this belief and I don't feel the need to debate them. But I would disagree if someone were to use this logic to say this means there is an appreciably lower risk for a retiree.

So, do you or JoMoney or anyone else think dividend funds are appreciably lower risk for retirees than the total market because of these expected dividends? If not, does JoMoney's comment translate into a reason for preferring dividend funds in some other way?
Last edited by CuriousTacos on Fri Jun 24, 2022 2:18 pm, edited 1 time in total.
Da5id
Posts: 4895
Joined: Fri Feb 26, 2016 8:20 am

Re: What's the deal with dividend funds?

Post by Da5id »

topper1296 wrote: Fri Jun 24, 2022 1:53 pm
Da5id wrote: Tue Jun 21, 2022 9:42 am
BGeste wrote: Tue Jun 21, 2022 9:36 am So you get the dividend and price appreciation outperformance as well.
Image

You are at least somewhat on team "left graph" apparently per the quoted statement?

Dividends are fine as a preference. And they are surely significant as a component of total return for stocks. But if you think beating the market on a total return basis is just as simple as "invest in stocks with dividends", seems like SPIVA would look better given the availability of such an easy to implement active strategy?
Something doesn't add up here. :oops:
Image
Again, if beating the market portfolio is as easy as "buy the good dividend paying stocks" SPIVA would look different. What is your exact point?
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

MtnRetreat wrote: Fri Jun 24, 2022 2:08 pm
CuriousTacos wrote: Thu Jun 23, 2022 3:54 pm
MtnRetreat wrote: Thu Jun 23, 2022 3:33 pm
CuriousTacos wrote: Thu Jun 23, 2022 2:24 pm The goal is the greatest return for a given amount of risk for the portfolio as a whole.
I just want to single this out as fundamentally incorrect for many retirees. The goal is not to generate maximum future returns for a particular perceived risk, but to secure what they have because they cannot likely work significantly in the future and don't want to take a reduction in lifestyle. The goal is to generate stable and predictable income from one part of the portfolio.

Some portion of the portfolio may be considered speculative into the more distant future with the hope of building more wealth, but that is not the dividend investment portion of the portfolio.
So if there are two portfolios with the same risk, you think retirees should choose the one with lower total returns (defined as the sum of the returns from income, interest, and capital gains)?
But there are not ever two different portfolios of same risk and different returns, where the risk is known absolutely and ahead of time.

Dividend investing is not simply putting together a pile of stocks that all happen to pay dividends. It is selecting stocks which pay good dividends consistently over many years, and which appear to have excellent future prospects of remaining so. Which means they are believed to be low risk individually as well as low risk grouped together. I contend in a volatile market that this basket will be lower volatility than "the entire market", whatever that is.

So the quality dividend portfolio necessarily contains boring companies with a good track record of stable performance, which are less likely to drop as much as various indices.
I understand and agree that we can't know anything with certainty. But you say that "quality dividend" stocks "are believed to be low risk" and will be "lower volatility than the entire market", so you are making some predictive judgments, however uncertain. If I clarify/amend my statement, would you agree with this: "to the best of our uncertain knowledge, the goal is to find a portfolio that we perceive to promise the greatest return for a given amount of perceived risk."?

Sorry if I'm hammering this point, but your reaction to my statement was very surprising and I want to clarify exactly what you mean. Because, if that's your goal, and someone can point out that there might be an even better way to achieve that goal, I think that could be helpful.
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

topper1296 wrote: Fri Jun 24, 2022 1:53 pm Something doesn't add up here. :oops:
Image
I, and several others here, have said that we agree that certain characteristics have performed very well in the past on a risk-adjusted basis. These include the commonly cited factors like size, value, profitability, quality, low-volatility, momentum, etc. We have also said that we think dividends are incidentally associated with some of these factors. One S&P study showed that a dividend portfolio outperformed the S&P 500, but the dividend portfolio was equally weighted, and performed about the same as an equal-weight S&P 500, and the shareholder yield index (which looks at dividends + buybacks) outperformed both. So while a dividend portfolio might be expected to outperform the S&P, it might just be because a dividend portfolio is tilted towards smaller, undervalued, profitable companies, and you could do even better to tilt towards those companies directly rather than by a dividend proxy.

So, if your goal is to find something that backtests well, I think that small-value should be in the mix. I don't have access to the data used in that chart, or else I would offer a comparison.
User avatar
burritoLover
Posts: 2543
Joined: Sun Jul 05, 2020 12:13 pm

Re: What's the deal with dividend funds?

Post by burritoLover »

topper1296 wrote: Fri Jun 24, 2022 1:53 pm
Da5id wrote: Tue Jun 21, 2022 9:42 am
BGeste wrote: Tue Jun 21, 2022 9:36 am So you get the dividend and price appreciation outperformance as well.
Image

You are at least somewhat on team "left graph" apparently per the quoted statement?

Dividends are fine as a preference. And they are surely significant as a component of total return for stocks. But if you think beating the market on a total return basis is just as simple as "invest in stocks with dividends", seems like SPIVA would look better given the availability of such an easy to implement active strategy?
Something doesn't add up here. :oops:
Image
Graphs claiming to make some conclusion without revealing the methodology of the data are pretty useless. Is there a link to how it was constructed? I imagine based on those numbers, there's something involving survivorship bias.
dbr
Posts: 41884
Joined: Sun Mar 04, 2007 9:50 am

Re: What's the deal with dividend funds?

Post by dbr »

topper1296 wrote: Fri Jun 24, 2022 1:53 pm
Something doesn't add up here. :oops:
Image
The idea presumably is to hire Ned Davis Research to manage your investment into the dividend growers and initiators. We already know that we can't find that result by holding mutual funds from Vanguard.

You would note that there is a 1% greater CAGR over 40 years for the growers over all dividend payers. If your manager charges 1% then you haven't gained much. They don't show a curve for TSM. The result may also not be predictive as it would include survivor bias.

They don't show a CAGR but if we assumed starting at $100 the CAGR would be 10.7%. The CAGR of the S&P 500 total return for the same time period is about 10.1%. I don't know if this difference is enough to make a big deal out of it, especially given that we are kind of in SWAG territory here.

The poor results for dividend cutters and eliminators might be where the investor ends up if he botches the stock selection.

I don't think there is any dispute that if one can select a portfolio of higher returning stocks then it will be a higher returning portfolio. The trick is to show how to make that selection consistently ex ante and without an excessive increase in risk.

I personally have no objection to someone attempting something like this if they are willing to take their chances.
exodusNH
Posts: 4790
Joined: Wed Jan 06, 2021 8:21 pm

Re: What's the deal with dividend funds?

Post by exodusNH »

burritoLover wrote: Fri Jun 24, 2022 2:53 pm
topper1296 wrote: Fri Jun 24, 2022 1:53 pm
Da5id wrote: Tue Jun 21, 2022 9:42 am
BGeste wrote: Tue Jun 21, 2022 9:36 am So you get the dividend and price appreciation outperformance as well.
Image

You are at least somewhat on team "left graph" apparently per the quoted statement?

Dividends are fine as a preference. And they are surely significant as a component of total return for stocks. But if you think beating the market on a total return basis is just as simple as "invest in stocks with dividends", seems like SPIVA would look better given the availability of such an easy to implement active strategy?
Something doesn't add up here. :oops:
Image
Graphs claiming to make some conclusion without revealing the methodology of the data are pretty useless. Is there a link to how it was constructed? I imagine based on those numbers, there's something involving survivorship bias.
I agree, that graph is suspect without evidence backing it up. The fact that the y axis is not logarithmic immediately makes it questionable that it was produced by someone doing a true financial analysis.

I was only able to find that image here: https://seekingalpha.com/article/440584 ... -investors

Which is written by a person/company that likes dividends. No explanation on the graph is given. There is literally no information given about the image.

It might as well be a PowerPoint presentation given by a cat about how humans are happier without dogs.
Apathizer
Posts: 1136
Joined: Sun Sep 26, 2021 2:56 pm

Re: What's the deal with dividend funds?

Post by Apathizer »

MtnRetreat wrote: Fri Jun 24, 2022 2:08 pm

Dividend investing is not simply putting together a pile of stocks that all happen to pay dividends. It is selecting stocks which pay good dividends consistently over many years, and which appear to have excellent future prospects of remaining so. Which means they are believed to be low risk individually as well as low risk grouped together. I contend in a volatile market that this basket will be lower volatility than "the entire market", whatever that is.

So the quality dividend portfolio necessarily contains boring companies with a good track record of stable performance, which are less likely to drop as much as various indices.
But quality is what's important; not dividends. Dividends are purely mechanical. As we keep explaining, and you don't seem to understand, they are not an increase in value. They''re just moving money from one location to another. If they're reinvested that movement is temporary and it's as if the dividend were never issued apart from tax issues in taxable accounts.

By focusing on dividends you're reducing diversification which likely increases volatility. You don't seem to understand that. It's like thinking moving money between different accounts increases total money when it doesn't.
ROTH: 40% AVUS, 30% DFAX, 30% BNDW. Taxable: 50% BNDW, 30% AVUS, 20% DFAX.
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

Apathizer wrote: Fri Jun 24, 2022 3:22 pm
MtnRetreat wrote: Fri Jun 24, 2022 2:08 pm

Dividend investing is not simply putting together a pile of stocks that all happen to pay dividends. It is selecting stocks which pay good dividends consistently over many years, and which appear to have excellent future prospects of remaining so. Which means they are believed to be low risk individually as well as low risk grouped together. I contend in a volatile market that this basket will be lower volatility than "the entire market", whatever that is.

So the quality dividend portfolio necessarily contains boring companies with a good track record of stable performance, which are less likely to drop as much as various indices.
But quality is what's important; not dividends. Dividends are purely mechanical. As we keep explaining, and you don't seem to understand, they are not an increase in value. They''re just moving money from one location to another. If they're reinvested that movement is temporary and it's as if the dividend were never issued apart from tax issues in taxable accounts.

By focusing on dividends you're reducing diversification which likely increases volatility. You don't seem to understand that. It's like thinking moving money between different accounts increases total money when it doesn't.
While I wasn't so sure in their previous posts, at least in this post, MtnRetreat isn't implying that dividend stocks/funds are low risk because the dividend itself is some mechanical near-guarantee of a return floor or anything like that. Instead, in this post, they seem to be saying that a certain dividend history is a good screen for companies that are low risk/volatility on the whole. That may be true to an extent, but I'm curious if MtnRetreat has read much about quality/profitability/low volatility factors, and if not, why not? If the goal is quality and low volatility, I would think that MtnRetreat would be interested in various rigorous attempts to research such a thing, and why dividends were not found to be a large component of those factors.
User avatar
HanSolo
Posts: 1327
Joined: Thu Jul 19, 2012 3:18 am

Re: What's the deal with dividend funds?

Post by HanSolo »

alex_686 wrote: Fri Jun 24, 2022 8:06 am
HanSolo wrote: Fri Jun 24, 2022 6:55 am 2. Wouldn't it be a better axiom that there isn't One True Investment Portfolio? And that different people make different choices because the nature of different choices are different, and some people want this and some want that? And as long as they understand the nature of what they're buying, and they aren't making any "big mistakes" (like going outside their risk tolerance, putting everything in one stock or sector, etc.), then they aren't doing anything "wrong" (or heretical, or illusory, or a palliative for their psychological situation)?
So axiom number 2 is correct.
Good so far.
Not that one can build a better portfolio than the one true portfolio.
Huh? That sounds like axiom #1.
The problem is not that the strategy is different than the one true portfolio or that the goals are illogical. That us all fine. The problem is that the strategy is based on flawed logic which has historically failed at what it is trying to do.
That's the claim axiom #1 fans usually roll out when discussing international, gold, sector funds, individual stock-picking... you-name-it.

As I said already, one of my holdings is Vanguard Equity Income. Saying that my portfolio is failing at what it is trying to do is false. I can confirm that my portfolio has been producing, and continues to produce, the performance and stability characteristics that were intended.

Perhaps that is new information for you.
CuriousTacos wrote: Fri Jun 24, 2022 1:16 pm I generally agree with #2, i.e. that there shouldn't be "One True Investment Portfolio" on BH, that there's quite a large range of alternatives that are reasonable, and that there are a variety of valid reasons for preferring these reasonable alternatives.
Good so far.
But, similar to what alex_686 said, one person can have valid reasons for choosing a portfolio, and someone else can have flawed reasons for choosing the exact same portfolio. I think it's appropriate for the community to discuss whether certain reasons for choosing/promoting/defending a particular portfolio are flawed or not.
You mean flawed according to you. You keep asking for mathematical proofs of "optimality" (which does not exist). That's what brings us back to axiom #1.

Some people do look at it numerically (as you keep advocating) and have found that the performance/risk characteristics of a certain investment is adequate. They can't prove that it's, in your words, "optimal" (as in mathematically certain to beat total market in the future), but they have assessed that it's "good enough". How is that wrong?

Some people aren't mathematically inclined, but they've read what various well-known authors have to say about portfolio construction (including Bogle), and simply select something that's in line with what they've read (and equity-income was one of the model portfolios Bogle suggested for retirees). Assuming there's no new research that concludes that there's a "big mistake" in any of those portfolios, how is that wrong?

Some people have a stock-picking background and have moved to mutual funds for convenience and simplicity. They might look at various mutual funds of interest, and select funds that own the stocks they'd choose if they were still stock-pickers. How is that wrong?
Based on the perceived insult from the phrase "free money", perhaps we should avoid that phrase altogether and generally be more careful to mainly address overtly-stated reasons unless we're starting a thread for the sole purpose of discussing a particular reason that's out there in the world.
Moving to axiom #2 will help. And responding to what someone in the thread actually said (rather than hypothetical "people out there") will help. Nobody in the thread ever said they believe in free money.
Are you insulted by me saying that behavioral or psychological benefits are valid reasons for choosing a dividend-heavy portfolio? If so, are there better phrases for describing these things?
"Investor preference" might be a good start.

That being said, I'm starting to understand that the answer to my question #3 may be "yes".
dbr wrote: Fri Jun 24, 2022 1:34 pm I think it is a mistake to characterize something as a bad idea by dismissing it as a behavioral or psychological benefit when the real problem is that the reasoning behind the idea is a misunderstanding of investments or a selection of a less effective idea arrived at in ignorance of better ideas.
My axiom #2 presented a third option: that different people want to own different things. I also own gold and silver ETFs. The above kinds of pejoratives (e.g., "ignorance", or even "psychological benefit", which seems to allude to the investor's psychological condition) are regularly hurled at investors like myself.
A discussion that takes all this into account is going to require lot of nuance.
Or just move to axiom #2.
CuriousTacos wrote: Fri Jun 24, 2022 2:17 pm So, do you or JoMoney or anyone else think dividend funds are appreciably lower risk for retirees than the total market because of these expected dividends? If not, does JoMoney's comment translate into a reason for preferring dividend funds in some other way?
First of all, you're mixing up several different questions. One is dividend emphasis vs. not (this was the question posed by the OP). Another is total market vs. not total market. Another is indexing vs. active. Another is mutual funds vs. stock-picking.

Your question introduces the presumption that everything is being compared to a total market index mutual fund. That presumption is indicative of axiom #1.

I can't speak for JoMoney, but I'll just say that I can't prove mathematically (since that's the only thing you'll accept) that anything will have a better risk-adjusted return than anything else in the future. And neither can anyone else. What I can say is that, over the past several months that inflation has been raging, I've seen articles that have used the stock duration argument to explain why dividend stocks were not dropping as much as non-dividend-paying stocks. While I haven't seen a mathematical proof, I can accept it as a possible explanation for what we can plainly observe happening in the market. And I haven't seen a mathematical proof (from you, or anyone) disproving those articles.

I'll just close by pointing out that the "free money mystery" I referenced earlier remains unsolved. If anyone eventually solves it, then that may be the basis for further comment. It's interesting that there are people who claim to know how dividends work, but are unable to solve this one.
Last edited by HanSolo on Fri Jun 24, 2022 5:06 pm, edited 7 times in total.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
Charles Joseph
Posts: 279
Joined: Tue Apr 05, 2022 10:49 pm

Re: What's the deal with dividend funds?

Post by Charles Joseph »

alex_686 wrote: Thu Jun 23, 2022 8:54 pm
Charles Joseph wrote: Thu Jun 23, 2022 4:47 pm This is mere gibberish to a retiree who, rather than rely on the market price of stocks, is looking for steady income in retirement. As John Bogle said, retirees should rely on dividends, not the market price. Whether this is "cognitive load error," "behavioral error," or some other such nonsense is absolutely meaningless to the retiree trying to keep the lights on and put food on the table.
I consider the following statement a very reasonable heuristic: 1 pound of lead falls faster than 1 bound of feathers because it is heavier.

It is light, intuitive, produces actionable data, and is generally right. Far faster and simpler than Newton's laws of motions. However, I am very aware of logical incoherence of the above sentence. You can't build off that theory.

To wit, this gibberish is absolutely critical for keeping the lights on and food on the table for retirees. I have seen too many cases where people were sold on the dividends and told they did not have to worry about price risk only for the underlying stock to blow up, the dividends to disappear, and see the whole thing to colipase. Sometimes this was done by slick salespeople selling inappropriate high risk investments. More often it was just plain ignorance.
We are in total agreement on the above. I got out of single stocks years ago. Seriously, I own broad based index funds, with a tilt toward dividends. It helps me sleep at night. I still don't see how, in a tech-dominated market, when a crash could take more than a decade to recover, a retiree who focuses somewhat on dividends (realizing that the further he strays from the market the more risk he is taking) is doing himself a disservice, if during that decade-long (or longer) recovery, which grinds on and on, he is receiving above average distributions to help him pay the bills.

The only reason I own any investment at all is for cash flow. That's it. No other reason. I understand total return. I understand that over the long haul total return will equal dividend yield plus earnings growth. But heck, I want some of it now. And I'll want that more so in 3-4 years when I retire.

And that ain't gibberish. 8-)
alex_686
Posts: 10621
Joined: Mon Feb 09, 2015 2:39 pm

Re: What's the deal with dividend funds?

Post by alex_686 »

MtnRetreat wrote: Fri Jun 24, 2022 2:15 pm Who here remembers the tech-wreck? Who here was actively investing at the time?

I watched my newly retired father lose half his retirement savings when all those glorious companies turned out to be creatively accounting and falsely claiming revenues. The company names were the ones all over the tv with their fabulous achievements. Had he been in the boring established dividend paying companies he would have been better off. Then again in 2008 his portfolio dropped enormously, pretty much leaving him with just a pension and Social Security to live on.

What it comes down to is every portfolio needs to be diversified and hedged, both in terms of investments and in strategy. Just dividend stocks is as logical as just tech high-fliers.
Funny you should ask. During the dot.com boom and bust I was sitting on the margin and compliance desk for a brokerage firm. I got to see lots of different portfolios fail for lots of different reasons.

I saw lots of tech portfolios blow up. I also saw a fair number of “safe dividend” portfolios blow up. In many ways the dividend portfolios were harder to deal with. In part because they were more tragic - the tech people had the ability to suffer harm, the dividend people less so. However the key take away was that the tech people knew they were playing with fire, the dividend people thought they were fire proof - and they were not. Best not to foster false illusions of safety.

The dot.com bust kind if focused my career on risk, so a fair amount of technical training in theory followed for practical use.

Which takes us back to dividends. I don’t see dividends as a valid factor. There is no theory behind it. They don’t act differently, or to the extent that they do there are better explanations. i.e. they do nothing special to put food on the table or keep the lights on.

As such I see the dividend label as mostly marketing.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Zeno
Posts: 789
Joined: Wed Sep 12, 2018 10:44 am

Re: What's the deal with dividend funds?

Post by Zeno »

Charles Joseph wrote: Fri Jun 24, 2022 4:14 pm
alex_686 wrote: Thu Jun 23, 2022 8:54 pm
Charles Joseph wrote: Thu Jun 23, 2022 4:47 pm This is mere gibberish to a retiree who, rather than rely on the market price of stocks, is looking for steady income in retirement. As John Bogle said, retirees should rely on dividends, not the market price. Whether this is "cognitive load error," "behavioral error," or some other such nonsense is absolutely meaningless to the retiree trying to keep the lights on and put food on the table.
I consider the following statement a very reasonable heuristic: 1 pound of lead falls faster than 1 bound of feathers because it is heavier.

It is light, intuitive, produces actionable data, and is generally right. Far faster and simpler than Newton's laws of motions. However, I am very aware of logical incoherence of the above sentence. You can't build off that theory.

To wit, this gibberish is absolutely critical for keeping the lights on and food on the table for retirees. I have seen too many cases where people were sold on the dividends and told they did not have to worry about price risk only for the underlying stock to blow up, the dividends to disappear, and see the whole thing to colipase. Sometimes this was done by slick salespeople selling inappropriate high risk investments. More often it was just plain ignorance.
We are in total agreement on the above. I got out of single stocks years ago. Seriously, I own broad based index funds, with a tilt toward dividends. It helps me sleep at night. I still don't see how, in a tech-dominated market, when a crash could take more than a decade to recover, a retiree who focuses somewhat on dividends (realizing that the further he strays from the market the more risk he is taking) is doing himself a disservice, if during that decade-long (or longer) recovery, which grinds on and on, he is receiving above average distributions to help him pay the bills.

The only reason I own any investment at all is for cash flow. That's it. No other reason. I understand total return. I understand that over the long haul total return will equal dividend yield plus earnings growth. But heck, I want some of it now. And I'll want that more so in 3-4 years when I retire.

And that ain't gibberish. 8-)
100% agree with Charles. And my retirement is within the next 18 months. I completely understand total returns but logging onto Vanguard the day after I retire to have dividends (from funds, not stocks) deposited into our checking account in lieu of reinvestment will provide immediate psychological SORR benefits without selling a doggone thing. And that will also help relationship-wise on the home front.

(As to the original poster, a feather and bowling ball fall at the same rate in a vacuum. The feather only falls more slowly in a non-vacuum because of air resistance, not because of weight)
Statistical
Posts: 530
Joined: Tue Jul 06, 2021 1:08 pm

Re: What's the deal with dividend funds?

Post by Statistical »

Zeno wrote: Fri Jun 24, 2022 5:03 pm
Charles Joseph wrote: Fri Jun 24, 2022 4:14 pm
alex_686 wrote: Thu Jun 23, 2022 8:54 pm
Charles Joseph wrote: Thu Jun 23, 2022 4:47 pm This is mere gibberish to a retiree who, rather than rely on the market price of stocks, is looking for steady income in retirement. As John Bogle said, retirees should rely on dividends, not the market price. Whether this is "cognitive load error," "behavioral error," or some other such nonsense is absolutely meaningless to the retiree trying to keep the lights on and put food on the table.
I consider the following statement a very reasonable heuristic: 1 pound of lead falls faster than 1 bound of feathers because it is heavier.

It is light, intuitive, produces actionable data, and is generally right. Far faster and simpler than Newton's laws of motions. However, I am very aware of logical incoherence of the above sentence. You can't build off that theory.

To wit, this gibberish is absolutely critical for keeping the lights on and food on the table for retirees. I have seen too many cases where people were sold on the dividends and told they did not have to worry about price risk only for the underlying stock to blow up, the dividends to disappear, and see the whole thing to colipase. Sometimes this was done by slick salespeople selling inappropriate high risk investments. More often it was just plain ignorance.
We are in total agreement on the above. I got out of single stocks years ago. Seriously, I own broad based index funds, with a tilt toward dividends. It helps me sleep at night. I still don't see how, in a tech-dominated market, when a crash could take more than a decade to recover, a retiree who focuses somewhat on dividends (realizing that the further he strays from the market the more risk he is taking) is doing himself a disservice, if during that decade-long (or longer) recovery, which grinds on and on, he is receiving above average distributions to help him pay the bills.

The only reason I own any investment at all is for cash flow. That's it. No other reason. I understand total return. I understand that over the long haul total return will equal dividend yield plus earnings growth. But heck, I want some of it now. And I'll want that more so in 3-4 years when I retire.

And that ain't gibberish. 8-)
100% agree with Charles. And my retirement is within the next 18 months. I completely understand total returns but logging onto Vanguard the day after I retire to have dividends (from funds, not stocks) deposited into our checking account in lieu of reinvestment will provide immediate psychological SORR benefits without selling a doggone thing. And that will also help relationship-wise on the home front.

(As to the original poster, a feather and bowling ball fall at the same rate in a vacuum. The feather only falls more slowly in a non-vacuum because of air resistance, not because of weight)
All equity ETFs issue dividends. All of them. So it isn't oh man I need to get the only fund out there with dividends. You can't find a single ETF fund without dividends.

The question is should you select companies solely based on dividend and is that a false sense of security. Plenty of high dividend funds fell quite significantly and companies cut dividends in the 2008 crash.

Someone in 2006 might have said I going to go with the "safer' VYM over VTI. The high dividend yield will protect me. It didn't.

They traded away 0.75% CAGR for nothing
https://www.portfoliovisualizer.com/fun ... ymbols=VYM

It has a lower total return, roughly the same volatility, actually had a slightly deeper max drawdown, and the sharpe/sortino ratios (measure of risk compensated return) are worse. That was going through a market meltdown and crippling recession hypothetically the best time for such a fund to shine.

Now it isn't catastrophic. This hypothetical retiree is fine but the protection they bought with lower returns didn't exist. They didn't trade lower returns for reduced volatility, a shallower max drawdown, or more consistent returns they just traded lower returns for nothing.

Higher than average dividends aren't a predictor of anything.
Last edited by Statistical on Fri Jun 24, 2022 7:03 pm, edited 1 time in total.
User avatar
HanSolo
Posts: 1327
Joined: Thu Jul 19, 2012 3:18 am

Re: What's the deal with dividend funds?

Post by HanSolo »

Statistical wrote: Fri Jun 24, 2022 5:16 pm Higher than average dividends aren't a predictor of anything.
Was there a prediction? If so, please quote it.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Fri Jun 24, 2022 4:14 pm
CuriousTacos wrote: Fri Jun 24, 2022 2:17 pm But, similar to what alex_686 said, one person can have valid reasons for choosing a portfolio, and someone else can have flawed reasons for choosing the exact same portfolio. I think it's appropriate for the community to discuss whether certain reasons for choosing/promoting/defending a particular portfolio are flawed or not.
You mean flawed according to you. You keep asking for mathematical proofs of "optimality" (which does not exist). That's what brings us back to axiom #1.
I didn't say anything about "mathematical proofs of optimality" in my response to your question above or anywhere else. I think you are mis-characterizing what I have said in certain contexts that are not the same as this one. If you want to think that I'm too dogmatic simply for thinking it's conceivable that someone could have a flaw in their logic for choosing for a particular portfolio, then so be it.

BH is a place for civil debate, not for every idea and opinion to get unquestioned endorsement. I'm sorry if you don't like that certain ideas get more attention than others. It may surprise you that I hold certain opinions that are very unpopular around here, too, and I'm just fine with that. Regardless, this thread isn't about BH as a whole, so to continue this exchange would be off-topic.
Last edited by CuriousTacos on Fri Jun 24, 2022 7:40 pm, edited 1 time in total.
AlwaysLearningMore
Posts: 579
Joined: Sun Jul 26, 2020 2:29 pm

Re: What's the deal with dividend funds?

Post by AlwaysLearningMore »

alex_686 wrote: Fri Jun 24, 2022 4:56 pm ...I don’t see dividends as a valid factor. There is no theory behind it. They don’t act differently, or to the extent that they do there are better explanations. i.e. they do nothing special to put food on the table or keep the lights on.

As such I see the dividend label as mostly marketing.
Wellesley has apparently been successfully "marketing" this for 40+ years: "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income-focused balanced funds. Investors with a medium- or long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund as a core holding in their portfolio."
https://investor.vanguard.com/investmen ... x#overview
Retirement is best when you have a lot to live on, and a lot to live for.
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Fri Jun 24, 2022 4:14 pm What I can say is that, over the past several months that inflation has been raging, I've seen articles that have used the stock duration argument to explain why dividend stocks were not dropping as much as non-dividend-paying stocks. While I haven't seen a mathematical proof, I can accept it as a possible explanation for what we can plainly observe happening in the market. And I haven't seen a mathematical proof (from you, or anyone) disproving those articles.
If we suppose that dividend stocks have a lower sensitivity to treasury interest rates purely because of the dividend payments, and dividend stocks did not drop as much as non-dividend stocks (or the total market) recently primarily because of that lower sensitivity, then it would surprise me that value stocks behaved almost exactly like dividend stocks even though their dividend yield is roughly in between "high yield" and the total market. (Vanguard high yield: 2.7%, S&P 500 Value: 1.9%, S&P 500: 1.3%). It is for reasons like this that I think value, quality, profitability, etc, are more useful metrics.
Image
User avatar
HanSolo
Posts: 1327
Joined: Thu Jul 19, 2012 3:18 am

Re: What's the deal with dividend funds?

Post by HanSolo »

CuriousTacos wrote: Fri Jun 24, 2022 6:54 pm I didn't say anything about "mathematical proofs of optimality" in my response to your question above or anywhere else. I think you are mis-characterizing what I have said in certain contexts that are not the same as this one.
That's fine if it's true. I just didn't know any other way to interpret comments like the following:
CuriousTacos wrote: Thu Jun 23, 2022 6:32 pm it's hard to know if you are making implicit predictions in your decisions, or merely choosing things according to some psychological/behavioral preference with no regard for any possible evidence of whether your choices have been or will be optimal.
Putting aside my (possibly erroneous) interpretation of your comment, since the above was originally directed at me, I'll just add that, in the case of my own investment choices, my objectives include neither "be optimal" nor provide "possible evidence" thereof. My target is "good enough" (in terms of financial results, not the "psychological" benefits you were alluding to), and my investments have been achieving that.

Perhaps the source of the disconnect is that your objectives and/or investor preferences are different from mine.
BH is a place for civil debate, not for every idea and opinion to get unquestioned endorsement. I'm sorry if you don't like that certain ideas get more scrutiny than others.
I'm fine with that. I'm only trying to caution against "straw men" (disagreeing with something nobody in the thread said) and also against assuming others have an objective that they don't have (the above being an example of where that seems to have happened in this thread, according to the wording used).
Regardless, this thread isn't about BH as a whole, so to continue this exchange would be off-topic.
In order to get back on topic, I'll address the OP's question directly.

As far as I can tell, some potential reasons to consider a dividend fund (or any fund) are as follows:

0. You can mathematically prove that they will outperform some other choice, or otherwise prove that they are "optimal" for some given objective. (I'm numbering this as "zero" because I'm not sure this is possible, for dividend investing, or for any other kind of investing).

1. Short of being able to assess "optimality", you've assessed that the numerical characteristics of the fund (in terms of performance, volatility, diversification, valuation metrics, tax effects, etc.) are "good enough" for your objectives (while remembering that different investors may have different investment objectives).

2. You've assessed that the non-numerical characteristics of the fund (i.e., the nature of the underlying investments, what stocks are owned, what kinds of businesses they are, sectors emphasized or excluded, the fund's investment policies, etc.) are compatible with your investor preferences, in terms of what you want to own.

3. Aside from fund's characteristics (both numerical and non-numerical), your characteristics as an investor may include personal or psychological reasons to invest in it (e.g., your father told you to, the fund is popular in certain circles, etc.).

The above would be the reasons to consider any fund, not just dividend funds. Whether they're valid reasons or not is up to the individual. In my opinion, it's important to know what one is buying ("caveat emptor"). Then buy what you want.

One word of caution: sometimes the discussions are treated in a black-and-white way (e.g., assuming that if reason #0 isn't satisfied, then #3 is the only other option), in which case it's worthwhile to remember that reasons #1 and #2 also exist.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Fri Jun 24, 2022 4:14 pm I'll just close by pointing out that the "free money mystery" I referenced earlier remains unsolved. If anyone eventually solves it, then that may be the basis for further comment. It's interesting that there are people who claim to know how dividends work, but are unable to solve this one.
I guess you didn't think my response counted:
CuriousTacos wrote: Tue Jun 21, 2022 2:15 pm This example is only as relevant as your underlying assumptions about market efficiency. Dividends absolutely can "benefit" equity holders in a variety of examples, but that doesn't mean that, at current prices, dividend-paying stocks will outperform the total market by any metric. An efficient market will correctly value how much this "dividend benefit" is worth, making it irrelevant to anything actionable.

In other words, HanSolo might be right about the theory that dividends can benefit investors. But Da5id/burritoLover can still be right that this is irrelevant to any of us because the market already knows this.
So I'll try rewording it...

The answer to your question about hypothetical companies that go bankrupt is that the shareholders of the company that paid dividends came out better than the shareholders of the company that did not. If that hypothetical example is enough for you to base your preference on, go for it.

For anyone else who cares, though, HanSolo's example simply shows that companies should return profits to shareholders at some point in some way (could be buybacks, or a buyout, etc), and by extension that certain companies should probably do so now. It does not by itself mean (nor has HanSolo claimed) that companies that do not currently pay a dividend are higher risk or that companies that do currently pay a dividend are lower risk- you'd need to know a lot of other things about a company to assess this. Likewise, it does not by itself mean (nor has HanSolo claimed) that companies that have paid dividends lately will have a greater return than the total market over the next 1, 5, 10, 30, 50 years. A good part of this is that everyone else knows about the past and expected future dividends, so you're paying the price that some very smart people think is appropriate for those cash flows. So whether this is actionable is in the eye of the beholder.
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Fri Jun 24, 2022 7:52 pm That's fine if it's true. I just didn't know any other way to interpret comments like the following:
CuriousTacos wrote: Thu Jun 23, 2022 6:32 pm but since I don't know all your thoughts and motives, it's hard to know if you are making implicit predictions in your decisions, or merely choosing things according to some psychological/behavioral preference with no regard for any possible evidence of whether your choices have been or will be optimal.
I can see how that could have been viewed as an exhaustive list of possibilities, but I did not mean it that way when I typed it. I was more trying to say that I've been having a hard time trying to figure out your thoughts and motives, even when I've asked for clarification.

For example, in the rest of your post, you list some general "possible" reasons for considering any fund whatsoever, but you did not say which, if any, of them explain why you do or do not prefer dividend funds or elaborate on the finer details of why. If you don't care to elaborate on that, that's fine, I'll continue discussing this with others who care to explain their reasons more clearly.
Charles Joseph
Posts: 279
Joined: Tue Apr 05, 2022 10:49 pm

Re: What's the deal with dividend funds?

Post by Charles Joseph »

AlwaysLearningMore wrote: Fri Jun 24, 2022 7:18 pm
alex_686 wrote: Fri Jun 24, 2022 4:56 pm ...I don’t see dividends as a valid factor. There is no theory behind it. They don’t act differently, or to the extent that they do there are better explanations. i.e. they do nothing special to put food on the table or keep the lights on.

As such I see the dividend label as mostly marketing.
Wellesley has apparently been successfully "marketing" this for 40+ years: "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income-focused balanced funds. Investors with a medium- or long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund as a core holding in their portfolio."
https://investor.vanguard.com/investmen ... x#overview
And over the last 27 years (most data available) Wellesley has outperformed both the 40/60 Vanguard Lifestrategy Fund and a 40/60 S&P 500/Total Bond mix.
Charles Joseph
Posts: 279
Joined: Tue Apr 05, 2022 10:49 pm

Re: What's the deal with dividend funds?

Post by Charles Joseph »

AlwaysLearningMore wrote: Fri Jun 24, 2022 7:18 pm
alex_686 wrote: Fri Jun 24, 2022 4:56 pm ...I don’t see dividends as a valid factor. There is no theory behind it. They don’t act differently, or to the extent that they do there are better explanations. i.e. they do nothing special to put food on the table or keep the lights on.

As such I see the dividend label as mostly marketing.
Wellesley has apparently been successfully "marketing" this for 40+ years: "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income-focused balanced funds. Investors with a medium- or long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund as a core holding in their portfolio."
https://investor.vanguard.com/investmen ... x#overview
Removing the Lifestrategy Fund, we see that Wellesley has outperformed the 40/60 S&P 500/Total Bond Market mix over the past 35 years, with a higher risk adjusted return.
Eastwest
Posts: 40
Joined: Tue Sep 03, 2013 11:17 pm

Re: What's the deal with dividend funds?

Post by Eastwest »

Personally, I'm attracted to SCHD for the stock screening process, not necessarily the dividends themselves.

"All index eligible stocks must have sustained at least 10 consecutive years of dividend payments, have a minimum float-adjusted market capitalization of $500 million USD and meet minimum liquidity criteria. The index components are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate. Stocks in the index are weighted based on a modified market capitalization approach. No single stock can represent more than 4.0% of the index and no single sector, as defined by the index provider, can represent more than 25% of the index, as measured at the time of index construction, reconstitution and rebalance. The index composition is reviewed annually and rebalanced quarterly."

And the FACT that SCHD has beaten TSM in YTD, 1, 3, 5, 10 year periods without being invested in the Large Cap Tech darlings of the past decade bull market is simply amazing.
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

Charles Joseph wrote: Fri Jun 24, 2022 9:18 pm
AlwaysLearningMore wrote: Fri Jun 24, 2022 7:18 pm
alex_686 wrote: Fri Jun 24, 2022 4:56 pm ...I don’t see dividends as a valid factor. There is no theory behind it. They don’t act differently, or to the extent that they do there are better explanations. i.e. they do nothing special to put food on the table or keep the lights on.

As such I see the dividend label as mostly marketing.
Wellesley has apparently been successfully "marketing" this for 40+ years: "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income-focused balanced funds. Investors with a medium- or long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund as a core holding in their portfolio."
https://investor.vanguard.com/investmen ... x#overview
Removing the Lifestrategy Fund, we see that Wellesley has outperformed the 40/60 S&P 500/Total Bond Market mix over the past 35 years, with a higher risk adjusted return.
I think the Wellington and Wellesley funds are great, but it's hard to know how much of their success has been due to dividends, or due to value/profitability/quality exposure, or due to their active bets with their bonds. It's possible to construct a portfolio that's performed nearly identically to Wellington by combining Large Value with Intermediate/Long treasuries. It's more difficult to match Wellesley's performance doing the same, which leads me to believe a decent portion of their success is on the bond side. Again, I think they're great funds, but I don't know how much it says about dividends (when many of us are pointing out value/quality/profitability already).
User avatar
HanSolo
Posts: 1327
Joined: Thu Jul 19, 2012 3:18 am

Re: What's the deal with dividend funds?

Post by HanSolo »

CuriousTacos wrote: Fri Jun 24, 2022 8:07 pm For example, in the rest of your post, you list some general "possible" reasons for considering any fund whatsoever, but you did not say which, if any, of them explain why you do or do not prefer dividend funds or elaborate on the finer details of why.
I'll elaborate on that after we reach some clarity on the below.
CuriousTacos wrote: Fri Jun 24, 2022 7:57 pm The answer to your question about hypothetical companies that go bankrupt is that the shareholders of the company that paid dividends came out better than the shareholders of the company that did not.
If I understand correctly, the shareholders came out better in case (b) than in case (a), where the only action that was taken differently in the two cases (by definition of the scenario I gave) was that the company paid dividends in case (b), and did not pay dividends in case (a). That's what I had thought the outcome would be as well.

Contrary to that, we have the oft-repeated assertion that if a company pays dividends, it has no effect on the investment results of shareholders. This assertion has been worded in so many different ways, including in this very thread... "a net nothing"... "whether or not a company pays a dividend makes absolutely no difference to the stock's total return"... "It's total return that matters and whether a dividend (which is a part of earnings) is paid out to investors or reinvested by the business makes no difference in the end result"... and on and on.

How do we reconcile the above two positions? Was there some mistake in your (and my) understanding of cases (a)(b)? Or should the latter set of oft-repeated assertions be qualified in some way (e.g., "this is true, except when it's not")?
So whether this is actionable is in the eye of the beholder.
Maybe. But someone took the time and effort to post the above-mentioned oft-repeated assertion... let's call that "X". If I come along and say "X isn't always true (and I'm not sure it's ever true, if we consider the total lifespan of companies)", I get told it's non-actionable and therefore off-topic. OK, fine, but if that's off-topic, then aren't the repeated assertions of "X" also off-topic? And, even if they're both off-topic, isn't it valid to provide a correction to "X" if it turns out to be false or incomplete? Why is only the correction off-topic, but the original assertion, even if false, is considered as on-topic, or at least worthy of repetition ad infinitum, ad nauseum?

Again, I'm not claiming that this is actionable (or that it's not)... only that if "X" is on-topic, then so is "not X"... I think.

Again... just askin'.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
User avatar
burritoLover
Posts: 2543
Joined: Sun Jul 05, 2020 12:13 pm

Re: What's the deal with dividend funds?

Post by burritoLover »

Wow this thread has gone off the rails, into the country-side, and buried itself deep in the river bed. Here's the OP original question for reference.
martincmartin wrote: Sun Jun 19, 2022 10:53 am Why do funds like SCHD, which tracks the Dow Jones U.S. Dividend 100 Index? Why do I care whether I get my money from (qualified?) dividends or long term capital gains? Are these for people who don't want to track their investments, figure out what to sell, and instead just live on dividends? Is that even a viable strategy for your hypothetical 4% WR retiree? Are they for people who are into actively managed stuff and so don't have long term capital gains?

As a Boglehead, should I consider Dividend funds?
User avatar
burritoLover
Posts: 2543
Joined: Sun Jul 05, 2020 12:13 pm

Re: What's the deal with dividend funds?

Post by burritoLover »

Eastwest wrote: Fri Jun 24, 2022 9:28 pm Personally, I'm attracted to SCHD for the stock screening process, not necessarily the dividends themselves.

"All index eligible stocks must have sustained at least 10 consecutive years of dividend payments, have a minimum float-adjusted market capitalization of $500 million USD and meet minimum liquidity criteria. The index components are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate. Stocks in the index are weighted based on a modified market capitalization approach. No single stock can represent more than 4.0% of the index and no single sector, as defined by the index provider, can represent more than 25% of the index, as measured at the time of index construction, reconstitution and rebalance. The index composition is reviewed annually and rebalanced quarterly."

And the FACT that SCHD has beaten TSM in YTD, 1, 3, 5, 10 year periods without being invested in the Large Cap Tech darlings of the past decade bull market is simply amazing.
It isn't a bad methodology but at 100 stocks the possibility of tracking error regret is not insignificant.
Target2019
Posts: 557
Joined: Sat Mar 03, 2007 5:30 pm

Re: What's the deal with dividend funds?

Post by Target2019 »

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

As a Boglehead, should I consider Dividend funds?
I can't tell you what to do. But this is what I see with SCHD, which has a shorter history. It pays quarterly dividends. I retrieved the information from Yahoo Finance, and combined the dividend into half-yearly amounts. I did this as it is easier to understand the dividend growth in this fund, especially year-over-year.

Date Div Div Growth
6/18/2012 0.34
12/24/2012 0.47
6/24/2013 0.42 1.23%
12/23/2013 0.48
6/23/2014 0.52 1.22%
12/22/2014 0.53
6/22/2015 0.58 1.11%
12/21/2015 0.57
6/20/2016 0.62 1.07%
12/19/2016 0.64
6/19/2017 0.66 1.07%
12/18/2017 0.69
6/26/2018 0.67 1.02%
12/12/2018 0.77
6/26/2019 0.77 1.16%
12/12/2019 0.95
6/24/2020 0.88 1.14%
12/10/2020 1.15
6/23/2021 1.04 1.18%
12/8/2021 1.21
6/22/2022 1.22 1.17%

Data about growth and total performance is also in Yahoo Finance for analysis and comparison to returns of other portfolio allocations. 10 year trailing returns average is 13.21%.

There is also a wealth of statistics at https://www.schwabassetmanagement.com/products/schd including an entire list of the holdings, sector allocation, and so on.

You can use the 2 sites I've mentioned to investigate further. Or simply not use SCHD at all.

We use this in a taxable portfolio because it is diversified across 100 companies, and the lineup changes when company(s) falter and no longer meet the selection criteria. If you look at the Holdings summary page at Schwab you'll see the top ten companies, which are 40-50% of the fund. The expense ratio is low enough (0.06) that it does not concern me.

The elephant in the room is, "How does this compare to performance of S&P 500?" You can get that answer on Backtest Portfolio Asset Allocation. I've used Broad Market, Growth, and Dividend ETF symbols in this comparison.
https://www.portfoliovisualizer.com/bac ... ion3_3=100

This fits nicely in our taxable portfolio, which pays R.E. taxes and Fed estimates.

I wish you well with your investments.
Charles Joseph
Posts: 279
Joined: Tue Apr 05, 2022 10:49 pm

Re: What's the deal with dividend funds?

Post by Charles Joseph »

CuriousTacos wrote: Fri Jun 24, 2022 9:44 pm
Charles Joseph wrote: Fri Jun 24, 2022 9:18 pm
AlwaysLearningMore wrote: Fri Jun 24, 2022 7:18 pm
alex_686 wrote: Fri Jun 24, 2022 4:56 pm ...I don’t see dividends as a valid factor. There is no theory behind it. They don’t act differently, or to the extent that they do there are better explanations. i.e. they do nothing special to put food on the table or keep the lights on.

As such I see the dividend label as mostly marketing.
Wellesley has apparently been successfully "marketing" this for 40+ years: "The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income-focused balanced funds. Investors with a medium- or long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund as a core holding in their portfolio."
https://investor.vanguard.com/investmen ... x#overview
Removing the Lifestrategy Fund, we see that Wellesley has outperformed the 40/60 S&P 500/Total Bond Market mix over the past 35 years, with a higher risk adjusted return.
I think the Wellington and Wellesley funds are great, but it's hard to know how much of their success has been due to dividends, or due to value/profitability/quality exposure, or due to their active bets with their bonds. It's possible to construct a portfolio that's performed nearly identically to Wellington by combining Large Value with Intermediate/Long treasuries. It's more difficult to match Wellesley's performance doing the same, which leads me to believe a decent portion of their success is on the bond side. Again, I think they're great funds, but I don't know how much it says about dividends (when many of us are pointing out value/quality/profitability already).
Okay, so, the benchmark for the equity portion of Wellesley (which I hold a bunch of) is the FTSE High Dividend Yield Index. Vanguard doesn't break out how the equity portion of Wellesley follows the equity benchmark, just the composite benchmark. But, VYM's benchmark is the FTSE High Dividend Yield Index, which has underperformed the S&P 500 since 2007.

So, I think you're correct in suspecting that the bond portion (mainly high quality corporates) of Wellesley probably has everything to do with Wellesley beating a 40/60 S&P/total bond portfolio.

Interesting learning experience there. Thanks.
Last edited by Charles Joseph on Sat Jun 25, 2022 9:04 am, edited 1 time in total.
TN_Boy
Posts: 2945
Joined: Sat Jan 17, 2009 12:51 pm

Re: What's the deal with dividend funds?

Post by TN_Boy »

burritoLover wrote: Sat Jun 25, 2022 7:20 am
Eastwest wrote: Fri Jun 24, 2022 9:28 pm Personally, I'm attracted to SCHD for the stock screening process, not necessarily the dividends themselves.

"All index eligible stocks must have sustained at least 10 consecutive years of dividend payments, have a minimum float-adjusted market capitalization of $500 million USD and meet minimum liquidity criteria. The index components are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate. Stocks in the index are weighted based on a modified market capitalization approach. No single stock can represent more than 4.0% of the index and no single sector, as defined by the index provider, can represent more than 25% of the index, as measured at the time of index construction, reconstitution and rebalance. The index composition is reviewed annually and rebalanced quarterly."

And the FACT that SCHD has beaten TSM in YTD, 1, 3, 5, 10 year periods without being invested in the Large Cap Tech darlings of the past decade bull market is simply amazing.
It isn't a bad methodology but at 100 stocks the possibility of tracking error regret is not insignificant.
Though I'd rather have TSM, I wouldn't (except for tax considerations in a brokerage account) be unhappy if I had to own this fund. Per morningstar's portfolio page, SCHD seems reasonably diversified across sectors, its stock style is large value versus TSM's large blend, etc. Nothing crazy there. It's reported turnover is 46% (seems high ...) versus TSM 4%. SCHD is more concentrated, with 42% of its assets in the top 10 holdings versus 22% for TSM.

On the taxes, morningstar lists SCHD's 3 year tax cost ratio as 1.14, TSM's is .6. I don't know what the longer term tax cost ratio is, but that .54 difference is about the same as the SCHD outperformance in the 10 year performance between TSM and SCHD.

SCHD hardly seems like a make or break choice for your retirement. If you are a value or dividend kind of investor, it seems reasonable.
User avatar
JoMoney
Posts: 13926
Joined: Tue Jul 23, 2013 5:31 am

Re: What's the deal with dividend funds?

Post by JoMoney »

TN_Boy wrote: Sat Jun 25, 2022 8:27 am...
On the taxes, morningstar lists SCHD's 3 year tax cost ratio as 1.14, TSM's is .6. I don't know what the longer term tax cost ratio is, but that .54 difference is about the same as the SCHD outperformance in the 10 year performance between TSM and SCHD...
Inside a retirement account it would make no tax differences, and in a taxable account for 2021 100% of SCHD's distributions were 'Qualified Dividend Income'
https://www.schwabassetmanagement.com/r ... e-qdi-2021
So it would be taxed at the same rate as capital gains, and as long as we're talking about someone that would otherwise be making withdrawals and needs/wants the income, they would be at the same tax rate.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Da5id
Posts: 4895
Joined: Fri Feb 26, 2016 8:20 am

Re: What's the deal with dividend funds?

Post by Da5id »

JoMoney wrote: Sat Jun 25, 2022 8:37 am
TN_Boy wrote: Sat Jun 25, 2022 8:27 am...
On the taxes, morningstar lists SCHD's 3 year tax cost ratio as 1.14, TSM's is .6. I don't know what the longer term tax cost ratio is, but that .54 difference is about the same as the SCHD outperformance in the 10 year performance between TSM and SCHD...
Inside a retirement account it would make no tax differences, and in a taxable account for 2021 100% of SCHD's distributions were 'Qualified Dividend Income'
https://www.schwabassetmanagement.com/r ... e-qdi-2021
So it would be taxed at the same rate as capital gains, and as long as we're talking about someone that would otherwise be making withdrawals and needs/wants the income, they would be at the same tax rate.
Unless I understand you incorrectly, if you raise money by either SCHD dividends or TSM dividends+ TSM sales TSM is generally taxed less. The *rate* may be the same, but unless the cost basis of the TSM shares sold is $0 the gain taxed is less. And of course dividends are taxable but if the lot of TSM actually sold is a loss it decreases taxes.
dbr
Posts: 41884
Joined: Sun Mar 04, 2007 9:50 am

Re: What's the deal with dividend funds?

Post by dbr »

Eastwest wrote: Fri Jun 24, 2022 9:28 pm Personally, I'm attracted to SCHD for the stock screening process, not necessarily the dividends themselves.

"All index eligible stocks must have sustained at least 10 consecutive years of dividend payments, have a minimum float-adjusted market capitalization of $500 million USD and meet minimum liquidity criteria. The index components are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate. Stocks in the index are weighted based on a modified market capitalization approach. No single stock can represent more than 4.0% of the index and no single sector, as defined by the index provider, can represent more than 25% of the index, as measured at the time of index construction, reconstitution and rebalance. The index composition is reviewed annually and rebalanced quarterly."

And the FACT that SCHD has beaten TSM in YTD, 1, 3, 5, 10 year periods without being invested in the Large Cap Tech darlings of the past decade bull market is simply amazing.
That result of meaninglessly better performance is entirely a result of losses in TSM from large growth stocks in 2022. Otherwise the results are technically the opposite.

A better statement not subject to timing and considering the statistical variability of results in investing is that SHHD and TSM are not different in performance. Whether or not that is amazing would need further analysis and a comparison of holdings. A conclusion from that, to whatever extent there is a conclusion from backtesting,* is that if a person for some reason prefers the sort of assets held in SCHD there is no harm in that preference nor any particular benefit. That is a pretty consistent general message about dividend investing -- that it is neither particularly helpful nor particularly harmful to the investor.

Backtesting, if it going to be consulted, needs more than a ten year history, and even with more years it is a tough way to get useful estimates of differences in approach. This comes back to the question of whether dividend factors ever surfaced in bigger studies such as Fama-French, where dividends don't surface as a factor after value is included, and maybe not even before.
dbr
Posts: 41884
Joined: Sun Mar 04, 2007 9:50 am

Re: What's the deal with dividend funds?

Post by dbr »

Da5id wrote: Sat Jun 25, 2022 8:42 am
JoMoney wrote: Sat Jun 25, 2022 8:37 am
TN_Boy wrote: Sat Jun 25, 2022 8:27 am...
On the taxes, morningstar lists SCHD's 3 year tax cost ratio as 1.14, TSM's is .6. I don't know what the longer term tax cost ratio is, but that .54 difference is about the same as the SCHD outperformance in the 10 year performance between TSM and SCHD...
Inside a retirement account it would make no tax differences, and in a taxable account for 2021 100% of SCHD's distributions were 'Qualified Dividend Income'
https://www.schwabassetmanagement.com/r ... e-qdi-2021
So it would be taxed at the same rate as capital gains, and as long as we're talking about someone that would otherwise be making withdrawals and needs/wants the income, they would be at the same tax rate.
Unless I understand you incorrectly, if you raise money by either SCHD dividends or TSM dividends+ TSM sales TSM is generally taxed less. The *rate* may be the same, but unless the cost basis of the TSM shares sold is $0 the gain taxed is less. And of course dividends are taxable but if the lot of TSM actually sold is a loss it decreases taxes.
Yes, taxwise control of when and what capital gains are taken is an advantage, perhaps small or perhaps significant, for selling appreciated shares. A possibility of tax avoidance by basis step-up should also be considered and opportunity to tax loss harvest should be considered.
User avatar
JoMoney
Posts: 13926
Joined: Tue Jul 23, 2013 5:31 am

Re: What's the deal with dividend funds?

Post by JoMoney »

Da5id wrote: Sat Jun 25, 2022 8:42 am
JoMoney wrote: Sat Jun 25, 2022 8:37 am
TN_Boy wrote: Sat Jun 25, 2022 8:27 am...
On the taxes, morningstar lists SCHD's 3 year tax cost ratio as 1.14, TSM's is .6. I don't know what the longer term tax cost ratio is, but that .54 difference is about the same as the SCHD outperformance in the 10 year performance between TSM and SCHD...
Inside a retirement account it would make no tax differences, and in a taxable account for 2021 100% of SCHD's distributions were 'Qualified Dividend Income'
https://www.schwabassetmanagement.com/r ... e-qdi-2021
So it would be taxed at the same rate as capital gains, and as long as we're talking about someone that would otherwise be making withdrawals and needs/wants the income, they would be at the same tax rate.
Unless I understand you incorrectly, if you raise money by either SCHD dividends or TSM dividends+ TSM sales TSM is generally taxed less. The *rate* may be the same, but unless the cost basis of the TSM shares sold is $0 the gain taxed is less. And of course dividends are taxable but if the lot of TSM actually sold is a loss it decreases taxes.
Minor quibble with what you said, but "the gain" is taxed the same, if you sold TSM shares at break-even or at a loss... sure, you wouldn't owe taxes on that, but that's not a gain.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Da5id
Posts: 4895
Joined: Fri Feb 26, 2016 8:20 am

Re: What's the deal with dividend funds?

Post by Da5id »

JoMoney wrote: Sat Jun 25, 2022 8:51 am
Da5id wrote: Sat Jun 25, 2022 8:42 am
JoMoney wrote: Sat Jun 25, 2022 8:37 am
TN_Boy wrote: Sat Jun 25, 2022 8:27 am...
On the taxes, morningstar lists SCHD's 3 year tax cost ratio as 1.14, TSM's is .6. I don't know what the longer term tax cost ratio is, but that .54 difference is about the same as the SCHD outperformance in the 10 year performance between TSM and SCHD...
Inside a retirement account it would make no tax differences, and in a taxable account for 2021 100% of SCHD's distributions were 'Qualified Dividend Income'
https://www.schwabassetmanagement.com/r ... e-qdi-2021
So it would be taxed at the same rate as capital gains, and as long as we're talking about someone that would otherwise be making withdrawals and needs/wants the income, they would be at the same tax rate.
Unless I understand you incorrectly, if you raise money by either SCHD dividends or TSM dividends+ TSM sales TSM is generally taxed less. The *rate* may be the same, but unless the cost basis of the TSM shares sold is $0 the gain taxed is less. And of course dividends are taxable but if the lot of TSM actually sold is a loss it decreases taxes.
Minor quibble with what you said, but "the gain" is taxed the same, if you sold TSM shares at break-even or at a loss... sure, you wouldn't owe taxes on that, but that's not a gain.
If you have $1000 SCHD dividend you pay tax on $1000. If you raise $1000 from a combination of a TSM dividend and selling shares your tax burden will under almost all assumptions be less.
Charles Joseph
Posts: 279
Joined: Tue Apr 05, 2022 10:49 pm

Re: What's the deal with dividend funds?

Post by Charles Joseph »

Eastwest wrote: Fri Jun 24, 2022 9:28 pm Personally, I'm attracted to SCHD for the stock screening process, not necessarily the dividends themselves.
Agreed re: screening process. I own SCHD, and like the stock screening process and the dividends.

Just one metric, for example: The fund's Return on Equity is 35%. S&P 500 ROE is 22%.

These companies make great use of shareholder dollars.
TN_Boy
Posts: 2945
Joined: Sat Jan 17, 2009 12:51 pm

Re: What's the deal with dividend funds?

Post by TN_Boy »

JoMoney wrote: Sat Jun 25, 2022 8:37 am
TN_Boy wrote: Sat Jun 25, 2022 8:27 am...
On the taxes, morningstar lists SCHD's 3 year tax cost ratio as 1.14, TSM's is .6. I don't know what the longer term tax cost ratio is, but that .54 difference is about the same as the SCHD outperformance in the 10 year performance between TSM and SCHD...
Inside a retirement account it would make no tax differences, and in a taxable account for 2021 100% of SCHD's distributions were 'Qualified Dividend Income'
https://www.schwabassetmanagement.com/r ... e-qdi-2021
So it would be taxed at the same rate as capital gains, and as long as we're talking about someone that would otherwise be making withdrawals and needs/wants the income, they would be at the same tax rate.
Sure, that's why in the part of my post you deleted, I said I'd be mildly annoyed by the extra tax drag in a brokerage account. Obviously in tax-deferred it makes no difference.

Because of tax loss harvesting over the years, I'm confident that I could extract 3.1% from a TSM portfolio with lower tax cost than 3.1% derived solely from dividends from SCHD. Do I think the difference is large? No. Which is why I say having SCHD as a core holding doesn't strike me as at all crazy.

That said, I do wonder if the 3 year tax cost ratio for 3 years is typical for SCHD, on the low side, on the high side, etc. I'm sure they manage the fund to reduce capital gains distributions, but its turnover is listed as 46%. [Edited to add: But I am fairly confident TSM funds will always be tax efficient].
Last edited by TN_Boy on Sat Jun 25, 2022 10:09 am, edited 1 time in total.
User avatar
JoMoney
Posts: 13926
Joined: Tue Jul 23, 2013 5:31 am

Re: What's the deal with dividend funds?

Post by JoMoney »

Da5id wrote: Sat Jun 25, 2022 9:38 am
JoMoney wrote: Sat Jun 25, 2022 8:51 am
Da5id wrote: Sat Jun 25, 2022 8:42 am
JoMoney wrote: Sat Jun 25, 2022 8:37 am
TN_Boy wrote: Sat Jun 25, 2022 8:27 am...
On the taxes, morningstar lists SCHD's 3 year tax cost ratio as 1.14, TSM's is .6. I don't know what the longer term tax cost ratio is, but that .54 difference is about the same as the SCHD outperformance in the 10 year performance between TSM and SCHD...
Inside a retirement account it would make no tax differences, and in a taxable account for 2021 100% of SCHD's distributions were 'Qualified Dividend Income'
https://www.schwabassetmanagement.com/r ... e-qdi-2021
So it would be taxed at the same rate as capital gains, and as long as we're talking about someone that would otherwise be making withdrawals and needs/wants the income, they would be at the same tax rate.
Unless I understand you incorrectly, if you raise money by either SCHD dividends or TSM dividends+ TSM sales TSM is generally taxed less. The *rate* may be the same, but unless the cost basis of the TSM shares sold is $0 the gain taxed is less. And of course dividends are taxable but if the lot of TSM actually sold is a loss it decreases taxes.
Minor quibble with what you said, but "the gain" is taxed the same, if you sold TSM shares at break-even or at a loss... sure, you wouldn't owe taxes on that, but that's not a gain.
If you have $1000 SCHD dividend you pay tax on $1000. If you raise $1000 from a combination of a TSM dividend and selling shares your tax burden will under almost all assumptions be less.
Sure.. Just want to be clear that under the scenario you're presenting, the lower tax burden is a result of not making money on the TSM shares you're selling.. which could also be accomplished by selling shares of SCHD at a loss/no gain and might even have more shares at a lower value given much of SCHDs value being distributed as a qualified dividend rather than a capital gain.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
sycamore
Posts: 4510
Joined: Tue May 08, 2018 12:06 pm

Re: What's the deal with dividend funds?

Post by sycamore »

Da5id wrote: Sat Jun 25, 2022 9:38 am ...
If you have $1000 SCHD dividend you pay tax on $1000. If you raise $1000 from a combination of a TSM dividend and selling shares your tax burden will under almost all assumptions be less.
Pedantically...

In the 0% tax bracket, the tax burden could very well be the same. For Married Filing Jointly in 2022, that's taxable income up to $83,350 which covers a large number of taxpayers. Though maybe not a large number of Bogleheads?

For sure, the added income from 100% qualified dividends (versus part qualified dividends and part cap gains) could affect other tax credits & deductions. And dividend income can't be offset by carryover losses like cap gains can be. But I've had a number of years in the tax bracket where income from cap gains or qualified dividends made no difference.
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

JoMoney wrote: Sat Jun 25, 2022 10:09 am Sure.. Just want to be clear that under the scenario you're presenting, the lower tax burden is a result of not making money on the TSM shares you're selling.. which could also be accomplished by selling shares of SCHD at a loss/no gain and might even have more shares at a lower value given much of SCHDs value being distributed as a qualified dividend rather than a capital gain.
TSM could be up 100% and still only half of what you sell is taxable because the other half is your basis.
dbr
Posts: 41884
Joined: Sun Mar 04, 2007 9:50 am

Re: What's the deal with dividend funds?

Post by dbr »

Charles Joseph wrote: Sat Jun 25, 2022 9:44 am
Eastwest wrote: Fri Jun 24, 2022 9:28 pm Personally, I'm attracted to SCHD for the stock screening process, not necessarily the dividends themselves.
Agreed re: screening process. I own SCHD, and like the stock screening process and the dividends.

Just one metric, for example: The fund's Return on Equity is 35%. S&P 500 ROE is 22%.

These companies make great use of shareholder dollars.
It's fine for people to like this idea of selecting investments. You could say this follows Graham and Buffett in spirit. An alternative is the Bogle approach of broad index holdings that pay no explicit attention to corporate management.

I personally myself feel comfortable understanding the general properties of diverse portfolios and have no idea how to make sense of something like the return on equity of a particular corporation or what it means to make great use of shareholder dollars.

This may be a function of background. A person experienced in the sciences and with statistics of large collections of individuals would be like me. A person with a business management background would gravitate to a different approach.

I worked in R&D in a large corporation and have a pretty good idea what that process looks like. I could go on about statistical process control or the electrical properties of polymers for a long time. Why Megacorp has been successful enough to keep me in a pension for 15 years of retirement I would not be able to explain. I know people who have worked for companies that could not do that, including my father. I admit that after 25 years at that company I have no idea what the executive management actually does day in and day out even with being on a first name basis with some of them.
User avatar
JoMoney
Posts: 13926
Joined: Tue Jul 23, 2013 5:31 am

Re: What's the deal with dividend funds?

Post by JoMoney »

CuriousTacos wrote: Sat Jun 25, 2022 10:31 am
JoMoney wrote: Sat Jun 25, 2022 10:09 am Sure.. Just want to be clear that under the scenario you're presenting, the lower tax burden is a result of not making money on the TSM shares you're selling.. which could also be accomplished by selling shares of SCHD at a loss/no gain and might even have more shares at a lower value given much of SCHDs value being distributed as a qualified dividend rather than a capital gain.
TSM could be up 100% and still only half of what you sell is taxable because the other half is your basis.
Sure... And you could sell some of your SCHD basis as well without paying taxes on your non-gain, you're more likely to have unappreciated basis in SCHD shares because of the taxable dividend distribution
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
CuriousTacos
Posts: 285
Joined: Thu Apr 12, 2018 3:31 pm

Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Sat Jun 25, 2022 2:41 am Contrary to that, we have the oft-repeated assertion that if a company pays dividends, it has no effect on the investment results of shareholders. This assertion has been worded in so many different ways, including in this very thread... "a net nothing"... "whether or not a company pays a dividend makes absolutely no difference to the stock's total return"... "It's total return that matters and whether a dividend (which is a part of earnings) is paid out to investors or reinvested by the business makes no difference in the end result"... and on and on.

How do we reconcile the above two positions? Was there some mistake in your (and my) understanding of cases (a)(b)? Or should the latter set of oft-repeated assertions be qualified in some way (e.g., "this is true, except when it's not")?
Perhaps some of those quotes had a certain context in mind (i.e. an expected/certain dividend) that could have been better clarified. Perhaps some of them did not have any context in mind, but should have. So I'll add some here:

The future net gain or loss of your investment starting now is completely dependent on the future performance of the company (including dividends) relative to the current expectations of the future. So if everyone with 100% certainty expects a dividend of a certain amount to happen next week, then it's a net nothing to your investment when it happens- it was already accounted for in the price, and the price falls by about that much when the dividend is paid. For some very uncertain dividend, if the company surprises and announces that it will be paid (or an expected one surprisingly increased), and this is not merely paid by taking on debt, burning through precious cash, or deciding their planned projects are worthless, etc, then it is a net positive to your investment. On the flipside, if some future expected dividend is reduced or eliminated (and not because they're paying down debt or using the cash for an amazing new project, etc), it is a net negative to your investment.

Unfortunately, the dividend fund/investor only knows the past dividend history (and other company characteristics), and the market knows all this same information, so for there to be a net gain overall, they would need to be better than the market at using this information to predict future unexpected events.

I guess I'm rephrasing the quotes above to say "an expected/certain dividend is a net nothing, and you almost certainly can't predict uncertain future dividends any better than the market can."

Back to your hypothetical example, there are many possibilities you haven't included, i.e.:
- Company C, which uses share repurchases to return exactly the same amount of cash as company B at exactly the same times. The shareholders in this company come out exactly the same as company A
- Company D, which doesn't pay a dividend now and invests that in new opportunities, grows bigger than A or B, and ultimately pays a bigger dividend (NPV) than A before eventually going bankrupt
- Company E, which pays even larger dividends than company A, and runs out of cash in the next recession before those dividends amount to much of anything

And there are many more. We can't know in advance which of these we're getting (as you say, nobody knows nothing), and there's very good research that shows we should either buy the whole haystack, or possibly listen to what factor research says about various sources of risk/return to possibly add some diversity or risk adjusted return that way.
Locked