Dividend Misunderstandings & Only Spend Return

[Bfwolf]

Moreover, I'm not sure exactly what we are testing here. Mostly I figured we were testing a dividend strategy. Given a portfolio this non-diversified (I'm not running a mutual fund) and there are only about 4 industries you are going to have all sorts of issues gumming up the works. Particular litigation could move an equal weighted portfolio like this 15%. A single M&A could be +8%. The pipeline guys are going to swing wildly with 2019 energy prices. If those come high especially if 2020 look similar they take off like a rocket and they might not have better than a 3% yield anymore. If next year I get 100+% return off changes in pipeline demand I beat TSM for sure. But is that really a fair test? If those come in too low they might not be able to maintain the dividend in 2018 and disqualify in the other direction, USA pipeline capacity is way above current demand that's why I picked them up cheap. I'm sure if they crash and burn you'll consider that a fair test. Gilead scientific goes up another 15% and I'll look for a spot to sell off my upside (covered call). At that point do I just tell you what I got and the price or do you want to shadow trade the option? Verizon is not going to be a long term holding I don't think. When I sell what do you do? Some of these companies are too small for mutual funds to even invest in. This is way more large cap than normal because of Gilead, Verizon, Century Link and Intel. But that's chance because of when you asked the question. The small cap bias is likely to reassert itself in coming months. How much small cap vs. large cap is gumming up your test?

Currency fluctuations are the least of your problems for running this test. You have non systematic stuff gumming up the works everywhere confusing the discussion of what you want to test with my personal taste in stocks (I like depressed hard assets with lots of debt where I don't think the bondholders are marking the assets at full value for buyout, with a high chance of an earnings spike in out-of-favor industries). A lot of those stocks happen to have high dividends and certainly I consider the dividend to be a sign of insider confidence. If I can justify their confidence, its a buy. Many of these companies are too small for a mutual fund. You want to track this portfolio, you'll get to see how value works. But don't think you have any chance for controlling for random variables. The final result over any sane timeframe is a crap shoot.

This isn't diversified. The non systematic risk doesn't bother me because it is unlikely to correlate with the other non-systematic risks I'm taking all over the rest of the portfolio investing in many other things. After all, while this thread is about income investors, I'm not one. And for reasons I'm not getting into I may never be one. So if we are doing this. What is it you are testing?

You said, "It really isn't that hard to figure out which companies have a reliable yield and choose companies based their ability to provide the dividend. Yield plus quality screens would give you many many companies with a reliable dividend. Which incidentally also outperform the market and at lower risk."

That's what we're testing. If 10 companies doesn't work for you, pick as many as you like. My only conditions are that they are American (so we can have a reasonable benchmark to compare against: Total US Stock Market) and pay a dividend north of 3%.

You've made a big claim that is unsupported by all the research to date. So back it up.

[Phineas J. Whoopee]

Nearly everything after the first 100 posts or so demonstrates that there is misunderstanding about dividends, and that it is devoutly held and proponents of it are willing to shift the goalposts in order to defend their positions, but that wasn't my question.

Why is there this lack of understanding?

My conjecture is it's related to the idea that one spend only the returns, then misunderstanding, I don't accuse misrepresenting, what returns are.

Related to it is the idea some investors may view stock dividends as if they are bond coupons.

Any further thoughts on the original topic of this thread, which is why?

PJW

[willthrill81]

Nearly everything after the first 100 posts or so demonstrates that there is misunderstanding about dividends, and that it is devoutly held and defenders of it are willing to shift the goalposts in order to support their opinions, but that wasn't my question.

Why is there this misunderstanding?

My conjecture is it's related to the idea that one spend only the returns, then misunderstanding what returns are.

Related to it is the idea some investors may view stock dividends as if they are bond coupons.

Any further thoughts on the original topic of this thread, which is why?

PJW

I think much of the why can be tied to this: dividend investors think that their principal is represented by the number of shares they own rather than the dollar value of those shares.

A 'total return' person doesn't have a problem buying 100 shares for $10,000, seeing those shares appreciate to $20,000, then selling $5,000 of them to generate income. A 'dividends only' person sees the sale of any of the 100 shares as a loss of principal and, as such, undesirable.

[Phineas J. Whoopee]

...
I think much of the why can be tied to this: dividend investors think that their principal is represented by the number of shares they own rather than the dollar value of those shares.

A 'total return' person doesn't have a problem buying 100 shares for $10,000, seeing those shares appreciate to $20,000, then selling $5,000 of them to generate income. A 'dividends only' person sees the sale of any of the 100 shares as a loss of principal and, as such, undesirable.

You may be right, and if so I'd further suggest it is a conflation of principal and capital that represents the foundation of the problem. Loans have principal. Equity investments, like ownership of stocks, do not. All principal is capital, but not all capital is principal. Principal is a subset of capital.

Or are we again running up against the mistaken conflation of all investing with a savings account?

PJW

[willthrill81]

...
I think much of the why can be tied to this: dividend investors think that their principal is represented by the number of shares they own rather than the dollar value of those shares.

A 'total return' person doesn't have a problem buying 100 shares for $10,000, seeing those shares appreciate to $20,000, then selling $5,000 of them to generate income. A 'dividends only' person sees the sale of any of the 100 shares as a loss of principal and, as such, undesirable.

You may be right, and if so I'd further suggest it is a conflation of principal and capital that represents the foundation of the problem. Loans have principal. Equity investments, like ownership of stocks, do not. All principal is capital, but not all capital is principal. Principal is a subset of capital.

Or are we again running up against the mistaken conflation of all investing with a savings account?

PJW

I'm not sure how important the terminology here is in explaining the why as much as how people react to it. If someone thinks of their investment as shares, then it makes sense that they don't want to sell shares. If they think of their investment as dollars, then selling shares to get dollars is no problem.

[Phineas J. Whoopee]

...
I'm not sure how important the terminology here is in explaining the why as much as how people react to it. If someone thinks of their investment as shares, then it makes sense that they don't want to sell shares. If they think of their investment as dollars, then selling shares to get dollars is no problem.

You mean like this?
Implications of "One Hasn't Lost if One Hasn't Sold"

PJW

[NotWhoYouThink]

I've been reading along, and offer my commendations to OP and others who have made valiant efforts to listen, understand, and educate.
It seems to me that the people with strongest commitment to misunderstanding dividends appear not to have much experience with the internal operations of business, or with accounting. They tend to present the business as a black box value and dividend generator rather than as a group of individuals raising capital, producing products and services, collecting revenue, and paying bills. It can distort the understanding of what the stock price and dividend represent.

[willthrill81]

...
I'm not sure how important the terminology here is in explaining the why as much as how people react to it. If someone thinks of their investment as shares, then it makes sense that they don't want to sell shares. If they think of their investment as dollars, then selling shares to get dollars is no problem.

You mean like this?
Implications of "One Hasn't Lost if One Hasn't Sold"

PJW

I think they are different but related ideas. They both lead to aberrant concepts and behaviors.

[Phineas J. Whoopee]

...
I'm not sure how important the terminology here is in explaining the why as much as how people react to it. If someone thinks of their investment as shares, then it makes sense that they don't want to sell shares. If they think of their investment as dollars, then selling shares to get dollars is no problem.

You mean like this?
Implications of "One Hasn't Lost if One Hasn't Sold"

PJW

I think they are different but related ideas. They both lead to aberrant concepts and behaviors.

I didn't mean to suggest conflation of terms, but rather of concepts.
PJW

[Thesaints]

They simply treat stocks as if they were bonds.

[Phineas J. Whoopee]

They simply treat stocks as if they were bonds.

If so, maybe the lack of the conceptual distinction between stocks and bonds also leads to the idea that there's been a 35-year bull market in instruments all of which matured in no more than 30 years.
PJW

[snarlyjack]

Let me try a different angle.

In my neighborhood their are house & duplexes.
They all cost about the same price. They provide the
same service, a place to live & store your stuff.

But they are different, from an accounting standpoint.
The house doesn't provide any cash flow but appreciates
in value. The duplex provides cash flow and appreciates
in value. (Which appreciates more in value)?

Which is a better investment? It depends on what the investor
is looking for. They both take money to buy. They both have
maintenance expenses. In real estate it's all about location,
location, location. They both need constant care & watching over.

In the stock market you can buy stocks and/or dividend paying stocks.
In one sense they are the same but in another sense they are different.
Which is a better investment? It all depends on the investor & what
he is looking for in a investment. In a crash scenario all 4 different
investments go down in value (houses, duplexes, stocks, dividend paying stocks).
In growth times they all appreciate in value. Which is the better
investment? I would say their are different roads to Dublin...

[willthrill81]

Let me try a different angle.

In my neighborhood their are house & duplexes.
They all cost about the same price. They provide the
same service, a place to live & store your stuff.

But they are different, from an accounting standpoint.
The house doesn't provide any cash flow but appreciates
in value. The duplex provides cash flow and appreciates
in value. (Which appreciates more in value)?

Which is a better investment? It depends on what the investor
is looking for. They both take money to buy. They both have
maintenance expenses. In real estate it's all about location,
location, location. They both need constant care & watching over.

In the stock market you can buy stocks and/or dividend paying stocks.
In one sense they are the same but in another sense they are different.
Which is a better investment? It all depends on the investor & what
he is looking for in a investment. In a crash scenario all 4 different
investments go down in value (houses, duplexes, stocks, dividend paying stocks).
In growth times they all appreciate in value. Which is the better
investment? I would say their are different roads to Dublin...

One problem with your analogy is that the duplex and the house both appreciate at the same rate. That is not true of dividend-paying stocks and stocks that don't pay dividends. It has been repeatedly shown that dividend-paying stocks do not appreciate at the same rate as those that don't pay a dividend. It's easy to understand when you think about it. If a company pays $100 to investors, the company is now worth $100 less than it was before.

Another problem is liquidity. If I sell either property, I no longer have any investment. The same is not true of stocks, where it is easy to see a fraction of one's investment to achieve the desired cash flow.

[Phineas J. Whoopee]

Let me try a different angle.
...

I was sorry to read about your loss of your parents at such a young age, snarlyjack. My condolences.

You conceded upthread that your preference is built from your psychology and nothing else. Psychology is important. Peoples' feelings are real, and are important. I hear you.

Feelings aren't math.

PJW

[CantPassAgain]

I've been reading along, and offer my commendations to OP and others who have made valiant efforts to listen, understand, and educate.
It seems to me that the people with strongest commitment to misunderstanding dividends appear not to have much experience with the internal operations of business, or with accounting. They tend to present the business as a black box value and dividend generator rather than as a group of individuals raising capital, producing products and services, collecting revenue, and paying bills. It can distort the understanding of what the stock price and dividend represent.

Pretty much yeah.

[ThereAreNoGurus]

Thanks OP for trying to get this thread back on topic.

So much nonsense posted that should have been a separate thread for those who felt compelled to change the subject.

After posting the above, I read a sample Kiplinger's Retirement Report I received in the mail earlier this week. There was an article titled, "No Simple Rule for Spending Your Assets." It begins: "Most new retirees face the same conundrum: How best to spend down assets? One rule of thumb is to spend only portfolio interest and dividends."

[snarlyjack]

Thank you Phineas!

Life is funny...The Lord taketh & The Lord giveth!
The bad news is my parents are gone...the good news
is I have lot's of life insurance money.

Now... it's what to do, what to do! I've had to study &
learn. The Boglehead family has been great & very
supportive. Not to mention super educational. I figure
if I can figure all this stuff out so can most people.
Being your own advisor can work but you have to put in
the time to understand your wants, needs & desires. Then
match up the different Vanguard funds to your needs. By the
way Vanguard has been excellent to work with in processing
life insurance proceeds & guidance. I have nothing bad to say
about Vanguard or the Bogleheads at all. It has all been positive

[avalpert]

...
I think much of the why can be tied to this: dividend investors think that their principal is represented by the number of shares they own rather than the dollar value of those shares.

A 'total return' person doesn't have a problem buying 100 shares for $10,000, seeing those shares appreciate to $20,000, then selling $5,000 of them to generate income. A 'dividends only' person sees the sale of any of the 100 shares as a loss of principal and, as such, undesirable.

You may be right, and if so I'd further suggest it is a conflation of principal and capital that represents the foundation of the problem. Loans have principal. Equity investments, like ownership of stocks, do not. All principal is capital, but not all capital is principal. Principal is a subset of capital.

Or are we again running up against the mistaken conflation of all investing with a savings account?

PJW

I think both of your suggestions are part of the errors - another one is they confuse the terms and methods of academic models for their real life applications. You see that when you see certain people (like one poster here today) who assert silly things like 'companies that don't offer dividends are worth $0' because they confuse 'dividends' in a theoretical valuation model for real-life dividends.

I think this one is particularly common among those who turn their misunderstanding into dogmatic belief in the fallacy - this is big issue among many 'income' investors, gold bugs and 'permanent portfolio' adherents (among others).

[avalpert]

Let me try a different angle.

In my neighborhood their are house & duplexes.
They all cost about the same price. They provide the
same service, a place to live & store your stuff.

But they are different, from an accounting standpoint.
The house doesn't provide any cash flow but appreciates
in value. The duplex provides cash flow and appreciates
in value. (Which appreciates more in value)?

Which is a better investment? It depends on what the investor
is looking for. They both take money to buy. They both have
maintenance expenses. In real estate it's all about location,
location, location. They both need constant care & watching over.

In the stock market you can buy stocks and/or dividend paying stocks.
In one sense they are the same but in another sense they are different.
Which is a better investment? It all depends on the investor & what
he is looking for in a investment. In a crash scenario all 4 different
investments go down in value (houses, duplexes, stocks, dividend paying stocks).
In growth times they all appreciate in value. Which is the better
investment? I would say their are different roads to Dublin...

It's a poor - really a false - analogy. The non-dividend paying stock is generating income like the duplex even if that income isn't going into your checking account via dividends. The comparison would be between you owning a duplex in an LLC and taking distributions from the LLC (paying dividends) or using the free cash to invest in other properties within the LLC.

[Phineas J. Whoopee]

...
I think much of the why can be tied to this: dividend investors think that their principal is represented by the number of shares they own rather than the dollar value of those shares.

A 'total return' person doesn't have a problem buying 100 shares for $10,000, seeing those shares appreciate to $20,000, then selling $5,000 of them to generate income. A 'dividends only' person sees the sale of any of the 100 shares as a loss of principal and, as such, undesirable.

You may be right, and if so I'd further suggest it is a conflation of principal and capital that represents the foundation of the problem. Loans have principal. Equity investments, like ownership of stocks, do not. All principal is capital, but not all capital is principal. Principal is a subset of capital.

Or are we again running up against the mistaken conflation of all investing with a savings account?

PJW

I think both of your suggestions are part of the errors - another one is they confuse the terms and methods of academic models for their real life applications. You see that when you see certain people (like one poster here today) who assert silly things like 'companies that don't offer dividends are worth $0' because they confuse 'dividends' in a theoretical valuation model for real-life dividends.

I think this one is particularly common among those who turn their misunderstanding into dogmatic belief in the fallacy - this is big issue among many 'income' investors, gold bugs and 'permanent portfolio' adherents (among others).

What is it, avalpert, about

I didn't mean to suggest conflation of terms, but rather of concepts. ...

you fail to understand?

PJW

[avalpert]

...
I think much of the why can be tied to this: dividend investors think that their principal is represented by the number of shares they own rather than the dollar value of those shares.

A 'total return' person doesn't have a problem buying 100 shares for $10,000, seeing those shares appreciate to $20,000, then selling $5,000 of them to generate income. A 'dividends only' person sees the sale of any of the 100 shares as a loss of principal and, as such, undesirable.

You may be right, and if so I'd further suggest it is a conflation of principal and capital that represents the foundation of the problem. Loans have principal. Equity investments, like ownership of stocks, do not. All principal is capital, but not all capital is principal. Principal is a subset of capital.

Or are we again running up against the mistaken conflation of all investing with a savings account?

PJW

I think both of your suggestions are part of the errors - another one is they confuse the terms and methods of academic models for their real life applications. You see that when you see certain people (like one poster here today) who assert silly things like 'companies that don't offer dividends are worth $0' because they confuse 'dividends' in a theoretical valuation model for real-life dividends.

I think this one is particularly common among those who turn their misunderstanding into dogmatic belief in the fallacy - this is big issue among many 'income' investors, gold bugs and 'permanent portfolio' adherents (among others).

What is it, avalpert, about

I didn't mean to suggest conflation of terms, but rather of concepts. ...

you fail to understand?

PJW

Well nothing, except my point here is distinct from the conceptual conflation you spoke of - I am adding the conflation of academic models with pure representations of reality and then raising their misunderstanding of the abstract model to a level of dogmatic truth.

[Phineas J. Whoopee]

Do you mean, avalpert, in theory there is no difference between theory and practice?
PJW

[jbolden1517]

That's what we're testing. If 10 companies doesn't work for you, pick as many as you like. My only conditions are that they are American (so we can have a reasonable benchmark to compare against: Total US Stock Market) and pay a dividend north of 3%.

You've made a big claim that is unsupported by all the research to date. So back it up.

Fair enough. I'll add GM and HT and we'll go with that list. More large cap than normal for me but GM does look attractive.

[avalpert]

Do you mean, avalpert, in theory there is no difference between theory and practice?
PJW

I'm not sure if that is tongue in cheek or not - I would say in practice some see no difference between theories and practice and misapply theories that were never designed to be used in practice practically raising the models of the theory into theoretical deities that they practice as dogma.

More seriously, this isn't unique to finance and economics but I think it is more prevalent in those fields (other fields where it is really bad include environmental science, medical science and psychology).

[snarlyjack]

Here is a article that might help everyone.

"Why I don't compare my portfolio to the S & P 500"

I know what my goals are, I know what I need to accomplish
with my portfolio. What does that have to do with comparing
my portfolio to a arbitrary index?

It's a interesting thought provoking article...that might help us...

Enjoy.

http://www.dividendmantra.com/2013/12/w ... ortfolios/

[Thesaints]

The obvious answer is that the S&P500 is not a "random index", but a proxy of the US stock market. However, it is correct that today there are better index against which to benchmark one's portfolio stocks component.
That said, I don't feel like the article is as interesting as it is provoking. "I focus on what matters to me and my ability to one day live off of passive dividend income.", writes its author. The chances of recovering from such an error are slim.

[avalpert]

Here is a article that might help everyone.

"Why I don't compare my portfolio to the S & P 500"

I know what my goals are, I know what I need to accomplish
with my portfolio. What does that have to do with comparing
my portfolio to a arbitrary index?

It's a interesting thought provoking article...that might help us...

Enjoy.

http://www.dividendmantra.com/2013/12/w ... ortfolios/

No, it really isn't. It repeats the same fallacies and poor analogies that lead them to make poor investment decisions. In this case it will either lead him to chase yield thereby taking on more risk than is prudent (through less diversification and selecting riskier assets) or lead him to wait longer than needed to declare his freedom because he is ignoring a large portion of his financial fruits he has to pluck. The latter isn't the worst thing in the world - just means he will work longer than he needed to and enjoy retirement for less time, the former can be devastating to his financial future.

You are in a great position in that you happened upon a corner of the web that will keep trying to help you avoid that same fallacy.

[willthrill81]

The obvious answer is that the S&P500 is not a "random index", but a proxy of the US stock market. However, it is correct that today there are better index against which to benchmark one's portfolio stocks component.
That said, I don't feel like the article is as interesting as it is provoking. "I focus on what matters to me and my ability to one day live off of passive dividend income.", writes its author. The chances of recovering from such an error are slim.

At the end of the day, whether you have met your goals is most important. This is part of the Boglehead 'philosophy'.

That being said, many, if not most, investors would feel a lot of regret with their equity portion of their portfolio if it substantially underperformed 'the market' over the long-term, and the S&P 500 is the de facto measure of the market for most, though TSM is more accurate. Bogle recently said this in an interview.

[mega317]

It's easy to understand when you think about it.

This made me laugh. The existence of this thread (and the one that inspired it) seems to argue otherwise.

[willthrill81]

It's easy to understand when you think about it.

This made me laugh. The existence of this thread (and the one that inspired it) seems to argue otherwise.

I suspect that the problem is either that (1) people aren't thinking about it or (2) people are seriously overthinking it.

If a company pays $1, it's worth $1 less than it was before. That's the crux of the dividend issue, and a 2nd grader can understand that.

Taking a dollar from one pocket (a company you own) and putting into another pocket (a checking account you own) doesn't change how much money you have.

[Thesaints]

At the end of the day, whether you have met your goals is most important. This is part of the Boglehead 'philosophy'.

Not a useful philosophy if it may induce one to take on more risk for less expected return.

That being said, many, if not most, investors would feel a lot of regret with their equity portion of their portfolio if it substantially underperformed 'the market' over the long-term, and the S&P 500 is the de facto measure of the market for most, though TSM is more accurate. Bogle recently said this in an interview.

Yeah. The radio continues to give the DOW closing. I guess old habits are hard to leave, but those who do leave them have an advantage.

[snarlyjack]

Keep in mind that I' am just providing what I think
are thought provoking articles.

1). I don't invest in individual stocks, I only invest in Vanguard Mutual Funds (no ETF's).
2). I really like VHDYX fund & I like investing in Big Blue Chip stocks (for assorted reasons).
3). Very few people here are 100% invested in the TSM or S & P 500. So they are not
comparing themselves to the S & P 500 total returns.
4). I would say most Bogleheads are using a particular AA (asset allocation) in
their portfolio's, 60/40, 70/30, 80/20 etc.
5). Most Bogleheads that I have read about are using multiple funds (tilting).
It would be very difficult for these people to compare their portfolios to the market.
6). It also get's into the conversation of the 4% safe withdrawal rules (Trinity Studies).
7). All in all I think this is a very complicated study/conversation.
_________

What I do know is: I 'am very young. 23 years old. Age 100 - age 23 = 77 more investing years.
I like dividends & really don't want to sell off the portfolio in the future. The portfolio needs
to last 77 more years. I' am looking for good growth + income (financial freedom sounds good).
I think I can accomplish that, but any & all suggestions are welcome!

[LadyGeek]

How to utilize dividends as an investment strategy is an on-going topic that won't be settled here. This thread has run its course and is locked (rehashing arguments, topic exhausted, no added value to continue). See: Locked Topics

Moderators or site admins may lock a topic (set it so no more replies may be added) when a violation of posting policy has occurred. Occasionally, even if there are no overt violations of posting policy, a topic (or thread) will reach a point where the information content of the discussion has been essentially exhausted and further replies are much more likely to cause distress to the community than add anything of value.