Explain to me why dividends aren't real money

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GrowthSeeker
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Re: Explain to me why dividends aren't real money

Post by GrowthSeeker » Wed Feb 12, 2020 1:31 am

Designairohio wrote:
Tue Feb 11, 2020 8:04 pm
I have around 8% of my portfolio in a REIT (Chimera Investment Corp, CIM) this company pays around a 10% dividend and the price stays pretty steady. It drops on exdividend day then normally recovers within 3 to4 weeks.

They way I see it I’m making 10% and acquiring more shares through reinvestment. Is this a poor investment?
Would I be better off in VTSAX Getting A 2% and the growth of the NAV?
All of my CIM is in tax advantaged accounts.
Well, let's look at Portfolio Visualizer and compare CIM with VTSAX to see how they have done in the past. PV is reporting on total return, not just share price.

But these back tests depend a lot on the start and stop dates, so here are the same to investments starting a year later.

The point is, the large dividend of CIM does not make CIM any better than VTSAX. If other things were being equal, a 10% dividend is way better than a 2% dividend. But other things are not equal.
Just because you're paranoid doesn't mean they're NOT out to get you.

rossington
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Re: Explain to me why dividends aren't real money

Post by rossington » Wed Feb 12, 2020 4:11 am

nisiprius wrote:
Tue Feb 11, 2020 8:34 pm
VEIPX, the Vanguard Equity-Income fund, is a fund in a category that used to be better known: a stock fund that's intended to provide dividend income. It's actively managed but I'm going to use it because it goes back to 1988, much farther back than VHDYX. If we compare VEIPX (blue) to the Vanguard 500 Index Fund (orange), we see that in terms of total return, how much money each fund made one way or the other, they were a close match most of the time. The dividend fund didn't participate as heavily in the big bull market of the late 1990s; you could say, it didn't get caught up as much in the bubble; whether that's a good thing or a bad thing depends on your point of view. But, overall, about the same.

People like to put microscopes on small differences, and it's common to claim that selecting stocks with high dividends means selecting management that cares about shareholder value or whatever... just as some people claim that stocks with high loadings on the value factor are better, or whatever. But, overall, about the same.

If dividends were a free lunch, extra money on top of the same capital appreciation, then their accumulation and reinvestment would loft the blue curve farther and farther above the orange curve. That didn't happen. Every year, both funds made about the same amount of money, except for the late nineties, when the S&P 500 fund made more for a while and then gave it all back.

Source

Image

If, however, instead of showing total return, we set the chart to show price only, we see a huge difference. In terms of price per share, the S&P 500 fund (orange) grew far, far more than the dividend-oriented fund (green).

Image

So is the S&P 500 fund (orange line) hugely better? Of course not. Was the dividend fund (green line) hugely better? No. Both funds made and in most years they made just about the same amount of money, they just made it in different ways. The dividend fund investors received much more money in dividends. And the S&P 500 fund paid out much less in dividends, but almost exactly made up for it in capital appreciation.

Another way to say it is that the S&P 500 companies kept most of their earnings inside their stock shares, using it to invest in themselves and grow the company. The stocks in the dividend fund didn't keep as much of their earnings, but handed it out to shareholders instead.
But interestingly if we use VEIRX the Admiral share class since it's inception in '02 we see an approximately 10% increase over VFINX in total return.... Source.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: Explain to me why dividends aren't real money

Post by abuss368 » Wed Feb 12, 2020 8:16 am

Phineas J. Whoopee wrote:
Tue Feb 11, 2020 7:23 pm
Interest on a savings account increases one's wealth. A dividend on a stock does not.
That may be able to be explained better. I believe you were referring to when a dividend is paid there is a corresponding decrease in the NAV. The impact to wealth over time from a stocks return is a combination of both dividends and earnings growth. The speculative portion while having impact in the near term is essentially zero over the long term.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

Designairohio
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Re: Explain to me why dividends aren't real money

Post by Designairohio » Wed Feb 12, 2020 8:30 am

GrowthSeeker wrote:
Wed Feb 12, 2020 1:31 am
Designairohio wrote:
Tue Feb 11, 2020 8:04 pm
I have around 8% of my portfolio in a REIT (Chimera Investment Corp, CIM) this company pays around a 10% dividend and the price stays pretty steady. It drops on exdividend day then normally recovers within 3 to4 weeks.

They way I see it I’m making 10% and acquiring more shares through reinvestment. Is this a poor investment?
Would I be better off in VTSAX Getting A 2% and the growth of the NAV?
All of my CIM is in tax advantaged accounts.
Well, let's look at Portfolio Visualizer and compare CIM with VTSAX to see how they have done in the past. PV is reporting on total return, not just share price.

But these back tests depend a lot on the start and stop dates, so here are the same to investments starting a year later.

The point is, the large dividend of CIM does not make CIM any better than VTSAX. If other things were being equal, a 10% dividend is way better than a 2% dividend. But other things are not equal.
Thanks Growthseeker,
That sure is interesting what difference a year makes, I have been wondering if CIM was worth the risk of owning an individual stock and how it might hold up in a recession.
I may just sell and invest in VTSAX

GrowthSeeker
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Re: Explain to me why dividends aren't real money

Post by GrowthSeeker » Wed Feb 12, 2020 9:02 am

Designairohio wrote:
Wed Feb 12, 2020 8:30 am
GrowthSeeker wrote:
Wed Feb 12, 2020 1:31 am
Designairohio wrote:
Tue Feb 11, 2020 8:04 pm
I have around 8% of my portfolio in a REIT (Chimera Investment Corp, CIM) this company pays around a 10% dividend and the price stays pretty steady. It drops on exdividend day then normally recovers within 3 to4 weeks.

They way I see it I’m making 10% and acquiring more shares through reinvestment. Is this a poor investment?
Would I be better off in VTSAX Getting A 2% and the growth of the NAV?
All of my CIM is in tax advantaged accounts.
Well, let's look at Portfolio Visualizer and compare CIM with VTSAX to see how they have done in the past. PV is reporting on total return, not just share price.

But these back tests depend a lot on the start and stop dates, so here are the same to investments starting a year later.

The point is, the large dividend of CIM does not make CIM any better than VTSAX. If other things were being equal, a 10% dividend is way better than a 2% dividend. But other things are not equal.
Thanks Growthseeker,
That sure is interesting what difference a year makes, I have been wondering if CIM was worth the risk of owning an individual stock and how it might hold up in a recession.
I may just sell and invest in VTSAX
Well, of course comparing CIM and VTSAX head to head is apples to oranges:
individual stock vs fund
real estate vs broad market
correlation coefficient between CIM and broad market .56 or .50 in the above two time frames.

So I think you'd have to look at your entire portfolio; and also compare CIM with a real estate fund.
Just because you're paranoid doesn't mean they're NOT out to get you.

alex_686
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Re: Explain to me why dividends aren't real money

Post by alex_686 » Wed Feb 12, 2020 9:45 am

Designairohio wrote:
Tue Feb 11, 2020 8:04 pm
I have around 8% of my portfolio in a REIT (Chimera Investment Corp, CIM) this company pays around a 10% dividend and the price stays pretty steady. It drops on exdividend day then normally recovers within 3 to4 weeks.

They way I see it I’m making 10% and acquiring more shares through reinvestment. Is this a poor investment?
Would I be better off in VTSAX Getting A 2% and the growth of the NAV?
All of my CIM is in tax advantaged accounts.
It is not that it is a poor investment, but you are focusing on the wrong thing.

You would be in exactly the same spot if the company had done a stock buyback. The accounting logic is rock hard.

You should be in the same spot if the company had used the cash to invest in new projects for higher future dividends. The economic logic here is strong, but you have to make a few assumptions,

You have to move to 2nd and 3rd order effects before you see any differences, such as tax, risk, and agency issues.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

alex_686
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Re: Explain to me why dividends aren't real money

Post by alex_686 » Wed Feb 12, 2020 9:49 am

boomer_techie wrote:
Tue Feb 11, 2020 6:16 pm
alex_686 wrote:
Tue Feb 11, 2020 9:14 am
boomer_techie wrote:
Tue Feb 11, 2020 8:53 am
However, if a company accumulates too much cash, a corporate raider may swoop in and do a leveraged buyout of the company using it's own cash.
And this is bad because? You will still get the cash.
It is bad for current management - thus they don't want to accumulate massive cash reserves. It can also be bad for you when your "steady earner" is bought out from under you.
For me, this is a argument against buying dividend stocks. 1/2 of the “steady earners” are high risk stock. Greater variance in returns, twice as likely to have negative earning surprises, more likely to go bankrupt.

The average retail investor put too much weight on dividends, when it really is a false security blanket. Give me the cold hard truth any day.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

MindBogler
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Re: Explain to me why dividends aren't real money

Post by MindBogler » Wed Feb 12, 2020 10:02 am

watchnerd wrote:
Wed Feb 12, 2020 12:46 am
Lots of Boglehead thread titles these days are very click-bait sounding
People learn by example. Have you read a typical site with links lately? 8-) :D

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Re: Explain to me why dividends aren't real money

Post by willthrill81 » Wed Feb 12, 2020 10:04 am

watchnerd wrote:
Wed Feb 12, 2020 12:46 am
All Seasons wrote:
Tue Feb 11, 2020 7:57 pm
willthrill81 wrote:
Tue Feb 11, 2020 7:24 pm
I smell troll.
Ditto.
Lots of Boglehead thread titles these days are very click-bait sounding
Yes, but in this case, the OP disappeared as well.
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CyclingDuo
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Re: Explain to me why dividends aren't real money

Post by CyclingDuo » Wed Feb 12, 2020 10:44 am

willthrill81 wrote:
Wed Feb 12, 2020 10:04 am
watchnerd wrote:
Wed Feb 12, 2020 12:46 am
All Seasons wrote:
Tue Feb 11, 2020 7:57 pm
willthrill81 wrote:
Tue Feb 11, 2020 7:24 pm
I smell troll.
Ditto.
Lots of Boglehead thread titles these days are very click-bait sounding
Yes, but in this case, the OP disappeared as well.
Checked a few other threads in the OP's profile where the same thing happened. Example was a post about house size for a family and the OP never came back after opening the thread. That's not to say the OP isn't reading the responses to their original post, but it does have a "fly by" aspect to it...
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justsomeguy2018
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Re: Explain to me why dividends aren't real money

Post by justsomeguy2018 » Thu Feb 13, 2020 9:42 pm

CyclingDuo wrote:
Wed Feb 12, 2020 10:44 am
willthrill81 wrote:
Wed Feb 12, 2020 10:04 am
watchnerd wrote:
Wed Feb 12, 2020 12:46 am
All Seasons wrote:
Tue Feb 11, 2020 7:57 pm
willthrill81 wrote:
Tue Feb 11, 2020 7:24 pm
I smell troll.
Ditto.
Lots of Boglehead thread titles these days are very click-bait sounding
Yes, but in this case, the OP disappeared as well.
Checked a few other threads in the OP's profile where the same thing happened. Example was a post about house size for a family and the OP never came back after opening the thread. That's not to say the OP isn't reading the responses to their original post, but it does have a "fly by" aspect to it...
I'm still here. I just don't have much to add.

My thinking is with a dividend at least you have something in your pocket at the end of the day, yes, a non-dividend stock is reinvesting in growing the company, but what if they fail or are not good at it? I guess if you are reinvesting the dividends then you are screwed either way though.

It seems to me after reading the various threads on this issue that the main issues with dividends are (1) tax drag and (2) slower potential growth because they are giving out a dividend instead of using it to grow the company, and therefore, the share price.

That's my takeaway from everything.

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Phineas J. Whoopee
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Re: Explain to me why dividends aren't real money

Post by Phineas J. Whoopee » Fri Feb 14, 2020 3:40 pm

abuss368 wrote:
Wed Feb 12, 2020 8:16 am
Phineas J. Whoopee wrote:
Tue Feb 11, 2020 7:23 pm
Interest on a savings account increases one's wealth. A dividend on a stock does not.
That may be able to be explained better. I believe you were referring to when a dividend is paid there is a corresponding decrease in the NAV. The impact to wealth over time from a stocks return is a combination of both dividends and earnings growth. The speculative portion while having impact in the near term is essentially zero over the long term.
If I understand, you're asserting dividends are everything over the long term. I think dividends are something but not everything, not even over the long term.

We disagree for reasons I have repeatedly explained.

PJW

BogleMelon
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Re: Explain to me why dividends aren't real money

Post by BogleMelon » Fri Feb 14, 2020 3:45 pm

justsomeguy2018 wrote:
Mon Feb 10, 2020 9:48 pm


If I own a high yield fund paying 5% vs a fund paying 0%, how am I not making money? If that is the case what is the point of receiving dividends at all?
The High yield fund Nav will decrease by 5%, the other fund NAV will stay the same.
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rj342
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Re: Explain to me why dividends aren't real money

Post by rj342 » Fri Feb 14, 2020 3:46 pm

The problem I have w people who dismiss dividends is they are instead dismissing the ability of corporation to play accounting games to make the quarterly balance sheet look better and goose the stock price. Or just put out pure propaganda. It is a lot harder to fake paying out cash quarter after quarter.

I think one of the worst aspects of tax policy is they way dividends are disadvantaged vs capital gains. A bias toward dividends encourages old school 'investment', where a bias toward capital gains fuels 'speculation" (Yes, I know the difference can be in the eye of the beholder).

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Phineas J. Whoopee
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Re: Explain to me why dividends aren't real money

Post by Phineas J. Whoopee » Fri Feb 14, 2020 3:48 pm

justsomeguy2018 wrote:
Thu Feb 13, 2020 9:42 pm
CyclingDuo wrote:
Wed Feb 12, 2020 10:44 am
willthrill81 wrote:
Wed Feb 12, 2020 10:04 am
watchnerd wrote:
Wed Feb 12, 2020 12:46 am
All Seasons wrote:
Tue Feb 11, 2020 7:57 pm


Ditto.
Lots of Boglehead thread titles these days are very click-bait sounding
Yes, but in this case, the OP disappeared as well.
Checked a few other threads in the OP's profile where the same thing happened. Example was a post about house size for a family and the OP never came back after opening the thread. That's not to say the OP isn't reading the responses to their original post, but it does have a "fly by" aspect to it...
I'm still here. I just don't have much to add.

My thinking is with a dividend at least you have something in your pocket at the end of the day, yes, a non-dividend stock is reinvesting in growing the company, but what if they fail or are not good at it? I guess if you are reinvesting the dividends then you are screwed either way though.

It seems to me after reading the various threads on this issue that the main issues with dividends are (1) tax drag and (2) slower potential growth because they are giving out a dividend instead of using it to grow the company, and therefore, the share price.

That's my takeaway from everything.
The takeaway should be that a thing plus ten dollars is worth precisely ten dollars more than the very same thing without the ten dollars.

PJW

BogleMelon
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Re: Explain to me why dividends aren't real money

Post by BogleMelon » Fri Feb 14, 2020 3:52 pm

justsomeguy2018 wrote:
Thu Feb 13, 2020 9:42 pm


My thinking is with a dividend at least you have something in your pocket at the end of the day, yes, a non-dividend stock is reinvesting in growing the company, but what if they fail or are not good at it?
You can always maintain $xyz amount in that fund/stock that doesn't pay divedends, anything extra due to capital appreciation, could be sold.

Example:
Scenario 1: Fund A: Paying 5% dividend. You put $1000. End of the year, you have $1000 worth of stocks+ $50 taxable dividends (assuming the market effect is flat!)
Scenario 2: Fund B: Paying 0%. You put $1000. End of the year, the fund did the same revenue as fund A, but without dividends. You have $1050 worth of stocks. Now you have the choice to
i. sell $50 worth of stocks and pay taxes (Same as fund A)
ii. keep them in the fund.

How the question is for you, how Scenario 2 (i) is worse than Scenario 1?
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Phineas J. Whoopee
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Re: Explain to me why dividends aren't real money

Post by Phineas J. Whoopee » Fri Feb 14, 2020 3:53 pm

rj342 wrote:
Fri Feb 14, 2020 3:46 pm
The problem I have w people who dismiss dividends is they are instead dismissing the ability of corporation to play accounting games to make the quarterly balance sheet look better and goose the stock price. Or just put out pure propaganda. It is a lot harder to fake paying out cash quarter after quarter.

I think one of the worst aspects of tax policy is they way dividends are disadvantaged vs capital gains. A bias toward dividends encourages old school 'investment', where a bias toward capital gains fuels 'speculation" (Yes, I know the difference can be in the eye of the beholder).
Quite right. Institutions, which represent the bulk of daily trading volume, know that fact and take it into account. They're the ones, mostly, who discover prices at the margin.

They are not fooled.

PJW

dbr
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Re: Explain to me why dividends aren't real money

Post by dbr » Fri Feb 14, 2020 3:54 pm

rj342 wrote:
Fri Feb 14, 2020 3:46 pm
The problem I have w people who dismiss dividends is they are instead dismissing the ability of corporation to play accounting games to make the quarterly balance sheet look better and goose the stock price. Or just put out pure propaganda. It is a lot harder to fake paying out cash quarter after quarter.

I think one of the worst aspects of tax policy is they way dividends are disadvantaged vs capital gains. A bias toward dividends encourages old school 'investment', where a bias toward capital gains fuels 'speculation" (Yes, I know the difference can be in the eye of the beholder).
For this to matter to an investor in a diversified portfolio of stocks, which is mostly the topic on this forum, one would have to establish that segregating stocks on a dividend paying statistic would result in a portfolio with higher return at same risk or lower risk at same return compared to some other way of sorting out a portfolio of stocks. For the most part that does not work out. This is the gist of what Larry Swedroe wrote about in his long running blog articles. If one can construct a portfolio of higher returning and lower risk stocks using some kind of dividend criterion, they should certainly do it.

As to methods to study individual companies and pick stocks, I wouldn't know. In any case something would have to be done to overcome single stock idiosyncratic risk.

fyre4ce
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Re: Explain to me why dividends aren't real money

Post by fyre4ce » Fri Feb 14, 2020 4:05 pm

rchmx1 wrote:
Mon Feb 10, 2020 11:27 pm
I'm new to investing as well, and while I'd say I've gotten to the point where my head is firmly wrapped around the fact that a dividend payout doesn't leave your with anything more than what you started with, I feel like I still have a bit of cognitive dissonance with something else that's frequently brought up when the topic of dividends arises. I will often come across statements to the effect that the value of a stock is based largely upon expected future dividend payouts. There seems to be a bit of inconsistency here. Dividends don't provide anything more than what you had before the ex-div date, and yet expected future dividends play a big role in stock valuations? I know I'm missing something (and I would expect it to be something like, "future expected dividend payouts" stands for "if we think a company will become stable and profitable enough to pay consistent dividends in the future, that serves as a good reason to grant them this estimated current value"), but I was wondering if any of the brighter minds than mine here could offer their insight on this aspect of the dividend topic.
I would suggest a revision to the bolded sentence that should make things more clear: "...the value of a stock is based largely upon expected future earnings, and the possibility that these earnings could be paid out to shareholders as dividends*." Companies that earn money decide to pay dividends, or not, for all sorts of reasons. But if a company is able to earn a profit, owning shares of that company becomes attractive to investors because there's a high chance that the owners of the company will eventually see that profit.

*stock buy-backs also serve a very similar function

alex_686
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Re: Explain to me why dividends aren't real money

Post by alex_686 » Fri Feb 14, 2020 5:18 pm

fyre4ce wrote:
Fri Feb 14, 2020 4:05 pm
I would suggest a revision to the bolded sentence that should make things more clear: "...the value of a stock is based largely upon expected future earnings, and the possibility that these earnings could be paid out to shareholders as dividends*." Companies that earn money decide to pay dividends, or not, for all sorts of reasons. But if a company is able to earn a profit, owning shares of that company becomes attractive to investors because there's a high chance that the owners of the company will eventually see that profit.

*stock buy-backs also serve a very similar function
The value of a stock is based on its Free Cash Flow to Equity. Full Stop. Dividends are the classic method, but stock buybacks and cash mergers fall in here as well.

In theory one should be indifferent to a small dividend now verse a large payout later. There are lots of secondary factors to consider - risk, taxes, etc.

This is the correct theoretical framework, tried and tested.

In this framework dividends are not that interesting. They are short term low-risk cash flows. There are lots of cool tricks one can do with cash but you are not going to affect a company’s enterprise value. Hence, current dividends don’t matter much.

What is more interesting are the long term cash flows. For example, what will be the dividend in 10 years. If you look at the Gordon Dividend Discount Model, the growth in dividends and the associated risk has a larger impact than the initial starting point of the dividends.

Earnings is only interesting in how it affects growth. There are lots of valuable companies that have negative earnings. The classic examples are in oil exploration and land development. Spend 20 years burning through money then sell the competed project.
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TN_Boy
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Re: Explain to me why dividends aren't real money

Post by TN_Boy » Fri Feb 14, 2020 6:31 pm

rj342 wrote:
Fri Feb 14, 2020 3:46 pm
The problem I have w people who dismiss dividends is they are instead dismissing the ability of corporation to play accounting games to make the quarterly balance sheet look better and goose the stock price. Or just put out pure propaganda. It is a lot harder to fake paying out cash quarter after quarter.

stuff deleted ..
I understand your comment, and you are not the only one who holds the view that paying dividends may force a company to be "more honest."

But I've never seen any reference to an academic study showing that dividend paying stocks have more accurate financial statements.

If you've seen such a study please point me to it.

I believe that in the US, major distortions on financial statements tend to get discovered. While there are smaller things companies can (legally) do to tweak earnings, big stuff is illegal and can get people put in jail.

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Re: Explain to me why dividends aren't real money

Post by abuss368 » Fri Feb 14, 2020 8:49 pm

Phineas J. Whoopee wrote:
Fri Feb 14, 2020 3:40 pm
abuss368 wrote:
Wed Feb 12, 2020 8:16 am
Phineas J. Whoopee wrote:
Tue Feb 11, 2020 7:23 pm
Interest on a savings account increases one's wealth. A dividend on a stock does not.
That may be able to be explained better. I believe you were referring to when a dividend is paid there is a corresponding decrease in the NAV. The impact to wealth over time from a stocks return is a combination of both dividends and earnings growth. The speculative portion while having impact in the near term is essentially zero over the long term.
If I understand, you're asserting dividends are everything over the long term. I think dividends are something but not everything, not even over the long term.

We disagree for reasons I have repeatedly explained.

PJW
That is an incorrect assumption as I have not asserted that dividends are everything over the long term as underlined above.

Jack Bogle has often written in his excellent books that a stocks return is a combination of the items noted above. Please consider reading "Bogle on Mutual Funds" as it is an excellent book and you will learn much!

Best.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Phineas J. Whoopee
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Re: Explain to me why dividends aren't real money

Post by Phineas J. Whoopee » Fri Feb 14, 2020 9:50 pm

abuss368 wrote:
Fri Feb 14, 2020 8:49 pm
Phineas J. Whoopee wrote:
Fri Feb 14, 2020 3:40 pm
abuss368 wrote:
Wed Feb 12, 2020 8:16 am
Phineas J. Whoopee wrote:
Tue Feb 11, 2020 7:23 pm
Interest on a savings account increases one's wealth. A dividend on a stock does not.
That may be able to be explained better. I believe you were referring to when a dividend is paid there is a corresponding decrease in the NAV. The impact to wealth over time from a stocks return is a combination of both dividends and earnings growth. The speculative portion while having impact in the near term is essentially zero over the long term.
If I understand, you're asserting dividends are everything over the long term. I think dividends are something but not everything, not even over the long term.

We disagree for reasons I have repeatedly explained.

PJW
That is an incorrect assumption as I have not asserted that dividends are everything over the long term as underlined above.

Jack Bogle has often written in his excellent books that a stocks return is a combination of the items noted above. Please consider reading "Bogle on Mutual Funds" as it is an excellent book and you will learn much!

Best.
What I underlined is specifically what you wrote.

I'm finished with this exchange.

PJW

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Re: Explain to me why dividends aren't real money

Post by abuss368 » Fri Feb 14, 2020 10:31 pm

Phineas J. Whoopee wrote:
Fri Feb 14, 2020 9:50 pm
abuss368 wrote:
Fri Feb 14, 2020 8:49 pm
Phineas J. Whoopee wrote:
Fri Feb 14, 2020 3:40 pm
abuss368 wrote:
Wed Feb 12, 2020 8:16 am
Phineas J. Whoopee wrote:
Tue Feb 11, 2020 7:23 pm
Interest on a savings account increases one's wealth. A dividend on a stock does not.
That may be able to be explained better. I believe you were referring to when a dividend is paid there is a corresponding decrease in the NAV. The impact to wealth over time from a stocks return is a combination of both dividends and earnings growth. The speculative portion while having impact in the near term is essentially zero over the long term.
If I understand, you're asserting dividends are everything over the long term. I think dividends are something but not everything, not even over the long term.

We disagree for reasons I have repeatedly explained.

PJW
That is an incorrect assumption as I have not asserted that dividends are everything over the long term as underlined above.

Jack Bogle has often written in his excellent books that a stocks return is a combination of the items noted above. Please consider reading "Bogle on Mutual Funds" as it is an excellent book and you will learn much!

Best.
Perhaps you and I understand words and grammar differently. What I underlined is specifically what you wrote.

I'm finished with this exchange.

PJW
Read "Bogle on Mutual Funds" and you will gain and learn so much!

Please continue to ask any questions regarding the book as it is one of my favorites.

Best.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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watchnerd
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Re: Explain to me why dividends aren't real money

Post by watchnerd » Sun Feb 16, 2020 10:30 am

rj342 wrote:
Fri Feb 14, 2020 3:46 pm


I think one of the worst aspects of tax policy is they way dividends are disadvantaged vs capital gains. A bias toward dividends encourages old school 'investment', where a bias toward capital gains fuels 'speculation" (Yes, I know the difference can be in the eye of the beholder).
Which kind of dividends are you referring to?

Qualified or ordinary?
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justsomeguy2018
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Re: Explain to me why dividends aren't real money

Post by justsomeguy2018 » Fri Feb 28, 2020 12:02 am

So if dividends arent real (or "free lunch") money then explain to me how a person buying VOO in March 2000 and holding it for 12 years has a better return than someone buying VOO 12 years later at the exact same price? What is the difference, if not 12 years of dividend payments??

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willthrill81
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Re: Explain to me why dividends aren't real money

Post by willthrill81 » Fri Feb 28, 2020 12:19 am

justsomeguy2018 wrote:
Fri Feb 28, 2020 12:02 am
So if dividends arent real (or "free lunch") money then explain to me how a person buying VOO in March 2000 and holding it for 12 years has a better return than someone buying VOO 12 years later at the exact same price? What is the difference, if not 12 years of dividend payments??
Dividends are real money, but they are not a free lunch. They are just part of the total return of stocks.

Perhaps an example will illustrate this. Let's say you own a business. It has $10,000 in its checking account. You transfer $1,000 from that checking account to your own personal checking account. Has your net worth changed? No, because you owned the $1,000 the whole time. The same is true of a business. You owned your share of the dividends when they were just cash sitting in the company's account. The dividends being transferred to your account does not change their value.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Explain to me why dividends aren't real money

Post by Northern Flicker » Fri Feb 28, 2020 12:26 am

justsomeguy2018 wrote:
Mon Feb 10, 2020 9:48 pm
I feel like I have seen it said on here that dividends/ETF capital gains distros "aren't a free lunch" because they just lower the NAV.

I kind of follow, but I guess at the same time I don't follow.

If I own a high yield fund paying 5% vs a fund paying 0%, how am I not making money? If that is the case what is the point of receiving dividends at all?
The point of dividends is that companies without something seriously productive to invest the money in should just return it to investors. A utility company may invest in infrastructure such as, say the conversion of a coal-firing plant to solar energy. This is a legitimate use of capital. But utility companies are not entrepreneurial organizations trying to develop self-driving cars or new vaccines for corona viruses. They are in the business of providing electricity to a relatively static customer base with local steady growth at best. They often/usually generate more income than they can invest in new business so they return it to investors as dividends. And investors typically buy these stocks for the income stream.

A bond is a contract to pay out interest on loaned principal and then to return the principal back at maturity. It is tempting to think of a stock dividend in the same way, but that is not correct. There is no contractual requirement to pay a dividend, and it may be reduced or eliminated at any time. The yield is just a future projection based on past performance and future revenue expectations, not something you automatically earn as a percentage of the value of your holding. And as noted above, when the cash is distributed out of the company, it lowers the book value of the company by that amount of cash that the company no longer holds, essentially paying the dividend out of “principal”. (By comparison, interest payments on bond principal are not paid out of principal). Some companies use share buybacks as a more indirect, but more tax-efficient way of distributing revenue to investors.

Sidestepping the issue of buybacks vs dividends, companies with lower dividends tend to be more growth oriented, reinvesting most or all of their revenue into new business opportunities. Companies with higher dividends tend to be a more mature, stable business with more stable revenue streams.
Risk is not a guarantor of return.

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Re: Explain to me why dividends aren't real money

Post by justsomeguy2018 » Fri Feb 28, 2020 12:27 am

willthrill81 wrote:
Fri Feb 28, 2020 12:19 am
justsomeguy2018 wrote:
Fri Feb 28, 2020 12:02 am
So if dividends arent real (or "free lunch") money then explain to me how a person buying VOO in March 2000 and holding it for 12 years has a better return than someone buying VOO 12 years later at the exact same price? What is the difference, if not 12 years of dividend payments??
Dividends are real money, but they are not a free lunch. They are just part of the total return of stocks.

Perhaps an example will illustrate this. Let's say you own a business. It has $10,000 in its checking account. You transfer $1,000 from that checking account to your own personal checking account. Has your net worth changed? No, because you owned the $1,000 the whole time. The same is true of a business. You owned your share of the dividends when they were just cash sitting in the company's account. The dividends being transferred to your account does not change their value.
So are you basically saying that the S&P500 value would have been a lot higher in 2012 if no dividends had been paid out over those 12 years? If so I suppose that makes sense.

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Gort
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Re: Explain to me why dividends aren't real money

Post by Gort » Fri Feb 28, 2020 12:27 am

willthrill81 wrote:
Fri Feb 28, 2020 12:19 am
justsomeguy2018 wrote:
Fri Feb 28, 2020 12:02 am
So if dividends arent real (or "free lunch") money then explain to me how a person buying VOO in March 2000 and holding it for 12 years has a better return than someone buying VOO 12 years later at the exact same price? What is the difference, if not 12 years of dividend payments??
Dividends are real money, but they are not a free lunch. They are just part of the total return of stocks.

Perhaps an example will illustrate this. Let's say you own a business. It has $10,000 in its checking account. You transfer $1,000 from that checking account to your own personal checking account. Has your net worth changed? No, because you owned the $1,000 the whole time. The same is true of a business. You owned your share of the dividends when they were just cash sitting in the company's account. The dividends being transferred to your account does not change their value.
And in your example, the company is now worth $1,000 less.

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Re: Explain to me why dividends aren't real money

Post by willthrill81 » Fri Feb 28, 2020 12:54 am

justsomeguy2018 wrote:
Fri Feb 28, 2020 12:27 am
willthrill81 wrote:
Fri Feb 28, 2020 12:19 am
justsomeguy2018 wrote:
Fri Feb 28, 2020 12:02 am
So if dividends arent real (or "free lunch") money then explain to me how a person buying VOO in March 2000 and holding it for 12 years has a better return than someone buying VOO 12 years later at the exact same price? What is the difference, if not 12 years of dividend payments??
Dividends are real money, but they are not a free lunch. They are just part of the total return of stocks.

Perhaps an example will illustrate this. Let's say you own a business. It has $10,000 in its checking account. You transfer $1,000 from that checking account to your own personal checking account. Has your net worth changed? No, because you owned the $1,000 the whole time. The same is true of a business. You owned your share of the dividends when they were just cash sitting in the company's account. The dividends being transferred to your account does not change their value.
So are you basically saying that the S&P500 value would have been a lot higher in 2012 if no dividends had been paid out over those 12 years? If so I suppose that makes sense.
That's correct.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Explain to me why dividends aren't real money

Post by rossington » Fri Feb 28, 2020 4:56 am

willthrill81 wrote:
Fri Feb 28, 2020 12:54 am
justsomeguy2018 wrote:
Fri Feb 28, 2020 12:27 am
willthrill81 wrote:
Fri Feb 28, 2020 12:19 am
justsomeguy2018 wrote:
Fri Feb 28, 2020 12:02 am
So if dividends arent real (or "free lunch") money then explain to me how a person buying VOO in March 2000 and holding it for 12 years has a better return than someone buying VOO 12 years later at the exact same price? What is the difference, if not 12 years of dividend payments??
Dividends are real money, but they are not a free lunch. They are just part of the total return of stocks.

Perhaps an example will illustrate this. Let's say you own a business. It has $10,000 in its checking account. You transfer $1,000 from that checking account to your own personal checking account. Has your net worth changed? No, because you owned the $1,000 the whole time. The same is true of a business. You owned your share of the dividends when they were just cash sitting in the company's account. The dividends being transferred to your account does not change their value.
So are you basically saying that the S&P500 value would have been a lot higher in 2012 if no dividends had been paid out over those 12 years? If so I suppose that makes sense.
That's correct.
That is only correct if one believes that investors are determining stock prices to the extent that dividend payouts are a primary consideration.
But investor psychology with its infinite variables ultimately determine stock valuations, not a mathematical assumption that somehow dividend payouts make a stock worth less.
Dividends are a part of total return but have no long term overall affect on how an investor will value a stock. Investors pay what they are willing to pay based on their own assumptions.
Thus we can't be certain that stock prices would be higher if a dividend was not paid. There is no way of determining this.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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