Author Topic: Investment returns are real!  (Read 7592 times)

BJC

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Investment returns are real!
« on: July 02, 2017, 09:56:16 PM »
Ok,  as strange as this seems,  it just occurred to me how real investment returns are. I think it's from the fact that mint has aggregated all our investment accounts,  but it just hit me...  We have about $300k in investments.  Assuming 7% returns,  we essentially have a better than minimum wage salary being generated every year going forward... Amazing!

I know this is obvious to all on here,  it has just never seemed this tangible to me.... Looking forward to more compounding!

WildJager

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Re: Investment returns are real!
« Reply #1 on: July 02, 2017, 10:16:18 PM »
The feeling just keeps getting more absurd.  Some days I feel bad about the "unfairness" of it all... generating profit only for providing capital.  But then I remember that's the essence of the most stable (and in the end fair) economic system yet devised.  Capitalism, while not perfect, helps a lot of people.

Maybe there will be a better system in the future, but until then, yeah.  I appreciate being one of the ones on the positive side of this system. 

Congrats on figuring it out, and best of luck to the future!

Bateaux

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Re: Investment returns are real!
« Reply #2 on: July 03, 2017, 07:19:05 PM »
I've looked at the returns and had the same perspectives.   This year I've already seen greater gains on the investments than will be my salary for the year.  In fact any year with a greater than 7% return will exceed my salary.   Most would be FIRE at that point.  I look at it as having a clone working hard for me.
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Khanjar

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Re: Investment returns are real!
« Reply #3 on: July 03, 2017, 08:10:17 PM »
There's a difference between intellectual knowledge of a thing, and knowing it in your bones, as it were. Intellectually, I've known investments pay off over time. I even saw my money, around 10k of it I think, double in relatively short order due to me starting my investment and saving journey around the time of after the financial crash.

This year has blown that out of the water. Seeing my net worth go up by more than my earned income for several months of this year, it's a totally different experience.

VolcanicArts

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Re: Investment returns are real!
« Reply #4 on: July 03, 2017, 10:50:57 PM »
I really just look at it like you are managing a company with less headache. The company pays you a percent of their profit, and this is your investment return. You are in essence being rewarded for providing money which allows the company to expand and grow at a higher rate than would be possible without your investment. They are also rewarding you with returns based on how much risk you are personally taking on in order to allow them to generate more revenue. This is just my simplified rationale for passive income streams.

marty998

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Re: Investment returns are real!
« Reply #5 on: July 04, 2017, 04:12:58 AM »
You are in essence being rewarded for providing money which allows the company to expand and grow at a higher rate than would be possible without your investment. They are also rewarding you with returns based on how much risk you are personally taking on in order to allow them to generate more revenue. This is just my simplified rationale for passive income streams.

Only if you provide that money in the Primary market (IPO or share issues).

If you're buying shares in the Secondary market (on the NYSE for example) then all you're doing is sending cash to someone who was willing to liquidate their investment.

In that case, you are freeing up cash for someone else to spend. If, through buying shares at a higher price than the previous close you drive up a share price, you are making everyone else a little bit wealthier too.


Stubblestache

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Re: Investment returns are real!
« Reply #6 on: July 04, 2017, 04:47:35 AM »
New to the forum (first post eeeep) but this has given me a real boost. I was just screwing around on Amazon of all places debating whether I really needed to buy something.

I don't. And this has reminded me why. Earning minimum wage from passive investment would be incredible!

marty998

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Re: Investment returns are real!
« Reply #7 on: July 04, 2017, 03:47:59 PM »
New to the forum (first post eeeep) but this has given me a real boost. I was just screwing around on Amazon of all places debating whether I really needed to buy something.

I don't. And this has reminded me why. Earning minimum wage from passive investment would be incredible!

There will come a time when your stash will not be stubble sized... what will you do with your username then? :D

Davids

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Re: Investment returns are real!
« Reply #8 on: July 04, 2017, 05:02:13 PM »
They're real, and they're spectacular!!!

EnjoyIt

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Re: Investment returns are real!
« Reply #9 on: July 04, 2017, 06:57:29 PM »
They're real, and they're spectacular!!!

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BTDretire

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Re: Investment returns are real!
« Reply #10 on: July 05, 2017, 07:50:33 AM »

Stubblestache

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Re: Investment returns are real!
« Reply #11 on: July 20, 2017, 07:48:07 AM »
New to the forum (first post eeeep) but this has given me a real boost. I was just screwing around on Amazon of all places debating whether I really needed to buy something.

I don't. And this has reminded me why. Earning minimum wage from passive investment would be incredible!

There will come a time when your stash will not be stubble sized... what will you do with your username then? :D

haha I will look at my name and marvel at how far I've come :)

yakamashii

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Re: Investment returns are real!
« Reply #12 on: July 20, 2017, 08:02:58 AM »
Yes, to us, without a doubt, they're real.
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TheAnonOne

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Re: Investment returns are real!
« Reply #13 on: July 20, 2017, 09:09:10 AM »
There may be a 1-3 period where it actually shrinks, and that is why you get to grow. You are buying risk and being rewarded in returns.

If it was guaranteed to go up, you would make similar returns to banks, or 1%

That being said, since the election the market is up around 18%, and we have seen our NW explode. We were down in the mid 300s in NOV, and up around 450k now!

Wow

Dances With Fire

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Re: Investment returns are real!
« Reply #14 on: July 20, 2017, 09:53:31 AM »
There may be a 1-3 period where it actually shrinks, and that is why you get to grow. You are buying risk and being rewarded in returns.

If it was guaranteed to go up, you would make similar returns to banks, or 1%

That being said, since the election the market is up around 18%, and we have seen our NW explode. We were down in the mid 300s in NOV, and up around 450k now!

Wow

^^^ Yes, we should remind ourselves from time to time that there will be those years that we earn very little or even negative returns. I remind myself of 2000 & 2008 for example.

That said, last year my dividends and gains "earned" more than my full time *work*. (I should note also that I am one of the "older" members here and have saved and invested for many, many years.)  I have to agree that those here who have LBYM, took on personal and financial risk, were disciplined, and worked towards a goal or goals should be rewarded.

2Birds1Stone

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Re: Investment returns are real!
« Reply #15 on: July 20, 2017, 10:10:16 AM »
One thing to remember, especially on a message board as young as this one....losses will be just as profound.

We have had the luxury of an 8 year bull market in our rearview mirror.

When the next big correction (-20%+) happens......years of salary will just as easily be wiped from our balance sheets.
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dougules

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Re: Investment returns are real!
« Reply #16 on: July 20, 2017, 11:16:21 AM »
I still don't think it's real to me.  It's basically like our cat is making $16/hr sitting on his ass at home. 

Everybody here is right about not getting caught up in gains and losses.  I wouldn't look so much at your value going up as much as what the companies in your index funds are making.  Every time somebody shops at Amazon, Target, Chevron, etc. etc. you are getting a cut.  Those are your profits whether the companies pass them out as dividends or keep them to reinvest.  That's what's driving the gains over time, and that's what you're really earning.  The companies in the S&P 500 made $94 per share of the index last year, and that is your money whether it's in your personal account or stays in theirs. 
« Last Edit: July 20, 2017, 11:19:03 AM by dougules »

afuera

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Re: Investment returns are real!
« Reply #17 on: July 20, 2017, 11:23:54 AM »
"The price of anything is the amount of life you exchange for it" - Henry David Thoreau

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MilesTeg

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Re: Investment returns are real!
« Reply #18 on: July 20, 2017, 01:02:02 PM »
Ok,  as strange as this seems,  it just occurred to me how real investment returns are. I think it's from the fact that mint has aggregated all our investment accounts,  but it just hit me...  We have about $300k in investments.  Assuming 7% returns,  we essentially have a better than minimum wage salary being generated every year going forward... Amazing!

I know this is obvious to all on here,  it has just never seemed this tangible to me.... Looking forward to more compounding!

This is not correct, but only needs a small tweak: Realized investment returns are real.

Of course, realized investment returns means you have sold the investment and have the return in hand. Until then, it's just numbers. Invest wisely and don't get too excited when they go up; don't get too excited when they go down. And over any significant period, they WILL do both.

Caoineag

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Re: Investment returns are real!
« Reply #19 on: July 20, 2017, 02:38:51 PM »
One thing to remember, especially on a message board as young as this one....losses will be just as profound.

We have had the luxury of an 8 year bull market in our rearview mirror.

When the next big correction (-20%+) happens......years of salary will just as easily be wiped from our balance sheets.

I am pretty sure that at this point I owe Mr. Market at least 1 -20% year. Despite massive contributions, I am pretty sure my last count attributed more than 40% of my account value to market gains over the years (to be fair, this is going down as I keep putting more and more money away and we get further from 24% market gains). Though I am pretty sure to equal years of our salary that's more like 70% losses...

And while the "realized investment returns are real" comment is accurate, its also not helpful for retirement planning whereas tracking market gains/losses does tell you whether or not your portfolio can support you. Part of the reason I watch my portfolio on a regular basis, is to grow comfortable with how much it gains and loses in a day, week, month or year (and actually multiple years too).

We are finally getting to the point where market gains will both support our spending and increase the net worth for the inevitable more expensive needs farther down the road (say healthcare). We wouldn't actually believe that if we weren't tracking what our portfolio is throwing off. In fact, tracking our personal market gains has been key to making both my spouse and I comfortable with retiring early.

I understand wanting to keep in mind that things that go up also can go down but being willfully blind to both would leave me with a lot of anxiety. Much better to feel how real investment returns can be (whether positive or negative) and be prepared for that then to hit retirement and flip out.

Oh and let me add, I am jealous of all of you who have experienced market gains greater than your contributions in a year. Unless that happens this year, I will retire prior to my portfolio gaining more from market gains than from my personal contributions.

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Re: Investment returns are real!
« Reply #20 on: July 20, 2017, 02:46:17 PM »
I still don't think it's real to me.  It's basically like our cat is making $16/hr sitting on his ass at home. 

Everybody here is right about not getting caught up in gains and losses.  I wouldn't look so much at your value going up as much as what the companies in your index funds are making.  Every time somebody shops at Amazon, Target, Chevron, etc. etc. you are getting a cut.  Those are your profits whether the companies pass them out as dividends or keep them to reinvest.  That's what's driving the gains over time, and that's what you're really earning.  The companies in the S&P 500 made $94 per share of the index last year, and that is your money whether it's in your personal account or stays in theirs.

Stockholders have almost zero claim to a companies money. Bondholders? Yeah they can say they do. For pennies on the dollar.

The only way you 'get' a slice of that money is when others buy your shares from you.

Keep in mind if no share growth occurs, a dividend would eventually bring the stock to $0.


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Re: Investment returns are real!
« Reply #21 on: July 20, 2017, 03:47:57 PM »
As a man getting up in years, I recommend you not too get too high right now as when the next downturn comes you will have a hard time.  Try to stay even and ignore the value while maximizing your savings rate and you will be fine.

Same.  I have been through years where my pension lost 30%.  Its easy to think ah well we had years of good growth but then when you watch it try and recover over *years* its actually a big bummer. The worst is paying your monthly and watch the value fall.. and the next month.. and the next.

Even as recent as 2015 I had an investment that lost about 15% at the end of the term.

This has made me rethink a little and we spread the money around a bit more now.

dougules

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Re: Investment returns are real!
« Reply #22 on: July 20, 2017, 04:07:47 PM »
I still don't think it's real to me.  It's basically like our cat is making $16/hr sitting on his ass at home. 

Everybody here is right about not getting caught up in gains and losses.  I wouldn't look so much at your value going up as much as what the companies in your index funds are making.  Every time somebody shops at Amazon, Target, Chevron, etc. etc. you are getting a cut.  Those are your profits whether the companies pass them out as dividends or keep them to reinvest.  That's what's driving the gains over time, and that's what you're really earning.  The companies in the S&P 500 made $94 per share of the index last year, and that is your money whether it's in your personal account or stays in theirs.

Stockholders have almost zero claim to a companies money. Bondholders? Yeah they can say they do. For pennies on the dollar.

It's true individual stockholders don't have much power, but collectively they own the company.  If stockholders don't eventually get the company's earnings in some form, they will have changes made.   

Quote
The only way you 'get' a slice of that money is when others buy your shares from you.

Keep in mind if no share growth occurs, a dividend would eventually bring the stock to $0.

I'm not sure I understand where you're going.  You don't necessarily need growth to make money.  It's true that you need growth if you want to get retained earnings back, but if a company were distributing 100% of its earnings as dividends then growth wouldn't matter.  Most companies retain a decent portion of their earnings, though. 

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Re: Investment returns are real!
« Reply #23 on: July 20, 2017, 04:26:52 PM »
The only way you 'get' a slice of that money is when others buy your shares from you.

Keep in mind if no share growth occurs, a dividend would eventually bring the stock to $0.

This just seems intuitively false. Let's pretend company A is worth $1 billion, has 10million shares outstanding at $100 each. Now they sell $200 million in product and it cost $160 million in expenses all in. They now have $40 million in profits. They give $4/share as a dividend. With 0% growth they can still give a $4 dividend every year forever. Sure inflation might make the $4 worth less but the stock could still be worth $100 each forever with 0% growth.
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dj

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Re: Investment returns are real!
« Reply #24 on: July 20, 2017, 04:43:37 PM »
This is reassuring and really makes me want to stick with a strict budget (as strict as I can while still living life). When you first started investing, what did you go after? Index funds?

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Re: Investment returns are real!
« Reply #25 on: July 20, 2017, 09:21:34 PM »

This just seems intuitively false. Let's pretend company A is worth $1 billion, has 10million shares outstanding at $100 each. Now they sell $200 million in product and it cost $160 million in expenses all in. They now have $40 million in profits. They give $4/share as a dividend. With 0% growth they can still give a $4 dividend every year forever. Sure inflation might make the $4 worth less but the stock could still be worth $100 each forever with 0% growth.

Read under price implications

http://www.investopedia.com/articles/stocks/07/dividend_implications.asp?lgl=rira-baseline-vertical

Why is the price of stock worth $100? Who says? Is there some master pricing guide somewhere?

On the ex date shares would open at $96.

With 0% growth their value next year is $96. They issue another dividend. Shares are now $92.

Again, the single ONLY thing that brings the share price up is appreciation in value on the stock. Mortgage based REITs are a great example of why looking at yield is stupid. The sole thing that matters is TOTAL RETURN.
« Last Edit: July 20, 2017, 09:26:39 PM by inline five »

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Re: Investment returns are real!
« Reply #26 on: July 20, 2017, 09:24:38 PM »
I still don't think it's real to me.  It's basically like our cat is making $16/hr sitting on his ass at home. 

Everybody here is right about not getting caught up in gains and losses.  I wouldn't look so much at your value going up as much as what the companies in your index funds are making.  Every time somebody shops at Amazon, Target, Chevron, etc. etc. you are getting a cut.  Those are your profits whether the companies pass them out as dividends or keep them to reinvest.  That's what's driving the gains over time, and that's what you're really earning.  The companies in the S&P 500 made $94 per share of the index last year, and that is your money whether it's in your personal account or stays in theirs.

Stockholders have almost zero claim to a companies money. Bondholders? Yeah they can say they do. For pennies on the dollar.

It's true individual stockholders don't have much power, but collectively they own the company.  If stockholders don't eventually get the company's earnings in some form, they will have changes made.   

Quote
The only way you 'get' a slice of that money is when others buy your shares from you.

Keep in mind if no share growth occurs, a dividend would eventually bring the stock to $0.

I'm not sure I understand where you're going.  You don't necessarily need growth to make money.  It's true that you need growth if you want to get retained earnings back, but if a company were distributing 100% of its earnings as dividends then growth wouldn't matter.  Most companies retain a decent portion of their earnings, though.

So you'd be cool with losing money year over year on the stock, paying tax on the dividend, and slowly seeing your net value in holdings decrease? Dividends are really just forced sales of stock.

Including taxes you'll actually lose money if the shares don't appreciate in value.

Dances With Fire

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Re: Investment returns are real!
« Reply #27 on: July 21, 2017, 06:33:42 AM »
This is reassuring and really makes me want to stick with a strict budget (as strict as I can while still living life). When you first started investing, what did you go after? Index funds?

dj, the very first funds that I bought many years ago were: Vanguard Wellington & Vanguard S & P 500 index trust.

Indexing was very "new" at the time and the financial media did not give it much of a chance of surviving.

Just look how the average person was now able to invest and do as well as the wealthy investors. (Without stock-picking or getting "inside" information from a few wealthy brokerages. A huge win for all of us. IMO.)


TornWonder

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Re: Investment returns are real!
« Reply #28 on: July 21, 2017, 08:16:31 AM »
I still don't think it's real to me.  It's basically like our cat is making $16/hr sitting on his ass at home. 

Everybody here is right about not getting caught up in gains and losses.  I wouldn't look so much at your value going up as much as what the companies in your index funds are making.  Every time somebody shops at Amazon, Target, Chevron, etc. etc. you are getting a cut.  Those are your profits whether the companies pass them out as dividends or keep them to reinvest.  That's what's driving the gains over time, and that's what you're really earning.  The companies in the S&P 500 made $94 per share of the index last year, and that is your money whether it's in your personal account or stays in theirs.

Stockholders have almost zero claim to a companies money. Bondholders? Yeah they can say they do. For pennies on the dollar.

It's true individual stockholders don't have much power, but collectively they own the company.  If stockholders don't eventually get the company's earnings in some form, they will have changes made.   

Quote
The only way you 'get' a slice of that money is when others buy your shares from you.

Keep in mind if no share growth occurs, a dividend would eventually bring the stock to $0.

I'm not sure I understand where you're going.  You don't necessarily need growth to make money.  It's true that you need growth if you want to get retained earnings back, but if a company were distributing 100% of its earnings as dividends then growth wouldn't matter.  Most companies retain a decent portion of their earnings, though.

So you'd be cool with losing money year over year on the stock, paying tax on the dividend, and slowly seeing your net value in holdings decrease? Dividends are really just forced sales of stock.

Including taxes you'll actually lose money if the shares don't appreciate in value.

You seem to have a misunderstanding on how stocks operate.  A company that pays a constant 100% dividend with no growth (or decline) in revenue and income will have a stock that is valued exactly like a bond.  The dividends will function as interest payments.  Every quarter, once the dividend date hits, the stock price would drop by the amount of the dividend, but then build up to the exact same price prior to the next dividend date.
« Last Edit: July 21, 2017, 09:00:32 AM by TornWonder »

BTDretire

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Re: Investment returns are real!
« Reply #29 on: July 21, 2017, 08:46:59 AM »
The only way you 'get' a slice of that money is when others buy your shares from you.

Keep in mind if no share growth occurs, a dividend would eventually bring the stock to $0.

This just seems intuitively false. Let's pretend company A is worth $1 billion, has 10million shares outstanding at $100 each. Now they sell $200 million in product and it cost $160 million in expenses all in. They now have $40 million in profits. They give $4/share as a dividend. With 0% growth they can still give a $4 dividend every year forever. Sure inflation might make the $4 worth less but the stock could still be worth $100 each forever with 0% growth.
My thinking leans your way. I'll give my scenario and let others shoot it down.
 A 'perfectly efficient market'* values a stock at $100 the day of ex dividend. during the quarter they start to build earnings, that makes the price $100 plus the accumulated earnings, in a 'perfectly efficient market'* these earnings would show up as increasing the price of that stock. Using 4%, each month the earnings increase the stock price by $1.25, by the end of the quarter the stock price in a 'perfectly efficient market'* would be $104. Then they pay the dividend and the price drops to $100 and then we start again.
The earning must be after all other expenses are paid.

'perfectly efficient market'* -- this does not exist, but many stocks do increase some before ex day.

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Re: Investment returns are real!
« Reply #30 on: July 21, 2017, 09:29:45 AM »
You seem to have a misunderstanding on how stocks operate.  A company that pays a constant 100% dividend with no growth (or decline) in revenue and income will have a stock that is valued exactly like a bond.  The dividends will function as interest payments.  Every quarter, once the dividend date hits, the stock price would drop by the amount of the dividend, but then build up to the exact same price prior to the next dividend date.

The stock price 'building back up' is appreciation. If this does not happen, guess what? Stock goes to $0. That was my point.

In NO WAY are dividends even closely related to interest. That is a HUGE misconception among investors.

A good example of what you are referring to is 'O'. Pays out almost all profits as dividends. Good track history. Yet look at price range of -1 year. Up to $70's and down to $50's. Hardly bond like.
« Last Edit: July 21, 2017, 09:36:37 AM by inline five »

TornWonder

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Re: Investment returns are real!
« Reply #31 on: July 21, 2017, 09:36:33 AM »
You seem to have a misunderstanding on how stocks operate.  A company that pays a constant 100% dividend with no growth (or decline) in revenue and income will have a stock that is valued exactly like a bond.  The dividends will function as interest payments.  Every quarter, once the dividend date hits, the stock price would drop by the amount of the dividend, but then build up to the exact same price prior to the next dividend date.

The stock price 'building back up' is appreciation. If this does not happen, guess what? Stock goes to $0. That was my point.

In NO WAY are dividends even closely related to interest. That is a HUGE misconception among investors.

If a company consistently makes the exact same profit, and pays it all out as a dividend, why would their stock ever go to $0?

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Re: Investment returns are real!
« Reply #32 on: July 21, 2017, 09:42:55 AM »


If a company consistently makes the exact same profit, and pays it all out as a dividend, why would their stock ever go to $0?

Well obviously it wouldn't. There would be share price growth to whatever the market's mood is at that time.

My initial response was to someone who thinks stockholders have a claim to the money the corp earns. That is dangerous thinking. Who cares if the company earned $billions, if the market cuts their share price in half it's not like you get a check. The only way earnings translate into earnings for share holders is share price growth. Issuing a dividend isn't like getting a piece of that profit, because your share price goes down equal to the dividend amount, putting you back at square one.

Why do people continue to quote multiple quotes here?
« Last Edit: July 21, 2017, 09:44:27 AM by inline five »

TornWonder

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Re: Investment returns are real!
« Reply #33 on: July 21, 2017, 09:48:22 AM »


If a company consistently makes the exact same profit, and pays it all out as a dividend, why would their stock ever go to $0?

Well obviously it wouldn't. There would be share price growth to whatever the market's mood is at that time.

My initial response was to someone who thinks stockholders have a claim to the money the corp earns. That is dangerous thinking. Who cares if the company earned $billions, if the market cuts their share price in half it's not like you get a check. The only way earnings translate into earnings for share holders is share price growth. Issuing a dividend isn't like getting a piece of that profit, because your share price goes down equal to the dividend amount, putting you back at square one.

Why do people continue to quote multiple quotes here?

Except getting a dividend literally is getting a piece of the profit.  That's where 99% of qualified dividends come from.  Most companies have a dividend rate that is a percentage of earnings that will be paid out in dividends.  So you can see that the bolded statements are demonstrably false.

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Re: Investment returns are real!
« Reply #34 on: July 21, 2017, 09:56:12 AM »


Except getting a dividend literally is getting a piece of the profit.  That's where 99% of qualified dividends come from.  Most companies have a dividend rate that is a percentage of earnings that will be paid out in dividends.  So you can see that the bolded statements are demonstrably false.

But you aren't getting anything. You get $4 in dividend per their example but share price is -$4.

You get $0, which is effectively less than $0 because you must pay tax on the dividend.

If you own a stock and you get a $10 dividend but the share price drops by $20, have you made any money? (please don't say yes)

TornWonder

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Re: Investment returns are real!
« Reply #35 on: July 21, 2017, 10:12:11 AM »


Except getting a dividend literally is getting a piece of the profit.  That's where 99% of qualified dividends come from.  Most companies have a dividend rate that is a percentage of earnings that will be paid out in dividends.  So you can see that the bolded statements are demonstrably false.

But you aren't getting anything. You get $4 in dividend per their example but share price is -$4.

You get $0, which is effectively less than $0 because you must pay tax on the dividend.

If you own a stock and you get a $10 dividend but the share price drops by $20, have you made any money? (please don't say yes)

Well, you get $4 without having to sell your stock.  You pay taxes on qualified dividends at the capital gains rate, so there is no difference monetarily to you in receiving the dividend versus selling the stock for an extra $4.

I don't even understand the purpose of your last sentence.  If there is no dividend and the share price drops by $10, have you made any money?

Dividends aren't about making money, they're about receiving a share of the company's profits for the prior accounting period rather than having the company reinvest 100% of earnings.


inline five

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Re: Investment returns are real!
« Reply #36 on: July 21, 2017, 10:23:50 AM »
Ok here is another example. What is better to own:

GM IPO at $35/share in 2010. You presently get a $1.50 dividend. Share price now is $37. GM makes $5 bil a year in profit. They are a monster!

Tesla price 2010 $21. Price now is $330. Tesla makes no profit and pays no dividend.

You misread my post. I said if there was a $10 dividend but share price drops $20, have you made any money? The answer is no, you lost money. Despite the company making money and you getting a 'slice' of it.

Companies borrow to pay dividends all the time. Oil companies are a great example now.

TornWonder

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Re: Investment returns are real!
« Reply #37 on: July 21, 2017, 10:47:19 AM »
Ok here is another example. What is better to own:

GM IPO at $35/share in 2010. You presently get a $1.50 dividend. Share price now is $37. GM makes $5 bil a year in profit. They are a monster!

Tesla price 2010 $21. Price now is $330. Tesla makes no profit and pays no dividend.

You misread my post. I said if there was a $10 dividend but share price drops $20, have you made any money? The answer is no, you lost money. Despite the company making money and you getting a 'slice' of it.

Companies borrow to pay dividends all the time. Oil companies are a great example now.

Well, since it's 2017 now, and I have no way of predicting the future, I have no idea which of those stocks is better to own.  If you know the future could you please post the answer here so that we can all become rich?

I didn't misread your post, I just changed the question to show you how silly it was to even ask.  I never argued that dividends make you money, it is a distribution of profits from the company.  Can a profitable company's stock price drop?  Yes, it happens every day.  If the stock price drops with no dividend payment, you have still "lost".

The vast, vast majority of companies have  dividends tied directly to profits.  For many companies, letting cash sit for a period of time to wait for dividend payment is lost opportunity cost, so they will reinvest the profit, then borrow at a lower than reinvestment rate to pay dividends.  This changes the leverage ratio and can actually increase firm value.

inline five

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Re: Investment returns are real!
« Reply #38 on: July 21, 2017, 11:00:36 AM »
I was responding to the poster who thinks shareholders get a piece of the companies profit. They only do if the share price goes up. Dividends won't contribute to appreciation because the share price + dividend is a neutral event.

dougules

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Re: Investment returns are real!
« Reply #39 on: July 21, 2017, 11:07:49 AM »


Except getting a dividend literally is getting a piece of the profit.  That's where 99% of qualified dividends come from.  Most companies have a dividend rate that is a percentage of earnings that will be paid out in dividends.  So you can see that the bolded statements are demonstrably false.

But you aren't getting anything. You get $4 in dividend per their example but share price is -$4.

You get $0, which is effectively less than $0 because you must pay tax on the dividend.

If you own a stock and you get a $10 dividend but the share price drops by $20, have you made any money? (please don't say yes)

Let's move this to a new thread so we don't hijack this one: 
    Investor Alley » Realizing Earnings (Side thread from "Investment returns are real!")


StudentEngineer

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Re: Investment returns are real!
« Reply #40 on: July 21, 2017, 12:24:26 PM »
Totally agree with you BJC, its one thing to understand the concept of compound interest and another to see it physically working on your behalf.  I'm still very early into my investing career and can't wait to hit the major milestones 50k, 100k, 200k, 250k, 500k etc.  I'm trying to structure my portfolio in blue chip stocks that pay rising dividends so that my purchasing power is not just maintained but actually increases through the years + the fact that dividends in blue chip companies are more stable and predictable so the less risk suits me well.  Although it will probably be a bit of a slower route to FI.

Congrats on making the connection! It just reinforces good habits.
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w@nker

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Re: Investment returns are real!
« Reply #41 on: July 21, 2017, 09:56:22 PM »
inline five - dude - you need to stop acting like an authority on finance and investments, because you clearly aren't.  Over the long run, shareholder returns will generally reflect the cash earnings of the business, plain and simple. So, stop thinking about share gains vs. dividends and start thinking about earnings.  Companies can choose to distribute these earnings in the form of dividends (which you accurately characterized as a suboptimal for most investors who are subject to income taxes), or retain these earnings (which will increase the share value over time, subject - of course - to near and medium term fluctuations due to the whims of Mr. Market) and allow shareholders to effectively create their own dividends by selling shares.  Short-term market fluctuations, share buybacks, capital raising, and taxes aside, a company with a 10% earnings yield that remains perfectly constant over time (no growth) will generate something close to a 10% return for shareholders over the long-run...regardless of the distribution mechanism through which shareholders realize that return.  Shareholders do have a claim on the equity of the business, by definition, and there are various mechanisms by which Shareholders can monetize that claim.

VolcanicArts

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Re: Investment returns are real!
« Reply #42 on: July 22, 2017, 12:26:06 AM »
I have realized that investment returns are real for a long time, but only recently have I actually sat down to calculate how much I make per year just on dividends alone without ever touching the principal. After accounting for all taxes, margin interest, leverage, and tax exempt municipal bond distribution I came up with about 13 dollars per hour 40 hours per week is what my yield is paying me. I consider this to be barebones FI, for if something were to happen to my other income streams it would provide me enough money to pay my bills, and eat and maybe put gas in my car, but not much else. I was reading an article a while back, and it had some really solid points that I'm sure a lot of Mustachians already realize, and that is that even if you don't want to FIRE and like your job, once you reach a high enough net worth, you could actually be losing money through time and opportunity cost by working a 9 to 5 gig. At a high enough net worth, if you were to simply spend your time at Starbucks daily poring over business articles, balancing investments, looking for new business and growth opportunities, finding ways to decrease your tax liability, working on ways to decrease cost of living, focusing on business start up ideas etc., you could actually have a higher return at that point by efficiently utilizing your time vs. wasting it to contribute a small amount more to your stache that the 9 to 5 job would give you. Anyways food for thought, I'm always interested in stories or comments and ideas related to this topic.

VolcanicArts

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Re: Investment returns are real!
« Reply #43 on: July 22, 2017, 12:46:18 AM »
After reading this thread there appears to be a lot of animosity towards dividend investing, not sure why. The concept is not hard the company gives you a percentage of their profit in the form of cash and then the share price drops an amount to offset the distribution. Yes you pay taxes on dividends( excluding municipal bond funds in a tax free state), but you also have to factor in that you have more control over the profits vs. if the company were to simply keep all their earnings and decide what they want to do with it. Even if you just sold shares instead of receiving dividends you still receive either a tax on a short term or long term capital gain, and the price of the stock will still drop to offset the declining value from sales. Me personally I would rather have more control and receive the money as a dividend up front, which gives me a choice as to what I want to do with the money, vs. the company making all the choices for me. There are many healthy companies that have very high dividend yields for many years with payout ratios below 70%. It should also be noted that over the long run dividend players have solidly outperformed their indices and are better able to withstand stress and volatility. So please stop preaching to everyone that growth stocks are superior to dividend stocks, as this is simply not the case, both will be taxed, but the dividend payers will give you more options and generally represent healthier companies with good valuations.

FIRE47

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Re: Investment returns are real!
« Reply #44 on: July 22, 2017, 03:26:49 AM »
I still don't think it's real to me.  It's basically like our cat is making $16/hr sitting on his ass at home. 

Everybody here is right about not getting caught up in gains and losses.  I wouldn't look so much at your value going up as much as what the companies in your index funds are making.  Every time somebody shops at Amazon, Target, Chevron, etc. etc. you are getting a cut.  Those are your profits whether the companies pass them out as dividends or keep them to reinvest.  That's what's driving the gains over time, and that's what you're really earning.  The companies in the S&P 500 made $94 per share of the index last year, and that is your money whether it's in your personal account or stays in theirs.

Stockholders have almost zero claim to a companies money. Bondholders? Yeah they can say they do. For pennies on the dollar.

The only way you 'get' a slice of that money is when others buy your shares from you.

Keep in mind if no share growth occurs, a dividend would eventually bring the stock to $0.

Ive seen everyone try to explain the concept to you backwards and forwards - but I'll try to do it in the most simple way possible. Companies generate cash flow, they are not just a fixed pile of shrinking money the pays out dividends inexplicably.

This is an example of a little bit of knowledge being a dangerous thing - you've taken the concept of an ex dividend date and extrapolated it over the very long term.

inline five

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Re: Investment returns are real!
« Reply #45 on: July 22, 2017, 07:18:41 AM »


Ive seen everyone try to explain the concept to you backwards and forwards - but I'll try to do it in the most simple way possible. Companies generate cash flow, they are not just a fixed pile of shrinking money the pays out dividends inexplicably.

This is an example of a little bit of knowledge being a dangerous thing - you've taken the concept of an ex dividend date and extrapolated it over the very long term.

Again go back and read the chain. I never once stated dividends would drive the share price to zero in the real world. I stated without growth the price would be driven to $0. My initial post, which then kept getting taken out of context, was solely directed toward that thought.


inline five

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Re: Investment returns are real!
« Reply #46 on: July 22, 2017, 07:21:35 AM »
After reading this thread there appears to be a lot of animosity towards dividend investing, not sure why.

This is part of the reason why I don't like dividends:

Quote
As for dividend companies, this is a nice long term summary of the aristocrats, which is generally regarded as "safe" companies that have been increasing dividends at the time of purchase for 25 years.

these dividend aristocrats are not somehow immune to all the things that effect company's and stocks . Just like other companies, their outcomes change.

In 2009 there were 52 stocks that met the group’s strict criteria.

As of 2012, there were 51.

But of those 51, 13 were different than the original set. So over the course of just 3 years, there was a 27% change in the group’s composition.

Going back to 1989's list :

Of those 26, seven are still on the list today, ten were removed because they either cut or froze their dividend, four were removed for an unknown reason, and the remainder were acquired at some point. So at least ten of the 26 had an outcome that is different from the assumption of dividend growth every year through thick and thin.

Gives some pause for thought when choosing to invest in dividend companies.

BTDretire

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Re: Investment returns are real!
« Reply #47 on: July 22, 2017, 08:49:05 AM »
Keep in mind, just because they are not on the list could mean many things, but doesn't necessarily mean they stopped paying a dividend entirely. It could mean they had a bad year, that will keep them off the list for 24 more years. But those 24 years could be great!

StudentEngineer

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Re: Investment returns are real!
« Reply #48 on: July 23, 2017, 08:18:48 AM »
After reading this thread there appears to be a lot of animosity towards dividend investing, not sure why.

This is part of the reason why I don't like dividends:

Quote
As for dividend companies, this is a nice long term summary of the aristocrats, which is generally regarded as "safe" companies that have been increasing dividends at the time of purchase for 25 years.

these dividend aristocrats are not somehow immune to all the things that effect company's and stocks . Just like other companies, their outcomes change.

In 2009 there were 52 stocks that met the group’s strict criteria.

As of 2012, there were 51.

But of those 51, 13 were different than the original set. So over the course of just 3 years, there was a 27% change in the group’s composition.

Going back to 1989's list :

Of those 26, seven are still on the list today, ten were removed because they either cut or froze their dividend, four were removed for an unknown reason, and the remainder were acquired at some point. So at least ten of the 26 had an outcome that is different from the assumption of dividend growth every year through thick and thin.

Gives some pause for thought when choosing to invest in dividend companies.

This is a fairly disingenuous statement.  If you had invested in the Dividend Aristocrats in 2008 you would have outperformed the S & P by a very good margin.  If you had just maintained a portfolio of the dividend aristocrats, selling when a dividend cut was announced and buying any new company that joined the aristocrat list, you would have done even better.

Check it out:  http://www.dividendgrowthinvestor.com/2017/06/investing-in-dividend-aristocrats-from.html

Likewise if you did it with dividend champions your results would have been even better

http://www.dividendgrowthinvestor.com/2017/06/investing-in-dividend-champions-from.html

Further either strategy would have seen you lose less and recover quicker than the general market, all while maintaining a large portion of the dividends coming your way during the next two years.

Any thoughts?
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WerKater

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Re: Investment returns are real!
« Reply #49 on: July 23, 2017, 09:04:06 AM »


Ive seen everyone try to explain the concept to you backwards and forwards - but I'll try to do it in the most simple way possible. Companies generate cash flow, they are not just a fixed pile of shrinking money the pays out dividends inexplicably.

This is an example of a little bit of knowledge being a dangerous thing - you've taken the concept of an ex dividend date and extrapolated it over the very long term.

Again go back and read the chain. I never once stated dividends would drive the share price to zero in the real world. I stated without growth the price would be driven to $0. My initial post, which then kept getting taken out of context, was solely directed toward that thought.
The problem is that you are talking about "growth" and what you apparently mean is "growth of the stock price between two dividend dates".

Our fictional, perfectly reliable, company will pay out its dividend of 4$ on the dividend date. The stock price will fall by 4$ from 100 to 96. And over the course of one year the stock price will grow back to 100$. True, if this stock price growth does not occur, the stock price will continue to fall, ultimately to 0.

What most people mean when they hear "growth" in this context, is "growth of the company" (Usually over a term much longer than one year). And that is not at all necessary.