Author Topic: Investing for Dividends  (Read 16780 times)

Jules13

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Investing for Dividends
« on: February 09, 2015, 05:09:30 PM »
I would like to learn more about and get into investing for dividends.  Can someone please point me to some articles/websites/blogs to start learning about this?
Thanks.

wtjbatman

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Re: Investing for Dividends
« Reply #1 on: February 09, 2015, 06:12:10 PM »

SaintM

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Re: Investing for Dividends
« Reply #2 on: February 09, 2015, 06:13:55 PM »
The best way to invest! I'd recommend Income Investing Secrets by Richard Stooker.

Eric

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Re: Investing for Dividends
« Reply #3 on: February 09, 2015, 06:30:31 PM »
What's the appeal of dividends to you?  Dividends are mathematically the same as capital appreciation.  When a stock pays out a dividend, that money is not created out of thin air.  The price of the underlying stock also decreases by the dividend payout amount.  There's no free lunch here.  For example:

Stock worth $100, pays a 5% dividend, you now have $5 in your pocket and $95 worth of stock.
Stock worth $100, pays no dividend but you sell $5 worth, you now have $5 in your pocket and $95 worth of stock.

In addition, since not every stock pays dividends, you're artificially limiting your diversification based on an arbitrary trait.  You have to be careful that you don't end up in a concentrated sector (e.g., energy stocks, since utilities tend to offer large dividends) that can be expose you to lots of extra risk for little extra gain.

That said, if you want to put a lot of work into it, it can be a decent strategy.  Or you could go the lazy route and just buy broad market index funds that include all the dividend paying stocks and non-dividend paying stocks like VTSAX.

SaintM

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Re: Investing for Dividends
« Reply #4 on: February 09, 2015, 06:46:01 PM »
You have cash flow without selling and incurring commissions and capital gains taxes.
You maintain some semblance of downside protection. If the company is still profitable and declines, causing the yield to go up, institutional buyers step in.
The company shares its success with the investor, helping investors avoid wealth-killing managements.
Qualified dividends are taxed at 0, 15, or 20%.
Some distributions are untaxed return of capital, allowing the investor to delay any taxes (think REITs and MLPs)
Discourages companies from cooking the books; you find out really quick if the dividend checks don't clear.

josstache

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Re: Investing for Dividends
« Reply #5 on: February 09, 2015, 07:41:17 PM »
Stock, bought for $50, worth $100, pays a 5% dividend, you now have $5 $4 in your pocket and $95 worth of stock. Your basis in the stock is $50, leaving unrealized gains of $45, which may be untaxed in a mustachian FIRE scenario.

Stock, bought for $50, worth $100, pays no dividend but you sell $5 worth, you now have $5 $4.50 in your pocket and $95 worth of stock. Your basis in the stock is $47.50, leaving unrealized gains of $47.50, which may be untaxed in a mustachian FIRE scenario.


Fixed to account for taxes assuming top marginal rates in the current year (worst case scenario).
« Last Edit: February 09, 2015, 08:35:09 PM by josstache »

Dodge

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Re: Investing for Dividends
« Reply #6 on: February 09, 2015, 08:43:55 PM »
You have cash flow without selling and incurring commissions and capital gains taxes.
You maintain some semblance of downside protection. If the company is still profitable and declines, causing the yield to go up, institutional buyers step in.
The company shares its success with the investor, helping investors avoid wealth-killing managements.
Qualified dividends are taxed at 0, 15, or 20%.
Some distributions are untaxed return of capital, allowing the investor to delay any taxes (think REITs and MLPs)
Discourages companies from cooking the books; you find out really quick if the dividend checks don't clear.

1.  If you're paying commissions for buying/selling, you aren't doing it right.

2.  Not all dividends from dividend funds/companies are qualified dividends.  Even if they are, the tax rate of qualified dividends is equal to the long term capital gains tax rate, so after the first year, there is no tax advantage of having qualified dividends vs capital gains.

3.  All evidence has shown that investing for dividends is a horrible idea.  It's not the worst I've seen on the forum, but it's pretty close.  For the sake of anyone new to investing and considering a dividend strategy after seeing this thread, here's one of Vanguard's papers on the topic:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

Some highlights:

Quote
Investors spending from a retirement portfolio typically employ one of two well-known methods: the total return approach or the income approach. Historically, these approaches have been discussed as mutually exclusive—an investor follows either one or the other. In reality, the two approaches are similar in many ways, and in fact operate identically up to a point. Using the total-return approach, the investor spends from both the principal and income components of his or her portfolio. Under the income approach, the investor typically spends only the income generated by the portfolio, which often is not sufficient to meet spending needs.

Quote
Common approaches for increasing portfolio income—and why they may be inadvisable

For those investors who are not comfortable spending from their portfolio’s balance and/or whose portfolio cash flow is insufficient for their needs, there are three primary ways to increase income: increase their overall allocation to bonds; keep their existing bond allocation but tilt it toward high-yield bonds; or tilt their existing equity allocation toward higher-dividend paying stocks. None of these are preferred strategies for maintaining inflation-adjusted spending over long periods.

Quote
In conclusion, the total-return approach to spending is identical to the income approach for investors whose portfolios generate enough cash flow to meet their spending needs. For those investors who need more cash flow than their portfolios yield, the total-return approach is the preferred method. Compared with the income-only approach, the total return approach is likelier to increase the longevity of the portfolio, increase its tax-efficiency, and reduce the number of times that the portfolio needs to be rebalanced. In addition, for most investors, a total return approach can produce the same cash flow as an income-only approach with no decrease in return and a lower tax liability.

This graph is particularly interesting:




Also, this might help explain why some people push for it so strongly, despite the evidence showing it to be suboptimal:

Quote
Why do shareholders believe so strongly that a $1 dividend is preferable to a $1 capital gain? Meir Statman looked at this question in a 1984 article called “Explaining Investor Preference for Cash Dividends,” coauthored by Hersh Sheffrin. He also reviews the idea in his new book, What Investors Really Want, pointing out that receiving $1,000 in dividends is no different from selling $1,000 worth of stock to create a “homemade dividend.”

Even when this idea is explained to people, most refuse to accept it. Statman suggests that it comes down to a cognitive bias called mental accounting. Investors categorize $1,000 in dividends as income that they will happily spend, but the idea of selling $1,000 worth of stock is “dipping into capital,” which causes them great anxiety. This idea is deeply ingrained in many investors, but it is an illusion, because a company that pays a dividend to shareholders is depleting its own capital.

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

Again to the new investors, I recommend leaving emotions out of your portfolio.  As said earlier, thanks to the research, you now know how much this choice costs you in terms of reduced wealth.  The choice is yours.

SaintM

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Re: Investing for Dividends
« Reply #7 on: February 09, 2015, 10:08:03 PM »

1.  If you're paying commissions for buying/selling, you aren't doing it right.

2.  Not all dividends from dividend funds/companies are qualified dividends.  Even if they are, the tax rate of qualified dividends is equal to the long term capital gains tax rate, so after the first year, there is no tax advantage of having qualified dividends vs capital gains.

3.  All evidence has shown that investing for dividends is a horrible idea.  It's not the worst I've seen on the forum, but it's pretty close.  For the sake of anyone new to investing and considering a dividend strategy after seeing this thread, here's one of Vanguard's papers on the topic:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

Some highlights:

Quote
Investors spending from a retirement portfolio typically employ one of two well-known methods: the total return approach or the income approach. Historically, these approaches have been discussed as mutually exclusive—an investor follows either one or the other. In reality, the two approaches are similar in many ways, and in fact operate identically up to a point. Using the total-return approach, the investor spends from both the principal and income components of his or her portfolio. Under the income approach, the investor typically spends only the income generated by the portfolio, which often is not sufficient to meet spending needs.

1. Not buying and selling. Buying and collecting the dividend. If there is no dividend (or not enough to meet spending needs) you have to sell.  I'm not smart enough to know when to sell, but I don't have to worry about that because the dividend check comes as scheduled.

2. It's easy to research which companies pay qualified dividends, no qualified dividends, and return of capital.

3. I strongly dispute that dividend investing is a horrible idea. The synopsis of the Vanguard article espouses total return, but assumes that one cannot amass enough dividends to fund a lifestyle without dipping into the underlying asset. That depends on one's lifestyle, but is entirely possible. The article does not mention that dividend growth tends to outpace inflation.  Without dipping into the asset, I can live entirely off the income and pass the asset on to my heirs. With the total return example, you will eventually run out of the asset to sell.

Dodge

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Re: Investing for Dividends
« Reply #8 on: February 09, 2015, 10:45:14 PM »

1.  If you're paying commissions for buying/selling, you aren't doing it right.

2.  Not all dividends from dividend funds/companies are qualified dividends.  Even if they are, the tax rate of qualified dividends is equal to the long term capital gains tax rate, so after the first year, there is no tax advantage of having qualified dividends vs capital gains.

3.  All evidence has shown that investing for dividends is a horrible idea.  It's not the worst I've seen on the forum, but it's pretty close.  For the sake of anyone new to investing and considering a dividend strategy after seeing this thread, here's one of Vanguard's papers on the topic:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

Some highlights:

Quote
Investors spending from a retirement portfolio typically employ one of two well-known methods: the total return approach or the income approach. Historically, these approaches have been discussed as mutually exclusive—an investor follows either one or the other. In reality, the two approaches are similar in many ways, and in fact operate identically up to a point. Using the total-return approach, the investor spends from both the principal and income components of his or her portfolio. Under the income approach, the investor typically spends only the income generated by the portfolio, which often is not sufficient to meet spending needs.

1. Not buying and selling. Buying and collecting the dividend. If there is no dividend (or not enough to meet spending needs) you have to sell.  I'm not smart enough to know when to sell, but I don't have to worry about that because the dividend check comes as scheduled.

2. It's easy to research which companies pay qualified dividends, no qualified dividends, and return of capital.

3. I strongly dispute that dividend investing is a horrible idea. The synopsis of the Vanguard article espouses total return, but assumes that one cannot amass enough dividends to fund a lifestyle without dipping into the underlying asset. That depends on one's lifestyle, but is entirely possible. The article does not mention that dividend growth tends to outpace inflation.  Without dipping into the asset, I can live entirely off the income and pass the asset on to my heirs. With the total return example, you will eventually run out of the asset to sell.

1.  It's quite simple.  Receiving a dividend on a schedule is mathematically equivalent to selling on that same schedule, and if you're paying commissions for buying or selling, you choose the wrong broker.

2.  Not sure why this matters, because as shown above, even qualified dividends are taxed worse than regular long-term capital gains.  As Vanguard mentioned in their study on this, your idea of researching the best companies is inherently riskier than simply owning the full stock market index.  Much riskier.  Off-the-charts riskier.  It is pretty much a statistical certainty that you will underperform/lose money over the long run.  Researching individual stocks, for your retirement portfolio, is quite literally one of the most risky things you can do.  Especially on a forum like this where your retirement funds might need to last 50 years.

3.  No.  This is what you are missing.  You *never* run out of the asset to sell.  Never.  When the growth is higher than your withdrawal rate + inflation (which you need for dividends as well), you will never run out of shares.  It makes it easier to imagine this, when you realize mutual funds can be bought and sold in fractional shares (you can buy/sell 0.013 of a share for example).  I've attached a sample excel sheet I made (opens just fine in the free open source LibreOffice if you don't have Excel):



Dividends are mathematically equivalent to selling on a schedule (meaning it provides no benefit), and investing for dividends puts your investments at significant risk, so yes it is a horrible idea.

Dividend Mantra

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Re: Investing for Dividends
« Reply #9 on: February 10, 2015, 12:03:54 AM »
Dodge,

These endless debates bore me. But I'm feeling a bit spry this morning.

"Not sure why this matters, because as shown above, even qualified dividends are taxed worse than regular long-term capital gains."

Come again? Qualified dividends and long-term capital gains are both taxed at 0% at the ordinary 0% and 15% income tax rates. What if in the above example the cost basis on the $30 stock was only $5? Invest long enough and you're going to be doing a lot more than doubling your investment, especially assuming this is someone who is living off of their portfolio and has been at it a while.

"It is pretty much a statistical certainty that you will underperform/lose money over the long run."

I always laugh at these dogmatic statements. I get that a good chunk (and probably even most) of active funds will probably underperform passive funds tracking the broader market over the long haul because of fees, but individual investors won't pay these fees. In fact, just about the time I'll be living off of my dividend income I'll probably be paying little or no fees for the rest of my life. Beats even the cheapest Vanguard fund, especially since by the time I'm 50 or 60 years old my account will likely be worth millions and prone to a grand or so per year in "cheap" fees. A grand or so annually I'd rather keep. Furthermore, I wonder what individuals we're talking about when pointing to people underperforming the market. I'm pretty high profile with my activities, yet nobody has surveyed me or asked for my XIRR spreadsheet. I take those statements that "you WILL underperform the market" with a huge grain of salt. Buying high-quality dividend growth stocks is really just taking the best of the market and avoiding a good portion of the junk anyway.

"No.  This is what you are missing.  You *never* run out of the asset to sell.  Never.  When the growth is higher than your withdrawal rate + inflation (which you need for dividends as well), you will never run out of shares."

Ahh, more dogma. I love the smell of dogma in the morning.

Never, huh? And using a massive qualifier "WHEN the growth is higher than your withdrawal rate..." which, of course, cannot be known today. And then you blast out a spreadsheet showing a constant, linear growth rate, as if the market grows in such a fashion. I love it.

The Trinity Study (which seems to be gospel round these parts) has already been updated and came out with the success rates of a 4% SWR adjusting for inflation:

http://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx

The success rate of a 4% SWR with inflation adjustments is 98% for an all-stock portfolio (which seems to be what we're talking about here since we're comparing dividends to withdrawals - bonds don't pay dividends). 98% is very high, don't get me wrong. But it's not 100%. And it's not *never*. I used fancy stars around the word never like you did. Nice! Plus, it should be noted that the success rates go DOWN the longer you're living off of your portfolio, not UP. That's important to note because the longest time frame used in the Trinity Study was 30 years. Retire at 35 or 40 years old and try to sell off your portfolio for the rest of your life, and it would seem to me the possible failure rate is even higher than 95%.

That's all the quantifiable stuff. It should be noted there are numerous qualitative reasons to live off of dividend income, but that's neither here nor there.

I almost exclusively avoid these discussions because they're never ending. But every once in a while I just see nonsense that can't be ignored.

Enjoy the fodder. I'll leave you with your dogma.

Best wishes!

Dodge

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Re: Investing for Dividends
« Reply #10 on: February 10, 2015, 06:38:17 AM »

Come again? Qualified dividends and long-term capital gains are both taxed at 0% at the ordinary 0% and 15% income tax rates. What if in the above example the cost basis on the $30 stock was only $5?

If the cost basis were $5, it would still beat the dividend.  Dividends are less tax-efficient than capital gains.


"It is pretty much a statistical certainty that you will underperform/lose money over the long run."

I always laugh at these dogmatic statements. I get that a good chunk (and probably even most) of active funds will probably underperform passive funds tracking the broader market over the long haul because of fees, but individual investors won't pay these fees. In fact, just about the time I'll be living off of my dividend income I'll probably be paying little or no fees for the rest of my life. Beats even the cheapest Vanguard fund, especially since by the time I'm 50 or 60 years old my account will likely be worth millions and prone to a grand or so per year in "cheap" fees. A grand or so annually I'd rather keep.

Ignoring the extra risk of a portfolio (by being significantly less diversified), and only discussing it's cost, when the portfolio provides no benefit in terms of added returns (the expected return of a less diversified portfolio is much less than the index), is a bad idea.  Recommending this as a safe idea to other investors for their retirement money, is irresponsible.   

Furthermore, I wonder what individuals we're talking about when pointing to people underperforming the market. I'm pretty high profile with my activities, yet nobody has surveyed me or asked for my XIRR spreadsheet. I take those statements that "you WILL underperform the market" with a huge grain of salt. Buying high-quality dividend growth stocks is really just taking the best of the market and avoiding a good portion of the junk anyway.

They don't need to ask, it's all math.  The less diversified portfolio has a lower expected return.

"No.  This is what you are missing.  You *never* run out of the asset to sell.  Never.  When the growth is higher than your withdrawal rate + inflation (which you need for dividends as well), you will never run out of shares."

Never, huh? And using a massive qualifier "WHEN the growth is higher than your withdrawal rate..." which, of course, cannot be known today.

Is it your assertion that a dividend strategy does not require returns which grow faster than your withdrawal rate + inflation?

dantownehall

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Re: Investing for Dividends
« Reply #11 on: February 10, 2015, 07:09:22 AM »
Dividends are mathematically equivalent to selling on a schedule (meaning it provides no benefit), and investing for dividends puts your investments at significant risk, so yes it is a horrible idea.

Yes, but with a important caveat - the person selling on a schedule is at the mercy of the market's valuation of the company he/she is selling at the time.  Your chart looks very nice, but most stocks don't go up exactly 7.5% a year.  It might average out, but there's no rule that says it has to - your returns are path dependent, meaning if the market tanks and you sell $1000 worth of shares (your "dividend") and then the market goes back up, you come out behind.  If the market goes up first, and then down, you come out ahead.  Over the long run, it will probably average out, but it doesn't have to.

Dividends are more predictable, because the market price of the security is not involved.

frugalnacho

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Re: Investing for Dividends
« Reply #12 on: February 10, 2015, 07:20:54 AM »
Dividends are mathematically equivalent to selling on a schedule (meaning it provides no benefit), and investing for dividends puts your investments at significant risk, so yes it is a horrible idea.

Yes, but with a important caveat - the person selling on a schedule is at the mercy of the market's valuation of the company he/she is selling at the time.  Your chart looks very nice, but most stocks don't go up exactly 7.5% a year.  It might average out, but there's no rule that says it has to - your returns are path dependent, meaning if the market tanks and you sell $1000 worth of shares (your "dividend") and then the market goes back up, you come out behind.  If the market goes up first, and then down, you come out ahead.  Over the long run, it will probably average out, but it doesn't have to.

Dividends are more predictable, because the market price of the security is not involved.

So stocks that pay dividends aren't affected when the market as a whole tanks?  Do they keep the dividends they intend to pay you in a secret free lunch box so it's their when the market tanks?

dantownehall

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Re: Investing for Dividends
« Reply #13 on: February 10, 2015, 07:29:42 AM »
Dividends are mathematically equivalent to selling on a schedule (meaning it provides no benefit), and investing for dividends puts your investments at significant risk, so yes it is a horrible idea.

Yes, but with a important caveat - the person selling on a schedule is at the mercy of the market's valuation of the company he/she is selling at the time.  Your chart looks very nice, but most stocks don't go up exactly 7.5% a year.  It might average out, but there's no rule that says it has to - your returns are path dependent, meaning if the market tanks and you sell $1000 worth of shares (your "dividend") and then the market goes back up, you come out behind.  If the market goes up first, and then down, you come out ahead.  Over the long run, it will probably average out, but it doesn't have to.

Dividends are more predictable, because the market price of the security is not involved.

So stocks that pay dividends aren't affected when the market as a whole tanks?  Do they keep the dividends they intend to pay you in a secret free lunch box so it's their when the market tanks?

My point is that price can deteriorate even when the company fundamentals have not.  Dividends are paid out of earnings, irrespective of whether or not the market is accurately valuing the company.  The way the market is currently valuing a company is a factor for someone who is selling on a schedule.

Roots&Wings

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Re: Investing for Dividends
« Reply #14 on: February 10, 2015, 07:39:53 AM »
I'd recommend "Get Rich with Dividends" by Marc Lichtenfeld (despite the stupid title) if you're considering individual stocks for part of your stash.  The pertinent points are outlined here: https://thetaoofwealth.wordpress.com/2013/07/02/how-to-get-rich-with-dividend-stocks/

James

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Re: Investing for Dividends
« Reply #15 on: February 10, 2015, 07:52:48 AM »
Buying dividend stocks is just like any stock picking or timing the market. It isn't the mustachian way, but whatever floats your boat. It's obviously better than buying a boat... :)
 
I don't wish to cherry pick stocks, whether based on dividends, growth expectation, or other catagories... I will stick with buying whole trees and take the good with the bad. But if you think you have found a way to beat the market by buying dividend stocks, then best of luck to you. Buying dividend stocks isn't likely to be high risk, it's not a dangerous choice, just different than what MMM has suggested or what I suggest.

Dodge

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Re: Investing for Dividends
« Reply #16 on: February 10, 2015, 07:52:52 AM »
Dividends are mathematically equivalent to selling on a schedule (meaning it provides no benefit), and investing for dividends puts your investments at significant risk, so yes it is a horrible idea.

Yes, but with a important caveat - the person selling on a schedule is at the mercy of the market's valuation of the company he/she is selling at the time.  Your chart looks very nice, but most stocks don't go up exactly 7.5% a year.  It might average out, but there's no rule that says it has to - your returns are path dependent, meaning if the market tanks and you sell $1000 worth of shares (your "dividend") and then the market goes back up, you come out behind.  If the market goes up first, and then down, you come out ahead.  Over the long run, it will probably average out, but it doesn't have to.

Dividends are more predictable, because the market price of the security is not involved.

Dividends are mathematically equivalent to selling.  If the stock falls 50%, and you receive a $1,000 dividend, that is mathematically equivalent to selling $1,000 worth of stock.

During the last crash, 6 of the 52 companies in the dividend aristocrats list (a list of companies which have increased their dividends for 25 years) cut their dividends by over 90%. Five years later, their payouts are still a small fraction of what they used to be, and their share prices remain decimated.

Yearly dividend payouts before, after, and now:

Bank of America: $2.46 to $0.04 (and still at $0.04)
Fifth Third Bancorp: $1.72 to $0.04 (now up to $0.48)
Comerica: $2.52 to $0.20 (now up to $0.75)
Keycorp: $1.46 to $0.04 (now up to $0.22)
Progressive: $3.20 to $0.00 (now up to ~$0.50)
Regions Financial: $1.50 to $0.04 (now up to $0.12)

Had you been largely invested with any of these companies, your portfolio would have been decimated, and unlike the rest of the market, you would still be waiting on the recovery.  I recently looked up the portfolio (an ETF) of a widely quoted and interviewed dividend guru.  He is highly regarded in the dividend community, and has been interviewed in many media outlets.  Here's what I found.

With both bigger dips at the 2009 low, and lower highs during the boom years, this is another example of higher risk (in terms of volatility and diversification), for lower rewards.  One of their biggest dividend ETFs got down to just 35% of it's previous high, at the 2009 low.  I hope no one saw their $1,000,000 investment drop down to $350,000, and sold out!



For anyone reading this who is new to investing, please take note; this is why we ignore the gurus who claim to be beating the market.  This is why we diversify.  Over the next 50 years, the chances are 99%+ that your index portfolio will beat this, with significantly less work and risk.  Don't be tempted, your life savings, and your ability to retire (or stay retired) is not worth it.

jackiechiles2

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Re: Investing for Dividends
« Reply #17 on: February 10, 2015, 07:55:08 AM »
Dividends are mathematically equivalent to selling on a schedule (meaning it provides no benefit), and investing for dividends puts your investments at significant risk, so yes it is a horrible idea.

Yes, but with a important caveat - the person selling on a schedule is at the mercy of the market's valuation of the company he/she is selling at the time.  Your chart looks very nice, but most stocks don't go up exactly 7.5% a year.  It might average out, but there's no rule that says it has to - your returns are path dependent, meaning if the market tanks and you sell $1000 worth of shares (your "dividend") and then the market goes back up, you come out behind.  If the market goes up first, and then down, you come out ahead.  Over the long run, it will probably average out, but it doesn't have to.

Dividends are more predictable, because the market price of the security is not involved.

So stocks that pay dividends aren't affected when the market as a whole tanks?  Do they keep the dividends they intend to pay you in a secret free lunch box so it's their when the market tanks?

I'm not really an expert on stocks, but NPR had a story on oil producers the other day and how they continue to pay out dividends even though some are borrowing money to pay the dividends due to the recent downturn in oil prices.  This is because Oil stock prices are generally stable and if it didn't pay dividends, there'd be no real reason to invest in it since the upside is limited.   Same goes for stocks like Coke or ATT.  Those stock prices stay relatively stable so dividend payments tend to continue in spite of fluctuations in the market.

dantownehall

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Re: Investing for Dividends
« Reply #18 on: February 10, 2015, 08:14:59 AM »
Dividends are mathematically equivalent to selling on a schedule (meaning it provides no benefit), and investing for dividends puts your investments at significant risk, so yes it is a horrible idea.

Yes, but with a important caveat - the person selling on a schedule is at the mercy of the market's valuation of the company he/she is selling at the time.  Your chart looks very nice, but most stocks don't go up exactly 7.5% a year.  It might average out, but there's no rule that says it has to - your returns are path dependent, meaning if the market tanks and you sell $1000 worth of shares (your "dividend") and then the market goes back up, you come out behind.  If the market goes up first, and then down, you come out ahead.  Over the long run, it will probably average out, but it doesn't have to.

Dividends are more predictable, because the market price of the security is not involved.

Dividends are mathematically equivalent to selling.  If the stock falls 50%, and you receive a $1,000 dividend, that is mathematically equivalent to selling $1,000 worth of stock.

During the last crash, 6 of the 52 companies in the dividend aristocrats list (a list of companies which have increased their dividends for 25 years) cut their dividends by over 90%. Five years later, their payouts are still a small fraction of what they used to be, and their share prices remain decimated.

Yearly dividend payouts before, after, and now:

Bank of America: $2.46 to $0.04 (and still at $0.04)
Fifth Third Bancorp: $1.72 to $0.04 (now up to $0.48)
Comerica: $2.52 to $0.20 (now up to $0.75)
Keycorp: $1.46 to $0.04 (now up to $0.22)
Progressive: $3.20 to $0.00 (now up to ~$0.50)
Regions Financial: $1.50 to $0.04 (now up to $0.12)

Had you been largely invested with any of these companies, your portfolio would have been decimated, and unlike the rest of the market, you would still be waiting on the recovery.  I recently looked up the portfolio (an ETF) of a widely quoted and interviewed dividend guru.  He is highly regarded in the dividend community, and has been interviewed in many media outlets.  Here's what I found.

With both bigger dips at the 2009 low, and lower highs during the boom years, this is another example of higher risk (in terms of volatility and diversification), for lower rewards.  One of their biggest dividend ETFs got down to just 35% of it's previous high, at the 2009 low.  I hope no one saw their $1,000,000 investment drop down to $350,000, and sold out!



For anyone reading this who is new to investing, please take note; this is why we ignore the gurus who claim to be beating the market.  This is why we diversify.  Over the next 50 years, the chances are 99%+ that your index portfolio will beat this, with significantly less work and risk.  Don't be tempted, your life savings, and your ability to retire (or stay retired) is not worth it.

I agree with your premise (hence the yes in my original post) and have argued against basing investment decisions on dividends elsewhere, but just wanted to point out that it's possible for two mathematically equivalent things to give different returns.

frugalnacho

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Re: Investing for Dividends
« Reply #19 on: February 10, 2015, 08:16:24 AM »
If you got different returns how can it be mathematically equivalent?

dantownehall

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Re: Investing for Dividends
« Reply #20 on: February 10, 2015, 08:28:02 AM »
If you got different returns how can it be mathematically equivalent?

The possibility of market irrationality should be considered.  Like I've said, it's likely price and value won't decouple significantly enough for things to not average out.

Aphalite

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Re: Investing for Dividends
« Reply #21 on: February 10, 2015, 08:30:04 AM »
I'm not really an expert on stocks, but NPR had a story on oil producers the other day and how they continue to pay out dividends even though some are borrowing money to pay the dividends due to the recent downturn in oil prices.  This is because Oil stock prices are generally stable and if it didn't pay dividends, there'd be no real reason to invest in it since the upside is limited.   Same goes for stocks like Coke or ATT.  Those stock prices stay relatively stable so dividend payments tend to continue in spite of fluctuations in the market.

This is false. Oil companies would be borrowing right now regardless of whether or not they are paying dividends, like all companies, because the cost of borrowing is low and return on capital (whether borrowed or earned) is far greater. Companies like Exxon or Shell have enough cash reserves to pay out 2-3 years of dividends without needing to issue debt load.

I know this forum touts indexing as the be all end all, and for most investors that's true. You have to spend thousands of hours on analysis and learning if you want to pick stocks. But here's a couple of points I want the "newbies" to understand in case they ever want to learn more about equities outside of indexing

1) 90% of the time, passive index funds beat actively managed funds due to lower fees. But 75% of actively managed funds BEAT passive index funds on pure performance. It's only when the fee drag (and taxes, see #2 below) is considered that passive index funds beat actively managed funds

2) the NUMBER ONE killer for average stock pickers is TURNOVER. This is another advantage passive funds hold over actively managed funds. VTSAX has turnover only when stocks are kicked out of the market, which is rare, or when they must rebalance and the cash streams from dividends and new investor money isn't enough, which is rarer in a bull market. Active managed funds constantly create capital gains taxes with the consistent selling of holdings (a lot of funds have over 100% turnover every year, compared to 3% for VTSAX)

3) Indexing means you are subject to incredibly stupid allocation of capital (based on market cap) for certain companies. There are people paying 70x PE for Facebook, which VTSAX has as 1% of its holdings. This is equivalent to the dot com bubble of 2000, when tech companies would report losses and investors still bought due to expectations of "growth". Intrinsic value in equities is created from sales, not optimism. But valuation frenzies can drive up prices at any time, or on the flip side of the coin, create undervaluation - people are irrational

4) This leads to the point that probably the best pro of dividend investing is exposure to the VALUE SECTOR. Valuation matters. Most companies that pay dividends are well established, with not a lot of good ways to continue to compound its capital. Thus, the best use of its capital is distribution to its investors. When you index, you are betting half on optimism (growth of Facebook's earnings) and half on stability (as someone said above, cash streams is the best proof that a company's underlying economic engine is still churning along). Dividend focused investing means you're betting entirely on stability and that even if things go south and optimism fades, the underlying economic engine is still churning away. A company at 70 PE can't make the same claims because the value (and what you paid for it, remember valuation matters) is based almost entirely on optimism.

5) Dodge's list of 90% dividend cuts consists entirely of the finance sector. If there are any industries to avoid, it's finance, airline, and to an extent, technology. There's no reason to "diversify" into risky sectors if your aim is to reduce risk. The only reason to dabble into these industries is to capture market gains.

A majority of investors should index. But if you are committed to spending thousands of hours in reading and studying, then buying (at a reasonable price) good BUSINESSES and holding forever will give you better returns than indexing. If your IPS consists of only "invest in stocks that pay high dividends", then your portfolio is probably doomed. Instead, focus on companies with good underlying business practices, including capital allocation, such as distributing dividends when there's no good growth prospects for reinvestment, then there's no reason that indexing should be your complete and utter dogma.

Aphalite

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Re: Investing for Dividends
« Reply #22 on: February 10, 2015, 08:40:16 AM »
What's the appeal of dividends to you?  Dividends are mathematically the same as capital appreciation.  When a stock pays out a dividend, that money is not created out of thin air.  The price of the underlying stock also decreases by the dividend payout amount.  There's no free lunch here.  For example:

Stock worth $100, pays a 5% dividend, you now have $5 in your pocket and $95 worth of stock.
Stock worth $100, pays no dividend but you sell $5 worth, you now have $5 in your pocket and $95 worth of stock.

In addition, since not every stock pays dividends, you're artificially limiting your diversification based on an arbitrary trait.  You have to be careful that you don't end up in a concentrated sector (e.g., energy stocks, since utilities tend to offer large dividends) that can be expose you to lots of extra risk for little extra gain.

That said, if you want to put a lot of work into it, it can be a decent strategy.  Or you could go the lazy route and just buy broad market index funds that include all the dividend paying stocks and non-dividend paying stocks like VTSAX.

That'd be true in a mathematically elegant world, but not really the case in the real world. Valuation/pricing is subject to the whims of an investor, cash flow is not. You can find plenty of examples where stock went up after ex dividend date

James

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Re: Investing for Dividends
« Reply #23 on: February 10, 2015, 09:20:00 AM »
A majority of investors should index. But if you are committed to spending thousands of hours in reading and studying, then buying (at a reasonable price) good BUSINESSES and holding forever will give you better returns than indexing. If your IPS consists of only "invest in stocks that pay high dividends", then your portfolio is probably doomed. Instead, focus on companies with good underlying business practices, including capital allocation, such as distributing dividends when there's no good growth prospects for reinvestment, then there's no reason that indexing should be your complete and utter dogma.

I think this last paragraph is great, and I agree. I am definitely best in the index group, but I can see the rational for someone with enough experience and research making decisions that may beat the market. But the key for me is to make sure these caveats are clear so those without high amounts of experience and research don't follow blindly those that favor other methods. Just reading about other methods and understanding why they may work isn't enough to make them work for yourself.

Eric

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Re: Investing for Dividends
« Reply #24 on: February 10, 2015, 09:56:01 AM »
What's the appeal of dividends to you?  Dividends are mathematically the same as capital appreciation.  When a stock pays out a dividend, that money is not created out of thin air.  The price of the underlying stock also decreases by the dividend payout amount.  There's no free lunch here.  For example:

Stock worth $100, pays a 5% dividend, you now have $5 in your pocket and $95 worth of stock.
Stock worth $100, pays no dividend but you sell $5 worth, you now have $5 in your pocket and $95 worth of stock.

In addition, since not every stock pays dividends, you're artificially limiting your diversification based on an arbitrary trait.  You have to be careful that you don't end up in a concentrated sector (e.g., energy stocks, since utilities tend to offer large dividends) that can be expose you to lots of extra risk for little extra gain.

That said, if you want to put a lot of work into it, it can be a decent strategy.  Or you could go the lazy route and just buy broad market index funds that include all the dividend paying stocks and non-dividend paying stocks like VTSAX.

That'd be true in a mathematically elegant world, but not really the case in the real world. Valuation/pricing is subject to the whims of an investor, cash flow is not. You can find plenty of examples where stock went up after ex dividend date

I'm also sure you can find plenty of examples where the stock went down further after the ex dividend date.  These stocks are still part of the market after all. 

If you think a dividend focused strategy is the best for you, then great, have at it.  Most people asking about it however, don't realize that dividends aren't free money, so it's important to point that out before someone else makes the decision to become less diversified just to collect a dividend.

Dodge

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Re: Investing for Dividends
« Reply #25 on: February 10, 2015, 10:03:29 AM »
I'm not really an expert on stocks, but NPR had a story on oil producers the other day and how they continue to pay out dividends even though some are borrowing money to pay the dividends due to the recent downturn in oil prices.  This is because Oil stock prices are generally stable and if it didn't pay dividends, there'd be no real reason to invest in it since the upside is limited.   Same goes for stocks like Coke or ATT.  Those stock prices stay relatively stable so dividend payments tend to continue in spite of fluctuations in the market.

This is false. Oil companies would be borrowing right now regardless of whether or not they are paying dividends, like all companies, because the cost of borrowing is low and return on capital (whether borrowed or earned) is far greater. Companies like Exxon or Shell have enough cash reserves to pay out 2-3 years of dividends without needing to issue debt load.

I know this forum touts indexing as the be all end all, and for most investors that's true. You have to spend thousands of hours on analysis and learning if you want to pick stocks. But here's a couple of points I want the "newbies" to understand in case they ever want to learn more about equities outside of indexing

1) 90% of the time, passive index funds beat actively managed funds due to lower fees. But 75% of actively managed funds BEAT passive index funds on pure performance. It's only when the fee drag (and taxes, see #2 below) is considered that passive index funds beat actively managed funds

2) the NUMBER ONE killer for average stock pickers is TURNOVER. This is another advantage passive funds hold over actively managed funds. VTSAX has turnover only when stocks are kicked out of the market, which is rare, or when they must rebalance and the cash streams from dividends and new investor money isn't enough, which is rarer in a bull market. Active managed funds constantly create capital gains taxes with the consistent selling of holdings (a lot of funds have over 100% turnover every year, compared to 3% for VTSAX)

3) Indexing means you are subject to incredibly stupid allocation of capital (based on market cap) for certain companies. There are people paying 70x PE for Facebook, which VTSAX has as 1% of its holdings. This is equivalent to the dot com bubble of 2000, when tech companies would report losses and investors still bought due to expectations of "growth". Intrinsic value in equities is created from sales, not optimism. But valuation frenzies can drive up prices at any time, or on the flip side of the coin, create undervaluation - people are irrational

4) This leads to the point that probably the best pro of dividend investing is exposure to the VALUE SECTOR. Valuation matters. Most companies that pay dividends are well established, with not a lot of good ways to continue to compound its capital. Thus, the best use of its capital is distribution to its investors. When you index, you are betting half on optimism (growth of Facebook's earnings) and half on stability (as someone said above, cash streams is the best proof that a company's underlying economic engine is still churning along). Dividend focused investing means you're betting entirely on stability and that even if things go south and optimism fades, the underlying economic engine is still churning away. A company at 70 PE can't make the same claims because the value (and what you paid for it, remember valuation matters) is based almost entirely on optimism.

5) Dodge's list of 90% dividend cuts consists entirely of the finance sector. If there are any industries to avoid, it's finance, airline, and to an extent, technology. There's no reason to "diversify" into risky sectors if your aim is to reduce risk. The only reason to dabble into these industries is to capture market gains.

A majority of investors should index. But if you are committed to spending thousands of hours in reading and studying, then buying (at a reasonable price) good BUSINESSES and holding forever will give you better returns than indexing. If your IPS consists of only "invest in stocks that pay high dividends", then your portfolio is probably doomed. Instead, focus on companies with good underlying business practices, including capital allocation, such as distributing dividends when there's no good growth prospects for reinvestment, then there's no reason that indexing should be your complete and utter dogma.

1.  The index is the average of all participants.  Anything outside the index, is active.  It is mathematically impossible for 75% of active money to beat the average.

3&4.  "incredibly stupid allocation of capital", this is your opinion.  My own view is that because Vanguard has sort of gotten the market for cap-weighted index funds sewn up, absolutely everyone else who wants to sell something is cranking out propaganda on why cap-weighting sucks and you should pay an extra 0.40% on the expense ratio for their some other fancy kind of weighting.

If you want to avoid the "duds," you need to be aware that that is exactly what high % dividend stocks are: the stocks that the market thinks are duds and aren't willing to pay much for.  If they were willing to pay more, the dividend wouldn't be so high.  The $3 dividend wouldn't represent 7% of the stock price.  There are two ways to parse this. You can say "It's Different For Me" (wonderful phrase Rick Ferri just coined) because I know the ones that look like duds but aren't.

Or, you can take the legitimate passive-investing factor-based approach, and say that these high-dividend stocks as a class are persistently undervalued for... mysterious... reasons, so you can get some advantage out of them without having to pick individual stocks, buy buying a dividend fund. The catch is that these are exactly the funds which have higher fees, higher turnover, less diversification, less return, and high volatility.

Unfortunately, statistics show you can't reliably tell which stocks are duds, no matter how long you study.  So none of these are very good options.

5.  You cannot predict which sectors will be risky in the future.  That's why you diversify.

rmendpara

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Re: Investing for Dividends
« Reply #26 on: February 10, 2015, 10:12:04 AM »
Most people have no business picking individual stocks.

We can see from above the "math" argument...

Dodge:
Quote
Dividends are mathematically equivalent to selling.  If the stock falls 50%, and you receive a $1,000 dividend, that is mathematically equivalent to selling $1,000 worth of stock.

Partially true, but this ignores the value provided to an investor from an increased ability to reallocate. Einhorn does a decent job of explaining why capital allocation matters, in a somewhat similar dialogue from a while back on AAPL (pre dividend).

http://finance.yahoo.com/blogs/daily-ticker/einhorn-apple-create-something-nothing-153252073.html

Regardless, I fully agree that most people are best off by following a strategy that they understand that is most, if not 100%, composed of a diversified allocation among passive funds to capture reasonable real returns on investments (out-earn inflation) and managing risk.

With that said, if you are willing to put in the time and effort to learn about investments (a good thing for most people to at least be familiar with), then dividend-tilted (not all of your portfolio), can be one way to reduce risk and provide some cash flow.

skyrefuge

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Re: Investing for Dividends
« Reply #27 on: February 10, 2015, 10:29:06 AM »
In fact, just about the time I'll be living off of my dividend income I'll probably be paying little or no fees for the rest of my life. Beats even the cheapest Vanguard fund, especially since by the time I'm 50 or 60 years old my account will likely be worth millions and prone to a grand or so per year in "cheap" fees. A grand or so annually I'd rather keep.

This is no longer true. Some Vanguard index funds now have expenses that are effectively zero (or even negative, essentially paying you to own them). 10-year growth of 10k for VIIIX (listed ER=0.02%) is $21,231.95 vs. the index's $21.171.90. This is assumed to be possible due to income the fund receives via securities lending. And by the time you're 50 or 60 years old, the expense ratio will be even lower than it is now. So you'll have to remove this particular argument from your quiver.

Aphalite

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Re: Investing for Dividends
« Reply #28 on: February 10, 2015, 10:29:40 AM »
1.  The index is the average of all participants.  Anything outside the index, is active.  It is mathematically impossible for 75% of active money to beat the average.

3&4.  "incredibly stupid allocation of capital", this is your opinion.  My own view is that because Vanguard has sort of gotten the market for cap-weighted index funds sewn up, absolutely everyone else who wants to sell something is cranking out propaganda on why cap-weighting sucks and you should pay an extra 0.40% on the expense ratio for their some other fancy kind of weighting.

If you want to avoid the "duds," you need to be aware that that is exactly what high % dividend stocks are: the stocks that the market thinks are duds and aren't willing to pay much for.  If they were willing to pay more, the dividend wouldn't be so high.  The $3 dividend wouldn't represent 7% of the stock price.  There are two ways to parse this. You can say "It's Different For Me" (wonderful phrase Rick Ferri just coined) because I know the ones that look like duds but aren't.

Or, you can take the legitimate passive-investing factor-based approach, and say that these high-dividend stocks as a class are persistently undervalued for... mysterious... reasons, so you can get some advantage out of them without having to pick individual stocks, buy buying a dividend fund. The catch is that these are exactly the funds which have higher fees, higher turnover, less diversification, less return, and high volatility.

Unfortunately, statistics show you can't reliably tell which stocks are duds, no matter how long you study.  So none of these are very good options.

5.  You cannot predict which sectors will be risky in the future.  That's why you diversify.

1. Only mathematically impossible if all other investors allocated their capital according to market cap, I'm only referencing the study most often cited by indexers - which say that over 90% of actively managed funds do not beat the index, which is true but only because of the fee drag

3&4 I agree that looking for only high yield dividend stocks is a foolish endeavor, that shouldn't be the basis of your IPS. I also don't recommend picking an active fund over a passive fund, my point is if you want to do better than the index, you need to spend thousands of hours reading and understanding, then allocating your capital yourself. If you do not feel that's a good use of your time, then paying 5 basis points for vanguard to invest your money is a perfectly good course of action. Cap weighting sucks because you're basing you allocation decision on the sum of investors in the market, and as we all know, people aren't rational. Don't equate the price of a stock for its intrinsic value, is all I'm saying

5. You can definitely predict which sectors are more risky in the future. There is no world where the general populace will give up bread, milk, and jam before a ride on an airplane if their money disappears
« Last Edit: February 10, 2015, 10:31:43 AM by aphalite »

beltim

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Re: Investing for Dividends
« Reply #29 on: February 10, 2015, 11:05:46 AM »

It is pretty much a statistical certainty that you will underperform/lose money over the long run. 

Ah, the MMM forums, where almost anyone is capable of doing something that maybe 0.0001% to 0.01% actually do (retire after 10-ish years of working), but it's a statistical certainty that you can't do something that 15-50% of people actually do (beat the returns of the stock market).

wtjbatman

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Re: Investing for Dividends
« Reply #30 on: February 10, 2015, 11:36:50 AM »
I feel like bold is the new caps lock.

Although I can't say that with any statistical certainty.

Eric

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Re: Investing for Dividends
« Reply #31 on: February 10, 2015, 11:43:29 AM »
I feel like bold is the new caps lock.

Although I can't say that with any statistical certainty.

It's a fancier version for sure.

Scandium

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Re: Investing for Dividends
« Reply #32 on: February 10, 2015, 12:26:41 PM »

5. You can definitely predict which sectors are more risky in the future. There is no world where the general populace will give up bread, milk, and jam before a ride on an airplane if their money disappears

Just hope you picked the right milk producer.

jackiechiles2

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Re: Investing for Dividends
« Reply #33 on: February 10, 2015, 12:27:15 PM »
In fact, just about the time I'll be living off of my dividend income I'll probably be paying little or no fees for the rest of my life. Beats even the cheapest Vanguard fund, especially since by the time I'm 50 or 60 years old my account will likely be worth millions and prone to a grand or so per year in "cheap" fees. A grand or so annually I'd rather keep.

This is no longer true. Some Vanguard index funds now have expenses that are effectively zero (or even negative, essentially paying you to own them). 10-year growth of 10k for VIIIX (listed ER=0.02%) is $21,231.95 vs. the index's $21.171.90. This is assumed to be possible due to income the fund receives via securities lending. And by the time you're 50 or 60 years old, the expense ratio will be even lower than it is now. So you'll have to remove this particular argument from your quiver.

Am I correct in seeing that the fund you listed has a minimum investment of $200 million?  If that's the case, then it's no wonder the fees are low on that fund.  Do any other Vanguard funds approach fees that low that are obtainable by people with less than $200m?

Ricky

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Re: Investing for Dividends
« Reply #34 on: February 10, 2015, 01:02:09 PM »
So many facts...so little truth.

Can't we all agree on one statistic: arguing about investing with others is futile.

Jules13

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Re: Investing for Dividends
« Reply #35 on: February 10, 2015, 01:19:52 PM »
Thanks for all the responses, though admittedly, I started to get lost with all the back and forth since I don't really understand it.  Obviously need to read it more carefully.  Thanks for the links, etc.  Cash flow is why I am wanting to look into.  Just want to invest some.  We set some money aside for my husband to buy stocks that he gets interested in.  Might just do the same with dividend investing.  Just a small portion of our portfolio to add something different and learn more. 


brooklynguy

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Re: Investing for Dividends
« Reply #36 on: February 10, 2015, 01:23:25 PM »
...something that maybe 0.0001% to 0.01% actually do (retire after 10-ish years of working)

Actually, the best estimate of the percentage of the current US population that retired after 10-ish years of working that the collective brainpower of this forum could come up with was closer to 0.5%.

Carry on.

skyrefuge

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Re: Investing for Dividends
« Reply #37 on: February 10, 2015, 01:29:20 PM »
Am I correct in seeing that the fund you listed has a minimum investment of $200 million?  If that's the case, then it's no wonder the fees are low on that fund.  Do any other Vanguard funds approach fees that low that are obtainable by people with less than $200m?

Vanguard's Institutional Plus Class funds do have minimums in the hundreds-of-millions-of-dollars range, but you don't actually have to have $200m on your own to invest in them. Many large company 401(k)s have access to them on the basis that the total company-wide 401(k) assets in that fund exceed $200m. S&P 500 and Total Stock Market are the only funds I'm aware of that have the 0.02% ERs in their Institutional Plus versions.

My general point was that Dividend Mantra's assumptions about expenses are incorrect/out-of-date. VFIAX (which everyone can access for only $10k) has a 0.05% listed expense ratio, but its 10-year CAGR is 7.78% vs. the index's 7.79%, for an actual drag of only 0.01%. That's $200 on a $2M portfolio, not "a grand", as DM suggested. It's likely that the listed ER will drop to 0.04% soon, given that Vanguard's ERs continually drop as the funds become larger (the ER was 0.07% as late as 2010), and at that point the effective expenses will be zero.

beltim

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Re: Investing for Dividends
« Reply #38 on: February 10, 2015, 01:33:18 PM »
...something that maybe 0.0001% to 0.01% actually do (retire after 10-ish years of working)

Actually, the best estimate of the percentage of the current US population that retired after 10-ish years of working that the collective brainpower of this forum could come up with was closer to 0.5%.

Carry on.

Alright, that's a really interesting thread.  I find it hard to believe that 1 in 150 people who are 30 years old can be retired, but still, my basic point stands.

Aphalite

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Re: Investing for Dividends
« Reply #39 on: February 10, 2015, 01:37:30 PM »
Thanks for all the responses, though admittedly, I started to get lost with all the back and forth since I don't really understand it.  Obviously need to read it more carefully.  Thanks for the links, etc.  Cash flow is why I am wanting to look into.  Just want to invest some.  We set some money aside for my husband to buy stocks that he gets interested in.  Might just do the same with dividend investing.  Just a small portion of our portfolio to add something different and learn more.

Here's another one:
http://www.joshuakennon.com/category/investing-articles/
Specifically: http://www.joshuakennon.com/mail-bag-missionaries-in-china-who-need-passive-income-from-their-savings/

Although I am not as fervently in the index camp as many others, I do agree with them that investing solely based on dividend yield is a pretty terrible idea. If you guys want to buy equities without investing hours upon hours in learning about it, just make sure it's a small percentage of your entire portfolio

skyrefuge

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Re: Investing for Dividends
« Reply #40 on: February 10, 2015, 01:47:38 PM »
Thanks for all the responses, though admittedly, I started to get lost with all the back and forth since I don't really understand it.  Obviously need to read it more carefully.

Yep, I would say don't start pursuing a dividend strategy until you can understand everything that has been discussed in this thread.

Cash flow is why I am wanting to look into.  Just want to invest some.

Are you retired? Do you have some current use for cash-flow generated by investments? If not, then it's more financially efficient to avoid unnecessary cash-flow, and grow your stash via (unrealized) capital gains instead. Being able to clearly elucidate why you want to "get into investing for dividends" is a critical first step.

We set some money aside for my husband to buy stocks that he gets interested in.  Might just do the same with dividend investing.  Just a small portion of our portfolio to add something different and learn more.

Oh, is this just for entertainment purposes? Ok, then sure, just throw your money at stuff, but realize it's probably going to cost you money, as most entertainment venues do.

Can't we all agree on one statistic: arguing about investing with others is futile.

Um, no? I think all the people who have come to this forum for investing advice and been happy with the advice they received would strongly disagree with you.

Aphalite

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Re: Investing for Dividends
« Reply #41 on: February 10, 2015, 02:23:17 PM »
Here's one more - a discussion in this forum two years ago. Much of the same arguments - Nord's last comment is pretty spot on

"I'm saying that the math is against dividend investing.  It's less tax-efficient for starters, and if you read Buffett's analysis it makes sense to sell for capital gains instead of to invest for dividends.

The reason people favor dividends is because it enforces a measure of discipline on a company.  Most businesses do a lousy job of deploying their capital, and an even worse job of buying back their own shares.  (Buffett & Berkshire are notable exceptions.)  In addition, a company that does not pay dividends can be tempted to use all sorts of cheating aggressive accounting methods to make it seem as though they're responsibly using capital... right up until they run out of cash.

So dividends impose a minimal standard of fiscal truth upon a company.  (Especially international companies with murkier accounting standards than the U.S.)  To pay a dividend, they have to earn money and use it responsibly.  To keep their share price up, they have to periodically raise that dividend.  Dividends are about the only tool that investors have to really measure the fiscal health of a company."


http://forum.mrmoneymustache.com/investor-alley/help-with-approach-to-retirement-funding-swr-dividend-vs-bogleheads-investing/

Ricky

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Re: Investing for Dividends
« Reply #42 on: February 10, 2015, 02:46:18 PM »
Can't we all agree on one statistic: arguing about investing with others is futile.

Um, no? I think all the people who have come to this forum for investing advice and been happy with the advice they received would strongly disagree with you.
Again, point proven. You're arguing something that can't be argued. Facts are great. I'm all for them. Your replies thus far in this thread have been factual and are healthy to the discussion. Others have laid out ideas and points that could be perceived as facts when they may or may not be (dangerous).

In fact, this thread should have stopped after the first reply since the OP was asking where he could find more information about dividends. Arguing the underlying principles or reasoning behind investing in dividends is pointless! One should research every investing technique possible (including day trading!) and make their own educated decision rather than read unqualified people go back and forth.

Eric

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Re: Investing for Dividends
« Reply #43 on: February 10, 2015, 03:02:49 PM »
In fact, this thread should have stopped after the first reply since the OP was asking where he could find more information about dividends. Arguing the underlying principles or reasoning behind investing in dividends is pointless! One should research every investing technique possible (including day trading!) and make their own educated decision rather than read unqualified people go back and forth.

That's not really up to you to decide Ricky.  It's hardly pointless as there are many good, reasoned thoughts presented.  Surely the OP and others reading received a benefit from them.

Also, I'd highly dispute the notion that the responses here are from "unqualified people".  Most posters seem pretty knowledgeable to me.  I'm not sure what else besides knowledge is needed to qualify.

clifp

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Re: Investing for Dividends
« Reply #44 on: February 10, 2015, 03:14:38 PM »
Thanks for all the responses, though admittedly, I started to get lost with all the back and forth since I don't really understand it.  Obviously need to read it more carefully.  Thanks for the links, etc.  Cash flow is why I am wanting to look into.  Just want to invest some.  We set some money aside for my husband to buy stocks that he gets interested in.  Might just do the same with dividend investing.  Just a small portion of our portfolio to add something different and learn more.

If you or your dear husband. are interested in dividend I'd recommend the Ultimate Dividend Playbook, by Morningstar's Josh Peters.  The Morningstar Dividend investing newsletter is worth signing up for the free trial offer, because it comes with some very nice free supplements.  Over the decades I've probably signed up for 10 investing newsletter over the decades and his is the only one I've bother to renew. Over the last 8 years he has beat the S&P by 1.8% while seeing considerable less volatility, Beta= .75 I follow about 2/3 of his buy recommendation and bit over 1/2 of his sell recommendation.  Over pretty much the same period I've achieve similar result in my portfolio.

Bicycle_B

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Re: Investing for Dividends
« Reply #45 on: February 10, 2015, 06:52:21 PM »
Possibly the commenters with strong opinions on dividends vs indexing have not convinced each other.  But I for one found the discussion illuminating.  The combination of principles explained, examples calculated, and relevant links was helpful to my understanding.   Thanks to all!!



hodedofome

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Re: Investing for Dividends
« Reply #46 on: February 10, 2015, 08:31:07 PM »

http://www.dividendgrowthinvestor.com
http://www.dividendmantra.com
http://www.seekingalpha.com (Click "Articles", then "Dividends & Income")

+1 for dividend growth investor, good guy who does good research. Pretty close to what I imagine Buffett would do if he was a dividend focused investor. Also, FWIW, he has beaten the market handily in the 7 years he's been blogging.

Dodge

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Re: Investing for Dividends
« Reply #47 on: February 10, 2015, 08:38:06 PM »

It is pretty much a statistical certainty that you will underperform/lose money over the long run. 

Ah, the MMM forums, where almost anyone is capable of doing something that maybe 0.0001% to 0.01% actually do (retire after 10-ish years of working), but it's a statistical certainty that you can't do something that 15-50% of people actually do (beat the returns of the stock market).

This post is a perfect example of the traps people fall into.  They see people achieving things that seem impossible (retiring early), then when they see the statistics of how few people are able to beat the market over the long term, they think it's possible for them to do that too!  Things like this don't phase them:

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"Of the 355 equity funds in 1970, fully 233 of those funds have gone out of business. Only 24 oupaced the market by more than 1% a year. These are terrible odds." Jack Bogle (2007)

Bill Bernstein, author of The Four Pillars of Investing: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."

"Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing." Charles Schwab

"The fund industry's dirty little secret: most actively managed funds never do as well as their benchmark." Arthur Levitt, Chairman, SEC

"Over the long-term the superiority of indexing is a mathematical certainty." Jason Zweig, senior writer for "Money"

"Indexing virtually guarantees you superior performance. Bill Bernstein, author, financial adviser

"With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me." Bill Miller, portfolio manager

Sources:

http://www.bogleheads.org/forum/viewtopic.php?t=173#p20484
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

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But there's a big thing they're missing there.  They don't see that it's a competition.  Tell someone they can beat Michael Jordan in a game of basketball, and they will laugh in your face...but give them a sales pitch for "one weird trick" to beat the market, and people will line up to give you money.

Retiring early is comparatively easy.  Simply follow the formula, save money, and you'll get there.  It almost guaranteed.  Saving money is the hardest part, and you're mostly only competing with yourself on that front.  For the newbies in the thread, it's important to understand this next point.  When someone claims they can beat that market over the long term, they're saying you can beat over half of all money invested in the market this year, then again next year, and again the year after that...for as long as they live.  All by using a published, widely known strategy, that the other market participants (the people they claim to be beating) are aware of.  This is essentially the claim:

"<Insert Strategy Here> beat over half of all invested dollars in the past.  While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."

This isn't just someone saying, "I can beat Lebron James in a 1 on 1 basketball game, you can too!"

It's, "I can beat Lebron James in a 1 on 1 basketball game, every single year, and he knows exactly what I'm going to do each time, and he doesn't copy my strategy or figure out a way to beat me, so I expect I will continue beating him in the future, you can too!"

Compared to:

"Indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."

Which one of these statements are you willing to bet your life savings on?

Dodge

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Re: Investing for Dividends
« Reply #48 on: February 10, 2015, 08:39:37 PM »
The index is the average of all participants.  Anything outside the index, is active.  It is mathematically impossible for 75% of active money to beat the average.

This is incorrect for a variety of reasons.

For starters, defining the "average" of the stock market is a nontrivial thing to do. Consider this: It is possible to lose an arbitrarily large amount of money based on a fixed investment. For example, if you short sell a stock, you can lose an unlimited amount of money based on a small initial investment. That means the average return across all investors could actually be extremely low if skewed down by some particularly dramatic negative returns. (And losing a large amount of money on a short position does not mean that any one other person has correspondingly dramatically high returns.) Therefore, it is possible that 75% of investors could be above the average return per investor. Is it true? I don't know, and I don't know if anyone does, but it's not "mathematically impossible".

Also, that's beside the point because aphalite didn't claim that 75% of investors beat the average return per investor. He or she made a far more specific claim which I will let you re-read. The claim he or she made could also be true; it's not mathematically impossible.

"Dollars" does not equal "Investors".  It is certainly possible for the majority of "Investors" to underperform the average, but it is not possible for the majority of all "Dollars" to underperform the average.

beltim

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Re: Investing for Dividends
« Reply #49 on: February 10, 2015, 09:38:19 PM »
Dodge - that was an exceptionally long post that never addressed my point.  You'll notice I specifically did not talk about active fund managers.  While data for individual investors is hard to find (and most of what is available shows how badly investors do relative to the funds they're invested in, specifically because of bad market timing), there are a few studies that unlike active managers, individual investors who outperform the market are more likely to continue to outperform the market.  So I don't know how many individual investors outperform the market, but I know they exist - so no, it is most definitely not a statistical certainty that you will underperform the market.