Author Topic: 0% taxes with DGI  (Read 19484 times)

Freeyourchains2

  • Guest
0% taxes with DGI
« on: May 30, 2013, 12:25:19 PM »
For FI with dividend growth investing at 0% taxes at any age:

Diversify and accumulate 23 positions of high quality dividend growth paying stocks over the course of your working time period (say 10 years), then let their growing dividends pay you forever more.

For example after retiring in 10 years of working with a 60% savings rate and re-investing you have:

$350,000 @ 7% = $24,500 in passive dividend income on the first year of FI.
Next year, $350,000 @ 7.7% = $26,950.

Not including any capital gains or losses because these high quality companies have been paying out ever increasing dividends for decades with average dividend growth of 10% per year + stock price growth + splits.

Taxes on long-term dividends/capital gains = 0% for 25% bracket or lower ($36,250 or lower for single tax filiers, $72,500 for married)
15% for income $36,250-$400,000,
and 20% for long term capital gains/dividends income over $400,000.

So if your expenses are less then $36,250 per year (long term dividend income). Then you pay 0% taxes and are financially independent, and at whatever age you have managed to diversify and accumulate these positions with this stache.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4381
  • Location: CT
Re: 0% taxes with DGI
« Reply #1 on: May 30, 2013, 12:29:05 PM »
You can get 0% taxes with regular stocks too, or index funds, or anything else which is under normal long term capital gains tax.

Joet

  • Guest
Re: 0% taxes with DGI
« Reply #2 on: May 30, 2013, 02:07:21 PM »
Dividend stocks getting hammered recently
http://finance.yahoo.com/news/dow-ends-record-central-banks-004212618.html


The sector has bubbled and will (IMO) likely under-perform the broad indexes moving forward. Proceed with caution. There's no 'magic' to dividends vs. equity appreciation, imo. As stated, long term capital gains work just fine for 'normal' equities/indexes as well. 2.5% to 4% SWR require a more reasonable 750k-1m to safely spin off the $ you are looking at here [IMO]

Also at the ~7% dividend yield rate, you're kind of in the nethersphere of equities that are in no shape/form/or way related to the "blue chip" dividend stocks that are actually expected to keep delivering like that. Those are much closer to 3-4%

"Dividend cuts never happen!"
http://online.wsj.com/article/SB10001424127887324482504578455332746856500.html
« Last Edit: May 30, 2013, 02:34:45 PM by Joet »

Freeyourchains2

  • Guest
Re: 0% taxes with DGI
« Reply #3 on: May 31, 2013, 07:23:39 AM »

Also at the ~7% dividend yield rate, you're kind of in the nethersphere of equities that are in no shape/form/or way related to the "blue chip" dividend stocks that are actually expected to keep delivering like that. Those are much closer to 3-4%


Thank you for the replies.

I meant in the above example to initially invest in Blue chip companies, that have initial yields of 3-4%, but those with dividend increases that also grow annually by around 10%.

Thus by year 10, if you didn't sell high at some point for many reasons, your first initially invested yields will have risen to around 9.4% in dividends.

By year 30, yields of 63.45%, if the solid high quality and consumer needed company hasn't changed in their business model that drastically.

The tempting part usually is the capital gains between small to large cap companies over the years and some blue-chip companies, because those capital gains will rise a lot faster (and/or fall quicker if things change) then dividend growth company payouts whom have been paying out year after year and make their investors happy, just like their loyal consumers.

It's a slow though very passive pace, and involves a little more hands research then simply index investing in the broad market, but this way you control your choices your whole life with your investments without middleman policies.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 0% taxes with DGI
« Reply #4 on: May 31, 2013, 08:56:16 AM »
Thus by year 10, if you didn't sell high at some point for many reasons, your first initially invested yields will have risen to around 9.4% in dividends.

By year 30, yields of 63.45%, if the solid high quality and consumer needed company hasn't changed in their business model that drastically.

That's just compound interest.. there's no magic about it.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Joet

  • Guest
Re: 0% taxes with DGI
« Reply #5 on: May 31, 2013, 11:12:49 AM »
and really the "magic" with dividend stocks (in taxable space) is that the dividend triggers the taxable event at your normal income rate(s). The index investor is getting around a 1.5-2.0% dividend anyways (not really a good thing, imo), but the capital gains at least are taken at the long term cap rate (currently 15%) vs your normal income tax marginal rate. That's a very good thing.

Undecided

  • Handlebar Stache
  • *****
  • Posts: 1089
Re: 0% taxes with DGI
« Reply #6 on: May 31, 2013, 11:35:54 AM »
and really the "magic" with dividend stocks (in taxable space) is that the dividend triggers the taxable event at your normal income rate(s). The index investor is getting around a 1.5-2.0% dividend anyways (not really a good thing, imo), but the capital gains at least are taken at the long term cap rate (currently 15%) vs your normal income tax marginal rate. That's a very good thing.

My general view is that dividends vs. capital gains tilts are insignificantly (or inestimably?) different, so I don't see anything special in the OP's strategy, but, for the record, for a long-term investor, at least under current tax treatment, the vast majority of dividends in any year will qualify for treatment at the same long-term capital gains rate (with a little planning, I suppose you could avoid do your buying in the first third of a company's quarterly dividend cycle (for example) to make all of the dividends qualified in every year). (Although I guess you'd have to avoid some foreign equities to really make that true.)

Joet

  • Guest
Re: 0% taxes with DGI
« Reply #7 on: May 31, 2013, 11:38:13 AM »
ah didn't know that. That certainly changes things, thank you. I had been assuming dividends were EVIL EVIL at your marginal income tax rate

Undecided

  • Handlebar Stache
  • *****
  • Posts: 1089
Re: 0% taxes with DGI
« Reply #8 on: May 31, 2013, 11:47:09 AM »
ah didn't know that. That certainly changes things, thank you. I had been assuming dividends were EVIL EVIL at your marginal income tax rate

Take a look at "Qualified Dividends" here: http://www.irs.gov/publications/p550/ch01.html#en_US_2012_publink100010066

grantmeaname

  • Magnum Stache
  • ******
  • Posts: 4978
  • Age: 28
  • Location: Cincinnati
  • Cast me away from yesterday's things
Re: 0% taxes with DGI
« Reply #9 on: May 31, 2013, 03:59:28 PM »
$350,000 @ 7% = $24,500 in passive dividend income on the first year of FI.
Next year, $350,000 @ 7.7% = $26,950.

Not including any capital gains or losses because these high quality companies have been paying out ever increasing dividends for decades with average dividend growth of 10% per year + stock price growth + splits.
Name for me one blue-chip company paying a 7% dividend yield that's growing at 10% annually. Not 23, just one.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4381
  • Location: CT
Re: 0% taxes with DGI
« Reply #10 on: May 31, 2013, 04:19:54 PM »
Magical Fantasies Inc.?

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #11 on: June 27, 2014, 10:03:20 PM »
$350,000 @ 7% = $24,500 in passive dividend income on the first year of FI.
Next year, $350,000 @ 7.7% = $26,950.

Not including any capital gains or losses because these high quality companies have been paying out ever increasing dividends for decades with average dividend growth of 10% per year + stock price growth + splits.
Name for me one blue-chip company paying a 7% dividend yield that's growing at 10% annually. Not 23, just one.

I think he was referring to yield on cost instead of market yield

For example Coca-Cola pays a current yearly dividend of $1.22, current price is around $42 for a yield of 2.9%

Coca-Cola has grown their dividend every year for 50 years. Let's say they continue to grow earnings and the dividend for the next ten years at an 8% rate. Which means in ten years the dividend will be (1.22*1.07^10) 2.63. This gives us a yield on cost of 6.2% which I think is a reasonable guess for Coca Cola. It's not quite a 7% yield but pretty close and gives you an idea of how someone could live on the dividends quite comfortably if they treat the stock market as a place to buy fractions of excellent business that pay a rising stream of dividends over time.

I don't disagree with indexing as a strategy it has a lot of strengths. However a well managed dividend growth portfolio which gives safety of principle the number one priority is a great option IMHO. Dividends represent the pure intrinsic value of the business. When a company issues a dividends it give the owners a slice of the intrinsic value of the business. Imagine if you were living on your index portfolio in the 2008 melt down and selling off enough to get the 4% you planned to use. You would have been selling at fire sale prices. However if you just collected dividends from excellent businesses then you wouldn't have had to worry about selling your principal.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
0% taxes with DGI
« Reply #12 on: June 27, 2014, 11:38:28 PM »
There is nothing magical about dividend stocks.

Selling appreciated stock, and taking a dividend are the exact same thing.  In both cases the value of your assets decreases by the exact amount of money that you pull out of the stock that you own.

The only difference is that you have no control over when a company issues a dividend whereas you can decide when you want to take capital gains.

The only reason why dividend stocks historically have outperformed non-dividend paying stocks is because they have had a higher exposure to the value factor.

When you adjust for value, there is quite simply no advantage to buying dividend stocks.

grantmeaname

  • Magnum Stache
  • ******
  • Posts: 4978
  • Age: 28
  • Location: Cincinnati
  • Cast me away from yesterday's things
Re: 0% taxes with DGI
« Reply #13 on: June 28, 2014, 12:27:15 AM »
We couldn't let this thread and the OP die a year ago?

TomTX

  • Magnum Stache
  • ******
  • Posts: 4184
  • Location: Texas
Re: 0% taxes with DGI
« Reply #14 on: June 28, 2014, 06:06:21 AM »
We couldn't let this thread and the OP die a year ago?

Apparently not.

...and "yield on cost" is bullshit which has been previously debunked pretty thoroughly around here. It appears to mainly be a marketing tool for selling dividend stocks.

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #15 on: June 28, 2014, 10:34:34 AM »
There is nothing magical about dividend stocks.

Selling appreciated stock, and taking a dividend are the exact same thing.  In both cases the value of your assets decreases by the exact amount of money that you pull out of the stock that you own.


They aren't the exact same thing, they are two different types of transactions. Dividends are a disbursement of cash from the company directly to the owners. Stock sales are an exchange of cash for ownership rights with price based on supply and demand for the underlying stock.


peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #16 on: June 28, 2014, 10:43:24 AM »
We couldn't let this thread and the OP die a year ago?

Apparently not.

...and "yield on cost" is bullshit which has been previously debunked pretty thoroughly around here. It appears to mainly be a marketing tool for selling dividend stocks.

I wasn't advocating yield on cost as a great metric, only clarifying the original authors argument. Someone thought the author was referring to a currently available 7% yielding stock with 10% dividend growth. I was only trying to clarify the original argument (or at least my interpretation of it).

I also don't see a problem in continuing an old thread, nor do I see the logic in getting frustrated when someone does.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 0% taxes with DGI
« Reply #17 on: June 28, 2014, 10:52:18 AM »
There is nothing magical about dividend stocks.

Selling appreciated stock, and taking a dividend are the exact same thing.  In both cases the value of your assets decreases by the exact amount of money that you pull out of the stock that you own.


They aren't the exact same thing, they are two different types of transactions. Dividends are a disbursement of cash from the company directly to the owners. Stock sales are an exchange of cash for ownership rights with price based on supply and demand for the underlying stock.

They amount to the same thing in terms of company value.  MD's point was that dividends aren't magically created out of thin air, it's money coming off the books.

They often have different tax treatment though.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1383
Re: 0% taxes with DGI
« Reply #18 on: June 28, 2014, 11:00:04 AM »
Wow, the dead arise.  Next thing you know we will have a hocus visitation.

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #19 on: June 28, 2014, 11:34:57 AM »
There is nothing magical about dividend stocks.

Selling appreciated stock, and taking a dividend are the exact same thing.  In both cases the value of your assets decreases by the exact amount of money that you pull out of the stock that you own.


They aren't the exact same thing, they are two different types of transactions. Dividends are a disbursement of cash from the company directly to the owners. Stock sales are an exchange of cash for ownership rights with price based on supply and demand for the underlying stock.

They amount to the same thing in terms of company value.  MD's point was that dividends aren't magically created out of thin air, it's money coming off the books.


I disagree with that argument. When you sell a stock you are taking the price the market gives you. The market may not be giving you a price that equals value, the price could be higher or lower than value. A dividend on the other hand is cash, which represents intrinsic value (all the cash a company will ever put out discounted to present value). I think Warren Buffet said it best when it comes to buying and selling stocks "price is what you give, value is what you get". Dividends payouts have almost nothing to do with price or the supply and demand auction system used to buy and sell stocks. They are just cash the company has made conducting its business.

That said I have no problems with the indexing strategy per se, I just don't think there is a single best investment method. Rather there are different methods which work in different situations and it is up to each individual investor to determine the best method for their needs.  Indexing is a great one size fits all method, the empirical evidence for it's effectiveness is indisputable and on top of that it is easy to implement using currently available securities (vanguard total market etf's etc).
« Last Edit: June 28, 2014, 12:10:50 PM by peterpatch »

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
0% taxes with DGI
« Reply #20 on: June 28, 2014, 11:36:07 AM »
Perhaps the most elegant argument against any magical property of dividends, (and perhaps an argument for some negative tax consequences) is that the world's greatest investor, who happens to be a value investor, and who is often cited as influential by dividend growth investors, Warren Buffett, chooses not to distribute dividends with his own stock, Berkshire Hathaway.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: 0% taxes with DGI
« Reply #21 on: June 28, 2014, 11:42:21 AM »

There is nothing magical about dividend stocks.

Selling appreciated stock, and taking a dividend are the exact same thing.  In both cases the value of your assets decreases by the exact amount of money that you pull out of the stock that you own.


They aren't the exact same thing, they are two different types of transactions. Dividends are a disbursement of cash from the company directly to the owners. Stock sales are an exchange of cash for ownership rights with price based on supply and demand for the underlying stock.

They amount to the same thing in terms of company value.  MD's point was that dividends aren't magically created out of thin air, it's money coming off the books.


I disagree with that argument. When you sell a stock you are taking the price the market gives you. The market may not be giving you a price that equal value, the price could be higher or lower than value. A dividend on the other hand is cash, which represents intrinsic value (all the cash a company will ever put out discounted to present value). I think Warren Buffet said it best when it comes to buying and selling stocks "price is what you give, value is what you get". Dividends payouts have almost nothing to do with price or the supply and demand auction system used to buy and sell stocks. They are just cash the company has made conducting their business.

That said I have no problems with the indexing strategy per se, I just don't think there is a single best investment method. Rather there are different methods which work in different situations and it is up to each individual investor to determine the best method for their needs.  Indexing is a great one size fits all method, the empirical evidence for it's effectiveness is indisputable and on top of that it is easy to implement using currently available securities (vanguard total market etf's etc).

Your argument here for the unique quality of dividends, essentially boils down to two arguments.

1.  The market is inefficient, and taking a dividend allows you to take advantage of this inefficiency.

2.  Selling stock is worse than dividend taking because of the bid ask spread.

Both are possible, I suppose. But there's literally no evidence, in balance, that dividend stock investing beats indexing, and plenty of evidence to the contrary.






arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 0% taxes with DGI
« Reply #22 on: June 28, 2014, 11:56:05 AM »
They amount to the same thing in terms of company value.  MD's point was that dividends aren't magically created out of thin air, it's money coming off the books.


I disagree with that argument. When you sell a stock you are taking the price the market gives you. The market may not be giving you a price that equal value, the price could be higher or lower than value. A dividend on the other hand is cash, which represents intrinsic value (all the cash a company will ever put out discounted to present value). I think Warren Buffet said it best when it comes to buying and selling stocks "price is what you give, value is what you get".

Most of us believe the market is fairly efficient, so you're taking the fair market price, and they work out to the same.

But okay, even if you disagree and you think it isn't, you should prefer selling stocks over dividends because a dividend is forced on you whether you like it or not.  You can sell if you think a company is overvalued and buy if you think it isn't.

If you're going to invoke Buffett, you should read his arguments on why he prefers capital gains to dividends.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #23 on: June 29, 2014, 02:47:52 AM »
They amount to the same thing in terms of company value.  MD's point was that dividends aren't magically created out of thin air, it's money coming off the books.


I disagree with that argument. When you sell a stock you are taking the price the market gives you. The market may not be giving you a price that equal value, the price could be higher or lower than value. A dividend on the other hand is cash, which represents intrinsic value (all the cash a company will ever put out discounted to present value). I think Warren Buffet said it best when it comes to buying and selling stocks "price is what you give, value is what you get".

Most of us believe the market is fairly efficient, so you're taking the fair market price, and they work out to the same.

But okay, even if you disagree and you think it isn't, you should prefer selling stocks over dividends because a dividend is forced on you whether you like it or not.  You can sell if you think a company is overvalued and buy if you think it isn't.

If you're going to invoke Buffett, you should read his arguments on why he prefers capital gains to dividends.

I think the market often prices stocks accurately based on underlying value, probably more often then not.

I have read most of the berkshire hathaway annual reports (still need to read through 2002-2007 a work in progress) available from the berkshire website so I am aware of Buffett's views on dividends and capital gains. I consider Buffett to be a great teacher and I learned a great deal from his annual reports and still do upon reviewing them. Probably the best Buffet invocation against dividend investing and stock picking in general is the fact that that when he dies almost all the assets he leaves his current wife Astrid will be put into an S&P 500 index portfolio. However it would be wrong to say that because Berkshire doesn’t pay a dividend that Buffett was implying that dividends were somehow worse than capital appreciation. Buffett loves dividends, his operating companies essentially pay him all of their surplus income as a dividend which he re-allocates to the best opportunities he can think of. He has a fantastic capital allocation track record which is quite rare and valuable so investors have been much better off letting Berkshire reinvest all profits rather than taking a dividend. Taxation issues are probably Buffetts main issue with dividends he receives from companies he doesn’t own outright.
I hold dividend paying stocks in tax advantaged accounts where the dividend is not taxed or is taxed at the same rate as capital gains.

My basic strategy is to place long term safety of principal first and a reasonable return second. There are many ways to implement this strategy and dividend growth investing is my particular favourite.

I agree that a dividend is disbursed without any choice on my part and this could result in excess income. However I could reinvest the surplus back into the market if I had to through a DRIP or just by reinvesting my excess deposits. I don't see this as anything but a minor annoyance given the extremely low commissions I pay on stock transactions through my discount broker.

Dividends allow me to take a small fraction of the company's intrinsic value at regular intervals. I don't have to worry about constantly valuing the underlying company and buying and selling for capital gains. The dividend is cash which has a value equal to price therefore it’s almost always fair value to receive a dividend. There is a lot more time involved in a selecting stocks for a dividend growth portfolio then there is for an indexing strategy but for me it is worth it.

Dividends provide other benefits as well. For example if a company cuts their dividend the stock price almost always suffers a large quoting loss. Management is therefore loathe to cut the dividend which keeps them disciplined on making sure that there is enough cash flow available to cover the dividend and as well as any ongoing cash requirements for the company.
« Last Edit: June 29, 2014, 02:49:55 AM by peterpatch »

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: 0% taxes with DGI
« Reply #24 on: June 29, 2014, 11:02:59 AM »
Fair enough. You like dividend growth investing. I sincerely hope that the strategy is a real winner for you going forward.

I would just push back on some of your justifications.

1.  Your principle is no safer when invested in a dividend stock than in any other stock. Dividend stocks are just as subject to the whim of beta. Your principle is no more protected than non-dividend paying stocks. When the stock market goes down, so will the principal value of your dividend stocks.

2.  Reinvesting dividends, makes you subject to bid ask spreads, which was one of your arguments for taking dividends as opposed to selling shares  in the first place. Furthermore, small fees add up and your expense ratio will likely end up being higher than if you had invested in a broad market mutual fund or ETF.

3.  As you point out dividend paying companies are incentivized to keep on increasing dividends.  This creates a perverse incentive. (This means that they will pay higher dividends, even when the money would be better invested elsewhere or used to pay down debt.)

4.  At this time of low interest rates, investors are irrationally exuberant about dividends because it increases their "yield."  This means that dividend stocks, by and large, are likely overvalued now, meaning their expected future performance is lower than the historical mean.

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #25 on: June 29, 2014, 12:59:00 PM »
Fair enough. You like dividend growth investing. I sincerely hope that the strategy is a real winner for you going forward.



2.  Reinvesting dividends, makes you subject to bid ask spreads, which was one of your arguments for taking dividends as opposed to selling shares  in the first place. Furthermore, small fees add up and your expense ratio will likely end up being higher than if you had invested in a broad market mutual fund or ETF.



I never said anything about bid ask spreads specifically or implicitly , you are misrepresenting my position entirely by attempting to imply otherwise.

You have absolutely no idea what my personal investing expense ratio is vs. a broad based index investing portfolio and to say otherwise is pure speculation on your part. ETF's charge a regularly occurring management expense, directly held stocks do not. Therefore it is totally possible that someones average expenses in directly held securities are much lower then even a super low MER vanguard ETF.

Other people on this thread have been intellectually honest and this will be my first and last response to you unless you can also meet that basic requirement.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
0% taxes with DGI
« Reply #26 on: June 29, 2014, 01:26:48 PM »
Peter,

I'm sorry I offended you. It was truly not my intent.

You made the claim earlier that taking dividends was more efficient than selling shares because the security might be mispriced. The difference from the price that you pay and the price that you can sell a security is called a bid ask spread. If this is not the inefficient pricing you were referring to, please make a more specific argument. I was doing my best to interpret your general argument as a specific and credible one. 

If you feel I am being intellectually dishonest, please share how specifically.  I honestly have no idea what you are referring to.

I have made some very specific criticisms of your arguments for DGI versus broad index investing. If you feel the arguments are flawed, please share how.

I honestly have no negative feelings towards you as an individual, and hope you'll take me at my word for this. I feel your arguments are flawed, nothing more nothing less.
« Last Edit: June 30, 2014, 12:08:39 PM by milesdividendmd »

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1188
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: 0% taxes with DGI
« Reply #27 on: June 29, 2014, 02:15:31 PM »
Your analysis depends on these magic companies that experience continued above market average compound dividend growth, right? For 30 years?

I think this is a flawed assertion. 

Eventually those companies would by definition,  comprise essentially the entire market. 

Can somebody do the math? It reminds me of the St Petersburg Paradox.

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: 0% taxes with DGI
« Reply #28 on: June 29, 2014, 03:06:42 PM »
Taking cash dividends and selling shares are functionally equivalent because money is fungible. They are two different kinds of transactions, yes, but the actual effects on your wealth are identical.

The difference in expenses between holding stocks directly and low-cost index funds is so low as to be completely meaningless and shouldn't reasonably factor into the conversation at all.
« Last Edit: June 29, 2014, 03:08:47 PM by kyleaaa »

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: 0% taxes with DGI
« Reply #29 on: June 29, 2014, 03:19:28 PM »

Taking cash dividends and selling shares are functionally equivalent because money is fungible. They are two different kinds of transactions, yes, but the actual effects on your wealth are identical.

The difference in expenses between holding stocks directly and low-cost index funds is so low as to be completely meaningless and shouldn't reasonably factor into the conversation at all.

+1

If anything manually reinvesting dividends and paying a transaction fee each time you buy a stock in this manner (Which is in stark contrast to The costless reinvesting ofdividends into a low cost mutual fund or fee free ETF) Will make the expenses of such a strategy significantly more expensive than the expenses of buying low-cost index funds.

This is the point I made earlier, which Peter mistakenly took as a personal attack on his own finances.



peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #30 on: June 30, 2014, 11:07:30 PM »
Your analysis depends on these magic companies that experience continued above market average compound dividend growth, right? For 30 years?

I think this is a flawed assertion. 

Eventually those companies would by definition,  comprise essentially the entire market. 

Can somebody do the math? It reminds me of the St Petersburg Paradox.

My analysis doesn't require above market average compound dividend growth. I do however prefer an earnings yield of about twice the 10 year federal bond rate.

In my dividend growth portfolio I don't try to beat the market. I try to get the best risk adjusted returns possible using using a strategy that fits my personal situation. There is more than one road to Rome. In order to adjust for risk I look at things like dividend growth track record, debt vs equity, safety ratings from value line, dividend payout ratio, interest coverage ratio, sector, economic franchise (some people call this a "moat"), ROIC/ROE etc. I also like to see how a company fared in the last few recessions (revenue, earnings, interest coverage, cash flow , dividend etc.). After a stock passes through my safety filters I then filter for a minimum dividend yield, growth level and discount to fair value. It's an extremely discriminatory process that, at this moment, filters out all but 5 stocks on the US stock exchanges.

You are right that exponential growth cannot continue indefinitely. Bacteria can grow exponentially and over short durations but fortunately the growth always hits a wall before they take over the universe.

That said a 7 or 8% rate of compounding isn't nearly the same magnitude as something like bacteria doubling every hour. Coca-Cola won't take over the market growing at 7 or 8%, however their growth will likely slow down the bigger they get.

It would be nice to "beat the market" but I see that as a fools errand (or perhaps an investing geniuses errand but most people who try to beat the market fail). I would prefer to just collect a rising stream of dividends from fantastic companies that are almost sure to raise the dividend year after year due to well run businesses with sustainable competitive advantages. I believe in diversification because odds are I will be wrong in some of my stock choices in spite of all my research.

I am also an indexer, John Bogle provided a great gift to civilization with Vanguards low fee broad based index securities which I use. I also follow an indexing strategy using target date funds in my employer matching pension program. So I am DCAing into an index fund every month, I have my wife's work pension set up the same way.


I looked up St. Petersburg paradox and I have no special competence that would allow me to discuss anything in regards to that.
« Last Edit: June 30, 2014, 11:11:28 PM by peterpatch »

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 0% taxes with DGI
« Reply #31 on: June 30, 2014, 11:26:23 PM »
It reminds me of the St Petersburg Paradox.

Okay, that was really fun reading.  Thanks for pointing that out.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #32 on: June 30, 2014, 11:29:42 PM »
Taking cash dividends and selling shares are functionally equivalent because money is fungible. They are two different kinds of transactions, yes, but the actual effects on your wealth are identical.

The difference in expenses between holding stocks directly and low-cost index funds is so low as to be completely meaningless and shouldn't reasonably factor into the conversation at all.

When you sell stock you are exchanging ownership of a company for cash. A dividend is a payment of cash that a company has made from the company to the owner. The value of the company becomes less by exactly the amount of the dividend payment. However in the case of selling stock I would say that the cash you receive could be the same, less or more then the intrinsic value of the shares you sold. The intrinsic value of the shares being the value of all the cash the company will return to the shareholders discounted to present value multiplied by your fraction of ownership.

I agree that the expense comparison is probably a rounding error of difference in the long run when comparing buy and hold stock investing to indexing.

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: 0% taxes with DGI
« Reply #33 on: June 30, 2014, 11:38:36 PM »
Your argument here for the unique quality of dividends, essentially boils down to two arguments.

1.  The market is inefficient, and taking a dividend allows you to take advantage of this inefficiency.

2.  Selling stock is worse than dividend taking because of the bid ask spread.

Both are possible, I suppose. But there's literally no evidence, in balance, that dividend stock investing beats indexing, and plenty of evidence to the contrary.

There's AAII data (http://www.ctrust.com/pdf/newsletters/ctc2013-04.pdf) that shows that stocks that grow dividends return more than companies that pay constant dividends, which return much more than stocks with no dividends, which return more than stocks that cut dividends.  Over the last 30 years, the annualized returns for those categories are 9.7%, 7.3%, 1.8%, and -0.2%.

That seems like damn strong evidence to me.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
0% taxes with DGI
« Reply #34 on: June 30, 2014, 11:42:13 PM »
Your argument here for the unique quality of dividends, essentially boils down to two arguments.

1.  The market is inefficient, and taking a dividend allows you to take advantage of this inefficiency.

2.  Selling stock is worse than dividend taking because of the bid ask spread.

Both are possible, I suppose. But there's literally no evidence, in balance, that dividend stock investing beats indexing, and plenty of evidence to the contrary.

There's AAII data (http://www.ctrust.com/pdf/newsletters/ctc2013-04.pdf) that shows that stocks that grow dividends return more than companies that pay constant dividends, which return much more than stocks with no dividends, which return more than stocks that cut dividends.  Over the last 30 years, the annualized returns for those categories are 9.7%, 7.3%, 1.8%, and -0.2%.

That seems like damn strong evidence to me.

The question is not whether stocks that pay dividends, return more than stocks that do not pay dividends,(Or stocks that pay constant dividends, or diminishing dividends etc.)

The question is whether dividend paying stocks return more, after their exposure to the value factor, size factor, quality factor, momentum factor, etc, is accounted for.

And unfortunately for dividend growth investors, the answer is probably no.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 0% taxes with DGI
« Reply #35 on: June 30, 2014, 11:43:29 PM »
Your argument here for the unique quality of dividends, essentially boils down to two arguments.

1.  The market is inefficient, and taking a dividend allows you to take advantage of this inefficiency.

2.  Selling stock is worse than dividend taking because of the bid ask spread.

Both are possible, I suppose. But there's literally no evidence, in balance, that dividend stock investing beats indexing, and plenty of evidence to the contrary.

There's AAII data (http://www.ctrust.com/pdf/newsletters/ctc2013-04.pdf) that shows that stocks that grow dividends return more than companies that pay constant dividends, which return much more than stocks with no dividends, which return more than stocks that cut dividends.  Over the last 30 years, the annualized returns for those categories are 9.7%, 7.3%, 1.8%, and -0.2%.

That seems like damn strong evidence to me.

Holy conflated data batman!

Don't you think it's just possible that companies growing their dividends are doing so because their company and profits are growing?  And companies having to cut dividends aren't doing so hot?

It's not increasing the dividend that makes a company do well, and it's not cutting a dividend that makes a company do poorly.  Those are just symptoms of the problem (or indicators of the wellness).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: 0% taxes with DGI
« Reply #36 on: June 30, 2014, 11:44:28 PM »
Your argument here for the unique quality of dividends, essentially boils down to two arguments.

1.  The market is inefficient, and taking a dividend allows you to take advantage of this inefficiency.

2.  Selling stock is worse than dividend taking because of the bid ask spread.

Both are possible, I suppose. But there's literally no evidence, in balance, that dividend stock investing beats indexing, and plenty of evidence to the contrary.

There's AAII data (http://www.ctrust.com/pdf/newsletters/ctc2013-04.pdf) that shows that stocks that grow dividends return more than companies that pay constant dividends, which return much more than stocks with no dividends, which return more than stocks that cut dividends.  Over the last 30 years, the annualized returns for those categories are 9.7%, 7.3%, 1.8%, and -0.2%.

That seems like damn strong evidence to me.

The question is not whether stocks that pay dividends, return more than stocks that do not pay dividends,(Or stocks that pay constant dividends, or diminishing dividends etc.)

The question is whether dividend paying stocks return more, after their exposure to the value factor, size factor, quality factor, momentum factor, etc, is accounted for.

And unfortunately for dividend growth investors, the answer is probably no.

This one factor is insufficient to explain your excess returns, one you take into account  these four other factors?

I'll take Occam's Razor here.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: 0% taxes with DGI
« Reply #37 on: June 30, 2014, 11:44:40 PM »

Your argument here for the unique quality of dividends, essentially boils down to two arguments.

1.  The market is inefficient, and taking a dividend allows you to take advantage of this inefficiency.

2.  Selling stock is worse than dividend taking because of the bid ask spread.

Both are possible, I suppose. But there's literally no evidence, in balance, that dividend stock investing beats indexing, and plenty of evidence to the contrary.

There's AAII data (http://www.ctrust.com/pdf/newsletters/ctc2013-04.pdf) that shows that stocks that grow dividends return more than companies that pay constant dividends, which return much more than stocks with no dividends, which return more than stocks that cut dividends.  Over the last 30 years, the annualized returns for those categories are 9.7%, 7.3%, 1.8%, and -0.2%.

That seems like damn strong evidence to me.

Holy conflated data batman!

Don't you think it's just possible that companies growing their dividends are doing so because their company and profits are growing?  And companies having to cut dividends aren't doing so hot?

It's not increasing the dividend that makes a company do well, and it's not cutting a dividend that makes a company do poorly.  Those are just symptoms of the problem (or indicators of the wellness).

Great point!



milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
0% taxes with DGI
« Reply #38 on: June 30, 2014, 11:48:14 PM »
Your argument here for the unique quality of dividends, essentially boils down to two arguments.

1.  The market is inefficient, and taking a dividend allows you to take advantage of this inefficiency.

2.  Selling stock is worse than dividend taking because of the bid ask spread.

Both are possible, I suppose. But there's literally no evidence, in balance, that dividend stock investing beats indexing, and plenty of evidence to the contrary.

There's AAII data (http://www.ctrust.com/pdf/newsletters/ctc2013-04.pdf) that shows that stocks that grow dividends return more than companies that pay constant dividends, which return much more than stocks with no dividends, which return more than stocks that cut dividends.  Over the last 30 years, the annualized returns for those categories are 9.7%, 7.3%, 1.8%, and -0.2%.

That seems like damn strong evidence to me.

The question is not whether stocks that pay dividends, return more than stocks that do not pay dividends,(Or stocks that pay constant dividends, or diminishing dividends etc.)

The question is whether dividend paying stocks return more, after their exposure to the value factor, size factor, quality factor, momentum factor, etc, is accounted for.

And unfortunately for dividend growth investors, the answer is probably no.

This one factor is insufficient to explain your excess returns, one you take into account  these four other factors?

I'll take Occam's Razor here.

Unfortunately for your argument, while there are defined factors that effect equity returns (beta, value, size, momentum, quality)  there is no "dividend factor."

In other words, when you systematically look for factors that effect returns, the dividend factor simply does not exist.

Or do you think Fama/French just forgot to check dividends in their three factor model?
« Last Edit: June 30, 2014, 11:51:28 PM by milesdividendmd »

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: 0% taxes with DGI
« Reply #39 on: June 30, 2014, 11:52:27 PM »
Your argument here for the unique quality of dividends, essentially boils down to two arguments.

1.  The market is inefficient, and taking a dividend allows you to take advantage of this inefficiency.

2.  Selling stock is worse than dividend taking because of the bid ask spread.

Both are possible, I suppose. But there's literally no evidence, in balance, that dividend stock investing beats indexing, and plenty of evidence to the contrary.

There's AAII data (http://www.ctrust.com/pdf/newsletters/ctc2013-04.pdf) that shows that stocks that grow dividends return more than companies that pay constant dividends, which return much more than stocks with no dividends, which return more than stocks that cut dividends.  Over the last 30 years, the annualized returns for those categories are 9.7%, 7.3%, 1.8%, and -0.2%.

That seems like damn strong evidence to me.

Holy conflated data batman!

Don't you think it's just possible that companies growing their dividends are doing so because their company and profits are growing?  And companies having to cut dividends aren't doing so hot?

It's not increasing the dividend that makes a company do well, and it's not cutting a dividend that makes a company do poorly.  Those are just symptoms of the problem (or indicators of the wellness).

Well, sure, but it's a very good indicator to follow.  There's other data, too, though, such as the fact that companies almost universally buy back stock at inopportune times—when their stock is expensive—actually destroying shareholder value. 
http://online.wsj.com/news/articles/SB10001424052970203824904577213891035614390
http://www.ft.com/cms/s/0/da77b98e-c987-11e0-9eb8-00144feabdc0.html#axzz36C2qtoti

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #40 on: June 30, 2014, 11:52:50 PM »
Peter,

I'm sorry I offended you. It was truly not my intent.

You made the claim earlier that taking dividends was more efficient than selling shares because the security might be mispriced. The difference from the price that you pay and the price that you can sell a security is called a bid ask spread. If this is not the inefficient pricing you were referring to, please make a more specific argument. I was doing my best to interpret your general argument as a specific and credible one. 

If you feel I am being intellectually dishonest, please share how specifically.  I honestly have no idea what you are referring to.

I have made some very specific criticisms of your arguments for DGI versus broad index investing. If you feel the arguments are flawed, please share how.

I honestly have no negative feelings towards you as an individual, and hope you'll take me at my word for this. I feel your arguments are flawed, nothing more nothing less.

Let's just chalk this up to a misunderstanding then. I didn't specifically talk about bid ask spread (delta between highest buyer price and lowest seller price). If you thought I was referring to bid/ask I think it would have been better to indicate that was your assumption rather then refute a specific argument that I never actually made. If you want to have a dialogue that is fine, we can get to specific credible arguments that way through question and answer.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: 0% taxes with DGI
« Reply #41 on: June 30, 2014, 11:53:59 PM »

Peter,

I'm sorry I offended you. It was truly not my intent.

You made the claim earlier that taking dividends was more efficient than selling shares because the security might be mispriced. The difference from the price that you pay and the price that you can sell a security is called a bid ask spread. If this is not the inefficient pricing you were referring to, please make a more specific argument. I was doing my best to interpret your general argument as a specific and credible one. 

If you feel I am being intellectually dishonest, please share how specifically.  I honestly have no idea what you are referring to.

I have made some very specific criticisms of your arguments for DGI versus broad index investing. If you feel the arguments are flawed, please share how.

I honestly have no negative feelings towards you as an individual, and hope you'll take me at my word for this. I feel your arguments are flawed, nothing more nothing less.

Let's just chalk this up to a misunderstanding then. I didn't specifically talk about bid ask spread (delta between highest buyer price and lowest seller price). If you thought I was referring to bid/ask I think it would have been better to indicate that was your assumption rather then refute a specific argument that I never actually made. If you want to have a dialogue that is fine, we can get to specific credible arguments that way through question and answer.

Thanks Peter. I appreciate it.



arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 0% taxes with DGI
« Reply #42 on: June 30, 2014, 11:59:44 PM »
Well, sure, but it's a very good indicator to follow.

There's probably other more reliable indicators, like earnings reports.  In any case, yes, a company does well, their stock rises, they increase dividends.  Another company that doesn't pay dividends also does well?  Their stock also rises.  It's not the dividend that's making those companies' stock price rise, it's the doing well part.

That was my point with the AAII data - it doesn't show that dividend stock companies are better than non-dividend stock companies, just that ones that are doing well raise dividends, and ones that are doing poorly cut them.  Sort of a "duh," huh?  ;)

Well, sure, but it's a very good indicator to follow.  There's other data, too, though, such as the fact that companies almost universally buy back stock at inopportune times—when their stock is expensive—actually destroying shareholder value. 
http://online.wsj.com/news/articles/SB10001424052970203824904577213891035614390
http://www.ft.com/cms/s/0/da77b98e-c987-11e0-9eb8-00144feabdc0.html#axzz36C2qtoti

Any company can buy back stock, whether they issue dividends or not.  That's a separate issue.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: 0% taxes with DGI
« Reply #43 on: July 01, 2014, 12:18:21 AM »
Well, sure, but it's a very good indicator to follow.  There's other data, too, though, such as the fact that companies almost universally buy back stock at inopportune times—when their stock is expensive—actually destroying shareholder value. 
http://online.wsj.com/news/articles/SB10001424052970203824904577213891035614390
http://www.ft.com/cms/s/0/da77b98e-c987-11e0-9eb8-00144feabdc0.html#axzz36C2qtoti

Any company can buy back stock, whether they issue dividends or not.  That's a separate issue.

Yeah, that separate issue is really what I had wanted to address.  I thought that earlier you had said that stock buybacks were equivalent to a dividend, but upon rereading I see that you say that selling stock is equivalent to a dividend.  So never mind.  I'll save my rant against stock buybacks (in practice, not in theory) for a more appropriate thread.
« Last Edit: July 01, 2014, 12:21:16 AM by beltim »

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #44 on: July 01, 2014, 09:13:03 AM »
In the book The Future For Investors by Jeremy Siegel he shows that dividends and valuation are extremely important factors for an investor. One surprising thing he found was that investors would have had better total returns simply buying and holding the original S&P 500 companies rather then holding a typical index ETF that bought and sold stock to match the most current S&P 500 listing.

A lot of these academic models use something called beta as a measurement of risk. Beta measures the past price volatility of a stock vs the whole markets volatility. I have always had misgivings about beta. For example if I own stock in Coca- Cola for $45 and suddenly the price drops to $20 (no changes to the company's fundamentals) beta says the stock is riskier. Same company with same goals and outlook for the future and now you can buy it's earnings for half the price it just was at. Beta would say that Coca-Cola became a riskier investment because of the big price fluctuation. Value investing would say the investment became a much less riskier investment because of the decrease in price vs value. In fact I think any reasonable person can see that  Coca-Cola is a less riskier investment in this scenario. Beta just seems like a convenient mathematical 'plug' rather then a real measure of risk.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 0% taxes with DGI
« Reply #45 on: July 01, 2014, 09:13:36 AM »
Well, sure, but it's a very good indicator to follow.  There's other data, too, though, such as the fact that companies almost universally buy back stock at inopportune times—when their stock is expensive—actually destroying shareholder value. 
http://online.wsj.com/news/articles/SB10001424052970203824904577213891035614390
http://www.ft.com/cms/s/0/da77b98e-c987-11e0-9eb8-00144feabdc0.html#axzz36C2qtoti

Any company can buy back stock, whether they issue dividends or not.  That's a separate issue.

Yeah, that separate issue is really what I had wanted to address.  I thought that earlier you had said that stock buybacks were equivalent to a dividend, but upon rereading I see that you say that selling stock is equivalent to a dividend.  So never mind.  I'll save my rant against stock buybacks (in practice, not in theory) for a more appropriate thread.

Gotcha.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 0% taxes with DGI
« Reply #46 on: July 01, 2014, 09:15:37 AM »
In the book The Future For Investors by Jeremy Siegel he shows that dividends and valuation are extremely important factors for an investor. One surprising thing he found was that investors would have had better total returns simply buying and holding the original S&P 500 companies rather then holding a typical index ETF that bought and sold stock to match the most current S&P 500 listing.

A lot of these academic models use something called beta as a measurement of risk. Beta measures the past price volatility of a stock vs the whole markets volatility. I have always had misgivings about beta. For example if I own stock in Coca- Cola for $45 and suddenly the price drops to $20 (no changes to the company's fundamentals) beta says the stock is riskier. Same company with same goals and outlook for the future and now you can buy it's earnings for half the price it just was at. Beta would say that Coca-Cola became a riskier investment because of the big price fluctuation. Value investing would say the investment became a much less riskier investment because of the decrease in price vs value. In fact I think any reasonable person can see that  Coca-Cola is a less riskier investment in this scenario. Beta just seems like a convenient mathematical 'plug' rather then a real measure of risk.

If you feel like that's always true, take the inverse of beta for your risk model.

I'd wager though that it's MUCH more common for a stock to drop in price for real reasons (bad earnings report, scandal, etc.) than for it to drop for no reason.  In other words, it is a riskier investment in that scenario.  You coke scenario is much less common than the other way around.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #47 on: July 01, 2014, 09:42:54 AM »
In the book The Future For Investors by Jeremy Siegel he shows that dividends and valuation are extremely important factors for an investor. One surprising thing he found was that investors would have had better total returns simply buying and holding the original S&P 500 companies rather then holding a typical index ETF that bought and sold stock to match the most current S&P 500 listing.

A lot of these academic models use something called beta as a measurement of risk. Beta measures the past price volatility of a stock vs the whole markets volatility. I have always had misgivings about beta. For example if I own stock in Coca- Cola for $45 and suddenly the price drops to $20 (no changes to the company's fundamentals) beta says the stock is riskier. Same company with same goals and outlook for the future and now you can buy it's earnings for half the price it just was at. Beta would say that Coca-Cola became a riskier investment because of the big price fluctuation. Value investing would say the investment became a much less riskier investment because of the decrease in price vs value. In fact I think any reasonable person can see that  Coca-Cola is a less riskier investment in this scenario. Beta just seems like a convenient mathematical 'plug' rather then a real measure of risk.

If you feel like that's always true, take the inverse of beta for your risk model.

I'd wager though that it's MUCH more common for a stock to drop in price for real reasons (bad earnings report, scandal, etc.) than for it to drop for no reason.  In other words, it is a riskier investment in that scenario.  You coke scenario is much less common than the other way around.

I agree, the market usually provides a good approximation to value, but not always. If the market were a perfect arbiter of risk to reward then people like Ben Graham, Warren Buffett, Walter Schloss and Howard Marks wouldn't have been able to do so well for so long following value investing principles. Beating the market is probably extremely hard and time consuming, it's supposed to be hard and time consuming otherwise everyone would be doing it and would drive prices up to the point where it would become hard and time consuming.

Still these scenarios happen where price drops below value and it's possible to take advantage of these situations which refutes the argument of super strong market efficiency where all data is priced into the stock at all times.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: 0% taxes with DGI
« Reply #48 on: July 01, 2014, 12:51:14 PM »

In the book The Future For Investors by Jeremy Siegel he shows that dividends and valuation are extremely important factors for an investor. One surprising thing he found was that investors would have had better total returns simply buying and holding the original S&P 500 companies rather then holding a typical index ETF that bought and sold stock to match the most current S&P 500 listing.

A lot of these academic models use something called beta as a measurement of risk. Beta measures the past price volatility of a stock vs the whole markets volatility. I have always had misgivings about beta. For example if I own stock in Coca- Cola for $45 and suddenly the price drops to $20 (no changes to the company's fundamentals) beta says the stock is riskier. Same company with same goals and outlook for the future and now you can buy it's earnings for half the price it just was at. Beta would say that Coca-Cola became a riskier investment because of the big price fluctuation. Value investing would say the investment became a much less riskier investment because of the decrease in price vs value. In fact I think any reasonable person can see that  Coca-Cola is a less riskier investment in this scenario. Beta just seems like a convenient mathematical 'plug' rather then a real measure of risk.

If you feel like that's always true, take the inverse of beta for your risk model.

I'd wager though that it's MUCH more common for a stock to drop in price for real reasons (bad earnings report, scandal, etc.) than for it to drop for no reason.  In other words, it is a riskier investment in that scenario.  You coke scenario is much less common than the other way around.

I agree, the market usually provides a good approximation to value, but not always. If the market were a perfect arbiter of risk to reward then people like Ben Graham, Warren Buffett, Walter Schloss and Howard Marks wouldn't have been able to do so well for so long following value investing principles. Beating the market is probably extremely hard and time consuming, it's supposed to be hard and time consuming otherwise everyone would be doing it and would drive prices up to the point where it would become hard and time consuming.

Still these scenarios happen where price drops below value and it's possible to take advantage of these situations which refutes the argument of super strong market efficiency where all data is priced into the stock at all times.

I actually agree with this. Simply put if you buy stocks when their valuations are low you are likely to have better long term performance relative to buying them when valuations are high. This is the value factor, which has been well described.

I also agree that Buffet and Graham have outperformed the broader market because of their skill in security valuation.

What doesn't follow, is that I can outperform the market by employing a value stock picking strategy.

Simply put, there is a reason Buffet is famous. He is the vanishing exception in a world of stock picking failures. Which is why he himself recommends broad index funds for almost all investors.

And value investing, of course, is not the same thing as  DG investing.



peterpatch

  • Stubble
  • **
  • Posts: 101
Re: 0% taxes with DGI
« Reply #49 on: July 01, 2014, 01:30:01 PM »

In the book The Future For Investors by Jeremy Siegel he shows that dividends and valuation are extremely important factors for an investor. One surprising thing he found was that investors would have had better total returns simply buying and holding the original S&P 500 companies rather then holding a typical index ETF that bought and sold stock to match the most current S&P 500 listing.

A lot of these academic models use something called beta as a measurement of risk. Beta measures the past price volatility of a stock vs the whole markets volatility. I have always had misgivings about beta. For example if I own stock in Coca- Cola for $45 and suddenly the price drops to $20 (no changes to the company's fundamentals) beta says the stock is riskier. Same company with same goals and outlook for the future and now you can buy it's earnings for half the price it just was at. Beta would say that Coca-Cola became a riskier investment because of the big price fluctuation. Value investing would say the investment became a much less riskier investment because of the decrease in price vs value. In fact I think any reasonable person can see that  Coca-Cola is a less riskier investment in this scenario. Beta just seems like a convenient mathematical 'plug' rather then a real measure of risk.

If you feel like that's always true, take the inverse of beta for your risk model.

I'd wager though that it's MUCH more common for a stock to drop in price for real reasons (bad earnings report, scandal, etc.) than for it to drop for no reason.  In other words, it is a riskier investment in that scenario.  You coke scenario is much less common than the other way around.

I agree, the market usually provides a good approximation to value, but not always. If the market were a perfect arbiter of risk to reward then people like Ben Graham, Warren Buffett, Walter Schloss and Howard Marks wouldn't have been able to do so well for so long following value investing principles. Beating the market is probably extremely hard and time consuming, it's supposed to be hard and time consuming otherwise everyone would be doing it and would drive prices up to the point where it would become hard and time consuming.

Still these scenarios happen where price drops below value and it's possible to take advantage of these situations which refutes the argument of super strong market efficiency where all data is priced into the stock at all times.

I actually agree with this. Simply put if you buy stocks when their valuations are low you are likely to have better long term performance relative to buying them when valuations are high. This is the value factor, which has been well described.

I also agree that Buffet and Graham have outperformed the broader market because of their skill in security valuation.

What doesn't follow, is that I can outperform the market by employing a value stock picking strategy.

Simply put, there is a reason Buffet is famous. He is the vanishing exception in a world of stock picking failures. Which is why he himself recommends broad index funds for almost all investors.

And value investing, of course, is not the same thing as  DG investing.

DG investing can also be value investing, but value investing doesn't have to be DG investing. You could argue that all investing is value investing and anything else is speculation but it would depend on definitions which vary.

I am not sure what your definition of DG investing it's such a loose term which has many different interpretations.

I consider myself a value investor and a dividend growth investor but I also index because it's just so easy compared to the other options. Being an average investor may be the best option for most people because they don't have the time, skill or talent for other options. You can't argue with an almost guaranteed average 6-8% long term return just for sticking your money  into a low cost total market security and letting it run. Combine that with the ability to withdraw 3-4 % a year without worrying about permanent capital loss and you've got the foundation for responsible financial planning with low fee's and overhead.

You also have to consider risk, I don't want to beat the market, I want to make a certain return with very little long term capital risk. To do this I only select securities in companies that I think will continue to rake in ever increasing earnings (and payout a percentage as dividends) throughout my lifetime and beyond. I see investing as essentially buying profit. I prefer being paid through dividends for many reasons but as mentioned one good reason is that there is less valuation risk because dividends equal fair value. Capital gains and stock buy-backs entail valuation risk. As someone noted companies often buy back stock when the company is priced too high thereby exchanging cash for securities that are overvalued compared to what investors could get elsewhere. If you discount, using your opportunity cost of capital, the cash flows you could get elsewhere and you find that you could get better returns investing the surplus your self then stock buybacks are sub optimal for you. On the other hand the inverse could be true, this creates a distribution of risk that isn't present if the surplus amounts are distributed as dividends (taxes aside).