Author Topic: 0% taxes with DGI  (Read 19483 times)

milesdividendmd

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Re: 0% taxes with DGI
« Reply #50 on: July 01, 2014, 02:03:06 PM »
Right. A dividend paying company can be a value company. In fact dividend paying companies have a tendency of being more on the value end of the spectrum than on the growth end.

I own lots of dividend paying companies in my value funds (and my broad stock market funds)

There is just vary little evidence that dividend stocks are less risky than non dividend paying stocks. They can depreciate every bit as fast as non dividend paying stocks.

The only argument I can see for preferring dividend payers to non dividend payers is essentially a behavioral one. Meaning you can just live off of the dividends without ever selling a stock, without thinking. In practice, however , this is identical to just pulling out a fixed percentage of your portfolio (more dollars when your portfolio is up than when it is down.).





milesdividendmd

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Re: 0% taxes with DGI
« Reply #51 on: July 01, 2014, 02:08:35 PM »
As to the valuation risk, dividends are not immune, there can be inflated dividends when a stock is overvalued, and every bit as much net asset value for the stock owner is lost in this instance, as in selling of an equivalent fraction of shares.

Plus, it is probably foolishness for an individual to believe he can price a security better than the market. It's not impossible, it's just very unlikely.



peterpatch

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Re: 0% taxes with DGI
« Reply #52 on: July 01, 2014, 02:21:39 PM »
Right. A dividend paying company can be a value company. In fact dividend paying companies have a tendency of being more on the value end of the spectrum than on the growth end.

I own lots of dividend paying companies in my value funds (and my broad stock market funds)

There is just vary little evidence that dividend stocks are less risky than non dividend paying stocks. They can depreciate every bit as fast as non dividend paying stocks.

The only argument I can see for preferring dividend payers to non dividend payers is essentially a behavioral one. Meaning you can just live off of the dividends without ever selling a stock, without thinking. In practice, however , this is identical to just pulling out a fixed percentage of your portfolio (more dollars when your portfolio is up than when it is down.).

I don't think anyone should invest in a stock only because of its dividend metrics (yield, growth etc.). That's just too risky and doesn't account for other important factors.

The problem with dividends is that if you look at all the companies that pay them  you're looking at the wrong thing. It's the companies that have paid them and raised them every year historically for at least 8 years that make up the first cut of companies I look at. After that I do a lot of filtering that has nothing to do with dividends.

kyleaaa

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Re: 0% taxes with DGI
« Reply #53 on: July 02, 2014, 10:26:15 AM »
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 with you, but none of that changes the fact that the end result for YOU, the investor, is identical. It just doesn't matter.

peterpatch

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Re: 0% taxes with DGI
« Reply #54 on: July 02, 2014, 11:28:23 AM »
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 with you, but none of that changes the fact that the end result for YOU, the investor, is identical. It just doesn't matter.

I think the cash in hand is the same, but what you are left with in stock asset value could be totally different. During the 30's there were tons of stocks that were selling for less then the cash (net of all debt) that the company had. You could essentially buy the whole company and empty the cash registers for a profit and still get the the rest of the business (buildings, land, plant , equipment etc.) for free. If I owned stock like that and it was paying a steady dividend I would have a better chance of waiting out the mis-pricing then if it paid no dividend at all. There probably aren't situations this extreme these days but I think you can find instances (2008-2009) where it would have been better to get a dividend (cash from company to owner) then sell the stock at firesale prices (cash from new owner to original owner).


kyleaaa

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Re: 0% taxes with DGI
« Reply #55 on: July 02, 2014, 01:27:53 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 with you, but none of that changes the fact that the end result for YOU, the investor, is identical. It just doesn't matter.

I think the cash in hand is the same, but what you are left with in stock asset value could be totally different. During the 30's there were tons of stocks that were selling for less then the cash (net of all debt) that the company had. You could essentially buy the whole company and empty the cash registers for a profit and still get the the rest of the business (buildings, land, plant , equipment etc.) for free. If I owned stock like that and it was paying a steady dividend I would have a better chance of waiting out the mis-pricing then if it paid no dividend at all. There probably aren't situations this extreme these days but I think you can find instances (2008-2009) where it would have been better to get a dividend (cash from company to owner) then sell the stock at firesale prices (cash from new owner to original owner).

Yeah, but that was in the 30s when markets weren't nearly as efficient as they are today. Even Ben Graham admitted int he 70s that his methods no longer worked and advised people to just buy what amounted to an index fund.

But no, there are no situations anywhere ever where it would be better to get a dividend than sell a stock at fire sale prices THAT IS KNOWABLE IN ADVANCE (which is really what you're claiming). Not in today's efficient markets.

Chuck

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Re: 0% taxes with DGI
« Reply #56 on: July 02, 2014, 02:31:37 PM »
The problem with owning a small number of specific positions and relying upon them to support you with dividend income really boils down to a lack of diversification. Just because six or eight companies have managed to shell out dough for 40-50 years doesn't mean they can continue to do so in the future.

Even though I personally have positions in JNJ, PG and others that I'm sure you'd support, I'm dumping them the second they go LTCG because the exposure isn't worth the regular dividends.

peterpatch

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Re: 0% taxes with DGI
« Reply #57 on: July 02, 2014, 05:09:32 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 with you, but none of that changes the fact that the end result for YOU, the investor, is identical. It just doesn't matter.

I think the cash in hand is the same, but what you are left with in stock asset value could be totally different. During the 30's there were tons of stocks that were selling for less then the cash (net of all debt) that the company had. You could essentially buy the whole company and empty the cash registers for a profit and still get the the rest of the business (buildings, land, plant , equipment etc.) for free. If I owned stock like that and it was paying a steady dividend I would have a better chance of waiting out the mis-pricing then if it paid no dividend at all. There probably aren't situations this extreme these days but I think you can find instances (2008-2009) where it would have been better to get a dividend (cash from company to owner) then sell the stock at firesale prices (cash from new owner to original owner).

Yeah, but that was in the 30s when markets weren't nearly as efficient as they are today. Even Ben Graham admitted int he 70s that his methods no longer worked and advised people to just buy what amounted to an index fund.

But no, there are no situations anywhere ever where it would be better to get a dividend than sell a stock at fire sale prices THAT IS KNOWABLE IN ADVANCE (which is really what you're claiming). Not in today's efficient markets.

I think this is boiling down to degree's of efficiency. My perspective is that the market is often efficient but sometimes suffers from human psychology and can vastly mis-price the underlying value of stocks. On the other hand other folks  think that the market is much more efficient and is rationally pricing all available information into the stock in a way that makes it impossible for anyone to achieve above market returns without extreme luck and/or skill. If the market is as efficient as you assert it is then you are right, however I don't think it is that efficient all the time. Also I don't see how someone couldn't see that stocks were on sale in the '08-'09 crash, it seemed pretty obvious to me that people were scared and running for the exits and were driving prices down to areas that were vastly below value, it was a good time for the long term investor with the capital and stomach to ride out storm.

milesdividendmd

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Re: 0% taxes with DGI
« Reply #58 on: July 02, 2014, 08:52:02 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 with you, but none of that changes the fact that the end result for YOU, the investor, is identical. It just doesn't matter.

I think the cash in hand is the same, but what you are left with in stock asset value could be totally different. During the 30's there were tons of stocks that were selling for less then the cash (net of all debt) that the company had. You could essentially buy the whole company and empty the cash registers for a profit and still get the the rest of the business (buildings, land, plant , equipment etc.) for free. If I owned stock like that and it was paying a steady dividend I would have a better chance of waiting out the mis-pricing then if it paid no dividend at all. There probably aren't situations this extreme these days but I think you can find instances (2008-2009) where it would have been better to get a dividend (cash from company to owner) then sell the stock at firesale prices (cash from new owner to original owner).

Yeah, but that was in the 30s when markets weren't nearly as efficient as they are today. Even Ben Graham admitted int he 70s that his methods no longer worked and advised people to just buy what amounted to an index fund.

But no, there are no situations anywhere ever where it would be better to get a dividend than sell a stock at fire sale prices THAT IS KNOWABLE IN ADVANCE (which is really what you're claiming). Not in today's efficient markets.

I think this is boiling down to degree's of efficiency. My perspective is that the market is often efficient but sometimes suffers from human psychology and can vastly mis-price the underlying value of stocks. On the other hand other folks  think that the market is much more efficient and is rationally pricing all available information into the stock in a way that makes it impossible for anyone to achieve above market returns without extreme luck and/or skill. If the market is as efficient as you assert it is then you are right, however I don't think it is that efficient all the time. Also I don't see how someone couldn't see that stocks were on sale in the '08-'09 crash, it seemed pretty obvious to me that people were scared and running for the exits and were driving prices down to areas that were vastly below value, it was a good time for the long term investor with the capital and stomach to ride out storm.

In retrospect, that was certainly true.

The question is, and assuming an investor was able to recognize that "stocks were on sale, " would he have been better off just dumping his cash into broad index funds or a slice and dice index portfolio tilted towards the small,  value, and momentum, factors?

Even the greatest value investor of all, Warren Buffet, has underperformed the S&P for the past 5 years.



peterpatch

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Re: 0% taxes with DGI
« Reply #59 on: July 03, 2014, 08:14:15 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 with you, but none of that changes the fact that the end result for YOU, the investor, is identical. It just doesn't matter.

I think the cash in hand is the same, but what you are left with in stock asset value could be totally different. During the 30's there were tons of stocks that were selling for less then the cash (net of all debt) that the company had. You could essentially buy the whole company and empty the cash registers for a profit and still get the the rest of the business (buildings, land, plant , equipment etc.) for free. If I owned stock like that and it was paying a steady dividend I would have a better chance of waiting out the mis-pricing then if it paid no dividend at all. There probably aren't situations this extreme these days but I think you can find instances (2008-2009) where it would have been better to get a dividend (cash from company to owner) then sell the stock at firesale prices (cash from new owner to original owner).

Yeah, but that was in the 30s when markets weren't nearly as efficient as they are today. Even Ben Graham admitted int he 70s that his methods no longer worked and advised people to just buy what amounted to an index fund.

But no, there are no situations anywhere ever where it would be better to get a dividend than sell a stock at fire sale prices THAT IS KNOWABLE IN ADVANCE (which is really what you're claiming). Not in today's efficient markets.

I think this is boiling down to degree's of efficiency. My perspective is that the market is often efficient but sometimes suffers from human psychology and can vastly mis-price the underlying value of stocks. On the other hand other folks  think that the market is much more efficient and is rationally pricing all available information into the stock in a way that makes it impossible for anyone to achieve above market returns without extreme luck and/or skill. If the market is as efficient as you assert it is then you are right, however I don't think it is that efficient all the time. Also I don't see how someone couldn't see that stocks were on sale in the '08-'09 crash, it seemed pretty obvious to me that people were scared and running for the exits and were driving prices down to areas that were vastly below value, it was a good time for the long term investor with the capital and stomach to ride out storm.

In retrospect, that was certainly true.

The question is, and assuming an investor was able to recognize that "stocks were on sale, " would he have been better off just dumping his cash into broad index funds or a slice and dice index portfolio tilted towards the small,  value, and momentum, factors?

Even the greatest value investor of all, Warren Buffet, has underperformed the S&P for the past 5 years.

That's true about the index fund. If people had kept dollar cost averaging into the weakness they'd be much better off today then if they didn't. I think a lot of people probably got scared and backed out of dollar cost averaging to save capital. I know a lot of companies suspended stock matching programs around then, what a slap in the face. They'll support you when the prices go higher and higher but as soon as they go down a lot they pull the plug reducing your future returns.

I agree with small and value factors being ways to get a little extra return. Small stocks are under followed by (or sometimes not followed at all) by analysts reducing the information available to price into the stock. This can create inefficiencies. Value I think we have covered.  I just don't get momentum. I don't see how momentum is legit as a theory of getting returns from the stock market. Why can't this factor just be explained by something else, could this not be a case of co-relation being confused with causation? What is the plausible reason for the momentum co-relation that allows us to determine that the co-relation is indicative of causality?

milesdividendmd

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Re: 0% taxes with DGI
« Reply #60 on: July 03, 2014, 08:40:18 PM »
Momentum is simply the observation that stocks that have recently done well are more likely to do well in the near term. (In addition to the converse.)

There are many explanations including the behavioral (people have a recency bias and are less likely to sell and more likely to buy recent winners, ) to structural factors (how institutional money flows in and out of funds.)

But then the value factor also has multiple explanations (bias towards "good" companies, and the actual  riskiness of "bad companies."

What is important is that these factors have been shown to increase returns in all geographic and market types.

The future?  Who knows, but if past is prologue, the power of these factors is incontrovertible.

Incidentally, one of the reasons I love the momentum play is because I tilt heavily towards value in my own portfolio. Since momentum tends to select growth stocks , I get an excellent diversification benefit with both higher expected returns from both the individual components of my portfolio and the synergy of combining poorly correlated asset classes.