The Money Mustache Community

Learning, Sharing, and Teaching => Investor Alley => Topic started by: Retired To Win on August 09, 2014, 11:15:09 AM

Title: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 09, 2014, 11:15:09 AM
For 20 years or more, I invested pretty much the same way most other people do. I put my retirement savings into a basket of mutual funds and hoped the value of that basket would grow. But every price downturn would shake my confidence in that hope of growth. I would look at the drop in market value of a fund -- or of my entire portfolio -- and fret, worry, stress. And if the price drop was deep enough or continuous enough I would finally freak out and sell the position at a loss.

Why? Because my perception of the value of my mutual fund shares was solely based on their market price. Because I saw my retirement future as tied to and dependent on the market price of those shares. Because I did not want to lose any more of that retirement future to stock market drops.

Boy, that really did not work for me. My fear of loss was too powerful a force. Fighting it involved daily stress, doubt and anxiety. And each time I gave into it by selling "to stop the loss" I would be hit with feelings of failure. And if the share prices recovered some time after I had sold, I would add to that feeling additional feelings of guilt, recrimination... and more failure. I felt completely out of control of my retirement future.

Thank heavens I've found a different way of investing that has really worked for me. A way that has put me much more in control. That way is to only invest in carefully screened individual high-yielding dividend stocks.

This investing mindset works for me. But I am not a financial advisor and I am not saying this will work for you. So, what does work for you? What lets you sleep at night?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: milesdividendmd on August 09, 2014, 12:48:19 PM

A dividend strategy would make me more nervous than a broad market strategy, particularly now.

Why? Because dividend stocks of historically been cheap relative to average Stocks. Now this is not the case because everyone is reaching for yield in the current low interest-rate environment..

The current overvaluation of dividend stocks is well captured in the following chart.

(http://img.tapatalk.com/d/14/08/10/uvejydun.jpg)

To me this is very suggestive that dividend stocks will underperform the broad market going forward. (Though admittedly no one knows the future.)

I just don't understand the thinking that somehow dividend stocks are safer. They are equities just like other equities and their return will be in proportion to the risk accepted by the shareholders and inversely proportional to their current valuation.

Stocks are  volatile and risky. This is why they have higher expected returns relative to Savings bonds. Dividend stocks are no exception to this rule.

That being said, if psychologically this makes it easier for you to hold equities, it is certainly possible to do well with a dividend strategy as long as you stick with your approach  through thick and thin.

I wish you only luck.


Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 09, 2014, 01:55:41 PM

[NINJA EDIT for any newbies finding this thread]

For any newbies finding this thread, Retired To Win holds 30% cash, and has fixed income which covers living expenses.

Source:

------------------------------
I earlier retired at 53, 14 years ago.  My allocation has not changed much.  My investments are 100% stocks.  I also hold cash for various purposes that amounts to 30% of what I have in stocks.  I'm also financially backstopped by fixed income which by itself covers all my basic living expenses. So you probably don't necessarily want to go by what I do unless your circumstances are similar.
------------------------------

http://forum.mrmoneymustache.com/investor-alley/asset-allocation-in-fire/msg626435/#msg626435 (http://forum.mrmoneymustache.com/investor-alley/asset-allocation-in-fire/msg626435/#msg626435)

So don't interpret the "Anyone Else Only Buying Dividend Stocks?" thread title as an indication that his/her net worth/life savings are in 100% dividend stocks.  Usually when people discuss asset allocation, things like a big holding of cash are included.  You can include fixed income too, but I'd guess that most people don't.  It's important to look at all the factors when determining how much risk you should take.  When you look at the full picture here, including the fact that Retired To Win owns a home without a mortgage, he/she has an asset allocation probably closer to 50/50 stocks/cash & fixed-income.

Since the cash & fixed-income side is less risky than even bonds, if you were to try and replicate this with a standard stock/bond portfolio, it would probably be something like 20/80 stocks/bonds.  In other words, "only buying dividend stocks" is much less risky for Retired To Win than it would be for the typical person on this website trying to retire early.  In truth, it doesn't matter what Retired To Win invests in, he/she is already set for life.

[/NINJA EDIT]


It sounds like your previous asset allocation was too risky for your personal risk tolerance.  To solve this, you have to reduce your risk.  Investing in "carefully screened individual high-yielding dividend stocks" does not reduce your risk.  It increases your risk.

The following page explains pretty well how your strategy is subjecting your portfolio to unsystematic risk, or uncompensated risk.  In other words, the additional risk you are taking, is not compensated with additional gains:

http://www.bogleheads.org/wiki/Risk_and_return:_an_introduction#Diversification

To reduce your risk, you can adjust your asset allocation towards more bond index funds, and international stock index funds.  I recommend reading the following wiki on Asset Allocation:

http://www.bogleheads.org/wiki/Asset_allocation

The Vanguard portfolio allocation models page also highlights this well:

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

Here are some real-life examples, If you funded these funds with $10,000 ten years ago in 2004, here's how they would have handled the 2008 crash:

100% Stocks - VTSAX
https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT#tab=1

(http://i.imgur.com/kEq8IzR.png)

2007 Peak: $15,359
2008 Low: $7,550
Loss: 50.8%

60% Stocks, 40% bonds - VBIAX
https://personal.vanguard.com/us/funds/snapshot?FundId=0502&FundIntExt=INT#tab=1

2007 Peak: $13,768
2008 Low: $9,300
Loss: 32.4%

80% Bonds, 20% Stocks - VASIX
https://personal.vanguard.com/us/funds/snapshot?FundId=0723&FundIntExt=INT#tab=1

2007 Peak: $12,500
2008 Low: $10,562
Loss:  15.5%

100% Bonds - VBTLX
https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT

(http://i.imgur.com/DcDY8Lv.png)

2007 Peak: $12,063
2008 Low: $11,587
Loss: 3.9%

Note, the 100% bond portfolio kept rising throughout the whole crash, besides a small blip down.  It barely moved.  We can see here, that stocks have higher gains, but are more risky (when measured in terms of volatility).  We also see that bonds have less gains, but are also less risky.

Now let's compare this to the Dividend Aristocrats fund, a fund which is comprised of the 50 highest dividend yielding constituents of the stocks of the S&P Composite 1500 Index, that have increased dividends every year for at least 25 consecutive years:

100% Stocks, high yield dividends - SDY
http://etfs.morningstar.com/quote?t=SDY

2007 Peak: $12,053
2008 Low: $5,602
Loss: 53.5%

By going this route, you have the worst of both worlds.  Lower gains than bonds, and higher risk than stocks.  Note, this fund is likely more diversified than your "carefully screened individual high-yielding dividend stocks", so you can expect your risk to be even higher than this.

In short, this move won't help you sleep at night during a crash.  Move to a portfolio with more bonds, and maybe you'll even be happy with a crash comes, as you'll have money sitting around (in bonds) just waiting for a crash, to buy stocks when they're on sale (rebalancing)!
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: AccidentalMiser on August 09, 2014, 02:13:41 PM
To answer your question, yes, I only buy dividend stocks now.

Solid companies with at least 3% yield (mostly) and a history of raising dividends over years.  When a stock takes a big hit for some reason, I buy about $3k worth.

There's a little more my strategy, but not much.  I'm looking to build an income machine that doesn't require me to collect rent checks and fix toilets.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: wtjbatman on August 09, 2014, 07:17:02 PM
Not exclusively, my 401k options keep me investing a significant percentage of my savings into index funds. But my IRA's are all dividend growth stocks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: AssetGrinder on August 09, 2014, 11:42:31 PM
I own solely dividend paying stocks. over 50 of em. Works for me.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: robotclown on August 10, 2014, 12:04:55 AM
If I'm reading that chart right, it's saying dividend stocks are still undervalued, provided they are also buying back shares.  The article it comes from claims that the highest yielding stocks are pretty overvalued, mostly the utilities.  I agree with that, but because utilities don't have much in the way of growth.

My portfolio is all dividend stocks now, and most of them from the dividend champions/contenders/etc lists.  Companies that can afford to raise dividends for decades on end have to be well run and profitable.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: rmendpara on August 10, 2014, 01:35:16 AM
Far from only dividend stocks, but I do expect it to be a significant portion of my retirement income.

Creating a solid passive income channel is a huge help to meeting your retirement needs.

Perhaps set a target level of dividend income as a "floor" of sorts for your future retirement. Perhaps your housing costs are $1.5k/mo, and you would like to cover around 2/3 of that (or ~$12k/yr) through dividends.

At a blended rate of 3.5%, that would be ~$342k portfolio. Perhaps the other $6k (500/mo) from fixed income interest?

The remainder can then come from rental/other investment income, and ensure that you still have some exposure to growth.

Setting targets and thinking about numbers is better than letting fear or emotions make your investment planning complex.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 10, 2014, 05:43:14 AM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).

How can anyone count on a company's stock price appreciating?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 10, 2014, 10:35:22 AM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).

How can anyone count on a company's stock price appreciating?

Ah, the old Dividend vs Total Return argument.  The evidence on this has been presented many times, and your side lost.  The simple fact that you think you can count on a dividend, but not count on appreciation, indicates a misunderstanding of how the market values a company.  Thanks to the empirical research, you now know how much this choice costs you in terms of reduced wealth. I don't quite get how someone could willingly make such a choice, but I wish you luck!
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: wtjbatman on August 10, 2014, 07:23:52 PM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).

How can anyone count on a company's stock price appreciating?

Ah, the old Dividend vs Total Return argument.  The evidence on this has been presented many times, and your side lost.  The simple fact that you think you can count on a dividend, but not count on appreciation, indicates a misunderstanding of how the market values a company.  Thanks to the empirical research, you now know how much this choice costs you in terms of reduced wealth. I don't quite get how someone could willingly make such a choice, but I wish you luck!

Wrong.

With dividends reinvested, a strategy focusing on dividend growth companies actually has a higher total return than even the S&P 500, over the last, oh, 50 years or so. Research also shows that dividend paying companies perform better than companies that do not pay a dividend. Likely because the majority of companies paying dividends are run well enough to be able to afford to return value to shareholders.

Nice try though :)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 10, 2014, 07:34:51 PM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).

How can anyone count on a company's stock price appreciating?

Ah, the old Dividend vs Total Return argument.  The evidence on this has been presented many times, and your side lost.  The simple fact that you think you can count on a dividend, but not count on appreciation, indicates a misunderstanding of how the market values a company.  Thanks to the empirical research, you now know how much this choice costs you in terms of reduced wealth. I don't quite get how someone could willingly make such a choice, but I wish you luck!

Wrong.

With dividends reinvested, a strategy focusing on dividend growth companies actually has a higher total return than even the S&P 500, over the last, oh, 50 years or so. Research also shows that dividend paying companies perform better than companies that do not pay a dividend. Likely because the majority of companies paying dividends are run well enough to be able to afford to return value to shareholders.

Nice try though :)

Source?

Logic dictates that if this were shown to be true, any advantage would immediately evaporate, as prices of those stocks would rise to reflect their new expected return.  If you have a source showing that these dividend stocks are immune to this phenomenon, please present it.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 10, 2014, 08:10:49 PM
The distinction has always escaped me - why should I care if I get "paid" in cash, or in increased value of the stock (say, by the company investing that money in a new factory, or whatever)? I want the company, which I own a part of, to do the best they can with excess profits - if that means investing in something to increase capacity/profits going forward (and hence no/low dividends), awesome. If there's no good opportunity out there then distributing the money to shareholders is fine too.

I have also read (but have no sources to back it up) that the total yield is pretty much the same for both high dividend and low/no dividend stocks. I'd love to see sources for research either way.

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Left on August 10, 2014, 08:16:45 PM
while i'm not an expert at investing... fairly new actually but from what I can tell, how are dividend stocks any better than holding bonds? I mean, if you compare vanguard's bond index to say at&t, you get about 3% vs 5%, but you also get more risk in one company too...

I mean, I don't see why people would go for dividend only, doesn't that share the same purpose as having bonds?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 10, 2014, 08:34:17 PM
The distinction has always escaped me - why should I care if I get "paid" in cash, or in increased value of the stock (say, by the company investing that money in a new factory, or whatever)? I want the company, which I own a part of, to do the best they can with excess profits - if that means investing in something to increase capacity/profits going forward (and hence no/low dividends), awesome. If there's no good opportunity out there then distributing the money to shareholders is fine too.

I have also read (but have no sources to back it up) that the total yield is pretty much the same for both high dividend and low/no dividend stocks. I'd love to see sources for research either way.

-W

There's lots of data to suggest that companies almost universally buy back stock at inopportune times—when their stock is expensive—actually destroying shareholder value.  So from that point of view, dividends are much better than buybacks.
http://online.wsj.com/news/articles/SB10001424052970203824904577213891035614390
http://www.ft.com/cms/s/0/da77b98e-c987-11e0-9eb8-00144feabdc0.html#axzz36C2qtoti
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 10, 2014, 09:13:51 PM
The distinction has always escaped me - why should I care if I get "paid" in cash, or in increased value of the stock (say, by the company investing that money in a new factory, or whatever)? I want the company, which I own a part of, to do the best they can with excess profits - if that means investing in something to increase capacity/profits going forward (and hence no/low dividends), awesome. If there's no good opportunity out there then distributing the money to shareholders is fine too.

I have also read (but have no sources to back it up) that the total yield is pretty much the same for both high dividend and low/no dividend stocks. I'd love to see sources for research either way.

-W

Depending on your situation, you should care very much if you're paid in cash, or increased value of the stock.  While mathematically, there is no monetary difference to your portfolio if a company decided to payout a dividend vs. keep/reinvest the cash, the forced distribution is a taxable event.  Depending on your tax bracket, a 2% dividend can be cut by 0.6 down to 1.4%.  There is also a cost to reinvesting the dividend.  The forced distribution is mathematically no different than selling stock, but you are forced to take it, whether you need it or not, which introduces it's own costs.  This is not optimal in all situations, and is best placed in a tax deferred account like an IRA or 401k.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 10, 2014, 09:15:42 PM
while i'm not an expert at investing... fairly new actually but from what I can tell, how are dividend stocks any better than holding bonds? I mean, if you compare vanguard's bond index to say at&t, you get about 3% vs 5%, but you also get more risk in one company too...

I mean, I don't see why people would go for dividend only, doesn't that share the same purpose as having bonds?

You are correct, high yield dividend stocks are not a replacement for bonds, and should not be used as such.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Left on August 10, 2014, 09:50:46 PM
@Dodge, I meant it the other way around, why aren't bonds a replacement for high yield dividend stocks? I mean unless you wanted the more risk for 1-2% more yield, but that can't be the entire reason is it? I'm thinking I may have missed something obvious but I can't figure it out. They are both payouts for you to live on, both around the same % payout too. But one is considered "safer" so why not?

And on the same point, wouldn't vanguard's vnq and vpu, real estate/utilities or royalty trusts also payout something similar to dividend stocks? Or are all of these (including bonds) considered dividend stocks as well?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 10, 2014, 10:17:17 PM
@Dodge, I meant it the other way around, why aren't bonds a replacement for high yield dividend stocks? I mean unless you wanted the more risk for 1-2% more yield, but that can't be the entire reason is it? I'm thinking I may have missed something obvious but I can't figure it out. They are both payouts for you to live on, both around the same % payout too. But one is considered "safer" so why not?

And on the same point, wouldn't vanguard's vnq and vpu, real estate/utilities or royalty trusts also payout something similar to dividend stocks? Or are all of these (including bonds) considered dividend stocks as well?

I don't think you missed anything obvious.  I'm sure they have their reasons for going dividend stocks instead of bonds for that portion of their portfolio.  Let's see what they say :)

Vanguard's VNQ, and VPU are both stocks.  As you can see here:

https://personal.vanguard.com/us/funds/snapshot?FundId=0960&FundIntExt=INT#tab=0
(https://www.evernote.com/shard/s222/sh/444029bb-8b73-4a47-9345-f434c4b718a8/14ecdc490758960c7038bb75a1ff4c7d/deep/0/Vanguard---Utilities-ETF---Overview.png)

Bonds are not considered dividend stocks.  Bonds are a separate asset class:

http://www.bogleheads.org/wiki/Bond_basics
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: robotclown on August 10, 2014, 11:35:30 PM
while i'm not an expert at investing... fairly new actually but from what I can tell, how are dividend stocks any better than holding bonds? I mean, if you compare vanguard's bond index to say at&t, you get about 3% vs 5%, but you also get more risk in one company too...

I mean, I don't see why people would go for dividend only, doesn't that share the same purpose as having bonds?

Bonds pay a fixed dollar amount for their duration.  Dividend stocks (the good ones, anyway) raise their payouts every year, hopefully at a rate higher than inflation.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: rmendpara on August 10, 2014, 11:53:17 PM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).

How can anyone count on a company's stock price appreciating?

Ah, the old Dividend vs Total Return argument.  The evidence on this has been presented many times, and your side lost.  The simple fact that you think you can count on a dividend, but not count on appreciation, indicates a misunderstanding of how the market values a company.  Thanks to the empirical research, you now know how much this choice costs you in terms of reduced wealth. I don't quite get how someone could willingly make such a choice, but I wish you luck!

Wrong.

With dividends reinvested, a strategy focusing on dividend growth companies actually has a higher total return than even the S&P 500, over the last, oh, 50 years or so. Research also shows that dividend paying companies perform better than companies that do not pay a dividend. Likely because the majority of companies paying dividends are run well enough to be able to afford to return value to shareholders.

Nice try though :)

Source?

Logic dictates that if this were shown to be true, any advantage would immediately evaporate, as prices of those stocks would rise to reflect their new expected return.  If you have a source showing that these dividend stocks are immune to this phenomenon, please present it.

Not quite. Markets are not efficient. Agree to disagree?

Investors price in risk based on their tolerance for various factors. Your opinion assumes that an investor is indifferent between receiving capital regularly vs. capital being reinvested into the business.

The premise between dividends and capital appreciation is that dividends are "less risky" than capital appreciation (or selling at some future date).

A dollar tomorrow is less valuable than a dollar today... all else equal. The difference is perception of risk of the dollar tomorrow/today, and how an investor prices that in... as well as if the dollar tomorrow may turn into $2 or $3.

Some may appreciate more, while others appreciate less, but unless you are a terrible stock picker, or don't diversify enough, the return shouldn't be too far off.

Of course, any pure strategy has its faults. For small(er) investment balances, dividends are a tax/trading fee efficient way to get some return from your investments vs. selling tranches.

I will admit that from a total return perspective, index investing is likely the best strategy.

Most people don't outperform on a risk:return basis.
Title: Anyone Else Only Buying Dividend Stocks?
Post by: milesdividendmd on August 11, 2014, 12:20:45 AM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).

How can anyone count on a company's stock price appreciating?

Ah, the old Dividend vs Total Return argument.  The evidence on this has been presented many times, and your side lost.  The simple fact that you think you can count on a dividend, but not count on appreciation, indicates a misunderstanding of how the market values a company.  Thanks to the empirical research, you now know how much this choice costs you in terms of reduced wealth. I don't quite get how someone could willingly make such a choice, but I wish you luck!

Wrong.

With dividends reinvested, a strategy focusing on dividend growth companies actually has a higher total return than even the S&P 500, over the last, oh, 50 years or so. Research also shows that dividend paying companies perform better than companies that do not pay a dividend. Likely because the majority of companies paying dividends are run well enough to be able to afford to return value to shareholders.

Nice try though :)

I believe that you're missing the obvious point here.

Dividend stocks have outperformed the S&P 500i because of their exposure to the value factor.

As demonstrated in the above chart dividend stocks are now being sold at a premium to the broad stock market. This suggests that they will underperform the broad stock market going forward (at least until they have dropped in price per-share again.)

Here's a question for you: if dividend yield was a predictor for increased future returns aside from the stocks underlying exposure to the value factor, wouldn't Fama and French have described dividend yield as one of the factors predicting increased returns along with value, size, and momentum?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: AssetGrinder on August 11, 2014, 01:11:09 AM
People often overlook dividend advantages over capital gains as they are taxed more favorably which works out very well for many over capital gains non dividend stocks. Everybody situation and goals are different. For many they choose a side and bash the other side like republican/democrats, pc/mac . People have to stop being elitist dicks and embrace all sides to investing. What works for you may not work for others so chill out people.

I am invested in dividend stocks primarily but I am not opposed to
index investing
Reits
preferred stock
bonds

I am just not a dick about it and bash other forms of investments. There is enough room for all investors to make money.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 11, 2014, 05:31:42 AM
To answer your question, yes, I only buy dividend stocks now.

Solid companies with at least 3% yield (mostly) and a history of raising dividends over years.  When a stock takes a big hit for some reason, I buy about $3k worth.

There's a little more to my strategy, but not much.  I'm looking to build an income machine that doesn't require me to collect rent checks and fix toilets.


Well put.  An "income machine": that's how I see my stock portoflio as well.

I have built my stock portfolio to provide me income based on my stock dividends. I have NOT built my portfolio on the expectation of following the standard withdrawal strategy of cashing out positions and spending down the portfolio's principal. Some day in the future I may very well adopt a cashing-out plan. But that will be done either as an end-game or in response to IRS required distribution requirements. I will not be cashing out positions just to cover my living expenses.

Are you -- or are you planning to -- cash out your positions just to cover living expenses?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Scandium on August 11, 2014, 07:35:01 AM
People often overlook dividend advantages over capital gains as they are taxed more favorably which works out very well for many over capital gains non dividend stocks. Everybody situation and goals are different. For many they choose a side and bash the other side like republican/democrats, pc/mac . People have to stop being elitist dicks and embrace all sides to investing. What works for you may not work for others so chill out people.

How? I don't understand. Both qualified dividends and capital gains (holding 1 year+) are taxed at 15% (in the US). If anything dividend is worse tax-wise since they are taxed at 15% every year, while capital gains are only taxes when I cash out. And for early retirees you would likely take those capital gains when you're in a lower tax bracket and pay no capital gains tax at all! Paying 15% every year vs zero: very easy math IMO. On top of the decreased diversification, increase risk and lower return of dividend stocks I really see no reason to bother.

And I don't see any bashing going on, somebody asked a question and people are pointing out focusing on dividend stocks is not optimal. That's a fact, not bashing. Assuming we all want more money, not less this isn't really a matter of opinion or "what works for you". Dividend stocks underperform total return (with more risk) and results in less money. That's a fact. If you still want to do it; fine. As long as people are aware of that. This is data, not opinion.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 11, 2014, 07:41:19 AM
Companies prefer to buy back stock these days vs paying dividends because of the tax advantages. It's getting tougher to find companies paying dividends, and even the ones who do, still end up buying back shares. The 'shareholder' yield strategies are much better than dividend-only strats, because they integrate looking at the dividend as well as share buybacks and debt paydown.

The comment about high dividend stocks being priced higher than the rest of the market is valid. However, I often wonder if we are in a secular trend with the baby boomers retiring and looking for yield. The yield chase may be able to continue for a very long time, and become the next bubble. We'll see.

In the end though, the most important thing in finding a good dividend paying company is to figure out IF IT CAN KEEP INCREASING DIVIDENDS IN THE FUTURE. If it can't continue to grow it's earnings, eventually it won't be able to grow dividends, or will even end up cutting them. You HAVE to be able to determine where future growth is going to come from, to make it a sustainable strat.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Garnacerous on August 11, 2014, 08:03:16 AM
As demonstrated in the above chart dividend stocks are now being sold at a premium to the broad stock market. This suggests that they will underperform the broad stock market going forward (at least until they have dropped in price per-share again.)

I agree with this line completely. The pps for the dividend market as a whole has been eating up any yield advantages it had before. I plan on increasing my stake in dividends at two points: when the prices become a little less highly valued, and when I finally retire and rely on an income without necessarily reducing the size of my portfolio.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: frugalnacho on August 11, 2014, 09:40:11 AM
I'm with walt and scandium, I don't see much of a difference.  I get the tax implications, although they don't seem like a big consideration for me.  It seems like the dividend side is saying dividends are superior, and the opposing side is saying there is no free lunch. 

What does it matter if you get a dividend check or you sell a small portion of your portfolio to get your money?  If dividend investing is so superior, won't the market balance that out?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 11, 2014, 01:41:11 PM
I'm with walt and scandium, I don't see much of a difference.  I get the tax implications, although they don't seem like a big consideration for me.  It seems like the dividend side is saying dividends are superior, and the opposing side is saying there is no free lunch. 

What does it matter if you get a dividend check or you sell a small portion of your portfolio to get your money?  If dividend investing is so superior, won't the market balance that out?

It's really not about the dividends. It's about companies that pay dividends are usually better off than companies that don't. It's about profitability, earnings, wide moats, value & quality etc etc. It's kind of hard for a massive fraud to happen in a company that pays regular dividends. Cash doesn't usually lie.

If you are able to identify quality companies - and likewise avoid ones that are poor, you should do well.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Scandium on August 11, 2014, 03:50:33 PM
I'm with walt and scandium, I don't see much of a difference.  I get the tax implications, although they don't seem like a big consideration for me.  It seems like the dividend side is saying dividends are superior, and the opposing side is saying there is no free lunch. 

What does it matter if you get a dividend check or you sell a small portion of your portfolio to get your money?  If dividend investing is so superior, won't the market balance that out?

It's really not about the dividends. It's about companies that pay dividends are usually better off than companies that don't. It's about profitability, earnings, wide moats, value & quality etc etc. It's kind of hard for a massive fraud to happen in a company that pays regular dividends. Cash doesn't usually lie.

If you are able to identify quality companies - and likewise avoid ones that are poor, you should do well.

This is absolutely correct! And since I (or you or anybody else) can't reliably do this it's best to just buy the index. Thanks for making my point for me!

And I see the fraud point brought up a lot, but I'm not really concerned about widespread fraud in the 3000+ companies I own in the US index. Not on a scale that I would notice at least.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 11, 2014, 03:59:23 PM
Not gonna disagree that most should index, but not everyone sucks at picking stocks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: AssetGrinder on August 11, 2014, 06:09:34 PM
People often overlook dividend advantages over capital gains as they are taxed more favorably which works out very well for many over capital gains non dividend stocks. Everybody situation and goals are different. For many they choose a side and bash the other side like republican/democrats, pc/mac . People have to stop being elitist dicks and embrace all sides to investing. What works for you may not work for others so chill out people.

How? I don't understand. Both qualified dividends and capital gains (holding 1 year+) are taxed at 15% (in the US). If anything dividend is worse tax-wise since they are taxed at 15% every year, while capital gains are only taxes when I cash out. And for early retirees you would likely take those capital gains when you're in a lower tax bracket and pay no capital gains tax at all! Paying 15% every year vs zero: very easy math IMO. On top of the decreased diversification, increase risk and lower return of dividend stocks I really see no reason to bother.

And I don't see any bashing going on, somebody asked a question and people are pointing out focusing on dividend stocks is not optimal. That's a fact, not bashing. Assuming we all want more money, not less this isn't really a matter of opinion or "what works for you". Dividend stocks underperform total return (with more risk) and results in less money. That's a fact. If you still want to do it; fine. As long as people are aware of that. This is data, not opinion.

Like I said before everyone situation is different. Canadian dividends are taxed at a lower rate than capital gains in Canada. This is data and not opinion. Also dont get me started on the retirees as there are some clear holes your argument.

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: TreeTired on August 11, 2014, 06:28:02 PM
Quote
That way is to only invest in carefully screened individual high-yielding dividend stocks.

Did I miss it,  or did not one person ask what his definition of "high-yielding"  was?   There is a big difference between a high quality growing company that has a dividend yielding 3% that has increased its dividend for 25 years straight,  vs a company with a nominal 10% yield that is achieved by paying a dividend greater than current earnings.

I started focusing on dividend stocks in 2009 when short term treasury yields became ridiculously low.   I have some large capital gains in stocks that I originally bought for the dividend,   like COP.    I also have some high yielders with large capital losses like NLY,  and some high yielders that have done well.  For me, a high yield dividend stock is > 6% and could be less than 6% if it is not a utility or telecom.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 11, 2014, 09:02:58 PM
For the sake of anyone new to investing and considering a dividend strategy after seeing this thread, here's one of Vanguard's papers on the topic:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors (https://personal.vanguard.com/pdf/s557.pdf)

Some highlights:

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

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

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

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

This graph is particularly interesting:

(http://i.imgur.com/XolyHHT.png)


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

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

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

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

Again to the new investors, I recommend leaving emotions out of your portfolio.  As said earlier, thanks to the research, you now know how much this choice costs you in terms of reduced wealth.  The choice is yours.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Left on August 11, 2014, 10:26:53 PM
@Dodge, but using that example, you have less shares each year? I mean, if the share grew from $15 to $30, shouldn't you want to only about half or $7 for income use while reinvesting the other half? I'm failing to see how selling shares in this way is smart since other time you'll keep selling and end up with zero shares? I know I'm incorrect but I don't see how selling shares this way can be sustainable? I just need to wrap my head around selling shares doesn't somehow deplete your shares? If it goes up $X, and you sell Y shares to get Z money, when in this process do you get around to buying more shares? Because I'd feel a lot more comfortable owning 10000 shares worth $10 than 1 share of $100000
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 11, 2014, 10:47:45 PM
If the growth in the price of the stock is faster than your withdrawal rate, you can sell shares below that rate forever and you're fine. It's easy to prove that to yourself with a spreadsheet.

I guess you could come up with some scenario where you end up with just one share worth a trillion dollars and then have to sell it or go hungry but in real life that's not going to happen.

The point is that if your profits are generated via cash payments (dividends) your tax hit is mandatory/bigger (in the US) and you make less money on your investment, assuming you want a steady income stream from your stock holdings.

Great article from Vanguard, as usual.

-W

@Dodge, but using that example, you have less shares each year? I mean, if the share grew from $15 to $30, shouldn't you want to only about half or $7 for income use while reinvesting the other half? I'm failing to see how selling shares in this way is smart since other time you'll keep selling and end up with zero shares? I know I'm incorrect but I don't see how selling shares this way can be sustainable? I just need to wrap my head around selling shares doesn't somehow deplete your shares? If it goes up $X, and you sell Y shares to get Z money, when in this process do you get around to buying more shares? Because I'd feel a lot more comfortable owning 10000 shares worth $10 than 1 share of $100000
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: milesdividendmd on August 12, 2014, 12:29:09 AM
Not gonna disagree that most should index, but not everyone sucks at picking stocks.

I don't disagree that  a small minority of investors are good stock pickers either. Warren Buffett, Mohnesh Pabrai, David Tepper, all very talented. That being said, looking at these exceptions and concluding that it is possible for you to be a good stock picker seems quite analogous to looking at LeBron James and thinking that it is possible that you could be a great NBA basketball player.

It's theoretically possible but vanishingly unlikely. Particularly if stockpicking is not your full time day job.

The  main point here is that This is a separate question from the wisdom of dividend growth investing. To say that dividend investing could be a good strategy if you're exceptionally good at picking stocks is to say that it is exceedingly unlikely that it is a good strategy for most individual investors.

In Investing it is generally more profitable to think probabilistically (like an actuary) rather than magically (like a fortune teller.)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 12, 2014, 05:10:49 AM
... Again to the new investors, I recommend leaving emotions out of your portfolio...

That is way easier said than done.  There is a whole subset of psychology termed behavioral finance that studies how our deepset and ingrained fight-or-flee INSTINCT wrecks havoc with the best laid anti-emotion (asset allocation) plans.

My approach totally solves that problem for me by keeping me focused on the dividend.

In my mind, the value of a stock is in its dividend, not its market price. So now I don't freak out when the market price of any of my stocks drops. As long as I can determine that the dividend (which ranges from 6% up to 10% plus) will continue to be paid, I do not concern myself. The dividend is my mental defense line against stress and anxiety. Against pulling the sell trigger based on nothing but herd-driven market panic.

I just keep collecting those high dividends.

This investing mindset works for me. But as I said before I am not a financial advisor and I am not saying this will work for you. So, has an asset allocation (or some other) strategy kept you from pulling the sell trigger on sudden or deep price drops?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: matchewed on August 12, 2014, 05:29:10 AM
... Again to the new investors, I recommend leaving emotions out of your portfolio...

That is way easier said than done.  There is a whole subset of psychology termed behavioral finance that studies how our deepset and ingrained fight-or-flee INSTINCT wrecks havoc with the best laid anti-emotion (asset allocation) plans.

My approach totally solves that problem for me by keeping me focused on the dividend.

In my mind, the value of a stock is in its dividend, not its market price. So now I don't freak out when the market price of any of my stocks drops. As long as I can determine that the dividend (which ranges from 6% up to 10% plus) will continue to be paid, I do not concern myself. The dividend is my mental defense line against stress and anxiety. Against pulling the sell trigger based on nothing but herd-driven market panic.

I just keep collecting those high dividends.

This investing mindset works for me. But as I said before I am not a financial advisor and I am not saying this will work for you. So, has an asset allocation (or some other) strategy kept you from pulling the sell trigger on sudden or deep price drops?

But now you just ignore all the factual things that aren't emotionally based that were just said to justify your strategy. In effect you're using an emotional bias to justify your strategy by saying it is not an emotional bias. By showing that appreciation and dividends are no different mathematically and for someone to step in and say therefore dividends are superior because I like them shows that you're not actually fortifying yourself mentally in a factual manner but an emotional one.

Again YMMV, your strategy will be your strategy, as long as you understand your risks and accept them that is fine. But don't paint it as some special flower for your own justification. There is nothing magical or special about dividends.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Scandium on August 12, 2014, 07:31:09 AM

In my mind, the value of a stock is in its dividend, not its market price. So now I don't freak out when the market price of any of my stocks drops. As long as I can determine that the dividend (which ranges from 6% up to 10% plus) will continue to be paid, I do not concern myself. The dividend is my mental defense line against stress and anxiety. Against pulling the sell trigger based on nothing but herd-driven market panic.

I just keep collecting those high dividends.

This investing mindset works for me. But as I said before I am not a financial advisor and I am not saying this will work for you. So, has an asset allocation (or some other) strategy kept you from pulling the sell trigger on sudden or deep price drops?

This part:
"I can determine that the dividend will continue to be paid"
You should really add "... for now".
And how do you do that? A company can cut dividend for any reason. What do you do then? sell? So will all the other dividend-chasers so now you're selling at a huge loss, or sit there with zero dividend. Maybe it will come back, but you can't know. And since only something like 40% of companies pay a dividend, and even fewer are "high yielding" the risk concentration is pretty severe.

What will the JNJ dividend be in 30 years? Many of these stocks tauted by the dividend fans are massive consumer brands with little growth potential, so seem (to me) to be priced largely for their dividend. I wonder what would happen if for example new tax rules caused many to reduce the dividend?
I'm interested to see what happens when this dividend-yield bubble pops.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Chris86 on August 12, 2014, 09:38:13 AM
I majored in finance for my undergrad, so keep in mind this my perspective and opinon only.

For me, a majority of my holdings are in dividend paying stocks. That doesn't mean that I've recently purchased them near 52-week highs. I keep tabs on everything I own and everything that I'm interested in. If it looks attractive, I'll put more in...using both technical and qualitative analysis.

If you take a look at dividend aristocrats, in particular, you'll see that they have somewhat of a different business model than other companies that may or may not pay a dividend. Typically, because these companies are so large or have so much expertise in the market, their business model changes from one of growth and increasing assets, to a mindset of continued earnings. Not saying that they don't attempt to grow themselves if the right opportunity comes by - just that it's not their main objective. Their main objective is to return a steady profit to the shareholders.

Now with that in mind, there are different metrics you can evaluate, such as payout ratio, which determines the percentage of earnings that are paid out to shareholders (feasibility). But if you look specifically at aristocrats, you'll see that even during tough times like 2007-2008, they continued to maintain or increase their dividend payments. Companies such as AT&T, Verizon, Coke, pretty much most major utilities, etc., focus their efforts on being able to make those dividend payments.

With that perspective in mind, I rate those companies as a safer investment. I wouldn't go as far as saying they're safe as bonds, but in my opinion and experience, they are less risky compared to a company that has just begun paying a dividend or doesn't pay one at all. Obviously diversifying helps reduce risk and you can get into some advanced technical analysis such as efficient frontier and modern portfolio theory. But since these companies are not spending large amounts of money on R&D or blowing tons of cash on something that may or may not pay off, there is less opportunity to lose money. You'll see that most aristocrats focus on continuous services/products or commodities (such as cell phone service or electricity) which best supports dividend payments.

The thing about buying a mutual fund (or any stock) with a growth perspective goal is not only buying it on the low price, but also knowing when the right time to sell is (near the high), which is impossible for most - how do you determine where the high is? Whereas a company that focuses its efforts on dividends, you really need to only be concerned with the ability to maintain a dividend and buying near the low. It seems more doable to analyze financial statements to validate ability to pay out dividends, than to determine when an equity has reached a high. At least that is my opinion.

On an interesting side note, you might find this whitepaper interesting. It talks about how value stocks actually outperformed growth stocks, written by Fama-French.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2358
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: frugalnacho on August 12, 2014, 10:00:41 AM
I'm with walt and scandium, I don't see much of a difference.  I get the tax implications, although they don't seem like a big consideration for me.  It seems like the dividend side is saying dividends are superior, and the opposing side is saying there is no free lunch. 

What does it matter if you get a dividend check or you sell a small portion of your portfolio to get your money?  If dividend investing is so superior, won't the market balance that out?

It's really not about the dividends. It's about companies that pay dividends are usually better off than companies that don't. It's about profitability, earnings, wide moats, value & quality etc etc. It's kind of hard for a massive fraud to happen in a company that pays regular dividends. Cash doesn't usually lie.

If you are able to identify quality companies - and likewise avoid ones that are poor, you should do well.

I know it's been brought up already, but won't the market adjust and correct for that?  Or do the dividend investors know something the rest of the masses don't know?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Chris86 on August 12, 2014, 10:09:16 AM
If the growth in the price of the stock is faster than your withdrawal rate, you can sell shares below that rate forever and you're fine. It's easy to prove that to yourself with a spreadsheet.

I guess you could come up with some scenario where you end up with just one share worth a trillion dollars and then have to sell it or go hungry but in real life that's not going to happen.

The point is that if your profits are generated via cash payments (dividends) your tax hit is mandatory/bigger (in the US) and you make less money on your investment, assuming you want a steady income stream from your stock holdings.

Great article from Vanguard, as usual.

-W

@Dodge, but using that example, you have less shares each year? I mean, if the share grew from $15 to $30, shouldn't you want to only about half or $7 for income use while reinvesting the other half? I'm failing to see how selling shares in this way is smart since other time you'll keep selling and end up with zero shares? I know I'm incorrect but I don't see how selling shares this way can be sustainable? I just need to wrap my head around selling shares doesn't somehow deplete your shares? If it goes up $X, and you sell Y shares to get Z money, when in this process do you get around to buying more shares? Because I'd feel a lot more comfortable owning 10000 shares worth $10 than 1 share of $100000

This is interesting. Unless you have infinity shares, you're eventually going to run out when you sell them. "If the growth price of the stock..." Well, honestly that's just another variable you're never going to be able to accurately determine.

The article seems biased. The first thing that came to mind when reading this was the fact that companies that don't pay dividends are usually considered more risky (which in turn investment firms, IE Vanguard, asks for a higher fee in equities favored in the article, as opposed to something large cap / dividend payers).

No one seemed to mention that selling (and likely buying) also comes with transaction fees, where dividends do not.
Say in that same example, you are getting $100. Whether from selling existing holdings or dividend income.

Dividend would pay 15% so you get $85. Whats the standard fee on a trade? $7-8? Plus capital gains?

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 10:17:16 AM
If the growth in the price of the stock is faster than your withdrawal rate, you can sell shares below that rate forever and you're fine. It's easy to prove that to yourself with a spreadsheet.

I guess you could come up with some scenario where you end up with just one share worth a trillion dollars and then have to sell it or go hungry but in real life that's not going to happen.

The point is that if your profits are generated via cash payments (dividends) your tax hit is mandatory/bigger (in the US) and you make less money on your investment, assuming you want a steady income stream from your stock holdings.

Great article from Vanguard, as usual.

-W

@Dodge, but using that example, you have less shares each year? I mean, if the share grew from $15 to $30, shouldn't you want to only about half or $7 for income use while reinvesting the other half? I'm failing to see how selling shares in this way is smart since other time you'll keep selling and end up with zero shares? I know I'm incorrect but I don't see how selling shares this way can be sustainable? I just need to wrap my head around selling shares doesn't somehow deplete your shares? If it goes up $X, and you sell Y shares to get Z money, when in this process do you get around to buying more shares? Because I'd feel a lot more comfortable owning 10000 shares worth $10 than 1 share of $100000

This is interesting. Unless you have infinity shares, you're eventually going to run out when you sell them. "If the growth price of the stock..." Well, honestly that's just another variable you're never going to be able to accurately determine.

The article seems biased. The first thing that came to mind when reading this was the fact that companies that don't pay dividends are usually considered more risky (which in turn investment firms, IE Vanguard, asks for a higher fee in equities favored in the article, as opposed to something large cap / dividend payers).

No one seemed to mention that selling (and likely buying) also comes with transaction fees, where dividends do not.
Say in that same example, you are getting $100. Whether from selling existing holdings or dividend income.

Dividend would pay 15% so you get $85. Whats the standard fee on a trade? $7-8? Plus capital gains?

Are you recommending purchasing individual stocks?  That's the only way you'd pay a fee on a sale, or worry about having "infinity shares".  Vanguard funds have 0 transaction fee, and you can buy/sell in fractional shares.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 10:18:11 AM
I'm with walt and scandium, I don't see much of a difference.  I get the tax implications, although they don't seem like a big consideration for me.  It seems like the dividend side is saying dividends are superior, and the opposing side is saying there is no free lunch. 

What does it matter if you get a dividend check or you sell a small portion of your portfolio to get your money?  If dividend investing is so superior, won't the market balance that out?

It's really not about the dividends. It's about companies that pay dividends are usually better off than companies that don't. It's about profitability, earnings, wide moats, value & quality etc etc. It's kind of hard for a massive fraud to happen in a company that pays regular dividends. Cash doesn't usually lie.

If you are able to identify quality companies - and likewise avoid ones that are poor, you should do well.

I know it's been brought up already, but won't the market adjust and correct for that?  Or do the dividend investors know something the rest of the masses don't know?

Yes, it would, and it has been proven time and time again that it does.

No, they don't.

There is no free lunch here.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 10:22:29 AM
I majored in finance for my undergrad, so keep in mind this my perspective and opinon only.

For me, a majority of my holdings are in dividend paying stocks. That doesn't mean that I've recently purchased them near 52-week highs. I keep tabs on everything I own and everything that I'm interested in. If it looks attractive, I'll put more in...using both technical and qualitative analysis.

If you take a look at dividend aristocrats, in particular, you'll see that they have somewhat of a different business model than other companies that may or may not pay a dividend. Typically, because these companies are so large or have so much expertise in the market, their business model changes from one of growth and increasing assets, to a mindset of continued earnings. Not saying that they don't attempt to grow themselves if the right opportunity comes by - just that it's not their main objective. Their main objective is to return a steady profit to the shareholders.

Now with that in mind, there are different metrics you can evaluate, such as payout ratio, which determines the percentage of earnings that are paid out to shareholders (feasibility). But if you look specifically at aristocrats, you'll see that even during tough times like 2007-2008, they continued to maintain or increase their dividend payments. Companies such as AT&T, Verizon, Coke, pretty much most major utilities, etc., focus their efforts on being able to make those dividend payments.

With that perspective in mind, I rate those companies as a safer investment. I wouldn't go as far as saying they're safe as bonds, but in my opinion and experience, they are less risky compared to a company that has just begun paying a dividend or doesn't pay one at all. Obviously diversifying helps reduce risk and you can get into some advanced technical analysis such as efficient frontier and modern portfolio theory. But since these companies are not spending large amounts of money on R&D or blowing tons of cash on something that may or may not pay off, there is less opportunity to lose money. You'll see that most aristocrats focus on continuous services/products or commodities (such as cell phone service or electricity) which best supports dividend payments.

The thing about buying a mutual fund (or any stock) with a growth perspective goal is not only buying it on the low price, but also knowing when the right time to sell is (near the high), which is impossible for most - how do you determine where the high is? Whereas a company that focuses its efforts on dividends, you really need to only be concerned with the ability to maintain a dividend and buying near the low. It seems more doable to analyze financial statements to validate ability to pay out dividends, than to determine when an equity has reached a high. At least that is my opinion.

On an interesting side note, you might find this whitepaper interesting. It talks about how value stocks actually outperformed growth stocks, written by Fama-French.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2358

Again for the new investors.  This is what it looks like when someone advocates individual stock picking.  Just remember, there is no free lunch.  Over the next 50 years, the chances are 99%+ that your index portfolio will beat this, with significantly less work and risk.  Don't be tempted, your life savings, and your ability to retire (or stay retired) is not worth it.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: pom on August 12, 2014, 10:28:28 AM

This is interesting. Unless you have infinity shares, you're eventually going to run out when you sell them.


That is not actually true. Build a spreadsheet where your share price increases 5% per year and you sell 4% of the value of your initial portfolio every year. You will never run out.

It depletes your shares but at a slower and slower rate such that you never run out of shares.

It is a similar concept as that of "escape velocity" where an object is slowed down by gravity but at a decreasing rate so that it can outrun the gravity of a planet.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 10:33:40 AM
I know it's been brought up already, but won't the market adjust and correct for that?  Or do the dividend investors know something the rest of the masses don't know?

Yes, it would, and it has been proven time and time again that it does.

No, they don't.

There is no free lunch here.

People keep saying that without any proof.  The strongest proof was your post earlier, which said that when people increase their bond allocation, their risk of the portfolio running out was greater... no shit, Sherlock.

In contrast, there's considerable data that shows that dividend-paying stocks have higher total returns.  For example: https://public.dreyfus.com/documents/manual/perspectives/dry-fsdwp.pdf

In principal, companies could use excess cash flow to buy back stocks and it would be even better than paying dividends.  However, CEOs are even worse investors than the average individual, and so are more likely to buy back stock when times are good (and the stock is high) than when times are bad, and the stock price is low (links in my post earlier).  The rare CEO who does buy when their company is undervalued - like Warren Buffett - creates tremendous shareholder value.  Even CEOs who consistently buy back stock would be better than a dividend.  But the average dividend policy in the US is to at least maintain the dividend, and grow it when possible.  This leads to better practical outcomes.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Scandium on August 12, 2014, 10:42:57 AM

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

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

That series was interesting, thanks.
Especially liked the point that often the return of the market is due to small cap and /or growth stocks, which eventually may become dividend payers. But if you only buy based on yield you will miss out on most of the growth and small cap gains. That's huge.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 10:53:29 AM
I know it's been brought up already, but won't the market adjust and correct for that?  Or do the dividend investors know something the rest of the masses don't know?

Yes, it would, and it has been proven time and time again that it does.

No, they don't.

There is no free lunch here.

People keep saying that without any proof.  The strongest proof was your post earlier, which said that when people increase their bond allocation, their risk of the portfolio running out was greater... no shit, Sherlock.

In contrast, there's considerable data that shows that dividend-paying stocks have higher total returns.  For example: https://public.dreyfus.com/documents/manual/perspectives/dry-fsdwp.pdf

In principal, companies could use excess cash flow to buy back stocks and it would be even better than paying dividends.  However, CEOs are even worse investors than the average individual, and so are more likely to buy back stock when times are good (and the stock is high) than when times are bad, and the stock price is low (links in my post earlier).  The rare CEO who does buy when their company is undervalued - like Warren Buffett - creates tremendous shareholder value.  Even CEOs who consistently buy back stock would be better than a dividend.  But the average dividend policy in the US is to at least maintain the dividend, and grow it when possible.  This leads to better practical outcomes.

Is it your assertion that a brochure from a mutual fund company selling high ER funds, claiming their managers are able to beat the market, is evidence that dividends are a free lunch?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 10:59:37 AM
I know it's been brought up already, but won't the market adjust and correct for that?  Or do the dividend investors know something the rest of the masses don't know?

Yes, it would, and it has been proven time and time again that it does.

No, they don't.

There is no free lunch here.

People keep saying that without any proof.  The strongest proof was your post earlier, which said that when people increase their bond allocation, their risk of the portfolio running out was greater... no shit, Sherlock.

In contrast, there's considerable data that shows that dividend-paying stocks have higher total returns.  For example: https://public.dreyfus.com/documents/manual/perspectives/dry-fsdwp.pdf

In principal, companies could use excess cash flow to buy back stocks and it would be even better than paying dividends.  However, CEOs are even worse investors than the average individual, and so are more likely to buy back stock when times are good (and the stock is high) than when times are bad, and the stock price is low (links in my post earlier).  The rare CEO who does buy when their company is undervalued - like Warren Buffett - creates tremendous shareholder value.  Even CEOs who consistently buy back stock would be better than a dividend.  But the average dividend policy in the US is to at least maintain the dividend, and grow it when possible.  This leads to better practical outcomes.

Is it your assertion that a brochure from a mutual fund company selling high ER funds, and claiming to be able to beat the market, is evidence that dividends are a free lunch?

No, and if that's what you took away from my post, you need to re-read it. If you don't like the source I gave, there's lot of others that show dividend-paying stocks have better total returns.  Here's a whole series of studies: http://www.mhinvest.com/studies.html

And it's not like this is new knowledge - people have been writing about it for at least a decade (http://www.mhinvest.com/files/pdf/NF_div_study_neddavis_2004.pdf), and probably much longer.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 12, 2014, 11:53:51 AM
Enhancing the Performance of Yield-Based Strategies http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2051101

I've already shared my thoughts on efficient markets and rational investors in other topics, so I won't be responding to anything in that regard for this one. Will the market arbitrage away every efficiency imaginable? According to finance professors' theories - yes. According to actual market participants with real world trading experience - not so much.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 12, 2014, 12:00:30 PM
Any "studies" from anyone who *isn't* in the business of active money management? Seriously, I'd like to see them.

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 12, 2014, 12:04:39 PM
Any "studies" from anyone who *isn't* in the business of active money management? Seriously, I'd like to see them.

-W

You would rather have 'research' from amateurs? I don't get it, the people that have the incentive to do quality research are the guys who are running money.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 12:06:28 PM
Any "studies" from anyone who *isn't* in the business of active money management? Seriously, I'd like to see them.

-W

Depends on how broadly you define the business of active money management.  The Ned Davis research above doesn't manage money.  AAII also has similar data.  Both, of course, sell research, predominantly to people interested in at least some active investing.

The larger issue, if you want someone unbiased and consider those sources biased, is how you could possibly get someone who wasn't involved in active money management.  Consider: someone does research and determines a profitable method of investing, better than index investing.  They would have to be a blithering idiot not to immediately become involved in one way or another - whether licensing their idea, becoming a consultant, working for a hedge fund, or something.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 12, 2014, 12:14:51 PM
Academics (folks like Schiller) do this kind of research all the time. Is there any academic research out there?

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 12:16:51 PM
I know it's been brought up already, but won't the market adjust and correct for that?  Or do the dividend investors know something the rest of the masses don't know?

Yes, it would, and it has been proven time and time again that it does.

No, they don't.

There is no free lunch here.

People keep saying that without any proof.  The strongest proof was your post earlier, which said that when people increase their bond allocation, their risk of the portfolio running out was greater... no shit, Sherlock.

In contrast, there's considerable data that shows that dividend-paying stocks have higher total returns.  For example: https://public.dreyfus.com/documents/manual/perspectives/dry-fsdwp.pdf

In principal, companies could use excess cash flow to buy back stocks and it would be even better than paying dividends.  However, CEOs are even worse investors than the average individual, and so are more likely to buy back stock when times are good (and the stock is high) than when times are bad, and the stock price is low (links in my post earlier).  The rare CEO who does buy when their company is undervalued - like Warren Buffett - creates tremendous shareholder value.  Even CEOs who consistently buy back stock would be better than a dividend.  But the average dividend policy in the US is to at least maintain the dividend, and grow it when possible.  This leads to better practical outcomes.

Is it your assertion that a brochure from a mutual fund company selling high ER funds, and claiming to be able to beat the market, is evidence that dividends are a free lunch?

No, and if that's what you took away from my post, you need to re-read it. If you don't like the source I gave, there's lot of others that show dividend-paying stocks have better total returns.  Here's a whole series of studies: http://www.mhinvest.com/studies.html

And it's not like this is new knowledge - people have been writing about it for at least a decade (http://www.mhinvest.com/files/pdf/NF_div_study_neddavis_2004.pdf), and probably much longer.

Don't have time to go through all of the links now (will later), but it smells like Survivorship Bias.

http://www.bogleheads.org/wiki/Survivorship_bias

The charts simply show, "This group of stocks which have exhibited increasing returns every year for the past 25 years, have higher returns than the market as a whole."

That sounds like a reasonable statement to make.  How is that information actionable?  Shall I then invest money in the stocks which have performed well over the past 25 years, hoping they will continue to perform well in the next 25 years?  Alarm bells should start ringing on that one.

We know that of the original Dividend Aristocrats, only 7 still remain in the index.  We also know that only 30% of companies currently in the index, are still there after 10 years, with the average length for any one company being 6.5 years.  This might be why the returns look so good in hindsight, yet are difficult to achieve in real-time.  I highlighted this in the second reply to this thread:

http://forum.mrmoneymustache.com/investor-alley/anyone-else-only-buying-dividend-stocks/msg366691/#msg366691

During the 2008 great recession, the Dividend Aristocrats fund (SDY), a fund which is comprised of the 50 highest dividend yielding constituents of the stocks of the S&P Composite 1500 Index, that have increased dividends every year for at least 25 consecutive years, had lower returns than 100% bonds, and higher risk (volatility) than 100% stocks.  Let's see what that looks like graphed:

(http://i.imgur.com/rL0hwqb.png)

The market index VTSAX returned: 40.48%
The Dividend Aristocrats fund (SDY) returned: 18.38%
The Preferred Stock Index Fund (PFF), a high yield fund which tracks 220 preferred stocks from 44 U.S. companies and yields a yearly dividend in the 7% range: -20.90%

Maybe the real question is, how can you invest in Dividend Aristocrats, before they become Dividend Aristocrats?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 12:19:32 PM
Academics (folks like Schiller) do this kind of research all the time. Is there any academic research out there?

-W

And Robert Shiller is a founder and the chief economist of the investment management firm MacroMarkets LLC.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 12:29:45 PM
Maybe the real question is, how can you invest in Dividend Aristocrats, before they become Dividend Aristocrats?

So your response to 40 years of data, is to use a subset of the stocks I was talking about, narrow the range to the last 7 years, and say that this time it's different?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 12, 2014, 12:34:01 PM
Let's see a graph of a longer time period, then. How has the DA fund performed relative to a straight S&P one?

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 12:36:23 PM
Let's see a graph of a longer time period, then. How has the DA fund performed relative to a straight S&P one?

-W

The index that SDY is based on only goes back about 10 years.  There's 40 years of data in my link above.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 12, 2014, 12:44:05 PM
I thought it went back to 1989. See here: http://seekingalpha.com/article/578321-dividend-aristocrat-investing

Is that not correct?

-W

Let's see a graph of a longer time period, then. How has the DA fund performed relative to a straight S&P one?

-W

The index that SDY is based on only goes back about 10 years.  There's 40 years of data in my link above.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 12:57:53 PM
I thought it went back to 1989. See here: http://seekingalpha.com/article/578321-dividend-aristocrat-investing

Is that not correct?

-W

Let's see a graph of a longer time period, then. How has the DA fund performed relative to a straight S&P one?

-W

The index that SDY is based on only goes back about 10 years.  There's 40 years of data in my link above.

Ah, oops.  That's what I get for using Dodge's data.  Dodge used SDY, which is the "high-yield" DA index.  That link you provided has the longest back-series of the Dividend Aristocrats that I'm aware of. 
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 01:52:12 PM
Let's see a graph of a longer time period, then. How has the DA fund performed relative to a straight S&P one?

-W

You're asking the wrong question.  Since the very nature of these lists are based on past performance, by definition, any chart not based on live year-by-year data will display the Survivorship Bias.  By that I mean, don't show me a chart of today's list of the best Dividend Funds over the last 25 years, and overlay it on a chart against the market as a whole.  Show me how the list from 1950 is doing.  Then 1960...etc.  If the Dividend Aristocrats were first created in 1989, show me a chart of how well the companies on the 1989 list did in 1990.  Then show how well the list on 1990 did in 1991...etc.

That's not what we're seeing, and this could be why all the dividend funds I can find, have such poor live-data returns.  Here's the oldest one I can find:

"The iShares Dow Jones US Select Dividend ETF (DVY) is the oldest dividend-focused ETF and is the only one to follow a pure high-yield strategy."

(http://i.imgur.com/AqKKRzk.png)

VTSAX - 98.74%
DVY - 48.4%

The fact that we can't find any older funds is a big red flag (again, alarm bells should be ringing).  It's possible they were liquidated for having even worse returns.  This is why it's important to find studies independent of the companies which profit from the sale of these type of funds.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 12, 2014, 02:29:15 PM
You think academics are unbiased? All research is biased, which is why you have to do your own.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on August 12, 2014, 02:34:55 PM
But if you look specifically at aristocrats, you'll see that even during tough times like 2007-2008, they continued to maintain or increase their dividend payments.

LOLWUT?

During those tough times, 6 of the 52 companies in the list cut their dividends by over 90%. Five years later, their payouts are still a small fraction of what they used to be, and their share prices remain decimated (but who cares about share prices when income is all that matters, amirite!?)

Yearly dividend payouts before, after, and now:

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

I generally think that a dividend-focused approach is sub-optimal and indicates an incomplete understanding about how stocks work, but is only marginally harmful. But, yikes, seeing a dividend-focused investor with an ignorance of the basic facts of recent history is downright scary!
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: monkeymind on August 12, 2014, 02:51:00 PM
This graph is particularly interesting:

(http://i.imgur.com/XolyHHT.png)

I’m not investment savvy enough to have a dog in this fight.  I’m just trying to understand…

In order to explore it, I thought I could extrapolate from the Vanguard “potential impact of a dividend vs. a stock sale” information.  I created the attached excel spreadsheet to try to follow the idea presented over time (bear with me, I have fair but not excellent excel skills).

First, I maintained the givens from the Vanguard table ($3/share dividend or sale of 100 shares; share value doubling over time) and extended those over 3 additional time periods.  Just kind of putting those parameters on repeat... 
I assumed that it’s because the position was shrinking at 100 shares at a clip for the total return investor, the results showed that in the second period, results were even and, by the third period, dividend investor pulled ahead.  “Oh”, I thought, “this looks like (all other things being equal), over the long run, the dividend option seems to be the better choice.”

Of course, looking at the table, I then realized that our dividend investor was getting only $3000 in cash flow every year (less tax) while the total returns investor was receiving ever increasing $$ in cash flow (less tax on capital gain).  That’s not really equivalent, is it?  Surely, we need to compare apples to apples.   

So, I tried again.  This time, I figured it’s appropriate that each investor should receive equal amounts of money per year ($3000).  With this scenario, the total returns investor would need to sell ever smaller numbers of shares in order to receive that $3000 per year.   Maybe this would show that total return investing is, in fact, superior.
   
But it didn't.  While this time, the total returns investor remained ahead for the second iteration, he was again behind by the end of third period.

Please, all of you who know your shit, tell me what I’m missing or what mistake I made to make it look like, theoretically, the dividend investment would win no matter how you look at it.   

Of course, this is a theoretical and simplified test-tube version of dividend investing and doesn't involve real-world market returns.  That alone could make all the difference.  And, according to the recent graphs that have been posted, this would seem to be the case.  Maybe theoretical tables such as this one support the opinions of the dividend crowd but the real world market graphs favor the total return group?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Chris86 on August 12, 2014, 03:04:53 PM
But if you look specifically at aristocrats, you'll see that even during tough times like 2007-2008, they continued to maintain or increase their dividend payments.

LOLWUT?

During those tough times, 6 of the 52 companies in the list cut their dividends by over 90%. Five years later, their payouts are still a small fraction of what they used to be, and their share prices remain decimated (but who cares about share prices when income is all that matters, amirite!?)

Yearly dividend payouts before, after, and now:

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

I generally think that a dividend-focused approach is sub-optimal and indicates an incomplete understanding about how stocks work, but is only marginally harmful. But, yikes, seeing a dividend-focused investor with an ignorance of the basic facts of recent history is downright scary!

You nailed it! 11% of those listed failed to maintain their dividend. What about the other 89%? As a comparison, in 2008 you could have held a fund that mirrored the Dow/Nasdaq which would have resulted in dropping 18% of your portfolio total value...but those are just basic facts of recent history, are they not?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Chris86 on August 12, 2014, 03:13:44 PM

This is interesting. Unless you have infinity shares, you're eventually going to run out when you sell them.


That is not actually true. Build a spreadsheet where your share price increases 5% per year and you sell 4% of the value of your initial portfolio every year. You will never run out.

It depletes your shares but at a slower and slower rate such that you never run out of shares.

It is a similar concept as that of "escape velocity" where an object is slowed down by gravity but at a decreasing rate so that it can outrun the gravity of a planet.

I would love to build a spreadsheet where my share price increases 5% every year. Perhaps you can give an example? That might be a conservative average to use over a long period of time, but that's not indicative of year to year - which is how often you will be selling, at a minimum, to get income. A 10% drop isn't remedied by a followed increase of 10%. When you eventually have to sell on the dips it will only act to accelerate your depletion.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on August 12, 2014, 03:24:19 PM
Please, all of you who know your shit, tell me what I’m missing or what mistake I made to make it look like, theoretically, the dividend investment would win no matter how you look at it.

You're losing track of the money that you save on taxes in the total-return option. In that first year, the total-return option ends up with $225 more in total ending value, but then that vanishes from your subsequent calculations. You need to either "reinvest" that $225, or, in a more-accurate real-world scenario, sell a number of shares so that the after-tax income equals the dividend after-tax income.

The Vanguard example is set up to show the effects of taxes. If taxes were not a factor, the outcomes would be exactly equal for both cases. The only thing that makes the total-return option better (and makes it better over the long-term as well) is the tax savings.

Good job on working through it yourself...I was pleasantly surprised to see that you remembered to subtract the dividends from the share price!

The yearly price-doubling is rather unrealistic though, and its effect will be to diminish the advantage of the total-return option as the years go on, since the captial-gain amount that gets taxed quickly nears the dividend-income amount.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 12, 2014, 03:29:23 PM
So wait, when we look at the SA comparison of S&P vs Dividend Aristocrats, I was under the impression that it's doing the following with the DA fund: in 1989, you have 52 (or whatever) companies. You buy $1000 worth of the fund. The next year, a company drops off the list maybe so you sell that stock, and you buy some shares of a new company that just qualified (if any), and you reinvest any dividends you got. You do that every year, and that's the return number we're looking at.

That sort of sounds like a terrible strategy (sell low?) but it would at least be a consistent way to compare vs. the S&P.

If the chart is actually a chart of how the ~50 companies currently on the list performed over the last 25 years then yes, it's obviously ridiculous. I could make any number of Walt's Awesome Company Funds using this sort of "strategy" and just pick the best stocks from the last 25 years. Why limit yourself to dividend payers? I'm sure some set of companies that started from nothing in 1989 and now are worth millions/billions could produce 100%+ annual returns on paper.

So what are we looking at on the Seeking Alpha chart? Can anyone tell me?

-Walt
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on August 12, 2014, 03:30:24 PM
You nailed it! 11% of those listed failed to maintain their dividend. What about the other 89%? As a comparison, in 2008 you could have held a fund that mirrored the Dow/Nasdaq which would have resulted in dropping 18% of your portfolio total value...but those are just basic facts of recent history, are they not?

I wasn't making a comparison between different approaches. I was simply pointing out the inaccuracy of your statement, in the hopes that naive readers would not take it as truth. I'll repeat what you wrote:

"if you look specifically at aristocrats, you'll see that even during tough times like 2007-2008, they continued to maintain or increase their dividend payments."

Do you maintain that is a factual statement?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Eric on August 12, 2014, 03:32:21 PM

This is interesting. Unless you have infinity shares, you're eventually going to run out when you sell them.


That is not actually true. Build a spreadsheet where your share price increases 5% per year and you sell 4% of the value of your initial portfolio every year. You will never run out.

It depletes your shares but at a slower and slower rate such that you never run out of shares.

It is a similar concept as that of "escape velocity" where an object is slowed down by gravity but at a decreasing rate so that it can outrun the gravity of a planet.

I would love to build a spreadsheet where my share price increases 5% every year. Perhaps you can give an example? That might be a conservative average to use over a long period of time, but that's not indicative of year to year - which is how often you will be selling, at a minimum, to get income. A 10% drop isn't remedied by a followed increase of 10%. When you eventually have to sell on the dips it will only act to accelerate your depletion.

And?  I think I'm lost on your point.  It matters not if you sell shares every year, if overall, the value of your shares increases.  Which it should over a long time period.  If this was not the case, there would be no such thing as a SWR higher than your dividend payments.

It's similar to saying which weighs more: a pound of feathers or a pound of gold?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Chris86 on August 12, 2014, 03:33:00 PM
If the growth in the price of the stock is faster than your withdrawal rate, you can sell shares below that rate forever and you're fine. It's easy to prove that to yourself with a spreadsheet.

I guess you could come up with some scenario where you end up with just one share worth a trillion dollars and then have to sell it or go hungry but in real life that's not going to happen.

The point is that if your profits are generated via cash payments (dividends) your tax hit is mandatory/bigger (in the US) and you make less money on your investment, assuming you want a steady income stream from your stock holdings.

Great article from Vanguard, as usual.

-W

@Dodge, but using that example, you have less shares each year? I mean, if the share grew from $15 to $30, shouldn't you want to only about half or $7 for income use while reinvesting the other half? I'm failing to see how selling shares in this way is smart since other time you'll keep selling and end up with zero shares? I know I'm incorrect but I don't see how selling shares this way can be sustainable? I just need to wrap my head around selling shares doesn't somehow deplete your shares? If it goes up $X, and you sell Y shares to get Z money, when in this process do you get around to buying more shares? Because I'd feel a lot more comfortable owning 10000 shares worth $10 than 1 share of $100000

This is interesting. Unless you have infinity shares, you're eventually going to run out when you sell them. "If the growth price of the stock..." Well, honestly that's just another variable you're never going to be able to accurately determine.

The article seems biased. The first thing that came to mind when reading this was the fact that companies that don't pay dividends are usually considered more risky (which in turn investment firms, IE Vanguard, asks for a higher fee in equities favored in the article, as opposed to something large cap / dividend payers).

No one seemed to mention that selling (and likely buying) also comes with transaction fees, where dividends do not.
Say in that same example, you are getting $100. Whether from selling existing holdings or dividend income.

Dividend would pay 15% so you get $85. Whats the standard fee on a trade? $7-8? Plus capital gains?

Are you recommending purchasing individual stocks?  That's the only way you'd pay a fee on a sale, or worry about having "infinity shares".  Vanguard funds have 0 transaction fee, and you can buy/sell in fractional shares.

Just going to leave this here... If you think the only fees that you're paying for your mutual fund are in the expense ratio, you're wrong.

http://online.wsj.com/news/articles/SB10001424052748703382904575059690954870722
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: vivophoenix on August 12, 2014, 03:36:24 PM
if you were to reinvest your dividends long term, would this pretty much be the equivalent of having held normal stock?

 esp, from my understanding, during times of down turn; they merely trim the dividend. so you dont lose value, you just lose the opportunity for growth that other stocks provide when the market goes back up.


 it seems like if i understand what im reading, the dividend yielding stocks  don't drop price during low markets.

so  it would be more advantageous to purchase other stocks while the market is low.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Chris86 on August 12, 2014, 03:36:45 PM

This is interesting. Unless you have infinity shares, you're eventually going to run out when you sell them.


That is not actually true. Build a spreadsheet where your share price increases 5% per year and you sell 4% of the value of your initial portfolio every year. You will never run out.

It depletes your shares but at a slower and slower rate such that you never run out of shares.

It is a similar concept as that of "escape velocity" where an object is slowed down by gravity but at a decreasing rate so that it can outrun the gravity of a planet.

I would love to build a spreadsheet where my share price increases 5% every year. Perhaps you can give an example? That might be a conservative average to use over a long period of time, but that's not indicative of year to year - which is how often you will be selling, at a minimum, to get income. A 10% drop isn't remedied by a followed increase of 10%. When you eventually have to sell on the dips it will only act to accelerate your depletion.

And?  I think I'm lost on your point.  It matters not if you sell shares every year, if overall, the value of your shares increases.  Which it should over a long time period.  If this was not the case, there would be no such thing as a SWR higher than your dividend payments.

It's similar to saying which weighs more: a pound of feathers or a pound of gold?

Here, I'll clarify with an example. Sorry for the confusion: If you have an asset worth $100 and you need $5 to live, you're going to sell 5% for that year. However, if you have an asset worth $100 and then it drops by 2%, still needing that $5 to live, you now need to sell 5.1%. Your biggest assumption (that the value of your shares is going to increase YoY) is the most riskiest.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on August 12, 2014, 04:08:50 PM
Your biggest assumption (that the value of your shares is going to increase YoY) is the most riskiest.

I don't think anyone was really making that assumption. We all realize that the stock market is volatile and there will be down years mixed with up years. And we have things like the Trinity Study (and its relatives) to quantify for us, exactly how detrimental are the effects of volatility on Safe Withdrawal Rates? It showed that historically, if we sold 4% or less of our portfolio per year, we would not run out of money in a 30-year period. That 4% number is substantially lower than the long-term return of the US stock market, and one major reason for that is exactly due to the volatility that you fear. It's already factored in.

Currently the yield of SDY is 2.28%. That's a much lower payout rate than the 4% withdrawal rate the Trinity Study suggests is safe. That implies one of two things.

1) You will end up selling shares for income just like the rest of us (and do just fine too!)
2) You will be accumulating a much larger portfolio than necessary (and thus, working longer) in order to fund your retirement with dividend income alone.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 04:34:51 PM
This graph is particularly interesting:

(http://i.imgur.com/XolyHHT.png)

I’m not investment savvy enough to have a dog in this fight.  I’m just trying to understand…

In order to explore it, I thought I could extrapolate from the Vanguard “potential impact of a dividend vs. a stock sale” information.  I created the attached excel spreadsheet to try to follow the idea presented over time (bear with me, I have fair but not excellent excel skills).

First, I maintained the givens from the Vanguard table ($3/share dividend or sale of 100 shares; share value doubling over time) and extended those over 3 additional time periods.  Just kind of putting those parameters on repeat... 
I assumed that it’s because the position was shrinking at 100 shares at a clip for the total return investor, the results showed that in the second period, results were even and, by the third period, dividend investor pulled ahead.  “Oh”, I thought, “this looks like (all other things being equal), over the long run, the dividend option seems to be the better choice.”

Of course, looking at the table, I then realized that our dividend investor was getting only $3000 in cash flow every year (less tax) while the total returns investor was receiving ever increasing $$ in cash flow (less tax on capital gain).  That’s not really equivalent, is it?  Surely, we need to compare apples to apples.   

So, I tried again.  This time, I figured it’s appropriate that each investor should receive equal amounts of money per year ($3000).  With this scenario, the total returns investor would need to sell ever smaller numbers of shares in order to receive that $3000 per year.   Maybe this would show that total return investing is, in fact, superior.
   
But it didn't.  While this time, the total returns investor remained ahead for the second iteration, he was again behind by the end of third period.

Please, all of you who know your shit, tell me what I’m missing or what mistake I made to make it look like, theoretically, the dividend investment would win no matter how you look at it.   

Of course, this is a theoretical and simplified test-tube version of dividend investing and doesn't involve real-world market returns.  That alone could make all the difference.  And, according to the recent graphs that have been posted, this would seem to be the case.  Maybe theoretical tables such as this one support the opinions of the dividend crowd but the real world market graphs favor the total return group?

After period 2, you stopped reducing the stock price by the amount of the dividend.  From cell C16 to E15, you did it.  But from cell E16 to G15 you did not.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 04:40:25 PM
If the growth in the price of the stock is faster than your withdrawal rate, you can sell shares below that rate forever and you're fine. It's easy to prove that to yourself with a spreadsheet.

I guess you could come up with some scenario where you end up with just one share worth a trillion dollars and then have to sell it or go hungry but in real life that's not going to happen.

The point is that if your profits are generated via cash payments (dividends) your tax hit is mandatory/bigger (in the US) and you make less money on your investment, assuming you want a steady income stream from your stock holdings.

Great article from Vanguard, as usual.

-W

@Dodge, but using that example, you have less shares each year? I mean, if the share grew from $15 to $30, shouldn't you want to only about half or $7 for income use while reinvesting the other half? I'm failing to see how selling shares in this way is smart since other time you'll keep selling and end up with zero shares? I know I'm incorrect but I don't see how selling shares this way can be sustainable? I just need to wrap my head around selling shares doesn't somehow deplete your shares? If it goes up $X, and you sell Y shares to get Z money, when in this process do you get around to buying more shares? Because I'd feel a lot more comfortable owning 10000 shares worth $10 than 1 share of $100000

This is interesting. Unless you have infinity shares, you're eventually going to run out when you sell them. "If the growth price of the stock..." Well, honestly that's just another variable you're never going to be able to accurately determine.

The article seems biased. The first thing that came to mind when reading this was the fact that companies that don't pay dividends are usually considered more risky (which in turn investment firms, IE Vanguard, asks for a higher fee in equities favored in the article, as opposed to something large cap / dividend payers).

No one seemed to mention that selling (and likely buying) also comes with transaction fees, where dividends do not.
Say in that same example, you are getting $100. Whether from selling existing holdings or dividend income.

Dividend would pay 15% so you get $85. Whats the standard fee on a trade? $7-8? Plus capital gains?

Are you recommending purchasing individual stocks?  That's the only way you'd pay a fee on a sale, or worry about having "infinity shares".  Vanguard funds have 0 transaction fee, and you can buy/sell in fractional shares.

Just going to leave this here... If you think the only fees that you're paying for your mutual fund are in the expense ratio, you're wrong.

http://online.wsj.com/news/articles/SB10001424052748703382904575059690954870722

This information strengthens the case for indexing, as an index would incur the smallest amount of these fees.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: tomsang on August 12, 2014, 05:08:21 PM
This reminds me of those investors that get all excited when their stock splits.  They don't get that it is still the same stock just divided into smaller parts. 

There is nothing magical or special about companies that have a dividend.  If anything the company is sending a message that they have no better uses for their capital than to give it back to the investors to figure out what to do with the excess capital.

If there was an efficiency in the market, somebody with a supercomputer would have figured that out and capitalized on it.  There is no free money in the stock market.

If it makes you sleep better at night, then so be it.  If you are receiving dividends that are higher than the market in total then you are taking on greater risk than the market in total.  Again, no free money.  Don't allow your guard to drop because of a dividend.  Dividends are not safer, they don't return a higher risk weighted yield, they don't stop aging, they don't do anything special.     
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 05:47:48 PM
So wait, when we look at the SA comparison of S&P vs Dividend Aristocrats, I was under the impression that it's doing the following with the DA fund: in 1989, you have 52 (or whatever) companies. You buy $1000 worth of the fund. The next year, a company drops off the list maybe so you sell that stock, and you buy some shares of a new company that just qualified (if any), and you reinvest any dividends you got. You do that every year, and that's the return number we're looking at.

That sort of sounds like a terrible strategy (sell low?) but it would at least be a consistent way to compare vs. the S&P.

If the chart is actually a chart of how the ~50 companies currently on the list performed over the last 25 years then yes, it's obviously ridiculous. I could make any number of Walt's Awesome Company Funds using this sort of "strategy" and just pick the best stocks from the last 25 years. Why limit yourself to dividend payers? I'm sure some set of companies that started from nothing in 1989 and now are worth millions/billions could produce 100%+ annual returns on paper.

So what are we looking at on the Seeking Alpha chart? Can anyone tell me?

-Walt

The Seeking Alpha chart seems genuine.  A few percentage points off from what MorningStar reports.  After doing some more research, I found why the Morningstar charts showed such poor returns.  The charts I've been posting which usually include dividends reinvested (growth charts) have actually been "price only" charts.  If you start with an ETF you get a price chart. If you start with a mutual fund it gives the total return (dividends reinvested), which you can then add an ETF to, without it changing back to a price chart.

Here's the real SDY vs VTSAX chart:

(http://i.imgur.com/7b8fgG2.png)

VTSAX still wins, but it's much closer.

(http://i.imgur.com/xiJFMIB.png)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 12, 2014, 06:31:23 PM
Well, just glancing at it, it looks like Seeking Alpha has the DA outperforming the S&P (and hence VTSAX since they track pretty closely) by a decent amount. So something is wrong somewhere.

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 06:33:42 PM
Well, just glancing at it, it looks like Seeking Alpha has the DA outperforming the S&P (and hence VTSAX since they track pretty closely) by a decent amount. So something is wrong somewhere.

-W

They're looking at different stocks and different time periods.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 12, 2014, 06:58:31 PM
Sure, but I thought SDY was pretty much identical. And in the time period of the Morningstar data SA says that Dividend Aristocrats was something like 8 percent returns, as opposed to something like 4.5% for S&P. The two data sets don't track at ALL, even in the same time period. What gives?

-W


Well, just glancing at it, it looks like Seeking Alpha has the DA outperforming the S&P (and hence VTSAX since they track pretty closely) by a decent amount. So something is wrong somewhere.

-W

They're looking at different stocks and different time periods.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 08:14:21 PM
Sure, but I thought SDY was pretty much identical. And in the time period of the Morningstar data SA says that Dividend Aristocrats was something like 8 percent returns, as opposed to something like 4.5% for S&P. The two data sets don't track at ALL, even in the same time period. What gives?

-W


Well, just glancing at it, it looks like Seeking Alpha has the DA outperforming the S&P (and hence VTSAX since they track pretty closely) by a decent amount. So something is wrong somewhere.

-W

They're looking at different stocks and different time periods.

No, SDY is some high yield subset of the dividend aristocrats that apparently doesn't track very well.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 12, 2014, 08:19:19 PM
https://www.spdrs.com/product/fund.seam?ticker=sdy

If it doesn't track well, they are doing a pretty crap job with it. Again, something is not making sense here.

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 12, 2014, 08:26:08 PM
Another shareholder yield article I just read tonight http://jimoshaughnessy.tumblr.com/post/94453059749/the-power-of-shareholder-yield
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 12, 2014, 09:32:55 PM
https://www.spdrs.com/product/fund.seam?ticker=sdy

If it doesn't track well, they are doing a pretty crap job with it. Again, something is not making sense here.

-W

Right, there's a difference between the "high yield dividend aristocrats" and "dividend aristocrats" indices
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: divinvestor on August 12, 2014, 11:15:41 PM
Hopefully this will settle the debate regarding the question of dividend-paying stocks being superior to non-dividend paying stocks. Here's an excerpt on pg. 126 from "The Future For Investors" by Jeremy Siegel. Keep in mind this book was written in 2005:

"From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains... The sum of $1,000 invested in stocks in 1871 would have accumulated almost $8 million after inflation by the end of 2003. Without reinvesting dividends, the accumulation would be less than $250,000."
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 11:35:16 PM
https://www.spdrs.com/product/fund.seam?ticker=sdy

If it doesn't track well, they are doing a pretty crap job with it. Again, something is not making sense here.

-W

Whenever someone claims to be able to beat the market, then publishes the method, you are wise to be skeptical.  The Dividend Aristocrats:

http://us.spindices.com/indices/strategy/sp-500-dividend-aristocrats

Hold about 53 stocks which "measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company."

There don't seem to be any ETFs that track this right now, besides the newly created NOBL.  Hopefully, over the next few decades or so (if the fund isn't closed by then), this ETF will show a live example of the returns you can expect by following the Dividend Aristocrats.

The High Yield Dividend Aristocrats:

http://us.spindices.com/indices/strategy/sp-high-yield-dividend-aristocrats-index

Hold about 96 stocks which are "designed to measure the performance of companies within the S&P Composite 1500® that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 years."  This is the higher yielding and more diversified cousin of the Dividend Aristocrats.  This is what the SDY tracks.  All information presented, shows the SDY underperforms a total stock market index (VTSAX), and has around 7x higher fees.

For the new traders reading this, some questions you should consider, in addition to all the alarm bells which should already be going off while reading this thread:

1.  If the Dividend Aristocrats represent a free lunch, and are indeed beating the market, where's the live evidence?  Certainly a fund manager somewhere would be willing to charge a 2-3% fee to offer their clients this free lunch?  Is it possible these funds all underperformed, and were liquidated? (Survivorship Bias)  Does it surprise you that there are literally 0 funds/ETFs tracking the Dividend Aristocrats (or any other dividend strategy that I can find), which beats the simple, cheap market index VTSAX?

2.  If this really is a free lunch, why hasn't the market already bought up all the stock, bidding up the price until the companies (still good companies) stock is so expensive, that any dividend gain is lost?  Is it your belief that while the market is aware of this free money opportunity (it is published, after all), the entire market chooses to not take advantage?

3.  This is investing money solely in the stocks which have performed well over the past 25 years, hoping they will continue to perform well in the next 25 years.  Does that sound like a good idea to you?  If so, you're might be much newer to investing than you think, and would do well do to some additional reading

4.  Does it surprise you that the only supporting evidence shown thus far in support of Dividend Aristocrats, were sourced from companies which profit from their higher fees, and have mangers which they claim can use dividends to "beat the market"?

Remember, all the evidence shows that over the next 50 years, the chances are 99%+ that your index portfolio will beat this, and with significantly less work and risk.  Don't be tempted, your life savings, and your ability to retire (or stay retired) is not worth it.

"Of the 355 equity funds in 1970, fully 233 of those funds have gone out of business. Only 24 oupaced the market by more than 1% a year. These are terrible odds." Jack Bogle (2007)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 12, 2014, 11:37:27 PM
Hopefully this will settle the debate regarding the question of dividend-paying stocks being superior to non-dividend paying stocks. Here's an excerpt on pg. 126 from "The Future For Investors" by Jeremy Siegel. Keep in mind this book was written in 2005:

"From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains... The sum of $1,000 invested in stocks in 1871 would have accumulated almost $8 million after inflation by the end of 2003. Without reinvesting dividends, the accumulation would be less than $250,000."

This is not relevant to the discussion.  That's an argument for reinvesting dividends vs. not reinvesting dividends.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: divinvestor on August 12, 2014, 11:52:10 PM
Actually I think it's extremely relevant because it shows the importance of dividends in terms of total return over a long period of time. And from what I've read, you have yet to provide any facts and figures to illustrate stocks that don't pay dividends are superior to dividend stocks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 13, 2014, 12:06:32 AM
Actually I think it's extremely relevant because it shows the importance of dividends in terms of total return over a long period of time. And from what I've read, you have yet to provide any facts and figures to illustrate stocks that don't pay dividends are superior to dividend stocks.

No one has made that claim.  I recommend reading back through the thread.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: pom on August 13, 2014, 03:13:39 AM
I agree with Dodge that you have to be careful with survivorship bias in many financial studies.

If you can predict which companies will  increase dividends in the next 25 years and invest in them now, then you will make a killing. Unfortunately it is not possible and it is unlikely to be the same companies that increased dividends in the last 25 years.

Admitedly there will probably be some correlation. Lets say for the sake of argument that 75% of the companies are the same; I will bet that the 25% fallen angels will have such poor return that overall you will gain little if anything at all.

You have to be very careful when backtesting not to include any future information in the choices that you make at time zero. It sounds so logical but in reality it is not always easy to do.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 13, 2014, 06:33:03 AM

I agree with Dodge that you have to be careful with survivorship bias in many financial studies.

If you can predict which companies will  increase dividends in the next 25 years and invest in them now, then you will make a killing. Unfortunately it is not possible and it is unlikely to be the same companies that increased dividends in the last 25 years.

Admitedly there will probably be some correlation. Lets say for the sake of argument that 75% of the companies are the same; I will bet that the 25% fallen angels will have such poor return that overall you will gain little if anything at all.

You have to be very careful when backtesting not to include any future information in the choices that you make at time zero. It sounds so logical but in reality it is not always easy to do.

Indeed. In reality it's much worse than 75%. Of the original Dividend Aristocrats, only 7 still remain in the index.  Looking back, only 30% of the companies in the index at any one time, are still there after 10 years.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 13, 2014, 06:40:30 AM

I agree with Dodge that you have to be careful with survivorship bias in many financial studies.

If you can predict which companies will  increase dividends in the next 25 years and invest in them now, then you will make a killing. Unfortunately it is not possible and it is unlikely to be the same companies that increased dividends in the last 25 years.

Admitedly there will probably be some correlation. Lets say for the sake of argument that 75% of the companies are the same; I will bet that the 25% fallen angels will have such poor return that overall you will gain little if anything at all.

You have to be very careful when backtesting not to include any future information in the choices that you make at time zero. It sounds so logical but in reality it is not always easy to do.

Indeed. In reality it's much worse than 75%. Of the original Dividend Aristocrats, only 7 still remain in the index.  Looking back, only 30% of the companies in the index at any one time, are still there after 10 years.

You keep arguing against a point that no one is making. Earlier I showed hard data that over long periods of time, stocks that pay dividends outperform stocks that don't.  And I showed data on why companies paying dividends do better than companies that by back stock (management buys back stock at inopportune times and prices).  No one has refuted that point, except by claiming bias on the part of the study authors, which I countered by providing other studies showing the same thing.  Your continued claims about some subset of dividend paying stocks are irrelevant to the larger point that stocks that pay dividends have higher returns.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Roland of Gilead on August 13, 2014, 07:20:34 AM
If dividend stocks consistently had gains above non-dividend stocks after accounting for dividend payments and growth, there would be a fantastic opportunity to be long dividend and short non-dividend, reaping all of the gains with none of the risk.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: tomsang on August 13, 2014, 07:34:48 AM
Interesting article that is on point.

http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2014/02/04/7-myths-about-dividend-paying-stocks
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 13, 2014, 07:46:11 AM
If dividend stocks consistently had gains above non-dividend stocks after accounting for dividend payments and growth, there would be a fantastic opportunity to be long dividend and short non-dividend, reaping all of the gains with none of the risk.

No. Such a strategy would have very high risks due to the possibility of margin calls.  Even if you know the starting and ending points exactly, you can still lose.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 13, 2014, 08:18:46 AM

I agree with Dodge that you have to be careful with survivorship bias in many financial studies.

If you can predict which companies will  increase dividends in the next 25 years and invest in them now, then you will make a killing. Unfortunately it is not possible and it is unlikely to be the same companies that increased dividends in the last 25 years.

Admitedly there will probably be some correlation. Lets say for the sake of argument that 75% of the companies are the same; I will bet that the 25% fallen angels will have such poor return that overall you will gain little if anything at all.

You have to be very careful when backtesting not to include any future information in the choices that you make at time zero. It sounds so logical but in reality it is not always easy to do.

Indeed. In reality it's much worse than 75%. Of the original Dividend Aristocrats, only 7 still remain in the index.  Looking back, only 30% of the companies in the index at any one time, are still there after 10 years.

You keep arguing against a point that no one is making. Earlier I showed hard data that over long periods of time, stocks that pay dividends outperform stocks that don't.  And I showed data on why companies paying dividends do better than companies that by back stock (management buys back stock at inopportune times and prices).  No one has refuted that point, except by claiming bias on the part of the study authors, which I countered by providing other studies showing the same thing.  Your continued claims about some subset of dividend paying stocks are irrelevant to the larger point that stocks that pay dividends have higher returns.

This entire thread seems predicated on "Only Buying Dividend Stocks".

Is it your assertion that no one in this thread has promoted purchasing "carefully screened individual high-yielding dividend stocks", or the importance of finding stocks which can "keep increasing dividends in the future"?

If not, is it your assertion that information on Survivorship Bias, and how often stocks which continuously increased their dividends for 25 years or more, suddenly stopped, is not relevant information for new investors possibly considering such a strategy?

If not, then sure.  I have not explicitly addressed your point on buybacks vs dividends.  Are you suggesting investors on this forum should only purchase stocks which pay dividends, and no stocks which participate in buybacks?  Is it your assertion that these are the only two options, and that these options are mutually exclusive?

Regarding the "data that over long periods of time, stocks that pay dividends outperform stocks that don't", it smells like Survivorship Bias.

http://www.bogleheads.org/wiki/Survivorship_bias

It simply shows, "This group of stocks which have exhibited returns every year over X years, have higher returns than the market as a whole."

That sounds like a reasonable statement to make.  How is that information actionable?  Shall I then invest money in the stocks which have exhibited returns every year over X years, hoping they will continue to perform well in the next X years?  Alarm bells should start ringing on that one.

Maybe the real question is, how can you invest in stocks which have exhibited returns every year over X years, before they join that group?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: tomsang on August 13, 2014, 08:32:36 AM
Another interesting article on dividend stocks.

http://www.onefpa.org/journal/Pages/Dividend%20Investing%20A%20Value%20Tilt%20in%20Disguise.aspx
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 13, 2014, 09:39:54 AM

I agree with Dodge that you have to be careful with survivorship bias in many financial studies.

If you can predict which companies will  increase dividends in the next 25 years and invest in them now, then you will make a killing. Unfortunately it is not possible and it is unlikely to be the same companies that increased dividends in the last 25 years.

Admitedly there will probably be some correlation. Lets say for the sake of argument that 75% of the companies are the same; I will bet that the 25% fallen angels will have such poor return that overall you will gain little if anything at all.

You have to be very careful when backtesting not to include any future information in the choices that you make at time zero. It sounds so logical but in reality it is not always easy to do.

Indeed. In reality it's much worse than 75%. Of the original Dividend Aristocrats, only 7 still remain in the index.  Looking back, only 30% of the companies in the index at any one time, are still there after 10 years.

You keep arguing against a point that no one is making. Earlier I showed hard data that over long periods of time, stocks that pay dividends outperform stocks that don't.  And I showed data on why companies paying dividends do better than companies that by back stock (management buys back stock at inopportune times and prices).  No one has refuted that point, except by claiming bias on the part of the study authors, which I countered by providing other studies showing the same thing.  Your continued claims about some subset of dividend paying stocks are irrelevant to the larger point that stocks that pay dividends have higher returns.

This entire thread seems predicated on "Only Buying Dividend Stocks".

Is it your assertion that no one in this thread has promoted purchasing "carefully screened individual high-yielding dividend stocks", or the importance of finding stocks which can "keep increasing dividends in the future"?
No.  My assertion is that that's not what you're arguing against.  You're the only one who has used SDY to try to prove anything, so continuing to point out differences there isn't responsive to an argument that anyone is making.

Quote
If not, is it your assertion that information on Survivorship Bias, and how often stocks which continuously increased their dividends for 25 years or more, suddenly stopped, is not relevant information for new investors possibly considering such a strategy?
No.  You haven't shown that there is survivorship bias.  Noting that the composition of an index has changed says nothing about survivorship bias.  For example, the S&P 500 components change, but there is no survivorship bias there.

Quote
If not, then sure.  I have not explicitly addressed your point on buybacks vs dividends.  Are you suggesting investors on this forum should only purchase stocks which pay dividends, and no stocks which participate in buybacks?  Is it your assertion that these are the only two options, and that these options are mutually exclusive?
No.  You're reading too much into my statement on buybacks, which is probably my fault.  I originally talked about buybacks as evidence that even though in theory there's no economic difference between dividends and stock buybacks (there may be a taxation difference depending on local laws and type of account), in practice there is a large difference.

Quote
Regarding the "data that over long periods of time, stocks that pay dividends outperform stocks that don't", it smells like Survivorship Bias.

http://www.bogleheads.org/wiki/Survivorship_bias
Claiming survivorship bias, then linking to the definition of survivorship bias, doesn't show that there is survivorship bias.

Quote
It simply shows, "This group of stocks which have exhibited returns every year over X years, have higher returns than the market as a whole."

That sounds like a reasonable statement to make.  How is that information actionable?  Shall I then invest money in the stocks which have exhibited returns every year over X years, hoping they will continue to perform well in the next X years?  Alarm bells should start ringing on that one.

Maybe the real question is, how can you invest in stocks which have exhibited returns every year over X years, before they join that group?

If stocks that pay dividends outperform stocks that don't, then the action is easy: buy stocks with dividends.  There's no survivorship bias.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: tomsang on August 13, 2014, 10:05:49 AM
Beltim - Logically if a certain sector or type of company returns a greater return with the same risk for a period of time then the market will jump on this and take away that advantage. Dividend vs non dividend have been discussed for a century. Those with super computers and billions and trillions would have noticed this inefficiency if one existed. If anything, like gold, if the non sophisticated investors are jumping in because of amazing performance I would stay away as the market will inflate and then pop.

There are no magic companies. Over the longterm the return will adjust to the risk rated mean. Dividends don't make a company more or less successful.

Those that are buying dividend ETF's are much safer than those buying 20-30 hot dividend stocks, but they are still missing out on the other half of a market. If taxes on dividends reverts back to ordinary income rates, dividend paying stocks will get hurt. If interest rates increase, dividend stocks will get hurt.

Those that are trying to beat the market are taking on more risk. Make sure that you understand that as you are building out your portfolio.

I also am taking on more risk by investing in privately held companies. I understand that and will need a lower SWR to adjust for the inherent risk.

Good luck.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 13, 2014, 10:14:08 AM
Tomsang -

Thanks for the response.  I want to note that I never made a claim about the risk of stocks that pay dividends - the risk may be higher, lower, or the same.  I don't know of data that would support any of those hypotheses, but I would certainly be interested in seeing such.

Regarding the impact of dividend taxes on dividend paying stocks, the research there is mixed.  Since a huge portion of investment dollars are through tax-advantaged accounts, any effect would likely be small.  And indeed, when people have looked for those effects, they obtain various results which are highly sensitive to starting and ending conditions: http://eml.berkeley.edu/~saez/chetty-rosenberg-saezNBER05divprice.pdf
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 13, 2014, 11:13:15 AM
If stocks that pay dividends outperform stocks that don't, then the action is easy: buy stocks with dividends.  There's no survivorship bias.

Dividends = returns.

Revisiting your statement:

"If stocks that have returns outperform stocks that don't, then the action is easy: buy stocks with returns.  There's no survivorship bias."

Don't you see?  These are the same tricks used by the active fund managers to fool the average investor into purchasing high ER funds with a 5% load.  Changing the word to "dividends" does not change the fact that you're using past performance to predict future results.  Survivorship Bias is inherent in this type of analysis, you can't avoid it.  If you followed this advice and purchased X number of dividend companies in 2013, and half of them went out of business in 2014, your real return would be -50%.  However, looking at the list of past dividend paying companies in the current year 2014, you would not see those out of business companies listed.  This could lead you to the conclusion that "Companies with returns outperform!".  In fact, no matter which year you look at this past data, this would turn out to be true.  This explains why there are no live-data dividend funds which actually outperform the market index VTSAX.  It's the definition of Survivorship Bias.

While you'll probably be OK with this type of strategy (as the SDY's only slight underperformance of VTSAX shows), you are significantly more at risk by being much less diversified.  This can have disastrous results for someone in this forum aiming towards Financial Independence, especially if they aren't as diversified as the SDY.

Take the thought process of the originator of this thread.  Their portfolio was too volatile, causing them to sell low after a crash, out of fear.  As a result, they change their asset allocation to 100% stocks, by doing research and purchasing individual companies.  Do you think such a mindset should go un-challenged in an early retirement forum?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 13, 2014, 11:20:15 AM
If stocks that pay dividends outperform stocks that don't, then the action is easy: buy stocks with dividends.  There's no survivorship bias.

Dividends = returns.

Revisiting your statement:

"If stocks that have returns outperform stocks that don't, then the action is easy: buy stocks with returns.  There's no survivorship bias."


This is the biggest load of nonsense in this thread.  Dividends are not the same as returns.  When you substitute words with different meanings, you get a sentence with different meanings. 

Quote
Don't you see?  These are the same tricks used by the active fund managers to fool the average investor into purchasing high ER funds with a 5% load.  Changing the word to "dividends" does not change the fact that you're using past performance to predict future results.  Survivorship Bias is inherent in this type of analysis, you can't avoid it.  If you followed this advice and purchased X number of dividend companies in 2013, and half of them went out of business in 2014, your real return would be -50%.  However, looking at the list of past dividend paying companies in the current year 2014, you would not see those out of business companies listed.  This could lead you to the conclusion that "Companies with returns outperform!".  In fact, no matter which year you look at this past data, this would turn out to be true.  This explains why there are no live-data dividend funds which actually outperform the market index VTSAX.  It's the definition of Survivorship Bias.

No.  Again, you're arguing against a straw man.  Not a single study anyone has presented works the way you just described. 
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Left on August 13, 2014, 11:28:29 AM
Quote
Did I miss it,  or did not one person ask what his definition of "high-yielding"  was?   There is a big difference between a high quality growing company that has a dividend yielding 3% that has increased its dividend for 25 years straight,  vs a company with a nominal 10% yield that is achieved by paying a dividend greater than current earnings.
I'm wondering this now with all this talk... Not so much the high yield part but just the title of the thread... I own VTI which pays a dividend as well... Actually most of my etf's pay some dividend, am I a dividend investor as well then without knowing it?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 13, 2014, 11:31:18 AM
If you can predict which companies will  increase dividends in the next 25 years and invest in them now, then you will make a killing. Unfortunately it is not possible and it is unlikely to be the same companies that increased dividends in the last 25 years.

Who is predicting which companies will do well for 25 years? A good system adapts to change. Once a company cuts it's dividend, it's dropped from the aristocrats index. The index automatically brings in the good companies and drops the bad, just like ANY index does. It is dynamic and not static. To take the example that Dodge used about looking at the dividend aristocrats from 1950 and see how they are now is ridiculous. Every index worth it's salt is dynamic.

Regardless, buying individual stocks based solely on yield and no other factor is a bit too simplistic. Incorporating stock buybacks and debt paydown (shareholder yield), and payout ratio (to determine whether they have room to continue to increase dividends and reinvest in the business) is essential. A line from one of the guys in Schwager's Market Wizards books goes like this: one indicator or factor may not be all that special, but when you combine it with 1 or 2 others, it suddenly becomes a great system.

So comparing a very simple index like the ones Dodge posted about - to the general market, doesn't tell the whole story. That methodology could be improved upon very easily. As well, comparing just the last 10 years tells us nothing. Real the article I posted from Jim O'Shaughnessy about shareholder yield. There were several 10 year periods over the last 100+ years where the shareholder yield strategy underperformed the market. Yet over the long haul it's consistently done 2%+ better than the market. Performance is always dependent on the timeframe you're looking at.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 13, 2014, 11:45:52 AM
If stocks that pay dividends outperform stocks that don't, then the action is easy: buy stocks with dividends.  There's no survivorship bias.

Dividends = returns.

Revisiting your statement:

"If stocks that have returns outperform stocks that don't, then the action is easy: buy stocks with returns.  There's no survivorship bias."


This is the biggest load of nonsense in this thread.  Dividends are not the same as returns.  When you substitute words with different meanings, you get a sentence with different meanings. 

Quote
Don't you see?  These are the same tricks used by the active fund managers to fool the average investor into purchasing high ER funds with a 5% load.  Changing the word to "dividends" does not change the fact that you're using past performance to predict future results.  Survivorship Bias is inherent in this type of analysis, you can't avoid it.  If you followed this advice and purchased X number of dividend companies in 2013, and half of them went out of business in 2014, your real return would be -50%.  However, looking at the list of past dividend paying companies in the current year 2014, you would not see those out of business companies listed.  This could lead you to the conclusion that "Companies with returns outperform!".  In fact, no matter which year you look at this past data, this would turn out to be true.  This explains why there are no live-data dividend funds which actually outperform the market index VTSAX.  It's the definition of Survivorship Bias.

No.  Again, you're arguing against a straw man.  Not a single study anyone has presented works the way you just described.

It's affect on our portfolio is the same.  If two otherwise identical companies are now worth 10% more, that can be distributed via a 10% dividend, or a 10% increase in price.  I could also have said:

"If stocks that have profits outperform stocks that don't, then the action is easy: buy stocks with profits.  There's no survivorship bias."

It doesn't matter.  The implication is the same.  If a company was able to pay dividends in the past, and you use that information to predict they will be able to pay dividends in the future, that's using past performance to predict future results.

Please present a study which looks at all dividend companies from 30 years ago (a typical retirement length), and tracks how well a portfolio with those same companies is doing now.  Then, please present a study which looks at all dividend companies from 30 years ago, invests 100% in those companies, then changes their allocation one year later, to update their portfolio with the new dividend stocks from that year, then again the next year...etc.  Make sure to include its holdings from each year so we can verify, all related transaction costs from constantly buying/selling (a turnover number will do), and produces both an annualized return number, and a measurement of risk vs. a total market index.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 13, 2014, 11:50:32 AM
I linked to a study covering 40 years.  If you want the source data, contact Ned Davis research.  I'm not really interested in providing more evidence when you don't accept what's already in front of you, without any data to contradict the results or any evidence that the data is wrong.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 13, 2014, 11:53:15 AM
If you can predict which companies will  increase dividends in the next 25 years and invest in them now, then you will make a killing. Unfortunately it is not possible and it is unlikely to be the same companies that increased dividends in the last 25 years.

Who is predicting which companies will do well for 25 years? A good system adapts to change. Once a company cuts it's dividend, it's dropped from the aristocrats index. The index automatically brings in the good companies and drops the bad, just like ANY index does. It is dynamic and not static.

Correct.  Can you point me to a source where I can see the live-data portfolio returns had I followed the index exactly?  None of the funds/ETFs I've seen which track these indexes perform as well as advertised.  If it truly beats the market over the long term by 2% annualized, and this information is publicly available, I would either expect:

1.  A number of long-term funds/ETFs with live-data returns matching this expectation.

or

2.  The market immediately priced in this advantage, making it impossible to take advantage of.

I've seen no evidence of #1, but much evidence for #2.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 13, 2014, 12:10:40 PM
Correct.  Can you point me to a source where I can see the live-data portfolio returns had I followed the index exactly?  None of the funds/ETFs I've seen which track these indexes perform as well as advertised.  If it truly beats the market over the long term by 2% annualized, and this information is publicly available, I would either expect:

1.  A number of long-term funds/ETFs with live-data returns matching this expectation.

or

2.  The market immediately priced in this advantage, making it impossible to take advantage of.

I've seen no evidence of #1, but much evidence for #2.

Well you missed my second paragraph where I said the dividend aristocrat funds are too simplistic and can easily be improved upon....

A better example are the RAFI indexes. http://www.researchaffiliates.com/Work%20with%20us/Indexes/Pages/Home.aspx
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 13, 2014, 02:18:49 PM
Quote
Did I miss it,  or did not one person ask what his definition of "high-yielding"  was?   There is a big difference between a high quality growing company that has a dividend yielding 3% that has increased its dividend for 25 years straight,  vs a company with a nominal 10% yield that is achieved by paying a dividend greater than current earnings.
I'm wondering this now with all this talk... Not so much the high yield part but just the title of the thread... I own VTI which pays a dividend as well... Actually most of my etf's pay some dividend, am I a dividend investor as well then without knowing it?

VTI is the ETF version of VTSAX.  Since this encompasses every stock in the market (well, 3740 of them), you have some stocks which pay dividends, and some which don't.  Currently it's dividend is 1.84%.

I wouldn't call you a "dividend investor" because you own VTI, as VTI was not created with dividends in mind.  Using the total return approach, you will withdraw dividends first, then if needed, sell stocks.  These are the two methods by which owning the stock can compensate you, and by not ignoring one to focus on the other, you're getting the best of both worlds.  Vanguard talks a bit about this in the pdf I mentioned earlier:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors (https://personal.vanguard.com/pdf/s557.pdf)

--------------------------

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

--------------------------

"In conclusion, the total-return approach to spending is identical to the income approach for investors whose portfolios generate enough cash flow to meet their spending needs. For those investors who need more cash flow than their portfolios yield, the total-return approach is the preferred method. Compared with the income-only approach, the total return approach is likelier to increase the longevity of the portfolio, increase its tax-efficiency, and reduce the number of times that the portfolio needs to be rebalanced. In addition, for most investors, a total return approach can produce the same cash flow as an income-only approach with no decrease in return and a lower tax liability."
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Scandium on August 14, 2014, 06:39:21 AM
Correct.  Can you point me to a source where I can see the live-data portfolio returns had I followed the index exactly?  None of the funds/ETFs I've seen which track these indexes perform as well as advertised.  If it truly beats the market over the long term by 2% annualized, and this information is publicly available, I would either expect:

1.  A number of long-term funds/ETFs with live-data returns matching this expectation.

or

2.  The market immediately priced in this advantage, making it impossible to take advantage of.

I've seen no evidence of #1, but much evidence for #2.

Well you missed my second paragraph where I said the dividend aristocrat funds are too simplistic and can easily be improved upon....

A better example are the RAFI indexes. http://www.researchaffiliates.com/Work%20with%20us/Indexes/Pages/Home.aspx
By who? Which fund would that be then? If it's easily improved upon I'd be shocked if there isn't a mutual fund doing it right now.

From what people say here you just need to look at payout ration, debt and a few other things to outperform so as pointed out several times; why is this not priced in already?

And I have not seen a clear answer to what Dodge has asked repeatedly; People say this strategy requires maintenance (which is a big con in my book). If you drop a stock once it cuts the dividend how will that portfolio perform? You're always selling at a loss, but collecting dividends. What is the return? If you bought the 50 dividend aristocrats in the 80s, you would have sold at least 43 of them, presumably at a loss. I'm curiously how this would look.

btw; thanks Dodge for presenting good arguments and data.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 14, 2014, 06:43:19 AM
Scandium, the S&P 500 works exactly as you described. How has that performed?

You are regularly adding and subtracting stocks from the index. Losers are dropped, winners are added. The S&P is the world's biggest momentum fund.

Slightly over half the stocks as compared to the entire invest-able universe from past history have been delisted. You HAVE to drop the losers, unless you want 50%+ of your stocks to go to zero.

So anyways, when companies cut their dividend, they are dropped from the aristocrats index. As new companies grow their dividends over time, they are added to the index. It is constantly adapting to the new environment, as any good strategy should.

Did you look at the RAFI indexes performance that you quoted in my post? That is an example of an improvement to the dividend aristocrats index. They've been well known for years but as you can see on the website, they are still beating their index benchmarks. You tell me why that is. Why is it not priced in? cause the markets aren't perfectly efficient
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 14, 2014, 07:37:49 AM
Scandium, the S&P 500 works exactly as you described. How has that performed?

In order to be added to the S&P 500, a company must have:


A company can lose any of these factors, without the stock price crashing (selling low).  A company can gain these factors, without the stock price soaring (buying high).  It is much more likely that a stock leaving a dividend focused fund, experiences a stock crash after cutting their dividend.  It is much more likely that a stock entering a dividend focused fund, has already experienced a rise in price.  Morningstar reports the following annual turnovers for the S&P500 and the Dividend Aristocrats:

S&P500: 3%
Dividend Aristocrats: 44%

This likely is a contributing factor in their underperformance of the market.  Is it your assertion that a high turnover does not negatively affect a portfolio?

@Scandium No problem.  There is a surprising amount of advice on this forum which can have ruinous results for someone seeking FIRE.  I'm still shocked no one else condemned the idea of moving to 100% stocks and less diversification as a solution, after fear caused them to panic sell at a market low.  I just read a thread over at another early retirement forum with some very sad stories of people who lost it all through trading in their retirement account:

http://www.early-retirement.org/forums/f29/big-mistakes-in-retirement-73144.html

We should do everything we can to prevent this.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 14, 2014, 07:50:31 AM
Morningstar reports the following annual turnovers for the S&P500 and the Dividend Aristocrats:

S&P500: 3%
Dividend Aristocrats: 44%

This likely is a contributing factor in their underperformance of the market.  Is it your assertion that a high turnover does not negatively affect a portfolio?

No, higher turnover in and of itself doesn't tell you anything about performance. However, all things being equal, trading less is better.

@Scandium No problem.  There is a surprising amount of advice on this forum which can have ruinous results for someone seeking FIRE.  I'm still shocked no one else condemned the idea of moving to 100% stocks and less diversification as a solution, after fear caused them to panic sell at a market low.  I just read a thread over at another early retirement forum with some very sad stories of people who lost it all through trading in their retirement account:

http://www.early-retirement.org/forums/f29/big-mistakes-in-retirement-73144.html

We should do everything we can to prevent this.

THIS we can agree on. The advice on this forum regarding 100% US stocks as a serious portfolio for life is borderline insanity. The only thing I can point to is it seems to have started from that jcollins fellow.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 14, 2014, 08:04:57 AM
@Scandium No problem.  There is a surprising amount of advice on this forum which can have ruinous results for someone seeking FIRE.  I'm still shocked no one else condemned the idea of moving to 100% stocks and less diversification as a solution, after fear caused them to panic sell at a market low.  I just read a thread over at another early retirement forum with some very sad stories of people who lost it all through trading in their retirement account:

http://www.early-retirement.org/forums/f29/big-mistakes-in-retirement-73144.html

We should do everything we can to prevent this.

I can also agree on this.  In some cases, I have no problem with 100% US stocks (young investors with a long time frame who already known that they're tolerant of risk).  This is obviously not the case here.  In fact, it's worse, because the OP apparently limits his/her options to stocks yielding more than 6%.  None of my evidence supports the highest yielders returning more.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 14, 2014, 08:06:28 AM
Morningstar reports the following annual turnovers for the S&P500 and the Dividend Aristocrats:

S&P500: 3%
Dividend Aristocrats: 44%

This likely is a contributing factor in their underperformance of the market.  Is it your assertion that a high turnover does not negatively affect a portfolio?

No, higher turnover in and of itself doesn't tell you anything about performance. However, all things being equal, trading less is better.

@Scandium No problem.  There is a surprising amount of advice on this forum which can have ruinous results for someone seeking FIRE.  I'm still shocked no one else condemned the idea of moving to 100% stocks and less diversification as a solution, after fear caused them to panic sell at a market low.  I just read a thread over at another early retirement forum with some very sad stories of people who lost it all through trading in their retirement account:

http://www.early-retirement.org/forums/f29/big-mistakes-in-retirement-73144.html

We should do everything we can to prevent this.

THIS we can agree on. The advice on this forum regarding 100% US stocks as a serious portfolio for life is borderline insanity. The only thing I can point to is it seems to have started from that jcollins fellow.

While there is some evidence a very large % of stocks gives the best chance of success, selecting "carefully screened individual high-yielding dividend stocks" is not the way to do it.

Here's a cfiresim chart of success rates of different allocations, assuming a 4% withdrawal rate.  Specifically I used a $1,000,000 portfolio, with a yearly withdrawal of $40,000, increasing each year with inflation.  With a 30 year chart seems to top out at around 60-70% stocks:

(http://i.imgur.com/xZvxZ1A.png)

The 60 year chart, however, doesn't top out until 90% stocks, and 100% stocks has the same success rate:

(http://i.imgur.com/D5Z9bCE.png)

The difference between 80% stocks and 100% stocks here, however, is only 3.53%.  The decreased volatility will probably help a lot more than the extra 3.53 percentage points in success rate.  Most importantly however, when using total market indexes, either one is significantly more likely to succeed over a 60 year retirement, than personally selecting "carefully screened individual high-yielding dividend stocks".
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 15, 2014, 05:59:51 AM

Take the thought process of the originator of this thread.  Their portfolio was too volatile, causing them to sell low after a crash, out of fear.  As a result, they change their asset allocation to 100% stocks, by doing research and purchasing individual companies.  Do you think such a mindset should go un-challenged in an early retirement forum?


As the originator of this thread, I have been basically lurking through this heated exchange, making notes on many many misassumptions, misconceptions and debate straw men regarding MY dividend investing that I will be addressing in an expanded, amended post in the next few days.  But I have a strong need to jump in and respond to this particular comment now.

I have invested based on this mindset of mine for 5 years.  My portfolio dividend yield has never dropped below 7.5%, even when factoring in the occassional dog that has sneaked into the kennel.  My portfolio has risen 290% over those 5 years.  And in those 5 years, I have never been panicked into a stock sale, but rather taken advantage of market panic time and time again.  I AM financially independent -- several years sooner than I originally expected -- directly due to this "crazy" investing mindset of mine.  And I never said it would work for anybody else; it has simply worked spectacularly well for me.

Much more -- in that expanded amended post -- coming soon.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: matchewed on August 15, 2014, 06:18:57 AM

Take the thought process of the originator of this thread.  Their portfolio was too volatile, causing them to sell low after a crash, out of fear.  As a result, they change their asset allocation to 100% stocks, by doing research and purchasing individual companies.  Do you think such a mindset should go un-challenged in an early retirement forum?


As the originator of this thread, I have been basically lurking through this heated exchange, making notes on many many misassumptions, misconceptions and debate straw men regarding MY dividend investing that I will be addressing in an expanded, amended post in the next few days.  But I have a strong need to jump in and respond to this particular comment now.

I have invested based on this mindset of mine for 5 years.  My portfolio dividend yield has never dropped below 7.5%, even when factoring in the occassional dog that has sneaked into the kennel.  My portfolio has risen 290% over those 5 years.  And in those 5 years, I have never been panicked into a stock sale, but rather taken advantage of market panic time and time again.  I AM financially independent -- several years sooner than I originally expected -- directly due to this "crazy" investing mindset of mine.  And I never said it would work for anybody else; it has simply worked spectacularly well for me.

Much more -- in that expanded amended post -- coming soon.

So you're going to defend your decisions by pointing out your success during the lowest point to the highest point in the last five years...
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 15, 2014, 07:19:26 AM
I am not going to defend my decisions; I am going to explain what I do more clearly.  And, yes, I am going to do it in the context of my real life experience during the last 5 years.  So, please, don't get ahead of yourselves -- again -- by misassuming that you already know what I am going to say.

Thanks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: matchewed on August 15, 2014, 07:46:12 AM
I am not going to defend my decisions; I am going to explain what I do more clearly.  And, yes, I am going to do it in the context of my real life experience during the last 5 years.  So, please, don't get ahead of yourselves -- again -- by misassuming that you already know what I am going to say.

Thanks.

I'm not going by an assumption of what you're going to say but by what you've actually said.

I have invested based on this mindset of mine for 5 years.  My portfolio dividend yield has never dropped below 7.5%, even when factoring in the occassional dog that has sneaked into the kennel.  My portfolio has risen 290% over those 5 years.  And in those 5 years, I have never been panicked into a stock sale, but rather taken advantage of market panic time and time again.  I AM financially independent -- several years sooner than I originally expected -- directly due to this "crazy" investing mindset of mine.  And I never said it would work for anybody else; it has simply worked spectacularly well for me.

Much more -- in that expanded amended post -- coming soon.

Your backing your claim up with a five year evaluation from 2009 (one of the lowest points any stock, dividend or not) to today (the highest point for the stock market so far). That demonstrates a recency bias. You're looking at an unprecedented run up in the market and saying your strategy works. How does it perform outside of that run up?

I'm glad you've been able to take advantage of short term run up. But that doesn't mean it's a sound strategy as it may not be able to be replicated in other environments. You may attribute the success to the strategy but then you're ignoring all the other factors which contributed to the success and may or may not be there in the future.

You claim false assumptions but I'm not assuming anything. I'm going directly off of what you have said. That is the opposite of assumption and working with what you've provided. It is rather poor and sloppy to attribute that other people are making poor assumptions when it is the information you've provided and people have just reached different conclusions.

Thanks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 15, 2014, 07:51:51 AM

Take the thought process of the originator of this thread.  Their portfolio was too volatile, causing them to sell low after a crash, out of fear.  As a result, they change their asset allocation to 100% stocks, by doing research and purchasing individual companies.  Do you think such a mindset should go un-challenged in an early retirement forum?


As the originator of this thread, I have been basically lurking through this heated exchange, making notes on many many misassumptions, misconceptions and debate straw men regarding MY dividend investing that I will be addressing in an expanded, amended post in the next few days.  But I have a strong need to jump in and respond to this particular comment now.

I have invested based on this mindset of mine for 5 years.  My portfolio dividend yield has never dropped below 7.5%, even when factoring in the occassional dog that has sneaked into the kennel.  My portfolio has risen 290% over those 5 years.  And in those 5 years, I have never been panicked into a stock sale, but rather taken advantage of market panic time and time again.  I AM financially independent -- several years sooner than I originally expected -- directly due to this "crazy" investing mindset of mine.  And I never said it would work for anybody else; it has simply worked spectacularly well for me.

Much more -- in that expanded amended post -- coming soon.

So you're going to defend your decisions by pointing out your success during the lowest point to the highest point in the last five years...

Indeed, during this period (from early 2009 to today) the market index has increased by more than 290%. 
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: matchewed on August 15, 2014, 07:54:28 AM

Take the thought process of the originator of this thread.  Their portfolio was too volatile, causing them to sell low after a crash, out of fear.  As a result, they change their asset allocation to 100% stocks, by doing research and purchasing individual companies.  Do you think such a mindset should go un-challenged in an early retirement forum?


As the originator of this thread, I have been basically lurking through this heated exchange, making notes on many many misassumptions, misconceptions and debate straw men regarding MY dividend investing that I will be addressing in an expanded, amended post in the next few days.  But I have a strong need to jump in and respond to this particular comment now.

I have invested based on this mindset of mine for 5 years.  My portfolio dividend yield has never dropped below 7.5%, even when factoring in the occassional dog that has sneaked into the kennel.  My portfolio has risen 290% over those 5 years.  And in those 5 years, I have never been panicked into a stock sale, but rather taken advantage of market panic time and time again.  I AM financially independent -- several years sooner than I originally expected -- directly due to this "crazy" investing mindset of mine.  And I never said it would work for anybody else; it has simply worked spectacularly well for me.

Much more -- in that expanded amended post -- coming soon.

So you're going to defend your decisions by pointing out your success during the lowest point to the highest point in the last five years...

Indeed, during this period (early 2009 to now) the market index has increased by more than 290%.

No where in what you've quoted did I state that the market index has increased by more than 290%.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 15, 2014, 07:55:22 AM
While there is some evidence a very large % of stocks gives the best chance of success, selecting "carefully screened individual high-yielding dividend stocks" is not the way to do it.

Here's a cfiresim chart of success rates of different allocations, assuming a 4% withdrawal rate.  Specifically I used a $1,000,000 portfolio, with a yearly withdrawal of $40,000, increasing each year with inflation.  With a 30 year chart seems to top out at around 60-70% stocks:

The 60 year chart, however, doesn't top out until 90% stocks, and 100% stocks has the same success rate:

To be fair here, you're looking at withdrawal rates.  If you're including an accumulation phase, the higher average returns of stocks are likely to grow your portfolio faster, assuming the investor doesn't sell during bear markets (a big assumption, I know).
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 15, 2014, 08:01:50 AM
While there is some evidence a very large % of stocks gives the best chance of success, selecting "carefully screened individual high-yielding dividend stocks" is not the way to do it.

Here's a cfiresim chart of success rates of different allocations, assuming a 4% withdrawal rate.  Specifically I used a $1,000,000 portfolio, with a yearly withdrawal of $40,000, increasing each year with inflation.  With a 30 year chart seems to top out at around 60-70% stocks:

The 60 year chart, however, doesn't top out until 90% stocks, and 100% stocks has the same success rate:

To be fair here, you're looking at withdrawal rates.  If you're including an accumulation phase, the higher average returns of stocks are likely to grow your portfolio faster, assuming the investor doesn't sell during bear markets (a big assumption, I know).

You are 100% correct.  Saying this more for the investing newbies, as you clearly understand this already, but bonds can help prevent the selling of stocks during a down market.  If you lost your job in 2008 and had to sell some investments unexpectedly, having bonds would've helped.

However, as you stated, if you never have to sell, you'd almost certainly come out way ahead with 100% stocks.  This is the graph that usually scares people into having a diversified portfolio :)

(http://s22.postimg.org/58ph5zzap/jpn1989_2013.jpg)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 15, 2014, 08:05:05 AM

Take the thought process of the originator of this thread.  Their portfolio was too volatile, causing them to sell low after a crash, out of fear.  As a result, they change their asset allocation to 100% stocks, by doing research and purchasing individual companies.  Do you think such a mindset should go un-challenged in an early retirement forum?


As the originator of this thread, I have been basically lurking through this heated exchange, making notes on many many misassumptions, misconceptions and debate straw men regarding MY dividend investing that I will be addressing in an expanded, amended post in the next few days.  But I have a strong need to jump in and respond to this particular comment now.

I have invested based on this mindset of mine for 5 years.  My portfolio dividend yield has never dropped below 7.5%, even when factoring in the occassional dog that has sneaked into the kennel.  My portfolio has risen 290% over those 5 years.  And in those 5 years, I have never been panicked into a stock sale, but rather taken advantage of market panic time and time again.  I AM financially independent -- several years sooner than I originally expected -- directly due to this "crazy" investing mindset of mine.  And I never said it would work for anybody else; it has simply worked spectacularly well for me.

Much more -- in that expanded amended post -- coming soon.

So you're going to defend your decisions by pointing out your success during the lowest point to the highest point in the last five years...

Indeed, during this period (early 2009 to now) the market index has increased by more than 290%.

No where in what you've quoted did I state that the market index has increased by more than 290%.

I wasn't being sarcastic.  During this time it has indeed grown by more than 290%.

(http://i.imgur.com/K3IfMcQ.png)

(http://i.imgur.com/rzHzJF2.png)

+309%
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 15, 2014, 08:09:20 AM
While there is some evidence a very large % of stocks gives the best chance of success, selecting "carefully screened individual high-yielding dividend stocks" is not the way to do it.

Here's a cfiresim chart of success rates of different allocations, assuming a 4% withdrawal rate.  Specifically I used a $1,000,000 portfolio, with a yearly withdrawal of $40,000, increasing each year with inflation.  With a 30 year chart seems to top out at around 60-70% stocks:

The 60 year chart, however, doesn't top out until 90% stocks, and 100% stocks has the same success rate:

To be fair here, you're looking at withdrawal rates.  If you're including an accumulation phase, the higher average returns of stocks are likely to grow your portfolio faster, assuming the investor doesn't sell during bear markets (a big assumption, I know).

You are 100% correct.  Saying this more for the investing newbies, as you clearly understand this already, but bonds can help prevent the selling of stocks during a down market.  If you lost your job in 2008 and had to sell some investments unexpectedly, having bonds would've helped.

However, as you stated, if you never have to sell, you'd almost certainly come out way ahead with 100% stocks.  This is the graph that usually scares people into having a diversified portfolio :)


Yes!  Nice chart.  It's good to agree with you after the earlier discussions.

I did some looking into Japanese bonds after looking at that chart, and it looks like the last time Japanese bonds yielded more than 2% for more than a blip was in 1997.  Your chart also very well shows the effect of international diversification of bonds.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: matchewed on August 15, 2014, 08:14:59 AM
What am I missing then? Checking back at a low during March of 2009 S&P at just over 150%, VTSMX at just over 160%. (https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=0&chfdeh=0&chdet=1408132800000&chddm=534888&chls=IntervalBasedLine&cmpto=NYSEARCA:VTI;MUTF:VTSMX&cmptdms=0;0&q=INDEXSP:.INX&ntsp=0&ei=ihTuU5CpNoicsgfPwoCgDQ)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 15, 2014, 08:18:42 AM
What am I missing then? Checking back at a low during March of 2009 S&P at just over 150%, VTSMX at just over 160%. (https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=0&chfdeh=0&chdet=1408132800000&chddm=534888&chls=IntervalBasedLine&cmpto=NYSEARCA:VTI;MUTF:VTSMX&cmptdms=0;0&q=INDEXSP:.INX&ntsp=0&ei=ihTuU5CpNoicsgfPwoCgDQ)

Dodge make a math error (23329/7550 = 3.09, which means it's gone up 209%.  And you're not including dividends, which should account for the remaining ~50%.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: matchewed on August 15, 2014, 08:19:43 AM
Ah gotcha, thanks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 15, 2014, 08:31:39 AM
While there is some evidence a very large % of stocks gives the best chance of success, selecting "carefully screened individual high-yielding dividend stocks" is not the way to do it.

Here's a cfiresim chart of success rates of different allocations, assuming a 4% withdrawal rate.  Specifically I used a $1,000,000 portfolio, with a yearly withdrawal of $40,000, increasing each year with inflation.  With a 30 year chart seems to top out at around 60-70% stocks:

The 60 year chart, however, doesn't top out until 90% stocks, and 100% stocks has the same success rate:

To be fair here, you're looking at withdrawal rates.  If you're including an accumulation phase, the higher average returns of stocks are likely to grow your portfolio faster, assuming the investor doesn't sell during bear markets (a big assumption, I know).

You are 100% correct.  Saying this more for the investing newbies, as you clearly understand this already, but bonds can help prevent the selling of stocks during a down market.  If you lost your job in 2008 and had to sell some investments unexpectedly, having bonds would've helped.

However, as you stated, if you never have to sell, you'd almost certainly come out way ahead with 100% stocks.  This is the graph that usually scares people into having a diversified portfolio :)


Yes!  Nice chart.  It's good to agree with you after the earlier discussions.

I did some looking into Japanese bonds after looking at that chart, and it looks like the last time Japanese bonds yielded more than 2% for more than a blip was in 1997.  Your chart also very well shows the effect of international diversification of bonds.

Yes definitely.  My objection earlier wasn't so much with your data and links.  I did not want a new investor on the forum to see that as justification for Retired To Win's ruinous investing strategy.

The interesting thing about Japanese bonds, that this chart shows, even with such low yields, the investor with 40% Japanese Bonds, 30% Japanese Stocks and 30% Foreign Stocks (yellow line), did just about as well as someone who also invested in foreign bonds with higher yields (green line).

This is a great advertisement for the 3 fund portfolio:

http://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 15, 2014, 08:34:52 AM
What am I missing then? Checking back at a low during March of 2009 S&P at just over 150%, VTSMX at just over 160%. (https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=0&chfdeh=0&chdet=1408132800000&chddm=534888&chls=IntervalBasedLine&cmpto=NYSEARCA:VTI;MUTF:VTSMX&cmptdms=0;0&q=INDEXSP:.INX&ntsp=0&ei=ihTuU5CpNoicsgfPwoCgDQ)

Dodge make a math error (23329/7550 = 3.09, which means it's gone up 209%.  And you're not including dividends, which should account for the remaining ~50%.

Opps!  In my mind if something goes up 300%, that means it has tripled.  $7,550 times 3.  If in the investing world a tripling means it went up 200%, I stand corrected :)

Edit:  Yes, duh.  If it goes up 100%, that has to mean it doubled.  So going up 200% would mean it tripled.  Got it!  I wonder if Retired To Win made the same mistake.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 15, 2014, 08:36:59 AM

Yes definitely.  My objection earlier wasn't so much with your data and links.  I did not want a new investor on the forum to see that as justification for Retired To Win's ruinous investing strategy.

The interesting thing about Japanese bonds, that this chart shows, even with such low yields, the investor with 40% Japanese Bonds, 30% Japanese Stocks and 30% Foreign Stocks (yellow line), did just about as well as someone who also invested in foreign bonds with higher yields (green line).

This is a great advertisement for the 3 fund portfolio:

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

Huh, I didn't even notice that part.  Do you have the raw data or a chart starting from the late 90s?  I'm interested to see if that holds true once Japanese bonds fell below 2% (from visual inspection it does).
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 15, 2014, 08:39:03 AM

Yes definitely.  My objection earlier wasn't so much with your data and links.  I did not want a new investor on the forum to see that as justification for Retired To Win's ruinous investing strategy.

The interesting thing about Japanese bonds, that this chart shows, even with such low yields, the investor with 40% Japanese Bonds, 30% Japanese Stocks and 30% Foreign Stocks (yellow line), did just about as well as someone who also invested in foreign bonds with higher yields (green line).

This is a great advertisement for the 3 fund portfolio:

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

Huh, I didn't even notice that part.  Do you have the raw data or a chart starting from the late 90s?  I'm interested to see if that holds true once Japanese bonds fell below 2% (from visual inspection it does).

Source with raw data:

http://www.bogleheads.org/forum/viewtopic.php?f=10&t=23036&start=100#p1971254
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 15, 2014, 09:36:18 AM
From the absolute bottom of the market the week of 3/6/2009, the market is up 231% including dividends https://drive.google.com/file/d/0BzyyTlvGE-T2M0d2T3UtRDF2ZzQ/edit?usp=sharing
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: frugledoc on August 15, 2014, 12:41:27 PM
I think index investing is hard to beat for your average investor.

However, I too like buying dividend stocks in the UK.  I don't just see investing as a means to an end. For me it is a hobby that I derive a lot of enjoyment from.

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: missj on August 16, 2014, 02:12:50 PM
One aspect I like about the concept of dividend paying stocks is that the company in question would have a much harder time over-reporting their earnings/value or "cooking the books" (as in an enron situation) because they simply MUST get those quarterly checks out and no amount of fraudulent bookkeeping can satisfy that requirement.  It would be extremely obvious if dividend checks bounced or didn't come, and so it is a built in system of checks and balances.

The other aspect I like about investing for dividend income as opposed to capital gain income is that I think it makes the emotional ups and downs of the stock market easier to weather for the average non-professional investor.  So basically what the OP eluded to.  If you are investing for capital gains only, then you never have any "true" profit until you sell.  And unless you manage to always sell at the highest share price in recent history, there will always be at least a small amount of regret or "what if" thinking that goes along with that sale.  And then even if you sell, now what?  you have that cash and you either spend it or re-invest it.  You cannot have your cake and eat it too. But with dividend paying stocks you can have your cake AND have a taste of the crumbs.

The obvious downside is double taxation and diversification.

I am such a novice at investing, but one thing I've heard and read over and over again from all types of traditional and non traditional sources is to diversify.  If you're only buying dividend producing stocks then even if that stock portfolio is nicely diversified, you still only have stock, which is just 1 type of investment vehicle.

I have  a lot to learn, and fully realize that what I'm about to type may embarrass me to come back and read in a few years, but here is what I consider to be a wise approach to diversification:

growth stocks
dividend stocks
bonds
government bonds
real estate (like, local actual pieces of property. not digital shares in a mortgage backed security or a REIT)
foreign currency
physical cash kept in your home (I don't mean $10,000 in your safe or anything, but if you don't have at least a little mad money around the house for emergencies, what if a big earthquake hits and ATMs don't work and the grocery stores are cash only?)
physical precious metals (I don't mean a lot.  This could be in the form of the family jewels, grandmas wedding ring, whatever)
physical assets to get you through any kind of personal, regional or national disaster.  NON PERISHABLE FOOD comes to mind.

Obviously, if the world continues as expected you'll want to be mostly invested in stocks, bonds and real estate.  But the other approaches definitely have their place as hedges against short term and long term disasters.

There is no guarantee the Euro won't collapse and gold shoots up to meet the DOW at $5,000.  There is no guarantee that the big west coast earthquake won't hit tomorrow disrupting delivery channels nationwide and all of a sudden the cost of a can of beans shoots up to $12 and you wipe out your entire emergency savings just feeding your family for a month,  if you could make a modest $200 rice and beans investment now to guard against disasters it will NEVER be a losing investment and actually will keep up with inflation much better than cash in the mattress plan!  ;-)

just sayin'....

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 16, 2014, 02:54:20 PM
One aspect I like about the concept of dividend paying stocks is that the company in question would have a much harder time over-reporting their earnings/value or "cooking the books" (as in an enron situation) because they simply MUST get those quarterly checks out and no amount of fraudulent bookkeeping can satisfy that requirement.  It would be extremely obvious if dividend checks bounced or didn't come, and so it is a built in system of checks and balances.

A dividend is never guaranteed, and can be cut at any time.  Actually, an argument can be made that a stock which pays a large dividend, all else equal, is inherently more risky.  Consider this, if a company which pays a large dividend, finds itself in a situation where it can't pay it, they can either:

1.  Reduce/eliminate their dividend.
or
2.  Borrow money to pay the dividend.

#1 will likely push their stock down even further, as many investors will have chosen their stock specifically for the dividend.  This provides a strong incentive for #2.  In fact, we see this all the time.  Many dividend stocks don't cut or eliminate their dividend, until after they've been in trouble for a while, and their price has dropped significantly.  As a company, it's arguable they would have been better off not paying out millions of dollars in dividends when they couldn't afford it.  It's easy to see how adding additional liabilities to the companies book, can make their default inherently more risky.

The other aspect I like about investing for dividend income as opposed to capital gain income is that I think it makes the emotional ups and downs of the stock market easier to weather for the average non-professional investor.  So basically what the OP eluded to.  If you are investing for capital gains only, then you never have any "true" profit until you sell.

This is an illusion, and in actuality the investor holding these individual stocks is taking on much more risk vs simply buying the market index and being more diversified.  As mentioned earlier, many dividend stocks have cut or eliminated their dividend, after dropping 50-60% or more.  This is not recommended for anyone seeking FIRE, or currently retired.  Many investors lost their shirts after investing in high dividend stocks in the recent past, here are some notable examples:

General Motors
Kodak
J.C. Penny
Barnes & Noble
Washington Mutual
Citigroup
Bank of America

Also, the market index is not capital gain only, it has a dividend too.  If you were so inclined, you could construct a 3 fund portfolio, holding 9,417 different stocks worldwide, and 710 different bonds, (60/40 allocation) yielding a bit over 3%.  That's almost your whole 4% withdrawal rate right there, and your portfolio will be significantly less risky.

Long story short, if you choose to purchase individual stocks (for any reason), chances are you'll be OK...but why risk it?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 16, 2014, 03:18:49 PM
If you were so inclined, you could construct a 3 fund portfolio, holding 9,417 different stocks worldwide, and 710 different bonds, (60/40 allocation) yielding a bit over 3%.  That's almost your whole 4% withdrawal rate right there, and your portfolio will be significantly less risky.

What's the combination of funds?  My guess is you were talking about VTSMX (1.7% yield), VGTSX (3.0% yield), and VBMFX (1.9% yield).  Assuming 30/30/40, that's just a 2.2% yield.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: missj on August 16, 2014, 03:25:45 PM

Also, the market index is not capital gain only, it has a dividend too.  If you were so inclined, you could construct a 3 fund portfolio, holding 9,417 different stocks worldwide, and 710 different bonds, (60/40 allocation) yielding a bit over 3%.  That's almost your whole 4% withdrawal rate right there, and your portfolio will be significantly less risky.

Long story short, if you choose to purchase individual stocks (for any reason), chances are you'll be OK...but why risk it?
thanks for your patient and thoughtful reply.

I admittedly don't know much about the nuts and bolts of investing, but I'm actively trying to learn.  I've read 3 books now on investing over the last couple of years and been doing online research but I'm constantly amazed by how much I don't know.

so please humor me, if you will, while I ask a probably very basic question.  when people talk about building a portfolio that can pay their living expenses forever, aren't they talking about living off the dividend income and interest income from bonds?  I fully realize I may be wrong, but it seems like if they were relying on growth stocks, they would have to sell the stock to live on it, and then they don't have the stock anymore so eventually their portfolio gets smaller and smaller, right?

This is a genuine question, I'm learning!

(and I AM so incline to construct a widely diversified  portfolio as you describe.  I just get overwhelmed by options and details).
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: monkeymind on August 16, 2014, 03:34:44 PM
You're losing track of the money that you save on taxes in the total-return option. In that first year, the total-return option ends up with $225 more in total ending value, but then that vanishes from your subsequent calculations. You need to either "reinvest" that $225, or, in a more-accurate real-world scenario, sell a number of shares so that the after-tax income equals the dividend after-tax income.

That makes sense.

The yearly price-doubling is rather unrealistic though

Yeah.  I figured if Vanguard could dream, so could I. ;-)

Thanks skyrefuge!

After period 2, you stopped reducing the stock price by the amount of the dividend.  From cell C16 to E15, you did it.  But from cell E16 to G15 you did not.

So I did, and that makes all the difference.

Thanks Dodge!
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 16, 2014, 07:47:15 PM
If you were so inclined, you could construct a 3 fund portfolio, holding 9,417 different stocks worldwide, and 710 different bonds, (60/40 allocation) yielding a bit over 3%.  That's almost your whole 4% withdrawal rate right there, and your portfolio will be significantly less risky.

What's the combination of funds?  My guess is you were talking about VTSMX (1.7% yield), VGTSX (3.0% yield), and VBMFX (1.9% yield).  Assuming 30/30/40, that's just a 2.2% yield.

Using TTM (Trailing 12 Month) yield, since I don't have a 30-day SEC yield for the international fund:

30% VTSAX (http://quotes.morningstar.com/fund/vwesx/f?t=VTSAX) - 1.77% yield
30% VTIAX (http://quotes.morningstar.com/fund/VTIAX/f?t=VTIAX) - 3.11% yield
40% VBLTX (http://quotes.morningstar.com/fund/vwesx/f?t=VBLTX) - 4.11% yield

1.77 * 0.30 + 3.11 * 0.30 + 4.11 *0.40 = 3.108% total yield

Here are the Vanguard links for those funds:

VTSAX - Total Stock Market Index Admiral Shares  (https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT)
VTIAX - Total International Stock Index Admiral Shares (https://personal.vanguard.com/us/funds/snapshot?FundId=0569&FundIntExt=INT)
VBLTX - Long-Term Bond Index (https://personal.vanguard.com/us/funds/snapshot?FundId=0522&FundIntExt=INT)

Yes, the long term bond index isn't as diverse as the Total Bond Market Index (https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT), I chose it for this example because of the higher yields.  Since the original Trinity Study, which is what Firecalc is based on, used "long-term high grade domestic bonds", it's probably ok.  Much more stable than your typical 100% stock dividend fund anyway:

(http://i.imgur.com/u610IaC.png)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on August 16, 2014, 08:11:20 PM
Huh, I hadn't seen that bond fund before. I certainly like the looks of it a whole lot more than the total bond market index. Thanks!
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 16, 2014, 08:12:39 PM

Also, the market index is not capital gain only, it has a dividend too.  If you were so inclined, you could construct a 3 fund portfolio, holding 9,417 different stocks worldwide, and 710 different bonds, (60/40 allocation) yielding a bit over 3%.  That's almost your whole 4% withdrawal rate right there, and your portfolio will be significantly less risky.

Long story short, if you choose to purchase individual stocks (for any reason), chances are you'll be OK...but why risk it?
thanks for your patient and thoughtful reply.

I admittedly don't know much about the nuts and bolts of investing, but I'm actively trying to learn.  I've read 3 books now on investing over the last couple of years and been doing online research but I'm constantly amazed by how much I don't know.

so please humor me, if you will, while I ask a probably very basic question.  when people talk about building a portfolio that can pay their living expenses forever, aren't they talking about living off the dividend income and interest income from bonds?  I fully realize I may be wrong, but it seems like if they were relying on growth stocks, they would have to sell the stock to live on it, and then they don't have the stock anymore so eventually their portfolio gets smaller and smaller, right?

This is a genuine question, I'm learning!

(and I AM so incline to construct a widely diversified  portfolio as you describe.  I just get overwhelmed by options and details).

I LOVE genuine questions :)

This issue was brought up earlier in the thread.  When the growth is higher than your withdrawal rate + inflation, you will never run out of shares.  It makes it easier to imagine this, when you realize mutual funds can be bought and sold in fractional shares (you can buy/sell 0.013 of a share for example).  I've attached a sample excel sheet I made (opens just fine in the free open source LibreOffice (http://libreoffice.org) if you don't have Excel):

(http://i.imgur.com/F2cBD75.png)

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 16, 2014, 08:35:06 PM
Huh, I hadn't seen that bond fund before. I certainly like the looks of it a whole lot more than the total bond market index. Thanks!

No problem!  Vanguard has lots of good bond funds, I love clicking around on this page (https://investor.vanguard.com/mutual-funds/all-vanguard-funds).  If you really wanted to reach for yields on the bond side, you could go for:

VWEHX - 5.60% TTM Yield (http://quotes.morningstar.com/fund/f?t=VWEHX) with 381 bonds (Vanguard link (https://personalp.vanguard.com/us/funds/snapshot?FundId=0029&FundIntExt=INT))
or
VWESX - 4.51% TTM Yield (http://quotes.morningstar.com/fund/vwesx/f?t=VWESX) with 710 bonds (Vanguard link (https://personalp.vanguard.com/us/funds/snapshot?FundId=0028&FundIntExt=INT))

Those are active funds though (YUCK!), so I don't like to touch those :)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 23, 2014, 07:21:37 PM
Statement from Jeremy J. Siegel, Professor of Finance at Wharton School, Senior Strategy Advisor to Wisdom Tree Investments, and author of "Stocks for the Long Run" says:

"Those stocks that pay higher dividends have, over the last half-century, given investors higher returns with lower risk than the low and non-dividend-paying stocks.  We've examined the record completely over very long-term periods, particularly an analysis of the entire S&P 500 index, which was created in 1957.  We find that in the long run dividend-paying stocks give investors a much better risk/return trade-off."*

Read it and weep...

*AAII Journal, August 2014, page 30.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Roland of Gilead on August 23, 2014, 08:58:25 PM
Statement from Jeremy J. Siegel, Professor of Finance at Wharton School, Senior Strategy Advisor to Wisdom Tree Investments, and author of "Stocks for the Long Run" says:

"Those stocks that pay higher dividends have, over the last half-century, given investors higher returns with lower risk than the low and non-dividend-paying stocks.  We've examined the record completely over very long-term periods, particularly an analysis of the entire S&P 500 index, which was created in 1957.  We find that in the long run dividend-paying stocks give investors a much better risk/return trade-off."*

Read it and weep...

*AAII Journal, August 2014, page 30.

Yes, I would weep.  Weep that I totally missed out on the huge growth in small cap/global stocks that did not pay dividends for the past 20 years.  You are missing a lot of growth by only focusing on (usually large) dividend paying stocks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 24, 2014, 12:09:44 AM
Statement from Jeremy J. Siegel, Professor of Finance at Wharton School, Senior Strategy Advisor to Wisdom Tree Investments, and author of "Stocks for the Long Run" says:

"Those stocks that pay higher dividends have, over the last half-century, given investors higher returns with lower risk than the low and non-dividend-paying stocks.  We've examined the record completely over very long-term periods, particularly an analysis of the entire S&P 500 index, which was created in 1957.  We find that in the long run dividend-paying stocks give investors a much better risk/return trade-off."*

Read it and weep...

*AAII Journal, August 2014, page 30.

Another example of an investment advisor attempting to sell a dividend focused ETF he manages.  Unfortunately, the ETFs referred to in the article, the same ones he manages, have all lagged behind the market index VTSAX, while charging 6x-7x higher fees:

(http://i.imgur.com/SnERAQD.png)

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

(http://i.imgur.com/3h580t6.png)

For anyone reading this who is new to investing, please take note; this is why we ignore market gurus.  It's easy to look back and determine which particular stocks would have beaten the market in the past.  Using that same methodology to then choose which stocks will outperform in the future is almost impossible.  That's why the SEC requires funds to tell investors that a fund's past performance does not necessarily predict future results.

If you use a quote like the one referenced by Retired To Win, to convince yourself you can achieve the impossible, just remember...even the person making the quote couldn't do it.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Left on August 24, 2014, 08:49:59 AM
I found a "dividend" etf that I like, with all the talk on this thread, I had to reconsider it
But I won't buy big into it until I FI...

It's going to be a bond asset though, BLV, seems to be at around 4% dividends so it seems good to me... yes it is a bond and not a stock, but as long as I get paid monthly, what difference is it to me?

edit, and going by past performance, it does pretty well too compared to blue chip dividend stocks, yes yes past performance... but what else should i base on? Since I don't mind having bonds that it has

edit: I think I'm having a hard time grasping the actual concept of dividends... since I see bond payments as the same :S, I know that they arent the same type of asset but so what? It's the same as investing in real estate, different asset, same money to spend
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 24, 2014, 09:23:24 AM
Statement from Jeremy J. Siegel, Professor of Finance at Wharton School, Senior Strategy Advisor to Wisdom Tree Investments, and author of "Stocks for the Long Run" says:

"Those stocks that pay higher dividends have, over the last half-century, given investors higher returns with lower risk than the low and non-dividend-paying stocks.  We've examined the record completely over very long-term periods, particularly an analysis of the entire S&P 500 index, which was created in 1957.  We find that in the long run dividend-paying stocks give investors a much better risk/return trade-off."*

Read it and weep...

*AAII Journal, August 2014, page 30.

Another example of an investment advisor attempting to sell a dividend focused ETF he manages.  Unfortunately, the ETFs referred to in the article, the same ones he manages, have all lagged behind the market index VTSAX, while charging 6x-7x higher fees... If you use a quote like the one referenced by Retired To Win, to convince yourself you can achieve the impossible, just remember...even the person making the quote couldn't do it.


Better read the quote again, a little more carefully.  The man is not talking about any particular ETF.  He is talking about the entire S&P 500 stock universe.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 24, 2014, 11:00:11 AM
Yeah, but the stuff he manages using that same philosophy is losing to the S&P and charging lots of money.

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 24, 2014, 11:06:37 AM
Statement from Jeremy J. Siegel, Professor of Finance at Wharton School, Senior Strategy Advisor to Wisdom Tree Investments, and author of "Stocks for the Long Run" says:

"Those stocks that pay higher dividends have, over the last half-century, given investors higher returns with lower risk than the low and non-dividend-paying stocks.  We've examined the record completely over very long-term periods, particularly an analysis of the entire S&P 500 index, which was created in 1957.  We find that in the long run dividend-paying stocks give investors a much better risk/return trade-off."*

Read it and weep...

*AAII Journal, August 2014, page 30.

Another example of an investment advisor attempting to sell a dividend focused ETF he manages.  Unfortunately, the ETFs referred to in the article, the same ones he manages, have all lagged behind the market index VTSAX, while charging 6x-7x higher fees:

(http://i.imgur.com/SnERAQD.png)

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

(http://i.imgur.com/3h580t6.png)

For anyone reading this who is new to investing, please take note; this is why we ignore market gurus.  It's easy to look back and determine which particular stocks would have beaten the market in the past.  Using that same methodology to then choose which stocks will outperform in the future is almost impossible.  That's why the SEC requires funds to tell investors that a fund's past performance does not necessarily predict future results.

If you use a quote like the one referenced by Retired To Win, to convince yourself you can achieve the impossible, just remember...even the person making the quote couldn't do it.


Better read the quote again, a little more carefully.  The man is not talking about any particular ETF.  He is talking about the entire S&P 500 stock universe.

Here's the full question and answer from the article:

--------------------------------------------

CR: Since you brought up WisdomTree (**the company he works for**), I know they have a dividend exchange-traded fund (ETF), which I believe you did some research on. Could you just comment on the role that dividends have played in stock returns?

JS: Dividends are an important component of stock returns. Those stocks that pay higher dividends have, over the last half-century, given investors higher returns with lower risk than the low- and non-dividend-paying stocks. We’ve examined the record completely over very long-term periods, particularly an analysis of the entire S&P 500 index, which was created in 1957. We find that in the long run dividend-paying stocks give investors a much better risk/return trade-off.

--------------------------------------------

To me, that very much looks like an investment advisor attempting to sell a dividend focused ETF he manages.  That being said, let's assume for a moment that his claim is accurate.  That the research he personally conducted for those specific WisdomTree dividend ETFs is scientifically sound, and didn't exhibit any survivorship bias.

It still didn't keep his managed funds from pretty significantly underperforming the index, with higher risk, and for 6x-7x the fee.  His analysis of past performance is not relevant.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 24, 2014, 09:21:05 PM
Assuming that the fund is using the same exact methodology as his research, we still can't draw any definitive conclusions based on less than 10 years of data. Some really robust strategies that have stood the test of time (value and momentum) have 'underperformed' for 10 year periods but have beaten the index over the long term.

Regardless, the index has only underperformed it's benchmark by 20 basis points since inception. http://www.wisdomtree.com/etfs/index-details.aspx?IndexID=1#performance
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 24, 2014, 10:14:22 PM

Assuming that the fund is using the same exact methodology as his research, we still can't draw any definitive conclusions based on less than 10 years of data. Some really robust strategies that have stood the test of time (value and momentum) have 'underperformed' for 10 year periods but have beaten the index over the long term.

Regardless, the index has only underperformed it's benchmark by 20 basis points since inception. http://www.wisdomtree.com/etfs/index-details.aspx?IndexID=1#performance

Yes, while it does fall in line with the results of every other dividend fund I've seen thus far, I don't disagree that 10 years is too short a time to come to any conclusions. But I was waiting for Retired To Win to say that, so I could point out that the track record of his strategy is only 5 years :-P

I honestly find it interesting, however, that literally ALL the dividend funds I see have underperformed the market index. Not only underperformed, but did so while being more risky (in terms of volatility). I would expect at least a few to outperform any particular time period, just due to random chance.

It's almost as if dividend funds, by their very nature, will always underperform...I wonder if the high turnover and "selling low" when a stock drops its dividend, is a larger factor than I thought.

Does anyone have any data that might explain this?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on August 24, 2014, 10:36:23 PM
I would assume that either you haven't looked at enough dividend funds (as you say, some should win just from chance) or else that the whole idea is fatally flawed because selling a stock on bad news (ie, when it dropped the dividend) and buying on good (awesome dividend this year!) is pretty much the opposite of what you want to do. Just simple regression to the mean is going to kill you on that strategy since you'll be buying and selling based on unusual/outlier performance.

I'm assuming the actual funds are more sophisticated than this and will, say, allow a 5 year grace period for an otherwise good-dividend stock. Maybe I'm wrong? In any case you'd still sell low and buy high in general.

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 25, 2014, 07:29:46 AM
I honestly find it interesting, however, that literally ALL the dividend funds I see have underperformed the market index. Not only underperformed, but did so while being more risky (in terms of volatility). I would expect at least a few to outperform any particular time period, just due to random chance.

It's almost as if dividend funds, by their very nature, will always underperform...I wonder if the high turnover and "selling low" when a stock drops its dividend, is a larger factor than I thought.

Does anyone have any data that might explain this?

What time frame are you looking at? If we're lumping all these funds into the past 5-10 years performance, then that could just be an underperforming time for all dividend focused strategies. But once again, I think looking at dividends alone is too simplistic. The RAFI funds have outperformed in the last 10 years, but they look at more than just dividends. 'Shareholder Yield' strategies are much better than dividend-only, because companies stopped focusing on dividends in the '80s and moved to share buybacks. Combining dividend and shareholder buybacks, along with debt paydown, is much more robust. Although it only has a 7.5 year track record, PKW (shareholder buyback fund) has outperformed by 3.5% a year https://www.invesco.com/portal/site/us/investors/etfs/product-detail?productId=PKW And that's only looking at buybacks.

As with any strategy, high fees can kill it. So can publicly sharing your strategy rules and allowing traders to 'front-run' your trades. Many ETFs out there suffer from this.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 25, 2014, 04:59:45 PM
I honestly find it interesting, however, that literally ALL the dividend funds I see have underperformed the market index. Not only underperformed, but did so while being more risky (in terms of volatility). I would expect at least a few to outperform any particular time period, just due to random chance.

It's almost as if dividend funds, by their very nature, will always underperform...I wonder if the high turnover and "selling low" when a stock drops its dividend, is a larger factor than I thought.

Does anyone have any data that might explain this?

What time frame are you looking at? If we're lumping all these funds into the past 5-10 years performance, then that could just be an underperforming time for all dividend focused strategies. But once again, I think looking at dividends alone is too simplistic. The RAFI funds have outperformed in the last 10 years, but they look at more than just dividends. 'Shareholder Yield' strategies are much better than dividend-only, because companies stopped focusing on dividends in the '80s and moved to share buybacks. Combining dividend and shareholder buybacks, along with debt paydown, is much more robust. Although it only has a 7.5 year track record, PKW (shareholder buyback fund) has outperformed by 3.5% a year https://www.invesco.com/portal/site/us/investors/etfs/product-detail?productId=PKW And that's only looking at buybacks.

As with any strategy, high fees can kill it. So can publicly sharing your strategy rules and allowing traders to 'front-run' your trades. Many ETFs out there suffer from this.

I've been looking at all timeframes I can find.

I understand your viewpoint on RAFI funds, but this thread is regarding "Anyone Else Only Buying Dividend Stocks", so I'd like to focus my posts on how bad of an idea that is :)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: hodedofome on August 25, 2014, 05:12:56 PM
You'll get no argument from me about dividend only strategies. Too simplistic. Need to add in some other factors.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on August 26, 2014, 08:42:43 PM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).
How can anyone count on a company's stock price appreciating?

Ah, the old Dividend vs Total Return argument.  The evidence on this has been presented many times, and your side lost.  The simple fact that you think you can count on a dividend, but not count on appreciation, indicates a misunderstanding of how the market values a company.  Thanks to the empirical research, you now know how much this choice costs you in terms of reduced wealth. I don't quite get how someone could willingly make such a choice, but I wish you luck!


Ah, the old straw man about it having to be either Dividend OR Total Return.  Note the text above which I have now bolded to make my approach clearer.  Yes, I buy for the dividend.  But I don't hold blindly for the dividend.  I take 10-percent-plus profits on dividend stocks quite frequently, and more often than not end up buying the same stock back when the price has dropped down again.  So, I collect the dividends unless  there's enough capital gain to collect.  If there is, then I collect that.  And then I reinvest the whole kit-and-kaboodle in more dividend stocks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: tomsang on August 26, 2014, 08:59:17 PM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).
How can anyone count on a company's stock price appreciating?

Ah, the old Dividend vs Total Return argument.  The evidence on this has been presented many times, and your side lost.  The simple fact that you think you can count on a dividend, but not count on appreciation, indicates a misunderstanding of how the market values a company.  Thanks to the empirical research, you now know how much this choice costs you in terms of reduced wealth. I don't quite get how someone could willingly make such a choice, but I wish you luck!


Ah, the old straw man about it having to be either Dividend OR Total Return.  Note the text above which I have now bolded to make my approach clearer.  Yes, I buy for the dividend.  But I don't hold blindly for the dividend.  I take 10-percent-plus profits on dividend stocks quite frequently, and more often than not end up buying the same stock back when the price has dropped down again.  So, I collect the dividends unless  there's enough capital gain to collect.  If there is, then I collect that.  And then I reinvest the whole kit-and-kaboodle in more dividend stocks.

So you also throw in market timing to your strategy?  This is sounding more dangerous by the moment.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on August 26, 2014, 09:37:15 PM
I own solely dividend paying stocks. over 50 of em. Works for me.


It has worked for me, too, for many years.  And in my mind, investing in dividend-paying stocks  is not about risk aversion or about price appreciation.

I simply want the company to share its profits with me.  And that is where the dividend comes in.

When I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).
How can anyone count on a company's stock price appreciating?

Ah, the old Dividend vs Total Return argument.  The evidence on this has been presented many times, and your side lost.  The simple fact that you think you can count on a dividend, but not count on appreciation, indicates a misunderstanding of how the market values a company.  Thanks to the empirical research, you now know how much this choice costs you in terms of reduced wealth. I don't quite get how someone could willingly make such a choice, but I wish you luck!


Ah, the old straw man about it having to be either Dividend OR Total Return.  Note the text above which I have now bolded to make my approach clearer.  Yes, I buy for the dividend.  But I don't hold blindly for the dividend.  I take 10-percent-plus profits on dividend stocks quite frequently, and more often than not end up buying the same stock back when the price has dropped down again.  So, I collect the dividends unless  there's enough capital gain to collect.  If there is, then I collect that.  And then I reinvest the whole kit-and-kaboodle in more dividend stocks.

So you also throw in market timing to your strategy?  This is sounding more dangerous by the moment.

Indeed.  I feel genuinely sorry for Retired To Win, if he/she is really trading his/her retirement money in this fashion...I'm afraid the retirement might be short-lived.  I've seen it time and time again.  There are many active traders over the last 5 years who think they know their stuff, not understanding that almost any trading strategy over the last 5 years would have exhibited fantastic gains.  When the market as a whole grows 20% a year for 5 years, how can you lose?

The following post from Big Mistakes In Retirement (http://www.early-retirement.org/forums/f29/big-mistakes-in-retirement-73144-2.html#post1480112) comes to mind:

------------------------------------------------------

Former work colleague made $100 million in 1999 day trading. Stopped working, bought a boat, sailed around Mexico, met his wife. Continued day trading. Lost $100 million in 01-02. Joined the Navy.

When I asked him if he regretted continuing day trading, he asked me: "How many people do you know that made $100 million in one year?"

I said, "The same number of people I know who lost $100 million in one year."

I guess he had a couple of good years and met his wife. I wonder if he's still at it...

------------------------------------------------------

This is why I keep trying to remind Retired To Win what would have happened to his/her portfolio in 2008-2009.  Since I think it might be a lost cause, I'll continue for the benefit of the investing newbies thinking about following in Retired To Win's footsteps.

Retired To Win, I implore you, quit while you're ahead.  You're financially independent, why keep playing when you've already won the game?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on April 14, 2015, 09:06:21 AM
For any newbies finding this thread, Retired To Win holds 30% cash, and has fixed income which covers living expenses.

Source:

------------------------------
I earlier retired at 53, 14 years ago.  My allocation has not changed much.  My investments are 100% stocks.  I also hold cash for various purposes that amounts to 30% of what I have in stocks.  I'm also financially backstopped by fixed income which by itself covers all my basic living expenses. So you probably don't necessarily want to go by what I do unless your circumstances are similar.
------------------------------

http://forum.mrmoneymustache.com/investor-alley/asset-allocation-in-fire/msg626435/#msg626435 (http://forum.mrmoneymustache.com/investor-alley/asset-allocation-in-fire/msg626435/#msg626435)

So don't interpret the "Anyone Else Only Buying Dividend Stocks?" thread title as an indication that his/her net worth/life savings are in 100% dividend stocks.  Usually when people discuss asset allocation, things like a big holding of cash are included.  You can include fixed income too, but I'd guess that most people don't.  It's important to look at all the factors when determining how much risk you should take.  When you look at the full picture here, including the fact that Retired To Win owns a home without a mortgage, he/she has an asset allocation probably closer to 50/50 stocks/cash & fixed-income.

Since the cash & fixed-income side is less risky than even bonds, if you were to try and replicate this with a standard stock/bond portfolio, it would probably be something like 20/80 stocks/bonds.  In other words, "only buying dividend stocks" is much less risky for Retired To Win than it would be for the typical person on this website trying to retire early.  In truth, it doesn't matter what Retired To Win invests in, he/she is already set for life.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on April 14, 2015, 09:31:18 AM
Since the cash & fixed-income side is less risky than even bonds

Just some language nit-picking here. For many (most?) people, the term "fixed-income" includes bond investments (in fact, that's often what it specifically refers to). Here you seem to be interpreting RTW's use of the term to mean "pension or Social Security", and maybe you're right (though who the hell can tell?), but just because RTW used the term that way, I don't think that means the rest of us should follow along.

http://en.wikipedia.org/wiki/Fixed_income
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: My Own Advisor on April 14, 2015, 07:21:57 PM
"Thank heavens I've found a different way of investing that has really worked for me. A way that has put me much more in control. That way is to only invest in carefully screened individual high-yielding dividend stocks."

I agree with the OP a bit.

I'm not so much looking for high-yielding stocks as I am dependable, growth-oriented dividend stocks, the companies that have been paying them for decades and generations in some cases.

I figure if I can own eventually 50 companies like this, I will be just fine and will not need any indexed products...eventually.  With these 50 blue-chip companies in my portfolio I could likely live off the income from these stocks and simply tune out all the investing noise.

At least that's the plan... :)

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on April 14, 2015, 07:36:11 PM
Ugh. You can live off of all kinds of income, including capital gains, or rent from real estate, or dividends.

You are wasting your mental effort on this, and most likely costing yourself money as well. But c'est la vie, dividends-are-magic folks are impossible to convince.

-W

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: scottish on April 14, 2015, 08:26:00 PM
to answer the original question, I have a dividend stock bias, but I am rebalancing for better diversification with small caps and internationally.

The debate here seems to be based on statistics (Dodge and Scandium) versus experience (Retire to Win).    I think both sides are a little misleading.   

No individual investor is a statistic.   If your purchases turn out to be timed poorly (just by luck, not suggesting market timing here), your performance will be much worse than if your purchases are timed well (also by luck).    Similarly, there are no guarantees that one person's experience will be repeatable.  If you've got an investment approach that you can stick with that does some kind of dollar cost averaging you're doing better than most people.

Does anyone practice risk management?    You know, bonds are great if the stock market is a bear for 5 years?   You can live off the bonds instead of selling your capital at a discount?  Dividends are a half-decent hedge against inflation that erodes the values of bonds.   But you can lose out on a lot of small cap gains if you have only large cap companies and the economy is firing on all cylinders.   How about managing your tax situation by minimizing your realized income?

One of the great things about the S&P500 or the total stock index is that it covers both large cap companies that pay dividends and smaller growth companies.    You get so much mileage out of one simple investment, it's no wonder MMM likes it.

But what about the risk that the US economy just sucks for 5 or 10 years?   Maybe you get in a war in the Balkans, spend another umpty trillion dollars on it and are crippled by debt.  Stock prices are down, companies default on bonds, inflation is up.   Another example is China, which is going to be the largest economy in the world before long.  I don't think the wealth transfer from the US to China is going to stop anytime soon.   What if it gets worse?  What if Xiao-mi clobbers apple and Baidu clobbers Google?  I hear so much about the US index market, but very little about international diversification.

Up here in Canada with our resource intense economy, I pay more attention to international diversification every year.

Does anyone have a good risk management strategy they'd like to share?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Dodge on April 14, 2015, 09:24:12 PM
to answer the original question, I have a dividend stock bias, but I am rebalancing for better diversification with small caps and internationally.

The debate here seems to be based on statistics (Dodge and Scandium) versus experience (Retire to Win).    I think both sides are a little misleading.   

No individual investor is a statistic.   If your purchases turn out to be timed poorly (just by luck, not suggesting market timing here), your performance will be much worse than if your purchases are timed well (also by luck).    Similarly, there are no guarantees that one person's experience will be repeatable.  If you've got an investment approach that you can stick with that does some kind of dollar cost averaging you're doing better than most people.

Does anyone practice risk management?    You know, bonds are great if the stock market is a bear for 5 years?   You can live off the bonds instead of selling your capital at a discount?  Dividends are a half-decent hedge against inflation that erodes the values of bonds.   But you can lose out on a lot of small cap gains if you have only large cap companies and the economy is firing on all cylinders.   How about managing your tax situation by minimizing your realized income?

One of the great things about the S&P500 or the total stock index is that it covers both large cap companies that pay dividends and smaller growth companies.    You get so much mileage out of one simple investment, it's no wonder MMM likes it.

But what about the risk that the US economy just sucks for 5 or 10 years?   Maybe you get in a war in the Balkans, spend another umpty trillion dollars on it and are crippled by debt.  Stock prices are down, companies default on bonds, inflation is up.   Another example is China, which is going to be the largest economy in the world before long.  I don't think the wealth transfer from the US to China is going to stop anytime soon.   What if it gets worse?  What if Xiao-mi clobbers apple and Baidu clobbers Google?  I hear so much about the US index market, but very little about international diversification.

Up here in Canada with our resource intense economy, I pay more attention to international diversification every year.

Does anyone have a good risk management strategy they'd like to share?

This sounds like a great thread, which I'd love to participate in :) But let's not have this discussion in an "Anyone Else Only Buying Dividend Stocks?" thread.  Make a new one, and I'll jump in with my analysis.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Retired To Win on April 15, 2015, 06:39:31 AM
For any newbies finding this thread, Retired To Win holds 30% cash, and has fixed income which covers living expenses.

Source:

------------------------------
I earlier retired at 53, 14 years ago.  My allocation has not changed much.  My investments are 100% stocks.  I also hold cash for various purposes that amounts to 30% of what I have in stocks.  I'm also financially backstopped by fixed income which by itself covers all my basic living expenses. So you probably don't necessarily want to go by what I do unless your circumstances are similar.
------------------------------

http://forum.mrmoneymustache.com/investor-alley/asset-allocation-in-fire/msg626435/#msg626435 (http://forum.mrmoneymustache.com/investor-alley/asset-allocation-in-fire/msg626435/#msg626435)

So don't interpret the "Anyone Else Only Buying Dividend Stocks?" thread title as an indication that his/her net worth/life savings are in 100% dividend stocks.  Usually when people discuss asset allocation, things like a big holding of cash are included.  You can include fixed income too, but I'd guess that most people don't.  It's important to look at all the factors when determining how much risk you should take.  When you look at the full picture here, including the fact that Retired To Win owns a home without a mortgage, he/she has an asset allocation probably closer to 50/50 stocks/cash & fixed-income.

Since the cash & fixed-income side is less risky than even bonds, if you were to try and replicate this with a standard stock/bond portfolio, it would probably be something like 20/80 stocks/bonds.  In other words, "only buying dividend stocks" is much less risky for Retired To Win than it would be for the typical person on this website trying to retire early.  In truth, it doesn't matter what Retired To Win invests in, he/she is already set for life.

Technically true, Dodge.  Maybe even a little more than "technically."

I usually don't factor in most of my cash as part of my investment allocation because it is not tagged as "investment cash."  Most of it is tagged as one type of budget reserve or another, or as "discretionary spending" cash.  The cash that I actually have in investment accounts is literally in transit, having been generated from a stock sale and waiting to be used to buy another stock.  (FYI.)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: scottish on April 15, 2015, 03:37:09 PM
Ok Dodge, here it is:  http://forum.mrmoneymustache.com/investor-alley/statistics-personal-experience-and-risk-management/ (http://forum.mrmoneymustache.com/investor-alley/statistics-personal-experience-and-risk-management/)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on May 28, 2015, 03:54:17 PM
Quote
Did I miss it,  or did not one person ask what his definition of "high-yielding"  was?   There is a big difference between a high quality growing company that has a dividend yielding 3% that has increased its dividend for 25 years straight,  vs a company with a nominal 10% yield that is achieved by paying a dividend greater than current earnings.
I'm wondering this now with all this talk... Not so much the high yield part but just the title of the thread... I own VTI which pays a dividend as well... Actually most of my etf's pay some dividend, am I a dividend investor as well then without knowing it?

VTI is the ETF version of VTSAX.  Since this encompasses every stock in the market (well, 3740 of them), you have some stocks which pay dividends, and some which don't.  Currently it's dividend is 1.84%.

I wouldn't call you a "dividend investor" because you own VTI, as VTI was not created with dividends in mind.  Using the total return approach, you will withdraw dividends first, then if needed, sell stocks.  These are the two methods by which owning the stock can compensate you, and by not ignoring one to focus on the other, you're getting the best of both worlds.  Vanguard talks a bit about this in the pdf I mentioned earlier:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors (https://personal.vanguard.com/pdf/s557.pdf)

--------------------------

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

--------------------------

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

So wouldn't this imply a mixed methodology may be best or just as optimal? If I can generate enough spending money from dividends in my Roth IRA then I will continue to have the same ownership in a company without having to liquidate whole shares and when I need extra money liquidating my traditional IRA in index funds instead of liquidating my dividend producing assets to pay for additional expenses?

I guess I get hung up on the assumption that dividends force taxes, when I hold all of my dividend producing equities in a Roth IRA. Also, it allows you to choose where to put your money when your dividends become large enough, similar to how Warren Buffett utilizes his float and dividends.


My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Roland of Gilead on May 28, 2015, 04:14:40 PM

My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.

But if they were equal weighted, you would only own $10,000 worth of Apple and also own $10,000 worth of Bob's Amazing Corn Dogs.  You might not really want to own $10,000 of BACD because you know Bob's dogs suck.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on May 28, 2015, 04:29:36 PM

My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.

But if they were equal weighted, you would only own $10,000 worth of Apple and also own $10,000 worth of Bob's Amazing Corn Dogs.  You might not really want to own $10,000 of BACD because you know Bob's dogs suck.

I was more referring to the S&P 500 than the total market.

Plus right now you are Investing in stocks you may not like any way. By purchasing a market cap weighted index fund you are saying Apple is 2x better than any other stock in the market.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Eric on May 28, 2015, 04:35:05 PM

My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.

But if they were equal weighted, you would only own $10,000 worth of Apple and also own $10,000 worth of Bob's Amazing Corn Dogs.  You might not really want to own $10,000 of BACD because you know Bob's dogs suck.

I was more referring to the S&P 500 than the total market.

Without knowing anything more about it, wouldn't the fact that these don't really exist in a market where there's seemingly an ETF for everything give a pretty good hint that it's not a quality investment strategy?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on May 28, 2015, 04:41:05 PM

My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.

But if they were equal weighted, you would only own $10,000 worth of Apple and also own $10,000 worth of Bob's Amazing Corn Dogs.  You might not really want to own $10,000 of BACD because you know Bob's dogs suck.

I was more referring to the S&P 500 than the total market.

Without knowing anything more about it, wouldn't the fact that these don't really exist in a market where there's seemingly an ETF for everything give a pretty good hint that it's not a quality investment strategy?

They are out there, just not very popular yet.

http://www.wsj.com/articles/SB10001424052748703555804576101812395730494

http://www.investopedia.com/articles/exchangetradedfunds/08/market-equal-weight.asp


I certainly don't have the option in my 401k which is where most of my index funds are.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Roland of Gilead on May 28, 2015, 04:50:57 PM
I can understand the situation where one company became absolutely dominant in an index (Apple does almost qualify for that).

In the extreme example where a single company formed something crazy like 30% of market cap weighted index, I would probably avoid the index or try to find some other way to diversify.   It probably does signify a bit of a bubble if one company grows to the point where it occludes all others.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: forummm on May 28, 2015, 04:53:42 PM

My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.

But if they were equal weighted, you would only own $10,000 worth of Apple and also own $10,000 worth of Bob's Amazing Corn Dogs.  You might not really want to own $10,000 of BACD because you know Bob's dogs suck.

I was more referring to the S&P 500 than the total market.

Plus right now you are Investing in stocks you may not like any way. By purchasing a market cap weighted index fund you are saying Apple is 2x better than any other stock in the market.

Well, all the other investors in the world are together saying that Apple is 2x better than any other stock in the market. If you don't buy a market cap weighted index fund, you're saying you know better than them what's right.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on May 28, 2015, 04:56:01 PM
It seems to me that if you can't be bothered to even use the "I'm feeling lucky" option to see that something had existed for years, you probably shouldn't say it doesn't exist.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on May 28, 2015, 04:59:15 PM

My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.

But if they were equal weighted, you would only own $10,000 worth of Apple and also own $10,000 worth of Bob's Amazing Corn Dogs.  You might not really want to own $10,000 of BACD because you know Bob's dogs suck.

I was more referring to the S&P 500 than the total market.

Plus right now you are Investing in stocks you may not like any way. By purchasing a market cap weighted index fund you are saying Apple is 2x better than any other stock in the market.

Well, all the other investors in the world are together saying that Apple is 2x better than any other stock in the market. If you don't buy a market cap weighted index fund, you're saying you know better than them what's right.

No, they're saying that apple is twice as valuable as any other company in the market. If you believe in the EMH, then that price represents the same risk-adjusted reward as every other company. 
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on May 28, 2015, 05:26:40 PM

My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.

But if they were equal weighted, you would only own $10,000 worth of Apple and also own $10,000 worth of Bob's Amazing Corn Dogs.  You might not really want to own $10,000 of BACD because you know Bob's dogs suck.

I was more referring to the S&P 500 than the total market.

Plus right now you are Investing in stocks you may not like any way. By purchasing a market cap weighted index fund you are saying Apple is 2x better than any other stock in the market.

Well, all the other investors in the world are together saying that Apple is 2x better than any other stock in the market. If you don't buy a market cap weighted index fund, you're saying you know better than them what's right.

Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

By owning an index weighted by market cap you are betting heavily that the answer is Apple.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Aphalite on May 28, 2015, 06:12:49 PM
Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

By owning an index weighted by market cap you are betting heavily that the answer is Apple.

I know you're trying to make a point but Netflix is a poor example to use - in the next 5 years unless its profits is going to increase more than 10 fold to 3b (giving it a generous TTM PE of 25 after its growth period is over), the valuation multiple will likely come down from 163

I do agree that smaller companies have a better ability to compound due to higher opportunity to capture additional market size, but equal weighting doesn't distinguish between high returning companies, like say, a Hershey's, versus a low return company, like say, a steel manufacturer. Of course, the higher returning company has a better ability to either grow its EPS or return capital to investors via buybacks or dividends. These are the two main sources of investor returns (the other being speculative, or an increase in valuation multiple)

If you equal weighted a certain amount of capital and then let the weighting adjust naturally by itself as companies grew more or less valuable, you could have better results than following a SP500 fund, but keeping an equal weight doesn't always mean that you'll outright beat market cap weighed - http://www.forbes.com/sites/rickferri/2013/04/29/no-free-lunch-from-equal-weight-sp-500/

Sometimes bigger companies do better - maybe it's through acquisitions, maybe it's through a revolutionary new product offering (can we all agree Apple was a pretty good company when they came out with the iphone? but then when the ipad came out it blew previous investor sentiments out of the water?)

There's other ways to weigh your portfolio, but why wouldn't you just allocate capital yourself if you think market cap is dumb? There's plenty of brokerages out there that offer free trades now if you have a certain balance (Robinhood is completely free, Merrill if you have a $25k balance). And besides that, you could just take the three historically best performing sectors of healthcare, consumer staples, and energy and invest in ETFs for those instead of a total market fund, why would an equal weight strategy be any better?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: forummm on May 28, 2015, 06:13:57 PM

My main concern with index funds is they are market cap weighted. The probability of Apple doubling in size is a lot less likely over the next 3-5 years than something like Uner Armour, yet an index fund holds 2-300% more AAPL than it does UA.

An equal weighted index fund would be great.

But if they were equal weighted, you would only own $10,000 worth of Apple and also own $10,000 worth of Bob's Amazing Corn Dogs.  You might not really want to own $10,000 of BACD because you know Bob's dogs suck.

I was more referring to the S&P 500 than the total market.

Plus right now you are Investing in stocks you may not like any way. By purchasing a market cap weighted index fund you are saying Apple is 2x better than any other stock in the market.

Well, all the other investors in the world are together saying that Apple is 2x better than any other stock in the market. If you don't buy a market cap weighted index fund, you're saying you know better than them what's right.

Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

By owning an index weighted by market cap you are betting heavily that the answer is Apple.

Which is more likely to be worth $0 in 5 years? The company with $200 billion in cash, quite a few products that people just can't get enough of for the last 10-30 years, thousands of patents, and sustaining an insane profit margin for 10 years? Or the one whose business model is totally dependent on continually securing rights to the latest movies and shows at prices that will allow it to compete with other distributors of that same content, relies on its competitors to carry its product to customers, has customers that revolt when prices rise $1 per month, is in an industry with a relatively low barrier to entry, and has new deep-pocketed firms announcing entry every few months?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Roland of Gilead on May 28, 2015, 06:14:13 PM
Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

By owning an index weighted by market cap you are betting heavily that the answer is Apple.

Neither is likely to double in 5 years...that is way above average market returns.

Apple can increase in share price without increasing market cap by doing share buybacks.   If people keep buying their products in droves and they keep printing money faster than the Fed, they very well may be able to buy back enough stock over the next decade that their market cap stays under a trillion but the share price does double.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on May 28, 2015, 06:15:19 PM
So wouldn't this imply a mixed methodology may be best or just as optimal?

Yes. The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders. Let the companies decide that themselves. They can choose to pay a dividend, do a share buyback, pay down debt, or reinvest in their business. They might not always make the perfect choice, but on average they'll probably make a better choice than you would, so just let them do their thing. So there's no reason to have a preference for a dividend-paying company over a non-dividend paying company. Just buy good companies (preferably by letting the market's wisdom select such companies, via index funds).

If I can generate enough spending money from dividends in my Roth IRA then I will continue to have the same ownership in a company without having to liquidate whole shares and when I need extra money liquidating my traditional IRA in index funds instead of liquidating my dividend producing assets to pay for additional expenses?

Do you have any need to maintain a particular ownership stake in a company? I doubt it.

Your index funds in your traditional IRA are also "dividend producing assets", so those will also generate spending money for you without liquidating shares. If that's still not enough spending money (and hopefully it won't be), then you can liquidate shares from either account, there's really no difference.

I guess I get hung up on the assumption that dividends force taxes, when I hold all of my dividend producing equities in a Roth IRA.

Well, you just said you hold some dividend-producing assets in your traditional IRA too, but yes, if all your dividend-producing assets are in tax shelters, then you don't have to be concerned with the extra taxation penalty caused by dividends. But by focusing on a small group of dividend stocks you may still be exposing yourself to other unnecessary costs/risks, as outlined in the Vanguard paper.

Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

So you go from a big interest in dividends, to now only caring about capital growth? I'm confused. The market cap of Apple doesn't have to double in order for it to provide a total return commensurate with the market-cap doubling of Netflix. It can instead provide return to shareholders via dividends or buybacks.  Apple is partly priced like it is because it earns shit-tons of money (especially compared to Netflix). Those earnings can be returned to shareholders to provide a valuable return even if the market cap doesn't budge at all.

By owning Apple, I get a share of the profits that come from all the suckers people who buy iPhones/iPads/etc. By owning Google, I get a share of the profits that come from all the companies buying ads. If Apple and Google merge, I want to continue getting access to those profits at the same rate. Why would I say "no, now that you've merged, I only want to get half the benefit I was getting from you guys before"? Owning an outsized portion of a company that makes an outsized portion of the economy's profits makes a lot of sense to me.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: KBecks2 on June 01, 2015, 06:07:11 AM
Most of my stocks pay modest dividends but also have growth.  Starbucks, Apple, Snap on, Wells Fargo, even a hot tech, skyworks, pays a small dividend.  But the divvy is not the big focus.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on June 01, 2015, 08:56:01 AM

Yes. The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders. Let the companies decide that themselves. They can choose to pay a dividend, do a share buyback, pay down debt, or reinvest in their business. They might not always make the perfect choice, but on average they'll probably make a better choice than you would, so just let them do their thing. So there's no reason to have a preference for a dividend-paying company over a non-dividend paying company. Just buy good companies (preferably by letting the market's wisdom select such companies, via index funds).

The bolded is my main concern. I do care how companies choose to return value to shareholders because some of them make poor decisions. A buyback may make sense if the stock is cheap, but often times management prefers buybacks because they have a lot of money in unvested stock at stake. A dividend does nothing for them considering the stock has not been vested or the option has not been exercised. But a buyback increases the value of their unvested shares. This is something that needs to be considered.

Similarly, capital investments back into the company don't always make sense and sometimes don't always pan out.

IMO the better option is to take the dividend and choose how to allocate the capital instead of letting others choose for you. It may make sense to DRIP, it may not.

My main point on the doubling of a stock's value is to show the impact the law of large #s has on the ability to grow further. Index funds are set up to reward companies that did great last year. I looked at my index fund fact sheet. In 2014 Apple was the biggest holding at 2.53%, now it is the biggest holding at 3.4%. over double the size of the next largest holding. With market cap weighting it is essentially a "buy high" strategy as the holding % is reflective of the "new" market cap on the day the fund re-balances. It's essentially a diversified opposite of the Dogs of the Dow strategy. Instead of picking the companies that did the worst last year you are picking the companies that did the best and/or remained the largest.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on June 01, 2015, 09:37:15 AM
If you think you are better at allocating capital than the majority of the managers of S&P 500 companies, then you should indeed aim for dividends. I'd bet against you on that, but if that's your belief, by all means stick to your guns.

-W

The bolded is my main concern. I do care how companies choose to return value to shareholders because some of them make poor decisions.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on June 01, 2015, 10:04:50 AM
If you think you are better at allocating capital than the majority of the managers of S&P 500 companies, then you should indeed aim for dividends. I'd bet against you on that, but if that's your belief, by all means stick to your guns.

-W

The bolded is my main concern. I do care how companies choose to return value to shareholders because some of them make poor decisions.

I've shared data here that shows that S&P managers increase buybacks when their stock is high and reduce them when low.  This relationship is much stronger than the similar one for dividends.  Most management does worse with these capital allocation decisions than the equivalent of "buy and hold."   
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on June 01, 2015, 10:29:56 AM
Sure, but that's not the same as saying you can do better.

I mean, if you really believe that the managers of big companies are generally crooks looking out for only their own interest, just waiting to rob your blind, then you shouldn't be invested in the stock market at all. History shows that even if those managers are all rascals - it's still a better bet than basically anything else.

-W

If you think you are better at allocating capital than the majority of the managers of S&P 500 companies, then you should indeed aim for dividends. I'd bet against you on that, but if that's your belief, by all means stick to your guns.

-W

The bolded is my main concern. I do care how companies choose to return value to shareholders because some of them make poor decisions.

I've shared data here that shows that S&P managers increase buybacks when their stock is high and reduce them when low.  This relationship is much stronger than the similar one for dividends.  Most management does worse with these capital allocation decisions than the equivalent of "buy and hold."
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on June 01, 2015, 10:40:45 AM
Sure, but that's not the same as saying you can do better.

Yes and no.  I could, in fact, do better if I had control of the capital allocation because I know this information.  I don't, however, have that power, and the information isn't actionable as an investor unless you have that power.

Quote
I mean, if you really believe that the managers of big companies are generally crooks looking out for only their own interest, just waiting to rob your blind, then you shouldn't be invested in the stock market at all. History shows that even if those managers are all rascals - it's still a better bet than basically anything else.

-W

That's not what I'm saying at all.  The managers still create wealth, and they're not out to rob you blind.  But it would be better if managers did a better job by not mistiming stock buybacks.

An analogy is like mutual fund investing.  Mutual fund managers may underperform the index, but until index funds were created, you couldn't really do anything about it.  So mutual funds gave higher returns than the next best thing, even though the returns lagged that of the index.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Ricky on June 01, 2015, 11:06:08 AM
For those that do think that companies misappropriate their use of funds and think paying a dividend is always the best choice, why not own a 50/50 split in your portfolio of a dividend ETF (or a collection of your own choosing) and a regular broad-market fund for the chance that you're wrong?

I don't understand the need to argue about it. Maybe index funds will outperform dividend "giants" as a whole over time, maybe they won't. Either way, if you're more comfortable with one than the other, what's the point in doing something your uncomfortable with? Both are investing, which is better than not investing. Whether you buy mostly dividend paying stocks or broad-market funds is still better than what the mass majority would do with their money. And it's unlikely that you'll end up losing a significant amount of money in either scenario so long as you're diversified in other investments. So please, just give it a rest.

Also, to be realistic, if most of the "dogs of the DOW" were to really go bust and stop paying dividends or being profitable, then we have LARGER problems on our hands than whether it was more important to be weighted in dividend-paying stocks or non-dividend paying stocks.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on June 01, 2015, 11:36:10 AM
For those that do think that companies misappropriate their use of funds and think paying a dividend is always the best choice, why not own a 50/50 split in your portfolio of a dividend ETF (or a collection of your own choosing) and a regular broad-market fund for the chance that you're wrong?

I don't understand the need to argue about it. Maybe index funds will outperform dividend "giants" as a whole over time, maybe they won't. Either way, if you're more comfortable with one than the other, what's the point in doing something your uncomfortable with? Both are investing, which is better than not investing. Whether you buy mostly dividend paying stocks or broad-market funds is still better than what the mass majority would do with their money. And it's unlikely that you'll end up losing a significant amount of money in either scenario so long as you're diversified in other investments. So please, just give it a rest.

Also, to be realistic, if most of the "dogs of the DOW" were to really go bust and stop paying dividends or being profitable, then we have LARGER problems on our hands than whether it was more important to be weighted in dividend-paying stocks or non-dividend paying stocks.

I most certainly do both and I don't necessarily agree that a dividend is always better. There are certain times where if a company pays a dividend it would be a red flag for me. Under Armour, Facebook, and other fast growing companies come to mind. I don't want to siphon cash from a business that is using all of it to grow. But I do want to siphon cash from a company that is established and re-allocation of all of their capital back into the business is not an efficient use of the money.

When a company becomes a certain size (which pretty much all of the top 50 market caps are, the probability that they will be able to efficiently utilize all of their net income to provide 12-15% growth to the top and bottom lines becomes less and less likely. I would rather a company like Chevron pay me a dividend than increase their cap-ex by that amount. But apparently, some people here don't seem to care what the company decides to do with their income as long as they make an attempt to return shareholder value.

For those that haven't I would strongly recommend reading The Intelligent Investor by Benjamin Graham. Even if you never want to touch individual equities the way Ben Graham describes the market and the philosophy of "business ownership" is well worth it.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on June 01, 2015, 08:56:13 PM
The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders.

The bolded is my main concern.

Sorry, I failed to mention my implicit investing assumptions along with that quote. Here it is more completely:

 - if you don't have any trust in your ability to know when a company is overvalued or undervalued (i.e., you aren't a stock-picker, which describes most people on this forum), then you shouldn't have any preference for how companies choose to return value to shareholders.
- if you're a stock-picker, then you absolutely should have a preference for how companies choose to return value to shareholders.

Those are two opposing positions, and this is a case where there is no logical middle ground between the two. You either believe you can't do any better than the company management at making capital decisions, or you believe that you can. The logical consequence of the former position is to just take what the companies (and the index) give you. The logical consequence of the latter position is to actively get out of a position whenever you think management is making bad decisions. Both defensible approaches.

What doesn't make a lot of sense is the middle ground: distrusting management enough to want them to pay you a direct dividend four days a year, yet continuing to trust them with a far larger portion of your capital for all the rest of the year. "Those guys don't know what they're doing, so I demand they give me 1% of my investment back in the form of cash so I can reinvest it properly. The other 99%? Oh, I'll totally keep invested with them." Huh?

Is that because you figure there's only a 1% chance that they're wrong, so you reduce your stake by only 1%? I guess that's possible, but it seems like an amazing coincidence. Why not reduce your stake by 10%? Or 100%? Otherwise it strongly suggests that you want to actively decide how to reallocate a portion of your capital and take the decision out of the hands of the company, but you paradoxically will let the company decide the amount that they'll let you reallocate.

I do care how companies choose to return value to shareholders because some of them make poor decisions. A buyback may make sense if the stock is cheap, but often times management prefers buybacks because they have a lot of money in unvested stock at stake. A dividend does nothing for them considering the stock has not been vested or the option has not been exercised. But a buyback increases the value of their unvested shares. This is something that needs to be considered.

Sure. If you believe it's bad for the company to do a buyback at a particular time, then tender your shares rather than holding them. As an active stock-picker, you should probably be reexamining and reallocating your positions regularly, regardless of dividend or buyback announcements.

Similarly, capital investments back into the company don't always make sense and sometimes don't always pan out.

Of course. And if you're sure your own capital investment decisions will produce a higher return, then you should take all of your capital out of the stock in question and redirect it more optimally, not just take out whatever small portion the company lets you have.

My main point on the doubling of a stock's value is to show the impact the law of large #s has on the ability to grow further. Index funds are set up to reward companies that did great last year. I looked at my index fund fact sheet. In 2014 Apple was the biggest holding at 2.53%, now it is the biggest holding at 3.4%. over double the size of the next largest holding.

Whoa, let me get this straight: your prime example of "the impact of the law of large #s on the ability to grow further" is to show that the largest number in 2014 went on to grow way more than the smaller numbers that make up the rest of the index?

With market cap weighting it is essentially a "buy high" strategy as the holding % is reflective of the "new" market cap on the day the fund re-balances.

Cap-weighted funds don't need to "rebalance". If Apple grows faster than the market, that increased weight is automatically reflected in the index fund, because the underlying AAPL shares held by the fund also grow faster than the rest of the fund. Yes, new money buying into a cap-weighted fund will buy at the ratios reflecting the most-recent weighting, but a dummy like me has no good reason to believe that the weighting at any one time is any more "correct" than the weighting at any other time. If you know enough to know which weighting would be "correct", then you shouldn't be investing in any mutual fund, much less index funds.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on June 01, 2015, 09:02:53 PM
The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders.

The bolded is my main concern.

Sorry, I failed to mention my implicit investing assumptions along with that quote. Here it is more completely:

 - if you don't have any trust in your ability to know when a company is overvalued or undervalued (i.e., you aren't a stock-picker, which describes most people on this forum), then you shouldn't have any preference for how companies choose to return value to shareholders.
- if you're a stock-picker, then you absolutely should have a preference for how companies choose to return value to shareholders.

Those are two opposing positions, and this is a case where there is no logical middle ground between the two. You either believe you can't do any better than the company management at making capital decisions, or you believe that you can. The logical consequence of the former position is to just take what the companies (and the index) give you. The logical consequence of the latter position is to actively get out of a position whenever you think management is making bad decisions. Both defensible approaches.

What doesn't make a lot of sense is the middle ground: distrusting management enough to want them to pay you a direct dividend four days a year, yet continuing to trust them with a far larger portion of your capital for all the rest of the year. "Those guys don't know what they're doing, so I demand they give me 1% of my investment back in the form of cash so I can reinvest it properly. The other 99%? Oh, I'll totally keep invested with them." Huh?

Is that because you figure there's only a 1% chance that they're wrong, so you reduce your stake by only 1%? I guess that's possible, but it seems like an amazing coincidence. Why not reduce your stake by 10%? Or 100%? Otherwise it strongly suggests that you want to actively decide how to reallocate a portion of your capital and take the decision out of the hands of the company, but you paradoxically will let the company decide the amount that they'll let you reallocate.

I do care how companies choose to return value to shareholders because some of them make poor decisions. A buyback may make sense if the stock is cheap, but often times management prefers buybacks because they have a lot of money in unvested stock at stake. A dividend does nothing for them considering the stock has not been vested or the option has not been exercised. But a buyback increases the value of their unvested shares. This is something that needs to be considered.

Sure. If you believe it's bad for the company to do a buyback at a particular time, then tender your shares rather than holding them. As an active stock-picker, you should probably be reexamining and reallocating your positions regularly, regardless of dividend or buyback announcements.

Similarly, capital investments back into the company don't always make sense and sometimes don't always pan out.

Of course. And if you're sure your own capital investment decisions will produce a higher return, then you should take all of your capital out of the stock in question and redirect it more optimally, not just take out whatever small portion the company lets you have.

My main point on the doubling of a stock's value is to show the impact the law of large #s has on the ability to grow further. Index funds are set up to reward companies that did great last year. I looked at my index fund fact sheet. In 2014 Apple was the biggest holding at 2.53%, now it is the biggest holding at 3.4%. over double the size of the next largest holding.

Whoa, let me get this straight: your prime example of "the impact of the law of large #s on the ability to grow further" is to show that the largest number in 2014 went on to grow way more than the smaller numbers that make up the rest of the index?

With market cap weighting it is essentially a "buy high" strategy as the holding % is reflective of the "new" market cap on the day the fund re-balances.

Cap-weighted funds don't need to "rebalance". If Apple grows faster than the market, that increased weight is automatically reflected in the index fund, because the underlying AAPL shares held by the fund also grow faster than the rest of the fund. Yes, new money buying into a cap-weighted fund will buy at the ratios reflecting the most-recent weighting, but a dummy like me has no good reason to believe that the weighting at any one time is any more "correct" than the weighting at any other time. If you know enough to know which weighting would be "correct", then you shouldn't be investing in any mutual fund, much less index funds.

So you are implying that the investment strategy used by Warren Buffett doesn't make sense?

Fair enough, I guess we will just have to agree to disagree.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on June 01, 2015, 09:13:02 PM
I don't understand the need to argue about it. Maybe index funds will outperform dividend "giants" as a whole over time, maybe they won't. Either way, if you're more comfortable with one than the other, what's the point in doing something your uncomfortable with? Both are investing, which is better than not investing. Whether you buy mostly dividend paying stocks or broad-market funds is still better than what the mass majority would do with their money.

Buying Starbucks only once a week, reverting to basic cable, and buying a new Camry vs. a new F-150 are also "better than what the mass majority would do with their money", but that's a damn low standard for Mustachians.

Yes, I completely agree that a dividend-focused approach (if diversified and reasonably passive) is not likely to greatly underperform a dividend-agnostic approach, and may even outperform it. But as I've said before (http://forum.mrmoneymustache.com/investor-alley/dividends-the-inexorable-seduction/), generally the pursuit of a dividend-focused strategy is an indication that an investor has only a first-order understanding of dividends and stock markets, and I figure a clearer understanding (such as the basic fact that a dividend payment reduces the share price) will be beneficial to their investment success in the long run. So I tend to encourage people to ignore dividends.

A whole culture of dividend-focused investing has grown out of such misunderstandings, and it perpetuates those misunderstandings, so I think it's reasonable for any of us to do whatever we can to counterbalance that culture rather than just saying "eh, believe whatever you want".
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on June 01, 2015, 09:23:59 PM
So you are implying that the investment strategy used by Warren Buffett doesn't make sense?

No, I had no intention to imply that. Everything I've read about Buffett tells me he's a really smart guy who really understands investing. Though given that most of what I know about his investment strategy comes from reading his yearly letters, perhaps there are points on which we disagree. If you could point out what you read in my post that implied such disagreement, I could investigate and clarify.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on June 01, 2015, 10:02:50 PM
So you are implying that the investment strategy used by Warren Buffett doesn't make sense?

No, I had no intention to imply that. Everything I've read about Buffett tells me he's a really smart guy who really understands investing. Though given that most of what I know about his investment strategy comes from reading his yearly letters, perhaps there are points on which we disagree. If you could point out what you read in my post that implied such disagreement, I could investigate and clarify.

You said it does not make any sense to own a company if you want a dividend from them as it implies you agree with management all but 4 days a year. WB essentially only owns companies that provide him with cash flow, of which he chooses how to re-allocate.

A dividend is a natural outcome of a healthy mature company. At a certain point in time a company can not efficiently allocate all of its capital by re-investingg for growth. Walmart comes to mind as an example. It could cease the dividend and the buybacks and instead decide to just open up as many stores as they can with all of their capital, but does it make sense? Instead they decided they are at a point where it makes sense to strategically grow and return excess capital to shareholders to do with as they please.

A dividend does not always make sense, I agree. I also don't only invest in dividend companies, I agree with your premise that often times people who think dividends are always the best may not have a full understanding of what total returns are and how a dividend is the equivalent of siphoning equity from the company. But I do see value in utilizing dividends to re-allocate capital to attractively priced assets in a similar manner to how Buffett and Munger run Berkshire. I see it as similar to owning an entire business and instead of taking a salary you re-invest it all back into the company for years. In the end you have two options. Sell it (or shares of it) or begin taking a dividend/salary. If you still believe in the business and think it will continue to do well does it make sense to sell it? Perhaps it does, but that is essentially what is happening in a dividend vs selling shares discussion.


Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on June 01, 2015, 11:12:23 PM
You said it does not make any sense to own a company if you want a dividend from them as it implies you agree with management all but 4 days a year.

Ah. No, I only said that if you're in the class that disagrees with management's capital allocation decisions it doesn't make sense to only want a dividend. You should divest yourself to a greater extent than the dividend. If you're in the other class (the one that trusts management) then it makes perfect sense to be happy with a dividend, because you trust that that was the best possible use of capital.

To be clear, I'm not anti-dividend. I'm simply against a focus on dividends when deciding on what to invest in. So I largely agree with the rest of your post; if a company has no better use for its cash than to pay a dividend, of course that's what it should do (well, actually I think it should execute a disciplined buyback schedule instead, as that returns the same value to shareholders but gives them tax flexibility).

FYI, Buffett seems to be in the same "trusts whatever management gives him" class that me and all other broad-market index investors are in. From his 2014 Letter (http://www.berkshirehathaway.com/letters/2014ltr.pdf):

"If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” [American Express, Coca-Cola, IBM and Wells Fargo] 2014 earnings before discontinued operations amounted to $4.7 billion.... In the earnings we report to you, however, we include only the dividends we receive – about $1.6 billion last year.... But make no mistake: The $3.1 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.

The earnings these investees retain are often used for repurchases of their own stock – a move that enhances Berkshire’s share of future earnings without requiring us to lay out a dime. Their retained earnings also fund business opportunities that usually turn out to be advantageous.
All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time (though 2015 will be a tough year for the group, in part because of the strong dollar). If the expected gains materialize, dividends to Berkshire will increase and, even more important, so will our unrealized capital gains." (emphasis added)

So he actually likes capital gains more than dividends in this case (maybe as he's run out of opportunities to direct cashflow towards?) And I'm pretty sure that unlike amateur-dividend-investors, he doesn't hold any of this paradoxical mistrust-of-management in the companies he owns. Sure, sharing some of their earnings with him and allowing him to reinvest it elsewhere has been a key part of the success of BH, but I'm sure he trusts his business managers to know when to reinvest in their own businesses vs. return the cash to him; I don't think he demands a 100% (or any other) payout ratio.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on June 02, 2015, 05:35:47 AM
You said it does not make any sense to own a company if you want a dividend from them as it implies you agree with management all but 4 days a year.

Ah. No, I only said that if you're in the class that disagrees with management's capital allocation decisions it doesn't make sense to only want a dividend. You should divest yourself to a greater extent than the dividend. If you're in the other class (the one that trusts management) then it makes perfect sense to be happy with a dividend, because you trust that that was the best possible use of capital.

To be clear, I'm not anti-dividend. I'm simply against a focus on dividends when deciding on what to invest in. So I largely agree with the rest of your post; if a company has no better use for its cash than to pay a dividend, of course that's what it should do (well, actually I think it should execute a disciplined buyback schedule instead, as that returns the same value to shareholders but gives them tax flexibility).

FYI, Buffett seems to be in the same "trusts whatever management gives him" class that me and all other broad-market index investors are in. From his 2014 Letter (http://www.berkshirehathaway.com/letters/2014ltr.pdf):

"If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” [American Express, Coca-Cola, IBM and Wells Fargo] 2014 earnings before discontinued operations amounted to $4.7 billion.... In the earnings we report to you, however, we include only the dividends we receive – about $1.6 billion last year.... But make no mistake: The $3.1 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.

The earnings these investees retain are often used for repurchases of their own stock – a move that enhances Berkshire’s share of future earnings without requiring us to lay out a dime. Their retained earnings also fund business opportunities that usually turn out to be advantageous.
All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time (though 2015 will be a tough year for the group, in part because of the strong dollar). If the expected gains materialize, dividends to Berkshire will increase and, even more important, so will our unrealized capital gains." (emphasis added)

So he actually likes capital gains more than dividends in this case (maybe as he's run out of opportunities to direct cashflow towards?) And I'm pretty sure that unlike amateur-dividend-investors, he doesn't hold any of this paradoxical mistrust-of-management in the companies he owns. Sure, sharing some of their earnings with him and allowing him to reinvest it elsewhere has been a key part of the success of BH, but I'm sure he trusts his business managers to know when to reinvest in their own businesses vs. return the cash to him; I don't think he demands a 100% (or any other) payout ratio.

Where did I say I miatrust management and that I want a 100% payout ratio? You seem to be taking my posts to their logical extremes. I'm not really sure why. Yes Buffett agrees that capital appreciation of a business is just as important of a return as cash flow, it is. But, take a look at his holdings. He likes dividends. You can trust management to run a great business but think there is better use for future cash flow. If you fully trusted management and thought they would do a great job at returning shareholder value would it not make sense to put all of your money in just that company? So, if I take your argument to its logical extreme if you trust the management to efficiently return capital to shareholders (in any way, through appreciation, buybacks, or dividends) you should invest all free equity in that one company. It offers the ability to rebalance without actually incurring transaction costs.

Or, perhaps, you want to own their business, but like the freedom the cash flow allows you to choose what you want to invest in given the conditions of all other available opportunities. For example, Disney just paid a dividend in January. Great, company, has had a great run, was at an all time high then. They could have just done a buyback, but instead I got cash from them and was able to use that cash to purchase more shares of Gilead, which was trading at an extreme discount at the time. I want to own more Disney, but not at $110.

The funny thing is the outcome of Just re-investing dividends into the same company and a buyback in the long term is essentially identical (although the latter can have tax advantages) because eventually the amount of shares repurchased increases the price of the shares to the point they just split the shares again to make prices attractive for retail investors.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: brooklynguy on June 02, 2015, 06:58:51 AM
Sorry, I failed to mention my implicit investing assumptions along with that quote. Here it is more completely:

 - if you don't have any trust in your ability to know when a company is overvalued or undervalued (i.e., you aren't a stock-picker, which describes most people on this forum), then you shouldn't have any preference for how companies choose to return value to shareholders.
- if you're a stock-picker, then you absolutely should have a preference for how companies choose to return value to shareholders.

Those are two opposing positions, and this is a case where there is no logical middle ground between the two. You either believe you can't do any better than the company management at making capital decisions, or you believe that you can. The logical consequence of the former position is to just take what the companies (and the index) give you. The logical consequence of the latter position is to actively get out of a position whenever you think management is making bad decisions. Both defensible approaches.

Here's a logically defensible middle ground:  managers are uniquely bad at the specific capital allocation decision of conducting share buybacks.  Incentives exist for managers to conduct share buybacks (including the immediate boost to earnings per share) that do not equally apply to other methods of allocating capital, such as paying dividends or making reinvestments in the business.  As beltim is fond of pointing out, the data shows (show? -- I know "data" is plural, but grammatically treating it that way offends my unenlightened ears) that corporate managers are generally pretty awful at timing the market through share buyback programs, which leads to destruction of shareholder value.  It is true that a dividend would have the same effect on any shareholders who choose to reinvest the dividend in additional shares, but share buybacks are not necessarily conducted in lieu of a dividend -- it is not necessarily the case that management first decides to return capital to shareholders, then decides which method (buyback vs. dividend) to use do it.  Instead, management may decide to conduct a share buyback (say, for the short-term (immediate, really) effect of increasing EPS, even at the expense of maximizing long-term shareholder value), when the alternative capital allocation strategy in their mind is not paying a dividend but reinvesting the cash in the business or even simply sitting on it.  I'm not saying I necessarily believe that any of this is pervasively true such that I express a preference against buybacks, but it is a logically coherent reason that someone may do so even if they generally believe that corporate managers are better capital allocators than themselves.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: forummm on June 02, 2015, 07:24:22 AM
But if managers are buying back shares at high values instead of paying out dividends, isn't that the same thing as them paying out dividends and you reinvesting them at high values?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: forummm on June 02, 2015, 07:26:37 AM
You said it does not make any sense to own a company if you want a dividend from them as it implies you agree with management all but 4 days a year.

Ah. No, I only said that if you're in the class that disagrees with management's capital allocation decisions it doesn't make sense to only want a dividend. You should divest yourself to a greater extent than the dividend. If you're in the other class (the one that trusts management) then it makes perfect sense to be happy with a dividend, because you trust that that was the best possible use of capital.

To be clear, I'm not anti-dividend. I'm simply against a focus on dividends when deciding on what to invest in. So I largely agree with the rest of your post; if a company has no better use for its cash than to pay a dividend, of course that's what it should do (well, actually I think it should execute a disciplined buyback schedule instead, as that returns the same value to shareholders but gives them tax flexibility).

FYI, Buffett seems to be in the same "trusts whatever management gives him" class that me and all other broad-market index investors are in. From his 2014 Letter (http://www.berkshirehathaway.com/letters/2014ltr.pdf):

"If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” [American Express, Coca-Cola, IBM and Wells Fargo] 2014 earnings before discontinued operations amounted to $4.7 billion.... In the earnings we report to you, however, we include only the dividends we receive – about $1.6 billion last year.... But make no mistake: The $3.1 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.

The earnings these investees retain are often used for repurchases of their own stock – a move that enhances Berkshire’s share of future earnings without requiring us to lay out a dime. Their retained earnings also fund business opportunities that usually turn out to be advantageous.
All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time (though 2015 will be a tough year for the group, in part because of the strong dollar). If the expected gains materialize, dividends to Berkshire will increase and, even more important, so will our unrealized capital gains." (emphasis added)

So he actually likes capital gains more than dividends in this case (maybe as he's run out of opportunities to direct cashflow towards?) And I'm pretty sure that unlike amateur-dividend-investors, he doesn't hold any of this paradoxical mistrust-of-management in the companies he owns. Sure, sharing some of their earnings with him and allowing him to reinvest it elsewhere has been a key part of the success of BH, but I'm sure he trusts his business managers to know when to reinvest in their own businesses vs. return the cash to him; I don't think he demands a 100% (or any other) payout ratio.

Capital gains don't have taxes in the short term. And if you *never* sell, you never have to pay in the long term either. Buffett hasn't bought or sold Coke in like 20 years. He may never sell it. If you hand the shares to your kids upon death, you handed them a lifetime of tax-free gains.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: brooklynguy on June 02, 2015, 07:35:00 AM
But if managers are buying back shares at high values instead of paying out dividends, isn't that the same thing as them paying out dividends and you reinvesting them at high values?

Yes, it is the same thing from the perspective of the reinvesting shareholders, which is what I said here:

It is true that a dividend would have the same effect on any shareholders who choose to reinvest the dividend in additional shares

But the point I went on to make is that a dividend payment is not the logically necessary alternative to a share buybacks.  Management could instead decide to let the company continue to sit on the cash, or reinvest it into the business (e.g., build a new factory).  Because share buybacks potentially have perverse incentives for management that those other alternatives do not, it would not necessarily be illogical for someone to take the position that they prefer for companies not to return capital to shareholders via stock buybacks, even if that person otherwise adopts an indexer-like "complete trust in management" approach.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on June 02, 2015, 01:51:13 PM
Where did I say I miatrust management and that I want a 100% payout ratio? You seem to be taking my posts to their logical extremes. I'm not really sure why.

You said "IMO the better option is to take the dividend and choose how to allocate the capital instead of letting others choose for you." Yes, you didn't say anything about a 100% payout ratio; that was more me asking a Socratic question: if you can allocate capital better than management, why would you not demand a 100% payout ratio (or sell all your shares)? Again, there's a logical conflict between you wanting to choose how to allocate the capital, but allowing the company decide the time and the amount for you to reallocate.

For example, Disney just paid a dividend in January. Great, company, has had a great run, was at an all time high then. They could have just done a buyback, but instead I got cash from them and was able to use that cash to purchase more shares of Gilead, which was trading at an extreme discount at the time. I want to own more Disney, but not at $110.

Perfect, this makes it easy to make my logical-extremism more tangible by using a concrete example. You believed at the time of the dividend that Gilead was a better value than Disney. So you reallocated some capital from Disney to Gilead. That makes perfect sense.

What's odd is that the amount you decided to reallocate was 1.25% of your holding in Disney. If you thought Gilead was a better value then Disney, why did you not reallocate 100% of your holding in Disney to Gilead? Or, if you were less-confident in your valuation estimates and wanted to hedge your bets, why not 10%? Or 1.35%? Or 0.25%? It seems like an incredible coincidence that the amount that you thought was correct to reallocate just happened to be the amount that Disney decided to pay out in a dividend.

Of course, it wasn't a coincidence. You decided your reallocation amount and timing based on the decision of Disney's management to pay a dividend.

This is the logical conflict I'm trying to highlight. If you trust company management to correctly know the amount of capital that you should reallocate elsewhere, then why would you stop trusting them when that amount just happens to be 0?

If we make the opposite assumption, and you don't trust company management to correctly know the amount of capital that you should reallocate elsewhere, then you always have the ability to perform these reallocations whenever you'd like (by selling the amount of shares you deem appropriate). A dividend is not necessary for you to perform reallocation.

In either case, the payment of a dividend (or lack thereof) should not matter to you.

Buffett's case is different. He likes to own entire companies. In that case, he cannot perform capital reallocation by selling portions of those companies and investing the money elsewhere (at least not easily). So dividends are the only way for him to get access the capital in those companies. Thus, his preference for dividends in the companies he wholly-owns is logical. Until you get to the point where you're buying entire companies, you are not shackled with that "limitation" and have far more flexibility in reallocation because you can just sell some shares.

(And for the companies he only owns portions of, they tend to be dividend payers just because the types of companies Buffett knows how to value happen to be the types of companies that pay dividends; after all, 84% of S&P500 companies pay dividends; it's not an unusual class of stock! His quotes I pasted show that their dividends are just a side-effect, not the reason he bought them.)

They could have just done a buyback, but instead I got cash from them

No, not "could have". Disney was doing a buyback, in addition to paying a dividend, and doing capital reinvestments (it seems like most companies do some mix of at least those three these days). In fact, the amount returned to shareholders via buybacks exceeded the amount returned via dividends by 2.6x. If you believed Gilead was a better value than Disney, why did you not at least sell a percentage of your shares equivalent to the buyback amount, in addition to taking the dividend? That still wouldn't be terribly logical, but at least it would be taking the entire portion of the money Disney knew no better use for, rather than only the fraction it returned in the form of a dividend.

Again, this is all to point out the logical inconsistencies that come from occupying the middle ground. If you're better at capital allocation than company management, then it makes no sense to let their dividend payments be the driver of your reallocations. Get your own ass in the driver's seat! And conversely, if you think you're no better at capital allocation than company management, then it makes no sense to favor any particular dividend payout amount over any other (including 0).
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: beltim on June 02, 2015, 02:17:52 PM
Where did I say I miatrust management and that I want a 100% payout ratio? You seem to be taking my posts to their logical extremes. I'm not really sure why.

You said "IMO the better option is to take the dividend and choose how to allocate the capital instead of letting others choose for you." Yes, you didn't say anything about a 100% payout ratio; that was more me asking a Socratic question: if you can allocate capital better than management, why would you not demand a 100% payout ratio (or sell all your shares)? Again, there's a logical conflict between you wanting to choose how to allocate the capital, but allowing the company decide the time and the amount for you to reallocate.

Companies are good are investing to expand their business, on average.  Companies are bad at reinvesting in their stock, on average.


Quote
If we make the opposite assumption, and you don't trust company management to correctly know the amount of capital that you should reallocate elsewhere, then you always have the ability to perform these reallocations whenever you'd like (by selling the amount of shares you deem appropriate). A dividend is not necessary for you to perform reallocation.

Investors don't have the ability to invest in a company's new project - management does.  I'm happy to let management decide whether they need funds to reinvest in their business - but unless they've shown better than average market timing, they shouldn't be in the business of doing buybacks.  Because, like most mutual funds managers and individual investors, their stock investments don't beat the market.

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mizzourah2006 on June 02, 2015, 02:51:38 PM
Where did I say I miatrust management and that I want a 100% payout ratio? You seem to be taking my posts to their logical extremes. I'm not really sure why.

You said "IMO the better option is to take the dividend and choose how to allocate the capital instead of letting others choose for you." Yes, you didn't say anything about a 100% payout ratio; that was more me asking a Socratic question: if you can allocate capital better than management, why would you not demand a 100% payout ratio (or sell all your shares)? Again, there's a logical conflict between you wanting to choose how to allocate the capital, but allowing the company decide the time and the amount for you to reallocate.

For example, Disney just paid a dividend in January. Great, company, has had a great run, was at an all time high then. They could have just done a buyback, but instead I got cash from them and was able to use that cash to purchase more shares of Gilead, which was trading at an extreme discount at the time. I want to own more Disney, but not at $110.

Perfect, this makes it easy to make my logical-extremism more tangible by using a concrete example. You believed at the time of the dividend that Gilead was a better value than Disney. So you reallocated some capital from Disney to Gilead. That makes perfect sense.

What's odd is that the amount you decided to reallocate was 1.25% of your holding in Disney. If you thought Gilead was a better value then Disney, why did you not reallocate 100% of your holding in Disney to Gilead? Or, if you were less-confident in your valuation estimates and wanted to hedge your bets, why not 10%? Or 1.35%? Or 0.25%? It seems like an incredible coincidence that the amount that you thought was correct to reallocate just happened to be the amount that Disney decided to pay out in a dividend.

Of course, it wasn't a coincidence. You decided your reallocation amount and timing based on the decision of Disney's management to pay a dividend.

This is the logical conflict I'm trying to highlight. If you trust company management to correctly know the amount of capital that you should reallocate elsewhere, then why would you stop trusting them when that amount just happens to be 0?

If we make the opposite assumption, and you don't trust company management to correctly know the amount of capital that you should reallocate elsewhere, then you always have the ability to perform these reallocations whenever you'd like (by selling the amount of shares you deem appropriate). A dividend is not necessary for you to perform reallocation.

In either case, the payment of a dividend (or lack thereof) should not matter to you.

Buffett's case is different. He likes to own entire companies. In that case, he cannot perform capital reallocation by selling portions of those companies and investing the money elsewhere (at least not easily). So dividends are the only way for him to get access the capital in those companies. Thus, his preference for dividends in the companies he wholly-owns is logical. Until you get to the point where you're buying entire companies, you are not shackled with that "limitation" and have far more flexibility in reallocation because you can just sell some shares.

(And for the companies he only owns portions of, they tend to be dividend payers just because the types of companies Buffett knows how to value happen to be the types of companies that pay dividends; after all, 84% of S&P500 companies pay dividends; it's not an unusual class of stock! His quotes I pasted show that their dividends are just a side-effect, not the reason he bought them.)

They could have just done a buyback, but instead I got cash from them

No, not "could have". Disney was doing a buyback, in addition to paying a dividend, and doing capital reinvestments (it seems like most companies do some mix of at least those three these days). In fact, the amount returned to shareholders via buybacks exceeded the amount returned via dividends by 2.6x. If you believed Gilead was a better value than Disney, why did you not at least sell a percentage of your shares equivalent to the buyback amount, in addition to taking the dividend? That still wouldn't be terribly logical, but at least it would be taking the entire portion of the money Disney knew no better use for, rather than only the fraction it returned in the form of a dividend.

Again, this is all to point out the logical inconsistencies that come from occupying the middle ground. If you're better at capital allocation than company management, then it makes no sense to let their dividend payments be the driver of your reallocations. Get your own ass in the driver's seat! And conversely, if you think you're no better at capital allocation than company management, then it makes no sense to favor any particular dividend payout amount over any other (including 0).


So diversification is only important in index investing? I did allocate a hell of a lot more capital to Gilead at that point in time and since then have made almost 30% compared to the markets 3% return, but I also believe in diversification. Apparently, you are advocating for the idea of "if you think another company is a better investment liquidate all other holdings and invest in them".

Your example only makes sense if I don't care about diversification.

Do you not believe there is a time when a company can no longer efficiently allocate capital back within their org? Or do you believe companies can organically or through M&A grow forever at competitive top and bottoms lines? Another positive about dividends is I don't have to incur a transaction fee on the way out. If I did what you say I would pay a $7.99 transaction fee to sell Disney and a $7.99 transaction fee to buy Gilead. With a dividend I split that fee in half.

You still haven't addressed the fact that Berkshire uses a very similar investment strategy (I.e. Owning high quality companies forever and taking the cash flow they generate to buy other attractively priced assets.)

But... I totally agree, all companies should just cease dividends and only do share buybacks. its not remotely possible that buybacks may have some conflict of interest because unvested shares and unvested options are impacted where as a dividend has no impact on those same shares. I work for a company and receive 10% of my salary in unvested stock every year, I love buybacks, because I wouldn't receive a dividend, but I get to reap the benefits of reduced float that comes with share buybacks, regardless of the price they are made at. Also, management of companies operate in a vacuum, you don't. For example, right now healthcare is expensive, but JNJ is relatively inexpensive compared to BMY, so JNJ may think it is an attractive price to buyback tons of shares. Yet over in financials, WFC is dirt cheap compared to JNJ and as the fed raises interest rates money will begin to flow back into financials. JNJ management is not looking at stock buybacks vs all other possible purchases in the spectrum of the investment world, they are comparing themselves to their peers.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: skyrefuge on June 02, 2015, 05:08:07 PM
Apparently, you are advocating for the idea of "if you think another company is a better investment liquidate all other holdings and invest in them".

Your example only makes sense if I don't care about diversification.

Hmm, have you only been reading random lines from my posts, and ignoring the rest? Yes, I raised the suggested the possibility of divesting yourself 100% from an overvalued company. But I immediately followed that with: "Or, if you were less-confident in your valuation estimates and wanted to hedge your bets, why not 10%? Or 1.35%? Or 0.25%?" My point was not to say "you should divest yourself 100%", it was to ask "of the infinite number of levels at which you could divest yourself, why did you choose the one that matched the amount the company decided?"

Do you not believe there is a time when a company can no longer efficiently allocate capital back within their org? Or do you believe companies can organically or through M&A grow forever at competitive top and bottoms lines?

"if a company has no better use for its cash than to pay a dividend, of course that's what it should do". I wrote that just two responses ago.

Another positive about dividends is I don't have to incur a transaction fee on the way out. If I did what you say I would pay a $7.99 transaction fee to sell Disney and a $7.99 transaction fee to buy Gilead. With a dividend I split that fee in half.

Good point. I agree that transactions fees are a logical reason to choose a somewhat different reallocation amount/timing than your valuation model would optimally suggest in a world without such fees. Have you done any analysis to create a rule-of-thumb for how far out-of-whack your allocation has to be to overcome the drag of transaction fees? For example, if your model tells you that you should divest yourself of 1.5% of your stake in Disney, and they happen to pay a 1.25% dividend, then it's unlikely that paying a fee to sell that extra 0.25% would be worth it. And if your model says you should divest yourself of 50%, then the fee to sell the extra 48.5% is probably worth it. But what if you're 10% off? Or 5%?

You still haven't addressed the fact that Berkshire uses a very similar investment strategy (I.e. Owning high quality companies forever and taking the cash flow they generate to buy other attractively priced assets.)

I think I've addressed BH quite a bit. But, ok. Yes, that is the strategy BH uses. That is also the strategy a dividend-agnostic, dividend-reinvesting index investor uses. It is a good strategy! I highly recommend it!

But... I totally agree, all companies should just cease dividends and only do share buybacks.

I should have kept my damn fool mouth shut and not let the word "buybacks" escape my lips. Because I think it's an unnecessary distraction from the discussion at hand. Everything I've said in our discussion still applies even if "buybacks" are not a legal option for companies, and the choice is only between dividends vs. retaining/reinvesting/debt-paydown. The logical passive investor just takes whatever dividends companies decide to give him, and reinvests them. The logical active investor either reinvests dividends in the same company if he feels the company is returning too much cash to him, or creates his own dividend by selling shares if he feels the company is returning too little cash to him, or does not own that company at all if he thinks their management regularly makes the wrong decisions. Neither selects or avoids companies to invest in based on their dividend payments.

(for the record, when I expressed a slight preference for buybacks in place of dividends, I said "I think [a company] should execute a disciplined buyback schedule", where the phrase "disciplined buyback schedule" was meant to convey "a buyback-program that even a buyback-hating dividend-lover wouldn't bitch about", e.g., one performed with the same amount of cash and with the same timing of your ideal dividend schedule, avoiding any of the potentially ulterior motives that are attributed to buybacks.)
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Ricky on June 02, 2015, 07:13:19 PM
I don't understand the need to argue about it. Maybe index funds will outperform dividend "giants" as a whole over time, maybe they won't. Either way, if you're more comfortable with one than the other, what's the point in doing something your uncomfortable with? Both are investing, which is better than not investing. Whether you buy mostly dividend paying stocks or broad-market funds is still better than what the mass majority would do with their money.

Buying Starbucks only once a week, reverting to basic cable, and buying a new Camry vs. a new F-150 are also "better than what the mass majority would do with their money", but that's a damn low standard for Mustachians.

Yes, I completely agree that a dividend-focused approach (if diversified and reasonably passive) is not likely to greatly underperform a dividend-agnostic approach, and may even outperform it. But as I've said before (http://forum.mrmoneymustache.com/investor-alley/dividends-the-inexorable-seduction/), generally the pursuit of a dividend-focused strategy is an indication that an investor has only a first-order understanding of dividends and stock markets, and I figure a clearer understanding (such as the basic fact that a dividend payment reduces the share price) will be beneficial to their investment success in the long run. So I tend to encourage people to ignore dividends.

A whole culture of dividend-focused investing has grown out of such misunderstandings, and it perpetuates those misunderstandings, so I think it's reasonable for any of us to do whatever we can to counterbalance that culture rather than just saying "eh, believe whatever you want".

While I see a distinction between knowing that dividends aren't the only form of capital allocation done by companies, and treating dividends as if they're the only viable form of income, it doesn't make a practical difference. Again, if dividends are easier to understand by some and that's how they are comfortable investing, and that they'll likely come out fine in the long run, what's the reason for needlessly pointing the distinction between "dividend" investing and "regular" investing? They're still going to see it how they want to see it, misconceptions abound or not. Theoretically, yes, the share price goes down by the amount of the dividend, but not always. Just like stock prices aren't always necessarily directly correlated to the underlying company.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: YoungInvestor on June 02, 2015, 08:08:50 PM
Dividends aren't do-or-die for me, but I like to evaluate a stock as the NPV of its future dividends. If I can calculate an IRR > 8% assuming a conservative growth of the dividend and 10% based on my best estimate, I'll just take the potential capital gains as icing on the cake.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: waltworks on June 02, 2015, 09:18:46 PM
I think the problem, really, is that a lot of dividend focused people end up buying individual stocks, and having problems with diversification and/or asset allocation, not to mention doing a bad job with tax optimization. And they end up spending a lot of time on their investments and tracking things, for negligible benefit.

If you are sophisticated enough to handle those things, and want to spend the time, there's probably nothing wrong with it.

-W
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Financial.Velociraptor on June 02, 2015, 09:23:34 PM
I was just noticing the topic is about ONLY divs.  I posted somewhere earlier on this thread and didn't grok that.  I have dividend leanings but have 4 issues in portfolio with no dividends.  I consider all the components of shareholder yield: debt repayment, dividends, and share buybacks.  I am also very high on insurers with a history of strong underwriting so I sometimes pick stocks with no dividend yield.

Put yield is more important to me than any of the above though.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: mrpercentage on June 03, 2015, 01:07:45 PM
People often overlook dividend advantages over capital gains as they are taxed more favorably which works out very well for many over capital gains non dividend stocks. Everybody situation and goals are different. For many they choose a side and bash the other side like republican/democrats, pc/mac . People have to stop being elitist dicks and embrace all sides to investing. What works for you may not work for others so chill out people.

I am invested in dividend stocks primarily but I am not opposed to
index investing
Reits
preferred stock
bonds

I am just not a dick about it and bash other forms of investments. There is enough room for all investors to make money.

I think if you make money you won. I'm often told that I could do better with (add whatever). My first thought is if this turns into a dick measuring contest there will always be a freak out there with a bigger one, a faster car, a meaner portfolio. So I agree with you. If it makes you happy and works for you great. I like stocks and shopping for them. It's psychologically different then auto investing and receiving a smaller take home paycheck. It just so happens that this monkeys darts seem to be hitting damn good companies too. I'm still doubling the 500
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: UKFreak on March 26, 2016, 05:05:58 AM
I agree 100%. I also used to buy stocks and mutual funds and then keep my fingers crossed that I could make money on the price. When the market was up, I was happy, when it was down my mood went with it. I was a slave to the market movements.

Today I only invest in companies that pay dividends, and have done so for decades. Instead on focusing on the prices of the stock, I focus on the dividend, and whether or not it is being raised. By investing in these companies, even if they have a small yield, the compunding effect of the increasing dividend will give me a nice passive growing income, without being held captive by market movements. It seems that companies that have raised their dividends for decades, are much more likely to keep raising them in the future as well. For instance, if you are the CEO of Coca Cola, who has raised their dividends for 53 years, would you be the one to cut the dividend? I think not :-(

For instance, see which Canadian companies have raised their dividends for the longest:
https://dividendplanet.com/best-canadian-dividend-stocks (https://dividendplanet.com/best-canadian-dividend-stocks)

Or see the corresponding list for British stocks:
https://dividendplanet.com/best-uk-dividend-stocks (https://dividendplanet.com/best-uk-dividend-stocks)

Happy dividend hunting!
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: nobodyspecial on March 26, 2016, 11:27:13 AM
For instance, if you are the CEO of Coca Cola, who has raised their dividends for 53 years, would you be the one to cut the dividend? I think not :-(
Similarly you could be the CEO of a telco who blindly raised dividends instead of investing in this new internet and mobile stuff.
 
Dividend companies are still subject to the market but have limited themselves to one way of using their resources - paying dividends. Which means that if you are eg. an oil company at the moment, you cut exploration, cut research, cut operations and pay a dividend even when you are losing money - because to be the first to cut it would send the wrong message. The couple of Canadian oil sands operators that have cut or eliminated the dividend have seen their share price rise while the others have seen it drop. There is no point in owning a stock which will pay a 2% dividend into bankruptcy.

 
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: tyir on March 26, 2016, 11:38:33 AM


For instance, see which Canadian companies have raised their dividends for the longest:
https://dividendplanet.com/best-canadian-dividend-stocks (https://dividendplanet.com/best-canadian-dividend-stocks)

Or see the corresponding list for British stocks:
https://dividendplanet.com/best-uk-dividend-stocks (https://dividendplanet.com/best-uk-dividend-stocks)


One issue with this mentality is you're buying the stocks that have done well in the past X years - there's no guarantee they are the ones that will do well in the next Y years. To me this is similar to "here are the active mutual funds who have done the best in the last 10 years". This argument has been done ad nauseum on this forum, though.

Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: Interest Compound on March 26, 2016, 12:26:38 PM
It seems that companies that have raised their dividends for decades, are much more likely to keep raising them in the future as well.

Besides the obvious attempt to spam the forum with your own links by digging up old threads on dividend investing and linking multiple times to your own website as your first-and-only-post to the forum...do you have any outside sources for this claim?
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: YoungInvestor on March 26, 2016, 01:06:49 PM
I consider myself a value investor. I am fairly agnostic to dividends, but pay attention to a company's strategy when it comes to returning capital. Does the company buy back overvalued stock? Does it just let cash pile up? How is the debt level? If the company can achieve high ROE, let them have it. For industries with slow growth, I want my cash.

I'm agnostic, yes, but only so long as the rationale behind decisions makes sense.

Re: tax treatments. Capital gains don't need to be triggered for you to cash out capital gains. You could just take out a margin loan (tax-deductible interest in the US, I assume) and receive a very favorable tax treatment, in which your heirs could sell stock at its stepped up basis to cover the loan.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: capitalninja on March 26, 2016, 03:27:46 PM
I only by stocks and/or ETFs that pay a dividend. If there's no dividend then all you have is an infertile golden goose. The only way to get any benefit is to kill the goose (i.e. sell the security).

IMO buying a security that doesn't pay a dividend falls squarely into the speculation column because you only win if the price goes up. That's a bad way to make money longterm.
Title: Re: Anyone Else Only Buying Dividend Stocks?
Post by: nobodyspecial on March 26, 2016, 09:24:53 PM
While companies paying dividends are saying that they can't make any investment or grow. They are OK as long as nothing changes.

A lot of canal companies paid handsome dividends, as did companies spending $60/bbl to extract oil sands.