Author Topic: Anyone Else Only Buying Dividend Stocks?  (Read 72939 times)

Retired To Win

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Anyone Else Only Buying Dividend Stocks?
« 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?

milesdividendmd

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #1 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.



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.



Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #2 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

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



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



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)!
« Last Edit: April 14, 2015, 09:14:36 AM by Dodge »

AccidentalMiser

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #3 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.

wtjbatman

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #4 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.

AssetGrinder

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #5 on: August 09, 2014, 11:42:31 PM »
I own solely dividend paying stocks. over 50 of em. Works for me.

robotclown

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #6 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.

rmendpara

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #7 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.

Retired To Win

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #8 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?

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #9 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!

wtjbatman

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #10 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 :)

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #11 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.

waltworks

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #12 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

Left

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #13 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?

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #14 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

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #15 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #16 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.

Left

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #17 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?

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #18 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


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

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

robotclown

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #19 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.

rmendpara

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #20 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.
« Last Edit: August 11, 2014, 12:03:35 AM by rmendpara »

milesdividendmd

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Anyone Else Only Buying Dividend Stocks?
« Reply #21 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?

AssetGrinder

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #22 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.

Retired To Win

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #23 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?

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #24 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.

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #25 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.
« Last Edit: August 11, 2014, 07:43:37 AM by hodedofome »

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #26 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.

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #27 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?

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #28 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.

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #29 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.

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #30 on: August 11, 2014, 03:59:23 PM »
Not gonna disagree that most should index, but not everyone sucks at picking stocks.

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #31 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.

« Last Edit: August 11, 2014, 06:13:09 PM by AssetGrinder »

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #32 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.

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #33 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

Some highlights:

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

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

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

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

This graph is particularly interesting:




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

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

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

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

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

Left

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #34 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

waltworks

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #35 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

milesdividendmd

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #36 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.)
« Last Edit: August 12, 2014, 12:32:29 AM by milesdividendmd »

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #37 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?

matchewed

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #38 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.

Scandium

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #39 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.
« Last Edit: August 12, 2014, 10:31:41 AM by Scandium »

Chris86

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #40 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

frugalnacho

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #41 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?

Chris86

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #42 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?


Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #43 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #44 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #45 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.

pom

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #46 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.

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #47 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.

Scandium

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #48 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #49 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?
« Last Edit: August 12, 2014, 10:56:35 AM by Dodge »