Author Topic: Anyone Else Only Buying Dividend Stocks?  (Read 71888 times)

tomsang

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #100 on: August 13, 2014, 08:32:36 AM »

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #101 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.

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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.

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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.

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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.

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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.

tomsang

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #102 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.

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #103 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

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #104 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?

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #105 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. 

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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. 

Left

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #106 on: August 13, 2014, 11:28:29 AM »
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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?

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #107 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #108 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. 

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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.

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #109 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #110 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.

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #111 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

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #112 on: August 13, 2014, 02:18:49 PM »
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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

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

"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."

Scandium

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #113 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.

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #114 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
« Last Edit: August 14, 2014, 07:35:28 AM by hodedofome »

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #115 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:

  • Market capitalization is greater than or equal to US$ 4.0 billion
  • Annual dollar value traded to float-adjusted market capitalization is greater than 1.0
  • minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date.

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.
« Last Edit: August 14, 2014, 07:39:26 AM by Dodge »

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #116 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.

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #117 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #118 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:



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



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".
« Last Edit: August 14, 2014, 08:13:29 AM by Dodge »

Retired To Win

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #119 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.

matchewed

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #120 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...

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #121 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.

matchewed

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #122 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #123 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%. 
« Last Edit: August 15, 2014, 07:54:04 AM by Dodge »

matchewed

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #124 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%.

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #125 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).

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #126 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 :)



Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #127 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%.





+309%

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #128 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.

matchewed

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #129 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%.

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #130 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%.

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%.

matchewed

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #131 on: August 15, 2014, 08:19:43 AM »
Ah gotcha, thanks.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #132 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

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #133 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%.

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.
« Last Edit: August 15, 2014, 08:44:48 AM by Dodge »

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #134 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).

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #135 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

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #136 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

frugledoc

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #137 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.


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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #138 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'....


Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #139 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?

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #140 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.

missj

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #141 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).

monkeymind

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #142 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!

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #143 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 - 1.77% yield
30% VTIAX - 3.11% yield
40% 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
VTIAX - Total International Stock Index Admiral Shares
VBLTX - Long-Term Bond Index

Yes, the long term bond index isn't as diverse as the Total Bond Market Index, 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:


beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #144 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!

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #145 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 if you don't have Excel):



« Last Edit: August 16, 2014, 08:59:28 PM by Dodge »

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #146 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.  If you really wanted to reach for yields on the bond side, you could go for:

VWEHX - 5.60% TTM Yield with 381 bonds (Vanguard link)
or
VWESX - 4.51% TTM Yield with 710 bonds (Vanguard link)

Those are active funds though (YUCK!), so I don't like to touch those :)
« Last Edit: August 16, 2014, 09:31:49 PM by Dodge »

Retired To Win

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #147 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.
« Last Edit: August 23, 2014, 07:33:01 PM by Retired To Win »

Roland of Gilead

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #148 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.

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #149 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:



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!



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.