Author Topic: Anyone Else Only Buying Dividend Stocks?  (Read 71966 times)

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #150 on: August 24, 2014, 08:49:59 AM »
I found a "dividend" etf that I like, with all the talk on this thread, I had to reconsider it
But I won't buy big into it until I FI...

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

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

edit: I think I'm having a hard time grasping the actual concept of dividends... since I see bond payments as the same :S, I know that they arent the same type of asset but so what? It's the same as investing in real estate, different asset, same money to spend
« Last Edit: August 24, 2014, 08:56:52 AM by eyem »

Retired To Win

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #151 on: August 24, 2014, 09:23:24 AM »
Statement from Jeremy J. Siegel, Professor of Finance at Wharton School, Senior Strategy Advisor to Wisdom Tree Investments, and author of "Stocks for the Long Run" says:

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

Read it and weep...

*AAII Journal, August 2014, page 30.

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


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

waltworks

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #152 on: August 24, 2014, 11:00:11 AM »
Yeah, but the stuff he manages using that same philosophy is losing to the S&P and charging lots of money.

-W

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #153 on: August 24, 2014, 11:06:37 AM »
Statement from Jeremy J. Siegel, Professor of Finance at Wharton School, Senior Strategy Advisor to Wisdom Tree Investments, and author of "Stocks for the Long Run" says:

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

Read it and weep...

*AAII Journal, August 2014, page 30.

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



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.


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

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

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

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

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

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

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

It still didn't keep his managed funds from pretty significantly underperforming the index, with higher risk, and for 6x-7x the fee.  His analysis of past performance is not relevant.

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #154 on: August 24, 2014, 09:21:05 PM »
Assuming that the fund is using the same exact methodology as his research, we still can't draw any definitive conclusions based on less than 10 years of data. Some really robust strategies that have stood the test of time (value and momentum) have 'underperformed' for 10 year periods but have beaten the index over the long term.

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

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #155 on: August 24, 2014, 10:14:22 PM »

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

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

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

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

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

Does anyone have any data that might explain this?

waltworks

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #156 on: August 24, 2014, 10:36:23 PM »
I would assume that either you haven't looked at enough dividend funds (as you say, some should win just from chance) or else that the whole idea is fatally flawed because selling a stock on bad news (ie, when it dropped the dividend) and buying on good (awesome dividend this year!) is pretty much the opposite of what you want to do. Just simple regression to the mean is going to kill you on that strategy since you'll be buying and selling based on unusual/outlier performance.

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

-W

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #157 on: August 25, 2014, 07:29:46 AM »
I honestly find it interesting, however, that literally ALL the dividend funds I see have underperformed the market index. Not only underperformed, but did so while being more risky (in terms of volatility). I would expect at least a few to outperform any particular time period, just due to random chance.

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

Does anyone have any data that might explain this?

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

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

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #158 on: August 25, 2014, 04:59:45 PM »
I honestly find it interesting, however, that literally ALL the dividend funds I see have underperformed the market index. Not only underperformed, but did so while being more risky (in terms of volatility). I would expect at least a few to outperform any particular time period, just due to random chance.

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

Does anyone have any data that might explain this?

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

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

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

I understand your viewpoint on RAFI funds, but this thread is regarding "Anyone Else Only Buying Dividend Stocks", so I'd like to focus my posts on how bad of an idea that is :)

hodedofome

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #159 on: August 25, 2014, 05:12:56 PM »
You'll get no argument from me about dividend only strategies. Too simplistic. Need to add in some other factors.

Retired To Win

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #160 on: August 26, 2014, 08:42:43 PM »
I own solely dividend paying stocks. over 50 of em. Works for me.


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

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

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

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


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

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #161 on: August 26, 2014, 08:59:17 PM »
I own solely dividend paying stocks. over 50 of em. Works for me.


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

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

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

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


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

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

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #162 on: August 26, 2014, 09:37:15 PM »
I own solely dividend paying stocks. over 50 of em. Works for me.


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

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

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

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


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

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

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

The following post from Big Mistakes In Retirement comes to mind:

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

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

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

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

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

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

Retired To Win, I implore you, quit while you're ahead.  You're financially independent, why keep playing when you've already won the game?

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #163 on: April 14, 2015, 09:06:21 AM »
For any newbies finding this thread, Retired To Win holds 30% cash, and has fixed income which covers living expenses.

Source:

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

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

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.
« Last Edit: April 14, 2015, 09:08:42 AM by Dodge »

skyrefuge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #164 on: April 14, 2015, 09:31:18 AM »
Since the cash & fixed-income side is less risky than even bonds

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

http://en.wikipedia.org/wiki/Fixed_income

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #165 on: April 14, 2015, 07:21:57 PM »
"Thank heavens I've found a different way of investing that has really worked for me. A way that has put me much more in control. That way is to only invest in carefully screened individual high-yielding dividend stocks."

I agree with the OP a bit.

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

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

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


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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #166 on: April 14, 2015, 07:36:11 PM »
Ugh. You can live off of all kinds of income, including capital gains, or rent from real estate, or dividends.

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

-W


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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #167 on: April 14, 2015, 08:26:00 PM »
to answer the original question, I have a dividend stock bias, but I am rebalancing for better diversification with small caps and internationally.

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

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

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

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

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

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

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

Dodge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #168 on: April 14, 2015, 09:24:12 PM »
to answer the original question, I have a dividend stock bias, but I am rebalancing for better diversification with small caps and internationally.

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

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

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

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

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

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

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

This sounds like a great thread, which I'd love to participate in :) But let's not have this discussion in an "Anyone Else Only Buying Dividend Stocks?" thread.  Make a new one, and I'll jump in with my analysis.

Retired To Win

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #169 on: April 15, 2015, 06:39:31 AM »
For any newbies finding this thread, Retired To Win holds 30% cash, and has fixed income which covers living expenses.

Source:

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

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

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

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

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

I usually don't factor in most of my cash as part of my investment allocation because it is not tagged as "investment cash."  Most of it is tagged as one type of budget reserve or another, or as "discretionary spending" cash.  The cash that I actually have in investment accounts is literally in transit, having been generated from a stock sale and waiting to be used to buy another stock.  (FYI.)

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mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #171 on: May 28, 2015, 03:54:17 PM »
Quote
Did I miss it,  or did not one person ask what his definition of "high-yielding"  was?   There is a big difference between a high quality growing company that has a dividend yielding 3% that has increased its dividend for 25 years straight,  vs a company with a nominal 10% yield that is achieved by paying a dividend greater than current earnings.
I'm wondering this now with all this talk... Not so much the high yield part but just the title of the thread... I own VTI which pays a dividend as well... Actually most of my etf's pay some dividend, am I a dividend investor as well then without knowing it?

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

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

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

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

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

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

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

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

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


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

An equal weighted index fund would be great.
« Last Edit: May 28, 2015, 04:08:51 PM by mizzourah2006 »

Roland of Gilead

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #172 on: May 28, 2015, 04:14:40 PM »

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

An equal weighted index fund would be great.

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

mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #173 on: May 28, 2015, 04:29:36 PM »

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

An equal weighted index fund would be great.

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

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

Plus right now you are Investing in stocks you may not like any way. By purchasing a market cap weighted index fund you are saying Apple is 2x better than any other stock in the market.
« Last Edit: May 28, 2015, 04:37:50 PM by mizzourah2006 »

Eric

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #174 on: May 28, 2015, 04:35:05 PM »

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

An equal weighted index fund would be great.

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

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

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

mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #175 on: May 28, 2015, 04:41:05 PM »

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

An equal weighted index fund would be great.

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

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

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

They are out there, just not very popular yet.

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

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


I certainly don't have the option in my 401k which is where most of my index funds are.

Roland of Gilead

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #176 on: May 28, 2015, 04:50:57 PM »
I can understand the situation where one company became absolutely dominant in an index (Apple does almost qualify for that).

In the extreme example where a single company formed something crazy like 30% of market cap weighted index, I would probably avoid the index or try to find some other way to diversify.   It probably does signify a bit of a bubble if one company grows to the point where it occludes all others.

forummm

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #177 on: May 28, 2015, 04:53:42 PM »

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

An equal weighted index fund would be great.

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

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

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

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

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #178 on: May 28, 2015, 04:56:01 PM »
It seems to me that if you can't be bothered to even use the "I'm feeling lucky" option to see that something had existed for years, you probably shouldn't say it doesn't exist.

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #179 on: May 28, 2015, 04:59:15 PM »

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

An equal weighted index fund would be great.

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

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

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

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

No, they're saying that apple is twice as valuable as any other company in the market. If you believe in the EMH, then that price represents the same risk-adjusted reward as every other company. 

mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #180 on: May 28, 2015, 05:26:40 PM »

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

An equal weighted index fund would be great.

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

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

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

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

Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

By owning an index weighted by market cap you are betting heavily that the answer is Apple.

Aphalite

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #181 on: May 28, 2015, 06:12:49 PM »
Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

By owning an index weighted by market cap you are betting heavily that the answer is Apple.

I know you're trying to make a point but Netflix is a poor example to use - in the next 5 years unless its profits is going to increase more than 10 fold to 3b (giving it a generous TTM PE of 25 after its growth period is over), the valuation multiple will likely come down from 163

I do agree that smaller companies have a better ability to compound due to higher opportunity to capture additional market size, but equal weighting doesn't distinguish between high returning companies, like say, a Hershey's, versus a low return company, like say, a steel manufacturer. Of course, the higher returning company has a better ability to either grow its EPS or return capital to investors via buybacks or dividends. These are the two main sources of investor returns (the other being speculative, or an increase in valuation multiple)

If you equal weighted a certain amount of capital and then let the weighting adjust naturally by itself as companies grew more or less valuable, you could have better results than following a SP500 fund, but keeping an equal weight doesn't always mean that you'll outright beat market cap weighed - http://www.forbes.com/sites/rickferri/2013/04/29/no-free-lunch-from-equal-weight-sp-500/

Sometimes bigger companies do better - maybe it's through acquisitions, maybe it's through a revolutionary new product offering (can we all agree Apple was a pretty good company when they came out with the iphone? but then when the ipad came out it blew previous investor sentiments out of the water?)

There's other ways to weigh your portfolio, but why wouldn't you just allocate capital yourself if you think market cap is dumb? There's plenty of brokerages out there that offer free trades now if you have a certain balance (Robinhood is completely free, Merrill if you have a $25k balance). And besides that, you could just take the three historically best performing sectors of healthcare, consumer staples, and energy and invest in ETFs for those instead of a total market fund, why would an equal weight strategy be any better?

forummm

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #182 on: May 28, 2015, 06:13:57 PM »

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

An equal weighted index fund would be great.

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

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

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

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

Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

By owning an index weighted by market cap you are betting heavily that the answer is Apple.

Which is more likely to be worth $0 in 5 years? The company with $200 billion in cash, quite a few products that people just can't get enough of for the last 10-30 years, thousands of patents, and sustaining an insane profit margin for 10 years? Or the one whose business model is totally dependent on continually securing rights to the latest movies and shows at prices that will allow it to compete with other distributors of that same content, relies on its competitors to carry its product to customers, has customers that revolt when prices rise $1 per month, is in an industry with a relatively low barrier to entry, and has new deep-pocketed firms announcing entry every few months?

Roland of Gilead

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #183 on: May 28, 2015, 06:14:13 PM »
Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

By owning an index weighted by market cap you are betting heavily that the answer is Apple.

Neither is likely to double in 5 years...that is way above average market returns.

Apple can increase in share price without increasing market cap by doing share buybacks.   If people keep buying their products in droves and they keep printing money faster than the Fed, they very well may be able to buy back enough stock over the next decade that their market cap stays under a trillion but the share price does double.

skyrefuge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #184 on: May 28, 2015, 06:15:19 PM »
So wouldn't this imply a mixed methodology may be best or just as optimal?

Yes. The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders. Let the companies decide that themselves. They can choose to pay a dividend, do a share buyback, pay down debt, or reinvest in their business. They might not always make the perfect choice, but on average they'll probably make a better choice than you would, so just let them do their thing. So there's no reason to have a preference for a dividend-paying company over a non-dividend paying company. Just buy good companies (preferably by letting the market's wisdom select such companies, via index funds).

If I can generate enough spending money from dividends in my Roth IRA then I will continue to have the same ownership in a company without having to liquidate whole shares and when I need extra money liquidating my traditional IRA in index funds instead of liquidating my dividend producing assets to pay for additional expenses?

Do you have any need to maintain a particular ownership stake in a company? I doubt it.

Your index funds in your traditional IRA are also "dividend producing assets", so those will also generate spending money for you without liquidating shares. If that's still not enough spending money (and hopefully it won't be), then you can liquidate shares from either account, there's really no difference.

I guess I get hung up on the assumption that dividends force taxes, when I hold all of my dividend producing equities in a Roth IRA.

Well, you just said you hold some dividend-producing assets in your traditional IRA too, but yes, if all your dividend-producing assets are in tax shelters, then you don't have to be concerned with the extra taxation penalty caused by dividends. But by focusing on a small group of dividend stocks you may still be exposing yourself to other unnecessary costs/risks, as outlined in the Vanguard paper.

Which is more likely to double in the next 5 years?

Apple moving from 762 billion to 1.524 trillion or Netflix going from 38 billion to 76 billion. It's a law of large #s discussion.

So you go from a big interest in dividends, to now only caring about capital growth? I'm confused. The market cap of Apple doesn't have to double in order for it to provide a total return commensurate with the market-cap doubling of Netflix. It can instead provide return to shareholders via dividends or buybacks.  Apple is partly priced like it is because it earns shit-tons of money (especially compared to Netflix). Those earnings can be returned to shareholders to provide a valuable return even if the market cap doesn't budge at all.

By owning Apple, I get a share of the profits that come from all the suckers people who buy iPhones/iPads/etc. By owning Google, I get a share of the profits that come from all the companies buying ads. If Apple and Google merge, I want to continue getting access to those profits at the same rate. Why would I say "no, now that you've merged, I only want to get half the benefit I was getting from you guys before"? Owning an outsized portion of a company that makes an outsized portion of the economy's profits makes a lot of sense to me.

KBecks2

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #185 on: June 01, 2015, 06:07:11 AM »
Most of my stocks pay modest dividends but also have growth.  Starbucks, Apple, Snap on, Wells Fargo, even a hot tech, skyworks, pays a small dividend.  But the divvy is not the big focus.

mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #186 on: June 01, 2015, 08:56:01 AM »

Yes. The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders. Let the companies decide that themselves. They can choose to pay a dividend, do a share buyback, pay down debt, or reinvest in their business. They might not always make the perfect choice, but on average they'll probably make a better choice than you would, so just let them do their thing. So there's no reason to have a preference for a dividend-paying company over a non-dividend paying company. Just buy good companies (preferably by letting the market's wisdom select such companies, via index funds).

The bolded is my main concern. I do care how companies choose to return value to shareholders because some of them make poor decisions. A buyback may make sense if the stock is cheap, but often times management prefers buybacks because they have a lot of money in unvested stock at stake. A dividend does nothing for them considering the stock has not been vested or the option has not been exercised. But a buyback increases the value of their unvested shares. This is something that needs to be considered.

Similarly, capital investments back into the company don't always make sense and sometimes don't always pan out.

IMO the better option is to take the dividend and choose how to allocate the capital instead of letting others choose for you. It may make sense to DRIP, it may not.

My main point on the doubling of a stock's value is to show the impact the law of large #s has on the ability to grow further. Index funds are set up to reward companies that did great last year. I looked at my index fund fact sheet. In 2014 Apple was the biggest holding at 2.53%, now it is the biggest holding at 3.4%. over double the size of the next largest holding. With market cap weighting it is essentially a "buy high" strategy as the holding % is reflective of the "new" market cap on the day the fund re-balances. It's essentially a diversified opposite of the Dogs of the Dow strategy. Instead of picking the companies that did the worst last year you are picking the companies that did the best and/or remained the largest.

waltworks

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #187 on: June 01, 2015, 09:37:15 AM »
If you think you are better at allocating capital than the majority of the managers of S&P 500 companies, then you should indeed aim for dividends. I'd bet against you on that, but if that's your belief, by all means stick to your guns.

-W

The bolded is my main concern. I do care how companies choose to return value to shareholders because some of them make poor decisions.

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #188 on: June 01, 2015, 10:04:50 AM »
If you think you are better at allocating capital than the majority of the managers of S&P 500 companies, then you should indeed aim for dividends. I'd bet against you on that, but if that's your belief, by all means stick to your guns.

-W

The bolded is my main concern. I do care how companies choose to return value to shareholders because some of them make poor decisions.

I've shared data here that shows that S&P managers increase buybacks when their stock is high and reduce them when low.  This relationship is much stronger than the similar one for dividends.  Most management does worse with these capital allocation decisions than the equivalent of "buy and hold."   

waltworks

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #189 on: June 01, 2015, 10:29:56 AM »
Sure, but that's not the same as saying you can do better.

I mean, if you really believe that the managers of big companies are generally crooks looking out for only their own interest, just waiting to rob your blind, then you shouldn't be invested in the stock market at all. History shows that even if those managers are all rascals - it's still a better bet than basically anything else.

-W

If you think you are better at allocating capital than the majority of the managers of S&P 500 companies, then you should indeed aim for dividends. I'd bet against you on that, but if that's your belief, by all means stick to your guns.

-W

The bolded is my main concern. I do care how companies choose to return value to shareholders because some of them make poor decisions.

I've shared data here that shows that S&P managers increase buybacks when their stock is high and reduce them when low.  This relationship is much stronger than the similar one for dividends.  Most management does worse with these capital allocation decisions than the equivalent of "buy and hold."

beltim

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #190 on: June 01, 2015, 10:40:45 AM »
Sure, but that's not the same as saying you can do better.

Yes and no.  I could, in fact, do better if I had control of the capital allocation because I know this information.  I don't, however, have that power, and the information isn't actionable as an investor unless you have that power.

Quote
I mean, if you really believe that the managers of big companies are generally crooks looking out for only their own interest, just waiting to rob your blind, then you shouldn't be invested in the stock market at all. History shows that even if those managers are all rascals - it's still a better bet than basically anything else.

-W

That's not what I'm saying at all.  The managers still create wealth, and they're not out to rob you blind.  But it would be better if managers did a better job by not mistiming stock buybacks.

An analogy is like mutual fund investing.  Mutual fund managers may underperform the index, but until index funds were created, you couldn't really do anything about it.  So mutual funds gave higher returns than the next best thing, even though the returns lagged that of the index.

Ricky

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #191 on: June 01, 2015, 11:06:08 AM »
For those that do think that companies misappropriate their use of funds and think paying a dividend is always the best choice, why not own a 50/50 split in your portfolio of a dividend ETF (or a collection of your own choosing) and a regular broad-market fund for the chance that you're wrong?

I don't understand the need to argue about it. Maybe index funds will outperform dividend "giants" as a whole over time, maybe they won't. Either way, if you're more comfortable with one than the other, what's the point in doing something your uncomfortable with? Both are investing, which is better than not investing. Whether you buy mostly dividend paying stocks or broad-market funds is still better than what the mass majority would do with their money. And it's unlikely that you'll end up losing a significant amount of money in either scenario so long as you're diversified in other investments. So please, just give it a rest.

Also, to be realistic, if most of the "dogs of the DOW" were to really go bust and stop paying dividends or being profitable, then we have LARGER problems on our hands than whether it was more important to be weighted in dividend-paying stocks or non-dividend paying stocks.

mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #192 on: June 01, 2015, 11:36:10 AM »
For those that do think that companies misappropriate their use of funds and think paying a dividend is always the best choice, why not own a 50/50 split in your portfolio of a dividend ETF (or a collection of your own choosing) and a regular broad-market fund for the chance that you're wrong?

I don't understand the need to argue about it. Maybe index funds will outperform dividend "giants" as a whole over time, maybe they won't. Either way, if you're more comfortable with one than the other, what's the point in doing something your uncomfortable with? Both are investing, which is better than not investing. Whether you buy mostly dividend paying stocks or broad-market funds is still better than what the mass majority would do with their money. And it's unlikely that you'll end up losing a significant amount of money in either scenario so long as you're diversified in other investments. So please, just give it a rest.

Also, to be realistic, if most of the "dogs of the DOW" were to really go bust and stop paying dividends or being profitable, then we have LARGER problems on our hands than whether it was more important to be weighted in dividend-paying stocks or non-dividend paying stocks.

I most certainly do both and I don't necessarily agree that a dividend is always better. There are certain times where if a company pays a dividend it would be a red flag for me. Under Armour, Facebook, and other fast growing companies come to mind. I don't want to siphon cash from a business that is using all of it to grow. But I do want to siphon cash from a company that is established and re-allocation of all of their capital back into the business is not an efficient use of the money.

When a company becomes a certain size (which pretty much all of the top 50 market caps are, the probability that they will be able to efficiently utilize all of their net income to provide 12-15% growth to the top and bottom lines becomes less and less likely. I would rather a company like Chevron pay me a dividend than increase their cap-ex by that amount. But apparently, some people here don't seem to care what the company decides to do with their income as long as they make an attempt to return shareholder value.

For those that haven't I would strongly recommend reading The Intelligent Investor by Benjamin Graham. Even if you never want to touch individual equities the way Ben Graham describes the market and the philosophy of "business ownership" is well worth it.

skyrefuge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #193 on: June 01, 2015, 08:56:13 PM »
The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders.

The bolded is my main concern.

Sorry, I failed to mention my implicit investing assumptions along with that quote. Here it is more completely:

 - if you don't have any trust in your ability to know when a company is overvalued or undervalued (i.e., you aren't a stock-picker, which describes most people on this forum), then you shouldn't have any preference for how companies choose to return value to shareholders.
- if you're a stock-picker, then you absolutely should have a preference for how companies choose to return value to shareholders.

Those are two opposing positions, and this is a case where there is no logical middle ground between the two. You either believe you can't do any better than the company management at making capital decisions, or you believe that you can. The logical consequence of the former position is to just take what the companies (and the index) give you. The logical consequence of the latter position is to actively get out of a position whenever you think management is making bad decisions. Both defensible approaches.

What doesn't make a lot of sense is the middle ground: distrusting management enough to want them to pay you a direct dividend four days a year, yet continuing to trust them with a far larger portion of your capital for all the rest of the year. "Those guys don't know what they're doing, so I demand they give me 1% of my investment back in the form of cash so I can reinvest it properly. The other 99%? Oh, I'll totally keep invested with them." Huh?

Is that because you figure there's only a 1% chance that they're wrong, so you reduce your stake by only 1%? I guess that's possible, but it seems like an amazing coincidence. Why not reduce your stake by 10%? Or 100%? Otherwise it strongly suggests that you want to actively decide how to reallocate a portion of your capital and take the decision out of the hands of the company, but you paradoxically will let the company decide the amount that they'll let you reallocate.

I do care how companies choose to return value to shareholders because some of them make poor decisions. A buyback may make sense if the stock is cheap, but often times management prefers buybacks because they have a lot of money in unvested stock at stake. A dividend does nothing for them considering the stock has not been vested or the option has not been exercised. But a buyback increases the value of their unvested shares. This is something that needs to be considered.

Sure. If you believe it's bad for the company to do a buyback at a particular time, then tender your shares rather than holding them. As an active stock-picker, you should probably be reexamining and reallocating your positions regularly, regardless of dividend or buyback announcements.

Similarly, capital investments back into the company don't always make sense and sometimes don't always pan out.

Of course. And if you're sure your own capital investment decisions will produce a higher return, then you should take all of your capital out of the stock in question and redirect it more optimally, not just take out whatever small portion the company lets you have.

My main point on the doubling of a stock's value is to show the impact the law of large #s has on the ability to grow further. Index funds are set up to reward companies that did great last year. I looked at my index fund fact sheet. In 2014 Apple was the biggest holding at 2.53%, now it is the biggest holding at 3.4%. over double the size of the next largest holding.

Whoa, let me get this straight: your prime example of "the impact of the law of large #s on the ability to grow further" is to show that the largest number in 2014 went on to grow way more than the smaller numbers that make up the rest of the index?

With market cap weighting it is essentially a "buy high" strategy as the holding % is reflective of the "new" market cap on the day the fund re-balances.

Cap-weighted funds don't need to "rebalance". If Apple grows faster than the market, that increased weight is automatically reflected in the index fund, because the underlying AAPL shares held by the fund also grow faster than the rest of the fund. Yes, new money buying into a cap-weighted fund will buy at the ratios reflecting the most-recent weighting, but a dummy like me has no good reason to believe that the weighting at any one time is any more "correct" than the weighting at any other time. If you know enough to know which weighting would be "correct", then you shouldn't be investing in any mutual fund, much less index funds.

mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #194 on: June 01, 2015, 09:02:53 PM »
The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders.

The bolded is my main concern.

Sorry, I failed to mention my implicit investing assumptions along with that quote. Here it is more completely:

 - if you don't have any trust in your ability to know when a company is overvalued or undervalued (i.e., you aren't a stock-picker, which describes most people on this forum), then you shouldn't have any preference for how companies choose to return value to shareholders.
- if you're a stock-picker, then you absolutely should have a preference for how companies choose to return value to shareholders.

Those are two opposing positions, and this is a case where there is no logical middle ground between the two. You either believe you can't do any better than the company management at making capital decisions, or you believe that you can. The logical consequence of the former position is to just take what the companies (and the index) give you. The logical consequence of the latter position is to actively get out of a position whenever you think management is making bad decisions. Both defensible approaches.

What doesn't make a lot of sense is the middle ground: distrusting management enough to want them to pay you a direct dividend four days a year, yet continuing to trust them with a far larger portion of your capital for all the rest of the year. "Those guys don't know what they're doing, so I demand they give me 1% of my investment back in the form of cash so I can reinvest it properly. The other 99%? Oh, I'll totally keep invested with them." Huh?

Is that because you figure there's only a 1% chance that they're wrong, so you reduce your stake by only 1%? I guess that's possible, but it seems like an amazing coincidence. Why not reduce your stake by 10%? Or 100%? Otherwise it strongly suggests that you want to actively decide how to reallocate a portion of your capital and take the decision out of the hands of the company, but you paradoxically will let the company decide the amount that they'll let you reallocate.

I do care how companies choose to return value to shareholders because some of them make poor decisions. A buyback may make sense if the stock is cheap, but often times management prefers buybacks because they have a lot of money in unvested stock at stake. A dividend does nothing for them considering the stock has not been vested or the option has not been exercised. But a buyback increases the value of their unvested shares. This is something that needs to be considered.

Sure. If you believe it's bad for the company to do a buyback at a particular time, then tender your shares rather than holding them. As an active stock-picker, you should probably be reexamining and reallocating your positions regularly, regardless of dividend or buyback announcements.

Similarly, capital investments back into the company don't always make sense and sometimes don't always pan out.

Of course. And if you're sure your own capital investment decisions will produce a higher return, then you should take all of your capital out of the stock in question and redirect it more optimally, not just take out whatever small portion the company lets you have.

My main point on the doubling of a stock's value is to show the impact the law of large #s has on the ability to grow further. Index funds are set up to reward companies that did great last year. I looked at my index fund fact sheet. In 2014 Apple was the biggest holding at 2.53%, now it is the biggest holding at 3.4%. over double the size of the next largest holding.

Whoa, let me get this straight: your prime example of "the impact of the law of large #s on the ability to grow further" is to show that the largest number in 2014 went on to grow way more than the smaller numbers that make up the rest of the index?

With market cap weighting it is essentially a "buy high" strategy as the holding % is reflective of the "new" market cap on the day the fund re-balances.

Cap-weighted funds don't need to "rebalance". If Apple grows faster than the market, that increased weight is automatically reflected in the index fund, because the underlying AAPL shares held by the fund also grow faster than the rest of the fund. Yes, new money buying into a cap-weighted fund will buy at the ratios reflecting the most-recent weighting, but a dummy like me has no good reason to believe that the weighting at any one time is any more "correct" than the weighting at any other time. If you know enough to know which weighting would be "correct", then you shouldn't be investing in any mutual fund, much less index funds.

So you are implying that the investment strategy used by Warren Buffett doesn't make sense?

Fair enough, I guess we will just have to agree to disagree.

skyrefuge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #195 on: June 01, 2015, 09:13:02 PM »
I don't understand the need to argue about it. Maybe index funds will outperform dividend "giants" as a whole over time, maybe they won't. Either way, if you're more comfortable with one than the other, what's the point in doing something your uncomfortable with? Both are investing, which is better than not investing. Whether you buy mostly dividend paying stocks or broad-market funds is still better than what the mass majority would do with their money.

Buying Starbucks only once a week, reverting to basic cable, and buying a new Camry vs. a new F-150 are also "better than what the mass majority would do with their money", but that's a damn low standard for Mustachians.

Yes, I completely agree that a dividend-focused approach (if diversified and reasonably passive) is not likely to greatly underperform a dividend-agnostic approach, and may even outperform it. But as I've said before, generally the pursuit of a dividend-focused strategy is an indication that an investor has only a first-order understanding of dividends and stock markets, and I figure a clearer understanding (such as the basic fact that a dividend payment reduces the share price) will be beneficial to their investment success in the long run. So I tend to encourage people to ignore dividends.

A whole culture of dividend-focused investing has grown out of such misunderstandings, and it perpetuates those misunderstandings, so I think it's reasonable for any of us to do whatever we can to counterbalance that culture rather than just saying "eh, believe whatever you want".

skyrefuge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #196 on: June 01, 2015, 09:23:59 PM »
So you are implying that the investment strategy used by Warren Buffett doesn't make sense?

No, I had no intention to imply that. Everything I've read about Buffett tells me he's a really smart guy who really understands investing. Though given that most of what I know about his investment strategy comes from reading his yearly letters, perhaps there are points on which we disagree. If you could point out what you read in my post that implied such disagreement, I could investigate and clarify.

mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #197 on: June 01, 2015, 10:02:50 PM »
So you are implying that the investment strategy used by Warren Buffett doesn't make sense?

No, I had no intention to imply that. Everything I've read about Buffett tells me he's a really smart guy who really understands investing. Though given that most of what I know about his investment strategy comes from reading his yearly letters, perhaps there are points on which we disagree. If you could point out what you read in my post that implied such disagreement, I could investigate and clarify.

You said it does not make any sense to own a company if you want a dividend from them as it implies you agree with management all but 4 days a year. WB essentially only owns companies that provide him with cash flow, of which he chooses how to re-allocate.

A dividend is a natural outcome of a healthy mature company. At a certain point in time a company can not efficiently allocate all of its capital by re-investingg for growth. Walmart comes to mind as an example. It could cease the dividend and the buybacks and instead decide to just open up as many stores as they can with all of their capital, but does it make sense? Instead they decided they are at a point where it makes sense to strategically grow and return excess capital to shareholders to do with as they please.

A dividend does not always make sense, I agree. I also don't only invest in dividend companies, I agree with your premise that often times people who think dividends are always the best may not have a full understanding of what total returns are and how a dividend is the equivalent of siphoning equity from the company. But I do see value in utilizing dividends to re-allocate capital to attractively priced assets in a similar manner to how Buffett and Munger run Berkshire. I see it as similar to owning an entire business and instead of taking a salary you re-invest it all back into the company for years. In the end you have two options. Sell it (or shares of it) or begin taking a dividend/salary. If you still believe in the business and think it will continue to do well does it make sense to sell it? Perhaps it does, but that is essentially what is happening in a dividend vs selling shares discussion.



skyrefuge

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #198 on: June 01, 2015, 11:12:23 PM »
You said it does not make any sense to own a company if you want a dividend from them as it implies you agree with management all but 4 days a year.

Ah. No, I only said that if you're in the class that disagrees with management's capital allocation decisions it doesn't make sense to only want a dividend. You should divest yourself to a greater extent than the dividend. If you're in the other class (the one that trusts management) then it makes perfect sense to be happy with a dividend, because you trust that that was the best possible use of capital.

To be clear, I'm not anti-dividend. I'm simply against a focus on dividends when deciding on what to invest in. So I largely agree with the rest of your post; if a company has no better use for its cash than to pay a dividend, of course that's what it should do (well, actually I think it should execute a disciplined buyback schedule instead, as that returns the same value to shareholders but gives them tax flexibility).

FYI, Buffett seems to be in the same "trusts whatever management gives him" class that me and all other broad-market index investors are in. From his 2014 Letter:

"If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” [American Express, Coca-Cola, IBM and Wells Fargo] 2014 earnings before discontinued operations amounted to $4.7 billion.... In the earnings we report to you, however, we include only the dividends we receive – about $1.6 billion last year.... But make no mistake: The $3.1 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.

The earnings these investees retain are often used for repurchases of their own stock – a move that enhances Berkshire’s share of future earnings without requiring us to lay out a dime. Their retained earnings also fund business opportunities that usually turn out to be advantageous.
All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time (though 2015 will be a tough year for the group, in part because of the strong dollar). If the expected gains materialize, dividends to Berkshire will increase and, even more important, so will our unrealized capital gains."
(emphasis added)

So he actually likes capital gains more than dividends in this case (maybe as he's run out of opportunities to direct cashflow towards?) And I'm pretty sure that unlike amateur-dividend-investors, he doesn't hold any of this paradoxical mistrust-of-management in the companies he owns. Sure, sharing some of their earnings with him and allowing him to reinvest it elsewhere has been a key part of the success of BH, but I'm sure he trusts his business managers to know when to reinvest in their own businesses vs. return the cash to him; I don't think he demands a 100% (or any other) payout ratio.

mizzourah2006

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Re: Anyone Else Only Buying Dividend Stocks?
« Reply #199 on: June 02, 2015, 05:35:47 AM »
You said it does not make any sense to own a company if you want a dividend from them as it implies you agree with management all but 4 days a year.

Ah. No, I only said that if you're in the class that disagrees with management's capital allocation decisions it doesn't make sense to only want a dividend. You should divest yourself to a greater extent than the dividend. If you're in the other class (the one that trusts management) then it makes perfect sense to be happy with a dividend, because you trust that that was the best possible use of capital.

To be clear, I'm not anti-dividend. I'm simply against a focus on dividends when deciding on what to invest in. So I largely agree with the rest of your post; if a company has no better use for its cash than to pay a dividend, of course that's what it should do (well, actually I think it should execute a disciplined buyback schedule instead, as that returns the same value to shareholders but gives them tax flexibility).

FYI, Buffett seems to be in the same "trusts whatever management gives him" class that me and all other broad-market index investors are in. From his 2014 Letter:

"If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” [American Express, Coca-Cola, IBM and Wells Fargo] 2014 earnings before discontinued operations amounted to $4.7 billion.... In the earnings we report to you, however, we include only the dividends we receive – about $1.6 billion last year.... But make no mistake: The $3.1 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.

The earnings these investees retain are often used for repurchases of their own stock – a move that enhances Berkshire’s share of future earnings without requiring us to lay out a dime. Their retained earnings also fund business opportunities that usually turn out to be advantageous.
All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time (though 2015 will be a tough year for the group, in part because of the strong dollar). If the expected gains materialize, dividends to Berkshire will increase and, even more important, so will our unrealized capital gains."
(emphasis added)

So he actually likes capital gains more than dividends in this case (maybe as he's run out of opportunities to direct cashflow towards?) And I'm pretty sure that unlike amateur-dividend-investors, he doesn't hold any of this paradoxical mistrust-of-management in the companies he owns. Sure, sharing some of their earnings with him and allowing him to reinvest it elsewhere has been a key part of the success of BH, but I'm sure he trusts his business managers to know when to reinvest in their own businesses vs. return the cash to him; I don't think he demands a 100% (or any other) payout ratio.

Where did I say I miatrust management and that I want a 100% payout ratio? You seem to be taking my posts to their logical extremes. I'm not really sure why. Yes Buffett agrees that capital appreciation of a business is just as important of a return as cash flow, it is. But, take a look at his holdings. He likes dividends. You can trust management to run a great business but think there is better use for future cash flow. If you fully trusted management and thought they would do a great job at returning shareholder value would it not make sense to put all of your money in just that company? So, if I take your argument to its logical extreme if you trust the management to efficiently return capital to shareholders (in any way, through appreciation, buybacks, or dividends) you should invest all free equity in that one company. It offers the ability to rebalance without actually incurring transaction costs.

Or, perhaps, you want to own their business, but like the freedom the cash flow allows you to choose what you want to invest in given the conditions of all other available opportunities. For example, Disney just paid a dividend in January. Great, company, has had a great run, was at an all time high then. They could have just done a buyback, but instead I got cash from them and was able to use that cash to purchase more shares of Gilead, which was trading at an extreme discount at the time. I want to own more Disney, but not at $110.

The funny thing is the outcome of Just re-investing dividends into the same company and a buyback in the long term is essentially identical (although the latter can have tax advantages) because eventually the amount of shares repurchased increases the price of the shares to the point they just split the shares again to make prices attractive for retail investors.
« Last Edit: June 02, 2015, 05:40:43 AM by mizzourah2006 »