Dividend investing

[El_Mariachi]

I know the hotness with MMM and this forum is index funds and the like

but does anyone do any dividend investing?

In one of my pots of money (IRA) I do dividend investing and its done well for me

also dont worry in another account I have pure Bogle style 3 fund portfolio

[CorpRaider]

I don't personally do it, but I think there's a pretty persuasive case that it can be effective in improving investor behavior and resulting in higher actual realized returns (at the investor level).

[El_Mariachi]

I don't personally do it, but I think there's a pretty persuasive case that it can be effective in improving investor behavior and resulting in higher actual realized returns (at the investor level).

I have been doing it for about 10 years its been working great for me

I split up my initial seed money 95% went into all the sectors, 1 stock in each, I was looking for good growth, a history of dividend increases and at least 4% dividend
then 5% of that I put in to a more speculative stock

all of the dividends are automatically reinvested

so if you look at my original seed I have gained 12.3% in dividends alone

I think for sure it improves my behavior, because if the stock is up or down, I know I am getting that dividend

IF its down, I dont really care because I am getting the dividend and lowering my cost basis

[Bogart99]

This is the dilemma I deal with as well. Should I put my money in solid dividend payers or an index. If I put my money in all dividend stocks then I can get a higher dividend yield and receive more money without having to sell any stock. The downside is I am stock picking and I like the diversity and ease of just buying an index.

[bacchi]

Wait, you're picking individual stocks?!? Phenomenally bad idea.

https://seekingalpha.com/article/3884316-26-dividend-aristocrats-let-sleep-well-night

How are you going to know when to sell?

[Bogart99]

If you want to build a long-term dividend portfolio you can reduce a lot of the risk in that article by not owning Financials.

[Telecaster]

This is the dilemma I deal with as well. Should I put my money in solid dividend payers or an index. If I put my money in all dividend stocks then I can get a higher dividend yield and receive more money without having to sell any stock. The downside is I am stock picking and I like the diversity and ease of just buying an index.

There is a flip side to that too.   Namely, the dividend is an amount and schedule of someone else's choosing.   And as bacchi's article points out, great dividend stocks can be crappy actual stocks.  Do you care more about the bottom line, or how the check gets cut?   

If you like, you can buy dividend oriented ETFs like NOBL so that takes the leg work out of it.  But NOBL's dividend yield is barely better than the S&P 500 itself.   

One thing I don't quite understand about the dividend stock strategies is if you are going for yield, why go for Dividend Aristocrats and the like?  Why not buy preferred stocks?   The yields beat the snot out of the Dividend Aristocrats.   

[Bogart99]

I'm just not real excited about saving my butt off to FIRE and then selling index shares during an unknown length bear market.

[Telecaster]

I'm just not real excited about saving my butt off to FIRE and then selling index shares during an unknown length bear market.

Are you excited by having your dividends cut by a third?   That happens too.   Again, if you are going for yield, why not buy preferred stocks or even bonds? 

[Bogart99]

I would rather deal with trying to cover 1/3 of my income in dividend cuts than selling nothing but index shares to live on in a bear market.

[El_Mariachi]

This is the dilemma I deal with as well. Should I put my money in solid dividend payers or an index. If I put my money in all dividend stocks then I can get a higher dividend yield and receive more money without having to sell any stock. The downside is I am stock picking and I like the diversity and ease of just buying an index.

the key is to diversify (not like sectors and different names), so not everything is dividend stocks

I have one bucket of money in dividend stocks, one bucket in a high yield savings (emergency fund), one bucket in my company 401k, one bucket in index funds

Wait, you're picking individual stocks?!? Phenomenally bad idea.

https://seekingalpha.com/article/3884316-26-dividend-aristocrats-let-sleep-well-night

How are you going to know when to sell?

Not really, you research the companies, pick big names, look at the long term graph, look at their dividend history, pick names that you can check on and that you understand their business/profit model

you dont, its buy and hold, investing, not trading

the idea is you buy and hold and reinvest, let the snowball grow if you will (sounds familiar no?)

then when you get to a certain level that you have decided on, you stop the automatic reinvestment and put the dividends in your core

The only time I have sold thus far is a position that I had for a long time that was not performing well, so I cut it loose

And out of all my stocks only Conoco Phillips has betrayed me and cut its dividend

Are you excited by having your dividends cut by a third?   That happens too.   Again, if you are going for yield, why not buy preferred stocks or even bonds?

only 1 company I own has ever cut dividends by that amount, Conoco after the barrel crash

You dont look only at the yield, but also at the growth of the company

to put it simply, look at their graph for the past 5 years, is the right higher than the left?

[Bogart99]

I have a 401k, an HSA,  and a Roth IRA. I can't touch them for about 20 years so I have no problem buying index funds and letting them compound for a couple decades. I worry about my taxable account that if I am able to FIRE will have to get me through 10-15 years. That's why I'm interested in dividend stocks in that account.

[Andy R]

This is the dilemma I deal with as well. Should I put my money in solid dividend payers or an index. If I put my money in all dividend stocks then I can get a higher dividend yield and receive more money without having to sell any stock. The downside is I am stock picking and I like the diversity and ease of just buying an index.

You are not receiving more money.

Take a look at stock prices when a company goes ex-dividend and you will see the price drops the amount of the dividend.

Some people try to argue that this isn't true because the share price doesn't fall by exactly the amount of the dividend paid out, sometimes it's more and sometimes it's less, but this can be explained by the fact that during the rest of the time when dividends are not paid out, the share price moves up and down and all over the place. The market is reacting to new information about the company, sector, or market it is in. For example, a company might release sales results for the past quarter and the price moves up in anticipation on future earnings. When a share goes ex-dividend, these forces are still in play, and this is why the share price doesn't drop by exactly the price of the dividend. That the share price drop isn't precisely the amount of the dividend paid out doesn't nullify the fact that the share price adjusts based on the dividend paid out.

When you get down to the nuts and bolts, here is what happens.

A company has earnings.

It then distributes some of those earnings to investors either as dividends or through share buy-backs, and retains the rest to grow the business. The same company with the same earnings can distribute 80% or 20% or any other amount of earnings and it will make no difference to your total return how much is distributed.

The company can also distribute earnings as a share buy back to boost up the price, so lower dividends don't mean the company necessarily invested more of their profits for (what some consider speculative) growth, it means there will be less shares in the company, but each share has increased in value. So again, it means nothing how much cash you get back in your hand as cash dividends.

The more they pay out in dividends, the less that is retained to grow the business, and therefore growth is reduced by the amount that was paid out in dividends. Dividends are not free money.

On top of this, by going with only high yielding companies, you face concentration risk through lack of diversification.

One more thing - "dividend investors" use backwards looking data, throwing out all the companies that intended to increase their dividend over time and failed, falely giving higher looking returns than in reality. This is called survivorship bias. You can't know which companies will continue to successfully increase their dividends over time into the future.

The list of problems with dividend investing begins with a complete misunderstanding of what dividends are (generally mistaking them for earnings, which they are not), and then continues to confirm the fallacy with biases, leaving you exposed to risks such as concentration, and the risk of believing your money is somehow safer.

I'm just not real excited about saving my butt off to FIRE and then selling index shares during an unknown length bear market.

By spending dividends, you are already spending from your total return, the only difference is that someone else has decided how much you can spend down. If a company buy's back 4% of it's shares, the shares have gone up 4% in value. If you then spend it down, then it was no different whether it was paid out in dividends or not.

Dividends are arbitrary and have no meaning, yet you are attaching a false meaning to them.


Further information
https://www.cnbc.com/2016/12/08/dont-buy-in-to-the-dividend-fallacy-new-academic-paper-warns.html
https://www.youtube.com/watch?v=UpXI_Vd51dA&t=9s
https://www.bogleheads.org/wiki/Why_did_my_fund_unexpectedly_drop_in_value
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=258311
https://www.forbes.com/sites/jimdahle/2018/11/11/five-reasons-to-avoid-focusing-on-dividend-stocks/#16394c797479
https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

[A Fella from Stella]

I'd be better off had I stuck with this when I came across it 5+ years ago instead of speculating in marijuana stocks.

As such, I've shifted my purchases (still holding the pot stocks, but not buying more) to dividend yielding companies like Ford, Rocky Mountain Chocolate Factory, Kroger, etc.

Are you holding any stock paying dividends right now?

[El_Mariachi]

I'd be better off had I stuck with this when I came across it 5+ years ago instead of speculating in marijuana stocks.

As such, I've shifted my purchases (still holding the pot stocks, but not buying more) to dividend yielding companies like Ford, Rocky Mountain Chocolate Factory, Kroger, etc.

Are you holding any stock paying dividends right now?

Dividend paying stocks?

yes one of my IRAs is entirely dividend paying stocks that I have carefully chosen and all except 2 have done well for me that being said I am averaging a total return way above my other account which has ETFs like VTI, FZROX and the like (yes on the same time scale)

[CorpRaider]

A dividend growth tilt is basically a quality/profitability/ROE/ROA tilt.  A yield tilt is basically a modest value tilt (in the academic vernacular with which the bogleheads are comfortable). 

I mean if you've got ~40 stocks across industries, you are getting most of the diversification/sample handled (but you would have to watch the concentration risk from excluding sectors that focus more on buybacks; which are basically the same thing if they are shrinking float, but with better us tax treatment). 

You could, in theory, run your portfolio more cheaply than VTSAX, with zero securities lending risk.  See ERE for discussions of this stuff....then again, don't read the peak oil discussion.

It seems that some of the DGI people fail to be cognizant of the trading costs.  Like if you are constantly buying $100 lots and paying $5 per trade, that 5% leakage is going to leave a mark over time. 

John D. Rockefeller loved to see the dividends roll in.  If the check or seeing the packed Apple store/MCD drive through helps you chill through 2000 or 2008-2009, you will probably end up with higher returns than someone who gets shaken from their "slice of America" when even the President is worrying that "this sucker might go down."

[bacchi]

John D. Rockefeller loved to see the dividends roll in.  If the check or seeing the packed Apple store/MCD drive through helps you chill through 2000 or 2008-2009, you will probably end up with higher returns than someone who gets shaken from their "slice of America" when even the President is worrying that "this sucker might go down."

! 2008-9 was not a good time to be a dividend investor. A number of companies cut their dividends. Some haven't recovered.

https://latimesblogs.latimes.com/money_co/2009/03/wells-dividen-1.html

Forty-one companies in the S&P 500 have cut their dividend payouts this year [in 2009], with the total reduction equivalent to $40.8 billion a year in cash lost to shareholders, according to Howard Silverblatt, senior analyst at S&P in New York.

Even worse is that dividend cutters are generally punished by the market and under perform the S&P 500.

Someone suggested under-weighting banks to avoid this kind of issue in the future. The problem is that needs to be determined before it actually happens. In other words, are you good enough to predict what the next declining sector will be? Oil because of renewables? Car manufacturers because of the sharing economy? Something else unseen?

[Bogart99]

It's actually pretty easy to see financials go boom and bust.

[UnleashHell]

I have a 401k, an HSA,  and a Roth IRA. I can't touch them for about 20 years

Why not?

[CorpRaider]

John D. Rockefeller loved to see the dividends roll in.  If the check or seeing the packed Apple store/MCD drive through helps you chill through 2000 or 2008-2009, you will probably end up with higher returns than someone who gets shaken from their "slice of America" when even the President is worrying that "this sucker might go down."

! 2008-9 was not a good time to be a dividend investor. A number of companies cut their dividends. Some haven't recovered.

https://latimesblogs.latimes.com/money_co/2009/03/wells-dividen-1.html

Forty-one companies in the S&P 500 have cut their dividend payouts this year [in 2009], with the total reduction equivalent to $40.8 billion a year in cash lost to shareholders, according to Howard Silverblatt, senior analyst at S&P in New York.

Even worse is that dividend cutters are generally punished by the market and under perform the S&P 500.

Someone suggested under-weighting banks to avoid this kind of issue in the future. The problem is that needs to be determined before it actually happens. In other words, are you good enough to predict what the next declining sector will be? Oil because of renewables? Car manufacturers because of the sharing economy? Something else unseen?

Well that depends on the tilt.  Yeah a yield tilt/value stocks sucked wind during that calendar year (as has been the historical pattern during recessions).  You can't just cite financial stocks during the second most severe financial panic as dispositive...even probative really.  Pretty sure VIG outperformed during the financial crisis (as a proxy for the dividend growth investors).  In the end as long as they are systematic, diversified, and low cost, I don't see the problem. 

The S&P 500 is just a large sample of actively picked big stonks that happen to be domiciled in the U.S., selected by a committee of humans (probably the worst way to make investing decisions), based on pre-specified screening criteria and VTI is an active bet on the U.S. not the 1/n passive global market portfolio.

[MikeO]

I don't look for dividend stocks but I started to look at how much my portfolio produces in dividends.  my portfolio is mostly index mutual funds, some ETF's, some growth funds.  All funds have exp ratios less than 0.6% some are much much less than that. 

I only started to look at this this year so I can't go back to the beginning but the previous 3 years I've made 4% in dividends each year.  I'm curious to see how much that changes as my portfolio increases.  Does the percentage stay the same or not?   If I can get at least that much, when I FIRE I won't have to touch my balance just take the dividends each year and the value overall will continue to increase in the long run.    my opinion on a problem of picking dividend stocks is there is no way to know which one is going to perform 10 or 20 years from now. You have to pick what you think is strong now and how it doesn't change.  if they tank, you won't be left with much. 

[vand]

Yes, I'm a fan, and I am building my income portfolio as one 1/3rd of my overall investment strategy.

I'm a UK Investor, and our FTSE100 is currently stuffed with high divi yielding bluechip companies. Many companies are paying a 6-7% dividend, and the whole index itself is yielding just shy of 5% overall (FTSE  overall P/E is about 14). High yielding shares are also commonly cheap, so they stand out as value picks too.

However, the risk with this strategy is that in chasing high dividend is because the shareprice has already fallen a lot and the market expects the dividend payout to be cut, and usually the market is right. You are often trying to catch a falling knife, and if the dividend is cut there is then little to support the shareprice so it can easily fall further and further.

[El_Mariachi]

A dividend growth tilt is basically a quality/profitability/ROE/ROA tilt.  A yield tilt is basically a modest value tilt (in the academic vernacular with which the bogleheads are comfortable). 

I mean if you've got ~40 stocks across industries, you are getting most of the diversification/sample handled (but you would have to watch the concentration risk from excluding sectors that focus more on buybacks; which are basically the same thing if they are shrinking float, but with better us tax treatment). 

You could, in theory, run your portfolio more cheaply than VTSAX, with zero securities lending risk.  See ERE for discussions of this stuff....then again, don't read the peak oil discussion.

It seems that some of the DGI people fail to be cognizant of the trading costs.  Like if you are constantly buying $100 lots and paying $5 per trade, that 5% leakage is going to leave a mark over time. 

John D. Rockefeller loved to see the dividends roll in.  If the check or seeing the packed Apple store/MCD drive through helps you chill through 2000 or 2008-2009, you will probably end up with higher returns than someone who gets shaken from their "slice of America" when even the President is worrying that "this sucker might go down."

that is a very good point, I generally invest my savings in my regular investment account, which is the one with the funds

And only buy large chunks when I roll over my company 401k into my IRA which has the DGI scheme

also a huge advantage is how my financial institution lets me automatically reinvest my dividends in the stock for free

and you are 100% right about the dividends rolling in, if the stock isnt moving much or going down a little knowing that I am about to get that 3%+ infusion is a real boon to my confidence

also what I mentioned earlier about investing in companies where you can easily check performance is a big confidence boost

like take Sears for example, if I would have had my money in Sears in the last 10 years, without even looking at their financial reports I could have walked into a Sears store and seen the problems

[bacchi]

Well that depends on the tilt.  Yeah a yield tilt/value stocks sucked wind during that calendar year (as has been the historical pattern during recessions).  You can't just cite financial stocks during the second most severe financial panic as dispositive...even probative really.  Pretty sure VIG outperformed during the financial crisis (as a proxy for the dividend growth investors).  In the end as long as they are systematic, diversified, and low cost, I don't see the problem. 

VIG's yield is currently lower than VTI and it's also a large cap blend, per MS. If you're strictly going for yield, why not VYM or DVYL? However, the lower yield VIG has a higher price return than VYM (about equal to DVYL or VTI). That ~1.3% extra yield from VYM hasn't been worth it since 2006, when VYM was started.

VIG (or VYM) is also an index fund of 184 holdings. It's not dependent on the ~20 companies that some random person thinks are the best/highest yield dividend payers at the moment.

The S&P 500 is just a large sample of actively picked big stonks that happen to be domiciled in the U.S., selected by a committee of humans (probably the worst way to make investing decisions), based on pre-specified screening criteria and VTI is an active bet on the U.S. not the 1/n passive global market portfolio.

[emphasis added]

Exactly! So why do random internet posters think they're better at it than professionals who do this for a living?

Everyone's a genius when the market is going up. Stick to the indices.

[Telecaster]

When you get down to the nuts and bolts, here is what happens.

A company has earnings.

It then distributes some of those earnings to investors either as dividends or through share buy-backs, and retains the rest to grow the business. The same company with the same earnings can distribute 80% or 20% or any other amount of earnings and it will make no difference to your total return how much is distributed.


Dividends are arbitrary and have no meaning, yet you are attaching a false meaning to them.

Yup.  That's why I keep saying if you want yield then go with bonds or preferreds.   A stock paying dividends or not can't change the total return, so who cares? 

[djadziadax]

You can look to Royalty Trusts - I own shares in one and it it pays out about 12% for me at the moment. They are not as volatile as they are based on mineral rights, not company earnings.

[h82goslw]

I'd be better off had I stuck with this when I came across it 5+ years ago instead of speculating in marijuana stocks.

As such, I've shifted my purchases (still holding the pot stocks, but not buying more) to dividend yielding companies like Ford, Rocky Mountain Chocolate Factory, Kroger, etc.

Are you holding any stock paying dividends right now?

Dividend paying stocks?

yes one of my IRAs is entirely dividend paying stocks that I have carefully chosen and all except 2 have done well for me that being said I am averaging a total return way above my other account which has ETFs like VTI, FZROX and the like (yes on the same time scale)

And over what time horizon are you making this comparison?  Have you gone through an extended period of decline or is this just solely in the latest bull run we've been experiencing the last 10 years?

[MustacheAndaHalf]

The S&P 500 and S&P 500 dividend stocks seem fairly similar to me, with the overall S&P 500 slightly ahead:

              1yr        3yr           5yr           10yr       15yr
SDY :    13.06    10.71        10.61   14.96        —
VOO:    12.57    14.77        10.80           —          —
VFINX:  12.54   14.66   10.68   15.04   8.85

(Data from morningstar)

[Telecaster]

If you pull of the chart going back to 2006 (inception of SDY), SPY crushes SDY pretty handily.   

[Mr Mark]

One potential problem with dividend investing is that it can be tax inefficient (and counts as income for medicaid/ACA), and forces you to receive income. Capital gains can be left unrealised and thus tax protected once 'long term'.

[MustacheAndaHalf]

If you pull of the chart going back to 2006 (inception of SDY), SPY crushes SDY pretty handily.

I don't see that claim born out by data: when I compare SDY and SPY in Google Finance, the data goes back to Nov 2005 and SPY beats SDY over the entire time frame.  The S&P 500 also beats the dividend version over the past 3 years by +4%/year.
https://www.google.com/search?q=sdy&tbm=fin#scso=_EOQeXaL3GYja8wX8rrXIDg2:0&smids=/g/1q62h0x10&wptab=COMPARE

[CorpRaider]

You can find plenty of cuts in prior data where a higher yield tilt dominates cap weighting; same deal with divvy growth/quality (and usually has lower volatility as well).  Depending on your tax bracket dividend income outside a deferral account can be very optimal for FIRE peeps (0% if you fall under ~$78K in AGI).

[Telecaster]

If you pull of the chart going back to 2006 (inception of SDY), SPY crushes SDY pretty handily.

I don't see that claim born out by data: when I compare SDY and SPY in Google Finance, the data goes back to Nov 2005 and SPY beats SDY over the entire time frame.  The S&P 500 also beats the dividend version over the past 3 years by +4%/year.
https://www.google.com/search?q=sdy&tbm=fin#scso=_EOQeXaL3GYja8wX8rrXIDg2:0&smids=/g/1q62h0x10&wptab=COMPARE

That's why I said SPY beats SDY pretty handily  :) 

[Rob_bob]

This is the dilemma I deal with as well. Should I put my money in solid dividend payers or an index. If I put my money in all dividend stocks then I can get a higher dividend yield and receive more money without having to sell any stock. The downside is I am stock picking and I like the diversity and ease of just buying an index.

You are not receiving more money.

Take a look at stock prices when a company goes ex-dividend and you will see the price drops the amount of the dividend.

Some people try to argue that this isn't true because the share price doesn't fall by exactly the amount of the dividend paid out, sometimes it's more and sometimes it's less, but this can be explained by the fact that during the rest of the time when dividends are not paid out, the share price moves up and down and all over the place. The market is reacting to new information about the company, sector, or market it is in. For example, a company might release sales results for the past quarter and the price moves up in anticipation on future earnings. When a share goes ex-dividend, these forces are still in play, and this is why the share price doesn't drop by exactly the price of the dividend. That the share price drop isn't precisely the amount of the dividend paid out doesn't nullify the fact that the share price adjusts based on the dividend paid out.

When you get down to the nuts and bolts, here is what happens.

A company has earnings.

It then distributes some of those earnings to investors either as dividends or through share buy-backs, and retains the rest to grow the business. The same company with the same earnings can distribute 80% or 20% or any other amount of earnings and it will make no difference to your total return how much is distributed.

The company can also distribute earnings as a share buy back to boost up the price, so lower dividends don't mean the company necessarily invested more of their profits for (what some consider speculative) growth, it means there will be less shares in the company, but each share has increased in value. So again, it means nothing how much cash you get back in your hand as cash dividends.

The more they pay out in dividends, the less that is retained to grow the business, and therefore growth is reduced by the amount that was paid out in dividends. Dividends are not free money.

On top of this, by going with only high yielding companies, you face concentration risk through lack of diversification.

One more thing - "dividend investors" use backwards looking data, throwing out all the companies that intended to increase their dividend over time and failed, falely giving higher looking returns than in reality. This is called survivorship bias. You can't know which companies will continue to successfully increase their dividends over time into the future.

The list of problems with dividend investing begins with a complete misunderstanding of what dividends are (generally mistaking them for earnings, which they are not), and then continues to confirm the fallacy with biases, leaving you exposed to risks such as concentration, and the risk of believing your money is somehow safer.

I'm just not real excited about saving my butt off to FIRE and then selling index shares during an unknown length bear market.

By spending dividends, you are already spending from your total return, the only difference is that someone else has decided how much you can spend down. If a company buy's back 4% of it's shares, the shares have gone up 4% in value. If you then spend it down, then it was no different whether it was paid out in dividends or not.

Dividends are arbitrary and have no meaning, yet you are attaching a false meaning to them.


Further information
https://www.cnbc.com/2016/12/08/dont-buy-in-to-the-dividend-fallacy-new-academic-paper-warns.html
https://www.youtube.com/watch?v=UpXI_Vd51dA&t=9s
https://www.bogleheads.org/wiki/Why_did_my_fund_unexpectedly_drop_in_value
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=258311
https://www.forbes.com/sites/jimdahle/2018/11/11/five-reasons-to-avoid-focusing-on-dividend-stocks/#16394c797479
https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

However when you sells shares to create income you reduce your future gains in dollars.

If you own 1000 shares and the price goes up $1 your account grows by $1000.  If you sell 100 shares and spend the money and the share price goes up $1 your account value grows by $900.

If you own 1000 shares of a dividend paying company that pays $1 per share you get $1000 each year to spend regardless of share price changes.

Without looking up the details I bought a position last Nov. IIRC, paying about 4.5% yield in dividends at that time.  It pays monthly so the share price is effected monthly.  I currently have ~20% in short term capital gains now and I had cash to spend as well plus the company has raised the dividend for the last 20 or 25 years and paying the dividend doesn't reduce the future income like selling shares would.  So the dividends reduce share price and future gains argument doesn't bother me much

[MoneyTree]

OP, how has your dividend portfolio performed overall in comparison to how the wider market has performed?

I was a dividend growth investor for years, looking at companies that fit the profile you describe and I did pretty well too, but compared to the broader market, I underperformed.

Combine that with the fact that because my dividend yield is higher than the index yield , for all these years I have been unnecessarily creating massive tax drag during the accumulation phase, when I'm in a higher tax bracket and it hurts the most, and I'm way behind where I would have been otherwise.

And when I actually do FIRE, those same dividends will be forcing me to recognize income. To some extent, that will be fine, as I do need some income, but I'd rather have greater control as to how much I recognize at any given time. Limiting my recognized income during retirement will allow me to strategically harvest capital gains, potentially qualify for any insurance subsidies (we'll see how that all plays out), etc.

So all in all, i realized I was sacrificing a lot just for that regular dividend payout, which may or may not be secure during a downturn anyways. 1) Inferior Total Return 2) Tax Drag in earning years that prolongs the accumulation phase, 3) Less flexibility to recognize income during retirement.

[Andy R]

However when you sells shares to create income you reduce your future gains in dollars.

If you own 1000 shares and the price goes up $1 your account grows by $1000.  If you sell 100 shares and spend the money and the share price goes up $1 your account value grows by $900.

If you own 1000 shares of a dividend paying company that pays $1 per share you get $1000 each year to spend regardless of share price changes.

Without looking up the details I bought a position last Nov. IIRC, paying about 4.5% yield in dividends at that time.  It pays monthly so the share price is effected monthly.  I currently have ~20% in short term capital gains now and I had cash to spend as well plus the company has raised the dividend for the last 20 or 25 years and paying the dividend doesn't reduce the future income like selling shares would.  So the dividends reduce share price and future gains argument doesn't bother me much

That was answered in the post you quoted. When you don't re-invest the dividends, your future gains have been reduced in an identical way. Dividends are not some sort of separate free money, they come out of the total return. Saying that it is not is a fallacy.

The fact that a specific stock you bought was able to grow their value and dividends over time in the past is not proof and is of no help since nobody knows today what stock will be able to do that in the future. Why don't you mention all the myriad of businesses that intended to do that and failed and average it out and you will not be so flippant about whether it bothers you or not. This was also explained in the post you quoted.

If it makes you feel good to believe fallacies to confirm your own biases, go right ahead, but it doesn't make them not fallacies.

[bacchi]

However when you sells shares to create income you reduce your future gains in dollars.

If you own 1000 shares and the price goes up $1 your account grows by $1000.  If you sell 100 shares and spend the money and the share price goes up $1 your account value grows by $900.

If you own 1000 shares of a dividend paying company that pays $1 per share you get $1000 each year to spend regardless of share price changes.

Without looking up the details I bought a position last Nov. IIRC, paying about 4.5% yield in dividends at that time.  It pays monthly so the share price is effected monthly.  I currently have ~20% in short term capital gains now and I had cash to spend as well plus the company has raised the dividend for the last 20 or 25 years and paying the dividend doesn't reduce the future income like selling shares would.  So the dividends reduce share price and future gains argument doesn't bother me much

That was answered in the post you quoted. When you don't re-invest the dividends, your future gains have been reduced in an identical way. Dividends are not some sort of separate free money, they come out of the total return. Saying that it is not is a fallacy.

Troof. The exchange (market maker, specialist, algorithm) actually reduces the open quote when a stock goes ex-div. It may go up from there, it may go down from there, but the open quote (and bid and ask) is reduced because the value of the company is reduced.

[MrUpwardlyMobile]

I do some dividend investing but it seems like my method addresses a lot of the concerns here. It’s not perfect but it’s an experiment that motivates me a lot.

I do monthly reports on it too.
http://upwardlymobile.life/the-june-2019-passive-income-report/

The short version is that I buy dividend ETFs. Some are preferred share ETFs, like PGX and PFF, which aren’t as diverse as I’d like. Others are far more diversified like SCHD, VYM, and SPYD.

The ETFs save me on transaction costs.  The preferred share ETFs have higher expense ratios than I’d like compared to the other ETFs.

[Mr Mark]

OP, how has your dividend portfolio performed overall in comparison to how the wider market has performed?

I was a dividend growth investor for years, looking at companies that fit the profile you describe and I did pretty well too, but compared to the broader market, I underperformed.

Combine that with the fact that because my dividend yield is higher than the index yield , for all these years I have been unnecessarily creating massive tax drag during the accumulation phase, when I'm in a higher tax bracket and it hurts the most, and I'm way behind where I would have been otherwise.

And when I actually do FIRE, those same dividends will be forcing me to recognize income. To some extent, that will be fine, as I do need some income, but I'd rather have greater control as to how much I recognize at any given time. Limiting my recognized income during retirement will allow me to strategically harvest capital gains, potentially qualify for any insurance subsidies (we'll see how that all plays out), etc.

So all in all, i realized I was sacrificing a lot just for that regular dividend payout, which may or may not be secure during a downturn anyways. 1) Inferior Total Return 2) Tax Drag in earning years that prolongs the accumulation phase, 3) Less flexibility to recognize income during retirement.

+1

For some the 'dividend growth investing' route can be an enjoyable hobby, puttering around on Seeking Alpha, doing research on companies and sectors, etc... Essentially feeling like your own Warren Buffet, with a stable of 20-50 solid (?) companies, all regularly sending you checks. 

But what a lot of time, it almost sounds like work! And all to (probably) under perform. Think of all the things you could be doing with your time instead if you just had a standard 70% VTSAX/30 VBTLX...

So, I'd say if analysing company balance sheets is something you're really into, and enjoy doing, and you of course track your relative and absolute performance regularly, buy and hold, quality companies, sector balanced, hey, go for it.

But I'd be wary of putting 100% of my 'stach into such a strategy. And note it can lead to the slippery slope of trading and market timing (selling covered calls to boost dividends anyone?) which almost certainly will lead to disaster. Has anyone backtested a 'dividend king' investment approach vs SWR?

[Telecaster]

I do some dividend investing but it seems like my method addresses a lot of the concerns here. It’s not perfect but it’s an experiment that motivates me a lot.

I do monthly reports on it too.
http://upwardlymobile.life/the-june-2019-passive-income-report/

The short version is that I buy dividend ETFs. Some are preferred share ETFs, like PGX and PFF, which aren’t as diverse as I’d like. Others are far more diversified like SCHD, VYM, and SPYD.

The ETFs save me on transaction costs.  The preferred share ETFs have higher expense ratios than I’d like compared to the other ETFs.

Keep in mind that preferred stocks don't trade like stocks, they trade like bonds.  There is nothing wrong with that, just keep in mind it isn't really part of the stock portion of your portfolio. 

[vand]

It's probably true that Dividend stocks have not matched the overall market (all dividends reinvested) over quite a number of years now, simply because in this cycle there seems to be a preference for growth stocks as investors have chased future earnings potential and valued those companies promising such at a premium. It is also why nearly all "value" funds have underperformed the market.

At this stage, after a long bull market this should not really come as a surprise. Long-time proven companies are preferred at the beginning of a new bull market when confidence is still fragile, and then as the bull evolves and matures investors gradually increase their appetite for risk. The cycle will repeat over the next bear market and recovery.. it always does.

[El_Mariachi]

I'd be better off had I stuck with this when I came across it 5+ years ago instead of speculating in marijuana stocks.

As such, I've shifted my purchases (still holding the pot stocks, but not buying more) to dividend yielding companies like Ford, Rocky Mountain Chocolate Factory, Kroger, etc.

Are you holding any stock paying dividends right now?

Dividend paying stocks?

yes one of my IRAs is entirely dividend paying stocks that I have carefully chosen and all except 2 have done well for me that being said I am averaging a total return way above my other account which has ETFs like VTI, FZROX and the like (yes on the same time scale)

And over what time horizon are you making this comparison?  Have you gone through an extended period of decline or is this just solely in the latest bull run we've been experiencing the last 10 years?

10 years on both, so apples to apples

[El_Mariachi]

OP, how has your dividend portfolio performed overall in comparison to how the wider market has performed?

I was a dividend growth investor for years, looking at companies that fit the profile you describe and I did pretty well too, but compared to the broader market, I underperformed.

Combine that with the fact that because my dividend yield is higher than the index yield , for all these years I have been unnecessarily creating massive tax drag during the accumulation phase, when I'm in a higher tax bracket and it hurts the most, and I'm way behind where I would have been otherwise.

And when I actually do FIRE, those same dividends will be forcing me to recognize income. To some extent, that will be fine, as I do need some income, but I'd rather have greater control as to how much I recognize at any given time. Limiting my recognized income during retirement will allow me to strategically harvest capital gains, potentially qualify for any insurance subsidies (we'll see how that all plays out), etc.

So all in all, i realized I was sacrificing a lot just for that regular dividend payout, which may or may not be secure during a downturn anyways. 1) Inferior Total Return 2) Tax Drag in earning years that prolongs the accumulation phase, 3) Less flexibility to recognize income during retirement.

so as I stated earlier my DGI bucket is in my IRA, so not much tax implications right now, compared to the broader market its been trending closely but not necessarily outperforming

as of today I am up 21.61% on my DGI bucket, in my fund bucket is up 7.43% in the same timeframe

[Greenback Reproduction Specialist]

I do both, invest in div stocks and sector ETF's. Over the years I've had a lot of success and a lot of failure with div stocks. I typically follow warren buffet and a few other well known fund managers to see what they like. I figure they have done massive amounts of research and if they are comfortable putting money into a stock, I can rest easy at night. The tough part becomes knowing when it is an appropriate time to sell. Its easier said than done because structural issues with a company are not always easy to spot at first, so you might find yourself watching a falling stock price and waiting for a bull run up to sell, and praying to break even. I've seen a fair share of solid S&P companies with 20+yr div records get knocked way down, then cancel their dividend. So i have modified my allocation over time to where I'm now about 75% ETFs and 25% div stocks, which I'm comfortable with. I've even picked up preferred stocks and CDs at great rates during media scares.

You make your money when you buy, just remember that. If you dont buy at a good price, you will always be stuck with poor returns.

[effigy98]

I like ETFS for dividends in case a company stops paying them and gets knocked out, it has little impact to the overall returns. Lower yields doing dividend growth investing, but I like the over all return. I am most interested in reducing sequence of returns risk with a dividend portfolio. I have heard bigern mention this a few times. His major complaint was paying taxes while earning income, but if you are close to FIRE does it matter?

For me, it is more psychological getting a paycheck even during bad times. Under 75k in dividends, pay no taxes for married couple even in a taxable account. Pretty good deal.

VDC: Max drawdown is insanely low when SHTF.
DGRO: Beats S&P 500.
VIG: Vanguard, close to DGRO.
SCHD: Good yield, quality and Dividend Growth. This might be my favorite well rounded one.

[Andy R]

I am most interested in reducing sequence of returns risk with a dividend portfolio.

In equity funds dividends come directly out of share prices. They do not increase your wealth. This has been explained in detail ad nauseam.

I have heard bigern mention this a few times. His major complaint was paying taxes while earning income, but if you are close to FIRE does it matter?

I'd like to see where ERN says that high dividend paying stocks reduce SOR risk. Could you point me to exactly where he says that please.

[vand]

The HYP strategy has massively underperformed in the last 5 years:

https://www.ft.com/content/e35847ea-a24a-11e9-a282-2df48f366f7d

The performance has been so abysmal that its now become a contrarian strategy.

[CorpRaider]

I am most interested in reducing sequence of returns risk with a dividend portfolio.

In equity funds dividends come directly out of share prices. They do not increase your wealth. This has been explained in detail ad nauseam.

I have heard bigern mention this a few times. His major complaint was paying taxes while earning income, but if you are close to FIRE does it matter?

I'd like to see where ERN says that high dividend paying stocks reduce SOR risk. Could you point me to exactly where he says that please.

It's a low(er) vol strategy (historically) so it makes sense he would analyze it like that.

[effigy98]

I am most interested in reducing sequence of returns risk with a dividend portfolio.

In equity funds dividends come directly out of share prices. They do not increase your wealth. This has been explained in detail ad nauseam.

I have heard bigern mention this a few times. His major complaint was paying taxes while earning income, but if you are close to FIRE does it matter?

I'd like to see where ERN says that high dividend paying stocks reduce SOR risk. Could you point me to exactly where he says that please.

I never said HIGH paying dividend stocks. I am interested in DIVIDEND GROWTH stocks. These may pay LESS then 2%, the important thing to me is quality by keeping the balance sheet clean. This has out performed the S&P consistently. Bigern makes the case that high yield is bad (VYM, HDV, etc) and I agree, all backtest results show this.

As I said about collecting the dividend, it is mostly psychological. I rather have this money deposited directly to my checking account every 3 months and not have to do anything and not see my share balance decrease. Selling shares during a downturn is A LOT different to me then collecting a dividend... It just feels different.

I also think if a company is trying to stay an Aristocrat and have the quality screen of something like SCHD, they need to keep their balance sheet clean instead of doing dumb things with the excess money. There are very few companies that are good at reinvesting money back into the business when they get really big.

I wish the forum would just be renamed VTSAX investing instead of Investor Alley because going against this mantra is futile here.

[waltworks]

Selling shares during a downturn is A LOT different to me then collecting a dividend... It just feels different.

And there we have it.

If you're just psychologically healthier with dividend stocks, that's fine. Likewise, if you're more concerned with total return and prefer to sell shares (like me) that's also fine.

The key is to not blind yourself to the reality: you are giving up a little bit of return in exchange for (maybe) a bit smoother ride, assuming you're widely diversified in your dividend-paying holdings. If you're stock picking dividend stocks you're probably not doing yourself any favors.

-W