Author Topic: Dividend-investing pros, cons, questions  (Read 6480 times)

mikescepaniak

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Dividend-investing pros, cons, questions
« on: August 22, 2019, 06:17:00 PM »
I'm FIRE'd. I live off of dividends paid out by the individual stocks I hold in a taxable brokerage account. In short, I mirror the holdings of the real-money Morningstar DividendInvestor Dividend Select Portfolio - https://mdi.morningstar.com/

I will be giving a presentation on my dividend-investing strategy in a few weeks at a local ChooseFI meet-up. Given the general preference within the FI/FIRE community for total market index-based mutual funds and ETFs, it is that option which I intend to compare/contrast with. In the presentation, I'll cover the major positives and negatives of my approach.

I characterize the income I earn from dividend-paying stocks as being
  • substantial
  • stable
  • consistent
  • inflation-proof
  • tax-advantaged
  • easily-harvested
  • low-stress

I plan to go into detail in support of each of these positives. Conversely, there are several arguments to be made against my dividend-investing strategy, coming from various angles, including
  • anti-dividend philosophical bias
  • fragile company-specific dividend policies
  • subscription/trading costs
  • tax-burdens
  • portfolio manager vulnerability
  • hands-on management requirement

I plan to go into detail in support of each of these negatives, as well.

If you are a dividend lover, hater, or neophyte, I'd appreciate your thoughts. I'm happy to provide more detail for each bullet above, but didn't want this post to be too lengthy. Thanks.

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FOLLOW-UP - I've published a long-form written version of the presentation I ended up giving. While I'm pleased with how the presentation went, I think the article is better. Anyway, here 'tis - Misguided Early Retiree Somehow Manages to Live Off of Dividends
« Last Edit: February 11, 2020, 06:40:01 PM by mikescepaniak »

Buffaloski Boris

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Re: Dividend-investing pros, cons, questions
« Reply #1 on: August 22, 2019, 06:45:37 PM »
Iím in the ďlikeĒ column, but with reservations. I guess my biggest reservation is that dividend stocks move with the market as well. So I donít see that youíre going to avoid pain if the overall market takes a dump. Also, not all dividends are created the same in my view. Some of these dividend stocks look like dogs with great dividends which in some cases look to me like a return of invested capital. Not a return of earnings.

Andy R

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Re: Dividend-investing pros, cons, questions
« Reply #2 on: August 22, 2019, 10:30:50 PM »
If you are a dividend lover, hater, or neophyte, I'd appreciate your thoughts. I'm happy to provide more detail for each bullet above, but didn't want this post to be too lengthy. Thanks.

Sure, please expand on all of them.

I characterize the income I earn from dividend-paying stocks as being
  • substantial
  • stable
  • consistent
  • inflation-proof
  • tax-advantaged
  • easily-harvested
  • low-stress

1. substantial
Share growth is also "substantial" and more so than dividends.

2. stable & consistent
Only in time of economic stability, at which time so are all other stocks.
https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/
https://earlyretirementnow.com/2019/03/04/the-yield-illusion-follow-up-swr-series-part-30/
https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/

3. tax-advantaged
I'd love to see a valid reason-based explanation how having more paid out as dividends instead of less is more tax efficient and not less tax efficient.

4. low-stress
Since dividends are certainly not stable and consistent during times that you need them to be (economic turbulence), the only reason left to think of them as low stress is the idea of just not looking at your portfolio,, which you can just as easily do by not looking at any other portfolio, or by falsely assuming they are a bond proxy (they are not), but please go ahead and show us your proof and reasoning.

5. inflation-proof
Sure, go ahead and provide some proof. I expect it to be the same idea of "proof" that dividend investors use, which is a proof by showing half the story and drawing a false conclusion, but go ahead, lets see what you got.

MustacheAndaHalf

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Re: Dividend-investing pros, cons, questions
« Reply #3 on: August 22, 2019, 11:18:20 PM »
If you comparing dividend stocks to the total stock market, then your advantages would have to be relative advantages.  It might also help to spell out which mutual fund or ETF best represents your approach.

Let's say you pick Vanguard Dividend Appreciation (VIG), compared to Vanguard Total Stock Market (VTI).  Well.. the surprise here is that both have the same dividend yield!  Their tax implications are identical, right now (1.8% yield, taxed at 15% for most people).  And they probably have a fair amount of overlap, which you'd have to pick apart.

You might instead go with Vanguard High Dividend Yield (VYM), which has a 3.3% dividend yield.  But that would shoot down your tax efficiency argument: every year, you'd pay taxes on 3.3% instead of 1.8%.  At a 15% tax rate, you'd pay about 0.22% more in taxes, which makes it less tax efficient.  And since money is money, you also lose out on a higher expense ratio (0.06% vs 0.03%), which would make for a 0.25% gap.

Mutual fund advertising always comes from those who can afford it - funds with higher expense ratios.  So I think a lot of us who favor index investing feel, rightly so, that a lot of the investment advertising is against us.  And we might lose sight of the overlaps between index investing and dividend investing.

So what specific things do you buy to do your index investing?

Financial.Velociraptor

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Re: Dividend-investing pros, cons, questions
« Reply #4 on: August 23, 2019, 08:57:00 AM »
I think you need to discuss asset allocation strategy, especially if you are using REIT, BDC, MLP, or bonds.

Boofinator

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Re: Dividend-investing pros, cons, questions
« Reply #5 on: August 23, 2019, 10:46:43 AM »
If I was advising someone who was considering the dividend-focused investing approach, I would only say that it might make sense for someone who is retired (or very low income and intends to stay that way) and whose income allows for the dividends to be taxed at 0%. The theory behind this is that dividend-paying stocks are priced slightly lower by most people due to their higher taxes, so if you can get them without paying taxes it could bump your yield by about 0.2%. That's theory though, and I haven't done any research whatsoever so results may vary.

mikescepaniak

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Re: Dividend-investing pros, cons, questions
« Reply #6 on: August 23, 2019, 12:45:20 PM »
Thanks for the responses! Good stuff here. Just to clarify, I'm not trying to engage in a debate here about the worth of dividend investing. Rather, I want to surface any pros, cons, or questions I haven't yet considered.

I guess my biggest reservation is that dividend stocks move with the market as well. So I donít see that youíre going to avoid pain if the overall market takes a dump. Also, not all dividends are created the same in my view. Some of these dividend stocks look like dogs...

Yes, dividend stocks move with the market. However, as I got closer to FIRE, I stopped caring much about the share prices of my holdings. Instead, all I really care about now is my yield and annual income.

In order to avoid high, but poor-quality dividends, I follow the lead of the model portfolio in Morningstar DividendInvestor. I don't know enough (or care to know enough) to properly gauge the quality of a stock's dividend - in terms of sustainability and growth prospects.

lets see what you got.

I'm not trying to convince you that my strategy is right for you. Again, I'm just trying to surface pros, cons, and questions. Less aggression, please.

Share growth is also "substantial" and more so than dividends.

I'm saying that the income (not total return) I earn is substantial in comparison to total market index-based alternatives - ~4.08% vs. 1.81% for VTI and 1.83% for VTSAX. I'll emphasize that qualifier more.

Only in time of economic stability, at which time so are all other stocks.

By "stable", I mean that stock prices yoyo up and down constantly, whereas dividend rates are (relative to stock prices) very stable and rise steadily (although cuts do happen).

I'd love to see a valid reason-based explanation how having more paid out as dividends instead of less is more tax efficient and not less tax efficient.

By "tax-advantaged", I mean from the perspective of the post-retirement investor, not the corporation. The tax rate for qualified dividends is 0% for single filers with taxable income up to $38,600 and married filers with taxable income up to $77,200. Of course, the same goes for long-term capital gains.

Since dividends are certainly not stable and consistent during times that you need them to be (economic turbulence)...

Post-retirement, I derive 100% of my income from dividend payments, which requires no selling. In comparison, I would find needing to sell shares to bring in income to be rather stressful, partly because I would then come to care about share price again. In comparison to share prices, dividend rates are much more stable.

5. inflation-proof

Admittedly, "inflation-aware" or "inflation-resistent" might be better terms here. Anyway, a worthwhile dividend-paying stock grows at a rate that is, to some degree, greater than inflation. For those stocks, the dividend rate tends to rise in a similar fashion (faster than inflation).

You might instead go with Vanguard High Dividend Yield (VYM), which has a 3.3% dividend yield.  But that would shoot down your tax efficiency argument: every year, you'd pay taxes on 3.3% instead of 1.8%.

By "tax-advantaged", I mean from the perspective of the post-retirement investor. Pre-retirement is a different story, which you have called-out. It's a good point, and I've added that to the cons. Thanks!

So what specific things do you buy to do your index investing?

I don't currently engage in any index investing.

I think you need to discuss asset allocation strategy, especially if you are using REIT, BDC, MLP, or bonds.

I do cover that. Thanks! However, this could be worth an additional point, as I believe that most/all total market indexes eschew MLPs and REITs, whereas I (and the model portfolio) don't.

...I would only say that it might make sense for someone who is retired (or very low income and intends to stay that way) and whose income allows for the dividends to be taxed at 0%.

Good point. Looks like that was brought up three times. I'll have to be sure to stress it.

Again, thank you. More thoughts are welcome.

ecchastang

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Re: Dividend-investing pros, cons, questions
« Reply #7 on: August 23, 2019, 01:51:09 PM »
Curious what your actual holdings look like.

habaneroNorway

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Re: Dividend-investing pros, cons, questions
« Reply #8 on: August 23, 2019, 01:59:05 PM »
The problem with basing FIRE income on dividends (at least to some extent) is that there is an underlying assumption that dividends keep up with inflation (not neccesarily) and that they are stable (they aren't). The main problem with the last point is that when they are cut is exactly when you don't want them to. I.e. in a bad market, so you will have to sell shares in order to fund your spending - and more than you originally planned to. Also, companies paying good dividends and have done so in the past don't have to keep doing it. They might borrow money to keep the dividend flowing and it might work until it doesn't. And when dividends are cut, share prices tend to fall. A lot.

You are probably worse off being overweight high-dividend stocks compared to the overall market total return. There ain't anything magical about dividends. If you look back the last 10 years in the raging bull market - being overweight dividend stocks means being underweight names like Amazon, Microsoft, Apple, Facebook, Google and youname it. Since these stocks are responsible for a very substantial part of the rise of the S&P 500 over the last 10 years, you would have lost out - fairly big time.

There is extremely little evidence suggesting that variations on the "yield shield" actually work and quite a lot for the opposite.


Buffaloski Boris

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Re: Dividend-investing pros, cons, questions
« Reply #9 on: August 23, 2019, 05:04:21 PM »
One thing I forgot to mention is that for me ďvalueĒ investing is as much about finding the good dogs in the kennel as it is the dividends. The dividends are a nice bonus.

Is it true that youíre not doing this through index funds? The horror!!

Andy R

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Re: Dividend-investing pros, cons, questions
« Reply #10 on: August 24, 2019, 02:37:00 AM »
I'm sorry mikescepaniak, these concepts have been debunked so many times, that the only way to believe these fallacies is to believe it because you want to believe it and ignore the facts rather than because of valid reasoning.

Lets go through your reasoning one by one.

You are saying the dividend amount is more substantial.
This is not relevant.
If you give me your money, I can give you 10% per year. Sure after 10 years you have no principle yet, but by your definition the amount paid out each year is more substantial.

Your comment about the dividends being more stable appears to relate entirely to the idea that you can simply look away from the share price movements. Behavioural investing is a real thing and this is a big point. However, you can do it with a more diversified portfolio by having a managed payout so that you still don't need to look at the share price. There is no read to increase your concentration risk of only investing in companies who have a higher dividend to achieve this.

Tax advantaged for someone on a low income in retirement - this would require you to own the high dividend stocks during decades of accumulation realising gains the whole way through, or else selling those and realising gains to move to high dividend stocks..

There is no reason to assume that dividends will appreciate with inflation. You are looking at only the companies who intended AND succeeded to do this in the past and ignore those that intended to and failed. There is no way to know which companies will succeed to do this into the future. Once you add in the companies that intended to do this and failed, your "evidence" no longer holds. This is is widely known as survivorship bias.

mikescepaniak

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Re: Dividend-investing pros, cons, questions
« Reply #11 on: August 29, 2019, 02:06:46 PM »
Curious what your actual holdings look like.

I just sent you a private message with a list.


mikescepaniak

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Re: Dividend-investing pros, cons, questions
« Reply #12 on: August 29, 2019, 05:07:04 PM »
There is extremely little evidence suggesting that variations on the "yield shield" actually work and quite a lot for the opposite.

I'm sorry mikescepaniak, these concepts have been debunked so many times, that the only way to believe these fallacies is to believe it because you want to believe it and ignore the facts rather than because of valid reasoning.

These responses are the first time I've heard of the term "yield shield". If possible, please point me at any articles that have informed your thinking on this. I looked through the Early Retirement Now (ERN) articles that Andy R referenced, but I don't find the comparison very compelling or relevant to what I'm presenting. I say this because ERN's "yield shield" comparison portfolio leans heavily on bonds and preferred shares (which appears to be responsible for the lion's share of the poor performance), whereas I'm all equities. The comparison portfolio also assumes index-based dividend stock selections, which is not what I'm presenting.

If it matters, the portfolio I'm "mirroring" has a cumulative total return of 8.5% since Jan 2005, which compares pretty well with the 8.8% return of the S&P 500. According to my personal calculations (which, admittedly, could be "off"), I've lagged the S&P 500 by 0.75% since 2008.

However, you can do it with a more diversified portfolio by having a managed payout so that you still don't need to look at the share price.

Good point. I'll add to the presentation. Thanks.

Tax advantaged for someone on a low income in retirement - this would require you to own the high dividend stocks during decades of accumulation realising gains the whole way through, or else selling those and realising gains to move to high dividend stocks.

Good point. Yes, the taxes paid on dividends received pre-retirement can be substantial, as you will probably be in a tax bracket or at an income level where qualified dividends are not taxed at 0%. However, for early retirees, where the accumulation/preparation phase is (hopefully) shorter than the execution phase, I suggest minimizing the taxes paid during the longer phase, not the shorter phase.

There is no reason to assume that dividends will appreciate with inflation. You are looking at only the companies who intended AND succeeded to do this in the past and ignore those that intended to and failed. There is no way to know which companies will succeed to do this into the future.

Obviously, there are no guarantees. However, a durable economic moat serves to insulate company profits and market share (see Buffett and Munger). A moat allows a stock to grow at a rate that is, to some degree, greater than inflation. For those stocks, given a commitment to the dividend, the dividend rate tends to rise in a similar fashion (faster than inflation). I'll expand on this a bit.

I appreciate everyone taking the time to respond. Very helpful. More thoughts are welcome.

samirol

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Re: Dividend-investing pros, cons, questions
« Reply #13 on: August 29, 2019, 06:02:55 PM »
This Vanguard paper is a good starting point to understanding dividend growth and high dividend strategies

https://personal.vanguard.com/pdf/ISGADOS.pdf

"Compared with other equities, the performance of these strategies has been time-period dependent and largely explained by their exposure to a handful of equity factors: value and lower volatility for high-dividend-yielding equities and lower volatility and quality for dividend growth equities."

The question is why should investors target indirect characteristics (dividends) instead of the actual sources of performance (factors)

Buffaloski Boris

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Re: Dividend-investing pros, cons, questions
« Reply #14 on: August 29, 2019, 06:11:15 PM »
The ďyield shieldĒ that Iíve seen described was on the Millenial Revolution website. I donít happen to agree with it. I just think it pays to be receptive to alternative investment strategies given the FI obsession with index funds. I respect those who are willing to think and bring something new or different to the table.

More to the topic of your presentation, you might want to talk about dividend stocks in the context of value investing. A stock with a relatively high dividend is often, but not always, a stock with a relatively low PE ratio.

Andy R

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Re: Dividend-investing pros, cons, questions
« Reply #15 on: August 29, 2019, 07:47:50 PM »
If it matters, the portfolio I'm "mirroring" has a cumulative total return of 8.5% since Jan 2005, which compares pretty well with the 8.8% return of the S&P 500. According to my personal calculations (which, admittedly, could be "off"), I've lagged the S&P 500 by 0.75% since 2008.

The problem is that just because those companies you selected have done that in the past does not mean they will continue to do that into the future.

If you went back to 2008, how would you have known those companies would have that performance going forward?

Have you excluded companies that had done well in the previous period but did not do well from 2008 until now? This is called survivorship bias, and this is exactly what SPIVA reports show - that over certain periods, those selecting a subset of the market can out perform, but over the longer term, if you include all the companies that failed, indexing beats over 80% of active managers. 

This can be explained by the Pareto Principle (the 80/20 rule).
Most of the future performance will come from a disproportionately small number of companies in the market, and it is much easier to miss some of these few companies resulting in lower returns than just investing in everything, and as a consequence, a disproportionately small number of fund managers will outperform by a large magnitude and a disproportionately large number of fund managers will underperform, so when you pick a fund manager with no real idea where they will end up, you have a much higher chance (over 80% going by the SPIVA reports) of ending up with one that under performs. Obviously this idea can be applied equally to an individual picking stocks as to a fund manager.

Malcat

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Re: Dividend-investing pros, cons, questions
« Reply #16 on: August 30, 2019, 05:36:17 AM »
Why is this suddenly a thing here??

I feel like I'm recently seeing thread after thread about this dividend nonsense. I'm also suddenly seeing a lot of articles promoting specific stock picks based on their high dividends. Just yesterday I read an article recommending that people near retirement dump their savings into 3 high-dividend stocks. Yep, just 3 stocks. WTF?

Where is this coming from?


slugsworth

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Re: Dividend-investing pros, cons, questions
« Reply #17 on: August 30, 2019, 02:00:16 PM »
If you are a dividend lover, hater, or neophyte, I'd appreciate your thoughts.

So, the dividend investing people I know, in real life, sell their dividend stocks when they cut the dividend lower than some threshold or stop providing dividends all together.  Is this something you advocate?

One of my concerns about dividend investing is this culling and reinvesting.  Again, I might be biased by the people who I've talked to in real life doing this.  I have serious concerns about people having to do this sort of maintenance to their portfolio as they age and loose their mental acuity. 

My understanding (and correct me if I'm wrong) is that any performance advantage dividend stocks have can be explained by a value tilt.  Why not just have a value oriented index fund with a managed payout, as Andy referenced. 

DavidAnnArbor

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Re: Dividend-investing pros, cons, questions
« Reply #18 on: August 30, 2019, 07:41:19 PM »
Someone I know got so whooped up by the idea of dividends that he bought these high dividend paying limited master partnerships that invested in oil/gas only to see these investments implode when fracking lowered gas/oil prices. I had told him all along to invest in a total stock market index.

Buffaloski Boris

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Re: Dividend-investing pros, cons, questions
« Reply #19 on: August 31, 2019, 07:41:15 PM »
Why is this suddenly a thing here??

I feel like I'm recently seeing thread after thread about this dividend nonsense. I'm also suddenly seeing a lot of articles promoting specific stock picks based on their high dividends. Just yesterday I read an article recommending that people near retirement dump their savings into 3 high-dividend stocks. Yep, just 3 stocks. WTF?

Where is this coming from?

Hi Malkynn. IMHO, itís a bit of a backlash. The index police on the MMM forums have become insufferable. Nothing attracts people quite so much as forbidden fruit. Iím glad to see it. I like to see what is working or not working for other people. Even if it may not be for me.

EvenSteven

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Re: Dividend-investing pros, cons, questions
« Reply #20 on: August 31, 2019, 08:03:07 PM »
Why is this suddenly a thing here??

I feel like I'm recently seeing thread after thread about this dividend nonsense. I'm also suddenly seeing a lot of articles promoting specific stock picks based on their high dividends. Just yesterday I read an article recommending that people near retirement dump their savings into 3 high-dividend stocks. Yep, just 3 stocks. WTF?

Where is this coming from?

Hi Malkynn. IMHO, itís a bit of a backlash. The index police on the MMM forums have become insufferable. Nothing attracts people quite so much as forbidden fruit. Iím glad to see it. I like to see what is working or not working for other people. Even if it may not be for me.

In the last several months I've seen a single poster make more posts about how indexes suck and everyone should be an individual stock picker than I have seen the entire rest of the forum posters combined police any kind of index orthodoxy.

bacchi

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Re: Dividend-investing pros, cons, questions
« Reply #21 on: August 31, 2019, 08:54:48 PM »
Why is this suddenly a thing here??

I feel like I'm recently seeing thread after thread about this dividend nonsense. I'm also suddenly seeing a lot of articles promoting specific stock picks based on their high dividends. Just yesterday I read an article recommending that people near retirement dump their savings into 3 high-dividend stocks. Yep, just 3 stocks. WTF?

Where is this coming from?

Hi Malkynn. IMHO, itís a bit of a backlash. The index police on the MMM forums have become insufferable. Nothing attracts people quite so much as forbidden fruit. Iím glad to see it. I like to see what is working or not working for other people. Even if it may not be for me.

In the last several months I've seen a single poster make more posts about how indexes suck and everyone should be an individual stock picker than I have seen the entire rest of the forum posters combined police any kind of index orthodoxy.

Word. I'm surprised we haven't seen the covered call options cheerleaders show up.

It'll all shake out in the market tumble. It always does.

Andy R

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Re: Dividend-investing pros, cons, questions
« Reply #22 on: August 31, 2019, 10:15:24 PM »
Hi Malkynn. IMHO, itís a bit of a backlash. The index police on the MMM forums have become insufferable. Nothing attracts people quite so much as forbidden fruit. Iím glad to see it. I like to see what is working or not working for other people. Even if it may not be for me.

I also like to see what are other people's strategies, but "dividend investing" is based entirely on fallacies.

Dividend investors are the FI version of god-believers.

They lack either the ability or willingness to reason, and consequently just accept it based on the fact that it feels good to believe it.

As each argument is shown to be a fallacy, instead of admitting their argument is a fallacy, they endlessly move on to other fallacies to try and confirm their bias.

Finally when they have exhausted every other attempt at defending their "belief", their final argument to avoid admitting their belief has been shown up as a fallacy is that focusing on dividends offers a behavioural benefit that allows you to remain invested during market turbulence, therefore it still has value. The problem with deluding yourself at the expense of facing the reality of the market is that you then will not be prepared if a sustained bear market hits and you find that dividend stocks are not a bond proxy, and that earnings of all businesses are hit by a recession, and they will be forced to draw down more and for longer than if they faced reality and prepared by having bonds instead of incorrectly assuming dividend socks are a bond proxy. Deluding yourself is not a benefit, it is a downfall.

Dividend investing is as much of a "strategy" as buying only companies with green in their logo because over the past 10 years companies with green in their logo have out performed, and then speculating after the fact that it was due to the colour of the logo which indicates that the psychology or culture of companies with green in their logo is linked to more creative people.

Heliios

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Re: Dividend-investing pros, cons, questions
« Reply #23 on: August 31, 2019, 10:56:51 PM »
Why is this suddenly a thing here??

I feel like I'm recently seeing thread after thread about this dividend nonsense. I'm also suddenly seeing a lot of articles promoting specific stock picks based on their high dividends. Just yesterday I read an article recommending that people near retirement dump their savings into 3 high-dividend stocks. Yep, just 3 stocks. WTF?

Where is this coming from?

Hi Malkynn. IMHO, itís a bit of a backlash. The index police on the MMM forums have become insufferable. Nothing attracts people quite so much as forbidden fruit. Iím glad to see it. I like to see what is working or not working for other people. Even if it may not be for me.

In the last several months I've seen a single poster make more posts about how indexes suck and everyone should be an individual stock picker than I have seen the entire rest of the forum posters combined police any kind of index orthodoxy.

I think individual stock-picking is great! I'd never do it myself or recommend it to friends and family, but anyone else who wants to give it a try should go for it! Every few weeks or so, I see a new article lamenting the herd mentality of index investing and how eventually, relative stock valuations will become fixed and decoupled from actual performance. However, I can't imagine that there will ever be a high enough percentage of disciplined index investors for this to occur.

MustacheAndaHalf

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Re: Dividend-investing pros, cons, questions
« Reply #24 on: September 01, 2019, 04:39:42 AM »
Post-retirement, I derive 100% of my income from dividend payments, which requires no selling. In comparison, I would find needing to sell shares to bring in income to be rather stressful, partly because I would then come to care about share price again. In comparison to share prices, dividend rates are much more stable.
I grabbed this reply to someone else, hope you don't mind me chiming in.  How many people's spending needs are exactly matched by their dividends?  Some people will need more - what do they do?  Some will need less: they are paying taxes for money they didn't need to withdraw.

Have you considered who complains when their investments double?  Those people don't complain about stability.  So I think the comparison you're looking for is this: do dividend stocks drop less often and by a smaller percentage than other stocks?

Vanguard has a white paper on dividend equities that might be interesting:
https://personal.vanguard.com/pdf/ISGADOS.pdf

You might instead go with Vanguard High Dividend Yield (VYM), which has a 3.3% dividend yield.  But that would shoot down your tax efficiency argument: every year, you'd pay taxes on 3.3% instead of 1.8%.
By "tax-advantaged", I mean from the perspective of the post-retirement investor. Pre-retirement is a different story, which you have called-out. It's a good point, and I've added that to the cons. Thanks!
Tax advantaged means 401(k), IRAs, Roths, etc.  But people can invest outside those, in taxable, and still have those taxable investments when they retire.  It's not about pre- and post-retirement, it's about tax-advantaged vs taxable.
Most people have everything (or nothing) in their tax advantaged accounts, so this might not apply to most people.  But for MMM types, the limits on contributions might push us into taxable investments.

« Last Edit: September 02, 2019, 01:41:08 AM by MustacheAndaHalf »

Malcat

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Re: Dividend-investing pros, cons, questions
« Reply #25 on: September 01, 2019, 05:44:53 AM »
Why is this suddenly a thing here??

I feel like I'm recently seeing thread after thread about this dividend nonsense. I'm also suddenly seeing a lot of articles promoting specific stock picks based on their high dividends. Just yesterday I read an article recommending that people near retirement dump their savings into 3 high-dividend stocks. Yep, just 3 stocks. WTF?

Where is this coming from?

Hi Malkynn. IMHO, itís a bit of a backlash. The index police on the MMM forums have become insufferable. Nothing attracts people quite so much as forbidden fruit. Iím glad to see it. I like to see what is working or not working for other people. Even if it may not be for me.

Most of the posts I'm seeing here seem to be people planning to only live on dividends as some way to have an ultra conservative WR, which seems like an odd strategy for just trying to be conservative.

Also based on the articles I've read about it, there really does seem to be a message of depending on dividends being somehow safer???

It seems more like a an attempt at a fallacy of security more than a backlash against indexing.


Buffaloski Boris

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Re: Dividend-investing pros, cons, questions
« Reply #26 on: September 01, 2019, 02:27:59 PM »

Most of the posts I'm seeing here seem to be people planning to only live on dividends as some way to have an ultra conservative WR, which seems like an odd strategy for just trying to be conservative.

Also based on the articles I've read about it, there really does seem to be a message of depending on dividends being somehow safer???

It seems more like a an attempt at a fallacy of security more than a backlash against indexing.

Dividend investment strategies have made the rounds of late. I saw something called the ďyield shieldĒ talked about on another popular FI site to address sequence of return risk. Not a fan personally, but I am a big fan of seeing it and other non-index strategies being discussed.

powskier

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Re: Dividend-investing pros, cons, questions
« Reply #27 on: September 01, 2019, 06:35:55 PM »
There does seem to be a lot of folks pushing nto so new strategies. I think a ton of investors here have never been through a down market. A lot of people will be getting their first "punch in the face" ( "everyone has a plan till they get punched in the face"-Mike Tyson) at some future point. At that point the yield chasers/dividend chasers/hyper leveraged folks will get a lesson. Everything works in a bull market.
Can you beat the market with many different strategies? Well yes, some people can, and some people do...at least for a while. Can those same people always beat the market? Less likely. Does average Joe beat the market with all these different strategies? Rarely. He also usually gets crushed when markets turn.
Boring index investing simply says match the index, no better no worse, less concentration risk, no hassle, no stress. For most folks it's the right choice.

iwannaretire

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Re: Dividend-investing pros, cons, questions
« Reply #28 on: September 01, 2019, 07:46:54 PM »
A few things you might want to add to the discussion is:

Pros

1.  Dividends don't lie.  A company has to have cash to pay the dividend, whereas revenue and earnings numbers can be easily fudged.

2.  Emphasize the importance of a dividend growth portfolio.  Companies that grow their dividends keep up with inflation and the stock price is likely to grow with the dividend.    So, it's important to include companies that grow dividends.   Companies with lower dividend rates and higher growth can produce capital gains that can be harvested to produce more dividends.

3.  There are methods to monitor the safety of a company's dividends, including free cash flow and bond ratings, to reduce the likelihood of a dividend cut.  Alternatively, sites such as Simply Safe Dividends do a good job of helping on that score.

4.  Dividend cash flow before retirement can be compounded by reinvestment of dividends. 

5.  Tax strategies can be used in a dividend portfolio, where losing positions can be replaced with similar companies with the same dividend amount to create a tax loss.

6.  A dividend strategy can keep you from ever having to touch your principal, which allows the portfolio to be given to heirs and build family wealth.

Cons

1.  A proper dividend portfolio does take management, as you do want to monitor whether companies are performing as expected.  This does not require daily work, but perhaps monthly or quarterly during earnings season.

2.  Dividend investment should not be done using an index because an index will include poor quality companies that are likely to cut their dividend in the result of a recession.   For the same reason, comparing a growth index to a dividend index is not a valid comparison of the manner in which dividend investing works.

3.  Good companies can go through phrases where they will freeze or cut a dividend due to the need to redirect resources to a new strategy or deal with a merger/acquisition.  The merger/acquisition/spinoff problem does impact the future projections of dividends and some sales/purchases may need to be made (but see no. 4)

4.  A proper dividend strategy would require a cash cushion above expected retirement spending amounts to account for unexpected expenses and/or dividend cuts.  120-150 percent of expected spending is preferable.


Andy R

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Re: Dividend-investing pros, cons, questions
« Reply #29 on: September 01, 2019, 11:32:58 PM »
A few things you might want to add to the discussion is:

1.  Dividends don't lie.  A company has to have cash to pay the dividend, whereas revenue and earnings numbers can be easily fudged.

They do indeed lie. As much as this comment is a lie.
A dividend includes payouts from assets sold down, they exclude earnings that are paid out via share buy-backs, and a company can pay out 20% or 80% or any other amount of their earnings and nothing has changed in terms of your return.
The amount of dividends paid out tells you nothing about a company's earnings or profitability.

2.  Emphasize the importance of a dividend growth portfolio.  Companies that grow their dividends keep up with inflation and the stock price is likely to grow with the dividend.    So, it's important to include companies that grow dividends.   Companies with lower dividend rates and higher growth can produce capital gains that can be harvested to produce more dividends.

Dividend "growth" investors look at historical performance of companies who intended and were successful in increasing their dividends over many years and they leave out the ones who intended to but failed to do so. When you add in the failed companies, this backwards looking data is biased and useless. It is the same argument that active managers use when they leave out all the active managers who failed and changed their company name when nobody would go with them again. SPIVA reports include these and show how crap active managers are when you included these. Since you can not know in advance which companies will out perform, if you included these with dividend "growth" investors, your data on "dividend growth" companies would be entirely different.

4.  Dividend cash flow before retirement can be compounded by reinvestment of dividends. 

Except you pay tax on it before you re-invest it so you miss out on potentially decades of compounding of delayed tax, and no long term CGT discount either, so not having it paid out at all would have been far more tax efficient.

6.  A dividend strategy can keep you from ever having to touch your principal, which allows the portfolio to be given to heirs and build family wealth.

As mentioned in the other thread -
If a company with a $99M market cap receives a gift of $1M in cash, their market cap is now $100M
In an identical way, when a company pays out $1M in dividends, the value of the company has dropped by that amount.
Dividends are not some sort of magical free money, they come out of the value of the company, and you can see it in real time when the price of the share drops by the amount of 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 therefore 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.


Dividend investors use fallacies, and you are no different, deceptively trying to make it look like it is just another decision where you weight up the upsides and downsides as a way to appear unbiased and hide the fact that your upsides are demonstrably false.

MustacheAndaHalf

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Re: Dividend-investing pros, cons, questions
« Reply #30 on: September 02, 2019, 01:40:03 AM »
2.  Dividend investment should not be done using an index because an index will include poor quality companies that are likely to cut their dividend in the result of a recession.   For the same reason, comparing a growth index to a dividend index is not a valid comparison of the manner in which dividend investing works.
You're claiming actively managed dividend funds beat passively managed dividend index funds?  Do you have evidence to back up that claim?

The data I've seen shows a clear advantage for funds that accept the expert consensus - the market value of a stock.  For example, for the past 5 years, the S&P 500 beat 82% of large cap funds.  But over 15 years, it beat 92% of them.
https://www.spglobal.com/_assets/documents/corporate/us-spiva-report-11-march-2019.pdf

iwannaretire

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Re: Dividend-investing pros, cons, questions
« Reply #31 on: September 02, 2019, 01:07:49 PM »
Sorry, if this was unclear.  Dividend investing should not be done using funds at all.  It is an individual stock picking strategy, and that would be a con for anyone who does not want to do that work.

mikescepaniak

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Re: Dividend-investing pros, cons, questions
« Reply #32 on: September 03, 2019, 12:34:49 PM »
I think I've come up with a comparison that could prove very instructive.

> The question is why should investors target indirect characteristics (dividends) instead of the actual sources of performance (factors)
> Why not just have a value oriented index fund with a managed payout, as Andy referenced.
I've never done any real-estate investing, nor have I read any forum discussions on the topic. I have to wonder if house resellers feel as strongly opposed to rental property owners as stock indexers do toward dividend stock investors. I think there's actually a really good comparison to be made there. For both house resellers and stock indexers, income is derived directly - from sales of assets. In contrast, for both rental property owners and dividend stock investors, income is derived indirectly - as a side-effect of owning the assets.

I can go further with this. Both house resellers and stock indexers are subject to relatively greater market volatility (since they are directly buying and selling on that market on a constant basis), but the total return has a greater upside. Conversely, both rental property owners and dividend stock investors are subject to less market volatility (since they have much less need to buy from and sell into the market on a constant basis), but the total return may be somewhat muted. Both rental property owners and dividend stock investors have ownership stakes in the underlying assets, but they tend to choose those assets primarily based on their ability to generate income. The income generated by both rental properties and dividend stocks tend to rise incrementally over time. Income from a rental property can take a huge hit if/when the property sits unrented for a spell, just as income from a dividend stock can take a huge hit if/when the dividend rate is cut. Both rental property owners and dividend stock investors are judicious when choosing assets to buy, so as to ensure a sustainable source of income. Neither rental property owners or dividend stock investors are trying to "beat the market".

Thoughts on this comparison?

> Have you excluded companies that had done well in the previous period but did not do well from 2008 until now? This is called survivorship bias
I'm familiar with the pitfalls of survivorship bias. But, just as survivors shouldn't be assumed to have done everything right, neither should they be assumed to have done nothing right. Besides, you could just as easily challenge a stock indexer's confidence in the S&P 500 as being subject to survivorship bias (against non-US stock markets). At some point, you need to pick a "survivor" to believe in. For many, going with the S&P 500 is a fantastic option, but that doesn't mean it's the only good option. And that is very much what I'm trying to present - an option.

> So, the dividend investing people I know, in real life, sell their dividend stocks when they cut the dividend lower than some threshold or stop providing dividends all together.  Is this something you advocate?
In general, yes. If a rental property you own stopped commanding a reasonable rent, I'd think you'd sell that property. (I'm really liking this analogy.)

> How many people's spending needs are exactly matched by their dividends?  Some people will need more - what do they do?  Some will need less: they are paying taxes for money they didn't need to withdraw.
If your dividend income came up short, you'd do what any other early retiree would do. You'd decrease your expenses, lower your charitable giving, supplement your income with a part-time job or gig, sell some stock, and/or dip into your cash cushion. The tax rate for qualified dividends is 0% for single filers with taxable income up to $38,600 and married filers with taxable income up to $77,200. As such, you're not "paying taxes for money [you] didn't need to withdraw".

I find this discussion enlightening. I think it'll make for a stronger presentation. Thank you all for that.

Buffaloski Boris

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Re: Dividend-investing pros, cons, questions
« Reply #33 on: September 03, 2019, 03:29:22 PM »
The rental investor/ dividend investor analogy is a really good one. I never thought of it in those terms. And of course there are all sorts of variants. One difference I see with the FI community is that there seems to be a strong aversion to dividend investing. But not to rental real estate. Go figure.

shinn497

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Re: Dividend-investing pros, cons, questions
« Reply #34 on: September 04, 2019, 12:01:03 AM »
Ben Felix gives one of the best anti-dividend focused arguments

The gist. Dividends mean nothing for overall returns. They aren't horrible but the biggest explanation between portfolio returns, on a risk adjusted basis, is the fama-french factor model. Dividends often act as a proxy for the value premium. This explains there recent outperformance, but this is not guaranteed for the future. But, if you want the value premium, go after it directly. Focusing specifically on dividends reduces diversification, increasing volatility on a risk adjusted basis. There is also extra tax drag for nonqualified dividends.

Dividends feel good, but that is it. There are better ways of constructing a portfolio.

On a side note. There is something to be said for dividends giving you an opportunity to rebalance. Especially as qualified domestic dividends are tax advantaged. Then again, if you are following a factor based strategy, you will be getting enough dividends anyway.

One personal take I may add is that I do not like the idea of constructing a dividend focused portfolio because it is more feeling based. I have a lingering suspicion that getting excited about dividends means you will over pay attention to your portfolio and be subject to irrational behaviour during a market downturn. In reality, the only sensible and rational thing to do during a downturn is nothing. Risk are part of returns. The idea that dividend paying stocks shield you from risk is misguided. And, once this proves to fail, your behaviour could suffer.

That is my 2 cents. Dividend portfolios aren't awful. And, if you really want them and it gets you motivated to invest. That is a net positive.
« Last Edit: September 04, 2019, 12:07:05 AM by shinn497 »

Andy R

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Re: Dividend-investing pros, cons, questions
« Reply #35 on: September 04, 2019, 01:12:01 AM »
> The question is why should investors target indirect characteristics (dividends) instead of the actual sources of performance (factors)
> Why not just have a value oriented index fund with a managed payout, as Andy referenced.
I've never done any real-estate investing, nor have I read any forum discussions on the topic. I have to wonder if house resellers feel as strongly opposed to rental property owners as stock indexers do toward dividend stock investors. I think there's actually a really good comparison to be made there. For both house resellers and stock indexers, income is derived directly - from sales of assets. In contrast, for both rental property owners and dividend stock investors, income is derived indirectly - as a side-effect of owning the assets.

I can go further with this. Both house resellers and stock indexers are subject to relatively greater market volatility (since they are directly buying and selling on that market on a constant basis), but the total return has a greater upside. Conversely, both rental property owners and dividend stock investors are subject to less market volatility (since they have much less need to buy from and sell into the market on a constant basis), but the total return may be somewhat muted. Both rental property owners and dividend stock investors have ownership stakes in the underlying assets, but they tend to choose those assets primarily based on their ability to generate income. The income generated by both rental properties and dividend stocks tend to rise incrementally over time. Income from a rental property can take a huge hit if/when the property sits unrented for a spell, just as income from a dividend stock can take a huge hit if/when the dividend rate is cut. Both rental property owners and dividend stock investors are judicious when choosing assets to buy, so as to ensure a sustainable source of income. Neither rental property owners or dividend stock investors are trying to "beat the market".

Thoughts on this comparison?

The rental investor/ dividend investor analogy is a really good one.

No it is not.

Index investors do not buy and sell frequently, we buy and hold it for decades making us more like property investors who buy and hold for decades, not resellers. This comparison makes no sense.

Not only that, property investing and stock investing is fundamentally different.
With stocks, many companies have share buybacks (do I need to put this in huge letters for it to stop being ignored?), which distribute money directly back to shareholders the same as dividends, only minus the tax disadvantage, so you are still getting your money, but not in the form of a dividend. Dividend investors completely ignore this. How many times must this be said before "dividend investors" like mikescepaniak finally admit that the specific amount of dividends has no meaning to the company's earnings, profitability, or how much is distributed to the investor?

The rest of the arguments are again based on fallacies. Correct that the total return is "muted" for a dividend investors, but that is because you are covering your ears and nothing else. Ignoring reality by covering your ears, and thereby not preparing for reality by having actual safe assets (bonds) in case of a sustained bear market is not a benefit, it is a downside.


> Have you excluded companies that had done well in the previous period but did not do well from 2008 until now? This is called survivorship bias
I'm familiar with the pitfalls of survivorship bias. But, just as survivors shouldn't be assumed to have done everything right, neither should they be assumed to have done nothing right. Besides, you could just as easily challenge a stock indexer's confidence in the S&P 500 as being subject to survivorship bias (against non-US stock markets). At some point, you need to pick a "survivor" to believe in. For many, going with the S&P 500 is a fantastic option, but that doesn't mean it's the only good option. And that is very much what I'm trying to present - an option.

The S&P500 has already had survivorship bias removed as they lose value when their individual companies lose value before they drop out of the index. It does not simply exclude those that lost value from historical data.

This is what I mean by dividend investors arguments being demonstrably false.

slugsworth

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Re: Dividend-investing pros, cons, questions
« Reply #36 on: September 05, 2019, 12:01:09 PM »
I think I've come up with a comparison that could prove very instructive.

> The question is why should investors target indirect characteristics (dividends) instead of the actual sources of performance (factors)
> Why not just have a value oriented index fund with a managed payout, as Andy referenced.



> So, the dividend investing people I know, in real life, sell their dividend stocks when they cut the dividend lower than some threshold or stop providing dividends all together.  Is this something you advocate?

Mike, thanks for responding to my questions - but I don't think you addressed my questions.  More plainly, is there anything special about dividend stocks that isn't captured by a value tilt.  My belief is 'no'.

The other concern is basically, since the method you are advocating involves selling equities that cut their dividends, at a time when everyone else who is focused on yield might be selling this same equity, it seems likely you might be locking in a loss an d generally following a herd mentality. . . which is the complaint about index investing.  The challenge I see is that the index investor, like any active investor is likely to under perform the market (50% of investors by definition do) and given their inexperience, I would hazard that they could under perform the market more substantially that the average investor.   On top of this, I see the tax disadvantages (for non-dividend funds) and the likelihood that older people using this method freak out and do themselves a disservice.


Regarding your analogy, it falls down in my opinion with things like stock buy backs that increase the value of the underlying asset (which is pretty hard to do with most rentals) and/or simply using profits to improve the business, which again is something that is tough to really to do in real estate in the way it is possible for a business to do.


mikescepaniak

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Re: Dividend-investing pros, cons, questions
« Reply #37 on: September 05, 2019, 01:48:54 PM »
Ben Felix gives one of the best anti-dividend focused arguments

The gist. Dividends mean nothing for overall returns.

Thanks for sharing that video. I watched it a couple times and don't have any fundamental disagreement with it. Investing for dividends a) won't necessarily beat the market and b) will result in a loss of diversification. Agreed. And I'm OK with that. I'm not trying to beat the market, but I am trying to maximize my income (just as a rental property owner would). And I don't feel that diversifying across 500 stocks is necessary to be adequately diversified.

With that being said, I don't agree with his assertion that stock buybacks and dividends net out to equivalent results. In theory, they could. But, in practice, they don't. A recent comment on the video puts it well:
Quote
However buybacks are done very inefficiently for the most part (All you need to do is look at when buybacks are mainly done & the strong correlation to when the markets are priced highest) this in my opinion can destroy investors returns due to management buying back shares above intrinsic value & quite often taking on leverage to do so. Management can't mess up paying a dividend whereas management can overpay for their own stock.

Company management doesn't average into their buybacks over the course of years/decades (as is best practice for individual investors). Instead, they try to time the market and/or shape market sentiment. No, thanks. I'll take the cash option.

Admittedly, from an index-level perspective, all you care about regarding buybacks is that it reduces the total available share count. So I can see their appeal, depending on your priorities/perspective. To each their own.

Thanks!

mikescepaniak

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Re: Dividend-investing pros, cons, questions
« Reply #38 on: September 05, 2019, 02:09:22 PM »
Mike, thanks for responding to my questions - but I don't think you addressed my questions.  More plainly, is there anything special about dividend stocks that isn't captured by a value tilt.  My belief is 'no'.

The other concern is basically, since the method you are advocating involves selling equities that cut their dividends, at a time when everyone else who is focused on yield might be selling this same equity, it seems likely you might be locking in a loss an d generally following a herd mentality. . .

Regarding your analogy, it falls down in my opinion with things like stock buy backs that increase the value of the underlying asset (which is pretty hard to do with most rentals) and/or simply using profits to improve the business, which again is something that is tough to really to do in real estate in the way it is possible for a business to do.

Sorry if I misfired with my response. Agreed. From a total return perspective, there is nothing special about dividends. But, me personally, I've found other advantages that make them worthwhile.

Yes, when a dividend-paying stock cuts its dividend, or even looks like it is heading toward cutting its dividend, things get ugly. But, that's why I follow the model portfolio. The portfolio manager(s) tend to do a pretty good job of forecasting a cut well before the cut is made. They aren't perfect, of course.

Agreed - analogies can only cover so much ground. But, I don't think that the absence of a corollary for buybacks invalidates the whole analogy. Do you? It's just meant to help frame the mechanics of dividend investing in a way that may elicit an "a-ha" moment of clarity.

Davnasty

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Re: Dividend-investing pros, cons, questions
« Reply #39 on: September 05, 2019, 03:00:54 PM »

For both house resellers and stock indexers, income is derived directly - from sales of assets. In contrast, for both rental property owners and dividend stock investors, income is derived indirectly - as a side-effect of owning the assets

Thoughts on this comparison?

I think the portion I quoted here is the full extent of the similarities between these two situations. Maybe if you were trying to explain on a very basic level what a dividend is (a periodic payout coming from an asset) but I don't think the concept is complicated enough to need an analogy. Other than that I don't see a relationship.

Telecaster

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Re: Dividend-investing pros, cons, questions
« Reply #40 on: September 05, 2019, 03:44:46 PM »
I think I've come up with a comparison that could prove very instructive.

> The question is why should investors target indirect characteristics (dividends) instead of the actual sources of performance (factors)
> Why not just have a value oriented index fund with a managed payout, as Andy referenced.
I've never done any real-estate investing, nor have I read any forum discussions on the topic. I have to wonder if house resellers feel as strongly opposed to rental property owners as stock indexers do toward dividend stock investors. I think there's actually a really good comparison to be made there. For both house resellers and stock indexers, income is derived directly - from sales of assets. In contrast, for both rental property owners and dividend stock investors, income is derived indirectly - as a side-effect of owning the assets.

I can go further with this. Both house resellers and stock indexers are subject to relatively greater market volatility (since they are directly buying and selling on that market on a constant basis), but the total return has a greater upside. Conversely, both rental property owners and dividend stock investors are subject to less market volatility (since they have much less need to buy from and sell into the market on a constant basis), but the total return may be somewhat muted. Both rental property owners and dividend stock investors have ownership stakes in the underlying assets, but they tend to choose those assets primarily based on their ability to generate income. The income generated by both rental properties and dividend stocks tend to rise incrementally over time. Income from a rental property can take a huge hit if/when the property sits unrented for a spell, just as income from a dividend stock can take a huge hit if/when the dividend rate is cut. Both rental property owners and dividend stock investors are judicious when choosing assets to buy, so as to ensure a sustainable source of income. Neither rental property owners or dividend stock investors are trying to "beat the market".

Thoughts on this comparison?

I don't think it provides any real clarity either.    In a nutshell, dividend investors rely on dividends for a steady, cash income stream and don't rely on a price appreciation.   Traditional index investors rely on the total return of the stock market.

Back in the day, all stocks paid dividends.  That's how you got your money out of the investment.  Soon, stock markets came along and you could trade stocks and make money based on price appreciation, but dividends remained the primary driver of stock returns for centuries.   Sometime around the mid-20th century, that flipped and price became the main driver.   Since that time, dividends have continued to play a smaller and smaller role in the total return of the stock market.

So if you go for a dividend only approach, you turn your back on most of the value growth of the stock market.   Most dividend strategies recommend investing in companies with a long history of dividend growth.   Besides the survivorship bias discussed above, most of those companies have fairly low dividend yields--not much different than that of the broader S&P 500 itself.    Which means you either need to have a lot more money in retirement, or accept a lower quality of life.    That is major, major, disadvantage of dividend strategies. 

Andy R

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Re: Dividend-investing pros, cons, questions
« Reply #41 on: September 05, 2019, 07:41:42 PM »
With that being said, I don't agree with his assertion that stock buybacks and dividends net out to equivalent results. In theory, they could. But, in practice, they don't. A recent comment on the video puts it well:
Quote
However buybacks are done very inefficiently for the most part (All you need to do is look at when buybacks are mainly done & the strong correlation to when the markets are priced highest) this in my opinion can destroy investors returns due to management buying back shares above intrinsic value & quite often taking on leverage to do so. Management can't mess up paying a dividend whereas management can overpay for their own stock.

Company management doesn't average into their buybacks over the course of years/decades (as is best practice for individual investors). Instead, they try to time the market and/or shape market sentiment. No, thanks. I'll take the cash option.

You are missing the point.
The point is not whether share buybacks vs paying out dividends are more efficient.
The point is that dividends are not earnings.
  • Dividends include payouts from selling down assets, so already this idea that living off only dividends does not reduce your asset base is debunked.
  • Dividends exclude the money used to go to grow the business and grow future earnings. This money has not just evaporated into the air.
  • Dividends exclude the profits that are distributed by other means, so again just because it is not part of the dividends, does not mean it has just evaporated into the air.

Dividends do not equal earnings and therefore are not remotely like rental income. They tell you nothing about a company's earnings, profitability or total return.

shinn497

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Re: Dividend-investing pros, cons, questions
« Reply #42 on: September 06, 2019, 01:00:23 AM »

Thanks for sharing that video. I watched it a couple times and don't have any fundamental disagreement with it. Investing for dividends a) won't necessarily beat the market and b) will result in a loss of diversification. Agreed. And I'm OK with that. I'm not trying to beat the market, but I am trying to maximize my income (just as a rental property owner would). And I don't feel that diversifying across 500 stocks is necessary to be adequately diversified.

I agree with this actually, which is why I am globally diversified. So not over 500 stocks but over several thousands. A lot of people look into the SP as a driver of returns. But they are not considering risk adjusted returns. It could very well be that the SP 500's recent performance is due to its volatility. In fact, statistically, this is very likely.

Company management doesn't average into their buybacks over the course of years/decades (as is best practice for individual investors). Instead, they try to time the market and/or shape market sentiment. No, thanks. I'll take the cash option.


I have heard this argument. I am curious if companies that pay dividends have better behaviour. I am willing to bet they don't and that any performance is not specific to dividends but to the value premium. But hey. You have inspired me to be curious about this.

Thanks!

Thank you! This is an informative discussion.
« Last Edit: September 06, 2019, 12:15:48 PM by shinn497 »

insufFIcientfunds

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Re: Dividend-investing pros, cons, questions
« Reply #43 on: September 06, 2019, 06:21:54 AM »
I'm not super knowledgeable on dividend investing and like the simplicity and diversification of index funds, but my perspective on the situation is kind of like this:

I was with a financial services firm for a long time whose "research council" would choose stocks to buy and sell and that's what was plucked in my portfolio. It was the typical 60/40 split, grew slow, often underperformed. I left.

Went to another firm who specializes in long term dividend investing. I asked a wealthy friend about them. He laughed and said "they've made a lot of people a lot of money, but don't touch your principle." Uhhhh, okay. They weren't actually that bad, I just didn't agree with the who "ride or die" philosophy on dividend investing and how they did it. The fact was though, for a regional firm, they managed billions of dollars and do well for their clients (apparently.) So whether posters believe it or not, there is a trade space that exists for dividend investing, it's just a matter of whether that philosophy fits into your financial plans and mental framework. I could throw 10 links for it, 10 links against it. The ole Interweb will offer you pros and cons for both.

I wound up leaving and going to Fidelity and investing in mostly indexes, sector mutual funds I like, and 1 or 2 individual stocks I like (which represents less than 5% of my holdings.)

In relation to the comparison to real estate; I think there are some similarities, and some differences. But really, why compare them at all? Are you using the real estate basis of comparison because you are explaining it to someone who is knowledgeable in real estate but not in dividend investing? I could see that because the real estate example would bridge that knowledge gap and would help relate the example to something they know. If you are explaining it to a group who is FI and was an engineer, doctor, software developer, kid who just got a bunch of money when his grandma died...whatever, might look at you like WTF is this guy talking about? They don't know real estate. I know I for sure do not.

So it is interesting here on the strength of opinions you are getting from posters. Also, I have seen an uptick in the amount of dividend related threads as I browse Investor Alley. Some I read, some I donít.

Buffaloski Boris

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Re: Dividend-investing pros, cons, questions
« Reply #44 on: September 06, 2019, 01:36:31 PM »
Ben Felix gives one of the best anti-dividend focused arguments

The gist. Dividends mean nothing for overall returns. They aren't horrible but the biggest explanation between portfolio returns, on a risk adjusted basis, is the fama-french factor model. Dividends often act as a proxy for the value premium. This explains there recent outperformance, but this is not guaranteed for the future. But, if you want the value premium, go after it directly. Focusing specifically on dividends reduces diversification, increasing volatility on a risk adjusted basis. There is also extra tax drag for nonqualified dividends.

Dividends feel good, but that is it. There are better ways of constructing a portfolio.

On a side note. There is something to be said for dividends giving you an opportunity to rebalance. Especially as qualified domestic dividends are tax advantaged. Then again, if you are following a factor based strategy, you will be getting enough dividends anyway.

One personal take I may add is that I do not like the idea of constructing a dividend focused portfolio because it is more feeling based. I have a lingering suspicion that getting excited about dividends means you will over pay attention to your portfolio and be subject to irrational behaviour during a market downturn. In reality, the only sensible and rational thing to do during a downturn is nothing. Risk are part of returns. The idea that dividend paying stocks shield you from risk is misguided. And, once this proves to fail, your behaviour could suffer.

That is my 2 cents. Dividend portfolios aren't awful. And, if you really want them and it gets you motivated to invest. That is a net positive.

I tend more to the "dividend agnostic" side of the spectrum. The problem I have with the low or nonexistent dividends is that to me it shows a sort of hubris on the part of management.  If you really have a great investment that the company can exploit, then by all means go for it.  I don't think that's all that common in mature industries.  So why not return the money to shareholders and let them decide what to do with it?

mikescepaniak

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Re: Dividend-investing pros, cons, questions
« Reply #45 on: September 17, 2019, 02:05:21 PM »
Thank you to everyone who took the time to post to this thread! I gave my presentation this past Saturday. According to all of the positive feedback I received, it went very well. I ended up deciding against including the comparison between rental property ownership and investing for dividends. After reading through the feedback here, I realized that I was targeting it mostly at this audience - in an attempt to cut through some of the strong anti-dividend bias. But that bias didn't show itself much in the audience for my presentation, despite most everyone there being indexers.

Someone came up to me after the presentation and commented that this discussion thread made me come off as a bit defensive, which is probably true. But, I'm glad I surfaced the arguments against. It gave me the opportunity to revisit the merits (and demerits) of my strategy. It also made for a more even-handed presentation. I actually included the URL for this discussion thread in my slide deck, so people can dig deeper if they'd like.

Again, thanks.

Scandium

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Re: Dividend-investing pros, cons, questions
« Reply #46 on: September 23, 2019, 06:29:00 AM »
in an attempt to cut through some of the strong anti-dividend bias. But that bias didn't show itself much in the audience for my presentation, despite most everyone there being indexers.

Calling facts you don't like "bias" is pretty lame.

From this thread it's clear you don't properly understand (or don't want to) the subject, and as someone said like most religious dividend fans refuse to accept facts. Yet you use false, but convincing sounding arguments (that people here have pointed out to you is false) to sell this sub-optimal idea to other people. Now I'm all for the letting the audience take responsibility, but don't you have some ethical problems presenting yourself as an authority when you're not? Personally I'd never want to present myself as en expert in something I don't fully understand, and haven't considered all the facts (and would in legal work rightly have my opinion thrown out). Maybe that's just me (and why I'm not in sales..:)

Car Jack

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Re: Dividend-investing pros, cons, questions
« Reply #47 on: September 23, 2019, 08:54:45 AM »
I can't say that I'm pro or anti dividend investing.  I theoretically favor non-dividend investing in taxable because of taxes.  Why?

Dividends: They come out quarterly.  They are then taxed.  Whether you want or need the money from dividends doesn't matter.  Just like RMDs, you have no choice but to take them and pay taxes.

Non-Dividend Stock:  You have total control over them and the taxes you pay.  If you have a year where you need more money, you can sell shares and pay cap gains.  If you don't need the money, you don't sell, you pay no tax.

Personally, my dividend payers in taxable are in ETFs (SCHB, VTI).  My non-dividend is only small because I'm a bit squeamish investing in a single stock, so it's in BRK/b.  My "plan" is to put more money into BRK/b and I've been running comparisons for years of SCHB total return vs BRK/b and BRK/b has won every time.  I just need the guts to commit more $$.

Scandium

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Re: Dividend-investing pros, cons, questions
« Reply #48 on: September 23, 2019, 09:21:24 AM »
comparisons for years of SCHB total return vs BRK/b and BRK/b has won every time.  I just need the guts to commit more $$.

So BRK has gone up more, so now you want to buy high? If (when..) it switches in the future will you sell BRK low to buy SCHB high too?

Stimpy

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Re: Dividend-investing pros, cons, questions
« Reply #49 on: September 23, 2019, 03:37:28 PM »
I'm staying out of this one.  It's been an interesting read though

I know where I stand on the subject, facts and all. 

Glad to hear your presentation went well @mikescepaniak.  Hope you gave everyone something to think about.