Author Topic: Dividend investors what are your assumptions?  (Read 1329 times)

slugsworth

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Dividend investors what are your assumptions?
« on: December 19, 2022, 04:08:35 PM »
I am in not a dividend investor but a family member is having their assets managed by a dividend believer. I'm concerned that their assumptions are too optimistic and/or they they are investing in yield traps. At what point do you say, that isn't sustainable? What sort of dividend growth rate do you think is reasonable to project forward?  Here is a subset of the investments they are using: ardc,
 evv, fsd, hyb, pdi, psec

Thoughts? Advice?
« Last Edit: December 20, 2022, 09:28:48 PM by slugsworth »

ChpBstrd

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Re: Dividend investors what are your assumptions?
« Reply #1 on: December 19, 2022, 09:22:19 PM »
Maybe you cherry picked the worst, but I agree that is one sketchy portfolio. To be clear, most of those close ended funds with expense ratios between 1.5% and 2.8% are simply buying the worst junk bonds in the market with leverage, so that they can publish a high dividend and attract the kind of investors who donít care how the sausage is made.

All of them have suffered huge losses of value over the past ten years of bull markets in, what, 8/10 years?! Imagine being invested in the stock market since 2012 and being down 30-40%!!! The next ten years could be worse.

PSEC meanwhile is a lender to companies that canít even sell junk bonds. Is that who you want to own when a recession looks probable?

Iíve sold puts on triple levered ETFs and played arbitrage games with the VIX, so Iím far from risk averse. I can say with confidence this portfolio doesnít have a chance at long term success. 100% dividend traps. Those funds might yield 10% but the price goes down that much each year becauseÖ
Spoiler: show
they charge an extremely high ER to return your own money to you as a taxable dividend!


Thereís no excuse for dividend chasing behavior when FDIC insured bank CDs are paying near 5%.

slugsworth

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Re: Dividend investors what are your assumptions?
« Reply #2 on: December 20, 2022, 12:36:10 AM »
Thanks. These weren't my cherry picks, they were theirs.

It is tough i don't want to crap on dividend investing but you confirmed what I thought. Ug.


vand

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Re: Dividend investors what are your assumptions?
« Reply #3 on: December 21, 2022, 01:16:17 PM »
I have 1/3 of my portfolio in a high income strategy - and yes I have read ERN and fully aware of how miserably the yield shield performed in the last bear market, but history doesn't have to repeat itself - at least not without making the alternative argument first - and it could easily be that it will perform better than a TR strategy over the next wobbly patch.

Assumptions I make? Hmm, not too many that are radically different to having a TR strategy, actually. Ultimately dividends are just one way for a company to return money to its shareholders. 

- I don't necessarily assume my long term returns are going to be higher
- I don't assume that dividends won't be cut or that the stream can't fall
- I don't assume that that either capital growth and especially dividend growth will match inflation (though I do hope that it will)



So why do I do it? Simply, as many others, I like to compartmentalize the asset base from its cashflow, and an income strategy is well suited for this. Ultimately I want my income portfolio to - in most years - be able to meet my lean-FIRE required level of income. So that's the income only from 1/3 of my total investments without touching the principal - very conservative.

I would also say that, while standard FIRE practices is based around TR and doesn't really care about separating income and principal, that is a very US-centric view where capital appreciation is more lauded. In most other countries we like to make a clearer distincting between the asset and the cashflow, and a lot ex-US stocks are more willing to pay out their income as dividends.

slugsworth

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Re: Dividend investors what are your assumptions?
« Reply #4 on: December 24, 2022, 04:16:39 PM »
Out of curiosity is the 1/3rd dividend strategy you are using focused on ex-US stocks?

Are 2/3rds of your investments planned for 'fat FIRE' or a legacy of some nature?

My primary concern is a family member chasing 10%+ yields using ETF 's that seem to cannibalize themselves to produce those yields.
I was hoping to better understand what a sustainable yield might be. In the US there are the 'dividend aristocrats' whose yield really isn't that high (at least the index I looked at) but there are much higher etf's focused on ex-US firms. Is there a yield that seems too high to you as you make your dividend investment decisions?

Mr Mark

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Re: Dividend investors what are your assumptions?
« Reply #5 on: January 18, 2023, 01:52:29 PM »
I try to have my cake and eat it.

My main taxable account is mostly passive equity/bond index plus some Wellington fund. But I like to play/trade in my tax protected account, which isn't a very big %. I find this keeps me interested in financial stuff (which I enjoy), and lets me trade without hurting anything too significant. Also, that way I don't have any tax issues with dividends and capital gains.

So, I've been gradually accumulating a collection (so far 20) of mostly dividend stocks. It currently provides a well covered annual 4.9% dividend, plus is subject to capital gains and losses. Some companies I'm mainly buying for expected capital gains rather than pure yield btw. No fancy options trading, just buy and mostly hold. There's a value/conservative theme(?)

For what it's worth, here's what I have so far (ymmv):

Company                                   Yield @ Jan 2023
AMERICAN ELECTRIC POWER COMPANY INC   3.50%
AMCOR PLC ORD USD 0.01   4.03%
BHP GROUP LTD SPON ADR   9.59%
DIGITAL REALTY * TRUST INC   4.57%
ENBRIDGE INC SUB NOTE SER 2018-B PREFERENCE SHS FXD/VAR   6.46%
IRON MOUNTAIN INC *   4.73%
NOVARTIS AG SPON ADR   3.60%
REALTY INCOME CORP *   4.46%
ALLKEM LTD   0.00%
PACKAGING CORP OF AMERICA   3.75%
RIO TINTO PLC SPONSORED ADR   9.00%
SOUTHERN COPPER CORP DEL   2.65%
SANOFI SPON ADR   3.51%
SIMON PROPERTY GROUP * INC NEW   5.76%
TYSON FOODS INC CL A   2.94%
REAVES UTILITY INCOME FUND   7.51%
VANGUARD REAL ESTATE INDEX ADMIRAL CL   3.66%
VOLKSWAGEN A G UNSPON ADR REPSTG 1/10TH SHS   4.49%
WOODSIDE ENERGY GROUP LTD SPON ADR   8.19%

vand

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Re: Dividend investors what are your assumptions?
« Reply #6 on: January 18, 2023, 04:38:00 PM »
Out of curiosity is the 1/3rd dividend strategy you are using focused on ex-US stocks?

Are 2/3rds of your investments planned for 'fat FIRE' or a legacy of some nature?

My primary concern is a family member chasing 10%+ yields using ETF 's that seem to cannibalize themselves to produce those yields.
I was hoping to better understand what a sustainable yield might be. In the US there are the 'dividend aristocrats' whose yield really isn't that high (at least the index I looked at) but there are much higher etf's focused on ex-US firms. Is there a yield that seems too high to you as you make your dividend investment decisions?

I am a UK based investor, so my income portfolio is very much stuffed with FTSE bluechips, many of which are paying 6%+ yields. The fwd yield is about 7.2% on the portfolio as a whole. Yes, you run the risk that some high yielders will turn into value traps, but there are always risks that you have to consider no matter what your (active) strategy, so it is really a case as ever of doing your due diligence and making a judgement if the underlying business can sustain the payout. I do think 10% is dangerously high - many are going to be distressed stocks, and their yield is probably only that high because the market is expecting a dividend cut.  I am not a huge fan of the "aristocrat" idea - no business is immune to a downswing, and I would personally prefer businesses pay out what they are able to from their business activities instead of making rash allocation decisions just so i that it doesn't fall off an arbitrary list.

The other 2/3rds of my stash is in various other strategies and is to ultimately be able to enjoy a few more of the luxuries a higher income came bring, and also to provide a legacy.  Ultimately I enjoy the process of wealth accumulation and see the slowish and steady growth of ones wealth a worthwhile goal in and of itself. It's true you can't take it with you when you die, but then nobody seems to criticize Buffett for keeping going for the last 50 years, either.
« Last Edit: January 18, 2023, 04:44:35 PM by vand »