Author Topic: Dividend stocks versus index investing  (Read 28184 times)

scottish

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Dividend stocks versus index investing
« on: February 11, 2015, 05:42:56 PM »
This is a really interesting topic for me.    I like dividend stocks.    In fact, the core of our portfolio is built around dividend stocks and I've been struggling with switching to an index based investing approach instead.    I want to switch because it's alot of work.   We've been doing ok, approximating the TSX composite on a long term basis.   The portfolio is spread out across 9 investment accounts (2 TFSAs, 3 RSPs, 1 RESP and 3 cash accounts) and it takes a substantial amount of time to try and do effective asset allocation across the accounts, manage contributions and deposits correctly and try to avoid failing companies.   (Anyone remember the yellow pages  YLO.UN?    I barely got out of that in time.   Another loser was Reitman's.)   So I periodically get a bad company and it really hurts to watch it go down in value, even if the rest of the portfolio is doing well.

Why don't I switch to index funds you ask?

Well it's because the fundamental value of a common stock is based around the future stream of dividends.   At least as far as I can tell.    So if a stock will never pay dividends, then it has no fundamental shareholder value.     

But of course it does have shareholder value.    Stocks appreciate in value even when they don't pay dividends.    This always has always bugged me.    Why do people buy new issues like Facebook with no yield?    Well they buy them because they expect other people to buy them, driving the price up.    Nobody expects Facebook to pay dividends anytime soon.    Wait, you say!    You own part of the company - that stock has a book value based on the company's assets.

Well yes...   but if the company liquidates then are the shareholders going to get any cash for those assets?   Nope.   We're down at the bottom of the creditor list.

I'm sure this all sounds very pedantic.    But I've never been comfortable with things unless I understand in painstaking detail exactly how they work.   And the notion of having most of our savings invested in something with no fundamental value is disturbing to me.

Is anyone else in this situation, i.e. dividends stocks versus index?    Should I just accept it as human nature and accept that stocks will rise speculatively, and take advantage of it through indexing?    Or is there some flaw in my reasoning that I can't see?






goodrookie

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Re: Dividend stocks versus index investing
« Reply #1 on: February 11, 2015, 06:13:49 PM »
Disclaimer: I am relatively new to stock market.
here's my take on it:

Dividend stock are better if you need the extra monthly income for whatever reasons (old age, unstable employment, cyclical income, etc.) But nothing is free. The stock price, in theory, is lower than what it could be if it didn't pay dividend. So, in a sense, they are same except you pay tax now (on the dividend) rather than later (on your capital gain).

I am a big fan of diversification but indexing is not my cup of tea.   


neil

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Re: Dividend stocks versus index investing
« Reply #2 on: February 11, 2015, 06:14:12 PM »
Well it's because the fundamental value of a common stock is based around the future stream of dividends.   At least as far as I can tell.    So if a stock will never pay dividends, then it has no fundamental shareholder value.     

So Autozone and Amazon are serial equity destroyers and are essentially worth zero?  (I don't like Amazon's valuation either but you can't tell me their enterprise is worth zero.)

I think investors can have goals other than maximizing total return but dividends for the sake of dividends only fills an emotional need.  Companies that are too focused on appeasing investors can sacrifice total return for the facade of increasing dividends.  This behavior does not interest me.

On the flip side, such hatred for stock buybacks.  Why?  Many people take the dividends and reinvest it.  What's the difference?  Your imaginary higher share count?

Except there actually is a difference.  Taxes.


I don't think there is anything wrong with finding quality businesses that pay dividends but the key first is quality.  If the business does not offer total return that interests me I won't keep an open mind for higher yield.  But then that makes you more of a value investor and not a "dividend" investor. in my opinion.

scottish

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Re: Dividend stocks versus index investing
« Reply #3 on: February 11, 2015, 06:38:25 PM »
Quote
So Autozone and Amazon are serial equity destroyers and are essentially worth zero?  (I don't like Amazon's valuation either but you can't tell me their enterprise is worth zero.)

No, obviously the businesses have value.    And I see the shares are doing well too.

I don't have a problem with buybacks.   More dividends for the remaining shareholders!

But my question for you is "why are the shares doing well?"     What is it about shares in Amazon and Autozone that makes people want to buy them?     If there aren't dividends then the shares don't give you direct access to the profits...

tj

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Re: Dividend stocks versus index investing
« Reply #4 on: February 11, 2015, 06:39:43 PM »
Why not combine the strategy and purchase a Dividend Index fund?

I feel like a Dividend Stock portfolio could be useful in the withdrawal phase, but does not seem necessary in the accumulation phase.

scottish

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Re: Dividend stocks versus index investing
« Reply #5 on: February 11, 2015, 06:57:56 PM »
Well we're getting ready to transition from accumulation to withdrawal in the next 5 years or so.    I'm going through and trying to get all the details organized.     Engineers and margins for error and all that.

Dividend index is an option.    Management fees are a bit higher, see for example  iShares Canadian XDV or CDZ which are both over 0.5%.   With a portfolio at $1M, that's a bit over $5,000 per year, which is about what we plan to spend on groceries.    Holding the stocks directly costs me nothing.   In fact I already have 8 of the top 10 stocks in XDV, now that I look at it in detail.

skyrefuge

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Re: Dividend stocks versus index investing
« Reply #6 on: February 11, 2015, 06:58:17 PM »
I was about to smash my head through my monitor upon seeing your thread title, but now I see that it's a somewhat different angle on this eternal standby, so let's have a go at it.

First, you've set up a false dichotomy. "Index funds" are in fact filled with dividend stocks. The dividend yield on the S&P 500 index is similar to that of many dividend-only indexes. So any broad-market index investor is also a dividend investor. Your issue really seems to be with the non-dividend stocks that are in the index.

Second, businesses can return value to their shareholders without paying dividends, through share buybacks. Spending money on a share buyback is mathematically equivalent to paying that money to shareholders in dividends. When shares are removed from the market, the percentage of the company that you own is increased, just as if you had reinvested dividends. So focusing only on dividends makes you blind to other companies that are just as effectively giving you a portion of their earnings.

Ok, now the main topic. Non-dividend-paying businesses have real fundamental value. Their value is not (only) determined by speculators waiting for a greater-fool.  You just have to play the game out to the end in your mind to see it. I know of three endgames for a non-dividend-paying business:

1) The business can start paying a dividend. See AAPL. If you bought it in its non-dividend-paying days, you'd be quite happy now. This is what a business will do when it is continuing to make money, but thinks it can no longer compound its earnings better than you can. Given the finite nature of the universe, this will eventually happen to all business if #2 or #3 don't happen.

2) The business can be bought by another business. As a part-owner, when someone else wants to come along and buy the business, you will get paid, just like if you owned your own hot-dog stand and someone wanted to buy it from you.

3) The business can die. If it is not paying dividends and not continually growing, that means it is not continually making money. That is a bad business, and a bad investment. If it fails, and its assets don't exceed its liabilities, yes, then you will receive nothing. But this has nothing to do with dividends. A bad business is a bad business regardless of its dividend payments. The dividend payments from a bad business may seem nice, but they really just increase the likelihood that it will fail. Your hot dog stand might have actually been able to survive if you didn't decide to pay your buddy $1000 every month on top of payroll, rent, and ingredient costs.

There is sort of a fourth endgame, the non-endgame. If the business does neither of #1-#3 during your investing lifetime, then just sell part or all of your share of the business. If it's a good business, the market will have recognized its growing value throughout time, and you will get a nice return.

At one point early in my investing life I also mistakenly believed that non-dividend-paying stocks were purely speculative, though it never tipped me into a dividend-only focus (I figured if non-dividend-paying stocks had been successful investments for so long, they would continue to be, for whatever reason). But by thinking through the endgames and realizing that market participants aren't actually all idiots, I began to see the solid core of value that genuinely sits behind the share prices of all successful businesses.
« Last Edit: March 02, 2015, 08:57:15 AM by skyrefuge »

seattlecyclone

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Re: Dividend stocks versus index investing
« Reply #7 on: February 11, 2015, 07:08:01 PM »
Skyrefuge is spot on. A company doesn't have to pay dividends right now to have real, intrinsic value. A profitable company that doesn't pay dividends could easily get bought out by someone (or some company) with deep pockets who wants that revenue stream for themselves. If the P/E ratio gets low enough, this is exactly what happens!

scottish

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Re: Dividend stocks versus index investing
« Reply #8 on: February 11, 2015, 07:13:08 PM »
That's a good reply.    Let's look at the endgames:

1) The business can start paying a dividend.

This means the future stream of dividends is non-zero, so we agree the shares have a value.

2) The business can be bought by another business.

I remember this happening with Inco and Dofasco.    So I have to agree with that.

3)  The business can die.

These are the companies I need to avoid.    Been through this one too.    So we agree on all 3 points.

I'm not sure I have the same conclusion though.    To me, this means that if the company is not paying dividends, buyers are speculating that 1) or 2) will happen instead of 3).   I have to think about this some more.

Anyway I'm not trying to say that market participants are idiots.    I believe that if it's stupid and it works it's not stupid.    I'm just trying to get a different perspective on non-dividend paying stocks as investments.    It would be much easier to just buy index funds if I could get over my dividend fetish.


Dodge

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Re: Dividend stocks versus index investing
« Reply #9 on: February 11, 2015, 07:13:17 PM »
This is a really interesting topic for me.    I like dividend stocks.    In fact, the core of our portfolio is built around dividend stocks and I've been struggling with switching to an index based investing approach instead.    I want to switch because it's alot of work.   We've been doing ok, approximating the TSX composite on a long term basis.   The portfolio is spread out across 9 investment accounts (2 TFSAs, 3 RSPs, 1 RESP and 3 cash accounts) and it takes a substantial amount of time to try and do effective asset allocation across the accounts, manage contributions and deposits correctly and try to avoid failing companies.   (Anyone remember the yellow pages  YLO.UN?    I barely got out of that in time.   Another loser was Reitman's.)   So I periodically get a bad company and it really hurts to watch it go down in value, even if the rest of the portfolio is doing well.

Why don't I switch to index funds you ask?

Well it's because the fundamental value of a common stock is based around the future stream of dividends.   At least as far as I can tell.    So if a stock will never pay dividends, then it has no fundamental shareholder value.     

But of course it does have shareholder value.    Stocks appreciate in value even when they don't pay dividends.    This always has always bugged me.    Why do people buy new issues like Facebook with no yield?    Well they buy them because they expect other people to buy them, driving the price up.    Nobody expects Facebook to pay dividends anytime soon.    Wait, you say!    You own part of the company - that stock has a book value based on the company's assets.

Well yes...   but if the company liquidates then are the shareholders going to get any cash for those assets?   Nope.   We're down at the bottom of the creditor list.

I'm sure this all sounds very pedantic.    But I've never been comfortable with things unless I understand in painstaking detail exactly how they work.   And the notion of having most of our savings invested in something with no fundamental value is disturbing to me.

Is anyone else in this situation, i.e. dividends stocks versus index?    Should I just accept it as human nature and accept that stocks will rise speculatively, and take advantage of it through indexing?    Or is there some flaw in my reasoning that I can't see?

Are you aware that dividends are mathematically equivalent to selling stock?  Once you understand that, and realize the big players in the market already understand that, it should be easier for you to feel comfortable owning the total stock market index.

ryan114

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Re: Dividend stocks versus index investing
« Reply #10 on: February 11, 2015, 07:20:43 PM »
In my mind, I think that a better question is Dividend stocks versus Bonds. I recently invested in some bond funds and have been pleased with the return (which occurs on a monthly rather than quarterly basis). The long term performance appears to be similar. Do you have a view on the relative risks of dividend stocks and bonds? Perhaps a good strategy is to diversify between these asset classes.

tj

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Re: Dividend stocks versus index investing
« Reply #11 on: February 11, 2015, 07:23:42 PM »
In my mind, I think that a better question is Dividend stocks versus Bonds. I recently invested in some bond funds and have been pleased with the return (which occurs on a monthly rather than quarterly basis). The long term performance appears to be similar. Do you have a view on the relative risks of dividend stocks and bonds? Perhaps a good strategy is to diversify between these asset classes.

Completely different. Dividend Stocks are more like Growth Stocks than like Bonds.


scottish

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Re: Dividend stocks versus index investing
« Reply #12 on: February 11, 2015, 07:24:58 PM »
Bonds are our second largest holding after dividend stocks.   This is actually a smaller percentage than I like in terms of diversification ( it's around 15% for bonds and 70% for dividend stocks), but with interest rates so low...

Dodge, how are you equating dividends with selling stock?      Are you referring to how the value of a stock drops by approx the value of the dividend once the dividend is distributed?

scottish

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Re: Dividend stocks versus index investing
« Reply #13 on: February 11, 2015, 07:29:14 PM »
I just found this link   http://howtoinvestonline.blogspot.com/2011/04/how-your-province-income-level-and.html   on the TFSA versus RSP thread.

Holy income tax batman.   At $60K (which is more than we'll need) income based strictly on dividends is taxed in the single digits in Canada, as opposed to RSP withdrawals which are roughly 3 times as much.

I didn't realize the tax difference was such a big factor.

josstache

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Re: Dividend stocks versus index investing
« Reply #14 on: February 11, 2015, 07:44:49 PM »
Tomorrow you and two business partners found a consulting company incorporated as a C-corporation.  You each contribute $100 in exchange for 100 shares.  A client pays the corporation $300.  A year passes. The corporation pays $105 of tax, leaving it with $495 sitting in a bank account.  The corporation has never paid a dividend and has no plans to pay regular dividends.  Corporate and individual income is taxed at 35% and qualified dividends and long term capital gains at 20%, based an US tax (a Canadian would need to plug in different numbers, which could change which answer is best).

1. What is the company worth?
A - Nothing, because it has never paid a dividend and has no plans to pay regular dividends.
B - Probably $495, subject to any other assets (including goodwill) or liabilities generated in the company over the course of the year.

2. Your Amazon Prime bill shows up on your credit card so you decide you need some of the money sitting in the corporation.  Options:
A - Sell 30 shares to your brother for $50. You pay $4 of tax, leaving you with $46.
B - Dividend out $150, of which you will receive $50. You pay $10 of tax, leaving you with $40.  Your business partners who didn't even want the dividend pay a total of $20 of tax and contribute the remaining $80 back into the company.
C - Take a loan for $50 secured by your shares, incurring no tax but subject to market interest.
(D - Kick yourself for not using an LLC taxed as a partnership.)

3. If number 2 above were instead a publicly traded corporation in which you owned a minor stake, would dividends become more attractive.  Why or why not?
« Last Edit: February 11, 2015, 07:51:33 PM by josstache »

skyrefuge

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Re: Dividend stocks versus index investing
« Reply #15 on: February 11, 2015, 08:45:23 PM »
I'm not sure I have the same conclusion though.    To me, this means that if the company is not paying dividends, buyers are speculating that 1) or 2) will happen instead of 3).

Exactly. No one buys stock in a business if they expect it to die. That's true whether the business pays dividends or not. The assumption of every buyer is that #1 or #2 will happen. Sometimes they're wrong, and #3 happens, but that's because the business stopped earning money, not because it failed to pay out that money to shareholders.

I remembered another thing that helped me see the solidity behind stock valuations: putting real-world numbers to them.

Allstate (ALL) paid out $1.12/share in dividends last year (apologies for my Americanism!) Kind of invisible, right? But it has 419 million shares outstanding, so that means it paid out a total of nearly half a billion dollars last year! Holy shit, that's real money! Imagine instead that it didn't pay out that money to shareholders, and just held on to it. And then did the same for the next year, and still held on to it, and the next year...  After a decade, everyone would know that Allstate has stockpiled several billion dollars in cash. Is there any doubt that your shares would be worth more than they were worth a decade ago? Anyone wanting to buy the company would need several billion dollars more than they would have needed a decade ago. That's real, concrete value, not speculation.

You don't even have to imagine such a thing. Berkshire Hathaway has a business unit that's very similar to Allstate called GEICO, and BRK.A pays no dividends. Instead, you see BRK.A's share price rising relatively steadily over the last 20 years (multiplying 10x) as shareholders recognize the continually-growing real value, while ALL has more bounced around a constant value (multiplying 4x) as its earnings leave the company rather than helping it grow. Obviously there are a million other real-world differences between the two companies, but that's at least what you would theoretically see between two identical companies if one paid dividends and the other did not.

Retire-Canada

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Re: Dividend stocks versus index investing
« Reply #16 on: February 11, 2015, 09:52:42 PM »

If you are a nonresident of Canada, withdrawals from an RRSP are taxed at a flat rate of 25% and distributions from an RRIF are taxed at a flat rate of 15%.

If you have a totally massive RRSP at retirement, you potentially save a lot of money by leaving Canada.

That's good to know. One of my concerns is ending up with a massive RRSP account that needs to be converted at forced withdrawal rates.

I've got a Swiss passport as well as Canadian so it might be worth living there for a year and pulling out all my RRSP $$ taking the tax hit at 25% and getting it over with.

Aloysius_Poutine

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Re: Dividend stocks versus index investing
« Reply #17 on: February 11, 2015, 10:03:35 PM »
I just found this link   http://howtoinvestonline.blogspot.com/2011/04/how-your-province-income-level-and.html   on the TFSA versus RSP thread.

Holy income tax batman.   At $60K (which is more than we'll need) income based strictly on dividends is taxed in the single digits in Canada, as opposed to RSP withdrawals which are roughly 3 times as much.

I didn't realize the tax difference was such a big factor.

Dividend income (as that author means it) is income that was "bought" with your after-tax dollars. Because RRSP contributions are not taxed, of course their withdrawals are hit with a heavy dose. Same idea with the TFSA income -- it was "purchased" with already-taxed money.

clifp

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Re: Dividend stocks versus index investing
« Reply #18 on: February 11, 2015, 10:59:17 PM »
Skyrefuge is spot on. A company doesn't have to pay dividends right now to have real, intrinsic value. A profitable company that doesn't pay dividends could easily get bought out by someone (or some company) with deep pockets who wants that revenue stream for themselves. If the P/E ratio gets low enough, this is exactly what happens!

This is certainly true. But virtually all methods of valuing stock going back to Ben Graham, Warren Buffett's mentor, use dividends as a mechanism.  In fact the most popular method the Dividend Discount Method, defines the intrinsic value of a stock as equal to the present value of all its future dividends.

If you think about if  a company never pays a dividend why would you want to own it. The only way to make money is to convince some other sucker to buy it and he turn has to find some other sucker to buy it?

innerscorecard

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Re: Dividend stocks versus index investing
« Reply #19 on: February 11, 2015, 11:11:14 PM »
Skyrefuge is spot on. A company doesn't have to pay dividends right now to have real, intrinsic value. A profitable company that doesn't pay dividends could easily get bought out by someone (or some company) with deep pockets who wants that revenue stream for themselves. If the P/E ratio gets low enough, this is exactly what happens!

This is certainly true. But virtually all methods of valuing stock going back to Ben Graham, Warren Buffett's mentor, use dividends as a mechanism.  In fact the most popular method the Dividend Discount Method, defines the intrinsic value of a stock as equal to the present value of all its future dividends.

If you think about if  a company never pays a dividend why would you want to own it. The only way to make money is to convince some other sucker to buy it and he turn has to find some other sucker to buy it?

I don't think it's at all accurate to call the Dividend Discount Model the most popular way of valuing stocks. The golden standard  is a discounted cash flow analysis or some variant of it.

clifp

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Re: Dividend stocks versus index investing
« Reply #20 on: February 12, 2015, 05:37:41 AM »


I don't think it's at all accurate to call the Dividend Discount Model the most popular way of valuing stocks. The golden standard  is a discounted cash flow analysis or some variant of it.

I could find any data to support your claim that discounted cash flow analysis is the gold standard. But I also couldn't find any data to support my claim the Dividend Discount Method is the most popular. So I'd say that DDM is a popular method as is DCF.

davisgang90

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Re: Dividend stocks versus index investing
« Reply #21 on: February 12, 2015, 05:48:17 AM »
I'm a very hands off investor and a dividend stock noob, but I've been buying dividend ETFs for my early retirement until I can access my IRA/TSP money.  I'm currently reinvesting dividends and plan to draw on them when I retire.

I only own a handful of individual stocks just for fun.  Everything else is a broader fund to avoid owning an individual stinker like the Yellow Pages.


skyrefuge

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Re: Dividend stocks versus index investing
« Reply #22 on: February 12, 2015, 09:42:17 AM »
This is certainly true. But virtually all methods of valuing stock going back to Ben Graham, Warren Buffett's mentor, use dividends as a mechanism.  In fact the most popular method the Dividend Discount Method, defines the intrinsic value of a stock as equal to the present value of all its future dividends.

If such a model concludes that a stock which does not currently pay dividends is valueless, then that's obviously a shitty model. Or at least woefully-incomplete. Here, I have a model that predicts which TV network an NFL game will be broadcast on: if it's two AFC teams playing, it will be on CBS. If it's two NFC teams playing, it will be on FOX. What? You saw a game on NBC or ESPN? No, that's impossible; according my model, NFL games only appear on CBS or FOX. That must have been a soccer match.

If you think about if  a company never pays a dividend why would you want to own it. The only way to make money is to convince some other sucker to buy it and he turn has to find some other sucker to buy it?

Er, that's the exact question posed by the OP that we've been answering in this thread. You even indirectly quoted my answer to that question; did you not read it?

beltim

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Re: Dividend stocks versus index investing
« Reply #23 on: February 12, 2015, 09:44:11 AM »
This is certainly true. But virtually all methods of valuing stock going back to Ben Graham, Warren Buffett's mentor, use dividends as a mechanism.  In fact the most popular method the Dividend Discount Method, defines the intrinsic value of a stock as equal to the present value of all its future dividends.

If such a model concludes that a stock which does not currently pay dividends is valueless, then that's obviously a shitty model. Or at least woefully-incomplete. Here, I have a model that predicts which TV network an NFL game will be broadcast on: if it's two AFC teams playing, it will be on CBS. If it's two NFC teams playing, it will be on FOX. What? You saw a game on NBC or ESPN? No, that's impossible; according my model, NFL games only appear on CBS or FOX. That must have been a soccer match.

I don't love the dividend discount model, but of course it looks absurd when you misuse it.

brooklynguy

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Re: Dividend stocks versus index investing
« Reply #24 on: February 12, 2015, 10:05:14 AM »
Yes, the idea behind using the present value of future dividends to determine the current value of the company is consistent with your post, skyrefuge, even if "future dividends" are only theoretical in that the company never intends to actually pay dividends.  Even endgame # 2 (buyout of company) ultimately relies on endgame # 1 (payment of dividends), because why else would the acquiring company purchase the business if not for endgame # 1 (and if the answer to that question is endgame # 2, then why would that acquiring company purchase the business if not for endgame # 1, and so on, ad infinitum)?

skyrefuge

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Re: Dividend stocks versus index investing
« Reply #25 on: February 12, 2015, 10:28:23 AM »
If the model takes into account hypothetical future dividends, obviously it becomes much better, but also a lot more difficult to apply. Given the way the model was invoked above, it's not clear whether clifp -- or anyone else who loves dividends -- intended to take into account future dividends when a stock has no present intention to pay dividends, or else they wouldn't be as reluctant to buy stocks that don't pay dividends.

Yep, exactly.

And yes, brooklynguy, I initially assumed that the DDM would have at least made an attempt to account for "future dividends" using exactly the chain you suggest, but according to Wikipedia, it does not.  The formula is price = D / x, where D is literally "the value of the next year's dividends".

It goes on to say "If the stock does not currently pay a dividend, like many growth stocks, more general versions of the discounted dividend model must be used to value the stock", and suggests using earnings rather than dividends. Like, duh. Maybe we should have just done that from the get-go.

The geocentric model worked fairly well to predict the motion of some things across the sky, until it didn't. The heliocentric model did a much better job for general use, and the more generally-applicable a model is, the more likely it is to be an accurate reflection of reality. When your model gives a nonsense answer on a subset of problems, that's usually a pretty good sign that there's something wrong with your model! No one continues to use the geocentric model, so I'm not sure why anyone would continue to use the dividend discount model.
« Last Edit: February 12, 2015, 10:34:39 AM by skyrefuge »

Scandium

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Re: Dividend stocks versus index investing
« Reply #26 on: February 12, 2015, 11:39:03 AM »
I just found this link   http://howtoinvestonline.blogspot.com/2011/04/how-your-province-income-level-and.html   on the TFSA versus RSP thread.

Holy income tax batman.   At $60K (which is more than we'll need) income based strictly on dividends is taxed in the single digits in Canada, as opposed to RSP withdrawals which are roughly 3 times as much.

I didn't realize the tax difference was such a big factor.

Others have answered your post pretty well. But please fix your spacebar, it appears to be stuck. It makes your post painfully hard to read.

clifp

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Re: Dividend stocks versus index investing
« Reply #27 on: February 12, 2015, 01:59:40 PM »
This is certainly true. But virtually all methods of valuing stock going back to Ben Graham, Warren Buffett's mentor, use dividends as a mechanism.  In fact the most popular method the Dividend Discount Method, defines the intrinsic value of a stock as equal to the present value of all its future dividends.

If such a model concludes that a stock which does not currently pay dividends is valueless, then that's obviously a shitty model. Or at least woefully-incomplete. Here, I have a model that predicts which TV network an NFL game will be broadcast on: if it's two AFC teams playing, it will be on CBS. If it's two NFC teams playing, it will be on FOX. What? You saw a game on NBC or ESPN? No, that's impossible; according my model, NFL games only appear on CBS or FOX. That must have been a soccer match.

If you think about if  a company never pays a dividend why would you want to own it. The only way to make money is to convince some other sucker to buy it and he turn has to find some other sucker to buy it?

Er, that's the exact question posed by the OP that we've been answering in this thread. You even indirectly quoted my answer to that question; did you not read it?

You are setting up a strawman here.  You oversimplified the model and cherry picked from the wiki.  The dividend discount values stocks on their future dividend payments. There is no requirement that stock currently pay a dividend only that it will in the future. So for instance,after Apple announce that it was thinking about paying a dividend but long before it actually did people were using the DDM to try and evaluate Apple stock.  It is obviously harder to evaluate a non dividend paying stock with this model.  But then it is also harder to evaluate a non dividend stock Period.

The predictability of these cash flows is why dividend stocks have lower beta, and also why they have higher risk adjusted returns.

scottish

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Re: Dividend stocks versus index investing
« Reply #28 on: February 12, 2015, 03:47:33 PM »
Quote
Everything else is a broader fund to avoid owning an individual stinker like the Yellow Pages.
   

I still remember reading their annual report and they talked about these web properties they had acquired as the future of the company.    I thought, 'that's odd, I've only heard of trader.ca', and went to check them out.   I don't know how much they paid for them, but $20 would have been about right.     I got out as fast as possible after that.

This thread was quite useful to me.   There are a couple of really useful takeaways here:
1.  View a company based on where it is in its lifecycle.    More mature companies are the ones that pay dividends.    Growth companies may not pay dividends or very minimal dividends, but as the company matures they are more likely to do so.   Apple and Microsoft are good examples of this.    This explains why free cash flow and price/earnings can be used as proxies when dividends are available.
2.  The big indexes like DJIA, S&P 500 and TSX composite have many dividend stocks already.   Since my peformance is close to the index performance, I probably already own a good chunk of the index directly.   Something to look into.
3.  And I think we need to take a much more in depth look at tax planning.   So far I've focused on income spliting, avoiding holding bonds in a non-registered account, and keeping international equities out of the TFSA.  I think I also need to do some careful spreadsheets on taxation under different assumptions - capital gains versus dividends in the non-registered accounts and income from the RSP.

thank you to everyone for your insights.

P.S.  Scandium what's wrong with my spacing?   is this post better?

seattlecyclone

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Re: Dividend stocks versus index investing
« Reply #29 on: February 12, 2015, 04:18:08 PM »
One space between sentences is sufficient.

scottish

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Re: Dividend stocks versus index investing
« Reply #30 on: February 12, 2015, 04:47:54 PM »
Huh.   Two spaces at the end of a sentence is normal.     I see lots of both.

johnny847

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Re: Dividend stocks versus index investing
« Reply #31 on: February 12, 2015, 04:59:55 PM »
Huh.   Two spaces at the end of a sentence is normal.     I see lots of both.
While I've seen both one or two spaces out there, you've got three and five spaces in between sentences in that quote. And you also have too many spaces in your previous posts. It does make it difficult to read.

seattlecyclone

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Re: Dividend stocks versus index investing
« Reply #32 on: February 12, 2015, 05:02:09 PM »
Huh.   Two spaces at the end of a sentence is normal.     I see lots of both.

First off, you used three and five spaces between your sentences there, not two.

Secondly, two spaces is not normal, at least not since the 1960s and not unless you're using a typewriter.

It's really not a big deal (in my opinion, anyway), but others seem to care more about this issue than me.

beltim

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Re: Dividend stocks versus index investing
« Reply #33 on: February 12, 2015, 05:05:57 PM »
Huh.   Two spaces at the end of a sentence is normal.     I see lots of both.

Ha!  I like the 3 and 5 space variants.  Print convention changed from two to one space in the mid 20th century, but there are still plenty of proponents of double spacing outside of published works.  It's an aesthetic thing that some people take inordinately seriously. 

skyrefuge

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Re: Dividend stocks versus index investing
« Reply #34 on: February 12, 2015, 05:14:50 PM »
It's really not a big deal (in my opinion, anyway), but others seem to care more about this issue than me.

Is especially not a big deal because much of our written communication these days is Web-based, and by default, Web-based publishing will automatically display only a single space, regardless of how many spaces you typed when entering the text. This forum is one of the only places I've seen that explicitly renders multiple spaces.

MidWestLove

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Re: Dividend stocks versus index investing
« Reply #35 on: February 12, 2015, 06:15:05 PM »
Interesting thread, I see it more of discussion of individual stock ownership (dividend or not) vs index ownership.
Stock ownership has its advantages - you can influence when to take profit or loss , no expense ratios, ability to concentrate in area you prefer or in company you truly believe in
For me, the biggest disadvantage of individual stock ownership is an assumption that I am somehow smarter than the next guy by assuming that I know something about the stock that other side does not . That is where index investing shines, IMHO. Also individual security analysis requires time, patience, desire to do it ,etc.

Financial.Velociraptor

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Re: Dividend stocks versus index investing
« Reply #36 on: February 12, 2015, 06:20:41 PM »
You can get both with VIG.  That is a Vanguard ETF with low (0.10%?) fees that tracks the Dividend Achievers index.  Performance is very similar to VOO.

johnny847

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Re: Dividend stocks versus index investing
« Reply #37 on: February 12, 2015, 06:58:48 PM »
Stock ownership has its advantages - you can influence when to take profit or loss , no expense ratios, ability to concentrate in area you prefer or in company you truly believe in
There are no expense ratios with owning individual stocks, but depending on what brokerage you use and sometimes how frequently you trade, there are expenses (ie, commissions).

FFA

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Re: Dividend stocks versus index investing
« Reply #38 on: February 12, 2015, 07:57:01 PM »
Interesting thread, I see it more of discussion of individual stock ownership (dividend or not) vs index ownership.
Stock ownership has its advantages - you can influence when to take profit or loss , no expense ratios, ability to concentrate in area you prefer or in company you truly believe in
For me, the biggest disadvantage of individual stock ownership is an assumption that I am somehow smarter than the next guy by assuming that I know something about the stock that other side does not . That is where index investing shines, IMHO. Also individual security analysis requires time, patience, desire to do it ,etc.
I subscribe to the index philosophy, but I decided to hold some direct shares in my home market (Australia). My reasoning being the local index is very concentrated. If you buy the four big banks, miner, Telco and a few others. It only takes a handful or two of direct holdings and you can cover 50-60% of the index. My objective is not to stockpick, just buy and hold these forever. I figured why pay Vanguard 0.15% per year for the next 40-50 years for these core holdings. It is a small fee but over such a long time it also adds up. Most of these also happen to be good dividend stocks which is another reason.

So I keep my domestic share exposure roughly half in direct blue chips and half in index ETF. I appreciate this logic doesn't apply to the US with a much more diversified index and even lower index MER's. But it could apply to Canada, Singapore, etc.

Indexer

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Re: Dividend stocks versus index investing
« Reply #39 on: February 12, 2015, 08:08:01 PM »
Short answer:  When you buy a stock you aren't just buying voting rights.  You are buying rights to the companies' profits.

Some companies that are trying to grow reinvest their profits back into the company to grow.  You should see appreciation through the stock going up in value over time.  Think of it this way.... the company is paying dividends but just reinvesting them back into the business on your behalf. 

Some companies don't have a lot of room to grow so they start paying those profits out to the owners... you.  That is where you get your dividends.   

My utility company isn't taking over new markets.  They pay me dividends.  Google is taking the money it made on search to go into mobile phones, and now they are taking the money and developing self driving cars.  Google is reinvesting my dividends into future endeavours to grow the business.

So I like my dividend stocks and my growth stocks... both in my VTI index fund.

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Re: Dividend stocks versus index investing
« Reply #40 on: February 12, 2015, 09:12:27 PM »
Then are are the companies who are taking their profits and giving upper management stock options and buying bad businesses (deworsification) and buying themselves gold plated toilets for their company paid G5. Good investing is as much about avoiding the semi obvious turds as it is buying the companies consistently growing earnings. Most indexes don't take this into consideration and you get all the junk as well.

kyith

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Re: Dividend stocks versus index investing
« Reply #41 on: February 20, 2015, 07:22:22 AM »
there is this ETF call VIG which invests in dividend aristocrats, who increase their dividends for 25 years or more.

the yield is very very low, but these are dividend stocks.so where do they lie haha!

tj

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Re: Dividend stocks versus index investing
« Reply #42 on: February 20, 2015, 07:20:55 PM »
there is this ETF call VIG which invests in dividend aristocrats, who increase their dividends for 25 years or more.

the yield is very very low, but these are dividend stocks.so where do they lie haha!

The yield is "low" because the price has gone up. If the price goes down and the dividends stay the same, then the yield is high. is that what you want?

Thats why everyone keeps saying that you need to look at total return.

kyith

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Re: Dividend stocks versus index investing
« Reply #43 on: February 20, 2015, 09:05:05 PM »
there is this ETF call VIG which invests in dividend aristocrats, who increase their dividends for 25 years or more.

the yield is very very low, but these are dividend stocks.so where do they lie haha!

The yield is "low" because the price has gone up. If the price goes down and the dividends stay the same, then the yield is high. is that what you want?

Thats why everyone keeps saying that you need to look at total return.

yes it definitely is because price has gone up but the reason it has gone up is because the underlying business have done really well as well, and what they paid out is a smaller proprotiion of their free cash flow.

but for ETF its also a function of how much the ETF manager wants to pay out. looking at total return is right really in this case.

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Re: Dividend stocks versus index investing
« Reply #44 on: February 20, 2015, 09:36:53 PM »
How do indexer's reconcile the fact that they own a higher percentage of over-priced stocks (higher market cap provides an upward bias within the index) and a lower percentage of under-priced stocks? I would have thought that this leads to under-performance long-term, compared to only buying when under-priced.

josstache

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Re: Dividend stocks versus index investing
« Reply #45 on: February 20, 2015, 10:11:54 PM »
A high market cap doesn't necessarily mean a company is overpriced.  While it would be nice to look at stocks with a magical stock screener that determines each's company's intrinsic value according to your own investing time frame, and only invest in those, such a screener does not exist.

Smaller companies have historically grown faster than larger ones, which is a rationale for having a tilt toward small- and/or medium-sized companies and/or value stocks in an index portfolio.  Some people buy an "equal weight" index, which does the same thing.

To determine if the choice of index leads to underperformance, we must decide what "underperformance" is relative to.  Obviously the best strategy is to use a crystal ball and invest in only the handful of stocks that will gain 50%+ in the next year.  Every strategy will underperform that.  What index investors do is decide which sub-market/s* of the global economy they would like to match, and invest in those entire markets, which means they will only "underperform" their desired sub-market/s to the extent of each index's net fees (if any).

*As I discuss in a recent thread, it is not possible, and perhaps not even desirable, to invest in an index or indices representing the entire global economy ("the market"), so one must choose sub-markets.
« Last Edit: February 20, 2015, 10:13:30 PM by josstache »

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Re: Dividend stocks versus index investing
« Reply #46 on: February 21, 2015, 01:27:05 AM »

I subscribe to the index philosophy, but I decided to hold some direct shares in my home market (Australia). My reasoning being the local index is very concentrated. If you buy the four big banks, miner, Telco and a few others. It only takes a handful or two of direct holdings and you can cover 50-60% of the index. My objective is not to stockpick, just buy and hold these forever. I figured why pay Vanguard 0.15% per year for the next 40-50 years for these core holdings. It is a small fee but over such a long time it also adds up. Most of these also happen to be good dividend stocks which is another reason.

So I keep my domestic share exposure roughly half in direct blue chips and half in index ETF. I appreciate this logic doesn't apply to the US with a much more diversified index and even lower index MER's. But it could apply to Canada, Singapore, etc.
[/quote]

Another Aussie here...

My (non retirement holdings) are currently $145k direct shares and $115k managed (mutual) funds. I have been investing directly in shares for 15+ years and have been generally successful. I practice 'selective reinvestment' of dividends; collect in cash and buy the shares I choose rather than what a company chooses.

Even with recent market rises my direct portfolio is currently running at a dividend yield of 4.57% and the value has increased $25k in the past 12 months. With franking credits (credits for tax already paid by the company) the yield is actually around 7% on an income basis alone.

I have the time to research and manage my direct share portfolio, however since the Aussie market is a drop in the ocean compared to the total value of the major world markets I use my managed funds to gain exposure to international markets and asset classes that i don't have them time to focus on. The current income yield (net of fees) is 3.78% and the value has grown by $11k.

Generally an Aussie's Super (401k) is a managed fund with little micro control available to the individual; you can choose the fund based on its profile but have little say in how they direct your money. Direct shares is my way of having some control.

FFA

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Re: Dividend stocks versus index investing
« Reply #47 on: February 21, 2015, 06:42:48 PM »
How do indexer's reconcile the fact that they own a higher percentage of over-priced stocks (higher market cap provides an upward bias within the index) and a lower percentage of under-priced stocks? I would have thought that this leads to under-performance long-term, compared to only buying when under-priced.
agree with josstache, and I also wish I had the magical crystal ball....
No one really knows what's over or underpriced except with hindsight.
And prices don't always revert to the mean....
Eg. There are growth companies eg Apple, where high market cap becomes higher and higher still.
And low mkt cap companies that go bankrupt (better to be underweight in the index)

burrow

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Re: Dividend stocks versus index investing
« Reply #48 on: February 21, 2015, 06:54:35 PM »
Please help me. Let's compare apples with apples. XYZ Co. is $2 and has earnings of $0.10 (PE 20). It commands twice the allocation in its index compared to when it is $1 with the same earnings (PE 10) ie. if we buy the index, we buy twice as much of that company when it is twice the price (and half as much when it is half the price). Am I missing something!

LordSquidworth

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Re: Dividend stocks versus index investing
« Reply #49 on: February 21, 2015, 07:16:32 PM »
Please help me. Let's compare apples with apples. XYZ Co. is $2 and has earnings of $0.10 (PE 20). It commands twice the allocation in its index compared to when it is $1 with the same earnings (PE 10) ie. if we buy the index, we buy twice as much of that company when it is twice the price (and half as much when it is half the price). Am I missing something!

Problem with many indexes is higher market caps = increased weight in the index, which doesn't distinguish between over/under priced.