Dividend stocks versus index investing

[FFA]

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!

I think you are missing something, but not sure I can easily explain...

In your example, it could be that xyz's future earnings will grow astronomically and that is the reason for the higher PE. In 5 years time, XYZ share price might well be $20. The index investor will have accumulated more and more as this company grew. The non index may have missed it all due to the view it's overpriced. Apple is a real life example of this.

Of course it could also be that XYZ goes nowhere and the 20 pe was over valued, which is the case I believe you are focusing on, in which the index approach can seem to  "lose out". But don't forget the other cases and prices don't always revert to the mean.

Hope this helps . Maybe others can explain it better, or perhaps the best thing is to read some of bogle and get it directly from a primary source on indexing!

[scottish]

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

I've been reading up on this, this type of index is called a capital weighted index.  This means that if a company's aggregate share value represents a larger part of the stock market, then it will also occupy a larger part of the index.  The now classic example is Nortel on the TSX Composite back about 15 years.  This one company made up 40% or so of the major Canadian stock index.

You would have been well on your way to beating this index by avoiding Nortel in the timespan of 2000-2007.  It didn't pay much in the way of dividends either, IIRC.   8-)

According to Wikipedia, The S&P 500 is float weighted.  This is very close to capital weighted - the weight of a company in the index is based on the aggregate value of the shares that are available for public trading.   

This actually sounds like a bad way to structure an index as an investment vehicle.  As the worth of a company grows, an asset allocation strategy would tell you to gradually take profits and reduce your holdings.  Does anyone else have thoughts on this?

[ChrisLansing]

Newbie investor here.   I've been following this thread because I'm also interested in buying dividend stocks. 

I will keep 85% or more of my total portfolio in index funds.    I've decided I can "risk" 15% of my investment funds on self picked stocks - I don't believe I'll learn much about stock picking w/o some "skin in the game".   (It might be smarter not to learn about stock picking and be 100% in index funds, but that just isn't me).

Is my thinking about dividend stocks too simplistic?   

My thinking is that if I buy ATT (for example) currently paying 5.5% yield I've more or less locked in a profit of 5.5%    That will be true every year I hold the stock, assuming continued payment of dividends at current levels and current share price.     Have I missed something?

My thinking is also that if my stock's share price goes up over the decade or so I plan to hold it, then I'll get the increase in share price, plus dividends.   

Finally, I'm thinking if my share price suddenly drops 5.5% an hour after I buy the stock, I'm not really out anything at the end of the year after I've collected my dividend.    (Assuming the dividend is still payed at the same amount - $1.88 for ATT)

If a dividend is the same as a sale, then won't I get the benefit of the "sale" while not actually selling?   

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?   

[Financial.Velociraptor]

Newbie investor here.   I've been following this thread because I'm also interested in buying dividend stocks. 

I will keep 85% or more of my total portfolio in index funds.    I've decided I can "risk" 15% of my investment funds on self picked stocks - I don't believe I'll learn much about stock picking w/o some "skin in the game".   (It might be smarter not to learn about stock picking and be 100% in index funds, but that just isn't me).

Is my thinking about dividend stocks too simplistic?   

My thinking is that if I buy ATT (for example) currently paying 5.5% yield I've more or less locked in a profit of 5.5%    That will be true every year I hold the stock, assuming continued payment of dividends at current levels and current share price.     Have I missed something?

My thinking is also that if my stock's share price goes up over the decade or so I plan to hold it, then I'll get the increase in share price, plus dividends.   

Finally, I'm thinking if my share price suddenly drops 5.5% an hour after I buy the stock, I'm not really out anything at the end of the year after I've collected my dividend.    (Assuming the dividend is still payed at the same amount - $1.88 for ATT)

If a dividend is the same as a sale, then won't I get the benefit of the "sale" while not actually selling?   

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?

Chris,

I am one of the dividend investing and income investing heretics here at MMM.  I think you have it exactly right.  I'll add something you did miss though: T has raised its distribution for 30 consecutive years!  You can realistically expect an annual raise for a very long time.  Bonus: the market thinks T should yield about 5.5%, so if the distribution goes up five percent...count on 5% of capital appreciation soon thereafter.  You can squeeze yet another point of yield out by writing out of the money covered calls (you'll pay STCG rate on that point unless in tax deferred account.)

I'll note that the index True Believers have a point during early accumulation phase.  You are going to pay about 15% of those distributions in taxes (unless you are in a tax protected account).  You thus miss out of 15% of the compounding versus a share buyback.  Personally, I think the track record of companies that raise their dividends makes it worth it.

[Left]

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?   

You run the problem of ATT being the next Sprint/Blackberry/Nokia/etc too. Or even Apple back in the 80s when it was almost bankrupt, or Bank of America/Vegas casinos during the 2008 crash. Do you plan to buy Sprint/Blackberry/Nokia now while it is "cheap" if you think it'll come back like Apple/BoA/casinos did?

Not really arguing against dividends, but wish there was a better "index" of only dividend (say >X%) companies instead. But until then, dividend investors are picking and choosing individual companies. Well there are indexes I think, but they don't seem "good" enough for most so they pick a few they "like" since they yield chase a bit

[ChrisLansing]

Newbie investor here.   I've been following this thread because I'm also interested in buying dividend stocks. 

I will keep 85% or more of my total portfolio in index funds.    I've decided I can "risk" 15% of my investment funds on self picked stocks - I don't believe I'll learn much about stock picking w/o some "skin in the game".   (It might be smarter not to learn about stock picking and be 100% in index funds, but that just isn't me).

Is my thinking about dividend stocks too simplistic?   

My thinking is that if I buy ATT (for example) currently paying 5.5% yield I've more or less locked in a profit of 5.5%    That will be true every year I hold the stock, assuming continued payment of dividends at current levels and current share price.     Have I missed something?

My thinking is also that if my stock's share price goes up over the decade or so I plan to hold it, then I'll get the increase in share price, plus dividends.   

Finally, I'm thinking if my share price suddenly drops 5.5% an hour after I buy the stock, I'm not really out anything at the end of the year after I've collected my dividend.    (Assuming the dividend is still payed at the same amount - $1.88 for ATT)

If a dividend is the same as a sale, then won't I get the benefit of the "sale" while not actually selling?   

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?

Chris,

I am one of the dividend investing and income investing heretics here at MMM.  I think you have it exactly right.  I'll add something you did miss though: T has raised its distribution for 30 consecutive years!  You can realistically expect an annual raise for a very long time.  Bonus: the market thinks T should yield about 5.5%, so if the distribution goes up five percent...count on 5% of capital appreciation soon thereafter.  You can squeeze yet another point of yield out by writing out of the money covered calls (you'll pay STCG rate on that point unless in tax deferred account.)

I'll note that the index True Believers have a point during early accumulation phase.  You are going to pay about 15% of those distributions in taxes (unless you are in a tax protected account).  You thus miss out of 15% of the compounding versus a share buyback.  Personally, I think the track record of companies that raise their dividends makes it worth it.

Yes T is a so called "aristocrat" having hiked it's dividend consistently for years.   

I think covered calls is too sophisticated for me right now.   

All my investments are in my Roth IRA. 

[ChrisLansing]

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?   

You run the problem of ATT being the next Sprint/Blackberry/Nokia/etc too. Or even Apple back in the 80s when it was almost bankrupt, or Bank of America/Vegas casinos during the 2008 crash. Do you plan to buy Sprint/Blackberry/Nokia now while it is "cheap" if you think it'll come back like Apple/BoA/casinos did?

Not really arguing against dividends, but wish there was a better "index" of only dividend (say >X%) companies instead. But until then, dividend investors are picking and choosing individual companies. Well there are indexes I think, but they don't seem "good" enough for most so they pick a few they "like" since they yield chase a bit

I run that type of risk by investing in anything, don't I?   

It might make sense to see what Vanguard offers in the way of a dividend index.   

Any thoughts on dividend ETFs vs individual stocks?

[Financial.Velociraptor]

It might make sense to see what Vanguard offers in the way of a dividend index.   

Any thoughts on dividend ETFs vs individual stocks?

Chris,

Vanguard has an ETF available at any broker known as VIG that is composed of Dividend Achievers. I think within Vanguard it goes commission free by a ticker somewhat like VDADX.  V.low fees on that one.  Best of all worlds?

[MidWestLove]

I think this was discussed here over and over again - I see it  as a matter of behavioral finance where people tend to prioritize 'tangible' return that they could immediately see in their accounts over other factors. a return is a return, company has revenue, has costs of doing business, and hopefully has more of the earlier than later :). If company earns profit (which it needs to stay in business for any sustained amount of time), profit is profit, whether kept on balance sheet as cash, reinvested in business, repurchased stock, or paid out as  dividends. there is little magical about dividends and focusing it alone would also allow investors to miss all of the amazing success stories (googles, apple, amazon, etc) when they are in the massive growth phase.... 

[Financial.Velociraptor]

MidWestLove,

Yes.  If you focus on blue chip dividend [growers?] companies, you miss the growth phase of young companies.  But you also miss the death and decay phase or just languish sideways phase of companies that have not the strength to maintain (and/or increase) actual cash distributions throughout the business cycle.  DGI cuts both tails off the distribution and creates a selection bias for survivors with strong cash flow and pricing power.

I don't think it benefits anyone to drink either the red (index/buyback/etc) or blue (dividend) Cool-Aid.  You need to more mentally flexible than any True Believer.  I make room for bonds, and non-dividend paying insurance companies as well.  And I like my big, boring, slow moving, blue-chip, dividend raisers most of all.  I sleep well at night with those big fat cash gushing slugs.  An index gives me the nerves about the inevitable index laggards that have not yet been kicked out of the index.

[tj]

It might make sense to see what Vanguard offers in the way of a dividend index.   

Any thoughts on dividend ETFs vs individual stocks?

Chris,

Vanguard has an ETF available at any broker known as VIG that is composed of Dividend Achievers. I think within Vanguard it goes commission free by a ticker somewhat like VDADX.  V.low fees on that one.  Best of all worlds?

I personally think VDIGX is a better choice. The index is more concentrated (despite more holdings) and more rigid in what it must buy and sell. The performance is very similar.

[Dodge]

Yes T is a so called "aristocrat" having hiked it's dividend consistently for years.   

Ah, the Dividend Aristocrats.  When people talk about dividend investing, the Dividend Aristocrats commonly come up.  A list of companies which have increased their dividend every year, for the pat 25 years.  How could we go wrong?  They throw up a chart showing the Dividend Aristocrats handily beating the market, and proclaim victory for their strategy.  It's all Survivorship Bias.

http://www.bogleheads.org/wiki/Survivorship_bias

The charts simply show, "This group of stocks which have exhibited increasing returns every year for the past 25 years, have higher returns than the market as a whole."

That sounds like a reasonable statement to make.  How is that information actionable?  Shall I then invest money in the stocks which have performed well over the past 25 years, hoping they will continue to perform well in the next 25 years?  Alarm bells should start ringing on that one.

While these charts on past performance always look great, I have yet to see an actual real-time dividend-focused fund beat the market.  This seemed strange to me, if the charts look so great, why weren't any funds/ETFs able to capitalize on this?  So I dug deeper...

We know that of the original Dividend Aristocrats, only 7 still remain in the index.  We also know that only 30% of companies currently in the index, are still there after 10 years, with the average length for any one company being 6.5 years.  This might be why the returns look so good in hindsight, yet are difficult to achieve in real-time. 

The worst part is when people advocate for dividend stocks at a replacement for bonds.  After all, bond yield is so low lately, you're just leaving yield on the table by choosing bonds over dividend stocks right?  During the 2008 great recession, the Dividend Aristocrats fund (SDY), a fund which is comprised of the 50 highest dividend yielding constituents of the stocks of the S&P Composite 1500 Index, that have increased dividends every year for at least 25 consecutive years, had lower returns than 100% bonds, and higher risk (volatility) than 100% stocks.  Let's see what that looks like graphed:



Of course, SDY only has about a 2% yield, that's barely better than bonds!  Let's see how the Preferred Stock Index Fund (PFF), a high yield fund which tracks 220 preferred stocks from 44 U.S. companies and yields a yearly dividend in the 7% range handled the 2008 recession:



Again, lower returns than 100% bonds (still hasn't caught up), and higher risk (volatility) than 100% stocks.  Imagine looking at your portfolio at this point in the crash, vs 100% stocks, and 100% bonds.  Imagine you're sitting pretty with $900,000 in your 100% dividend stock portfolio.  You're counting down the days till you're fire (under a year now!), then this happens:



Next thing you know you've lost your job and only have $300,000 left in your account.  I won't say "this is a very real possibility", I don't need to.  It has already happened, and it can happen again.

Maybe the real question is, how can you invest in Dividend Aristocrats, before they become Dividend Aristocrats?

[Dodge]

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?   

You run the problem of ATT being the next Sprint/Blackberry/Nokia/etc too. Or even Apple back in the 80s when it was almost bankrupt, or Bank of America/Vegas casinos during the 2008 crash. Do you plan to buy Sprint/Blackberry/Nokia now while it is "cheap" if you think it'll come back like Apple/BoA/casinos did?

Not really arguing against dividends, but wish there was a better "index" of only dividend (say >X%) companies instead. But until then, dividend investors are picking and choosing individual companies. Well there are indexes I think, but they don't seem "good" enough for most so they pick a few they "like" since they yield chase a bit

I run that type of risk by investing in anything, don't I?   

It might make sense to see what Vanguard offers in the way of a dividend index.   

Any thoughts on dividend ETFs vs individual stocks?

Yes you run that type of risk with any portfolio, which is why we diversify.  When you invest in a less diverse portfolio, you expose yourself to these risks.  Once you understand that dividends are mathematically equivalent to selling stocks, you'll see there's no reason to purposely choose a less diverse/more risky portfolio, as the expected return actually decreases when you do this.

[ChrisLansing]

Yes T is a so called "aristocrat" having hiked it's dividend consistently for years.   

Ah, the Dividend Aristocrats.  When people talk about dividend investing, the Dividend Aristocrats commonly come up.  A list of companies which have increased their dividend every year, for the pat 25 years.  How could we go wrong?  They throw up a chart showing the Dividend Aristocrats handily beating the market, and proclaim victory for their strategy.  It's all Survivorship Bias.

http://www.bogleheads.org/wiki/Survivorship_bias

The charts simply show, "This group of stocks which have exhibited increasing returns every year for the past 25 years, have higher returns than the market as a whole."

That sounds like a reasonable statement to make.  How is that information actionable?  Shall I then invest money in the stocks which have performed well over the past 25 years, hoping they will continue to perform well in the next 25 years?  Alarm bells should start ringing on that one. 

I confess I don't get your point here.   Why alarm bells?   Coke sold it's first stock in 1919.  Why does raising it's dividend the past 25 years raise alarm bells?   Are people suddenly going to stop drinking coke ?   Is this unsustainable, given their profits?     

While these charts on past performance always look great, I have yet to see an actual real-time dividend-focused fund beat the market.  This seemed strange to me, if the charts look so great, why weren't any funds/ETFs able to capitalize on this?  So I dug deeper...

We know that of the original Dividend Aristocrats, only 7 still remain in the index.  We also know that only 30% of companies currently in the index, are still there after 10 years, with the average length for any one company being 6.5 years.  This might be why the returns look so good in hindsight, yet are difficult to achieve in real-time. 

So is your point that only index investing makes sense?   (I'll readily agree it's the safest)   Wouldn't a list of value stocks or growth stocks change over 10 years?     

The worst part is when people advocate for dividend stocks at a replacement for bonds.  After all, bond yield is so low lately, you're just leaving yield on the table by choosing bonds over dividend stocks right?  During the 2008 great recession, the Dividend Aristocrats fund (SDY), a fund which is comprised of the 50 highest dividend yielding constituents of the stocks of the S&P Composite 1500 Index, that have increased dividends every year for at least 25 consecutive years, had lower returns than 100% bonds, and higher risk (volatility) than 100% stocks.  Let's see what that looks like graphed:



Of course, SDY only has about a 2% yield, that's barely better than bonds!  Let's see how the Preferred Stock Index Fund (PFF), a high yield fund which tracks 220 preferred stocks from 44 U.S. companies and yields a yearly dividend in the 7% range handled the 2008 recession:



Again, lower returns than 100% bonds (still hasn't caught up), and higher risk (volatility) than 100% stocks.  Imagine looking at your portfolio at this point in the crash, vs 100% stocks, and 100% bonds.  Imagine you're sitting pretty with $900,000 in your 100% dividend stock portfolio.  You're counting down the days till you're fire (under a year now!), then this happens:



Next thing you know you've lost your job and only have $300,000 left in your account.  I won't say "this is a very real possibility", I don't need to.  It has already happened, and it can happen again.

Maybe the real question is, how can you invest in Dividend Aristocrats, before they become Dividend Aristocrats?

But aside from index fund investing, this is the same question that applies in all cases.   How to recognize the "value" stocks at a time when the rest of the market hasn't figured out the "real" value?   How to recognize the growth stocks before they start growing?     Past performance of dividend stocks isn't a guarantee, but that's not the same as saying it's no indicator.   

[ChrisLansing]

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?   

You run the problem of ATT being the next Sprint/Blackberry/Nokia/etc too. Or even Apple back in the 80s when it was almost bankrupt, or Bank of America/Vegas casinos during the 2008 crash. Do you plan to buy Sprint/Blackberry/Nokia now while it is "cheap" if you think it'll come back like Apple/BoA/casinos did?

Not really arguing against dividends, but wish there was a better "index" of only dividend (say >X%) companies instead. But until then, dividend investors are picking and choosing individual companies. Well there are indexes I think, but they don't seem "good" enough for most so they pick a few they "like" since they yield chase a bit

I run that type of risk by investing in anything, don't I?   

It might make sense to see what Vanguard offers in the way of a dividend index.   

Any thoughts on dividend ETFs vs individual stocks?

Yes you run that type of risk with any portfolio, which is why we diversify.  When you invest in a less diverse portfolio, you expose yourself to these risks.  Once you understand that dividends are mathematically equivalent to selling stocks, you'll see there's no reason to purposely choose a less diverse/more risky portfolio, as the expected return actually decreases when you do this.

Except that mathematically when I sell, I no longer own the stock and it stops being a source of revenue.   Whereas dividends (may) keep flowing from my initial investment.   If they don't I can always sell for real.   

[tj]

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?   

You run the problem of ATT being the next Sprint/Blackberry/Nokia/etc too. Or even Apple back in the 80s when it was almost bankrupt, or Bank of America/Vegas casinos during the 2008 crash. Do you plan to buy Sprint/Blackberry/Nokia now while it is "cheap" if you think it'll come back like Apple/BoA/casinos did?

Not really arguing against dividends, but wish there was a better "index" of only dividend (say >X%) companies instead. But until then, dividend investors are picking and choosing individual companies. Well there are indexes I think, but they don't seem "good" enough for most so they pick a few they "like" since they yield chase a bit

I run that type of risk by investing in anything, don't I?   

It might make sense to see what Vanguard offers in the way of a dividend index.   

Any thoughts on dividend ETFs vs individual stocks?

Yes you run that type of risk with any portfolio, which is why we diversify.  When you invest in a less diverse portfolio, you expose yourself to these risks.  Once you understand that dividends are mathematically equivalent to selling stocks, you'll see there's no reason to purposely choose a less diverse/more risky portfolio, as the expected return actually decreases when you do this.

Except that mathematically when I sell, I no longer own the stock and it stops being a source of revenue.   Whereas dividends (may) keep flowing from my initial investment.   If they don't I can always sell for real.   

It's mathematically the same thing when you receive a dividend. Instead of the company reinvesting your portion of the profits, they pay you a dividend. Dividends are not a secret sauce.

[Dodge]

Yes T is a so called "aristocrat" having hiked it's dividend consistently for years.   

Ah, the Dividend Aristocrats.  When people talk about dividend investing, the Dividend Aristocrats commonly come up.  A list of companies which have increased their dividend every year, for the pat 25 years.  How could we go wrong?  They throw up a chart showing the Dividend Aristocrats handily beating the market, and proclaim victory for their strategy.  It's all Survivorship Bias.

http://www.bogleheads.org/wiki/Survivorship_bias

The charts simply show, "This group of stocks which have exhibited increasing returns every year for the past 25 years, have higher returns than the market as a whole."

That sounds like a reasonable statement to make.  How is that information actionable?  Shall I then invest money in the stocks which have performed well over the past 25 years, hoping they will continue to perform well in the next 25 years?  Alarm bells should start ringing on that one. 

I confess I don't get your point here.   Why alarm bells?   Coke sold it's first stock in 1919.  Why does raising it's dividend the past 25 years raise alarm bells?   Are people suddenly going to stop drinking coke ?   Is this unsustainable, given their profits?   

Alarm bells should be ringing, because of the whole "Past performance does not predict future returns" thing.  If you haven't read the studies, or heard of this logical fallacy yet, I recommend reading more about investing.  My favorite study is the one where they look at the top performing stocks over a particular timeframe (say 5 or 10 years), then track their performance over time.  Not only was there no correlation between a stock outperforming in one 5 year span, also outperforming in the next 5 years, the correction was actually negative.  In other words, stocks which outperformed the previous 5 years, were less likely than average to outperform over the next 5 years.  Here are some fun quotes about it:

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

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Standard & Poor's Persistence Scorecard (Dec-2014): "The data show a stronger likelihood for the best-performing funds to become the worst-performing funds than vice versa. Of 421 funds that were in the bottom quartile, 14.45% moved to the top quartile over the five year horizon, while 27.08% of the 421 funds that were in the top quartile moved into the bottom quartile during the same period."

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

More fun quotes can be found here: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=156573

While these charts on past performance always look great, I have yet to see an actual real-time dividend-focused fund beat the market.  This seemed strange to me, if the charts look so great, why weren't any funds/ETFs able to capitalize on this?  So I dug deeper...

We know that of the original Dividend Aristocrats, only 7 still remain in the index.  We also know that only 30% of companies currently in the index, are still there after 10 years, with the average length for any one company being 6.5 years.  This might be why the returns look so good in hindsight, yet are difficult to achieve in real-time. 

So is your point that only index investing makes sense?   (I'll readily agree it's the safest)   Wouldn't a list of value stocks or growth stocks change over 10 years?     

Yes they do change, which is why investing in a fund which only picks the top performing stocks (in terms of Dividends, Value, Growth...etc) from the previous X years, almost always underperforms.

The worst part is when people advocate for dividend stocks at a replacement for bonds.  After all, bond yield is so low lately, you're just leaving yield on the table by choosing bonds over dividend stocks right?  During the 2008 great recession, the Dividend Aristocrats fund (SDY), a fund which is comprised of the 50 highest dividend yielding constituents of the stocks of the S&P Composite 1500 Index, that have increased dividends every year for at least 25 consecutive years, had lower returns than 100% bonds, and higher risk (volatility) than 100% stocks.  Let's see what that looks like graphed:



Of course, SDY only has about a 2% yield, that's barely better than bonds!  Let's see how the Preferred Stock Index Fund (PFF), a high yield fund which tracks 220 preferred stocks from 44 U.S. companies and yields a yearly dividend in the 7% range handled the 2008 recession:



Again, lower returns than 100% bonds (still hasn't caught up), and higher risk (volatility) than 100% stocks.  Imagine looking at your portfolio at this point in the crash, vs 100% stocks, and 100% bonds.  Imagine you're sitting pretty with $900,000 in your 100% dividend stock portfolio.  You're counting down the days till you're fire (under a year now!), then this happens:



Next thing you know you've lost your job and only have $300,000 left in your account.  I won't say "this is a very real possibility", I don't need to.  It has already happened, and it can happen again.

Maybe the real question is, how can you invest in Dividend Aristocrats, before they become Dividend Aristocrats?

But aside from index fund investing, this is the same question that applies in all cases.   How to recognize the "value" stocks at a time when the rest of the market hasn't figured out the "real" value?   How to recognize the growth stocks before they start growing?     Past performance of dividend stocks isn't a guarantee, but that's not the same as saying it's no indicator.   

Correct, it applies in all cases, and this is one of the reasons why it's nearly impossible to beat the index over the long term.  "Not a guarantee" isn't the same as saying it's no indicator, but that's irrelevant.  The official warning from the SEC (Securities Exchange Commission), is quite literally:



There is no ambiguity here.  This text is all over their registration form which applicants are required to sign:

http://www.sec.gov/about/forms/formn-1a.pdf

[Retired To Win]

... 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?

Scottishstash...

Your words could have come straight out of my own head.  How you think is how I think.  Which is why I only invest in dividend-paying stocks.  And, like you, I am confounded that there is always a "greater fool" ready to buy a non-dividend payer at a higher price -- in the expectation of selling it off to another greater fool down the road.  But the fact is that one CAN COUNT ON that next person showing up eventually to pay more for that share of a non-dividend payer.  It is what it is.  But my gut just won't buy into it.  So I'm staying with my investing approach based on dividends.

[Dodge]

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?   

You run the problem of ATT being the next Sprint/Blackberry/Nokia/etc too. Or even Apple back in the 80s when it was almost bankrupt, or Bank of America/Vegas casinos during the 2008 crash. Do you plan to buy Sprint/Blackberry/Nokia now while it is "cheap" if you think it'll come back like Apple/BoA/casinos did?

Not really arguing against dividends, but wish there was a better "index" of only dividend (say >X%) companies instead. But until then, dividend investors are picking and choosing individual companies. Well there are indexes I think, but they don't seem "good" enough for most so they pick a few they "like" since they yield chase a bit

I run that type of risk by investing in anything, don't I?   

It might make sense to see what Vanguard offers in the way of a dividend index.   

Any thoughts on dividend ETFs vs individual stocks?

Yes you run that type of risk with any portfolio, which is why we diversify.  When you invest in a less diverse portfolio, you expose yourself to these risks.  Once you understand that dividends are mathematically equivalent to selling stocks, you'll see there's no reason to purposely choose a less diverse/more risky portfolio, as the expected return actually decreases when you do this.

Except that mathematically when I sell, I no longer own the stock and it stops being a source of revenue.   Whereas dividends (may) keep flowing from my initial investment.   If they don't I can always sell for real.   

All evidence has shown that investing for dividends is a horrible idea.  It's not the worst I've seen on the forum, but it's pretty close.  For the sake of anyone new to investing and considering a dividend strategy after seeing this thread, here's one of Vanguard's papers on the topic:

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

Some highlights:

------------------------------------------------------------------------------------------
Common approaches for increasing portfolio income—and why they may be inadvisable

For those investors who are not comfortable spending from their portfolio’s balance and/or whose portfolio cash flow is insufficient for their needs, there are three primary ways to increase income: increase their overall allocation to bonds; keep their existing bond allocation but tilt it toward high-yield bonds; or tilt their existing equity allocation toward higher-dividend paying stocks. None of these are preferred strategies for maintaining inflation-adjusted spending over long periods.
------------------------------------------------------------------------------------------

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

This graph is particularly interesting:




Also, this might help explain why some people push for it so strongly, despite the evidence showing it to be suboptimal:

------------------------------------------------------------------------------------------
Why do shareholders believe so strongly that a $1 dividend is preferable to a $1 capital gain? Meir Statman looked at this question in a 1984 article called “Explaining Investor Preference for Cash Dividends,” coauthored by Hersh Sheffrin. He also reviews the idea in his new book, What Investors Really Want, pointing out that receiving $1,000 in dividends is no different from selling $1,000 worth of stock to create a “homemade dividend.”

Even when this idea is explained to people, most refuse to accept it. Statman suggests that it comes down to a cognitive bias called mental accounting. Investors categorize $1,000 in dividends as income that they will happily spend, but the idea of selling $1,000 worth of stock is “dipping into capital,” which causes them great anxiety. This idea is deeply ingrained in many investors, but it is an illusion, because a company that pays a dividend to shareholders is depleting its own capital.
------------------------------------------------------------------------------------------

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

I recommend leaving emotions out of your portfolio.  Thanks to the research, you now know how much this choice costs you in terms of reduced wealth.  The choice is yours.

[scottish]

Well it's been working well for me for the last 13 years.    But as I mentioned back at the beginning, the dividend portfolio isn't that far off the TSX composite anyway.

Switching to index based investing is very tempting.   I have alot of research to do first though, because our cash accounts have substantial capital gains that will occur if I switch.

[johnny847]

Well it's been working well for me for the last 13 years. 

And again, you're ignoring

The official warning from the SEC (Securities Exchange Commission), is quite literally:



There is no ambiguity here.  This text is all over their registration form which applicants are required to sign:

http://www.sec.gov/about/forms/formn-1a.pdf

[scottish]

Indeed, perhaps I am.  Here's a very good picture - it compares the performance of a dividend ETF (which is pretty close to what I've got) to the TSX composite.

It turns out that we had quite a bit of cash coming into 2009 (for various reasons), which was mostly invested in the fall of 2009.  This suggests to me that the reason our portfolio did well was because we happened to invest a lot of money during that dip from the great recession.   If we'd just bought an index fund instead, we'd be up another couple of 100K.   That's serious money to leave on the table.

I have a few other things to look into, but I think it's time to start thinking about tax avoidance during the conversion.

[rpr]

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

Thanks for this link. I read that entire series of articles. It does a great job.


Sent from my iPad using Tapatalk

[ChrisLansing]

I would think dividend investing would be extremely attractive but many here don't seem too thrilled with the idea.    What am I missing?   

You run the problem of ATT being the next Sprint/Blackberry/Nokia/etc too. Or even Apple back in the 80s when it was almost bankrupt, or Bank of America/Vegas casinos during the 2008 crash. Do you plan to buy Sprint/Blackberry/Nokia now while it is "cheap" if you think it'll come back like Apple/BoA/casinos did?

Not really arguing against dividends, but wish there was a better "index" of only dividend (say >X%) companies instead. But until then, dividend investors are picking and choosing individual companies. Well there are indexes I think, but they don't seem "good" enough for most so they pick a few they "like" since they yield chase a bit

I run that type of risk by investing in anything, don't I?   

It might make sense to see what Vanguard offers in the way of a dividend index.   

Any thoughts on dividend ETFs vs individual stocks?

Yes you run that type of risk with any portfolio, which is why we diversify.  When you invest in a less diverse portfolio, you expose yourself to these risks.  Once you understand that dividends are mathematically equivalent to selling stocks, you'll see there's no reason to purposely choose a less diverse/more risky portfolio, as the expected return actually decreases when you do this.

Except that mathematically when I sell, I no longer own the stock and it stops being a source of revenue.   Whereas dividends (may) keep flowing from my initial investment.   If they don't I can always sell for real.   

All evidence has shown that investing for dividends is a horrible idea.  It's not the worst I've seen on the forum, but it's pretty close.  For the sake of anyone new to investing and considering a dividend strategy after seeing this thread, here's one of Vanguard's papers on the topic:

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

Some highlights:

------------------------------------------------------------------------------------------
Common approaches for increasing portfolio income—and why they may be inadvisable

For those investors who are not comfortable spending from their portfolio’s balance and/or whose portfolio cash flow is insufficient for their needs, there are three primary ways to increase income: increase their overall allocation to bonds; keep their existing bond allocation but tilt it toward high-yield bonds; or tilt their existing equity allocation toward higher-dividend paying stocks. None of these are preferred strategies for maintaining inflation-adjusted spending over long periods.
------------------------------------------------------------------------------------------

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

This graph is particularly interesting:




Also, this might help explain why some people push for it so strongly, despite the evidence showing it to be suboptimal:

------------------------------------------------------------------------------------------
Why do shareholders believe so strongly that a $1 dividend is preferable to a $1 capital gain? Meir Statman looked at this question in a 1984 article called “Explaining Investor Preference for Cash Dividends,” coauthored by Hersh Sheffrin. He also reviews the idea in his new book, What Investors Really Want, pointing out that receiving $1,000 in dividends is no different from selling $1,000 worth of stock to create a “homemade dividend.”

Even when this idea is explained to people, most refuse to accept it. Statman suggests that it comes down to a cognitive bias called mental accounting. Investors categorize $1,000 in dividends as income that they will happily spend, but the idea of selling $1,000 worth of stock is “dipping into capital,” which causes them great anxiety. This idea is deeply ingrained in many investors, but it is an illusion, because a company that pays a dividend to shareholders is depleting its own capital.
------------------------------------------------------------------------------------------

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

I recommend leaving emotions out of your portfolio.  Thanks to the research, you now know how much this choice costs you in terms of reduced wealth.  The choice is yours.

Isn't it worth making a distinction between my capital and ACME's capital?     If I have two stocks, one a dividend payer and the other paying no dividend, my capital is in both.   To get income from the dividend stock I only need to own the stock.  To get income from the non-payer, I need to sell shares, which is fine, but then I need to reinvest that capital if it's going to be productive.    I'm not sure why the bolded quote above conflates my capital with the company's.     
 
Is the fact that ACME is depleting it's own capital (not my capital) of concern?   Again, KO has been paying dividend longer than anyone here on this thread has been alive.   Coke doesn't seem to be depleting itself out of business.   I can see where some companies might pay out too much and diminish their needed capital, but assuming a reasonable payout ratio, why is the depletion of ACME's capital (surplus) a concern?   

If companies sabotage their own success by paying dividends one might think at least a few CEOs would have caught on by now.   

I have not yet had a chance to read the work of Jeremy Siegel, but my understanding is that he advocates that dividend paying stocks tend to outperform the market over the long run.    I wonder if you've read Siegal and if so what you think ? 

Finally, I guess I'm really missing something when looking at the table in the blue box, comparing a sale of shares to a dividend.   Why is the dividend investor's stock being reduced to $27/ share?    The dividend taker still holds 1000 shares, currently valued at $30/share.   

[rpr]

ChrisLansing -- paying a dividend will lead to a drop in share price.


Sent from my iPhone using Tapatalk

[Financial.Velociraptor]

ChrisLansing -- paying a dividend will lead to a drop in share price.


Sent from my iPhone using Tapatalk

Chris,

While rpr is technically correct, a stock almost always drops by roughly the amount of the distribution immediately after the x-div date, the stock runs up the same amount in the days before.  This should be a non-issue.

[Dodge]

Finally, I guess I'm really missing something when looking at the table in the blue box, comparing a sale of shares to a dividend.   Why is the dividend investor's stock being reduced to $27/ share?    The dividend taker still holds 1000 shares, currently valued at $30/share.

This shows you haven't been reading. Even if you didn't believe it, you should be familiar with the concept by now, to understand why they dropped the price. If you plan on investing this way, I recommend at least reading past the first two paragraphs:

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

If you think it's wrong that's one thing, but simply not reading any evidence or sources which disagree with you, isn't a wise move.

To answer your question, yes, the price drops by an amount equal to the dividend. This isn't free money, it has to come from somewhere. If a company pays out 100 million in dividend payments, they now have 100 million less dollars. The price of the stock is based on how much the company is worth, they are worth 100 million less dollars, so the price permanently drops by 100 million. If it surprises you that the price drops, you don't know how the stock market works, and if recommend more reading if you plan on straying from the index.

Dividends are not a free lunch.

[josstache]

ChrisLansing -- paying a dividend will lead to a drop in share price.


Sent from my iPhone using Tapatalk

Chris,

While rpr is technically correct, a stock almost always drops by roughly the amount of the distribution immediately after the x-div date, the stock runs up the same amount in the days before.  This should be a non-issue.

Dividends -- magical money that comes off of certain companies, and somehow no one knows about these easy arbitrage opportunities. 

If this were true, all you'd need to do is buy the shares just before the run up in price prior to the dividend, collect your dividend, and then sell.  (You could save time by selling just before receiving the dividend, actually.) Then repeat with another company.  You'd be rich within a few years.

Hits on the internet seem to focus on Australia, which may have unique tax reasons to do this.  I did unearth a balanced article on the subject, however: http://www.stockopedia.com/content/dividend-stripping-is-it-worth-playing-the-ex-div-calendar-67048/

Success with this strategy is likely to turn on being able to select those issues whose stock prices are most buoyant post the fall. For example, stocks with good price momentum often don't fall as much. However, that sounds more like stock-picking, with all its related risks, rather than a form of easy "arbitrage". Hence, dividend capture and ex-dividend strategies are likely to work best in a neutral or rising stock market while, in a falling market, it's going to be more difficult.

In any case, the amount of profit on each transaction is likely to be small, meaning that it may not still be worthwhile after transaction costs, the risk of holding the shares, or possible slippage if the market lacks liquidity. As Dibble notes:

"the variety of individual returns means that an investor will need to do a large number of trades to prudently manage their risk to take advantage of the edge".

Of course, the ex-dividend trading strategy can be enhanced by using margin to purchase the stock , increasing the yield of the dividend received (or by using covered calls), but this kind of investing has its own risks.

[ChrisLansing]

Finally, I guess I'm really missing something when looking at the table in the blue box, comparing a sale of shares to a dividend.   Why is the dividend investor's stock being reduced to $27/ share?    The dividend taker still holds 1000 shares, currently valued at $30/share.

This shows you haven't been reading. Even if you didn't believe it, you should be familiar with the concept by now, to understand why they dropped the price. If you plan on investing this way, I recommend at least reading past the first two paragraphs:

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

If you think it's wrong that's one thing, but simply not reading any evidence or sources which disagree with you, isn't a wise move.

To answer your question, yes, the price drops by an amount equal to the dividend. This isn't free money, it has to come from somewhere. If a company pays out 100 million in dividend payments, they now have 100 million less dollars. The price of the stock is based on how much the company is worth, they are worth 100 million less dollars, so the price permanently drops by 100 million. If it surprises you that the price drops, you don't know how the stock market works, and if recommend more reading if you plan on straying from the index.

Dividends are not a free lunch.

So then, you would have me believe that every time Coke pays a dividend of 25 cents, the stock drops by 25 cents?    Putting it in annual terms, if my KO stock pays $1.32 in dividends my stock shares should drop $1.32/share?    Is this what you are telling me?   

http://finance.yahoo.com/q/hp?s=KO&a=00&b=2&c=1962&d=02&e=2&f=2015&g=m

I'm confused then.   If we look at the price of KO for 9/4/12, just after it's most recent stock split, KO closed at $37.93    Since that time it has not only continued to pay dividends, but to increase the dividends.    The share price this morning is $43.20    It's been a bit higher, $44.83 in Nov last year, but it's up, compared to when the stock last split.   

Had I bought one share of coke on sept 4th, 2012, the share price would, this morning, make me a profit of $5.27 if I sold my share.  (Let's ignore commissions which would eat all the profit of buying/selling a single share of stock)    Meanwhile, I've also collected $2.85 in dividends.   

So, help me understand your point.   It looks to me like the share price of Coke has continued to rise while they have continued to pay and increase dividends.    This seems to be at odds with your explanation of how the market works.    I don't think KO is an isolated case.   

[ChrisLansing]

ChrisLansing -- paying a dividend will lead to a drop in share price.


Sent from my iPhone using Tapatalk

Chris,

While rpr is technically correct, a stock almost always drops by roughly the amount of the distribution immediately after the x-div date, the stock runs up the same amount in the days before.  This should be a non-issue.

Dividends -- magical money that comes off of certain companies, and somehow no one knows about these easy arbitrage opportunities. 

If this were true, all you'd need to do is buy the shares just before the run up in price prior to the dividend, collect your dividend, and then sell.  (You could save time by selling just before receiving the dividend, actually.) Then repeat with another company.  You'd be rich within a few years.

Hits on the internet seem to focus on Australia, which may have unique tax reasons to do this.  I did unearth a balanced article on the subject, however: http://www.stockopedia.com/content/dividend-stripping-is-it-worth-playing-the-ex-div-calendar-67048/

Success with this strategy is likely to turn on being able to select those issues whose stock prices are most buoyant post the fall. For example, stocks with good price momentum often don't fall as much. However, that sounds more like stock-picking, with all its related risks, rather than a form of easy "arbitrage". Hence, dividend capture and ex-dividend strategies are likely to work best in a neutral or rising stock market while, in a falling market, it's going to be more difficult.

In any case, the amount of profit on each transaction is likely to be small, meaning that it may not still be worthwhile after transaction costs, the risk of holding the shares, or possible slippage if the market lacks liquidity. As Dibble notes:

"the variety of individual returns means that an investor will need to do a large number of trades to prudently manage their risk to take advantage of the edge".

Of course, the ex-dividend trading strategy can be enhanced by using margin to purchase the stock , increasing the yield of the dividend received (or by using covered calls), but this kind of investing has its own risks.

Actually some investors do something very close to this.   Instead of buying for the slight share price fluctuation, they buy before the div-X date, take the dividend, then sell the stock.   

[waltworks]

If you buy the stock 1 day before the dividend is paid, you get 1/365 (or 1/90 or so if quarterly) of the dividend, not the entire amount. Jesus.

-W

[johnny847]

If you buy the stock 1 day before the dividend is paid, you get 1/365 (or 1/90 or so if quarterly) of the dividend, not the entire amount. Jesus.

-W

Incorrect. That's true for bond funds, not for stocks. http://www.thestreet.com/story/11785758/1/when-must-i-buy-a-stock-to-get-the-dividend.html

Finally, I guess I'm really missing something when looking at the table in the blue box, comparing a sale of shares to a dividend.   Why is the dividend investor's stock being reduced to $27/ share?    The dividend taker still holds 1000 shares, currently valued at $30/share.

This shows you haven't been reading. Even if you didn't believe it, you should be familiar with the concept by now, to understand why they dropped the price. If you plan on investing this way, I recommend at least reading past the first two paragraphs:

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

If you think it's wrong that's one thing, but simply not reading any evidence or sources which disagree with you, isn't a wise move.

To answer your question, yes, the price drops by an amount equal to the dividend. This isn't free money, it has to come from somewhere. If a company pays out 100 million in dividend payments, they now have 100 million less dollars. The price of the stock is based on how much the company is worth, they are worth 100 million less dollars, so the price permanently drops by 100 million. If it surprises you that the price drops, you don't know how the stock market works, and if recommend more reading if you plan on straying from the index.

Dividends are not a free lunch.

So then, you would have me believe that every time Coke pays a dividend of 25 cents, the stock drops by 25 cents?    Putting it in annual terms, if my KO stock pays $1.32 in dividends my stock shares should drop $1.32/share?    Is this what you are telling me?   

http://finance.yahoo.com/q/hp?s=KO&a=00&b=2&c=1962&d=02&e=2&f=2015&g=m

I'm confused then.   If we look at the price of KO for 9/4/12, just after it's most recent stock split, KO closed at $37.93    Since that time it has not only continued to pay dividends, but to increase the dividends.    The share price this morning is $43.20    It's been a bit higher, $44.83 in Nov last year, but it's up, compared to when the stock last split.   

Had I bought one share of coke on sept 4th, 2012, the share price would, this morning, make me a profit of $5.27 if I sold my share.  (Let's ignore commissions which would eat all the profit of buying/selling a single share of stock)    Meanwhile, I've also collected $2.85 in dividends.   

So, help me understand your point.   It looks to me like the share price of Coke has continued to rise while they have continued to pay and increase dividends.    This seems to be at odds with your explanation of how the market works.    I don't think KO is an isolated case.   

Clearly there will be a change in the stock price of KO because of market fluctuations, the same as any other day. But what Dodge said is still correct - if KO pays a dividend, then it's share price will drop by the dividend amount. Then, during the course of the day that hte dividend was issued, the stock price can change.

I don't think Dodge can explain it any more clearly than he already has. The dividend money comes from somewhere. If KO pays its shareholders $100M, then clearly, it has $100M less to reinvest into the company. It's not like KO just magically got $100M from somewhere and decided to give it to its shareholders.

[rpr]

So then, you would have me believe that every time Coke pays a dividend of 25 cents, the stock drops by 25 cents?    Putting it in annual terms, if my KO stock pays $1.32 in dividends my stock shares should drop $1.32/share?    Is this what you are telling me?   

http://finance.yahoo.com/q/hp?s=KO&a=00&b=2&c=1962&d=02&e=2&f=2015&g=m

I'm confused then.   If we look at the price of KO for 9/4/12, just after it's most recent stock split, KO closed at $37.93    Since that time it has not only continued to pay dividends, but to increase the dividends.    The share price this morning is $43.20    It's been a bit higher, $44.83 in Nov last year, but it's up, compared to when the stock last split.   

Had I bought one share of coke on sept 4th, 2012, the share price would, this morning, make me a profit of $5.27 if I sold my share.  (Let's ignore commissions which would eat all the profit of buying/selling a single share of stock)    Meanwhile, I've also collected $2.85 in dividends.   

So, help me understand your point.   It looks to me like the share price of Coke has continued to rise while they have continued to pay and increase dividends.    This seems to be at odds with your explanation of how the market works.    I don't think KO is an isolated case.

This just likely means that KO did not return all profits as dividends. They continued to reinvest some in growing their business.

In the same period, the market S&P500 not counting dividends is up 44%. Your total return was 21% from KO including dividends.


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[skyrefuge]

So, help me understand your point.   It looks to me like the share price of Coke has continued to rise while they have continued to pay and increase dividends.    This seems to be at odds with your explanation of how the market works.    I don't think KO is an isolated case.

You misunderstand the explanation. No one said that paying out dividends will make the share price continually decline.  The claim is that the payment of dividends will simply make the share price lower than it would otherwise be if those dividends had not been paid. In other words, share price can still increase in the face of dividend payments, it will just increase less than if those dividends had not been paid.

In the case of KO, they have paid out something like $13 billion in dividends since your Sept. 2012 date. Their market capitalization is currently $189 billion. They have 4.37 billion shares outstanding, and $189B/4.37B leads to their current $43.24 share price. If they hadn't paid those dividends, the market would recognize that they have $13 billion more in their bank account, so the market cap would be $13 billion larger, at $202 billion. $202B/4.37B = $46.22.

So by paying out those dividends, KO has effectively decreased its share price from $46.22 to $43.24, about a 7% difference.

This doesn't mean that KO has hurt their investors by decreasing the share price, since the dividends compensated the investors for that 7% share-price difference. It just points out that whether a company pays is earnings out in dividends or not is irrelevant to the shareholder.

[ChrisLansing]

If you buy the stock 1 day before the dividend is paid, you get 1/365 (or 1/90 or so if quarterly) of the dividend, not the entire amount. Jesus.

-W

Incorrect. That's true for bond funds, not for stocks. http://www.thestreet.com/story/11785758/1/when-must-i-buy-a-stock-to-get-the-dividend.html

Finally, I guess I'm really missing something when looking at the table in the blue box, comparing a sale of shares to a dividend.   Why is the dividend investor's stock being reduced to $27/ share?    The dividend taker still holds 1000 shares, currently valued at $30/share.

This shows you haven't been reading. Even if you didn't believe it, you should be familiar with the concept by now, to understand why they dropped the price. If you plan on investing this way, I recommend at least reading past the first two paragraphs:

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

If you think it's wrong that's one thing, but simply not reading any evidence or sources which disagree with you, isn't a wise move.

To answer your question, yes, the price drops by an amount equal to the dividend. This isn't free money, it has to come from somewhere. If a company pays out 100 million in dividend payments, they now have 100 million less dollars. The price of the stock is based on how much the company is worth, they are worth 100 million less dollars, so the price permanently drops by 100 million. If it surprises you that the price drops, you don't know how the stock market works, and if recommend more reading if you plan on straying from the index.

Dividends are not a free lunch.

So then, you would have me believe that every time Coke pays a dividend of 25 cents, the stock drops by 25 cents?    Putting it in annual terms, if my KO stock pays $1.32 in dividends my stock shares should drop $1.32/share?    Is this what you are telling me?   

http://finance.yahoo.com/q/hp?s=KO&a=00&b=2&c=1962&d=02&e=2&f=2015&g=m

I'm confused then.   If we look at the price of KO for 9/4/12, just after it's most recent stock split, KO closed at $37.93    Since that time it has not only continued to pay dividends, but to increase the dividends.    The share price this morning is $43.20    It's been a bit higher, $44.83 in Nov last year, but it's up, compared to when the stock last split.   

Had I bought one share of coke on sept 4th, 2012, the share price would, this morning, make me a profit of $5.27 if I sold my share.  (Let's ignore commissions which would eat all the profit of buying/selling a single share of stock)    Meanwhile, I've also collected $2.85 in dividends.   

So, help me understand your point.   It looks to me like the share price of Coke has continued to rise while they have continued to pay and increase dividends.    This seems to be at odds with your explanation of how the market works.    I don't think KO is an isolated case.   

Clearly there will be a change in the stock price of KO because of market fluctuations, the same as any other day. But what Dodge said is still correct - if KO pays a dividend, then it's share price will drop by the dividend amount. Then, during the course of the day that hte dividend was issued, the stock price can change.

I don't think Dodge can explain it any more clearly than he already has. The dividend money comes from somewhere. If KO pays its shareholders $100M, then clearly, it has $100M less to reinvest into the company. It's not like KO just magically got $100M from somewhere and decided to give it to its shareholders.

Thank you, I get what Dodge is trying to say now.    I think the problem was that his explanation said something about permanently reducing the stock price.   That is what I was hung up on.     

From what I've seen looking at historic prices, the next morning's opening price is often higher than the adj. close of the day when the dividend was paid.   Also the "drop" isn't always actually equal to the dividend amount.   Maybe this is due to market demand?    Or as rpr pointed out, not all profits were returned to shareholders.   

The "dividend drop" is nothing to be concerned about, assuming I'm investing in a good stock such as T or KO.     That drop will often disappear  very quickly.     

[ChrisLansing]

So, help me understand your point.   It looks to me like the share price of Coke has continued to rise while they have continued to pay and increase dividends.    This seems to be at odds with your explanation of how the market works.    I don't think KO is an isolated case.

You misunderstand the explanation. No one said that paying out dividends will make the share price continually decline.  The claim is that the payment of dividends will simply make the share price lower than it would otherwise be if those dividends had not been paid. In other words, share price can still increase in the face of dividend payments, it will just increase less than if those dividends had not been paid.

In the case of KO, they have paid out something like $13 billion in dividends since your Sept. 2012 date. Their market capitalization is currently $189 billion. They have 4.37 billion shares outstanding, and $189B/4.37B leads to their current $43.24 share price. If they hadn't paid those dividends, the market would recognize that they have $13 billion more in their bank account, so the market cap would be $13 billion larger, at $202 billion. $202B/4.37B = $46.22.

So by paying out those dividends, KO has effectively decreased its share price from $46.22 to $43.24, about a 7% difference.

This doesn't mean that KO has hurt their investors by decreasing the share price, since the dividends compensated the investors for that 7% share-price difference. It just points out that whether a company pays is earnings out in dividends or not is irrelevant to the shareholder.

Thank you, it's clear now.   

[ChrisLansing]

@Dodge

Thank you for the explanation.   Sorry it took me a while to understand it.     

[tj]

If you buy the stock 1 day before the dividend is paid, you get 1/365 (or 1/90 or so if quarterly) of the dividend, not the entire amount. Jesus.

-W

Incorrect. That's true for bond funds, not for stocks. http://www.thestreet.com/story/11785758/1/when-must-i-buy-a-stock-to-get-the-dividend.html

Finally, I guess I'm really missing something when looking at the table in the blue box, comparing a sale of shares to a dividend.   Why is the dividend investor's stock being reduced to $27/ share?    The dividend taker still holds 1000 shares, currently valued at $30/share.

This shows you haven't been reading. Even if you didn't believe it, you should be familiar with the concept by now, to understand why they dropped the price. If you plan on investing this way, I recommend at least reading past the first two paragraphs:

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

If you think it's wrong that's one thing, but simply not reading any evidence or sources which disagree with you, isn't a wise move.

To answer your question, yes, the price drops by an amount equal to the dividend. This isn't free money, it has to come from somewhere. If a company pays out 100 million in dividend payments, they now have 100 million less dollars. The price of the stock is based on how much the company is worth, they are worth 100 million less dollars, so the price permanently drops by 100 million. If it surprises you that the price drops, you don't know how the stock market works, and if recommend more reading if you plan on straying from the index.

Dividends are not a free lunch.

So then, you would have me believe that every time Coke pays a dividend of 25 cents, the stock drops by 25 cents?    Putting it in annual terms, if my KO stock pays $1.32 in dividends my stock shares should drop $1.32/share?    Is this what you are telling me?   

http://finance.yahoo.com/q/hp?s=KO&a=00&b=2&c=1962&d=02&e=2&f=2015&g=m

I'm confused then.   If we look at the price of KO for 9/4/12, just after it's most recent stock split, KO closed at $37.93    Since that time it has not only continued to pay dividends, but to increase the dividends.    The share price this morning is $43.20    It's been a bit higher, $44.83 in Nov last year, but it's up, compared to when the stock last split.   

Had I bought one share of coke on sept 4th, 2012, the share price would, this morning, make me a profit of $5.27 if I sold my share.  (Let's ignore commissions which would eat all the profit of buying/selling a single share of stock)    Meanwhile, I've also collected $2.85 in dividends.   

So, help me understand your point.   It looks to me like the share price of Coke has continued to rise while they have continued to pay and increase dividends.    This seems to be at odds with your explanation of how the market works.    I don't think KO is an isolated case.   

Clearly there will be a change in the stock price of KO because of market fluctuations, the same as any other day. But what Dodge said is still correct - if KO pays a dividend, then it's share price will drop by the dividend amount. Then, during the course of the day that hte dividend was issued, the stock price can change.

I don't think Dodge can explain it any more clearly than he already has. The dividend money comes from somewhere. If KO pays its shareholders $100M, then clearly, it has $100M less to reinvest into the company. It's not like KO just magically got $100M from somewhere and decided to give it to its shareholders.

Thank you, I get what Dodge is trying to say now.    I think the problem was that his explanation said something about permanently reducing the stock price.   That is what I was hung up on.     

From what I've seen looking at historic prices, the next morning's opening price is often higher than the adj. close of the day when the dividend was paid.   Also the "drop" isn't always actually equal to the dividend amount.   Maybe this is due to market demand?    Or as rpr pointed out, not all profits were returned to shareholders.   

The "dividend drop" is nothing to be concerned about, assuming I'm investing in a good stock such as T or KO.     That drop will often disappear  very quickly.   

It's not a guarantee.  I feel you'd be better off  with a Consumer Staples & Telecom ETF than going 100% T and KO.

[burrow]

It just points out that whether a company pays is earnings out in dividends or not is irrelevant to the shareholder.

Not quite.

Whether dividends are paid out or not IS relevant, depending on the incremental returns that company can make on retained earnings. A company that can continue to generate high ROE on retained earnings is better not to pay a dividend at all (a high payout ratio will reduce valuation). But a company that cannot generate a reasonable return on retained equity is best to pay it out in the way of dividends (to maximise value).

[ChrisLansing]

If you buy the stock 1 day before the dividend is paid, you get 1/365 (or 1/90 or so if quarterly) of the dividend, not the entire amount. Jesus.

-W

Incorrect. That's true for bond funds, not for stocks. http://www.thestreet.com/story/11785758/1/when-must-i-buy-a-stock-to-get-the-dividend.html

Finally, I guess I'm really missing something when looking at the table in the blue box, comparing a sale of shares to a dividend.   Why is the dividend investor's stock being reduced to $27/ share?    The dividend taker still holds 1000 shares, currently valued at $30/share.

This shows you haven't been reading. Even if you didn't believe it, you should be familiar with the concept by now, to understand why they dropped the price. If you plan on investing this way, I recommend at least reading past the first two paragraphs:

http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

If you think it's wrong that's one thing, but simply not reading any evidence or sources which disagree with you, isn't a wise move.

To answer your question, yes, the price drops by an amount equal to the dividend. This isn't free money, it has to come from somewhere. If a company pays out 100 million in dividend payments, they now have 100 million less dollars. The price of the stock is based on how much the company is worth, they are worth 100 million less dollars, so the price permanently drops by 100 million. If it surprises you that the price drops, you don't know how the stock market works, and if recommend more reading if you plan on straying from the index.

Dividends are not a free lunch.

So then, you would have me believe that every time Coke pays a dividend of 25 cents, the stock drops by 25 cents?    Putting it in annual terms, if my KO stock pays $1.32 in dividends my stock shares should drop $1.32/share?    Is this what you are telling me?   

http://finance.yahoo.com/q/hp?s=KO&a=00&b=2&c=1962&d=02&e=2&f=2015&g=m

I'm confused then.   If we look at the price of KO for 9/4/12, just after it's most recent stock split, KO closed at $37.93    Since that time it has not only continued to pay dividends, but to increase the dividends.    The share price this morning is $43.20    It's been a bit higher, $44.83 in Nov last year, but it's up, compared to when the stock last split.   

Had I bought one share of coke on sept 4th, 2012, the share price would, this morning, make me a profit of $5.27 if I sold my share.  (Let's ignore commissions which would eat all the profit of buying/selling a single share of stock)    Meanwhile, I've also collected $2.85 in dividends.   

So, help me understand your point.   It looks to me like the share price of Coke has continued to rise while they have continued to pay and increase dividends.    This seems to be at odds with your explanation of how the market works.    I don't think KO is an isolated case.   

Clearly there will be a change in the stock price of KO because of market fluctuations, the same as any other day. But what Dodge said is still correct - if KO pays a dividend, then it's share price will drop by the dividend amount. Then, during the course of the day that hte dividend was issued, the stock price can change.

I don't think Dodge can explain it any more clearly than he already has. The dividend money comes from somewhere. If KO pays its shareholders $100M, then clearly, it has $100M less to reinvest into the company. It's not like KO just magically got $100M from somewhere and decided to give it to its shareholders.

Thank you, I get what Dodge is trying to say now.    I think the problem was that his explanation said something about permanently reducing the stock price.   That is what I was hung up on.     

From what I've seen looking at historic prices, the next morning's opening price is often higher than the adj. close of the day when the dividend was paid.   Also the "drop" isn't always actually equal to the dividend amount.   Maybe this is due to market demand?    Or as rpr pointed out, not all profits were returned to shareholders.   

The "dividend drop" is nothing to be concerned about, assuming I'm investing in a good stock such as T or KO.     That drop will often disappear  very quickly.   

It's not a guarantee.  I feel you'd be better off  with a Consumer Staples & Telecom ETF than going 100% T and KO.

Right now I'm 100% VTTVX   I might use up to 15% (probably more like 10%) of my investment money for self-chosen stocks, and one strategy is dividend investing (I could use the income, not right now but in about 8 years).   I'm also considering a growth focus but finding it hard to choose growth stocks before they are obvious.    I'm probably months away from buying stock as opposed to index funds.     Regular investment in VTTVX has been set on auto pilot.   

I was looking at dividend ETFs earlier today.   

[tj]

I'd say 10-15% is reasonable. It's the 100% individual dividend stocks strategy that I question.

[Left]

While not the traditional dividend, i keep 10-15% in hvpw. Supposedly it helps insure against a market drop but it hasnt been put to a test yet. But i like what it has paid out to me so far. Yes i am behind total returns but for a "set" income, i'll take it. Using it with bonds, should provide most of my housing cost in 10 or so years, the rest of the living cost will be from selling stocks. I just want a fixed income to cover having a roof.

[skyrefuge]

It just points out that whether a company pays is earnings out in dividends or not is irrelevant to the shareholder.

Not quite.

Whether dividends are paid out or not IS relevant, depending on the incremental returns that company can make on retained earnings. A company that can continue to generate high ROE on retained earnings is better not to pay a dividend at all (a high payout ratio will reduce valuation). But a company that cannot generate a reasonable return on retained equity is best to pay it out in the way of dividends (to maximise value).

Sure, what you say is true, but unrelated to my statement. You're talking about decision #1: should we return these earnings to shareholders, or reinvest them? I'm talking about decision #2, made only after decision #1 is answered with "let's return these earnings to shareholders". At that point, the company can return those earnings to shareholders via #2a, dividends (like KO), via #2b, buybacks (like AZO), or via #2c, simply holding onto the cash (like BRK). ChrisLansing believed there was a difference between #2a and #2c, and we were pointing out the difference was irrelevant (if taxes are ignored).

Unrelated, but holy hell people, you don't have to quote 400 lines worth of 18 layers of previous posts to make a one-line response! Edit your damn quotes! Grrr.

[burrow]

I agree with ChrisLansing. I would have thought that #2a and #2c were only the same if the returns on that retained/distributed capital were the same. No?

[MidWestLove]

>  And I like my big, boring, slow moving, blue-chip, dividend raisers most of all

May be the part I am struggling with is understanding "liking" some individual stocks/companies (or in current word, record entries in data store somewhere indicating entitlement/ownership right) - why people 'like' or 'hate' any of this?  I neither like or dislike (or even care) about them, these are nothing more than tools for manage assets through participating in particular asset classes. I prefer for tools to be boring (and get my excitement elsewhere), I want for them to work (be cheap to own and cover what they need to cover), and get neither warm feelings or anything else out of financial instruments... I understand (but not share, also pretty utilitarian on that) liking cars , as you get to actually sit in it, liking clothes (similarly do not share), but liking electronic record somewhere? Or are people liking the return? I've read the Vanguard article and saw their math, this is subpar way to invest. is 'warm and fuzzy' really worth robbing yourself of return?

Is not it generally well known that emotions in investing=issues?

[skyrefuge]

I agree with ChrisLansing. I would have thought that #2a and #2c were only the same if the returns on that retained/distributed capital were the same. No?

Do you believe that a dividend payment is "free money" that has no effect on the share price? If not, then you don't actually agree with ChrisLansing (at least not the ChrisLansing from yesterday; you may agree with the subsequently-enlightened ChrisLansing of today).

We were discussing what happens to your portfolio value at the instant of dividend payment. When the cash moves from the company's bank account to your bank account, the answer is "nothing". Your portfolio, including your cash account, has the same value before and after that payment was made. (ChrisLansing thought the value went up by the amount of the dividend).

Yes, if you subsequently invest your cash differently than the company would have if they had held onto that cash, then over time, of course your returns will diverge.

[burrow]

I'm cool with that - must have come in mid-thread and mis-understood the discussion. Sorry.

[ChrisLansing]

I agree with ChrisLansing. I would have thought that #2a and #2c were only the same if the returns on that retained/distributed capital were the same. No?

Do you believe that a dividend payment is "free money" that has no effect on the share price? If not, then you don't actually agree with ChrisLansing (at least not the ChrisLansing from yesterday; you may agree with the subsequently-enlightened ChrisLansing of today).

We were discussing what happens to your portfolio value at the instant of dividend payment. When the cash moves from the company's bank account to your bank account, the answer is "nothing". Your portfolio, including your cash account, has the same value before and after that payment was made. (ChrisLansing thought the value went up by the amount of the dividend).

Yes, if you subsequently invest your cash differently than the company would have if they had held onto that cash, then over time, of course your returns will diverge.

While I see now that the money for dividends comes out of share price, I also see -after pouring over historic price data- that the closing price will rarely reflect the full amount of the dividend payment.   This is one reason I had trouble understanding the point.    It's clear that the price does drop the full amount, but it's hard to see in the price data.   It's easy to mistake the dividend drop for normal daily price fluctuation.    Often the days closing price will not show more than half (sometimes even less) the amount of the dividend drop.        It's still not free money, the dividend did come out of the share price.   

[Left]

the reason you don't see the exact drop is because the company is still doing business that day. If you take any single day of the year and see if the stock drops/falls, that's what it is doing on the day the dividend is paid out as well. So it can drop more/less than what the dividend pays out. The biggest thing I think is to avoid selling stocks on the dividend day if you want to "time" it by the dividend amount. I've seen people who try to time "buying" it as well, I don't recall it having any more success than buying it on any other day though since the next day or two days later, it could drop again or go up