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Learning, Sharing, and Teaching => Investor Alley => Topic started by: scottish on February 11, 2015, 05:42:56 PM

Title: Dividend stocks versus index investing
Post by: scottish 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?





Title: Re: Dividend stocks versus index investing
Post by: goodrookie 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.   

Title: Re: Dividend stocks versus index investing
Post by: neil 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.
Title: Re: Dividend stocks versus index investing
Post by: scottish 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...
Title: Re: Dividend stocks versus index investing
Post by: tj 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.
Title: Re: Dividend stocks versus index investing
Post by: scottish 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.
Title: Re: Dividend stocks versus index investing
Post by: skyrefuge 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.
Title: Re: Dividend stocks versus index investing
Post by: seattlecyclone 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!
Title: Re: Dividend stocks versus index investing
Post by: scottish 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.

Title: Re: Dividend stocks versus index investing
Post by: Dodge 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.
Title: Re: Dividend stocks versus index investing
Post by: ryan114 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.
Title: Re: Dividend stocks versus index investing
Post by: tj 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.

Title: Re: Dividend stocks versus index investing
Post by: scottish 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?
Title: Re: Dividend stocks versus index investing
Post by: scottish 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 (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.
Title: Re: Dividend stocks versus index investing
Post by: josstache 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?
Title: Re: Dividend stocks versus index investing
Post by: skyrefuge 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.
Title: Re: Dividend stocks versus index investing
Post by: Retire-Canada 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.
Title: Re: Dividend stocks versus index investing
Post by: Aloysius_Poutine 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 (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.
Title: Re: Dividend stocks versus index investing
Post by: clifp 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?
Title: Re: Dividend stocks versus index investing
Post by: innerscorecard 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.
Title: Re: Dividend stocks versus index investing
Post by: clifp 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.
Title: Re: Dividend stocks versus index investing
Post by: davisgang90 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.

Title: Re: Dividend stocks versus index investing
Post by: skyrefuge 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 (http://forum.mrmoneymustache.com/investor-alley/dividend-stocks-versus-index-investing/msg552887/#msg552887); did you not read it?
Title: Re: Dividend stocks versus index investing
Post by: beltim 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.
Title: Re: Dividend stocks versus index investing
Post by: brooklynguy 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)?
Title: Re: Dividend stocks versus index investing
Post by: skyrefuge 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 (http://en.wikipedia.org/wiki/Dividend_discount_model), 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.
Title: Re: Dividend stocks versus index investing
Post by: Scandium 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 (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.
Title: Re: Dividend stocks versus index investing
Post by: clifp 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 (http://forum.mrmoneymustache.com/investor-alley/dividend-stocks-versus-index-investing/msg552887/#msg552887); 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.
Title: Re: Dividend stocks versus index investing
Post by: scottish 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?
Title: Re: Dividend stocks versus index investing
Post by: seattlecyclone on February 12, 2015, 04:18:08 PM
One space between sentences is sufficient.
Title: Re: Dividend stocks versus index investing
Post by: scottish on February 12, 2015, 04:47:54 PM
Huh.   Two spaces at the end of a sentence is normal.     I see lots of both.
Title: Re: Dividend stocks versus index investing
Post by: johnny847 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.
Title: Re: Dividend stocks versus index investing
Post by: seattlecyclone 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 (http://www.slate.com/articles/technology/technology/2011/01/space_invaders.html), at least not since the 1960s (http://theworldsgreatestbook.com/how-many-spaces-after-a-period/) and not unless you're using a typewriter (http://www.cultofpedagogy.com/two-spaces-after-period/).

It's really not a big deal (in my opinion, anyway), but others seem to care more about this issue than me.
Title: Re: Dividend stocks versus index investing
Post by: beltim 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. 
Title: Re: Dividend stocks versus index investing
Post by: skyrefuge 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.
Title: Re: Dividend stocks versus index investing
Post by: MidWestLove 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.
Title: Re: Dividend stocks versus index investing
Post by: Financial.Velociraptor 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.
Title: Re: Dividend stocks versus index investing
Post by: johnny847 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).
Title: Re: Dividend stocks versus index investing
Post by: FFA 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.
Title: Re: Dividend stocks versus index investing
Post by: Indexer 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.
Title: Re: Dividend stocks versus index investing
Post by: hodedofome 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.
Title: Re: Dividend stocks versus index investing
Post by: kyith 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!
Title: Re: Dividend stocks versus index investing
Post by: tj 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.
Title: Re: Dividend stocks versus index investing
Post by: kyith 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.
Title: Re: Dividend stocks versus index investing
Post by: burrow 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.
Title: Re: Dividend stocks versus index investing
Post by: josstache 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.
Title: Re: Dividend stocks versus index investing
Post by: Sunnymo 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.
Title: Re: Dividend stocks versus index investing
Post by: FFA 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)
Title: Re: Dividend stocks versus index investing
Post by: burrow 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!
Title: Re: Dividend stocks versus index investing
Post by: LordSquidworth 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.
Title: Re: Dividend stocks versus index investing
Post by: FFA on February 21, 2015, 07:19:08 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!
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!
Title: Re: Dividend stocks versus index investing
Post by: scottish on February 28, 2015, 07:17:48 PM
Quote
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?

Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 01, 2015, 07:27:57 AM
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?   
Title: Re: Dividend stocks versus index investing
Post by: Financial.Velociraptor on March 01, 2015, 07:50:44 AM
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.
Title: Re: Dividend stocks versus index investing
Post by: Left on March 01, 2015, 08:01:45 AM
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
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 01, 2015, 08:19:23 AM
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. 
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 01, 2015, 08:22:15 AM
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?
Title: Re: Dividend stocks versus index investing
Post by: Financial.Velociraptor on March 01, 2015, 08:54:29 AM


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?
Title: Re: Dividend stocks versus index investing
Post by: MidWestLove on March 01, 2015, 09:10:32 AM
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.... 
Title: Re: Dividend stocks versus index investing
Post by: Financial.Velociraptor on March 01, 2015, 10:14:33 AM
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.
Title: Re: Dividend stocks versus index investing
Post by: tj on March 01, 2015, 10:21:49 AM


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.
Title: Re: Dividend stocks versus index investing
Post by: Dodge on March 01, 2015, 10:48:02 AM
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:

(http://i.imgur.com/qVjys41.png)

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:

(http://i.imgur.com/E5pYyuI.png)

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:

(http://i.imgur.com/O5uJ2a9.png)

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?
Title: Re: Dividend stocks versus index investing
Post by: Dodge on March 01, 2015, 11:58:53 AM
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.
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 01, 2015, 01:42:03 PM
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?     


Quote
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?     

Quote
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:

(http://i.imgur.com/qVjys41.png)

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:

(http://i.imgur.com/E5pYyuI.png)

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:

(http://i.imgur.com/O5uJ2a9.png)

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.   
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 01, 2015, 01:46:34 PM
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.   
Title: Re: Dividend stocks versus index investing
Post by: tj on March 01, 2015, 02:03:12 PM
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.
Title: Re: Dividend stocks versus index investing
Post by: Dodge on March 01, 2015, 02:24:53 PM
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

Quote
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.

Quote
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:

(http://i.imgur.com/qVjys41.png)

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:

(http://i.imgur.com/E5pYyuI.png)

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:

(http://i.imgur.com/O5uJ2a9.png)

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:

(http://i.imgur.com/xQnMtNF.png)

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
Title: Re: Dividend stocks versus index investing
Post by: Retired To Win on March 01, 2015, 02:30:34 PM
... 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.
Title: Re: Dividend stocks versus index investing
Post by: Dodge on March 01, 2015, 02:34:23 PM
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 (https://personal.vanguard.com/pdf/s557.pdf)

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:

(http://i.imgur.com/XolyHHT.png)


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.
Title: Re: Dividend stocks versus index investing
Post by: scottish on March 01, 2015, 07:32:33 PM
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.





Title: Re: Dividend stocks versus index investing
Post by: johnny847 on March 01, 2015, 07:55:50 PM
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:

(http://i.imgur.com/xQnMtNF.png)

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
Title: Re: Dividend stocks versus index investing
Post by: scottish on March 01, 2015, 08:21:41 PM
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.
Title: Re: Dividend stocks versus index investing
Post by: rpr on March 01, 2015, 08:40:29 PM


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
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 01, 2015, 11:41:03 PM
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 (https://personal.vanguard.com/pdf/s557.pdf)

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:

(http://i.imgur.com/XolyHHT.png)


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.   
Title: Re: Dividend stocks versus index investing
Post by: rpr on March 02, 2015, 02:02:29 AM
ChrisLansing -- paying a dividend will lead to a drop in share price.


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Title: Re: Dividend stocks versus index investing
Post by: Financial.Velociraptor on March 02, 2015, 06:36:35 AM
ChrisLansing -- paying a dividend will lead to a drop in share price.


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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.
Title: Re: Dividend stocks versus index investing
Post by: Dodge on March 02, 2015, 07:43:42 AM

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.
Title: Re: Dividend stocks versus index investing
Post by: josstache on March 02, 2015, 07:54:44 AM
ChrisLansing -- paying a dividend will lead to a drop in share price.


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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/

Quote
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.
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 02, 2015, 09:32:21 AM

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.   
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 02, 2015, 09:37:57 AM
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/

Quote
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.   
Title: Re: Dividend stocks versus index investing
Post by: waltworks on March 02, 2015, 09:41:27 AM
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
Title: Re: Dividend stocks versus index investing
Post by: johnny847 on March 02, 2015, 09:53:18 AM
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 (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.
Title: Re: Dividend stocks versus index investing
Post by: rpr on March 02, 2015, 10:22:45 AM


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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Title: Re: Dividend stocks versus index investing
Post by: skyrefuge on March 02, 2015, 10:26:59 AM
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.
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 02, 2015, 10:37:44 AM
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 (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.     
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 02, 2015, 10:39:26 AM
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.   
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 02, 2015, 10:56:37 AM
@Dodge

Thank you for the explanation.   Sorry it took me a while to understand it.     
Title: Re: Dividend stocks versus index investing
Post by: tj on March 02, 2015, 11:07:46 AM
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 (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.
Title: Re: Dividend stocks versus index investing
Post by: burrow on March 02, 2015, 11:42:26 AM
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).
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 02, 2015, 12:34:31 PM
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 (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.   
Title: Re: Dividend stocks versus index investing
Post by: tj on March 02, 2015, 01:59:12 PM
I'd say 10-15% is reasonable. It's the 100% individual dividend stocks strategy that I question.
Title: Re: Dividend stocks versus index investing
Post by: Left on March 02, 2015, 04:42:09 PM
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.
Title: Re: Dividend stocks versus index investing
Post by: skyrefuge on March 02, 2015, 04:44:23 PM
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.
Title: Re: Dividend stocks versus index investing
Post by: burrow on March 02, 2015, 06:59:49 PM
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?
Title: Re: Dividend stocks versus index investing
Post by: MidWestLove on March 02, 2015, 07:58:31 PM
>  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?
Title: Re: Dividend stocks versus index investing
Post by: skyrefuge on March 02, 2015, 09:30:19 PM
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.
Title: Re: Dividend stocks versus index investing
Post by: burrow on March 02, 2015, 09:44:07 PM
I'm cool with that - must have come in mid-thread and mis-understood the discussion. Sorry.
Title: Re: Dividend stocks versus index investing
Post by: ChrisLansing on March 03, 2015, 04:31:14 AM
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.   
Title: Re: Dividend stocks versus index investing
Post by: Left on March 03, 2015, 07:43:04 AM
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