Author Topic: Dividends do not matter  (Read 7519 times)

shinn497

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Dividends do not matter
« on: February 19, 2019, 10:20:23 PM »
DIVIDENDS DO NOT MATTER DIVIDENDS DO NOT MATTER

Sorry this is my favorite video evar since i have always thought it is a bit misguided the way people performance chase dividend paying stocks. Personally i would rather have buybacks and reinvestment since i don't like being taxed for money i don't work for.
« Last Edit: February 20, 2019, 08:22:53 AM by shinn497 »

Andy R

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Re: Dividends do not matter
« Reply #1 on: February 20, 2019, 02:06:47 AM »
Great video. Thanks for posting.

MustacheAndaHalf

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Re: Dividends do not matter
« Reply #2 on: February 20, 2019, 07:23:46 AM »
Had trouble viewing the video, but this URL worked for me:
https://www.youtube.com/watch?v=UpXI_Vd51dA

The video actually had the opposite effect for me.  I knew dividend funds accidentally tilt towards value, but I didn't know dividend aristocrat funds happen to have more value/quality/investability tilt.  Essentially, I think he's saying some dividend funds are acting a bit like multi-factor funds.  Put another way, some dividend funds are accidentally overlapping with how Warren Buffet selects stocks.

I personally don't use dividend funds, but I hadn't realized how much overlap they might have with Fama/French factor models of the stock market.

hobbes1

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Re: Dividends do not matter
« Reply #3 on: February 20, 2019, 08:00:26 AM »
DIVIDENDS DO NOT MATTER DIVIDENDS DO NOT MATTER

i don't like being taxed for money i don't work for.

So, passive income that you don't "work for" isn't your cup of tea? Interesting thought.
For me, I have no qualms about getting dividends or any other passive type income (passive IMHO)… money is money and if I don't have to slog through a job to get it (legally), then it seems pretty awesome to me. I'd rather have it and pay taxes than not have it at all. Different strokes, for different folks, right?

Andy R

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Re: Dividends do not matter
« Reply #4 on: February 20, 2019, 08:03:52 AM »
Had trouble viewing the video, but this URL worked for me:
https://www.youtube.com/watch?v=UpXI_Vd51dA

The video actually had the opposite effect for me.  I knew dividend funds accidentally tilt towards value, but I didn't know dividend aristocrat funds happen to have more value/quality/investability tilt.  Essentially, I think he's saying some dividend funds are acting a bit like multi-factor funds.  Put another way, some dividend funds are accidentally overlapping with how Warren Buffet selects stocks.

I personally don't use dividend funds, but I hadn't realized how much overlap they might have with Fama/French factor models of the stock market.

I believe the dividend growth investments are more tilted towards quality, but the problem is survivorship bias - they use only backwards looking data to see that they did well, but going forward it's obviously anyone's guess whether the same stocks or which new ones will have a growing dividend for the coming decades. Dividend growth investors never mention the survivorship bias in their data.


shinn497

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Re: Dividends do not matter
« Reply #5 on: February 20, 2019, 08:22:03 AM »
DIVIDENDS DO NOT MATTER DIVIDENDS DO NOT MATTER

i don't like being taxed for money i don't work for.

So, passive income that you don't "work for" isn't your cup of tea? Interesting thought.
For me, I have no qualms about getting dividends or any other passive type income (passive IMHO)… money is money and if I don't have to slog through a job to get it (legally), then it seems pretty awesome to me. I'd rather have it and pay taxes than not have it at all. Different strokes, for different folks, right?

Look it doesn't matter if you get dividends or not. You will make the same money either way. Except with dividends you get a yearly tax drag. I would strongly prefer companies do buy backs, reinvest, or invest in other companies than issue dividends. But investors are irrational so they will continue to issue them anyway and i sort of have accepted that.

shinn497

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Re: Dividends do not matter
« Reply #6 on: February 20, 2019, 08:26:30 AM »
Had trouble viewing the video, but this URL worked for me:
https://www.youtube.com/watch?v=UpXI_Vd51dA

The video actually had the opposite effect for me.  I knew dividend funds accidentally tilt towards value, but I didn't know dividend aristocrat funds happen to have more value/quality/investability tilt.  Essentially, I think he's saying some dividend funds are acting a bit like multi-factor funds.  Put another way, some dividend funds are accidentally overlapping with how Warren Buffet selects stocks.

I personally don't use dividend funds, but I hadn't realized how much overlap they might have with Fama/French factor models of the stock market.


I believe the dividend growth investments are more tilted towards quality, but the problem is survivorship bias - they use only backwards looking data to see that they did well, but going forward it's obviously anyone's guess whether the same stocks or which new ones will have a growing dividend for the coming decades. Dividend growth investors never mention the survivorship bias in their data.

Yeah factor investing is fine and smart. But you should do your research and do it right while also being wary of performance chasing. You may very well have dividends because those are just the type of companies that also correlate with other factors. BUT chasing securities purely because they have paid dividends in the past is simplistic and more about feeling good than actually achieving higher levels of performance.

dayzero

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Re: Dividends do not matter
« Reply #7 on: February 20, 2019, 08:31:51 AM »
DIVIDENDS DO NOT MATTER DIVIDENDS DO NOT MATTER

i don't like being taxed for money i don't work for.

So, passive income that you don't "work for" isn't your cup of tea? Interesting thought.
For me, I have no qualms about getting dividends or any other passive type income (passive IMHO)… money is money and if I don't have to slog through a job to get it (legally), then it seems pretty awesome to me. I'd rather have it and pay taxes than not have it at all. Different strokes, for different folks, right?

A dividend is a straightforward distribution of equity. It means instead of having $100 in equity you have $95 in equity and $5 in cash, and oh by the way now you have to pay taxes on that $5. If you needed $5, you could have just sold $5 worth of your equity instead and then only had to pay taxes on the amount above your cost basis. And you also have control over the timing. Dividends are an irrational means of distributing capital given the current tax structures, and that is why less and less companies do them.

sol

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Re: Dividends do not matter
« Reply #8 on: February 20, 2019, 08:40:51 AM »
I would strongly prefer companies do buy backs, reinvest,

I understand that desire to avoid taxation, but dividends are real money that shows up in your bank account.  Reinvestments and buy back are designed to increase the value of the company, and thus influence the stock price, but that's far from guaranteed.  I kind of look at taxes on dividends as the cost of doing a concrete conversion into cash.  You're paying for the surety.

Quote

or invest in other companies than issue dividends.

I'm not clear on the distinction between a company issuing a dividend and that company investing in another company that issues a dividend, except that now you're paying overhead in two different places.  If my company has $1 per share in surplus operating cash flow that I could pay to you as a dividend, why would I instead give it to another company so they could add it into their operating cash flow to pay you a dividend?

shinn497

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Re: Dividends do not matter
« Reply #9 on: February 20, 2019, 08:56:30 AM »
I would strongly prefer companies do buy backs, reinvest,

I understand that desire to avoid taxation, but dividends are real money that shows up in your bank account.  Reinvestments and buy back are designed to increase the value of the company, and thus influence the stock price, but that's far from guaranteed.  I kind of look at taxes on dividends as the cost of doing a concrete conversion into cash.  You're paying for the surety.

Quote

or invest in other companies than issue dividends.

I'm not clear on the distinction between a company issuing a dividend and that company investing in another company that issues a dividend, except that now you're paying overhead in two different places.  If my company has $1 per share in surplus operating cash flow that I could pay to you as a dividend, why would I instead give it to another company so they could add it into their operating cash flow to pay you a dividend?

Cash value is also not guaranteed as well. Every asset has some form of uncertainty in its price. Its just some are more uncertaint than others. Shying away and avoiding uncertainty in investing is exactly how you have less returns.  I also think you might have misread me (or maybe I should use a comma or something). I didn't say I'd prefer it if companies invested in other companies that paid dividends, I would prefer it if highly profitable companies that can't find room to grow and invest in themselves, invest in other companies. Take a company like boeing. If it can't figure out better ways of building planes, but still is making profits with its current models, I would rather it invest in spaceX than issue a dividend.

Here is the thing. If you hold a broad market index, you benefit from companies investing in each other. One way or another, a company that takes in capital and becomes more successful will increase the value of your index. Either it itself will appear and grow in value. OR it will make other companies more profitable and more valuable. OR it makes goods and services cheaper making money itself more valuable.

All in all I'd rather have more capital flowing into companies' hands so they can do amazing work and improve our economy than have it just be given to people and worse be taken by the govt. But hey thats me.

J Boogie

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Re: Dividends do not matter
« Reply #10 on: February 20, 2019, 09:01:28 AM »
I view dividends (and their stability/incremental growth) as a way that a company communicates its viability as a long term investment.

It shows the company is profitable, committed to being financially disciplined, and puts their money where their mouth is on a regular basis.

Which is why slashing a dividend is such a red flag for investors. Centurylink just did this and paid the price. I have avoided buying AT&T because I think their massive debt load might combined with their massive dividend might stretch them too thin. Dividend cuts show that a company didn't see something coming or didn't manage things well.

Andy R

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Re: Dividends do not matter
« Reply #11 on: February 20, 2019, 10:14:00 AM »
I view dividends (and their stability/incremental growth) as a way that a company communicates its viability as a long term investment.

It shows the company is profitable, committed to being financially disciplined, and puts their money where their mouth is on a regular basis.

This is entirely made up from your imagination and has no grounding in reality. Dividends have nothing to do with viability as a long term investment.

Dividends are not earnings.

A company has earnings.

It then pays out some of those earnings as dividends and retains the rest to grow the business. The same company with the same earnings can pay out 80% or 20% or any other amount of earnings (including zero) and it will make no difference to your total return.

Dividends are not free money. They come out of the total return. The more they pay out in dividends, the less that is retained to grow the business. You can even see it happen in real time when companies/funds goes ex-dividend and the share price drops the amount of the dividend being paid out.

The idea of dividends having some sort of meaning is based on a fundamental lack of understanding of how companies work.

Dividends are not earnings.

Further reading -
https://www.cnbc.com/2016/12/08/dont-buy-in-to-the-dividend-fallacy-new-academic-paper-warns.html
https://www.bogleheads.org/wiki/Why_did_my_fund_unexpectedly_drop_in_value
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=258311
https://www.forbes.com/sites/jimdahle/2018/11/11/five-reasons-to-avoid-focusing-on-dividend-stocks/#16394c797479
https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

sol

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Re: Dividends do not matter
« Reply #12 on: February 20, 2019, 10:28:35 AM »
The same company with the same earnings can pay out 80% or 20% or any other amount of earnings (including zero) and it will make no difference to your total return.

I agree that dividends are only a subset of total earnings, but the quoted sentence seems wrong to me.  Dividend payouts absolutely will make a difference in your total return, because they are the only portion of your total return that is actually converted into real value, today.  Everything else is a promisory note, an expectation of future dividends or sale price. 

A stock that pays no dividends at all is a weird investment, a purely speculative play.  It would appear to have no inherent value other than what other speculators will pay for it, since it does not guarantee you any return on your money whatsoever.  Yes, I know there are some famous and valuable companies that pay no dividends, but that doesn't make it any less weird to me.

We could argue about the differing ways to value a stock.  I understand the perspective that only total return matters, but that's definitely not the only way to look at the stock market. 

BDWW

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Re: Dividends do not matter
« Reply #13 on: February 20, 2019, 11:30:25 AM »
So if I read between the lines right, he's saying dividend growth is a middling proxy for value. And then goes on to say it's best to use no proxy for value.

Makes sense.

shinn497

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Re: Dividends do not matter
« Reply #14 on: February 20, 2019, 11:41:10 AM »
Yep! Now  bear in mind he goes on to recommend some funds from a fund manager he is probably in cahoots with so take this with a grain of salt. But the takeaway is to focus on factor investing not dividend investing.

J Boogie

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Re: Dividends do not matter
« Reply #15 on: February 20, 2019, 11:46:57 AM »
I view dividends (and their stability/incremental growth) as a way that a company communicates its viability as a long term investment.

It shows the company is profitable, committed to being financially disciplined, and puts their money where their mouth is on a regular basis.

This is entirely made up from your imagination and has no grounding in reality. Dividends have nothing to do with viability as a long term investment.

Dividends are not earnings.

A company has earnings.

It then pays out some of those earnings as dividends and retains the rest to grow the business. The same company with the same earnings can pay out 80% or 20% or any other amount of earnings (including zero) and it will make no difference to your total return.

Dividends are not free money. They come out of the total return. The more they pay out in dividends, the less that is retained to grow the business. You can even see it happen in real time when companies/funds goes ex-dividend and the share price drops the amount of the dividend being paid out.

The idea of dividends having some sort of meaning is based on a fundamental lack of understanding of how companies work.

Dividends are not earnings.


With such a condescending tone, I am not surprised you are mistaken. I have found those who have the best understanding of things tend to be the most gracious in their comments.

"The same company with the same earnings can pay out 80% or 20% or any other amount of earnings (including zero) and it will make no difference to your total return."

It will make a massive difference if the stock price decreases or remains flat. If you received a 5% dividend from a company for 20 years, and the stock price was flat or went down over those 20 years, that dividend would make the biggest difference to your total return.

"Dividends have nothing to do with viability as a long term investment."

My statement was that dividends (and the stability/incremental growth of them) can be used by a company to COMMUNICATE stability. They know quite well slashing a dividend hurts their stock price, and not just because investors won't get the same payout, but because they've failed to meet an expectation. By creating this expectation for investors, companies can meet it and generate feelings of confidence in investors. It's just like their earnings guidance, except taking it one step further. If they do it long enough they join the ranks of what are known as Dividend Achievers and if they do it even longer they can become Dividend Aristocrats. If dividends had nothing to do with viability as a stable investment, why would this class of companies exist?





Car Jack

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Re: Dividends do not matter
« Reply #16 on: February 20, 2019, 11:51:50 AM »
Some facts.  Berkshire Hathaway has never paid a dividend.  If you invest in a taxable account in a fund or stock that pays dividends, there's no way around it....you're paying taxes on some part of your investment every single year.  If instead, you are in a non-dividend paying stock, you pay nothing, zero, nada until you sell the non-dividend paying stock.  Thus, if you're working a strategy to place income in a particular year or avoid income in another year for tax reasons, you cannot do that with the dividend paying stock or fund but can easily do it with the non-dividend paying stock.

I hold BRK/B for this very reason.

sol

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Re: Dividends do not matter
« Reply #17 on: February 20, 2019, 12:19:39 PM »
Some facts.  Berkshire Hathaway has never paid a dividend.  If you invest in a taxable account in a fund or stock that pays dividends, there's no way around it....you're paying taxes on some part of your investment every single year.  If instead, you are in a non-dividend paying stock, you pay nothing, zero, nada until you sell the non-dividend paying stock.  Thus, if you're working a strategy to place income in a particular year or avoid income in another year for tax reasons, you cannot do that with the dividend paying stock or fund but can easily do it with the non-dividend paying stock.

Sure, but that's a terrible reason to choose an investment.  I also can't optimize my tax basis if I take a job and earn a paycheck, but sometimes working for a living is the most profitable thing you can do anyways, tax consequences be damned.

And just as a point of clarification, it is very possible to pay zero taxes on dividends.  Just be sure they're qualified dividends so they get the capital gains tax rate, and then keep your income in the 0% LTCG bracket.  That's almost $80,000 per year in tax-free dividend space if you're MFJ. 

shinn497

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Re: Dividends do not matter
« Reply #18 on: February 20, 2019, 01:07:18 PM »
Some facts.  Berkshire Hathaway has never paid a dividend.  If you invest in a taxable account in a fund or stock that pays dividends, there's no way around it....you're paying taxes on some part of your investment every single year.  If instead, you are in a non-dividend paying stock, you pay nothing, zero, nada until you sell the non-dividend paying stock.  Thus, if you're working a strategy to place income in a particular year or avoid income in another year for tax reasons, you cannot do that with the dividend paying stock or fund but can easily do it with the non-dividend paying stock.

I hold BRK/B for this very reason.

FWIW, Asset Allocation is pretty much the only reason, I think, to want dividends. But, even then it isn't that big of a deal.

You can use dividends to help you rebalance, but you can also do the same thing with inflows and outflows, which you will almost always have. So yeah. No dividends plz.

Realistically though i don't hate dividends. Just don't consider them when picking stocks. Then again, picking stocks is also not a good idea.

MustacheAndaHalf

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Re: Dividends do not matter
« Reply #19 on: February 20, 2019, 01:36:00 PM »
I personally don't use dividend funds, but I hadn't realized how much overlap they might have with Fama/French factor models of the stock market.

I believe the dividend growth investments are more tilted towards quality, but the problem is survivorship bias ... Dividend growth investors never mention the survivorship bias in their data.
That's true, and a difficult hurdle to get over.  Even if I go looking for the "dividend aristocrats" mentioned in the video and find several mutual funds, there might be others that closed (which tend to be the worst performing).  I would need to see a number of funds with tightly grouped performance to have confidence this could be interesting.

But even then, my goal isn't so much  weighing survivorship bias - it's weighing dividend growth / aristocrats funds against multi-factor funds.  Or, for that matter, against BRK.A since it sounds like there's overlap.

Telecaster

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Re: Dividends do not matter
« Reply #20 on: February 20, 2019, 01:37:24 PM »

My statement was that dividends (and the stability/incremental growth of them) can be used by a company to COMMUNICATE stability. They know quite well slashing a dividend hurts their stock price, and not just because investors won't get the same payout, but because they've failed to meet an expectation. By creating this expectation for investors, companies can meet it and generate feelings of confidence in investors. It's just like their earnings guidance, except taking it one step further. If they do it long enough they join the ranks of what are known as Dividend Achievers and if they do it even longer they can become Dividend Aristocrats. If dividends had nothing to do with viability as a stable investment, why would this class of companies exist?

Survivorship bias, mostly.  Stocks get dropped from the Dividend Aristocrats all the time.  Which is to say, they are stable, viable businesses until they aren't.   

bacchi

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Re: Dividends do not matter
« Reply #21 on: February 20, 2019, 01:48:11 PM »
Survivorship bias, mostly.  Stocks get dropped from the Dividend Aristocrats all the time.  Which is to say, they are stable, viable businesses until they aren't.

https://en.wikipedia.org/wiki/S%26P_500_Dividend_Aristocrats

19/52 companies dropped out in 2008-9. Pfizer, GE, Bud, Bank of America -- all of them cut dividends.


J Boogie

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Re: Dividends do not matter
« Reply #22 on: February 20, 2019, 02:03:45 PM »

My statement was that dividends (and the stability/incremental growth of them) can be used by a company to COMMUNICATE stability. They know quite well slashing a dividend hurts their stock price, and not just because investors won't get the same payout, but because they've failed to meet an expectation. By creating this expectation for investors, companies can meet it and generate feelings of confidence in investors. It's just like their earnings guidance, except taking it one step further. If they do it long enough they join the ranks of what are known as Dividend Achievers and if they do it even longer they can become Dividend Aristocrats. If dividends had nothing to do with viability as a stable investment, why would this class of companies exist?

Survivorship bias, mostly.  Stocks get dropped from the Dividend Aristocrats all the time.  Which is to say, they are stable, viable businesses until they aren't.

Two points of contention -

1- It doesn't happen all the time. It's rare that it will happen outside of a major correction, and it's pretty damn impressive for a company to prepare well enough for tough times that they are able to grow dividend payments during a recession.

2- Decreasing/Failing to increase a dividend one quarter does not equal a failed business. Plenty have fallen off and beaten the SP500.



https://seekingalpha.com/article/2115993-requiem-for-fallen-dividend-aristocrats

"The good news for dividend growth investors is that all is not lost if a company with a long history of steadily increasing its dividend opts either to stop raising it or cut its payout to shareholders. For it has been a roughly even split in the post crisis period between those companies whose share prices have held up well and those that have struggled."


Goldy

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Re: Dividends do not matter
« Reply #23 on: February 20, 2019, 04:31:43 PM »
This is very timely as I was about to start a thread asking what the point was of dividends.  As best as I could tell it’s net worth neutral except for that pesky dividend taxation.

Reminds me of the pay off the mortgage or invest question.  The math has a clear answer but then physiology gets involved.

JetBlast

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Re: Dividends do not matter
« Reply #24 on: February 20, 2019, 05:38:10 PM »
One problem I have with stock buybacks is that most managers are good at running companies, not investing. Most CEOs don’t have Warren Buffett’s skill set. Buffett is an investor who discribes his management style as being close to abdication.

CEOs initiate large buybacks when their company is flush with cash, regardless of whether the stock is being bought above its intrinsic value or not. Basically, they buy big at the peaks of economic cycles when valuations are high, then when the business cycle turns downward they reduce or suspend the buybacks to hoard cash, even though the stock is now a better long term value. I’d rather have the cash than have management use my money to buy their overpriced shares.

If management wants to stockpile cash and deploy it during a business cycle downturn, that’s different. However, they usually can’t hoard cash since Wall Street wants quick returns. Wall Street also doesn’t like taxes. That’s another pressure on management to initiate dumb buybacks.

MaaS

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Re: Dividends do not matter
« Reply #25 on: February 20, 2019, 06:38:08 PM »
I'd like to unpack this "a $10 share that pays a $1 dividend is now a $9 share" logic. I see a lot of smart people saying this quite often, but I'm not sold. Perhaps one of you can tell me what I'm missing.

Yes, the business has $1 per share less cash after the payout. The Enterprise Value has been reduced by $1/share. No arguments here.

But, we're talking about share price. For this statement to be true, investors would need to be valuing stocks incredibly logically. They would also need to be assignment as much importance to assets as they do expected future earnings. Valuations vary widely with little to no meaningful difference in balance sheets or earnings.

Apple and Google have huge net cash positions. Are they being given a premium multiple for it? IMO, no.

It just feels very theoretical. In a 100% rational world, this is probably true. But, a world ran by irrational humans? Is there any evidence that share prices reduce by the dividend amount after the record or payout date?



*Disclaimer: NOT saying dividends are the optimal use of capital.  Just inquiring about this line of logic.
« Last Edit: February 20, 2019, 06:43:48 PM by MaaS »

Andy R

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Re: Dividends do not matter
« Reply #26 on: February 20, 2019, 07:16:34 PM »
The same company with the same earnings can pay out 80% or 20% or any other amount of earnings (including zero) and it will make no difference to your total return.

I agree that dividends are only a subset of total earnings, but the quoted sentence seems wrong to me.  Dividend payouts absolutely will make a difference in your total return, because they are the only portion of your total return that is actually converted into real value, today.  Everything else is a promisory note, an expectation of future dividends or sale price. 

How is that different from selling down some shares on the day of the dividend or re-investing it back in? You are still converting to/from real value today.

A stock that pays no dividends at all is a weird investment, a purely speculative play.  It would appear to have no inherent value other than what other speculators will pay for it, since it does not guarantee you any return on your money whatsoever.  Yes, I know there are some famous and valuable companies that pay no dividends, but that doesn't make it any less weird to me.

We could argue about the differing ways to value a stock.  I understand the perspective that only total return matters, but that's definitely not the only way to look at the stock market.

Again, you are making the mistake of thinking earnings are dividends. A company with no earnings may be more speculative, but if they have the same earnings but just pay out less in dividends, how is it more speculative?

WhiteTrashCash

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Re: Dividends do not matter
« Reply #27 on: February 20, 2019, 07:17:21 PM »
I think dividends are a lot of fun when they show up in a Roth IRA, but I guess that's just me.

sol

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Re: Dividends do not matter
« Reply #28 on: February 20, 2019, 07:27:32 PM »
Again, you are making the mistake of thinking earnings are dividends. A company with no earnings may be more speculative, but if they have the same earnings but just pay out less in dividends, how is it more speculative?

No, I understand the difference between earnings and dividends just fine.

As an investor, I want my assets to generate income for me.  Dividends are income.  Capital growth is not income.  Potential taxes on dividends (which again are not a sure thing) are kind of like the fee you have to pay to convert your asset into actual income.

If anything, I think the common mistake here is that people think their vtsax balance represents a number of dollars.  You don't own dollars of vtsax, you own shares.  Those shares can be liquidated for income at today's prices, unless you have too many of them.  As an example, Bezos has shares in Amazon that are currently worth something like 130 billion dollars, but he doesn't actually have 130 billion dollars.  If he tried to sell those shares in order to generate 130 billion dollars of income, the stock price would plummet and his shares would be worth much less.   

His shares have additional value because he is the CEO, and his presence lends other investors the confidence to pay a premium for those shares.  But if Bezos suddenly wanted out, the company would suffer.  People would think he knew something they didn't about the future of Amazon, and they would worry that a new leader wouldn't be as good.  Today's spot price for Amazon shares is controlled by the careful balance of supply and demand, and he owns too many shares to liquidate them all without flooding the market and driving down the price.  He owns shares, not dollars, just like all of the rest of us who own shares.  Dividends are real dollars.

Andy R

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Re: Dividends do not matter
« Reply #29 on: February 20, 2019, 07:27:49 PM »
I view dividends (and their stability/incremental growth) as a way that a company communicates its viability as a long term investment.

It shows the company is profitable, committed to being financially disciplined, and puts their money where their mouth is on a regular basis.

This is entirely made up from your imagination and has no grounding in reality. Dividends have nothing to do with viability as a long term investment.

Dividends are not earnings.

A company has earnings.

It then pays out some of those earnings as dividends and retains the rest to grow the business. The same company with the same earnings can pay out 80% or 20% or any other amount of earnings (including zero) and it will make no difference to your total return.

Dividends are not free money. They come out of the total return. The more they pay out in dividends, the less that is retained to grow the business. You can even see it happen in real time when companies/funds goes ex-dividend and the share price drops the amount of the dividend being paid out.

The idea of dividends having some sort of meaning is based on a fundamental lack of understanding of how companies work.

Dividends are not earnings.


With such a condescending tone, I am not surprised you are mistaken. I have found those who have the best understanding of things tend to be the most gracious in their comments.

"The same company with the same earnings can pay out 80% or 20% or any other amount of earnings (including zero) and it will make no difference to your total return."

It will make a massive difference if the stock price decreases or remains flat. If you received a 5% dividend from a company for 20 years, and the stock price was flat or went down over those 20 years, that dividend would make the biggest difference to your total return.

The market is made up mostly of institutional investors are smarter than to go by something completely arbitrary sch as the part of earnings that are paid out as dividends.
Not only does it no reflect viability of a company in any way, the company can (and often do) sell off assets to pay for dividends which is again more reason why dividends mean nothing.
Dividends may appear to make a company viable to someone who believes it, but believing it does not make it so.


"Dividends have nothing to do with viability as a long term investment."

My statement was that dividends (and the stability/incremental growth of them) can be used by a company to COMMUNICATE stability. They know quite well slashing a dividend hurts their stock price, and not just because investors won't get the same payout, but because they've failed to meet an expectation. By creating this expectation for investors, companies can meet it and generate feelings of confidence in investors. It's just like their earnings guidance, except taking it one step further. If they do it long enough they join the ranks of what are known as Dividend Achievers and if they do it even longer they can become Dividend Aristocrats. If dividends had nothing to do with viability as a stable investment, why would this class of companies exist?

As mentioned previously, the success of "Dividend Aristocrats" ignores the problem of survivorship bias.
Ignoring that doesn't make the issue not real.

shinn497

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Re: Dividends do not matter
« Reply #30 on: February 20, 2019, 07:49:43 PM »
Again, you are making the mistake of thinking earnings are dividends. A company with no earnings may be more speculative, but if they have the same earnings but just pay out less in dividends, how is it more speculative?

No, I understand the difference between earnings and dividends just fine.

As an investor, I want my assets to generate income for me.  Dividends are income.  Capital growth is not income.  Potential taxes on dividends (which again are not a sure thing) are kind of like the fee you have to pay to convert your asset into actual income.

If anything, I think the common mistake here is that people think their vtsax balance represents a number of dollars.  You don't own dollars of vtsax, you own shares.  Those shares can be liquidated for income at today's prices, unless you have too many of them.  As an example, Bezos has shares in Amazon that are currently worth something like 130 billion dollars, but he doesn't actually have 130 billion dollars.  If he tried to sell those shares in order to generate 130 billion dollars of income, the stock price would plummet and his shares would be worth much less.   

His shares have additional value because he is the CEO, and his presence lends other investors the confidence to pay a premium for those shares.  But if Bezos suddenly wanted out, the company would suffer.  People would think he knew something they didn't about the future of Amazon, and they would worry that a new leader wouldn't be as good.  Today's spot price for Amazon shares is controlled by the careful balance of supply and demand, and he owns too many shares to liquidate them all without flooding the market and driving down the price.  He owns shares, not dollars, just like all of the rest of us who own shares.  Dividends are real dollars.

There are two issues with this.

  • The argument for devaluation also works with cash. If bezos had 130 billion dollars in cash and then liquidated it, he'd have the same issue of incurring inflation. In fact trading volume is already priced into the price of cash and the price of a equity
  • Cash has a lower return than equity. So holding cash is irrational. I'd argue you should want to hold cash for as little as possible in as low amounts as possible until right before you are going to spend it.

shinn497

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Re: Dividends do not matter
« Reply #31 on: February 20, 2019, 07:52:55 PM »
I think dividends are a lot of fun when they show up in a Roth IRA, but I guess that's just me.

I do too! This is why I state they are irrational. Realistically something like a 1% - 2% dividend is a good motivator. And helps with emotions and behaviour.

But, apart from being correlated with certain factors, they mean nothing in terms of returns. I think the power and importance of this statement is that it forces us to ask more important questions about our investments and what is really driving their returns. The psychology and emotional hit of investing is an important part of this discussion.

shinn497

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Re: Dividends do not matter
« Reply #32 on: February 20, 2019, 08:02:25 PM »
I'd like to unpack this "a $10 share that pays a $1 dividend is now a $9 share" logic. I see a lot of smart people saying this quite often, but I'm not sold. Perhaps one of you can tell me what I'm missing.

Yes, the business has $1 per share less cash after the payout. The Enterprise Value has been reduced by $1/share. No arguments here.

But, we're talking about share price. For this statement to be true, investors would need to be valuing stocks incredibly logically. They would also need to be assignment as much importance to assets as they do expected future earnings. Valuations vary widely with little to no meaningful difference in balance sheets or earnings.

Apple and Google have huge net cash positions. Are they being given a premium multiple for it? IMO, no.

It just feels very theoretical. In a 100% rational world, this is probably true. But, a world ran by irrational humans? Is there any evidence that share prices reduce by the dividend amount after the record or payout date?



*Disclaimer: NOT saying dividends are the optimal use of capital.  Just inquiring about this line of logic.

You are basically saying the issue with dividends is that the market is not efficient. This is a long debate with no clear answer. My take after all of my (still not expert) research is that markets are "efficient enough". E.G. they are efficient enought that stocks in aggregate and over long periods of time coalesce to their true price. And they are efficient enought that almost no investor can reliably obtain an alpha that is attributable to anything but random chance. Which means they are efficient enough that basing investor decision on the issuance of a dividend is irrational.

Irrational is not bad uninformed FWIW. I am a big believer that utilizing your own behaviour is the path to success. Like i say invest in a dividend portfolio if you think it will help you be consistant but don't do it for ideal returns. Which is interesting since this line of thinking would encourage people to do so during the accumulation stage not the preservation stage.

Like that is something that gets me. PEople LOVE income investments in  the "preservation" stage but by doing so you are increasing the probability of losing your capital. Read Big ERN's series on safe withdrawal rates to understand why.

Stimpy

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Re: Dividends do not matter
« Reply #33 on: February 21, 2019, 08:43:15 AM »
Always love it when the "Dividends do not matter crowd" show up.  Makes for interesting arguments.

Some basic facts: If a stock pay a dividend the price drops by that amount on that day.   To find out when a stock payed a dividend, obviously look at the chart.... Oh wait, you can't see where it took place?  Funny since the stock drops, you'd think you see that, except Mr Market tends to not have a straight value on any single day, so while you can make charts that show that hey, if the dividend hadn't been payed the stock would have gone up another 300%, the truth of the matter is, it might be the same price as it is today.  Why, cause Mr Market is a honey badger and don't give a dam!

Some companies absolutely should be reinvesting in their business and NOT paying a dividend, no argument from me, but lets take KO.   Raised its current dividend 56 years in a row and one of about 130ish companies that have done so for 25 years or more.   They know the cost to make a new beverage, and have more then enough income to play around a little.   Do you think investing more money into a drink will produce more income?  I'll bet they have tried that, and I'll bet the answer is NO.

As for buy backs, if done properly they can increase market value, but I see that the majority of the time (as already stated here) companies buy back at the top.  (Top is IN!)    What does that do?  Well, it COSTS value more often then not and does not really help the stock or barely does so.  If done properly yes, stock buybacks are efficient, but usually they are not.

As for taxes, well your gonna pay them when you pull out of your stocks so the difference is... (drum roll please) a dividend you still HAVE your stock AND if you DRIP (Reinvest your dividend) you have MORE stock.  Taxes and death are two absolutes.  Deal with it.

Finally as SOL said, it's cash money.  Fait currency, income, etc.   While it can be cut, it probably won't be most of the time.  And if it is (assuming individual stocks as ETF's/indexes in general pay a varying dividend) you will have plenty of warning as of the last few companies that have done so to me, I was fully aware it was one of the top possibilities.

Invest how you want to invest if you'd rather have no dividends, the don't invest in anythng that has those.  Those exist, and I fully expect somebody out there does just that.   and IF you get a dividend (and don't like it) just reinvest it and look at it as free stock.  It's not but devil is in the details, and move on.  It's all total return anyway so deal with it.   (Total return = current price gain + dividend)

After all that I do have to say, BRK.B may not pay a dividend, but sure looks like they love em as much as any dividend investor!
« Last Edit: February 21, 2019, 08:57:12 AM by stimepy »

J Boogie

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Re: Dividends do not matter
« Reply #34 on: February 21, 2019, 09:18:58 AM »

The market is made up mostly of institutional investors are smarter than to go by something completely arbitrary sch as the part of earnings that are paid out as dividends.
Not only does it no reflect viability of a company in any way, the company can (and often do) sell off assets to pay for dividends which is again more reason why dividends mean nothing.
Dividends may appear to make a company viable to someone who believes it, but believing it does not make it so.

If the market is made up of smart institutional investors, and the dividend doesn't reflect the viability of the company in ANY way, then why do share prices routinely drop when dividends are slashed? Is it because the investors that make up the market aren't smart, or because it DOES reflect the viability of the company in some way? Just as your theory about dividends not affecting total return doesn't hold up to real life examples, this theory of yours can be proven wrong by real life examples too. And yet you are the one who accused me of imagining things that have no grounding in reality.


"Dividends have nothing to do with viability as a long term investment."

My statement was that dividends (and the stability/incremental growth of them) can be used by a company to COMMUNICATE stability. They know quite well slashing a dividend hurts their stock price, and not just because investors won't get the same payout, but because they've failed to meet an expectation. By creating this expectation for investors, companies can meet it and generate feelings of confidence in investors. It's just like their earnings guidance, except taking it one step further. If they do it long enough they join the ranks of what are known as Dividend Achievers and if they do it even longer they can become Dividend Aristocrats. If dividends had nothing to do with viability as a stable investment, why would this class of companies exist?

As mentioned previously, the success of "Dividend Aristocrats" ignores the problem of survivorship bias.
Ignoring that doesn't make the issue not real.

As I replied to that, half of the fallen aristocrats still went on to outperform the S&P 500. Past performance not guaranteeing future results is a real issue, but past performance is a better indicator of future results than nothing. My statement stands.

bacchi

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Re: Dividends do not matter
« Reply #35 on: February 21, 2019, 09:55:02 AM »
It just feels very theoretical. In a 100% rational world, this is probably true. But, a world ran by irrational humans? Is there any evidence that share prices reduce by the dividend amount after the record or payout date?


When a stock goes ex-div, the exchange adjusts the closing stock price.

The chart is adjusted. It may rise from there, or it may fall from there, but the price is actually adjusted.


Let me repeat that: A dividend is not "free" money. The closing price is adjusted downward by the dividend amount.

bacchi

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Re: Dividends do not matter
« Reply #36 on: February 21, 2019, 10:06:26 AM »
As mentioned previously, the success of "Dividend Aristocrats" ignores the problem of survivorship bias.
Ignoring that doesn't make the issue not real.

As I replied to that, half of the fallen aristocrats still went on to outperform the S&P 500. Past performance not guaranteeing future results is a real issue, but past performance is a better indicator of future results than nothing. My statement stands.

Are you referring to the seekingalpha article you linked?

I only see 4 outperforms, 3 more-or-less equal to S&P, and 14 underperforms (sometimes by a large amount). What are the half that have outperformed?

J Boogie

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Re: Dividends do not matter
« Reply #37 on: February 21, 2019, 10:31:14 AM »
As mentioned previously, the success of "Dividend Aristocrats" ignores the problem of survivorship bias.
Ignoring that doesn't make the issue not real.

As I replied to that, half of the fallen aristocrats still went on to outperform the S&P 500. Past performance not guaranteeing future results is a real issue, but past performance is a better indicator of future results than nothing. My statement stands.

Are you referring to the seekingalpha article you linked?

I only see 4 outperforms, 3 more-or-less equal to S&P, and 14 underperforms (sometimes by a large amount). What are the half that have outperformed?

Yes, and based on your analysis there it seems I made an imprecise summary of an already imprecise summary -

"The good news for dividend growth investors is that all is not lost if a company with a long history of steadily increasing its dividend opts either to stop raising it or cut its payout to shareholders. For it has been a roughly even split in the post crisis period between those companies whose share prices have held up well and those that have struggled."

I don't believe this undermines my point that incremental and consistent dividend growth is a decent proxy for value. 14 out of the 59 2008 Dividend Aristocrats fell and underperformed the S&P, meaning 45 out of the 59 (just over 3/4) have either maintained their membership in the elite club or are greater than or equal to the roaring S&P.



dougules

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Re: Dividends do not matter
« Reply #38 on: February 21, 2019, 10:44:11 AM »
After all that I do have to say, BRK.B may not pay a dividend, but sure looks like they love em as much as any dividend investor!

Berkshire Hathaway is a little different from you and me.  They take the cash and put it into other more specific investments.  You could in theory do the same, but they have the resources for the research and expertise that true value investing takes.

Boofinator

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Re: Dividends do not matter
« Reply #39 on: February 21, 2019, 10:55:41 AM »
One problem I have with stock buybacks is that most managers are good at running companies, not investing. Most CEOs don’t have Warren Buffett’s skill set. Buffett is an investor who discribes his management style as being close to abdication.

CEOs initiate large buybacks when their company is flush with cash, regardless of whether the stock is being bought above its intrinsic value or not. Basically, they buy big at the peaks of economic cycles when valuations are high, then when the business cycle turns downward they reduce or suspend the buybacks to hoard cash, even though the stock is now a better long term value. I’d rather have the cash than have management use my money to buy their overpriced shares.

If management wants to stockpile cash and deploy it during a business cycle downturn, that’s different. However, they usually can’t hoard cash since Wall Street wants quick returns. Wall Street also doesn’t like taxes. That’s another pressure on management to initiate dumb buybacks.

You hit the nail on the head, and sadly this was neglected in Ben's video. Ben mentions the two ways to return value to shareholders (dividends and buybacks), but doesn't mention that share buybacks only make sense if they can be performed from a position that adds more value to the company (I would say at least equal to the long-term stock market return). So if shares are overpriced, companies should issue dividends; otherwise, they should do share buybacks. (Granted, its perhaps easier said than done to determine the fair market value of shares, but if anyone should be able to do it, it should be the companies themselves.)

Warren Buffett has been brought up a few times in this thread, and unsurprisingly, he's actually had some interesting things to say about share buybacks versus dividends (start on page 19): http://www.berkshirehathaway.com/letters/2012ltr.pdf.

JamOnFire

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Re: Dividends do not matter
« Reply #40 on: February 21, 2019, 10:58:19 AM »
While disappointed with some of the tone, I am enjoying this exchange.  I agree with the logic of the stock price dropping when dividends are issued.  I also agree that growth companies should probably keep their money to grow as fast as possible.

That being said, there is nothing wrong with not being focused on always growing. For example a utilities company that has steady cash flow, it makes sense to pay dividends.

Also, share buybacks aren't always the best option: they can be made on an overvalued share price.  Doesn't Mr. Buffet has a book value ratio he abides by when buying back shares.

Dividends can be one factor when choosing a stock but it shouldn't be the only factor, especially if you are looking for long term growth and appreciation.

You are kinda limited to dividend stocks if you are looking for steady income.

Jam


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Telecaster

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Re: Dividends do not matter
« Reply #41 on: February 21, 2019, 04:09:05 PM »
Some companies absolutely should be reinvesting in their business and NOT paying a dividend, no argument from me, but lets take KO.   Raised its current dividend 56 years in a row and one of about 130ish companies that have done so for 25 years or more.   They know the cost to make a new beverage, and have more then enough income to play around a little.   Do you think investing more money into a drink will produce more income?  I'll bet they have tried that, and I'll bet the answer is NO.

KO is an interesting case.   For decades their business model as just as you suggest.   They had a fairly small number of products that had a dedicated following and they simply printed money.    However, that trend has reversed in recent years and on a global scale too.  People aren't nearly as interested in sugary drinks anymore and want other options.  That has forced KO to come up with a variety of new products, like Odwalla, Costa Coffee, Vitamin Water, etc.   Each of those new products has new production, marketing, and distribution challenges, and accordingly higher costs.

The result is revenues have been declining for about a decade, but dividends and the share price have been increasing.   That has every sign that something Not Good is going to happen.   I'm not expert enough in the beverage business to know what KO should do, but you could point to the long slide in revenues and make a good argument they aren't investing enough in the business.   

Quote
As for buy backs, if done properly they can increase market value, but I see that the majority of the time (as already stated here) companies buy back at the top.  (Top is IN!)    What does that do?  Well, it COSTS value more often then not and does not really help the stock or barely does so.  If done properly yes, stock buybacks are efficient, but usually they are not.

Fully agree, all too many companies wind up paying a dollar for 80 cents worth of stock.   


jim555

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Re: Dividends do not matter
« Reply #42 on: February 21, 2019, 04:56:51 PM »
Stocks trade at whatever price people agree on.  A stock going ex dividend has outstanding stop and limit orders reduced by the dividend, but that doesn't mean it MUST to trade lower by the dividend amount since share price is an agreement between buyer and seller. 

Open ended mutual funds are different.  The price IS set and the price drops by the dividend amount because it is a calculation of net asset value.

Stachless

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Re: Dividends do not matter
« Reply #43 on: February 21, 2019, 05:05:51 PM »
Great news for Kraft Heinz shareholders....KHC just chopped their dividend from $0.625 to $0.40 per quarter!

This stock must be about to skyrocket with all those dividends saved!!!!!!  amirite?



Oh wait...

shinn497

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Re: Dividends do not matter
« Reply #44 on: February 21, 2019, 06:04:26 PM »
Always love it when the "Dividends do not matter crowd" show up.  Makes for interesting arguments.

Some basic facts: If a stock pay a dividend the price drops by that amount on that day.   To find out when a stock payed a dividend, obviously look at the chart.... Oh wait, you can't see where it took place?  Funny since the stock drops, you'd think you see that, except Mr Market tends to not have a straight value on any single day, so while you can make charts that show that hey, if the dividend hadn't been payed the stock would have gone up another 300%, the truth of the matter is, it might be the same price as it is today.  Why, cause Mr Market is a honey badger and don't give a dam!

Some companies absolutely should be reinvesting in their business and NOT paying a dividend, no argument from me, but lets take KO.   Raised its current dividend 56 years in a row and one of about 130ish companies that have done so for 25 years or more.   They know the cost to make a new beverage, and have more then enough income to play around a little.   Do you think investing more money into a drink will produce more income?  I'll bet they have tried that, and I'll bet the answer is NO.

As for buy backs, if done properly they can increase market value, but I see that the majority of the time (as already stated here) companies buy back at the top.  (Top is IN!)    What does that do?  Well, it COSTS value more often then not and does not really help the stock or barely does so.  If done properly yes, stock buybacks are efficient, but usually they are not.

As for taxes, well your gonna pay them when you pull out of your stocks so the difference is... (drum roll please) a dividend you still HAVE your stock AND if you DRIP (Reinvest your dividend) you have MORE stock.  Taxes and death are two absolutes.  Deal with it.

Finally as SOL said, it's cash money.  Fait currency, income, etc.   While it can be cut, it probably won't be most of the time.  And if it is (assuming individual stocks as ETF's/indexes in general pay a varying dividend) you will have plenty of warning as of the last few companies that have done so to me, I was fully aware it was one of the top possibilities.

Invest how you want to invest if you'd rather have no dividends, the don't invest in anythng that has those.  Those exist, and I fully expect somebody out there does just that.   and IF you get a dividend (and don't like it) just reinvest it and look at it as free stock.  It's not but devil is in the details, and move on.  It's all total return anyway so deal with it.   (Total return = current price gain + dividend)

After all that I do have to say, BRK.B may not pay a dividend, but sure looks like they love em as much as any dividend investor!

There is no top. Markets are efficient. Companies shouldn't market time and neither should you. And long term capital gains tax upon liquidation is much more preferable to the consistant yeary tax drag of dividends. This is true due to the math of compounding as well as the fact that some dividends are taxed as income, especially if you are internationally diversified.

You make good arguments though. I am glad to hear them!

FIPurpose

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Re: Dividends do not matter
« Reply #45 on: February 21, 2019, 07:37:39 PM »
Tax drag?

Any dividend focused investor is going to have a majority of their dividends come out qualified or are in a tax advantaged account, meaning that it's probably better for the company to pay out dividends for smaller investors. Either way it'd be negligible comparing dividend taxes vs capital gains. Which for me at least is in the 0% bracket either way.

In fact, companies paying me a small amount of dividends each year means that I fill out the lower tiers of the tax brackets without selling and losing qualified status. If you're still in the 0% bracket, it's probably better to get a small dividend than being forced to sell.

shinn497

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Re: Dividends do not matter
« Reply #46 on: February 21, 2019, 07:56:15 PM »
Wouldn't dividend investors be more likely to invest in non US stocks as those tend to have a higher yield?These are less likely to be qualified.

Andy R

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Re: Dividends do not matter
« Reply #47 on: February 21, 2019, 08:11:48 PM »

The market is made up mostly of institutional investors are smarter than to go by something completely arbitrary sch as the part of earnings that are paid out as dividends.
Not only does it no reflect viability of a company in any way, the company can (and often do) sell off assets to pay for dividends which is again more reason why dividends mean nothing.
Dividends may appear to make a company viable to someone who believes it, but believing it does not make it so.

If the market is made up of smart institutional investors, and the dividend doesn't reflect the viability of the company in ANY way, then why do share prices routinely drop when dividends are slashed? Is it because the investors that make up the market aren't smart, or because it DOES reflect the viability of the company in some way? Just as your theory about dividends not affecting total return doesn't hold up to real life examples, this theory of yours can be proven wrong by real life examples too. And yet you are the one who accused me of imagining things that have no grounding in reality.

The price drop is based on the problems in the company rather than being based on the dividend being cut, not the other way around.
https://en.wikipedia.org/wiki/Causality

Andy R

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Re: Dividends do not matter
« Reply #48 on: February 21, 2019, 08:12:49 PM »
Some basic facts: If a stock pay a dividend the price drops by that amount on that day.   To find out when a stock payed a dividend, obviously look at the chart.... Oh wait, you can't see where it took place?  Funny since the stock drops, you'd think you see that, except Mr Market tends to not have a straight value on any single day, so while you can make charts that show that hey, if the dividend hadn't been payed the stock would have gone up another 300%, the truth of the matter is, it might be the same price as it is today.  Why, cause Mr Market is a honey badger and don't give a dam!

The same forces that move prices up and down all day still act upon the shares at the same time the price drops from going ex-dividend.

Boofinator

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Re: Dividends do not matter
« Reply #49 on: February 22, 2019, 07:04:52 AM »
Some basic facts: If a stock pay a dividend the price drops by that amount on that day.   To find out when a stock payed a dividend, obviously look at the chart.... Oh wait, you can't see where it took place?  Funny since the stock drops, you'd think you see that, except Mr Market tends to not have a straight value on any single day, so while you can make charts that show that hey, if the dividend hadn't been payed the stock would have gone up another 300%, the truth of the matter is, it might be the same price as it is today.  Why, cause Mr Market is a honey badger and don't give a dam!

The same forces that move prices up and down all day still act upon the shares at the same time the price drops from going ex-dividend.

In other words, the noise is overwhelming the signal. If you average enough stock prices around the dividend date, the signal would become apparent at some point.