The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: shinn497 on February 19, 2019, 10:20:23 PM
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DIVIDENDS DO NOT MATTER DIVIDENDS DO NOT MATTER (https://www.youtube.com/watch?v=UpXI_Vd51dA)
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.
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Great video. Thanks for posting.
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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.
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DIVIDENDS DO NOT MATTER DIVIDENDS DO NOT MATTER (http://'https://www.youtube.com/watch?v=UpXI_Vd51dA&t=9s')
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?
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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.
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DIVIDENDS DO NOT MATTER DIVIDENDS DO NOT MATTER (http://'https://www.youtube.com/watch?v=UpXI_Vd51dA&t=9s')
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.
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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.
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DIVIDENDS DO NOT MATTER DIVIDENDS DO NOT MATTER (http://'https://www.youtube.com/watch?v=UpXI_Vd51dA&t=9s')
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.
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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.
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?
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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.
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.
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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.
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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/
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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.
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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."
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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.
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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.
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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.
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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?
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I think dividends are a lot of fun when they show up in a Roth IRA, but I guess that's just me.
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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.
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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.
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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.
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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.
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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. (https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/)
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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!
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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.
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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.
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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?
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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.
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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.
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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 (http://www.berkshirehathaway.com/letters/2012ltr.pdf).
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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
Sent from my ONEPLUS A6003 using Tapatalk
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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.
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.
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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.
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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...
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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!
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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.
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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.
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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
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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.
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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.
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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.
I agree with some of what you're saying. I think we can both laugh together about staying in the 0% LTCG bracket. I don't even know how to go to my employer and tell them "Hey, I want to have no cap gains tax, so can you just take a hundred grand back from my pay and bonuses?".
In Taxable (only), this is glaringly obvious to me because I get dividend statements. I tend to put money in as I get it throughout the year, so there will always be some unqualified dividends along with qualified. I use SCHB at Schwab (US broad market, which is pretty much large cap stocks). I bought some BRK/b as an experiment and to force myself to watch it. The 2 follow each other pretty well, with SCHB re-investing dividends. So at the end of the year (or like right now, where I'm about to do my taxes), the dividends on SCHB are here to roost and I'll be paying my taxes. But BRK/b is sitting there saying "dividends? What dividends? You don't need to pay no stinkin' taxes".
Yes, I'm very aware that I'm talking about a scary, single company stock. And no, I don't recommend doing this as a substitute for stock index allocation, but it's probably the best choice if one wants a stock that itself is very invested in a diversified portfolio.
So the point of all of this is simply.....if you get dividends, you pay taxes (at least in my tax bracket, I sure do). With BRK/b or any other non-dividend paying stock, you pay zero taxes. That's all I'm saying. It's something that many dividend focused people don't even consider.
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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.
I agree with some of what you're saying. I think we can both laugh together about staying in the 0% LTCG bracket. I don't even know how to go to my employer and tell them "Hey, I want to have no cap gains tax, so can you just take a hundred grand back from my pay and bonuses?".
In Taxable (only), this is glaringly obvious to me because I get dividend statements. I tend to put money in as I get it throughout the year, so there will always be some unqualified dividends along with qualified. I use SCHB at Schwab (US broad market, which is pretty much large cap stocks). I bought some BRK/b as an experiment and to force myself to watch it. The 2 follow each other pretty well, with SCHB re-investing dividends. So at the end of the year (or like right now, where I'm about to do my taxes), the dividends on SCHB are here to roost and I'll be paying my taxes. But BRK/b is sitting there saying "dividends? What dividends? You don't need to pay no stinkin' taxes".
Yes, I'm very aware that I'm talking about a scary, single company stock. And no, I don't recommend doing this as a substitute for stock index allocation, but it's probably the best choice if one wants a stock that itself is very invested in a diversified portfolio.
So the point of all of this is simply.....if you get dividends, you pay taxes (at least in my tax bracket, I sure do). With BRK/b or any other non-dividend paying stock, you pay zero taxes. That's all I'm saying. It's something that many dividend focused people don't even consider.
This is a good point, and to be clear the dividend tax drag is the dividend rate times the tax bracket (for most workers here the tax bracket is probably 15%). For all the work we do to minimize expense ratios (0.05% is waaay too high), some would choose to pay an extra 0.3% or so just to get more dividends.
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If the dividends are qualified then taxes won't be a problem for most people, only high income people will have to worry about it.
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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.
Mostly agree with you analysis on KO, I only used it as an example as it's the quickest one to write up to prove my point. There are other examples out there, about 130 of them actually, some of those being much better examples then KO but I am not as familiar with them as I am with KO.
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.
Depends on multiple factors including international taxes cause you tend to pay those no matter what. Not even a non-taxable account can save you. There is also lots of risk anytime you have a High Yield stock doesn't matter whether it is US or International. Kinda the same for High Yield bonds, your hoping nothing explodes before you get your moneys worth. Best example I can come up with right now is ATT (T). Highest indebted company out there, and a VERY high Yield. My analysis (and many others) is it's fine, unless they mess up, even a little bit then, well... Bu-bye Dividend and probably your investment.
Those high yielding stocks are often temping for new dividend investors which (despite what I am writing here) is why I more often then not, tell people to buy ETFs, and if you want to do stocks, learn about stock investing, specifically value stock investing first.
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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.
Correct, markets are efficient, but that does not automatically translate to buy backs being efficient. A single company may be HIGHLY overvalued at the time of a buy back, or it could be HIGHLY undervalued. Which again does not necessarily translate easily to top and bottom of the stocks price. From what I have seen, many companies do major buy backs when their company is overvalued and thus do not get the value of the buyback that they should, thus costing them value.
As for the tax drag, that depends on many factors such as qualified/un-qualified dividends, the tax ability of your account and your tax bracket. (Might be some other factors in there but those are the ones that come to mind.)
I won't disagree that if you have dividends in a taxable account that you will pay a small price. BUT if you are also doing DRIP (Dividend Reinvestment Plan which is automatic in a lot of accounts, including vanguard) you should be buying more of the stock, more dividends and more appreciation from your stock compounding your buying power and increasing your wealth without you having to lift a finger. What ever taxes your paying will basically become nullified by the power of compounding interest.
One last point on taxes, I assume you have a savings account/cd/some form of interest bearing item for your emergency fund right? (Also assuming your trying to get the MOST bang from your interest and not using a .001% HIGH interest Wells Fargo account. (Sorry that what I had for a bit and that was when most regular savings accounts were at 1%!)) Do you get mad that you have to pay taxes on that interest? It's the same concept. Your being paid to do NOTHING, though I won't deny stocks have more risky over savings accounts. But we aren't arguing that.
I did not bring up non-taxable accounts, because duh, no taxes. Not sure I can say anything more there....
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.
Not sure if we are agreeing or disagreeing here.
Big Investment Company Inc. decided to buy 20,000 shares at 2.00 above closing price in the morning. Lets say closing price was 20 dollars. BUT the dividend was 1 dollar so tomorrows opening price is 19. Guess who buys 20,000 shares at 22.00..... Did that price drop at the start of the day effect the price? No way to actually tell.
They ONLY way to know would be to have 2 companies trading at the exact same time, one with a dividend and one without. IF we make the assumption that all market orders are efficient and the same for both I assume the graphs will look the exact same, but again no way to tell.
Also, as has been stated a million times, the market is efficient. Wouldn't that mean that traders/investors have already taken into account the dividend before the mandatory price drop? (Food for thought....)
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Big Investment Company Inc. decided to buy 20,000 shares at 2.00 above closing price in the morning. Lets say closing price was 20 dollars. BUT the dividend was 1 dollar so tomorrows opening price is 19. Guess who buys 20,000 shares at 22.00..... Did that price drop at the start of the day effect the price? No way to actually tell.
They ONLY way to know would be to have 2 companies trading at the exact same time, one with a dividend and one without. IF we make the assumption that all market orders are efficient and the same for both I assume the graphs will look the exact same, but again no way to tell.
I know this isn't directed at me, but I believe you are misunderstanding the concept. If a purchaser buys a stock before the ex-dividend date, they receive the stock plus the dividend. If they buy after the ex-dividend date, they receive just the stock. Is someone going to pay more for the former or latter (everything else being equal)? This is why market prices for stocks tend to go down immediately after the ex-dividend date (though as noted, the drops are sometimes hard to see through the noise of other factors). If we were to go under the assumption this were not the case, then arbitragers would be all over it until it became the case.
Also, as has been stated a million times, the market is efficient. Wouldn't that mean that traders/investors have already taken into account the dividend before the mandatory price drop? (Food for thought....)
The price drop is the result of market efficiencies. The market price for the stocks includes the dividend payment if bought before the ex-dividend date, but doesn't include the dividend if bought after.
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I know this isn't directed at me, but I believe you are misunderstanding the concept. If a purchaser buys a stock before the ex-dividend date, they receive the stock plus the dividend. If they buy after the ex-dividend date, they receive just the stock. Is someone going to pay more for the former or latter (everything else being equal)? This is why market prices for stocks tend to go down immediately after the ex-dividend date (though as noted, the drops are sometimes hard to see through the noise of other factors). If we were to go under the assumption this were not the case, then arbitragers would be all over it until it became the case.
You are correct on the ex-div date but I did not say that the company payed it, I said the dividend effected opening price. That would be the ex-div date. As for the price drop, as Stated, did it? Can you prove the price actually drops? As stated in the scenario, the company still paid 22.00 for a company first thing in the morning even though the open price was 19. Are you saying that maybe they should have paid 23 if there was no dividend? Maybe but again, I disagree, they made the decision based on what their value formulas told them and that was 22. That formula(which probably cost millions to develop) should have ALREADY accounted for the dividend before the price drop the next day. Thus market was ALREADY efficient before the mandatory price drop.
But believe what you want.
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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.
...otherwise, there would be an unexploited arbitrage opportunity to take on leverage and trade shares or options around the ex-dividend date and capitalize on the inevitable price movement. Similaly, there is no special opportunity to do the reverse of this trade and buy stocks on their ex dividend date, collect the dividend, and exit the position the next day, rotating from stock to stock each day/week to collect as many dividends as possible with a limited amount of funds. Each of these trading strategies would yield something less than buy and hold over the long term. The first strategy would miss dividends plus capital gains during its days out of the market. The second would miss capital gains during its days out of the market. Do some spreadsheet analysis on a 10-20y timeframe if you doubt this.
The fact that there is no such consistent opportunity suggests that markets are efficient and traders are using discounted cash flow analysis on expected earnings over a long timeframe to set the prices they are willing to pay. If you were doing DCF on a spreadsheet, the completion of a quarterly earnings period, which includes any dividend paid out of retained earnings, would both remove one cash flow from your spreadsheet and add another further out cash flow. I.e. You would simultaneously remove last quarter's earnings and add the following quarter 10 years from now, so that you are still analyzing the same duration of time. Also, the amount of discount applied to each future earning flow on your spreadsheet is reduced as time passes and each future earnings flow gets closer. The addition of future cash flows and the steady adjustment of discounts offsets the steady removal of earnings as they happen.
TLDR: If you consider this explanation TLDR or unconvincing, try day trading around ex-dividend dates. I suggest NLY which yields 12% so it must be a good deal. Probably no one has thought of this and NLY is such a bargain (12% = ROI!) because nobody noticed. ;)
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I know this isn't directed at me, but I believe you are misunderstanding the concept. If a purchaser buys a stock before the ex-dividend date, they receive the stock plus the dividend. If they buy after the ex-dividend date, they receive just the stock. Is someone going to pay more for the former or latter (everything else being equal)? This is why market prices for stocks tend to go down immediately after the ex-dividend date (though as noted, the drops are sometimes hard to see through the noise of other factors). If we were to go under the assumption this were not the case, then arbitragers would be all over it until it became the case.
You are correct on the ex-div date but I did not say that the company payed it, I said the dividend effected opening price. That would be the ex-div date. As for the price drop, as Stated, did it? Can you prove the price actually drops? As stated in the scenario, the company still paid 22.00 for a company first thing in the morning even though the open price was 19. Are you saying that maybe they should have paid 23 if there was no dividend? Maybe but again, I disagree, they made the decision based on what their value formulas told them and that was 22. That formula(which probably cost millions to develop) should have ALREADY accounted for the dividend before the price drop the next day. Thus market was ALREADY efficient before the mandatory price drop.
But believe what you want.
In the case of a company being bought out, I think round numbers are more attractive and hence tend to be used more often when buying out companies (when the price per share is high enough). Even so, in your hypothetical example, if we assume the company was paying 4% dividends (which is on the higher end), then they would have offered $22.22 (assuming a quarterly dividend), not $23 as you suggest.
By the way, why do you keep mentioning a "mandatory" price drop? No such thing exists as far as I am aware of. The drop is a natural process, because the company is inherently now worth less.
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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.
...otherwise, there would be an unexploited arbitrage opportunity to take on leverage and trade shares or options around the ex-dividend date and capitalize on the inevitable price movement. Similaly, there is no special opportunity to do the reverse of this trade and buy stocks on their ex dividend date, collect the dividend, and exit the position the next day, rotating from stock to stock each day/week to collect as many dividends as possible with a limited amount of funds. Each of these trading strategies would yield something less than buy and hold over the long term. The first strategy would miss dividends plus capital gains during its days out of the market. The second would miss capital gains during its days out of the market. Do some spreadsheet analysis on a 10-20y timeframe if you doubt this.
The fact that there is no such consistent opportunity suggests that markets are efficient and traders are using discounted cash flow analysis on expected earnings over a long timeframe to set the prices they are willing to pay. If you were doing DCF on a spreadsheet, the completion of a quarterly earnings period, which includes any dividend paid out of retained earnings, would both remove one cash flow from your spreadsheet and add another further out cash flow. I.e. You would simultaneously remove last quarter's earnings and add the following quarter 10 years from now, so that you are still analyzing the same duration of time. Also, the amount of discount applied to each future earning flow on your spreadsheet is reduced as time passes and each future earnings flow gets closer. The addition of future cash flows and the steady adjustment of discounts offsets the steady removal of earnings as they happen.
TLDR: If you consider this explanation TLDR or unconvincing, try day trading around ex-dividend dates. I suggest NLY which yields 12% so it must be a good deal. Probably no one has thought of this and NLY is such a bargain (12% = ROI!) because nobody noticed. ;)
So first off, there IS a strategy to capture dividends on the ex-div day and sell the next. It is a thing and apparently some people make a profit that way. It is not a thing I do or recommend due to the inherent volatility and high taxes that are involved. Your welcome to try your luck on NLY though!
As for your next part, you are proving my point, with this.... Thanks. BUT this also this made me take a step back and realize I do need to restate 1 part, not because it's wrong, but the way it's stated is poorly done, and that was this part (Hopefully I can be clearer if not.... I tired? ):
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.
I absolutely think that those particular "stock would have gone up _______%" charts are crap, and INCORRECT. As stated, market is efficient, the dividend is accounted for, before the mandatory price drop. Yes, it's NOT an optional price drop. It happens every time and it's not resetting value, not now valuing the company less, or anything else, that value has already been figured by the time the ex-div rolls around by those buying the stock. The only exceptions MIGHT be if they announcement day and the ex-div day are next to each other (ie I announce at 4pm or after for ex-div next day and yes that happens.)
I WILL say that at some point in the past not sure exactly when, that DID have an impact and WAS useful. Now, no so much, it's something that needs to go away. (rambling slightly, trying to get off the soap box)
Anyway, the value however that was determined is where the stock begins trading (or trading around due to volatility), and sure, it's value is determined to have dropped, but to phrase it in the most ridiculous way possible: What Would The Company Do With It?
Your answer, reinvest it in another business. Like Verizon investing in Yahoo..... (It's a mess by the way)
Or ATT investing in Direct TV (crash and burn anyone)
or... I could continue with other bad business choices, but I don't think I need to. I'll admit right now, all the companies I am mentioning are Dividend companies BUT that's what I know, so I am using what I know, and I know they are JUST like any other company that doesn't pay a dividend. If they make a bad business decision, value goes down, end of story.
My point, IS that the dividend is NOT the factor that will drive the value down or the factor that will drive it up, as we cannot say that just because a business is reinvesting it's cash in itself does not automatically equal a greater valued company. So saying if they had kept the cash or reinvested it in themselves does not mean the price will go up. In could in fact tank. So don't assume that if a company didn't pay a dividend that automatically means it's giving away value. It might very well be earning value just by doing so. (ie NOT buying bad idea inc. and killing your company in the process.)
Of course we could look at Apple (Extreme cash hording). Tons of cash sitting there. Tons of value. And the cash is doing..... nothing? How many of people think that is a good idea??? (If you raise your hand I WILL knock you on the head with a paper airplane!) (Granted they now HAVE a dividend but that's not the point!)
Either way, dividends matter. The value of the company can literally depend
As a side note from me, not trying to convince anyone to invest in single stocks OR dividend paying ETFs. If you have a strategy that is working for you, stick to it and for this board that is mostly ETFs.
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Excessive dividends are NOT desirable... they create tax drag and your dividend is coming out of the NAV of the stock. It's preferable for as much of the dividend to be retained within the NAV without tax consequences. Unfortunately dividends are the most poorly understood concept among investors... so many people think just because a company is giving away dividends it's great as they think it's "free" money.. well, there is no free lunch, it's all coming out of your growth and you have to pay taxes on it to boot. Nope, there could be all sorts of ominous reasons for it.
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The UK FTSE 100 average dividend is 4.2% (has been between 3.5-4.5 for the past 8+ years)... at hose level it absolutely does matter more than the SP500 abt at 1.8%
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There is no such thing as a "mandatory" price drop for ex div corporate stocks. Price is agreed between buyer and seller alone.
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Price is agreed between buyer and seller alone.
Agreed, my example points that out BUT, the "official" price drops by the amount of the dividend (Not an optional price drop so it's mandatory), that does NOT mean that the price of the trades all drop. So YES there is a Mandatory price drop, but it does NOT (usually) effect the value of the trades.
I quote:
On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. - https://www.investopedia.com/articles/stocks/07/dividend_implications.asp
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Excessive dividends are NOT desirable... they create tax drag and your dividend is coming out of the NAV of the stock. It's preferable for as much of the dividend to be retained within the NAV without tax consequences. Unfortunately dividends are the most poorly understood concept among investors... so many people think just because a company is giving away dividends it's great as they think it's "free" money.. well, there is no free lunch, it's all coming out of your growth and you have to pay taxes on it to boot. Nope, there could be all sorts of ominous reasons for it.
Got it, YOU don't probably don't understand dividends, but you do understand taxes. Sounds good to me. I never said and will never say they are free money as everything out there has a cost. The only people whom, think they are free money are people whom are new or never understood dividends.
You believe that dividends give you no value, and that's fine. We can agree to disagree.
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Price is agreed between buyer and seller alone.
Agreed, my example points that out BUT, the "official" price drops by the amount of the dividend (Not an optional price drop so it's mandatory), that does NOT mean that the price of the trades all drop. So YES there is a Mandatory price drop, but it does NOT (usually) effect the value of the trades.
I quote:
On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. - https://www.investopedia.com/articles/stocks/07/dividend_implications.asp
Any GTC orders are also reduced by the dividend. There is an order type, DNR, which doesn't reduce. Many individual brokers don't offer it.
https://www.investopedia.com/terms/d/dnr.asp
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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.
Dividends decrease the book value of the company, not the market value .
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Price is agreed between buyer and seller alone.
Agreed, my example points that out BUT, the "official" price drops by the amount of the dividend (Not an optional price drop so it's mandatory), that does NOT mean that the price of the trades all drop. So YES there is a Mandatory price drop, but it does NOT (usually) effect the value of the trades.
I quote:
On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. - https://www.investopedia.com/articles/stocks/07/dividend_implications.asp
There is no "official" price, it isn't a thing. The official price is the last traded price. Reduction of stop and limit orders in the book do no change the price.
That being said it usually trades lower, but no actual mechanism causes this to happen other than supply and demand.
Yes the company is worth less by the amount of the dividend, but stock prices are not directly connected to the value of the company.
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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.
Dividends decrease the book value of the company, not the market value .
Incorrect. The stock price is actually adjusted by the exchange. The market value goes down on ex-div at closing.
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Incorrect. The stock price is actually adjusted by the exchange. The market value goes down on ex-div at closing.
This doesn't happen. Open ended mutual funds do reduce the price by the dividend at close because the funds are calculated on NAV. Corporate stock is not set to a NAV, it is set by buyer and seller. The exchange doesn't reduce last trade prices on close for ex divs. Please cite a source for this info.
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Incorrect. The stock price is actually adjusted by the exchange. The market value goes down on ex-div at closing.
This doesn't happen. Open ended mutual funds do reduce the price by the dividend at close because the funds are calculated on NAV. Corporate stock is not set to a NAV, it is set by buyer and seller. The exchange doesn't reduce last trade prices on close for ex divs. Please cite a source for this info.
Right, what a buyer paid is what the buyer paid. More accurately, the ticker quote is changed. (Also, to clarify some ambiguity on my part, the day of ex-div is too late to get the dividend.)
A source was cited above. There's also this one:
https://finance.zacks.com/stock-price-change-dividend-paid-3571.html
Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend. For example, if a stock trades at $50 per share and pays out a $0.25 quarterly dividend, the stock will be marked down to open at $49.75 per share.
http://groupssa.com/ex-dividendstockpriceadjustment.html
The only trade price that the exchange reduces by the exact amount of a dividend is the quote of the previous day's close, not any actual trade. But because the quote of the previous day's closing trade AND the bid and the ask of all outstanding orders are also reduced (unless placed with a Do Not Reduce restriction) by the exchange, plus the fact that the net asset value of the stock is now less (by the exact amount of the dividend), when trading begins on the ex-date the effect is usually a reduction in price approximating the size of the dividend, as traders are well aware of the reduction in the stock's net asset value.
Etc., etc.
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I liked this video a lot and appreciate the tone of voice of the speaker (easy to listen to) and his logic. I'm going to see what else he offers on his YouTube channel - thanks for the link!
And after reading this entire thread it seems to me that almost nothing brings out the boxing gloves like the whole dividend topic. The bickering! The condescending tones! The adamant points of view! The taking other posters to the mat!...what is it about dividends that spur this passion and outrage?
*Not speaking of every entry into this thread of course, but in general of entries in threads that involve dividends.
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I know Im terrible. But boxing is fun. Honestly though I appreciate all of you guys' chiming in.
I think I realize I like argue about stupid financial shit due to frustrations involving my own lonliness. I dun't know what to do about it. eh well.
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..what is it about dividends that spur this passion and outrage?
People who love dividend stocks see them as the ideal investment, with the steady cash flow of bonds and the growth potential of the overall stock market. They see dividend haters as reckless, short-term capital gains gamblers who misunderstand not only compounding but also the the realities of living off of investments. They feel their dividend stocks will have a higher total return than other stocks because of the dividend.
People who hate dividend stocks (hi) see them as a simple conversion of the firm's value and potential into a taxable return OF investment (not return ON investment). They see dividend lovers as being fooled by a single accounting factor into investing in dead-end companies like GE, Kraft, AT&T, and Ford.
In other words, they see each other as doing something irrational based on a simplistic understanding of how stocks work. In a tireless effort to clear the internet of irrationality, they say to each other "WTF are you thinking, idiot!"
I would be interested to learn whether one's opinion on dividends is predictive of one's opinion on paying off a mortgage early. There is probably some sort of underlying psychological factor, such as risk aversion, optimism, or a preference for cash accounting.
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People who love dividend stocks see them as the ideal investment, with the steady cash flow of bonds and the growth potential of the overall stock market. They see dividend haters as reckless, short-term capital gains gamblers who misunderstand not only compounding but also the the realities of living off of investments. They feel their dividend stocks will have a higher total return than other stocks because of the dividend.
People who hate dividend stocks (hi) see them as a simple conversion of the firm's value and potential into a taxable return OF investment (not return ON investment). They see dividend lovers as being fooled by a single accounting factor into investing in dead-end companies like GE, Kraft, AT&T, and Ford.
In other words, they see each other as doing something irrational based on a simplistic understanding of how stocks work. In a tireless effort to clear the internet of irrationality, they say to each other "WTF are you thinking, idiot!"
I would be interested to learn whether one's opinion on dividends is predictive of one's opinion on paying off a mortgage early. There is probably some sort of underlying psychological factor, such as risk aversion, optimism, or a preference for cash accounting.
Hmmm, interesting perspective. I can't speak for all dividend investors. (Hell I can't even speak for 2 dividend investor!) but I have to say that at least for me it pretty much, not spot on. Though I am sure that there are those out there that fit this description, or come close to it. I'll even admit to criticizing people taking there "zealot" behavior a little too far. The best investors understand that it doesn't matter how you get there(whatever there is), only that you do.
Now I have been called an idiot for liking dividends and investing in them and seen it tossed back as you have noted. I personally wouldn't call ANYONE an idiot or say they are doing it wrong for investing in non-dividend paying stocks/etfs. I'll defend them sure, but if you really don't want to collect a dividend and just depend on returns, by all means go for it. You find more value that way and we just have to agree to disagree.
Can we argue about it, absolutely! Who's right in the end? In this instance, the guy/gal whom retires early so.... All of us(hopefully)?
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Now I have been called an idiot for liking dividends and investing in them and seen it tossed back as you have noted. I personally wouldn't call ANYONE an idiot or say they are doing it wrong for investing in non-dividend paying stocks/etfs.
Straw man warning: nobody has called you that in this thread. You're bringing up an insult that nobody has used here.
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Now I have been called an idiot for liking dividends and investing in them and seen it tossed back as you have noted. I personally wouldn't call ANYONE an idiot or say they are doing it wrong for investing in non-dividend paying stocks/etfs.
Straw man warning: nobody has called you that in this thread. You're bringing up an insult that nobody has used here.
Perhaps not directly, but the implication was there when the poster he was responding to said he was "fooled", "doing something irrational", and saying to each other "WTF are you thinking, idiot!" Granted, all of this was postulated as a hypothetical, but by implication it presumed people are calling each other idiots.
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Now I have been called an idiot for liking dividends and investing in them and seen it tossed back as you have noted. I personally wouldn't call ANYONE an idiot or say they are doing it wrong for investing in non-dividend paying stocks/etfs.
Straw man warning: nobody has called you that in this thread. You're bringing up an insult that nobody has used here.
Correct. (And I'd be surprised if they did as we all seem to be smart, intelligent people.)
But I get the feeling I am becoming the aggressor here so.. Apologies to all as no offense was ever intended.
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I hold all my dividend aristocrats in tax protected accounts. I purchased the stocks directly (not through a fund). They make up about 25% of my stock portfolio. Tell me why I am stupid.
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I would be interested to learn whether one's opinion on dividends is predictive of one's opinion on paying off a mortgage early. There is probably some sort of underlying psychological factor, such as risk aversion, optimism, or a preference for cash accounting.
I created a poll to check for a correlation between dividend investing and early mortgage payoff:
https://forum.mrmoneymustache.com/investor-alley/poll-on-the-most-controversial-2-subjects-on-the-mmm-forum/ (https://forum.mrmoneymustache.com/investor-alley/poll-on-the-most-controversial-2-subjects-on-the-mmm-forum/)
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I am not against dividends. I am also highly highly for early mortgage payoff. One is a diversification argument and the other is behavioural.
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You buy a rental property, and charge rent as a reward for saving and investing your money. If the property is in an attractive area and its market price rises, that rise is unaffected by your charging rent or not. I suspect that most of the time, the rise in market price of a public company is not much affected if it pays dividends or not. If the public likes what the company is selling, then that market support comes after capital investment the company has made in the recent past.
Rents and dividends are a rewards for saving and investing. This has been the case since the ancient world. Those who want capital have to pay for it, either as interest, or as dividends.
In practice, most public companies borrow money and pay interest, and also pay dividends. Shareholders own part of the company, and the bank owns the rest. Analysts suggest that as a rule of thumb, shareholders should own two thirds of a company, and the bank one third. If a company pays 7% on borrowed money, and pays more than that in dividends, shareholders benefit from the difference.
The US tax code requires those who work for a living to pay a higher rate of income tax than those who do not work for a living, but hold qualifying share investments paying dividends. Does that tell you something?
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The US tax code requires those who work for a living to pay a higher rate of income tax than those who do not work for a living, but hold qualifying share investments paying dividends. Does that tell you something?
Maybe? But I'm not entirely clear on what you're trying to say. Can you be more explicit?
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I was being cynical: Congress and lobbyists have ensured that those receiving qualifying dividends pay a lower tax rate than those who work for a living. I am Australian, and wonder if many Americans even know there are two income tax scales; one for those who work, and one for those who do not.
In Australia there is only one income tax scale, but we have a strange custom known as dividend imputation, so that a company pays tax, then pays dividends with a credit for the income tax paid by the company. This means that Australian investors in most Australian companies pay little or no tax on their dividend income, so the effect is much the same as the American income tax scale for qualifying dividend income.
The moral is: invest and join the privileged upper class who pay income tax at a lower rate than the poor sods with no assets.
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Do any dividend investors focus on international for the higher dividends?
I thought that earlier post was interesting, I'd never heard of that idea.
One problem with an earlier post saying dividends do not impact the stock price: does that mean two otherwise identical companies can grow at identical rates if one throws off a 5% dividend and the other throws off a 2% dividend? I would think the company with a lower dividend kept more money to buy factories and hire people, letting it grow faster. Which means the market has to incorporate the dividend into it's estimates of future profit, and then reflect that in the stock price.
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I was being cynical: Congress and lobbyists have ensured that those receiving qualifying dividends pay a lower tax rate than those who work for a living. I am Australian, and wonder if many Americans even know there are two income tax scales; one for those who work, and one for those who do not.
In Australia there is only one income tax scale, but we have a strange custom known as dividend imputation, so that a company pays tax, then pays dividends with a credit for the income tax paid by the company. This means that Australian investors in most Australian companies pay little or no tax on their dividend income, so the effect is much the same as the American income tax scale for qualifying dividend income.
The moral is: invest and join the privileged upper class who pay income tax at a lower rate than the poor sods with no assets.
Investors in the U.S. are also double-taxed: first at the corporate level, and second at the individual level.
By the way, virtually everyone on this board was at one time (or still is) a poor sod with no assets, so the real moral of the story is don't buy stupid shit if you want to climb up the class ladder.
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One problem with an earlier post saying dividends do not impact the stock price: does that mean two otherwise identical companies can grow at identical rates if one throws off a 5% dividend and the other throws off a 2% dividend? I would think the company with a lower dividend kept more money to buy factories and hire people, letting it grow faster. Which means the market has to incorporate the dividend into it's estimates of future profit, and then reflect that in the stock price.
Typically, dividends act as a function of growth, not the other way around. So if a company can use accumulated capital to innovate, grow, and earn a good return on that capital, then it makes sense for that company to reinvest and not pay dividends (e.g. Amazon or Berkshire Hathaway). If a company can no longer use accumulated capital to create more growth in a cost-effective manner, it has transitioned into a 'value' company and should then pay out the capital as dividends.
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I was being cynical: Congress and lobbyists have ensured that those receiving qualifying dividends pay a lower tax rate than those who work for a living. I am Australian, and wonder if many Americans even know there are two income tax scales; one for those who work, and one for those who do not.
In Australia there is only one income tax scale, but we have a strange custom known as dividend imputation, so that a company pays tax, then pays dividends with a credit for the income tax paid by the company. This means that Australian investors in most Australian companies pay little or no tax on their dividend income, so the effect is much the same as the American income tax scale for qualifying dividend income.
The moral is: invest and join the privileged upper class who pay income tax at a lower rate than the poor sods with no assets.
Investors in the U.S. are also double-taxed: first at the corporate level, and second at the individual level.
By the way, virtually everyone on this board was at one time (or still is) a poor sod with no assets, so the real moral of the story is don't buy stupid shit if you want to climb up the class ladder.
That's the price of limited liability. I'm happy that nobody can come after my personal assets if a company I own stock in goes bust.