Author Topic: Help me understand dividends over time  (Read 6355 times)

FrugalSaver

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Help me understand dividends over time
« on: December 25, 2016, 10:10:43 AM »
Let's say in Tuesday I invest $1 million in the VTSAX. for easy math purposes, say the dividend rate is 2%.

That would generate $20,000 per year assuming no re-investment

If the market lost 30%, which is the average bear market which happens every 3 years on average over the last 100 years.

Here's my questions:

1) if we had an average bear market and lost 30% that would take my portfolio to $700,000. What would that do to the dividends?  Typically the nominal amount goes down in a bear market but the % can go up as companies start to react to reduced earnings.

2) if after that 30% bear drop, more money was added, how does that affect the dividend %?

3) is it better to think of dividends as a % for modeling purposes, or should I think of # of shares and look historically at the worst amount per share that's paid in the dividend for modeling purposes?

My goal is to get to the point that my dividends are funding 100% of my expenses and am trying to predict how that would affect my annual spending potential when the next bear markets arrive.


waltworks

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Re: Help me understand dividends over time
« Reply #1 on: December 25, 2016, 11:00:14 AM »
Ignore the dividends (which will drop in an economic downturn) and just look at total return. You do not need (or want) to just "live off the dividends" - you just need your total return to support your desired spending level.

In other words, you are making this too complicated. Read some 4% rule threads (like this one: http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/) or read up on the Trinity study (start here: https://en.wikipedia.org/wiki/Trinity_study).

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FrugalSaver

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Re: Help me understand dividends over time
« Reply #2 on: December 25, 2016, 01:38:09 PM »
I understand the 4% rule. I'm trying to learn more about the dividend impact and make sure I'm modeling that correctly for some personal goals so welcome any thoughts from anyone on my questions above. Thanks!

force majeure

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Re: Help me understand dividends over time
« Reply #3 on: December 25, 2016, 02:25:46 PM »
Ignore dividends? No way.
I am looking at a year line chart for Euro Stoxx 50 index, as an example. It returned 0% in price performance.
A dividend index did 10% and yielded 4%. In taxable accounts, dividends are useful side income, avoids you having to sell and trigger capital gains or pay commission.

marty998

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Re: Help me understand dividends over time
« Reply #4 on: December 25, 2016, 02:58:40 PM »
Ignore the dividends (which will drop in an economic downturn) and just look at total return. You do not need (or want) to just "live off the dividends" - you just need your total return to support your desired spending level.

In other words, you are making this too complicated. Read some 4% rule threads (like this one: http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/) or read up on the Trinity study (start here: https://en.wikipedia.org/wiki/Trinity_study).

-W

Ignore dividends? No way.
I am looking at a year line chart for Euro Stoxx 50 index, as an example. It returned 0% in price performance.
A dividend index did 10% and yielded 4%. In taxable accounts, dividends are useful side income, avoids you having to sell and trigger capital gains or pay commission.

Yeah look, you can't just blindly ignore dividends... as stated there are different tax consequences to dividends and capital. I wouldn't want to be selling capital to fund my 4% too often.

Our market is different to yours - companies pay out a much higher proportion of earnings as dividends - 4%/5% is the general pre-tax yield, and with tax credits can rise to 7-8% after tax for many low income taxpayers.

Living off dividends means one less thing to be worried about IMO.

Personally I would just concern myself with actual $'s. Sure it can go up and down depending on the larger constituents of the index, but trends over multi years should give you a reasonable guide as to what to expect.

Interest Compound

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Re: Help me understand dividends over time
« Reply #5 on: December 25, 2016, 11:08:22 PM »
The Dividend vs Total Return argument has been beaten to death on these forums. Total Return won.

Dividends are mathematically equivalent to selling stock, before you factor in taxes. After you factor in taxes, dividends are much less efficient:



If you are limiting your portfolio to only dividend payers, you're adding risk, for no expected reward, resulting in a less efficient risk-adjusted portfolio. Even worse, if you're goal is to fund your expenses in FIRE with 100% dividends, you'll either end up saving way too much (spending many more years working than you needed to), or you'll end up with a much riskier portfolio.

If you want a monthly paycheck from your investments, login to Vanguard, and tell them to send a monthly paycheck from your investments:



Seriously, just stop.

K-ice

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Re: Help me understand dividends over time
« Reply #6 on: December 26, 2016, 12:10:02 AM »
I think the OP has a good question that hasn't really been answered.

There are good points about lack of diversification with just dividend stocks.
But back to the question.


So 2% of 1M is $20,000

Does that change to $14,000 if it drops to $700,000?


I do not know the historical data for VTSAX. But I think strong companies try to hold their dividend in terms of payout per stock constant or increasing. Like .30 per share per quarter.  38, 42, 47, 47 cents looks like the VTI payout at the 6 month mark the past 4 years.

http://m.nasdaq.com/symbol/vti/dividend-history

Finding info that covered more years would be helpful.

Assuming dividend price per share is held constant the $20,000 would be relatively constant. This is only true if the companies keep the payout constant & you didn't sell any shares. So $20,000 on the now $700,000 portfolio is more like a 2.8% return. Yeah! (sarcastic)  at least it's still $20K but your net worth just got pummeled.

Of course ultimately you would hope your stocks come back to $1M and your dividend % will drop back to 2%.

Can anyone confirm this is how it works as I think this is the OP's question?

I have some dividend shares in a small risky energy company. (Don't judge it's a small amount of fun money.) They cut their dividend in 1/2 to keep more capital in the company. Not a good sign, & it happens, but from what I understand slashing the dividend payout would be less common in a well diversified ETF.

I'd be curious to know how much dividend payouts dropped in 2008? Did they drop in dollar amount? They might have even rose in % amount briefly.



LAGuy

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Re: Help me understand dividends over time
« Reply #7 on: December 26, 2016, 08:23:11 AM »
I think the OP has a good question that hasn't really been answered.

There are good points about lack of diversification with just dividend stocks.
But back to the question.


So 2% of 1M is $20,000

Does that change to $14,000 if it drops to $700,000?


I do not know the historical data for VTSAX. But I think strong companies try to hold their dividend in terms of payout per stock constant or increasing. Like .30 per share per quarter.  38, 42, 47, 47 cents looks like the VTI payout at the 6 month mark the past 4 years.

http://m.nasdaq.com/symbol/vti/dividend-history

Finding info that covered more years would be helpful.

Assuming dividend price per share is held constant the $20,000 would be relatively constant. This is only true if the companies keep the payout constant & you didn't sell any shares. So $20,000 on the now $700,000 portfolio is more like a 2.8% return. Yeah! (sarcastic)  at least it's still $20K but your net worth just got pummeled.

Of course ultimately you would hope your stocks come back to $1M and your dividend % will drop back to 2%.

Can anyone confirm this is how it works as I think this is the OP's question?

I have some dividend shares in a small risky energy company. (Don't judge it's a small amount of fun money.) They cut their dividend in 1/2 to keep more capital in the company. Not a good sign, & it happens, but from what I understand slashing the dividend payout would be less common in a well diversified ETF.

I'd be curious to know how much dividend payouts dropped in 2008? Did they drop in dollar amount? They might have even rose in % amount briefly.

The point of Interest Compound's post is that it doesn't matter. Your stock value is going to go down by an equivalent amount to whatever the dividend payment was. Dividends are just an accounting gimmick. Another way to look at them is as if somebody forcefully made you sell a percentage of your portfolio. However, if you really must have an answer, then yes in recessions dividend yields go down as companies that are less profitable pare back their dividend payments. One can hope that one day dividends will go away entirely as I'd rather not deal with the tax implications of the payments.

ender

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Re: Help me understand dividends over time
« Reply #8 on: December 26, 2016, 08:27:33 AM »
I'd be curious to know how much dividend payouts dropped in 2008? Did they drop in dollar amount? They might have even rose in % amount briefly.

http://www.multpl.com/s-p-500-dividend-yield/

The percentage went up slightly ~2009 but the absolute amount still went down fairly dramatically.

In other words, when the market goes down significantly the dividend yield may increase slightly but not enough to make up for the loss.

Crazycarl

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Re: Help me understand dividends over time
« Reply #9 on: December 27, 2016, 01:39:08 PM »
The dividend % always changes as the stock price changes. The actual Dividend only changes when the company declares the dividend payment (either quarterly, yearly, etc).

Example: I bought a bunch of ATT stock when it was at $33 / share yielding me about 6.8% ($1.95 / share, maybe at that time), the stock is currently at $42.67 / share and now only yields 4.57 % but the amount I receive per share has actually gone up!!, because the dividend has increased slower than the stock price. I am still making the 6.8% on my INITIAL investment, but only making 4.57 % on my total capital in that asset.

So, if the dividend does not change you are receiving the same amount even if the stock price fluctuates.

mizzourah2006

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Re: Help me understand dividends over time
« Reply #10 on: December 28, 2016, 07:15:47 AM »
I think the OP has a good question that hasn't really been answered.

There are good points about lack of diversification with just dividend stocks.
But back to the question.


So 2% of 1M is $20,000

Does that change to $14,000 if it drops to $700,000?


I do not know the historical data for VTSAX. But I think strong companies try to hold their dividend in terms of payout per stock constant or increasing. Like .30 per share per quarter.  38, 42, 47, 47 cents looks like the VTI payout at the 6 month mark the past 4 years.

http://m.nasdaq.com/symbol/vti/dividend-history

Finding info that covered more years would be helpful.

Assuming dividend price per share is held constant the $20,000 would be relatively constant. This is only true if the companies keep the payout constant & you didn't sell any shares. So $20,000 on the now $700,000 portfolio is more like a 2.8% return. Yeah! (sarcastic)  at least it's still $20K but your net worth just got pummeled.

Of course ultimately you would hope your stocks come back to $1M and your dividend % will drop back to 2%.

Can anyone confirm this is how it works as I think this is the OP's question?

I have some dividend shares in a small risky energy company. (Don't judge it's a small amount of fun money.) They cut their dividend in 1/2 to keep more capital in the company. Not a good sign, & it happens, but from what I understand slashing the dividend payout would be less common in a well diversified ETF.

I'd be curious to know how much dividend payouts dropped in 2008? Did they drop in dollar amount? They might have even rose in % amount briefly.

The point of Interest Compound's post is that it doesn't matter. Your stock value is going to go down by an equivalent amount to whatever the dividend payment was. Dividends are just an accounting gimmick. Another way to look at them is as if somebody forcefully made you sell a percentage of your portfolio. However, if you really must have an answer, then yes in recessions dividend yields go down as companies that are less profitable pare back their dividend payments. One can hope that one day dividends will go away entirely as I'd rather not deal with the tax implications of the payments.

I would never want dividends to go away in many companies. What would you expect them to do with the cash they generate on a quarterly basis? You have essentially 2 other options.

1. The company just keeps the cash, they can choose to just try to spend it all on further growth, or just keep it in cash. Would you want a company like Walmart to just open up stores to open up stores regardless of the economics of its profitability? Or Coca-Cola to just spend billions on marketing to try to further drive up sales? These older companies consistently generate way more cash than they can effectively allocate back into the company. So you either just let them waste it, or just hold it in cash/invest it. If you want a company like Walmart or Coca-Cola to also be your investment broker go for it, but I'd prefer I choose how to invest the extra cash and not the board of a company.

2. Share buybacks. Which historically benefit management. As an employee that receives RSUs I'd much prefer share buybacks because I don't have access to the stock for several years so receive no benefit from the dividends, but receive just as much of a benefit from buybacks as an actual shareholder. There is also plenty of evidence that companies are historically poor when it comes to implementing buybacks and executing those buybacks.


I'm not saying that a bit of all of the above is bad, but to say you'd prefer companies just stop dividends all together would almost certainly lower your long term return because instead of investing your dividends from one company into many (diversifying) you are allowing the company to make the decision on how to return value to you as a shareholder and removing the option of "We have too much cash and realize we can't effectively allocate it all within the business, so we are returning some to our owners".

One negative I think that has come out of index investing is that investors have stopped seeing it as a collection of investments in real companies that are all at different stages of maturity and instead just a number that hopefully continues to rise. A dividend from an index fund is just cash that gets taxed, a dividend from a real company is cash that the board has decided it can't effectively allocate within the company any longer and has decided to return to ownership.

The Intelligent Investor by Benjamin Graham does a great job of breaking down the purpose of investments/owning stock from a more business like perspective and would definitely consider mandatory reading for even index investors.
« Last Edit: December 28, 2016, 07:22:06 AM by mizzourah2006 »

FrugalSaver

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Re: Help me understand dividends over time
« Reply #11 on: December 28, 2016, 08:04:13 AM »
Maybe I didn't make it clear that the example is for vtsax

It's not a special dividend stock or dividend etf.

What I think I'll do is look at the historical dividend amount per share and model based on that. The % isn't as helpful as recessions destroy your total assets and the % isn't as meaningful in real terms. The amount of dividend per share though in nominal terms would be helpful.

Scandium

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Re: Help me understand dividends over time
« Reply #12 on: December 28, 2016, 10:20:39 AM »

2. Share buybacks. Which historically benefit management. As an employee that receives RSUs I'd much prefer share buybacks because I don't have access to the stock for several years so receive no benefit from the dividends, but receive just as much of a benefit from buybacks as an actual shareholder. There is also plenty of evidence that companies are historically poor when it comes to implementing buybacks and executing those buybacks.

Huh, based on what? A source for this? As a shareholder share buybacks is equivalent to a dividend payout, except I'm not taxed. How does this "benefit management"? (any more than dividends do?)

starguru

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Re: Help me understand dividends over time
« Reply #13 on: December 28, 2016, 12:32:39 PM »

2. Share buybacks. Which historically benefit management. As an employee that receives RSUs I'd much prefer share buybacks because I don't have access to the stock for several years so receive no benefit from the dividends, but receive just as much of a benefit from buybacks as an actual shareholder. There is also plenty of evidence that companies are historically poor when it comes to implementing buybacks and executing those buybacks.

Huh, based on what? A source for this? As a shareholder share buybacks is equivalent to a dividend payout, except I'm not taxed. How does this "benefit management"? (any more than dividends do?)

As someone who is partly compensated via RSUs, the following apply to me (not sure if all RSU recipients get the same treatment):

1.  Dividends *DO* benefit me even with unvested RSUs.  I accumulate dividend equivalents, which is to say they just hold the dividends my unvested RSUs shed until the RSUs vest.  When they vest, the dividend equivalents are released as well.  In practice, I never see that cash, as it goes directly to paying the tax on the RSU vest event, which is at my marginal rate.

2.  How are share buybacks equivalent to a dividend payout?  Share buybacks reduce the amount of outstanding shares, raising the price of the stock (hopefully).  They also, as a direct consequence of reducing the number of outstanding shares, reduce the total amount of dividend payouts.  That way a company, thru buybacks, can actually increase the dividend amount per share, but not increase the total amount of dividend payouts. 

3.  Buybacks can benefit management as a secondary effect if a company's management is incentivised to focus on stock price.  I don't know if this happens in practice, but if a CEOs performance metric say "you get XYZ if the share price is > n"  then buybacks could facilitate this.  But Im not sure if this happens in practice. 

Scandium

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Re: Help me understand dividends over time
« Reply #14 on: December 28, 2016, 12:50:26 PM »

2. Share buybacks. Which historically benefit management. As an employee that receives RSUs I'd much prefer share buybacks because I don't have access to the stock for several years so receive no benefit from the dividends, but receive just as much of a benefit from buybacks as an actual shareholder. There is also plenty of evidence that companies are historically poor when it comes to implementing buybacks and executing those buybacks.

Huh, based on what? A source for this? As a shareholder share buybacks is equivalent to a dividend payout, except I'm not taxed. How does this "benefit management"? (any more than dividends do?)
2.  How are share buybacks equivalent to a dividend payout?  Share buybacks reduce the amount of outstanding shares, raising the price of the stock (hopefully).  They also, as a direct consequence of reducing the number of outstanding shares, reduce the total amount of dividend payouts.  That way a company, thru buybacks, can actually increase the dividend amount per share, but not increase the total amount of dividend payouts. 

Because $1 spent on dividends or $1 spent on share buybacks increase the value for the remaining shareholders by an equivalent amount. The amount "returned to shareholders" is the same. If I have $100 of stocks and either get a $5 dividend or the price increase by $5 it's the same to me (less taxes). But the latter is better because of taxes, and giving me more flexibility.


starguru

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Re: Help me understand dividends over time
« Reply #15 on: December 28, 2016, 01:15:34 PM »

2. Share buybacks. Which historically benefit management. As an employee that receives RSUs I'd much prefer share buybacks because I don't have access to the stock for several years so receive no benefit from the dividends, but receive just as much of a benefit from buybacks as an actual shareholder. There is also plenty of evidence that companies are historically poor when it comes to implementing buybacks and executing those buybacks.

Huh, based on what? A source for this? As a shareholder share buybacks is equivalent to a dividend payout, except I'm not taxed. How does this "benefit management"? (any more than dividends do?)
2.  How are share buybacks equivalent to a dividend payout?  Share buybacks reduce the amount of outstanding shares, raising the price of the stock (hopefully).  They also, as a direct consequence of reducing the number of outstanding shares, reduce the total amount of dividend payouts.  That way a company, thru buybacks, can actually increase the dividend amount per share, but not increase the total amount of dividend payouts. 

Because $1 spent on dividends or $1 spent on share buybacks increase the value for the remaining shareholders by an equivalent amount. The amount "returned to shareholders" is the same. If I have $100 of stocks and either get a $5 dividend or the price increase by $5 it's the same to me (less taxes). But the latter is better because of taxes, and giving me more flexibility.

Are you claiming that if an investor buys, say, $100k of stock for a company, that company's stock market valuation increases by $100k?  I don't think that's true, but I don't know.   Although it's an interesting idea...

It seems to me paying a dividend puts cash in a stock holder's account.  The stock price also decreases by the appropriate amount per share.  Looking at the transaction in isolation, the company is valued less (stock price - dividend amount) but the stock holders value is increased, so net value change across company and stock holder is 0.

I can't wrap my head around the idea that a market actor buying some amount of shares of a company increases the company's value by that same amount.   Company stock market valuation is a simple function of stock price and number of shares.  Say there is a company with 1000 shares.  At some instant the share price is $100.  Stock market valuation is $100000.  Actor A might by 1000 shares at, say $100 a share.  The very next instant.  Actor B might buy 1 share at 99$ a share (i.e. the price fell).  Actor B spent $99, but spending $99 has decreased the company's valuation by 1 * the number of shares, so $1000.  Let's

So whereas a dividend payment decreases the company's stock market value by a set amount, it's hard to tell what buying a share does.  It affects the price of the stock, for sure, but I don't see a 1-1 correlation.

deborah

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Re: Help me understand dividends over time
« Reply #16 on: December 28, 2016, 01:17:24 PM »
The answer to the original question is complicated, as it varies.

Companies give dividends based upon the profit they have made and the amount of money they need for their future. So if your stock changes in value from $1m to $700k it can have little bearing upon the amount the company pays in dividend. This can really depend upon the market slice you are looking at.

For instance, mining companies need a lot of money when they are developing a mine. As a result they give little in dividends, but their share price might be going up dramatically because they have a really good lode that they are about to exploit. On the other hand, hypothetically, the developed mine might last for 10 years in production, so, at the end of that time (if they have no other mines and don't plan to start any more), they are making more money than they know what to do with, so they might be giving very high dividends, but have a very low share price (there really is no future for the company). This sort of business might have no change in an economic downturn, so their dividends might not change at all.

On the other hand, a bank tends to give high dividends relative to their share price, but as their business is based upon the economy, their dividends will definitely suffer whenever the market changes their value from $1m to $700k, and you would expect their dividend to also change.

Scandium

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Re: Help me understand dividends over time
« Reply #17 on: December 28, 2016, 01:44:56 PM »

2. Share buybacks. Which historically benefit management. As an employee that receives RSUs I'd much prefer share buybacks because I don't have access to the stock for several years so receive no benefit from the dividends, but receive just as much of a benefit from buybacks as an actual shareholder. There is also plenty of evidence that companies are historically poor when it comes to implementing buybacks and executing those buybacks.

Huh, based on what? A source for this? As a shareholder share buybacks is equivalent to a dividend payout, except I'm not taxed. How does this "benefit management"? (any more than dividends do?)
2.  How are share buybacks equivalent to a dividend payout?  Share buybacks reduce the amount of outstanding shares, raising the price of the stock (hopefully).  They also, as a direct consequence of reducing the number of outstanding shares, reduce the total amount of dividend payouts.  That way a company, thru buybacks, can actually increase the dividend amount per share, but not increase the total amount of dividend payouts. 

Because $1 spent on dividends or $1 spent on share buybacks increase the value for the remaining shareholders by an equivalent amount. The amount "returned to shareholders" is the same. If I have $100 of stocks and either get a $5 dividend or the price increase by $5 it's the same to me (less taxes). But the latter is better because of taxes, and giving me more flexibility.

Are you claiming that if an investor buys, say, $100k of stock for a company, that company's stock market valuation increases by $100k?  I don't think that's true, but I don't know.   Although it's an interesting idea...

It seems to me paying a dividend puts cash in a stock holder's account.  The stock price also decreases by the appropriate amount per share.  Looking at the transaction in isolation, the company is valued less (stock price - dividend amount) but the stock holders value is increased, so net value change across company and stock holder is 0.

I can't wrap my head around the idea that a market actor buying some amount of shares of a company increases the company's value by that same amount.   Company stock market valuation is a simple function of stock price and number of shares.  Say there is a company with 1000 shares.  At some instant the share price is $100.  Stock market valuation is $100000.  Actor A might by 1000 shares at, say $100 a share.  The very next instant.  Actor B might buy 1 share at 99$ a share (i.e. the price fell).  Actor B spent $99, but spending $99 has decreased the company's valuation by 1 * the number of shares, so $1000.  Let's

So whereas a dividend payment decreases the company's stock market value by a set amount, it's hard to tell what buying a share does.  It affects the price of the stock, for sure, but I don't see a 1-1 correlation.

You're not analyzing this correctly. No, buying/selling of shares on the open market doesn't change the valuation, just the price. Buying from the company does, i.e. the company issuing more shares. It doesn't change the value of the company, it changes the number if shares that value is distributed over. Share price is the value of the company (future earnings, assets etc), times some multiple (P/E), divided by shares outstanding. 

Company is worth $1,000,000. Has 1000 shares. Then $1000 per share. They buy back 500 shares. Now $1M/500 = $2000 per share. Your shares doubled in value, with no taxable event until you decide to sell. If you sell half your shares you'd be in the exact same position as if you got a 100% dividend.

I'm sure someone can explain this better and elaborate. This is really not my field..

*edit: yes I realize the buyback will reduce the assets by equal amount of $ so not this simple. But dividends would do the same so it's equal for that purpose.
« Last Edit: December 28, 2016, 01:51:19 PM by Scandium »

mizzourah2006

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Re: Help me understand dividends over time
« Reply #18 on: December 28, 2016, 01:47:49 PM »

2. Share buybacks. Which historically benefit management. As an employee that receives RSUs I'd much prefer share buybacks because I don't have access to the stock for several years so receive no benefit from the dividends, but receive just as much of a benefit from buybacks as an actual shareholder. There is also plenty of evidence that companies are historically poor when it comes to implementing buybacks and executing those buybacks.

Huh, based on what? A source for this? As a shareholder share buybacks is equivalent to a dividend payout, except I'm not taxed. How does this "benefit management"? (any more than dividends do?)

As someone who is partly compensated via RSUs, the following apply to me (not sure if all RSU recipients get the same treatment):

1.  Dividends *DO* benefit me even with unvested RSUs.  I accumulate dividend equivalents, which is to say they just hold the dividends my unvested RSUs shed until the RSUs vest.  When they vest, the dividend equivalents are released as well.  In practice, I never see that cash, as it goes directly to paying the tax on the RSU vest event, which is at my marginal rate.

2.  How are share buybacks equivalent to a dividend payout?  Share buybacks reduce the amount of outstanding shares, raising the price of the stock (hopefully).  They also, as a direct consequence of reducing the number of outstanding shares, reduce the total amount of dividend payouts.  That way a company, thru buybacks, can actually increase the dividend amount per share, but not increase the total amount of dividend payouts. 

3.  Buybacks can benefit management as a secondary effect if a company's management is incentivised to focus on stock price.  I don't know if this happens in practice, but if a CEOs performance metric say "you get XYZ if the share price is > n"  then buybacks could facilitate this.  But Im not sure if this happens in practice.

You have a unique situation then. I work for a fortune 25 company and receive nothing via dividend until my RSUs vest, but always receive the benefit of reduced shares outstanding.

Also share buybacks aren't equivalent to a dividend, they are just another way for the company to utilize excess cash.

Here are 2 articles that explain how buybacks can benefit management more than shareholders both with slightly separate takes:

https://www.google.com/amp/www.barrons.com/amp/articles/stock-buybacks-reward-management-more-than-stockholders-1443248132?client=safari

http://www.reuters.com/investigates/special-report/usa-buybacks-pay/
« Last Edit: December 28, 2016, 01:55:47 PM by mizzourah2006 »

neil

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Re: Help me understand dividends over time
« Reply #19 on: December 28, 2016, 02:11:14 PM »
If you want an example of an ordinary, stable business aggressively buying back shares with cash flow rather than paying dividends, AZO is a pretty good example.  The business results look somewhat ordinary; the stock looks like a blockbuster.  Overall, the business value only grows organically but shareholders see larger returns as they own a much larger percentage of the business.

https://ycharts.com/companies/AZO/shares_outstanding (last 5 years, 30% reduction in share count)

Upper management is usually heavily compensated by options which typically do not benefit from dividends so I agree there is some motivation to convert into a serial buyback machine.  It's not necessarily a positive move if the company is sacrificing growth and business protection in the process.  I could see it might make sense as a retailer in a saturated market to go this route.  I wish there were more extreme examples to observe.

starguru

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Re: Help me understand dividends over time
« Reply #20 on: December 28, 2016, 02:26:59 PM »
You're not analyzing this correctly. No, buying/selling of shares on the open market doesn't change the valuation, just the price. Buying from the company does, i.e. the company issuing more shares. It doesn't change the value of the company, it changes the number if shares that value is distributed over. Share price is the value of the company (future earnings, assets etc), times some multiple (P/E), divided by shares outstanding. 

Company is worth $1,000,000. Has 1000 shares. Then $1000 per share. They buy back 500 shares. Now $1M/500 = $2000 per share. Your shares doubled in value, with no taxable event until you decide to sell. If you sell half your shares you'd be in the exact same position as if you got a 100% dividend.

I'm sure someone can explain this better and elaborate. This is really not my field..

*edit: yes I realize the buyback will reduce the assets by equal amount of $ so not this simple. But dividends would do the same so it's equal for that purpose.

Hmm ok, you've convinced me.   

I think you are still forgetting, however, that you still pay taxes on RSUs when they vest.  So if a company does share buyback, your RSUs go up in value, but then you pay marginal rates when they vest.


starguru

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Re: Help me understand dividends over time
« Reply #21 on: December 28, 2016, 02:28:11 PM »
You have a unique situation then. I work for a fortune 25 company and receive nothing via dividend until my RSUs vest, but always receive the benefit of reduced shares outstanding.

Also share buybacks aren't equivalent to a dividend, they are just another way for the company to utilize excess cash.

Here are 2 articles that explain how buybacks can benefit management more than shareholders both with slightly separate takes:

https://www.google.com/amp/www.barrons.com/amp/articles/stock-buybacks-reward-management-more-than-stockholders-1443248132?client=safari

http://www.reuters.com/investigates/special-report/usa-buybacks-pay/

Hmm are you sure you don't get anything from dividends for unvested RSUs?   I thought that was standard treatment. 

Scandium

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Re: Help me understand dividends over time
« Reply #22 on: December 28, 2016, 02:30:22 PM »
You're not analyzing this correctly. No, buying/selling of shares on the open market doesn't change the valuation, just the price. Buying from the company does, i.e. the company issuing more shares. It doesn't change the value of the company, it changes the number if shares that value is distributed over. Share price is the value of the company (future earnings, assets etc), times some multiple (P/E), divided by shares outstanding. 

Company is worth $1,000,000. Has 1000 shares. Then $1000 per share. They buy back 500 shares. Now $1M/500 = $2000 per share. Your shares doubled in value, with no taxable event until you decide to sell. If you sell half your shares you'd be in the exact same position as if you got a 100% dividend.

I'm sure someone can explain this better and elaborate. This is really not my field..

*edit: yes I realize the buyback will reduce the assets by equal amount of $ so not this simple. But dividends would do the same so it's equal for that purpose.

Hmm ok, you've convinced me.   

I think you are still forgetting, however, that you still pay taxes on RSUs when they vest.  So if a company does share buyback, your RSUs go up in value, but then you pay marginal rates when they vest.

RSUs is a whole nother issue I'm not familiar with.

All this is bit of a moot point anyway since we don't control whether companies do dividend or buyback. I just buy the whole market anyway.

mizzourah2006

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Re: Help me understand dividends over time
« Reply #23 on: December 28, 2016, 02:45:47 PM »
You have a unique situation then. I work for a fortune 25 company and receive nothing via dividend until my RSUs vest, but always receive the benefit of reduced shares outstanding.

Also share buybacks aren't equivalent to a dividend, they are just another way for the company to utilize excess cash.

Here are 2 articles that explain how buybacks can benefit management more than shareholders both with slightly separate takes:

https://www.google.com/amp/www.barrons.com/amp/articles/stock-buybacks-reward-management-more-than-stockholders-1443248132?client=safari

http://www.reuters.com/investigates/special-report/usa-buybacks-pay/

Hmm are you sure you don't get anything from dividends for unvested RSUs?   I thought that was standard treatment.


https://www.schwab.com/public/eac/resources/articles/rsu_facts.html

So it looks like they can give you the divends, but they don't have to. I know we don't get ours because our company pays a pretty decent dividend, so I would notice it over the 5 years it takes our shares to all fully vest. That's awesome that your company gives you yours. That would be over $2k in dividends for me over the 5 years based on our current dividend and share price given my RSUs granted and I don't even get much in RSUs compared to our higher level peeps.

Woody Viet

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Re: Help me understand dividends over time
« Reply #24 on: December 28, 2016, 03:33:52 PM »
To answer the OPs original question, dividends are generally less volatile than the stock markets price level. That's because the underlying economy tends to be less volatile than investor sentiment.

If the stock market falls then the current yield tends to increase as dividends fall slower than prices.

You also want to think about inflation which can eat away at the real spending power of dividends - for example in the 70s and 80s dividends grew slowly over time but for long time spans significantly lagged inflation.

I personally only spend money out of my dividends, which I do because I'm old fashioned and the concept of not touching my capital is both appealing to me and makes me feel safe. That's a personal choice which ties into my comfortable withdrawal rate being lower than most folks. I really hate the idea of selling assets at a discount, hence not touching my capital.

Woody Viet

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Re: Help me understand dividends over time
« Reply #25 on: December 28, 2016, 03:43:06 PM »
Also to add to the general debate, dividends certainly make an enormous difference.

As people have already brought up, it all comes down to the internal rate of return the company can make on its investments. If the company has ran out of good investment opportunities then it's probably in the interests of shareholders to pay those dividends out and let the owners invest their capital elsewhere.

On the day of a dividend, a sum of cash paid out, or held back within a company, may be worth the same (ignoring taxes). However, after ten years the two situations will almost certainly turn out different.
« Last Edit: December 28, 2016, 03:45:04 PM by Woody Viet »

mathjak107

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Re: Help me understand dividends over time
« Reply #26 on: December 29, 2016, 01:28:17 AM »
To answer the OPs original question, dividends are generally less volatile than the stock markets price level. That's because the underlying economy tends to be less volatile than investor sentiment.

If the stock market falls then the current yield tends to increase as dividends fall slower than prices.

You also want to think about inflation which can eat away at the real spending power of dividends - for example in the 70s and 80s dividends grew slowly over time but for long time spans significantly lagged inflation.

I personally only spend money out of my dividends, which I do because I'm old fashioned and the concept of not touching my capital is both appealing to me and makes me feel safe. That's a personal choice which ties into my comfortable withdrawal rate being lower than most folks. I really hate the idea of selling assets at a discount, hence not touching my capital.

with every dividend payment the company is actually selling off a piece of your share price . the exchange's  automatically reduce the value of your investment by an equal amount . you are spending your capital whether you think so or not .

all compounding is on the dollars invested . if you had a 100k invested and got a 10% dividend , you have 10k in pocket . at the ring of the bell market action up or down over the next quarter is on only 90k .

you could have the same results from a non dividend payer by selling off the same 10k .

in the end you need the same total returns to stay solvent . it is only about total return when spending down , not how it is arrived at

mizzourah2006

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Re: Help me understand dividends over time
« Reply #27 on: December 29, 2016, 05:52:43 AM »
Also to add to the general debate, dividends certainly make an enormous difference.

As people have already brought up, it all comes down to the internal rate of return the company can make on its investments. If the company has ran out of good investment opportunities then it's probably in the interests of shareholders to pay those dividends out and let the owners invest their capital elsewhere.

On the day of a dividend, a sum of cash paid out, or held back within a company, may be worth the same (ignoring taxes). However, after ten years the two situations will almost certainly turn out different.

The bolded is the part people tend to ignore. If a mature company like Kroger keeps all its cash and tries to invest in expanding aggressively without regards to strategy it will almost certainly end up differently then had they decided to expand strategically and return some equity to shareholders via dividends and opportune buy backs.

Dividends have a very valuable part to play in the life cycle of a company. It's easy to ignore that when you visualize owning the market instead of owning all the companies that make up the market.

If you truly care about total returns you should hope eventually companies start paying their shareholders a dividend. Even Buffett has said the only reason Berkshire doesn't pay a dividend is because he is still able to find ways to provide a superior return on equity. When the day comes he can't he will implement a dividend in Berkshire. Berkshire itself is unique because It is a conglomerate of completely different types of companies. Most businesses aren't and thus will run out of ways to effectively allocate all cash it generates at some point in its life cycle.

Mr. Boh

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Re: Help me understand dividends over time
« Reply #28 on: December 29, 2016, 09:31:48 AM »
I agree with everything mizzourah2006 has posted in this thread.

seattlecyclone

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Re: Help me understand dividends over time
« Reply #29 on: December 29, 2016, 09:37:33 AM »
Also to add to the general debate, dividends certainly make an enormous difference.

As people have already brought up, it all comes down to the internal rate of return the company can make on its investments. If the company has ran out of good investment opportunities then it's probably in the interests of shareholders to pay those dividends out and let the owners invest their capital elsewhere.

On the day of a dividend, a sum of cash paid out, or held back within a company, may be worth the same (ignoring taxes). However, after ten years the two situations will almost certainly turn out different.

The bolded is the part people tend to ignore. If a mature company like Kroger keeps all its cash and tries to invest in expanding aggressively without regards to strategy it will almost certainly end up differently then had they decided to expand strategically and return some equity to shareholders via dividends and opportune buy backs.

Dividends have a very valuable part to play in the life cycle of a company. It's easy to ignore that when you visualize owning the market instead of owning all the companies that make up the market.

If you truly care about total returns you should hope eventually companies start paying their shareholders a dividend. Even Buffett has said the only reason Berkshire doesn't pay a dividend is because he is still able to find ways to provide a superior return on equity. When the day comes he can't he will implement a dividend in Berkshire. Berkshire itself is unique because It is a conglomerate of completely different types of companies. Most businesses aren't and thus will run out of ways to effectively allocate all cash it generates at some point in its life cycle.

Compound Interest's excellent chart shows that all else being equal, if a company is likely to grow exactly as fast as the rest of the market if it reinvests its earnings internally, doing that is better for shareholders than paying dividends. The shareholders have the option to receive even more cash after taxes than the dividend would provide, and their remaining shares will be worth the same as if the company paid a dividend. Of course if dividends are worse than internal reinvestment when the expected return is equal to the rest of the market, the expected return could be slightly worse than the rest of the market before the two options become equivalent from the perspective of an investor's total return.

Mature companies might be well aware that they're not likely to grow fast enough for internal reinvestment to be the better option for their shareholders. Those companies should return cash to shareholders, as you point out, and I don't mind it at all when they do. But as investors, we shouldn't flock to these companies exclusively as our preferred investment. If the management's assessment of their company's future growth prospects is correct, your return even with dividends is going to be less than the market average.

Or maybe they do expect to grow faster than the market, but they're paying dividends anyway because their shareholders have an irrational attachment to the income. This irrational attachment is what I would really like to correct here.

Retire-Canada

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Re: Help me understand dividends over time
« Reply #30 on: December 29, 2016, 10:45:13 AM »
My goal is to get to the point that my dividends are funding 100% of my expenses and am trying to predict how that would affect my annual spending potential when the next bear markets arrive.

To me this ^^^ sounds like you are going to work a whole bunch of extra years and when a big stock market event hits you'll be forced to find your spending money somewhere other than you just your dividend payments anyways.

seattlecyclone

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Re: Help me understand dividends over time
« Reply #31 on: December 29, 2016, 12:30:59 PM »
My goal is to get to the point that my dividends are funding 100% of my expenses and am trying to predict how that would affect my annual spending potential when the next bear markets arrive.

To me this ^^^ sounds like you are going to work a whole bunch of extra years and when a big stock market event hits you'll be forced to find your spending money somewhere other than you just your dividend payments anyways.

+1.

It's okay to sell some of your shares.
It's okay to sell some of your shares.
It's okay to sell some of your shares.
It's okay to sell some of your shares.
It's okay to sell some of your shares.
It's okay to sell some of your shares.
It's okay to sell some of your shares.
It's okay to sell some of your shares.

FrugalSaver

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Re: Help me understand dividends over time
« Reply #32 on: December 29, 2016, 04:35:52 PM »
VTSAX began trading in 2000 so just looking at the last 16 years, the lowest dividend paid out for a calendar year was 30.4 cents per share in 2002.

Several other years came close.  Obviously the nominal value of a penny decreases over time as inflation destroys the buying power.  During the recession of 2007-2009, dividends of 63, 61 and 54 cents were paid out per share, respectively.