Author Topic: I think DGI is becoming too close to a cult.  (Read 16687 times)

Khan

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I think DGI is becoming too close to a cult.
« on: July 15, 2015, 05:53:32 AM »
Now, before I begin casting stones at the holy crowd of dividends, don't get me wrong, IMO whatever investing strategy that actually get's you investing is a great one! And DGI investing is, depending on the metrics/timeframes used to investigate it that I've seen, anywhere between +/- 2% off of the S&P 500 returns, so, good enough for government ;)

But, the amount of DGI articles I see on the front page of Seeking Alpha, especially ones of questioning reality, such as this one about how YOC is an important metric...
http://seekingalpha.com/article/3325655-why-yield-on-cost-yoc-is-an-important-metric

Is this the new trend? The new bubble? I just finished reading Random Walk, and can I expect the ~2020 one to talk about the DGI bubble? lol

Edit: grammar.
« Last Edit: July 17, 2015, 04:53:04 PM by Khanjar »

innerscorecard

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Re: I think DGI is becoming too close to a cult.
« Reply #1 on: July 15, 2015, 07:13:23 AM »
It's certainly interesting how dividend investing is becoming one of the focal points of Seeking Alpha.

I think it makes sense though. The current US tax treatment of qualified dividends is relatively favorable for dividend investing.

It could turn illogical though, as all things do. Such as if people buy yield mindlessly without thinking about the capacity for the company to pay that money. But I see most people who learn dividend investing to be more thoughtful than that. After all, dividends (and especially sustainable dividend growth) are a (very rough) proxy for earnings power. Unlike price, which is what market-cap-weighted index funds are based on, for example.

forummm

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Re: I think DGI is becoming too close to a cult.
« Reply #2 on: July 15, 2015, 07:45:00 AM »
I think the mania is because 1) people don't understand that dividends and share appreciation are equivalent, 2) there's this false psychological safety that comes from dividends (which can be cut at anytime) vs stock price appreciation, 3) bond yields are so low that stock dividends can beat them and people don't understand why that doesn't necessarily make stocks better, and 4) because S&P has hyped the Aristocrats.

Aphalite

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Re: I think DGI is becoming too close to a cult.
« Reply #3 on: July 15, 2015, 08:14:22 AM »
You could say the same thing about index investing. Just as some DGI followers don't look at the underlying economics of the companies in the list, index investing is also a purely quantitative exercise. A lot of indexers look at the price of the index they're investing in, and doesn't consider the underlying companies that make it up

beltim

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Re: I think DGI is becoming too close to a cult.
« Reply #4 on: July 15, 2015, 09:11:35 AM »
I actually find yield on cost to be a useful metric - anyone who seriously uses it to help guide investment decisions is a terrible investor.  So it's a useful metric to see ehats worth reading!

forummm

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Re: I think DGI is becoming too close to a cult.
« Reply #5 on: July 15, 2015, 09:41:33 AM »
I actually find yield on cost to be a useful metric - anyone who seriously uses it to help guide investment decisions is a terrible investor.  So it's a useful metric to see ehats worth reading!

One could apply that logic to threads too.

But then I feel like I should help the poor confused soul out, and this place is about helping others...

skyrefuge

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Re: I think DGI is becoming too close to a cult.
« Reply #6 on: July 15, 2015, 09:44:56 AM »
Is a this the new trend? The new bubble? I just finished reading Random Walk, and can I expect the ~2020 one to talk about the DGI bubble? lol

I don't think it's really anything new, since dividends were the "standard" and commonly-understood form of return for mom-and-pop stock investors for decades. If anything, it's a bit like a nostalgia-driven revival, similar to the recent resurgence in vinyl records. Perhaps partly a reaction to being burned by the dot-com crash and its "high-flying growth stocks". Which somehow continues on 15 years later. "mp3s and streaming audio and unrealized capital gains aren't 'real', I want something I can hold in my hand, like a vinyl record, or a dividend check!"

I think the mania is because 1) people don't understand that dividends and share appreciation are equivalent, 2) there's this false psychological safety that comes from dividends (which can be cut at anytime) vs stock price appreciation, 3) bond yields are so low that stock dividends can beat them and people don't understand why that doesn't necessarily make stocks better, and 4) because S&P has hyped the Aristocrats.

Yep, good summary. I would also add the "contrariness" of the approach as an attractor. Almost all DGI investors will proudly refer to their "boring" approach and contrast it with what they imagine to be the standard investor chasing those "high-flying, exciting growth stocks" (unaware of the fact that the "high-flying growth stocks" mainstream they're revolting against is more imaginary than real). DGI seems to attract people who, like passive index investors, are convinced that buy-and-hold investing is superior to more-active trading, but unlike those index investors, are unwilling to cede their investment decisions to the market's wisdom. "If I let the market decide what companies I should invest in, what kind of man would that make me?!"

You could say the same thing about index investing.

Passive index investors tend to hold demonstrably-wrong beliefs less-often than DGIs. To make it clear, here is the key point from the linked article:

Suppose that [there is a] hypothetical drop in the shares of Hershey (NYSE:HSY). The DG investor is intrigued that it now yields 2.75%; What to do?

Using Yield on Cost, the DGI can look at his or her current portfolio to determine whether or not Hershey presents a better opportunity than what he or she currently has.

For instance, in my own personal portfolio, selling Wells Fargo (NYSE:WFC) would be off the table, even though it currently yields 2.64%. For me that number [its YOC] is 3.42% and steadily growing. For ACE Limited (NYSE:ACE), yes it currently yields 2.57%, but for me [its YOC is] 2.84% and again, steadily growing. The Yield on Cost on every other substantial position I own...is such that I would be taking a pay cut to own Hershey.
(emphasis added and edited for brevity)

In an article meant to defend Yield-on-Cost, he instead demonstrates how YOC has made him bamboozle himself. It has made him believe that a 2.75% dividend yield generates less income than a 2.64% or 2.57% dividend yield!

This is a perfect demonstration of what I always say when fighting against the misconceptions that drive dividend-focused strategies: in the end, a well-executed dividend-focused strategy probably isn't all that bad, but the misconceptions that one must hold in order for a DG strategy to seem logical bring with them a high risk that you will execute your strategy poorly.

beltim

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Re: I think DGI is becoming too close to a cult.
« Reply #7 on: July 15, 2015, 09:53:42 AM »
I actually find yield on cost to be a useful metric - anyone who seriously uses it to help guide investment decisions is a terrible investor.  So it's a useful metric to see ehats worth reading!

One could apply that logic to threads too.

But then I feel like I should help the poor confused soul out, and this place is about helping others...

I agree, and I'm happy to help out when people want it, or if there are common misconceptions that I can correct - like the recent social security thread. 

James

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Re: I think DGI is becoming too close to a cult.
« Reply #8 on: July 15, 2015, 09:55:14 AM »
I think dividend investing fits a niche because it is simple enough for the average person to understand and appreciate, is relatively safer than many other ways to pick stocks despite the decrease in complexity, and gives some sense of "control" that index investing is lacking. The many underlying complexities that affect dividend investing (mentioned by forummm and others) are ignored.

I'm not sure about it being a "bubble", since I don't see it greatly affecting company valuations. But I do agree it may have become just another part of the "investment game" of picking stocks, which can work to various degrees, but I don't want to play the game.

Edit: I agree with skyrefuge on the "nostalgia-driven revival" as well.
« Last Edit: July 15, 2015, 09:58:07 AM by James »

forummm

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Re: I think DGI is becoming too close to a cult.
« Reply #9 on: July 15, 2015, 09:56:05 AM »
"If I let the market decide what companies I should invest in, what kind of man would that make me?!"

A very rich and retired man.

brooklynguy

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Re: I think DGI is becoming too close to a cult.
« Reply #10 on: July 15, 2015, 10:06:37 AM »
I think dividend investing fits a niche because it is simple enough for the average person to understand

The problem, as skyrefuge explained, is that the apparent simplicity is a deception, which causes many investors (and probably the "average person") not to understand (but to think they do understand).  The heart of the confusion is that, as seductive and emotionally-appealing as the idea is, a dividend-paying stock is not analogous to a dollar-shitting goose (which is the belief held by many (or perhaps most) dividend-focused investors).

Scandium

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Re: I think DGI is becoming too close to a cult.
« Reply #11 on: July 15, 2015, 11:38:39 AM »
I think dividend investing fits a niche because it is simple enough for the average person to understand
a dividend-paying stock is not analogous to a dollar-shitting goose (which is the belief held by many (or perhaps most) dividend-focused investors).

That's it! I'm starting a "DSG investing" newsletter!

hodedofome

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Re: I think DGI is becoming too close to a cult.
« Reply #12 on: July 15, 2015, 11:57:49 AM »
There are some, such as dividendgrowthinvestor.com, that do a pretty good job of staying balanced. He has a P/E cap that keeps him from paying too much, and looks at payout ratios to determine if the company can keep increasing dividends. He also tries to (subjectively) look into the future and see if the company can continue to grow it's earnings. If someone followed his methodology, I don't see it being too harmful.

Baby boomers in search of yield at any cost are gonna get really hurt however. I could see it being another late '60s deal where giant conglomerates where trading at P/E's of 50 because they were considered safe or some stupid reason like that.

skyrefuge

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Re: I think DGI is becoming too close to a cult.
« Reply #13 on: July 15, 2015, 03:18:47 PM »
There are some, such as dividendgrowthinvestor.com, that do a pretty good job of staying balanced. He has a P/E cap that keeps him from paying too much, and looks at payout ratios to determine if the company can keep increasing dividends. He also tries to (subjectively) look into the future and see if the company can continue to grow it's earnings. If someone followed his methodology, I don't see it being too harmful.

Yeah, my take on dividendgrowthinvestor.com is that he's 70% of the way towards admitting that he's just a buy-and-hold value investor, and that dividends are actually irrelevant. Of the remaining 30% holding him back, 10% is a basic human stubbornness to admit he was wrong about something he once believed, and 20% is that he's realized basicvalueinvestor.com is not nearly as monetizable as dividendgrowthinvestor.com.

Of course this is a bit like saying that L. Ron Hubbard didn't actually believe any of his bullshit about Xenu and thetans, and simply used them as a tool to mislead and make money off the less-intelligent, so it's not exactly meant as high praise...

Retire-Canada

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Re: I think DGI is becoming too close to a cult.
« Reply #14 on: July 15, 2015, 03:46:29 PM »

Of course this is a bit like saying that L. Ron Hubbard didn't actually believe any of his bullshit about Xenu and thetans, and simply used them as a tool to mislead and make money off the less-intelligent, so it's not exactly meant as high praise...


WTF! Xenu is not real???? :( :( :(

forummm

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Re: I think DGI is becoming too close to a cult.
« Reply #15 on: July 15, 2015, 04:01:34 PM »

Of course this is a bit like saying that L. Ron Hubbard didn't actually believe any of his bullshit about Xenu and thetans, and simply used them as a tool to mislead and make money off the less-intelligent, so it's not exactly meant as high praise...


WTF! Xenu is not real???? :( :( :(

Xenu is real! Don't let them brainwash you with their evil psychology! You have the technology inside you.

Aphalite

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Re: I think DGI is becoming too close to a cult.
« Reply #16 on: July 15, 2015, 04:55:30 PM »
Passive index investors tend to hold demonstrably-wrong beliefs less-often than DGIs.
Agree on less often, you definitely don't have as many indexers that are in the "know enough to be a danger to themselves" group as compared to dividend focused investors

But buying and holding index fund while being agnostic to underlying economics can lead to having 30%+ of your holdings in extremely overpriced technology firms that don't have real earnings - although that maybe only occurs every 20 or 30 years. At year end 1999, your top 12 market cap companies (which would be about 30% of a total US market fund at the time) had a weighted average PE of 78: http://fortboise.org/top100mktcap.html

Sure, it might be a long time before that happens again, but insanity sometimes goes on for a lot longer than it should

In an article meant to defend Yield-on-Cost, he instead demonstrates how YOC has made him bamboozle himself. It has made him believe that a 2.75% dividend yield generates less income than a 2.64% or 2.57% dividend yield!

This is a perfect demonstration of what I always say when fighting against the misconceptions that drive dividend-focused strategies: in the end, a well-executed dividend-focused strategy probably isn't all that bad, but the misconceptions that one must hold in order for a DG strategy to seem logical bring with them a high risk that you will execute your strategy poorly.

I agree, in this instance the guy doesn't seem to understand opportunity cost of capital (what he should have done if he's truly only investing for yield is to subtract deferred taxes from his existing investments and then calculate if it's worth it to switch), and he doesn't talk anything about future expected cash flow/business prospects. He doesn't realize that total return is the metric that matters as an investor. I agree it's important that if you are going to consciously invest in only dividend paying companies to not use dividend growth and yield as your only considerations.

For me, when I hear DGI, I mostly think of value investing. Of course, an increasing dividend is no different than anything else you would use as a stock screen and should be the beginning of your research, not the end. The fact that a company pays a dividend is most likely a sign that it is a more mature and established firm. That it can grow its dividend consistently is a sign that its earnings and free cash flow is improving (unless if the payout ratio is being jacked up). That the Company must pay the dividend also keeps management honest and focused on executive decisions that lead to generation of cash instead of accrual earnings (an extreme example would be Enron's MTM tricks). Paying a dividend also forces management to employ best use decision making when allocating capital. There's less chance of management going out and overspending on empire building. You could, of course, argue that sometimes this results in a marvelous result (such as Philip Morris's acquisition of Kraft Foods, or Pepsi's investments into the properties that make up Yum), but it also avoids situations like Coke (and later Sony) buying Columbia pictures, or Quaker and Snapple, or Mondelez overpaying for Cadbury, ebay and skype, etc.

All in all, I think besides the focus on dividends, there's major disdain in this forum for people who pick stocks and thus deviate from market cap allocation. I think it goes back to the question you pose sky: do you think the market does the best job of allocating your capital. If the answer is yes or you don't know and think anyone who claims they do is wrong, then index. If you disagree, then you will always have a conflict with most of the posters on this forum. Nothing wrong with that, just a different cult of ideas on investing.

YoungInvestor

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Re: I think DGI is becoming too close to a cult.
« Reply #17 on: July 15, 2015, 06:25:26 PM »
I would be cautious to lump DGI investors in a single group.

Many are actually value investors who are simply looking to buy companies that do pay dividends (Some people may prefer businesses that do redistribute part of their earnings as opposed to keeping them, which I guess shows some consistency).

And since they're just value investors with a bias, they could take stocks to bubble levels, because, obviously, they'd stop to be good value.

I personally look for stocks where profit yields (The yield at which future profits are worth the current market price, assuming a conservative growth (I usually go with 1/4 what I expect growth-wise) are at least 8%. I like to see dividends, but meh.

innerscorecard

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Re: I think DGI is becoming too close to a cult.
« Reply #18 on: July 16, 2015, 01:54:58 AM »
Dividends are a fundamental metric (or rather an extremely rough proxy for the actual fundamental metric of free cash flow and the undefinable metric of normalized earnings power). So as bad as it gets (and I can see it getting bad, although I haven't seen huge evidence of that yet), at least it's better than market-cap weighted indexing, which uses price (the worst metric you can possibly use) as its metric (of course the irony is that even that terrible solution that is market-cap weighted indexing will, in a disciplined manner, give you better returns than most market participants).

wtjbatman

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Re: I think DGI is becoming too close to a cult.
« Reply #19 on: July 16, 2015, 08:05:42 AM »
That may be true, but in our defense, the kool-aid we drink tastes really good.

brooklynguy

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Re: I think DGI is becoming too close to a cult.
« Reply #20 on: July 16, 2015, 09:31:01 AM »
Dividends are a fundamental metric (or rather an extremely rough proxy for the actual fundamental metric of free cash flow and the undefinable metric of normalized earnings power). So as bad as it gets (and I can see it getting bad, although I haven't seen huge evidence of that yet), at least it's better than market-cap weighted indexing, which uses price (the worst metric you can possibly use) as its metric (of course the irony is that even that terrible solution that is market-cap weighted indexing will, in a disciplined manner, give you better returns than most market participants).

This criticism isn't quite fair.  Market-cap weighted indexing is the perfect metric for what it is designed to measure:  market value.  Indexers are not trying to beat the market by investing in "undervalued" assets; they (we, since I am one of them) are trying to match the market.  And, as a matter of tautology, a market-cap weighted index is the best tool to use to measure the market value of the assets constituting the market.

Aphalite

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Re: I think DGI is becoming too close to a cult.
« Reply #21 on: July 16, 2015, 09:34:28 AM »
Dividends are a fundamental metric (or rather an extremely rough proxy for the actual fundamental metric of free cash flow and the undefinable metric of normalized earnings power). So as bad as it gets (and I can see it getting bad, although I haven't seen huge evidence of that yet), at least it's better than market-cap weighted indexing, which uses price (the worst metric you can possibly use) as its metric (of course the irony is that even that terrible solution that is market-cap weighted indexing will, in a disciplined manner, give you better returns than most market participants).

This criticism isn't quite fair.  Market-cap weighted indexing is the perfect metric for what it is designed to measure:  market value.  Indexers are not trying to beat the market by investing in "undervalued" assets; they (we, since I am one of them) are trying to match the market.  And, as a matter of tautology, a market-cap weighted index is the best tool to use to measure the market value of the assets constituting the market.

It's also unfair as he is implying that just because a firm is LARGER, the go forward return will be less. Not true in all cases and misses the point. High market cap does not necessarily mean overpriced.

forummm

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Re: I think DGI is becoming too close to a cult.
« Reply #22 on: July 16, 2015, 03:37:30 PM »
Dividends are a fundamental metric (or rather an extremely rough proxy for the actual fundamental metric of free cash flow and the undefinable metric of normalized earnings power). So as bad as it gets (and I can see it getting bad, although I haven't seen huge evidence of that yet), at least it's better than market-cap weighted indexing, which uses price (the worst metric you can possibly use) as its metric (of course the irony is that even that terrible solution that is market-cap weighted indexing will, in a disciplined manner, give you better returns than most market participants).

The market price is the collective judgment of all the money in and out of the market about what the "right" price is. The minds behind that money took into account the dividend when making those decisions. So the market cap is the best guess of humanity (and machinity) about what the price should be. Dividends alone is just one small part of the picture.

Aphalite

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Re: I think DGI is becoming too close to a cult.
« Reply #23 on: July 16, 2015, 03:48:38 PM »
The market price is the collective judgment of all the money in and out of the market about what the "right" price is. The minds behind that money took into account the dividend when making those decisions. So the market cap is the best guess of humanity (and machinity) about what the price should be. Dividends alone is just one small part of the picture.

You can say the same thing about market cap as dividends - it's only one small part of the picture. Relying on market cap to decide your capital allocation doesn't investigate if the cap is driven by cold facts or wild optimism. Most of the time you're probably fine, but there are periods where wild optimism destroys your returns going forward. It's not like this is something that's hard to do. Take stock yield (add a few percentage points for growth) and compare it to bond/treasury yield. If it's way below treasury yield, then you know you're dealing with an optimism situation. It's lazy to rely strictly on index dogma and believe that market price is the true reflection of returns going forward. If it were the case, all securities would have the same return.

forummm

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Re: I think DGI is becoming too close to a cult.
« Reply #24 on: July 16, 2015, 04:35:37 PM »
The market price is the collective judgment of all the money in and out of the market about what the "right" price is. The minds behind that money took into account the dividend when making those decisions. So the market cap is the best guess of humanity (and machinity) about what the price should be. Dividends alone is just one small part of the picture.

You can say the same thing about market cap as dividends - it's only one small part of the picture. Relying on market cap to decide your capital allocation doesn't investigate if the cap is driven by cold facts or wild optimism. Most of the time you're probably fine, but there are periods where wild optimism destroys your returns going forward. It's not like this is something that's hard to do. Take stock yield (add a few percentage points for growth) and compare it to bond/treasury yield. If it's way below treasury yield, then you know you're dealing with an optimism situation. It's lazy to rely strictly on index dogma and believe that market price is the true reflection of returns going forward. If it were the case, all securities would have the same return.

I don't want to get into a debate here. But this is just silly. No one can completely accurately predict the future. The wisdom of the crowd does a good job of it much of the time. But the future of chaotic systems is at least somewhat unknowable. It's all risky (i.e. uncertain)--otherwise stocks wouldn't have the risk premium in their returns.

innerscorecard

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Re: I think DGI is becoming too close to a cult.
« Reply #25 on: July 16, 2015, 10:11:23 PM »
I'm certainly not saying that DGI is strictly superior to index investing, or that index investing is wrong. I get index investing. If I didn't enjoy the inputs of the act of investing, I would index. And it would be simple. 1/3 VTI, 1/3 VXUS, 1/3 BND (that's the benchmark I compare my own performance to). I wouldn't tilt. And I personally am not attracted at all to dividend investing or DGI. I am agnostic towards dividends (except as secondary evidence of other things).

But I don't think dividend investors are dumb or just misguided. They focus on only one thing, but that one thing happens to be something relatively reasonable. It would be even better if dividends were not taxed at all - as is the case in some jurisdictions.

EscapeVelocity2020

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Re: I think DGI is becoming too close to a cult.
« Reply #26 on: July 16, 2015, 11:35:08 PM »
Sub'ing to the thread to see how strong sentiment is either way.  If 'mainstream investors' believe that dividends are 'free money' provided by their companies' perpetually increasing earnings, then maybe dividend growth investing is the way to go as more and more suckers are brought in.  But we also need to see how this goes when the market declines.  I've seen companies cut their dividend, and then their stock collapses, which is a really horrible place for an  investor to be left in...

innerscorecard

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Re: I think DGI is becoming too close to a cult.
« Reply #27 on: July 16, 2015, 11:50:33 PM »
Dividends are a fundamental metric (or rather an extremely rough proxy for the actual fundamental metric of free cash flow and the undefinable metric of normalized earnings power). So as bad as it gets (and I can see it getting bad, although I haven't seen huge evidence of that yet), at least it's better than market-cap weighted indexing, which uses price (the worst metric you can possibly use) as its metric (of course the irony is that even that terrible solution that is market-cap weighted indexing will, in a disciplined manner, give you better returns than most market participants).

This criticism isn't quite fair.  Market-cap weighted indexing is the perfect metric for what it is designed to measure:  market value.  Indexers are not trying to beat the market by investing in "undervalued" assets; they (we, since I am one of them) are trying to match the market.  And, as a matter of tautology, a market-cap weighted index is the best tool to use to measure the market value of the assets constituting the market.

It's also unfair as he is implying that just because a firm is LARGER, the go forward return will be less. Not true in all cases and misses the point. High market cap does not necessarily mean overpriced.

AAPL is one of my core holdings, and it is the largest company there is. I was not implying that larger companies cannot be good investments.

But research has shown that merely equal weighting (or using any other weighting metric, which basically "randomizes the error"), will give you better returns than weighting by price.

innerscorecard

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Re: I think DGI is becoming too close to a cult.
« Reply #28 on: July 16, 2015, 11:51:25 PM »
Sub'ing to the thread to see how strong sentiment is either way.  If 'mainstream investors' believe that dividends are 'free money' provided by their companies' perpetually increasing earnings, then maybe dividend growth investing is the way to go as more and more suckers are brought in.  But we also need to see how this goes when the market declines.  I've seen companies cut their dividend, and then their stock collapses, which is a really horrible place for an  investor to be left in...

The exact reverse is true. If a strategy is disliked, it is more likely to produce good returns, as there isn't crowding in the set carrying capacity of the strategy. And every strategy does have a carrying capacity.

Scandium

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Re: I think DGI is becoming too close to a cult.
« Reply #29 on: July 17, 2015, 07:16:58 AM »
You can say the same thing about market cap as dividends - it's only one small part of the picture. Relying on market cap to decide your capital allocation doesn't investigate if the cap is driven by cold facts or wild optimism.
And how would you know which is what? As this is dependent on the future there is no way to know for sure. Is the value of perpetually unprofitable Amazon based on facts (insane sales volume, infrastructure, brand name) or optimism (no significant profits for decades)? Which promising new upstart will make it big, and which will fail?
 
Most of the time you're probably fine, but there are periods where wild optimism destroys your returns going forward. It's not like this is something that's hard to do. Take stock yield (add a few percentage points for growth) and compare it to bond/treasury yield. If it's way below treasury yield, then you know you're dealing with an optimism situation. It's lazy to rely strictly on index dogma and believe that market price is the true reflection of returns going forward. If it were the case, all securities would have the same return.
If it's so easy to do why do professional investors with billions on the line fall for it time and again?! I find this hindsight over every bubble in history is starting to become tiring. "Well, I would obviously have seen that X was a bubble/overpriced/whatever, and not bought that and become an instant millionaire" Yet it almost never seems to go that way..

I haven't been around long enough to know if this has always been the standard criticism of index funds? "If one only had perfect knowledge of the future, the index is clearly stupid and inefficient!" Well duh! Obviously, nobody is arguing differently. The problem is just that markets never seem to behave the way people think it should

Aphalite

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Re: I think DGI is becoming too close to a cult.
« Reply #30 on: July 17, 2015, 08:27:52 AM »
I don't want to get into a debate here. But this is just silly. No one can completely accurately predict the future. The wisdom of the crowd does a good job of it much of the time. But the future of chaotic systems is at least somewhat unknowable. It's all risky (i.e. uncertain)--otherwise stocks wouldn't have the risk premium in their returns.

That's a fair point. But you're positing that market cap is the best tool we have to predict the future, whereas there's also plenty of research out there saying that dividend yield also predicts the future pretty closely (as a group of course, you will often find cases of dividend payers where payout ratio is too high to maintain). It's unfair to discount that research when it's also an academic exercise like Bogle's works: http://www.suredividend.com/wp-content/uploads/2014/03/Dividends-A-Review-of-Historical-Returns.pdf

It's a fair criticism to say that dividend payers can cut dividends, but when you look at reality and the evidence, that pattern mostly hits financial institutions only, where to juice returns, management has to lever up. Sure indexing simplifies your investment plan and gives higher returns than 90% of mutual funds after fees, but you seem like the type who is continuously learning and studying investment given your amount of posts in this subforum, so I guess I don't understand the denial of the evidence that's out there regarding dividend focused strategies. Of course you will fail if you blindly buy DG stocks at too high of a price, but that's the case for buying index funds when stock prices are too high as well

AAPL is one of my core holdings, and it is the largest company there is. I was not implying that larger companies cannot be good investments.

But research has shown that merely equal weighting (or using any other weighting metric, which basically "randomizes the error"), will give you better returns than weighting by price.

I agree that at certain times in history, equal weighting stocks in the SP500 would give you outsized returns, but there are also other times when it doesn't. It all depends on when you buy in, if you equal weighted everything in 2003, you'd have great results now vs a market cap weighted fund, if you equal weighted everything in 1990, you would have results that are less spectacular: http://www.forbes.com/sites/rickferri/2013/04/29/no-free-lunch-from-equal-weight-sp-500/

Of course I know you already know this. You are a value investor and you understand price paid dictates returns, and the crazy run up in large cap in the late 90s contributed to a market cap strategy outperforming an equal weight. I'm just saying that it doesn't matter what allocation strategy you use when you index, you will overpay sometimes and underpay/get a good deal in other times, depending on Mr. Market's whims

Aphalite

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Re: I think DGI is becoming too close to a cult.
« Reply #31 on: July 17, 2015, 08:42:40 AM »
And how would you know which is what? As this is dependent on the future there is no way to know for sure. Is the value of perpetually unprofitable Amazon based on facts (insane sales volume, infrastructure, brand name) or optimism (no significant profits for decades)? Which promising new upstart will make it big, and which will fail?

That's the question isn't it? Are you willing to continue to bet along with the market that a greater fool will keep coming along and pay a higher price for the stock that you own?
 
If it's so easy to do why do professional investors with billions on the line fall for it time and again?! I find this hindsight over every bubble in history is starting to become tiring. "Well, I would obviously have seen that X was a bubble/overpriced/whatever, and not bought that and become an instant millionaire" Yet it almost never seems to go that way..

I haven't been around long enough to know if this has always been the standard criticism of index funds? "If one only had perfect knowledge of the future, the index is clearly stupid and inefficient!" Well duh! Obviously, nobody is arguing differently. The problem is just that markets never seem to behave the way people think it should

You are always chirping on this point, and the answer is always the same. Professional investors with billions are at a disadvantage because 1) it's harder to compound billions of dollars than a million dollars and 2) they are governed by quarterly expectations. A professional investor can't buy something for the long term because their job forces them to make bets for the best short term results, and I believe that no one on this forum will say that anyone can predict short term results with any sort of accuracy. But everyone can make fairly profitable bets for the long term. Index investing is a bet for the long term, that America and its companies will continue to innovate and generate profits and profit growth.

I agree with your point that markets don't seem to behave the way people think it should - but that applies to indexing too. An index strategy believes that by keeping costs low and diversifying into many different companies, you will get returns that beat 90% of the strategies out there, and I whole heartedly agree, low costs + diversification = the beginnings of a winning investment strategy. But indexing also assumes that weighing by market cap will be the best way to achieve this goal, where DG investors assume that by following the cash, they are capturing the best companies in the investment pool. DG investors also keep costs low and their portfolios diversified, they don't hold as many companies as an index, but the benefits of diversification starts to fade at around 10, 30-40, or over 100, depending on which study you reference and the make up of the companies you are diversifying into (for example, if diversifying into only blue chips, the academicly researched number is 10 stocks - Archer and Evans 1968 study, if selecting from a random pool of 1000 securities large and small cap, even 100 would not be enough - Domian, Louton, Racine 2006 study, if you're Charlie Munger, you believe that only 3 securities are needed)

Scandium

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Re: I think DGI is becoming too close to a cult.
« Reply #32 on: July 17, 2015, 08:56:08 AM »

You are always chirping on this point, and the answer is always the same. Professional investors with billions are at a disadvantage because 1) it's harder to compound billions of dollars than a million dollars and 2) they are governed by quarterly expectations. A professional investor can't buy something for the long term because their job forces them to make bets for the best short term results, and I believe that no one on this forum will say that anyone can predict short term results with any sort of accuracy. But everyone can make fairly profitable bets for the long term. Index investing is a bet for the long term, that America and its companies will continue to innovate and generate profits and profit growth.


And this point also always comes up to argue that some office rat who sit in his underwear at home reading MSNBC in the evening can beat wall st. And I still don't buy it. There are a multitude of closed hedge funds, with 5-10 year withdrawal limits. They don't even have to follow many of the SEC limits on mutual funds. So how are they encumbered by these things? Yet they haven't seen great returns either. And you'd be playing against them as a individual investor. There are also all the pension funds, endowments, private equity, etc who aren't as beholden to quarterly returns, since the shareholders can't, or won't take their money out. Like it or not, as an individual you're playing against some of the best educated people with the largest sums of money on the planet on the line. As is always pointed out with all of these kinds of arguments: if "everyone" was only making 3 months bets, and it was so extremely easy to cash out by just making longer term bets someone would do it already!

I can win "because mutual funds" is not an explanation I buy. If millions of people and billions of dollars say a share is worth $37.85, you'd have to come up with an extremely good reason why you think that's not the case.
« Last Edit: July 17, 2015, 09:01:10 AM by Scandium »

Aphalite

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Re: I think DGI is becoming too close to a cult.
« Reply #33 on: July 17, 2015, 10:02:17 AM »
And this point also always comes up to argue that some office rat who sit in his underwear at home reading MSNBC in the evening can beat wall st. And I still don't buy it. There are a multitude of closed hedge funds, with 5-10 year withdrawal limits. They don't even have to follow many of the SEC limits on mutual funds. So how are they encumbered by these things? Yet they haven't seen great returns either. And you'd be playing against them as a individual investor. There are also all the pension funds, endowments, private equity, etc who aren't as beholden to quarterly returns, since the shareholders can't, or won't take their money out. Like it or not, as an individual you're playing against some of the best educated people with the largest sums of money on the planet on the line.

Hedge funds take out 2% and 20% of your profits, so if the market returned 10%, you have a hurdle rate of up to 4% from the very beginning. That's far from low costs. Hedge funds also focus on short term strategies like derivative trading or option trading. That's far from a diversified strategy. You would also not be playing against them as an individual investor unless you are actively trading using those strategies. I think you have a perception that anytime you make an individual security selection, you're competing against many other stakeholders who have more knowledge and experience than you, and that's simply not the reality.

As is always pointed out with all of these kinds of arguments: if "everyone" was only making 3 months bets, and it was so extremely easy to cash out by just making longer term bets someone would do it already!

This doesn't make any sense. How would anyone get more money under management if their long term bets aren't matching up to short term results, even if they will eventually beat the short term traders? Additionally, individual investors aren't trying to prove to the world their returns are market beating, they're just trying to increase their spending power and create a life where they don't have to trade time for money. Top investors wouldn't boast of their return records (stealth wealth) unless they are trying to sell something, there's no need to, it would only result in misery.

I can win "because mutual funds" is not an explanation I buy. If millions of people and billions of dollars say a share is worth $37.85, you'd have to come up with an extremely good reason why you think that's not the case.

Millions of people and billions of dollars are invested in the consumer sucka culture in the US, and I'd dare say this community has come up with an extremely good reason not to join in.

Scandium

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Re: I think DGI is becoming too close to a cult.
« Reply #34 on: July 17, 2015, 10:39:09 AM »
And this point also always comes up to argue that some office rat who sit in his underwear at home reading MSNBC in the evening can beat wall st. And I still don't buy it. There are a multitude of closed hedge funds, with 5-10 year withdrawal limits. They don't even have to follow many of the SEC limits on mutual funds. So how are they encumbered by these things? Yet they haven't seen great returns either. And you'd be playing against them as a individual investor. There are also all the pension funds, endowments, private equity, etc who aren't as beholden to quarterly returns, since the shareholders can't, or won't take their money out. Like it or not, as an individual you're playing against some of the best educated people with the largest sums of money on the planet on the line.

Hedge funds take out 2% and 20% of your profits, so if the market returned 10%, you have a hurdle rate of up to 4% from the very beginning. That's far from low costs. Hedge funds also focus on short term strategies like derivative trading or option trading. That's far from a diversified strategy. You would also not be playing against them as an individual investor unless you are actively trading using those strategies. I think you have a perception that anytime you make an individual security selection, you're competing against many other stakeholders who have more knowledge and experience than you, and that's simply not the reality.

I believe the hedge fund index is before fees, and it still has underperformed the market. And who says all hedge funds focus on short term? Like I said some won't let you withdraw for 5 years, wouldn't that encourage long-term-ism?

If you think you've found and "undervalued" stock you're betting that (virtually) nobody else has discovered the same thing, otherwise the stock would be bid up to where it should be. That's what I mean by playing against everyone else.

But I realized there's no convincing you that you're not much smarter than everyone else, and nobody has ever had the brilliant idea of thinking long term. So have at it. Doesn't matter one way or another to me.

forummm

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Re: I think DGI is becoming too close to a cult.
« Reply #35 on: July 17, 2015, 11:49:54 AM »
I don't want to get into a debate here. But this is just silly. No one can completely accurately predict the future. The wisdom of the crowd does a good job of it much of the time. But the future of chaotic systems is at least somewhat unknowable. It's all risky (i.e. uncertain)--otherwise stocks wouldn't have the risk premium in their returns.

That's a fair point. But you're positing that market cap is the best tool we have to predict the future, whereas there's also plenty of research out there saying that dividend yield also predicts the future pretty closely (as a group of course, you will often find cases of dividend payers where payout ratio is too high to maintain). It's unfair to discount that research when it's also an academic exercise like Bogle's works: http://www.suredividend.com/wp-content/uploads/2014/03/Dividends-A-Review-of-Historical-Returns.pdf

It's a fair criticism to say that dividend payers can cut dividends, but when you look at reality and the evidence, that pattern mostly hits financial institutions only, where to juice returns, management has to lever up. Sure indexing simplifies your investment plan and gives higher returns than 90% of mutual funds after fees, but you seem like the type who is continuously learning and studying investment given your amount of posts in this subforum, so I guess I don't understand the denial of the evidence that's out there regarding dividend focused strategies. Of course you will fail if you blindly buy DG stocks at too high of a price, but that's the case for buying index funds when stock prices are too high as well

I'll read that study when I have time later. What I've seen to date tells me that when the dividend strategies have worked recently, the slight outperformance vs the S&P500 is entirely explained by the size and value effects at work.

Aphalite

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Re: I think DGI is becoming too close to a cult.
« Reply #36 on: July 17, 2015, 12:29:04 PM »
I'll read that study when I have time later. What I've seen to date tells me that when the dividend strategies have worked recently, the slight outperformance vs the S&P500 is entirely explained by the size and value effects at work.

That's probably a true statement. Large cap non-dividend paying firms were ran up in 2000 and so any outperformance lately probably had to do with the value component. The study is also hosted on a very pro-dividend site, and is from an investment firm (although using Kenneth French's data) that's trying to sell you something, so obviously take the bias into consideration when you read the study.

Khan

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Re: I think DGI is becoming too close to a cult.
« Reply #37 on: July 17, 2015, 04:51:43 PM »
Passive index investors tend to hold demonstrably-wrong beliefs less-often than DGIs.
For me, when I hear DGI, I mostly think of value investing. Of course, an increasing dividend is no different than anything else you would use as a stock screen and should be the beginning of your research, not the end. The fact that a company pays a dividend is most likely a sign that it is a more mature and established firm. That it can grow its dividend consistently is a sign that its earnings and free cash flow is improving (unless if the payout ratio is being jacked up). That the Company must pay the dividend also keeps management honest and focused on executive decisions that lead to generation of cash instead of accrual earnings (an extreme example would be Enron's MTM tricks). Paying a dividend also forces management to employ best use decision making when allocating capital. There's less chance of management going out and overspending on empire building. You could, of course, argue that sometimes this results in a marvelous result (such as Philip Morris's acquisition of Kraft Foods, or Pepsi's investments into the properties that make up Yum), but it also avoids situations like Coke (and later Sony) buying Columbia pictures, or Quaker and Snapple, or Mondelez overpaying for Cadbury, ebay and skype, etc.

All in all, I think besides the focus on dividends, there's major disdain in this forum for people who pick stocks and thus deviate from market cap allocation. I think it goes back to the question you pose sky: do you think the market does the best job of allocating your capital. If the answer is yes or you don't know and think anyone who claims they do is wrong, then index. If you disagree, then you will always have a conflict with most of the posters on this forum. Nothing wrong with that, just a different cult of ideas on investing.

I would be cautious to lump DGI investors in a single group.

Many are actually value investors who are simply looking to buy companies that do pay dividends (Some people may prefer businesses that do redistribute part of their earnings as opposed to keeping them, which I guess shows some consistency).

And since they're just value investors with a bias, they could take stocks to bubble levels, because, obviously, they'd stop to be good value.

I wanted to get back to this thread. The issue that I see, besides the plethora of "DGI" adherents, "DGI" articles, etc, is how people treat companies coming from a blindly DGI perspective. I see the same mistake from people that take it personally when a stock has "done them wrong".

For instance, when INTC failed to raise their dividend for the... 7th? consecutive quarter, finally killing a chance at a YoY increase, the tears of DGI adherents in the comments, well, I'm not gonna lie, it was pretty entertaining. When DGI/dividend adherents had jumped into Seadrill, a stock in a warning-bound industry, and they announced in their next conference call, after in the previous CC stating that the dividend was "safe"... These are not "rational" actors, they've found their dogma and believe they are trying to stick to it. Now granted, I'm only speaking to the tiny minority of an investing group that whines in the comment sections on specific securities that they just have to cry about, but it makes me wonder at the ideology of the majority of adherents who aren't published authors on the subject, and show their specific line of reasoning.

Add onto that, all the backwards looking analysis about this stock or that stock having done right by DGI investors... in a rising market where it was almost impossible to go wrong... >_>

I see equivalent logical failures in stocks that have "gone nowhere" during periods of 5-10 years, short-term thinking in stocks that haven't "done anything for me lately", stocks recovering from bailouts and capital destruction during the Financial Crash...

mrpercentage

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Re: I think DGI is becoming too close to a cult.
« Reply #38 on: July 17, 2015, 05:21:04 PM »
I think the mania is because 1) people don't understand that dividends and share appreciation are equivalent, 2) there's this false psychological safety that comes from dividends (which can be cut at anytime) vs stock price appreciation, 3) bond yields are so low that stock dividends can beat them and people don't understand why that doesn't necessarily make stocks better, and 4) because S&P has hyped the Aristocrats.

1. False. Not related at all. If you go all the way back to 1926 then 40% of the gains of the sp500 is reinvested dividends.
2. You still need to research the company. If a company has survived more than 2 serious market hits of 30% or more and managed to increase rather then cut dividends the odds of them getting cut is small
3. Dividends yield don't make stocks better but they do follow the majority of good long standing stalwarts. The only that doesn't have one that comes to mind is BRK-B. But most of the portfolio of Berkshire has a significant yield. Also if rates rise fast bonds as well are in danger the their trading value. For every point above your yield you will lose 7% principle value

innerscorecard

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Re: I think DGI is becoming too close to a cult.
« Reply #39 on: July 17, 2015, 05:40:28 PM »

You are always chirping on this point, and the answer is always the same. Professional investors with billions are at a disadvantage because 1) it's harder to compound billions of dollars than a million dollars and 2) they are governed by quarterly expectations. A professional investor can't buy something for the long term because their job forces them to make bets for the best short term results, and I believe that no one on this forum will say that anyone can predict short term results with any sort of accuracy. But everyone can make fairly profitable bets for the long term. Index investing is a bet for the long term, that America and its companies will continue to innovate and generate profits and profit growth.


And this point also always comes up to argue that some office rat who sit in his underwear at home reading MSNBC in the evening can beat wall st. And I still don't buy it. There are a multitude of closed hedge funds, with 5-10 year withdrawal limits. They don't even have to follow many of the SEC limits on mutual funds. So how are they encumbered by these things? Yet they haven't seen great returns either. And you'd be playing against them as a individual investor. There are also all the pension funds, endowments, private equity, etc who aren't as beholden to quarterly returns, since the shareholders can't, or won't take their money out. Like it or not, as an individual you're playing against some of the best educated people with the largest sums of money on the planet on the line. As is always pointed out with all of these kinds of arguments: if "everyone" was only making 3 months bets, and it was so extremely easy to cash out by just making longer term bets someone would do it already!

I can win "because mutual funds" is not an explanation I buy. If millions of people and billions of dollars say a share is worth $37.85, you'd have to come up with an extremely good reason why you think that's not the case.

In Friday's trading session I entered a limit order (at the existing ask) for a stock. After I bought just a bit over $1,000 of this stock, partially filling my order, there was no more liquidity at that price. Only around $30,000 worth of this stock traded in Friday's session.

The total market cap of the company is well under $50 million.

I am looking at another company. No shares of the company traded in Friday's session at all. It would be an unusual day if $30,000 of this stock traded.

These stocks, and plenty like them, are basically uninvestable for almost all institutional investors. They literally cannot compete with me, because they cannot buy.
« Last Edit: July 17, 2015, 05:44:19 PM by innerscorecard »

forummm

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Re: I think DGI is becoming too close to a cult.
« Reply #40 on: July 17, 2015, 06:18:35 PM »
In Friday's trading session I entered a limit order (at the existing ask) for a stock. After I bought just a bit over $1,000 of this stock, partially filling my order, there was no more liquidity at that price. Only around $30,000 worth of this stock traded in Friday's session.

The total market cap of the company is well under $50 million.

I am looking at another company. No shares of the company traded in Friday's session at all. It would be an unusual day if $30,000 of this stock traded.

These stocks, and plenty like them, are basically uninvestable for almost all institutional investors. They literally cannot compete with me, because they cannot buy.

So you are 1) taking a lot of your time to find these companies, 2) taking on significant risk because you are betting on highly speculative firms that are very small and could easily fail or have wild drops in price at any time and little information is available about these firms at all, and 3) taking on liquidity risk--the ability for you to get your money out any time soon without suffering substantial losses due to lack of buyer demand.

If the EMH is correct, you could reasonably expect to get higher returns because of all the additional risk you are taking on, but your risk adjusted returns would be about the same as buying VFIAX.

innerscorecard

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Re: I think DGI is becoming too close to a cult.
« Reply #41 on: July 17, 2015, 06:31:14 PM »
Thankfully, I have different risk preferences (and define risk differently) than the above definitions. And the time spent research and valuing these companies is fun for me. I sleep better knowing that I have more economic earnings power and/or economic asset value in my portfolio than would be the case if I had a similar market price amount of VFIAX.

So yeah, this could be basically explainable through the EMH and factors. I think the EMH is actually a very elegant set of default assumptions. And it's the way I always start my thoughts (that's why I recommend A Random Walk Down Wall Street to new investors, even though I disagree with much of the book now. It's like Newtonian physics - it works most of the time, and is a clear and logical way of explaining things that you would be wise to follow in most situations). I start out with the assumption that all securities are efficiently priced unless there is an identifiable reason they are not. So I need to know why there is a "variant perception" for any security that would cause it not to be efficiently priced.

All in all, it's *good* that investors have different preferences and styles. It's good that index fund investors, dual momentum investors, value investors and many more coexist on this board and in the investing ecosystem. When you have an ecosystem populated by only one type of participant, you get the mainland Chinese markets - huge volatility as everyone interprets information the same way.
« Last Edit: July 17, 2015, 06:36:27 PM by innerscorecard »

mrpercentage

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Re: I think DGI is becoming too close to a cult.
« Reply #42 on: July 17, 2015, 06:33:22 PM »
In DGI you do not sell shares. Your income comes from dividends. You don't invest money that you need to pull out. Period. You don't need to research that much. Find an unsinkable company that keeps increasing its dividend. How about PG. Then you just keep buying it and have its dividends reinvest and never stop until the dividends are enough to live off of. Different investment strategy.

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Re: I think DGI is becoming too close to a cult.
« Reply #43 on: July 18, 2015, 06:55:06 AM »
I read DGI blogs and do a small portion of my portfolio in DGI.  Agree with OP.  A lot of the bloggers have blinders.  I did a post on my own blog regarding "total shareholder return" that reduced dividends to just part of the picture and it was poorly received.  That is nonsense.  If you invest in companies that return cash to shareholders, you should be equally happy with dividends, share buybacks, or debt reduction.   

At any rate, I'm primarily an options investor with a preference for big slow moving dividend aristocrats and other low beta issues.