Dividend investing

[Telecaster]

It's probably true that Dividend stocks have not matched the overall market (all dividends reinvested) over quite a number of years now, simply because in this cycle there seems to be a preference for growth stocks as investors have chased future earnings potential and valued those companies promising such at a premium. It is also why nearly all "value" funds have underperformed the market.

That could well be, but there is at least one other factor involved, namely dividends are somewhat of an anachronism.  The S&P dividend yield has been declining for decades.   It is more tax efficient to buy back stock, or simply reinvest profits back into the company.   

[CorpRaider]

Sort of agnostic between shareholder yield (net buyback not simply to hide dilution via equity comp) and dividends but I like the discipline and just the screening function to show that management is aware someone else has a claim on "their empire" which is evidenced by capital distribution. 

Pretty sure OSAM has published (or at least frequently cited) some stuff showing capital distributors as a class have outperformed the growth/builders who need to retain all of the capital aggregated from investors and generated by the business.

[Telecaster]

Sort of agnostic between shareholder yield (net buyback not simply to hide dilution via equity comp) and dividends but I like the discipline and just the screening function to show that management is aware someone else has a claim on "their empire" which is evidenced by capital distribution. 

Pretty sure OSAM has published (or at least frequently cited) some stuff showing capital distributors as a class have outperformed the growth/builders who need to retain all of the capital aggregated from investors and generated by the business.

That sounds logical.   Companies in financial trouble will cut or not pay dividends.   But is a different world now.   Back in the day, dividends was how you got your money out of the company.   Most of the return of the S&P back then was in the form of dividends.  I can't remember when it flipped, but for recent decades most of the return has been price appreciation.    I don't think it is valid to compare price vs. dividends across the history of the S&P because it is simply a different animal now.   

This might not be a valid concern, but dividend strategies have become all the rage in recent years.  I never heard about them until a few years ago.   I have to wonder if the aristocrats and other dividend champions are getting bid up as investors search for yield.   

[Andy R]

Pretty sure OSAM has published (or at least frequently cited) some stuff showing capital distributors as a class have outperformed the growth/builders who need to retain all of the capital aggregated from investors and generated by the business.

And was this backwards looking data, ignoring all the companies that intended to do so but failed?
Survivorship bias

[vand]

It's probably true that Dividend stocks have not matched the overall market (all dividends reinvested) over quite a number of years now, simply because in this cycle there seems to be a preference for growth stocks as investors have chased future earnings potential and valued those companies promising such at a premium. It is also why nearly all "value" funds have underperformed the market.

That could well be, but there is at least one other factor involved, namely dividends are somewhat of an anachronism.  The S&P dividend yield has been declining for decades.   It is more tax efficient to buy back stock, or simply reinvest profits back into the company.

I'm more of the view that it is the shareholders' money; it should be given to them and let them decide how it should be should be spent. You wouldntt want your employer to do your shopping, pay your rent or otherwise spending your income packet before handing whats left back over to you and then justifying it with "hey, don't worry, it's more tax efficient that way."

I also think that from a macroeconomic perspective it's a failing of the tax code that share buyback is more tax efficient than paying out the divi. In both cases there is no change to the productive capacity of company, and it could be argued that economically the dividend payment is the better option, as the income will be redeployed in the economy according to ongoing market pricing signals.

[CorpRaider]

This might not be a valid concern, but dividend strategies have become all the rage in recent years.  I never heard about them until a few years ago.   I have to wonder if the aristocrats and other dividend champions are getting bid up as investors search for yield.

Yeah, that seems like a valid concern to me.  Dividend stocks have been bid up  as part of the hunt for yield (but arguably so have all financial assets). 

I think a lot of people got enthused about the dividend quality/growth stuff after the financial crisis too because they held up a lot better...it's basically low vol strategy (and that's kind of a feature in expectation) with some potential positive behavioral impacts at the investor level, I have no doubt that if they try and trade in and out of the strategy they will get reamed, but so too will a lot of the 100% VTI (best performing asset class in the world over the last decade-ish) people who panic out of their allocation and get hosed in the next big drawdown.

[Mr Mark]

This might not be a valid concern, but dividend strategies have become all the rage in recent years.  I never heard about them until a few years ago.   I have to wonder if the aristocrats and other dividend champions are getting bid up as investors search for yield.

Yeah, that seems like a valid concern to me.  Dividend stocks have been bid up  as part of the hunt for yield (but arguably so have all financial assets). 

I think a lot of people got enthused about the dividend quality/growth stuff after the financial crisis too because they held up a lot better...it's basically low vol strategy (and that's kind of a feature in expectation) with some potential positive behavioral impacts at the investor level, I have no doubt that if they try and trade in and out of the strategy they will get reamed, but so too will a lot of the 100% VTI (best performing asset class in the world over the last decade-ish) people who panic out of their allocation and get hosed in the next big drawdown.

I'd like to see some back-testing data on a solid top 40 dividend growth portfolio vs a 70/30 index using a 4% SWR over the past few big crashes. If Div growth offers an advantage wrt SOR risk, that's where it would show up. A lot of these people are expecting the dividends to sustain short term cashflow more reliably than realizing capital gains/losses under such corrections. Is that actually true?

Any data wizards who can run a quick sim?

[Telecaster]

I'd like to see some back-testing data on a solid top 40 dividend growth portfolio vs a 70/30 index using a 4% SWR over the past few big crashes. If Div growth offers an advantage wrt SOR risk, that's where it would show up. A lot of these people are expecting the dividends to sustain short term cashflow more reliably than realizing capital gains/losses under such corrections. Is that actually true?

Any data wizards who can run a quick sim?

The hard part is defining the dividend strategy.   Some people want stocks with a long history of increasing dividends (like the Aristocrats).  But those stocks usually have low-ish dividend yields.  So you'd need more money at the start than if you chose the 70/30 4% SWR.

You could pick stocks that already pay 4% and above dividends, but now you are stock picking, which is hard to back test.   

A simple screen would be to simply pick the Dow 30.  All blue chips that pay dividends and easy to track.    But again, dividend yield is lower than 4% at the start. 

[bacchi]

I'd like to see some back-testing data on a solid top 40 dividend growth portfolio vs a 70/30 index using a 4% SWR over the past few big crashes. If Div growth offers an advantage wrt SOR risk, that's where it would show up. A lot of these people are expecting the dividends to sustain short term cashflow more reliably than realizing capital gains/losses under such corrections. Is that actually true?

Any data wizards who can run a quick sim?

The hard part is defining the dividend strategy.   Some people want stocks with a long history of increasing dividends (like the Aristocrats).  But those stocks usually have low-ish dividend yields.  So you'd need more money at the start than if you chose the 70/30 4% SWR.

You could pick stocks that already pay 4% and above dividends, but now you are stock picking, which is hard to back test.   

A simple screen would be to simply pick the Dow 30.  All blue chips that pay dividends and easy to track.    But again, dividend yield is lower than 4% at the start.

Yeah, you'd have to account for survivor bias too. You can find a list of aristocrats/high-yield from 2000 or 1990, probably, and use them. It wasn't pretty in 2008/9 as a number of those companies suspended or slashed dividends.

When to cut and run, though? It's too late after the dividend suspension.

[waltworks]

Yeah, that's the biggest issue with the Aristocrats strategy. You're picking companies that have done super well - but if results for any company market-wide are at least somewhat random, you might just be picking companies that got lucky for the last 20 years (or whatever your time period is).

I'd love to see a backtest done using dividend aristocrat type stocks selected based on their status 10 years ago, 20 years ago, etc. Backtesting from current results/status is useless.

Note that I'm not volunteering to do such a test myself. Holy time sink...

-W

[MrUpwardlyMobile]

SCHD VYM and SPYD. Dividend ETFs take a lot of the guess work out.

[Telecaster]

SCHD VYM and SPYD. Dividend ETFs take a lot of the guess work out.

They do, but none of those pay 4% in dividends.   So if your goal is to retire using a stock dividend strategy as opposed to the standard 4% rule then you either have to accept a lower standard of living in retirement or work more years.   

[YoungInvestor]

I know the hotness with MMM and this forum is index funds and the like

but does anyone do any dividend investing?

In one of my pots of money (IRA) I do dividend investing and its done well for me

also dont worry in another account I have pure Bogle style 3 fund portfolio

I used to do DIG, went to indexes because of the research, and got so bored that my savings dipped significantly. I now keep my taxable account and tfsa in individual stock and index in my rrsp/pension.

My results are around the same in both accounts (slight edge in my self-managed accounts, but within what sheer luck would predict) and my savings rate has increased dramatically.

I also get more exposure to real assets (RE/infrastructure) in self-manager accounts,which diversifies my returns nicely.

[CorpRaider]

Another potential behavioral benefit.  Thx for sharing.

[effigy98]

Probably one way to match the psychological benefit of dividend investing but stick with total market or momentum is to somehow setup auto sell/withdraw from your VTI/VOO/VTSAX type account so you get a check like receiving dividends. Does anyone FIRE have this setup? Which places offer this?

[CorpRaider]

I think focusing on the dividends you are receiving from the ETFs in a drawdown (or generally) would give some of this benefit.  Selling in a drawdown seem likely to have the opposite effect.

[effigy98]

Interesting. That Dalio article says we are probably going to see something like the 1940s again, so what did well in the 40s?

In the 1940s, dividends comprised 74% of the total returns investors earned on stocks

The greatest outperformance for the highest yielding stocks came during the periods when real interest rates were at their most negative. "The highest yielders outperformed…when we were in the most intense phase of financial repression,"

https://www.wsj.com/articles/SB10001424052970204880404577227043217645160

Gold, Guns, and Dividends? Woot!

[MrUpwardlyMobile]

SCHD VYM and SPYD. Dividend ETFs take a lot of the guess work out.

They do, but none of those pay 4% in dividends.   So if your goal is to retire using a stock dividend strategy as opposed to the standard 4% rule then you either have to accept a lower standard of living in retirement or work more years.

I suppose, but you could invest in closed end funds for preferred shares like PGX and PFF if you wanted higher dividend yields like 5%+.  That said,  SCHD, SPYD, and VYM have all appreciated quite a bit on top of issuing dividends.