Author Topic: Understanding Dividends Strategies  (Read 13594 times)

beginner1977

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Understanding Dividends Strategies
« on: December 04, 2014, 02:51:04 PM »
Anyone provide/point me in a direction of understanding how companies chose to pay dividends?

matchewed

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Re: Understanding Dividends Strategies
« Reply #1 on: December 04, 2014, 04:17:59 PM »
What do you mean how? They distribute the dividend usually electronically. How do they choose? Usually pressure/decision from shareholders via board of directors.

CuencaSolo

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Re: Understanding Dividends Strategies
« Reply #2 on: December 04, 2014, 04:41:35 PM »
It's in management's interest not to pay any dividends at all, but to hang on to the money.  They think they can invest it wisely, and the stock will go up.  Often they're wrong.  They have a point that dividends are tax-inefficient in the US; the company pays near 40% on their net income, then they pay out part of what's left in dividends and the stockholders pay maybe another 25% on that.  The old recommendation by the wise guys, like Benjamin Graham, was to pay stock dividends proportional to the increase in the company's book value.  Those aren't income to the shareholder until the time of sale, but they are a nuisance to account for when you do sell, and nobody wants to sell 6 shares to get a small annual income.  The commissions eat you alive.  So what many companies are now doing is using whatever loose cash flow they have, sometimes plus whatever they can easily borrow, to buy back stock on the market.  That reduces the number of shares outstanding and increases the value of each remaining share, thus sharing the company's unneeded capital with the stockholders, and increasing the value of management's stock options.

divinvestor

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Re: Understanding Dividends Strategies
« Reply #3 on: December 04, 2014, 08:49:48 PM »
@CuencaSolo, I beg to differ with your arguments and feel the need to correct a couple things. The maximum corporate tax rate in America is 35%, not 40%, but most don't pay even close to 35%. A few years ago, General Electric didn't pay a single cent in corporate tax. Secondly, you receive dividends while you own the stock, not when it's finally sold. Perhaps I'm misreading what you said.  When a company and its board decide to pay a dividend, it creates a sort of trust between the company and shareholder and can create extraordinary long-term returns, especially when dividends are reinvested. In terms of buybacks, yes they are tax efficient in the sense that you are decreasing share count so their EPS goes up and you don't have a taxable event in the form of a dividend, but many times companies buy back their stock when it is overvalued. In short, dividends are better than buybacks in most cases.

beginner1977

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Re: Understanding Dividends Strategies
« Reply #4 on: December 05, 2014, 01:54:14 PM »
This helps...makes sense. Trying to wrap my head around why a company like Iron Mountain would pay dividends one way and someone like Digital Realty Trust would would pay another...

is the money on hand and the happiness of the shareholders that only things that drive those companies to pay dividends the way they do (ie...dividend strategy).

If that is the case wouldn't it be best to just pull a histroical report of dividends paid and invest in that company alone?

appreciate the thoughts/dicussion...

matchewed

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Re: Understanding Dividends Strategies
« Reply #5 on: December 05, 2014, 03:15:15 PM »
This helps...makes sense. Trying to wrap my head around why a company like Iron Mountain would pay dividends one way and someone like Digital Realty Trust would would pay another...

is the money on hand and the happiness of the shareholders that only things that drive those companies to pay dividends the way they do (ie...dividend strategy).

If that is the case wouldn't it be best to just pull a histroical report of dividends paid and invest in that company alone?

appreciate the thoughts/dicussion...

What do you mean by paying dividends one way or another? Both companies pay dividends. The amounts may be different, is that what you're asking about?

It depends on company management. Buffett is notorious for hating dividends for good reason. Usually the company doesn't have a dividend "strategy" they just choose to pay a certain amount out. That choice is made by the board of directors.

No you should not rely on historic payouts by an individual company to determine if they will continue to pay out dividends. Also when a company pays out dividends they are reducing the appreciation of the company stock. Dividends aren't some magical extra money.

divinvestor

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Re: Understanding Dividends Strategies
« Reply #6 on: December 06, 2014, 09:28:40 PM »
@Matchewed, with all due respect nobody's made the case that dividends are "magical extra money." The company can either reinvest their earnings back into the company, or pay out a portion as a dividend. Moving on, it's not completely accurate Buffett hates dividends. Look at the companies he invests in: Wells Fargo, Coca Cola, IBM, Procter & Gamble, etc. They all pay excellent dividends that end up in Berkshire Hathaway's coffers. It just so happens that Buffett decides not to pay a dividend because he thinks it's in the best interest of Berkshire Hathaway shareholders that he take those dividends from the aforementioned companies and make smart acquisitions. But he's the exception, not the rule. As a final thought and fun fact, Jeremy Siegel in his book "The Future for Investors" said that from 1871-2003, reinvested dividends produced 97 percent of all stock market returns, with only 3 percent coming from capital gains. Pretty interesting.

matchewed

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Re: Understanding Dividends Strategies
« Reply #7 on: December 07, 2014, 06:47:05 AM »
@Matchewed, with all due respect nobody's made the case that dividends are "magical extra money." The company can either reinvest their earnings back into the company, or pay out a portion as a dividend. Moving on, it's not completely accurate Buffett hates dividends. Look at the companies he invests in: Wells Fargo, Coca Cola, IBM, Procter & Gamble, etc. They all pay excellent dividends that end up in Berkshire Hathaway's coffers. It just so happens that Buffett decides not to pay a dividend because he thinks it's in the best interest of Berkshire Hathaway shareholders that he take those dividends from the aforementioned companies and make smart acquisitions. But he's the exception, not the rule. As a final thought and fun fact, Jeremy Siegel in his book "The Future for Investors" said that from 1871-2003, reinvested dividends produced 97 percent of all stock market returns, with only 3 percent coming from capital gains. Pretty interesting.

When someone walks in asking if they should just look at a historical track record of dividend payments and just invest in that company alone as if it is somehow a superior investment based on the fact that historically they pay out dividends then I feel I do have to state that dividends aren't some special form of income/wealth growth. If you disagree with that feel free to. But please point out to me how dividends are any different from capital appreciation.

waltworks

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Re: Understanding Dividends Strategies
« Reply #8 on: December 07, 2014, 08:32:27 AM »
Reinvested dividends did not account for 97 percent of stock market returns in the last 100+ years. Believing that is so inherently ridiculous that I have to assume you misunderstood the author somehow.

-W

YoungInvestor

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Re: Understanding Dividends Strategies
« Reply #9 on: December 07, 2014, 09:09:26 AM »
A company that pays healthy dividends is often better perceived as it indicates that they want to add value to the shareholders (in a similar way to a stock buyback program). It also adds up some stability to an investor's earnings.

Basically, some people like to see that a company is ensuring that it is actively paying back shareholders for their investments.

divinvestor

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Re: Understanding Dividends Strategies
« Reply #10 on: December 07, 2014, 11:36:40 AM »
Reinvested dividends did not account for 97 percent of stock market returns in the last 100+ years. Believing that is so inherently ridiculous that I have to assume you misunderstood the author somehow.

-W

@Waltworks, if you want to contradict Dr. Siegel's research about the long-term benefits of reinvested dividends, maybe you should take it up with him. But, I'm willing to take his word for it. What you are saying is just your own personal biases coming into play; I'm just the proverbial messenger here. Here's the exact quote and page number from the book: Page 126, "From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains."

If this isn't enough to convince you, here's a quote from Jack Bogle of Vanguard index investing fame:

"An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) - an amazing gap of $32 million. Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compounded long-term return earned by the companies in the S&P 500."




matchewed

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Re: Understanding Dividends Strategies
« Reply #11 on: December 07, 2014, 11:49:54 AM »
All that is an analysis of reinvesting dividends vs. taking the money and spending it on anything other than reinvestment. Of course reinvesting the dividends would increase your portfolio in the end. But if a company chooses to give out dividends or not doesn't affect the overall return of any particular stock.

divinvestor

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Re: Understanding Dividends Strategies
« Reply #12 on: December 07, 2014, 01:57:21 PM »
All that is an analysis of reinvesting dividends vs. taking the money and spending it on anything other than reinvestment. Of course reinvesting the dividends would increase your portfolio in the end. But if a company chooses to give out dividends or not doesn't affect the overall return of any particular stock.

That couldn't be further from the truth. Of course paying a dividend or not affects a stock's return. What's the alternative to paying a dividend? Reinvesting those earnings back into the company. So, if the money that gets reinvested back into the company turns out to be a bad investment, then it affects the stock in a negative way. For example, let's take Gilead Sciences which doesn't currently pay a dividend and never has in the past. Instead of initiating their first ever dividend, management decides to invest the earnings that would've gone towards a dividend into what they think is a promising new drug and a bunch of money is put into R&D. A few years go by, and the promising new drug turns out to be a bust and produces very little revenue. So, it turns out that money would've produced a better return for the stock in the form of a dividend.

deborah

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Re: Understanding Dividends Strategies
« Reply #13 on: December 07, 2014, 02:12:36 PM »
One thing that hasn't been mentioned is that different sectors have different dividend strategies. As dividends come out of profits, companies that need to use profits to buy equipment, explore, buy land rights... (eg. miners) tend to have smaller dividends than companies that play with money (eg. banks) because they don't need to use their profits elsewhere.

matchewed

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Re: Understanding Dividends Strategies
« Reply #14 on: December 07, 2014, 02:33:02 PM »
All that is an analysis of reinvesting dividends vs. taking the money and spending it on anything other than reinvestment. Of course reinvesting the dividends would increase your portfolio in the end. But if a company chooses to give out dividends or not doesn't affect the overall return of any particular stock.

That couldn't be further from the truth. Of course paying a dividend or not affects a stock's return. What's the alternative to paying a dividend? Reinvesting those earnings back into the company. So, if the money that gets reinvested back into the company turns out to be a bad investment, then it affects the stock in a negative way. For example, let's take Gilead Sciences which doesn't currently pay a dividend and never has in the past. Instead of initiating their first ever dividend, management decides to invest the earnings that would've gone towards a dividend into what they think is a promising new drug and a bunch of money is put into R&D. A few years go by, and the promising new drug turns out to be a bust and produces very little revenue. So, it turns out that money would've produced a better return for the stock in the form of a dividend.

What I mean is that if a company pays a dividend it is just counted as a knock against the general appreciation of the company. It doesn't matter if they pay a dividend or not given if they did the company will appreciate less if they don't they appreciate more. If the stock of a company goes up 10% and they decide to pay out a dividend the stock takes a hit equal to the percentage of the dividend.

Isn't just as easy to say the opposite? I already brought up Berkshire Hathaway. They don't pay a dividend and appreciate just fine. Your hypothetical is just that. It is just as easy to say they turned around and made a breakthrough drug that sold well and they would have been worse off paying a dividend.

deborah I agree with you, different sectors (and companies) will approach paying dividends out based on several factors including sector specific criteria. There would also be the size of the company, market presences, emergence of new technologies...etc. which would all influence the how much and if to pay out a dividend.

waltworks

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Re: Understanding Dividends Strategies
« Reply #15 on: December 07, 2014, 08:12:29 PM »
This just shows that the author doesn't understand (or isn't explaining) exponential functions well. Think of it this way:
-If I have a stock that I hold for 100 years that appreciates 1% per year and pays no dividends, after 100 years, I've got $270.
-If I have a stock that I hold for 100 years that appreciates zero, and pays 1% dividends (which I reinvest) and we assume no taxation on those dividends, I also have $270.
-If my stock both appreciates 1% and pays 1% (reinvested) dividends, I have $724.

Now, in that scenario, I would never say that *either* the capital gains or the dividend is mostly responsible for the extra gains, right? In fact, a rational person would say that both are responsible for 50% of the gains.

Let's look at another scenario.
-Capital gains @6% and no dividends. My $100 is now $33,930.
-Dividends @4% and no capital gains. My $100 is $5,050.
-Both added together (as the Bogle example) for a total of 10%/year. $100 becomes $1,378,000!

Now stop for a minute and think. When I added in the dividends, I suddenly had way more money! 97.5% of my gains came because I reinvested them! Dividends are awesome!

BUT - you could just spin it the other way and say that the capital gains accounted for 99.6% of the gains when you start from the default state of an only-dividend scenario.

The point is this: assessing your gains in the way that you are doing it is insane. If you are getting 6% from capital gains and 4% from dividends, then 60% of your gains are capital gains. Period. Otherwise over any long time scale, adding in ANY RANDOM FACTOR that boosts the investment yield will "account for" most of your profit.

That's just how exponents work. I could add in a special "magic investor bonus" of 1% on top of that 10% and it would "account for" most of my gains over that time period (in fact, my 1% magic-factor raises my total to a cool $3.4 million - the vast majority of my gains!)

The point is that you should put money in when you can, not that dividends are the majority of the gains of the market.

-W


@Waltworks, if you want to contradict Dr. Siegel's research about the long-term benefits of reinvested dividends, maybe you should take it up with him. But, I'm willing to take his word for it. What you are saying is just your own personal biases coming into play; I'm just the proverbial messenger here. Here's the exact quote and page number from the book: Page 126, "From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains."

If this isn't enough to convince you, here's a quote from Jack Bogle of Vanguard index investing fame:

"An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) - an amazing gap of $32 million. Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compounded long-term return earned by the companies in the S&P 500."
« Last Edit: December 07, 2014, 09:21:59 PM by waltworks »

skyrefuge

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Re: Understanding Dividends Strategies
« Reply #16 on: December 09, 2014, 10:19:17 AM »
@Waltworks, if you want to contradict Dr. Siegel's research about the long-term benefits of reinvested dividends, maybe you should take it up with him.

The point is this: assessing your gains in the way that you are doing it is insane. If you are getting 6% from capital gains and 4% from dividends, then 60% of your gains are capital gains. Period. Otherwise over any long time scale, adding in ANY RANDOM FACTOR that boosts the investment yield will "account for" most of your profit.

That's just how exponents work. I could add in a special "magic investor bonus" of 1% on top of that 10% and it would "account for" most of my gains over that time period (in fact, my 1% magic-factor raises my total to a cool $3.4 million - the vast majority of my gains!)

I'd like to say that this was a brilliant post, but, unfortunately, you don't have a "Dr." in front of your name, so I can't really trust anything you say. Could you try reposting as "Dr. waltworks" please? Then it might sound more believable to me.

KingCoin

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Re: Understanding Dividends Strategies
« Reply #17 on: December 09, 2014, 06:24:26 PM »
The other option that's being largely ignored here is corporate stock buybacks.

Stock buybacks deliver an identical return to shareholders as dividends, but do so in a more tax efficient manner.


beltim

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Re: Understanding Dividends Strategies
« Reply #18 on: December 09, 2014, 06:54:04 PM »
The other option that's being largely ignored here is corporate stock buybacks.

Stock buybacks deliver an identical return to shareholders as dividends, but do so in a more tax efficient manner.

In principle, yes.  In practice, corporate management on average destroys shareholder value by buying back stock (compared to dividends, and in some cases even compared to sitting on the cash).  See for example
http://online.wsj.com/news/articles/SB10001424052970203824904577213891035614390
http://www.ft.com/cms/s/0/da77b98e-c987-11e0-9eb8-00144feabdc0.html#axzz36C2qtoti

index

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Re: Understanding Dividends Strategies
« Reply #19 on: December 10, 2014, 07:34:01 AM »
Dividends/buybacks are just return of capital to shareholders. Paying a dividend means the company cannot find anything better to do with their money.

The real question here is do you want own a company that pays dividends prior to retiring? Lets take two companies for instance.

Company A makes $2.00 per year, reinvests $1.00 into the business and gives the other $1.00 back to shareholders. The dollar that is given back to shareholders becomes 65c after tax. If the investor holds the company in a non tax advantaged account, the investor sees 42 to 55c after tax. If the company return on invested capital is 8% and you reinvest dividends, after 10 years you have gained $22 from retained earnings and reinvested dividends.

Company B makes $2.00 per year and reinvests $2.00 back into the business. At at 8% ROIC this becomes $31 in increased value from retained earnings.

Which company did better by their shareholders?

The other problem with dividends is in the US, companies are encouraged to pay stable dividends to shareholders. Once a company starts paying dividends it is difficult to stop. What if XOM discovers a great new oil field and needs all of their earnings to pursue the new opportunity? Instead of cutting the dividend they will pursue the opportunity more slowly or in most cases, issue debt to pursue the opportunity and maintain their dividend. 

The best companies are those that issue special dividends or stock buybacks when their are not attractive opportunities, and reinvest all they can into the business when they have the chance.   

deborah

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Re: Understanding Dividends Strategies
« Reply #20 on: December 10, 2014, 02:40:42 PM »
It depends upon who the shareholders of the companies are. Different people want different things. Retired people whose income is dividends will get $1.

waltworks

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Re: Understanding Dividends Strategies
« Reply #21 on: December 10, 2014, 03:55:34 PM »
They can sell a share, or fractional share, and have their $1 plus a free bonus... but yes, people overvalue dividends/don't understand how it's possible to sell stock and not end up with nothing, and are bad at math to boot.

-W

It depends upon who the shareholders of the companies are. Different people want different things. Retired people whose income is dividends will get $1.

divinvestor

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Re: Understanding Dividends Strategies
« Reply #22 on: December 10, 2014, 08:50:39 PM »
I don't think you can sell just a fractional share. And every time you sell shares you pay a transaction fee. With a dividend stock, you can just take the dividends free of charge and not touch the principle.

Dodge

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Re: Understanding Dividends Strategies
« Reply #23 on: December 10, 2014, 09:21:22 PM »
I don't think you can sell just a fractional share. And every time you sell shares you pay a transaction fee. With a dividend stock, you can just take the dividends free of charge and not touch the principle.

You'll pay a transaction fee if you're invested in the individual stock, but that's a horrible idea.  Get a diversified index fund, and not only can you sell in fractional shares, but you won't pay any transaction fees.

Dodge

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Re: Understanding Dividends Strategies
« Reply #24 on: December 10, 2014, 09:23:23 PM »
This just shows that the author doesn't understand (or isn't explaining) exponential functions well. Think of it this way:
-If I have a stock that I hold for 100 years that appreciates 1% per year and pays no dividends, after 100 years, I've got $270.
-If I have a stock that I hold for 100 years that appreciates zero, and pays 1% dividends (which I reinvest) and we assume no taxation on those dividends, I also have $270.
-If my stock both appreciates 1% and pays 1% (reinvested) dividends, I have $724.

Now, in that scenario, I would never say that *either* the capital gains or the dividend is mostly responsible for the extra gains, right? In fact, a rational person would say that both are responsible for 50% of the gains.

Let's look at another scenario.
-Capital gains @6% and no dividends. My $100 is now $33,930.
-Dividends @4% and no capital gains. My $100 is $5,050.
-Both added together (as the Bogle example) for a total of 10%/year. $100 becomes $1,378,000!

Now stop for a minute and think. When I added in the dividends, I suddenly had way more money! 97.5% of my gains came because I reinvested them! Dividends are awesome!

BUT - you could just spin it the other way and say that the capital gains accounted for 99.6% of the gains when you start from the default state of an only-dividend scenario.

The point is this: assessing your gains in the way that you are doing it is insane. If you are getting 6% from capital gains and 4% from dividends, then 60% of your gains are capital gains. Period. Otherwise over any long time scale, adding in ANY RANDOM FACTOR that boosts the investment yield will "account for" most of your profit.

That's just how exponents work. I could add in a special "magic investor bonus" of 1% on top of that 10% and it would "account for" most of my gains over that time period (in fact, my 1% magic-factor raises my total to a cool $3.4 million - the vast majority of my gains!)

The point is that you should put money in when you can, not that dividends are the majority of the gains of the market.

-W


@Waltworks, if you want to contradict Dr. Siegel's research about the long-term benefits of reinvested dividends, maybe you should take it up with him. But, I'm willing to take his word for it. What you are saying is just your own personal biases coming into play; I'm just the proverbial messenger here. Here's the exact quote and page number from the book: Page 126, "From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains."

If this isn't enough to convince you, here's a quote from Jack Bogle of Vanguard index investing fame:

"An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) - an amazing gap of $32 million. Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compounded long-term return earned by the companies in the S&P 500."


index

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Re: Understanding Dividends Strategies
« Reply #25 on: December 10, 2014, 09:30:02 PM »
It depends upon who the shareholders of the companies are. Different people want different things. Retired people whose income is dividends will get $1.

No, that $1 in earnings could invested by the company before tax. After corporate tax it is 65c and available as a dividend. The retiree pays whatever tax rate is applicable. This is why dividends are said to be double taxed.

divinvestor

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Re: Understanding Dividends Strategies
« Reply #26 on: December 10, 2014, 09:31:52 PM »
I agree Cathy, but pretty much any institution like Scottrade, Schwab, etc will have some sort of commission if you buy or sell an individual stock.

Dodge

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Re: Understanding Dividends Strategies
« Reply #27 on: December 10, 2014, 09:48:50 PM »
I don't think you can sell just a fractional share. And every time you sell shares you pay a transaction fee. With a dividend stock, you can just take the dividends free of charge and not touch the principle.

You'll pay a transaction fee if you're invested in the individual stock, but that's a horrible idea.  Get a diversified index fund, and not only can you sell in fractional shares, but you won't pay any transaction fees.

Transaction fees apply to index funds too, assuming you mean ETFs. Vanguard ETFs have a relatively tight bid-ask spread on the open market, but it's not zero.

If you mean "commissions", there's no reason anybody in the USA should be paying those, even for individual stocks.

I was referring to mutual funds, as ETFs generally cannot be bought/sold in fractional shares.

waltworks

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Re: Understanding Dividends Strategies
« Reply #28 on: December 10, 2014, 10:30:23 PM »
Oh, man. Yes, you can sell fractional shares in many/most cases. Even if you couldn't, so what? Sell a share when you need to draw money, then sell another one when that runs out. And yes, you can "touch the principal" and not cause yourself any problems. Go sit down with a spreadsheet if you really want to - if you've got a SWR figured out that you like, you can sell 4% (or whatever you decide on) of your stocks forever as long as long-term market returns are greater than your withdrawal rate (regardless of whether those returns are from appreciation or dividends). In fact, you'll keep getting richer and richer, even while "touching the principal".

Dividends are neat. They are also overvalued because of the exact misconceptions you've posted here.  Hence you should probably ignore them if you want to maximize your investment gains.

-W

I don't think you can sell just a fractional share. And every time you sell shares you pay a transaction fee. With a dividend stock, you can just take the dividends free of charge and not touch the principle.

divinvestor

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Re: Understanding Dividends Strategies
« Reply #29 on: December 18, 2014, 12:16:45 AM »
You're not accounting for three key factors though, and those are the compounding effect of dividends, dividend growth, and the reinvestment of those dividends, where it becomes like a snowball rolling downhill. Stick to your "growth" stocks if you want, but my guess is you will probably under-perform the S&P over the long term.

waltworks

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Re: Understanding Dividends Strategies
« Reply #30 on: December 18, 2014, 06:25:45 AM »
Nobody said anything about picking "growth" stocks. Accounting for all the things you mentioned, a broad-index strategy wins over any form of dividend-oriented one, albeit not by very much.

-W

You're not accounting for three key factors though, and those are the compounding effect of dividends, dividend growth, and the reinvestment of those dividends, where it becomes like a snowball rolling downhill. Stick to your "growth" stocks if you want, but my guess is you will probably under-perform the S&P over the long term.

Fallenour

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Re: Understanding Dividends Strategies
« Reply #31 on: December 18, 2014, 06:45:04 AM »
OHHHHHHHHHH MAAAAAAAAAAAAAH GAAAAAAAAAAAAAAAAAWD!

AM I THE ONLY PERSON WHO KNOWS ABOUT TAXES ANYMORE!?!?!?!?!

If a corporation holds on the excessive amounts of cash, their taxes go up. If a company has an asset value of any kind, their taxes go up, A LOT!

Source: https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/Depreciation-of-Business-Assets/INF12091.html


Corporations pay 39.1% taxes in AMMMMMURICA!

Source: http://taxfoundation.org/article/corporate-income-tax-rates-around-world-2014


Average actual payouts are around 14.2% (yay accounting! YAY TAX LAWYERS! YYYAAAY TAX CREDIT!)

Source: IRS


People, you absolutely have to realize that taxes exist, and they OBLITERATE businesses. Social programs are NOT FREE, and are usually paid for by small to medium businesses.


capital gains tax rates are higher than standard dividend tax rates.

Buy backs arent done for investors to make more money, buy backs are done usually by businesses who want to stock price to go up, which is usually because the business struggled that year.

Apple is infamous for it. Almost all under performing quarters they have ever had, they also had a buyback period. Look it up. its so close to correlative its disgusting.

Buybacks allow companies to wipe out large amounts of stock, which drive up the market value due to simple supply and demand fundamentals and percent of percents basis.

If I have 40B in cash on hand, and I need a 10% growth, I simply wipe out 5% of my stock. If I buy 5% of it, that effective means 5% less is there. Speculators will buy the other 5% up because of the known anticipation of the impending increase in my stock value. Additionally, I dont have to make nearly as much in profits as I have to spend in cash reserves to get the exact same effect. The accurate ratio is some 2.5:1, made as compared to reserves spent, to reach the same market effect.

So I blow 5B in cash reserves on stock buyouts, it makes a 10B difference, I made up my 10B short fall, I have 35B in cash reserves, my asset value didn't increase, and my cash on hand went down, so I pay less taxes on that at the end of the year.


You pay taxes on holding stocks, you pay taxes on getting paid dividends, you get taxed for dying.

The key difference, is which one pays more taxes? How do I cheat, skip, jump, and loopdy loop my way around taxes? Which one will cost me less to do?

The simple truth, dividends. Automatic reinvestment allows you to dodge almost all tax bullets minus the asset value, which you can get around inside roth accounts, as well as 401k.

Get too big of a 401k? Get a business. Max that out too? Get another business, and a business partner in a separate industry. max that out as well? Rinse lather repeat.

Realistically, flexibility is the highest valued aspect of investing, specifically due to taxes. What countries can I do this from? How can I have this taxed in this region instead of that? Can by some magic or grace of God get this to go through luxumburg? What can I do to NOT PAY TAXES?

Dividends, commodities, and certain bond types give you this. Most stocks do not.
« Last Edit: December 18, 2014, 06:49:52 AM by Fallenour »

Scandium

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Re: Understanding Dividends Strategies
« Reply #32 on: December 18, 2014, 07:56:26 AM »
Wow! When did this turn into the "basic misunderstanding of economics" forum?
Fallenour's post is so full of wtf

You pay taxes on holding stock? WTF? How? Not until you sell (then 15%, or less)
But not on dividends? WTF? Yes you do, every year. 15% (usually)

No you don't pay that tax inside a 401k, but neither do you pay capital gains on gains, so what's the difference?

Oh, but your best "investment advice" is to get taxed through luxemburg? If you're a US citizen that is largely illegal, and probably highly complicated in any case. But that is somehow better than just an index fund and "get obliterated" by an up to 15% capital gains tax?

waltworks

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Re: Understanding Dividends Strategies
« Reply #33 on: December 18, 2014, 08:12:18 AM »
I was also baffled by that response.

-W

Fallenour

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Re: Understanding Dividends Strategies
« Reply #34 on: December 18, 2014, 08:57:06 AM »
Wow! When did this turn into the "basic misunderstanding of economics" forum?
Fallenour's post is so full of wtf

You pay taxes on holding stock? WTF? How? Not until you sell (then 15%, or less)
But not on dividends? WTF? Yes you do, every year. 15% (usually)

No you don't pay that tax inside a 401k, but neither do you pay capital gains on gains, so what's the difference?

Oh, but your best "investment advice" is to get taxed through luxemburg? If you're a US citizen that is largely illegal, and probably highly complicated in any case. But that is somehow better than just an index fund and "get obliterated" by an up to 15% capital gains tax?

Stock increases your overall asset worth, and is considered an asset for all purposes of law in regards to taxes as per IRS for any assets that are not directly tied for a non-taxable retirement account.

As for your 15% or less, these two alone prove that to be simply incorrect.

http://money.cnn.com/retirement/guide/investing_stocks.moneymag/index9.htm

followed up with

http://www.forbes.com/sites/davidmarotta/2014/05/25/capital-gains-tax-gets-more-complicated/

As for dividends, you assume that I pay taxes due to ordinary income. My overall income is well in excess of 6 figures, but my AGI and ANI are next to 0. By virtue of continual cycles of boom, bust, and buyout of businesses I own, in full or in part, combined with self investing via education, and amortized writeoffs, I very rarely pay taxes at all. When I do, its usually less than 1,000 a year. I like my money, and I like to keep it even more. Legally, of course.

As for your US citizen comment, you are very much so void of concept of the process of asset transfer, 1031 concepts, business acquisitions, and an overall humorous assumption that either everyone "is a US citizen" or the second set which is "everyone that is a US citizen always will be".

If you look into the trend of citizenship forfeiture, its an extremely popular "hip new thing" amongst most top 10%. I don't need to be a US citizen. It has no benefits to me, it offers overwhelming tax burdens, and it drastically limits me who I can do business with. Countries fail to realize, the US especially, that being a country is a lot like being a business, your citizens are your customers, and customers can leave at ANY TIME. Call me unpatriotic, but I didn't see you in Kabul or Baghdad. Burger King did the right thing, and so did every other business before them.

I very much so enjoy dual citizenship, whether the US chooses to recognize it or not, and I relish the day highly when I finally forfeit mine. Forfeiting my citizenship does not forfeit my assets, properties, monies, nor veteran status benefits. It simply makes me no longer a US citizen, and thus no longer required to pay US based taxes on foreign investments.

I only play long game, because in the end, long game matters. What we are today is only a fragment of what we will become, and one small fragment does not build you a masterpiece.

Fallenour

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Re: Understanding Dividends Strategies
« Reply #35 on: December 18, 2014, 09:01:51 AM »
The other option that's being largely ignored here is corporate stock buybacks.

Stock buybacks deliver an identical return to shareholders as dividends, but do so in a more tax efficient manner.

Not at all. A lot of times people look down on buybacks, as they are used as a means of "fluffing" the books (the stock) to look more valuable than they actually are.

The only time buybacks are actually beneficial is if there is a cycled process of splitting with buybacks. Otherwise, it simply increases the value of the stock of a short period of time (1-3 years) and leads to heavy overspeculation, and ultimately a market correction, which sends the stock value plummeting.

Also, you have to realize that when a company does a buyback, someone has to sell their stock, or are forced to sell their stock, depending on how many stock that company has, and it always ends in someone losing out on profits they could have otherwise realized.

A company only has the legal ability to issue so much stock (within reason of course you could split into oblivion), and when a buyback occurs, it has to be bought from somewhere. (usually its employee stock purchase programs honestly, so they realize an immediate 15% gain on average.)

beltim

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Re: Understanding Dividends Strategies
« Reply #36 on: December 18, 2014, 09:06:45 AM »
Wow! When did this turn into the "basic misunderstanding of economics" forum?
Fallenour's post is so full of wtf

You pay taxes on holding stock? WTF? How? Not until you sell (then 15%, or less)
But not on dividends? WTF? Yes you do, every year. 15% (usually)

No you don't pay that tax inside a 401k, but neither do you pay capital gains on gains, so what's the difference?

Oh, but your best "investment advice" is to get taxed through luxemburg? If you're a US citizen that is largely illegal, and probably highly complicated in any case. But that is somehow better than just an index fund and "get obliterated" by an up to 15% capital gains tax?

Stock increases your overall asset worth, and is considered an asset for all purposes of law in regards to taxes as per IRS for any assets that are not directly tied for a non-taxable retirement account.

The US doesn't have an asset tax. 

waltworks

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Re: Understanding Dividends Strategies
« Reply #37 on: December 18, 2014, 09:07:37 AM »
Those links say the opposite of what you are arguing.

-W

Fallenour

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Re: Understanding Dividends Strategies
« Reply #38 on: December 18, 2014, 09:33:57 AM »
Wow! When did this turn into the "basic misunderstanding of economics" forum?
Fallenour's post is so full of wtf

You pay taxes on holding stock? WTF? How? Not until you sell (then 15%, or less)
But not on dividends? WTF? Yes you do, every year. 15% (usually)

No you don't pay that tax inside a 401k, but neither do you pay capital gains on gains, so what's the difference?

Oh, but your best "investment advice" is to get taxed through luxemburg? If you're a US citizen that is largely illegal, and probably highly complicated in any case. But that is somehow better than just an index fund and "get obliterated" by an up to 15% capital gains tax?

Stock increases your overall asset worth, and is considered an asset for all purposes of law in regards to taxes as per IRS for any assets that are not directly tied for a non-taxable retirement account.

The US doesn't have an asset tax.

Not directly no, but they do punish you for having more. Categories that leverage taxes based on asset worth, as compared to incomes, or asset worth of estates passed, are directly affected by how much, or how little, the value itself is, regardless of whether they make you money, or cost you.

Fallenour

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Re: Understanding Dividends Strategies
« Reply #39 on: December 18, 2014, 09:37:01 AM »
Those links say the opposite of what you are arguing.

-W

Umm..No?

I said, in summarization, taxes suck, social programs arent free, people need to learn how to reduce their GI with AGI based strategies, being a US citizen if you are in the upper tax brackets gives you virtually no benefits, forfeiting your citizenship can be a very strong benefit depending on who you are and your situation, businesses get slapped with upwards of almost 40% taxes, and capital gains taxes are higher than dividend based taxes.

Which of those specifically is incorrect?


beltim

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Re: Understanding Dividends Strategies
« Reply #40 on: December 18, 2014, 09:39:44 AM »
Wow! When did this turn into the "basic misunderstanding of economics" forum?
Fallenour's post is so full of wtf

You pay taxes on holding stock? WTF? How? Not until you sell (then 15%, or less)
But not on dividends? WTF? Yes you do, every year. 15% (usually)

No you don't pay that tax inside a 401k, but neither do you pay capital gains on gains, so what's the difference?

Oh, but your best "investment advice" is to get taxed through luxemburg? If you're a US citizen that is largely illegal, and probably highly complicated in any case. But that is somehow better than just an index fund and "get obliterated" by an up to 15% capital gains tax?

Stock increases your overall asset worth, and is considered an asset for all purposes of law in regards to taxes as per IRS for any assets that are not directly tied for a non-taxable retirement account.

The US doesn't have an asset tax.

Not directly no, but they do punish you for having more. Categories that leverage taxes based on asset worth, as compared to incomes, or asset worth of estates passed, are directly affected by how much, or how little, the value itself is, regardless of whether they make you money, or cost you.

What's an example of "categories that leverage taxes based on asset worth?"

And while it's true that there's an estate tax, anything subject to the estate tax bypasses capital gains taxes (more accurately the assets have a new basis based on the date he assets are transferred).

waltworks

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Re: Understanding Dividends Strategies
« Reply #41 on: December 18, 2014, 09:42:24 AM »
The debate is about dividends vs. capital gains, not whether or not moving to Luxemborg is a good idea. WTF? Your links say: dividends are taxed at 15%. Capital gains are sometimes taxed at 0, 15, or 25 percent depending on AGI and length of time you held them. Both assuming a taxable account. Just like everyone knows.

Yes, IRA/401k/etc tax advantaged stuff is good, but in those cases dividends vs. capital gains don't matter since you're not getting taxed either way.

I will say that these posts (plus the ruble investing, plus others) are highly entertaining. You're producing an amazing amount of gibberish.

-W

Scandium

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Re: Understanding Dividends Strategies
« Reply #42 on: December 18, 2014, 09:53:46 AM »

Stock increases your overall asset worth, and is considered an asset for all purposes of law in regards to taxes as per IRS for any assets that are not directly tied for a non-taxable retirement account.
ehh, ok? So? As far as I know there's no tax on "asset worth" in the US. What do you mean by this?

As for your 15% or less, these two alone prove that to be simply incorrect.

http://money.cnn.com/retirement/guide/investing_stocks.moneymag/index9.htm

followed up with

http://www.forbes.com/sites/davidmarotta/2014/05/25/capital-gains-tax-gets-more-complicated/
That state that capital gain is 0%, 15%. More if you're over $250K income but that's not really a  concern of mine. This is the same for selling shares and dividends. So how does this make dividends better?

As for dividends, you assume that I pay taxes due to ordinary income. My overall income is well in excess of 6 figures, but my AGI and ANI are next to 0. By virtue of continual cycles of boom, bust, and buyout of businesses I own, in full or in part, combined with self investing via education, and amortized writeoffs,
Sometimes I think you just ramble on with buzzwords without saying anything..

As for your US citizen comment, you are very much so void of concept of the process of asset transfer, 1031 concepts, business acquisitions, and an overall humorous assumption that either everyone "is a US citizen" or the second set which is "everyone that is a US citizen always will be".
Yes finally you're correct; I have no idea about 1031 concepts or business acquisitions. Nor do I care to.

You are free to forfeit your citizenship, and move out course. To Luxemburg I assume? They have no tax? What is the citizenship process?

Ok now I'm confused. This:
http://luxembourg.angloinfo.com/information/money/income-tax/
claims the capital gains tax in Luxemburg is 19.5%, and income tax is 39.5% (on their worldwide income!). How is this better?!

If you indeed are a business owner I think the US legal/financial system counts as a pretty great benefit to you.
You do know forfeiting your citizenship also means you are no longer free to live in the US right?

I kind of feel your trolling, but it is humorous.
« Last Edit: December 18, 2014, 09:57:29 AM by Scandium »

skyrefuge

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Re: Understanding Dividends Strategies
« Reply #43 on: December 18, 2014, 10:14:47 AM »
I will say that these posts (plus the ruble investing, plus others) are highly entertaining. You're producing an amazing amount of gibberish.

It was clear from his first couple posts here that he is a supreme bullshitter. And thankfully bullshitters get nowhere at the MMM forums. Now I'm just sticking around to see if I can figure out which is most true:

- He's such a good real-life bullshitter that he has skated his way through life and into businesses and millions of dollars based on bullshit, and no one ever called him on it.
- He bullshit mainly serves himself, and those businesses and millions of dollars aren't actually what he thinks they are (e.g. maybe he's paid no taxes on all those booming and busting businesses because he's never actually made any money.)
- He's just delusional, and the bullshit he writes on the Internet is completely unconnected to any objective reality.
- He's just a troll (but a rather strange one).

Obviously an answer closer to the top of the list would be most interesting, but I'm now fearing that the truth is more towards the bottom...

arebelspy

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Re: Understanding Dividends Strategies
« Reply #44 on: December 18, 2014, 04:36:54 PM »
MOD NOTE: Tough to know what to do in a situation like this, normally we do give a lot of leeway assuming good intentions.  No need to keep reporting the same thread, we are aware.  If other instances arise, feel free to report (and please do). Thanks.  :)
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