Author Topic: Why are dividends the rage?  (Read 5570 times)

habaneroNorway

  • Bristles
  • ***
  • Posts: 462
Re: Why are dividends the rage?
« Reply #50 on: January 13, 2020, 01:56:17 PM »

You are correct, SOME dividends get cut in a down market.  But not ALL dividends get cut.  I would have to look it up, as I am unsure on indexes but I would be willing to bet some of those didn't "cut" either.  (Granted, those dividends are not stable enough to always tell, but I assume it should be obvious for 2008-09 data.)


In 2007 dividends grew by 11.45%, in 2008 they grew by 2.36%, in 2009 they were cut by 21.07% and grew by 1,45% in 2010 before growing every year since by ~5-20% YoY. These figures are not adjusted for inflation and cover all stocks in the S&P 500.

Form here:
https://www.multpl.com/s-p-500-dividend-growth/table/by-year

In 2009 a lot of companies cut dividends, but some of the usual suspects kept payouts unchanged.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2300
  • Location: EastCoast
Re: Why are dividends the rage?
« Reply #51 on: January 13, 2020, 02:06:54 PM »

You are correct, SOME dividends get cut in a down market.  But not ALL dividends get cut.  I would have to look it up, as I am unsure on indexes but I would be willing to bet some of those didn't "cut" either.  (Granted, those dividends are not stable enough to always tell, but I assume it should be obvious for 2008-09 data.)

As for proof of that not all dividends get cut on a recession, I'd say look up the Dividend Champions, contenders and challengers list.

As long as you can know ahead of time which will get cut you're all set!

Davnasty

  • Handlebar Stache
  • *****
  • Posts: 2187
Re: Why are dividends the rage?
« Reply #52 on: January 13, 2020, 02:35:14 PM »
Assuming stock value drops proportionally to dividends paid, then why does it matter whether a company cuts their dividends or not?

If you disagree with that assumption then whether or not dividends get cut is the wrong debate to be having.

Stimpy

  • Stubble
  • **
  • Posts: 163
  • Age: 36
  • Location: Middle of Nowhere
Re: Why are dividends the rage?
« Reply #53 on: January 14, 2020, 07:26:06 AM »

You are correct, SOME dividends get cut in a down market.  But not ALL dividends get cut.  I would have to look it up, as I am unsure on indexes but I would be willing to bet some of those didn't "cut" either.  (Granted, those dividends are not stable enough to always tell, but I assume it should be obvious for 2008-09 data.)


In 2007 dividends grew by 11.45%, in 2008 they grew by 2.36%, in 2009 they were cut by 21.07% and grew by 1,45% in 2010 before growing every year since by ~5-20% YoY. These figures are not adjusted for inflation and cover all stocks in the S&P 500.

Form here:
https://www.multpl.com/s-p-500-dividend-growth/table/by-year

In 2009 a lot of companies cut dividends, but some of the usual suspects kept payouts unchanged.

My point is still true, not all dividends were cut.   I won't disagree that there were cuts, no one with a brain will.  But not all were. 

As long as you can know ahead of time which will get cut you're all set!

Why?  If you have a plan, you should be set whether they get cut, or go up right?

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2300
  • Location: EastCoast
Re: Why are dividends the rage?
« Reply #54 on: January 14, 2020, 08:00:44 AM »

You are correct, SOME dividends get cut in a down market.  But not ALL dividends get cut.  I would have to look it up, as I am unsure on indexes but I would be willing to bet some of those didn't "cut" either.  (Granted, those dividends are not stable enough to always tell, but I assume it should be obvious for 2008-09 data.)


In 2007 dividends grew by 11.45%, in 2008 they grew by 2.36%, in 2009 they were cut by 21.07% and grew by 1,45% in 2010 before growing every year since by ~5-20% YoY. These figures are not adjusted for inflation and cover all stocks in the S&P 500.

Form here:
https://www.multpl.com/s-p-500-dividend-growth/table/by-year

In 2009 a lot of companies cut dividends, but some of the usual suspects kept payouts unchanged.

My point is still true, not all dividends were cut.   I won't disagree that there were cuts, no one with a brain will.  But not all were. 

As long as you can know ahead of time which will get cut you're all set!

Why?  If you have a plan, you should be set whether they get cut, or go up right?
No? You're not OK. If you depend on $40k a year in dividends to live of (to "not touch principal" *rolleyeys), and this gets cut to 20k then what do you do?

Someone said dividends are safer, since you don't have to sell in a downturn. I said how?

It sounds like the clever plan is to only invest in companies that WONT cut dividends, which is obviously a moronic, unworkable strategy. I don't care if they've raised them the last 25 years, that predicts nothing.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1689
Re: Why are dividends the rage?
« Reply #55 on: January 14, 2020, 09:25:22 AM »
So most dividend paying companies are pursuing a strategy of self-liquidation, like a farmer who sells 10 acres of his assets a year. Most are also simultaneously paying interest to borrow money so that they can continue paying the dividend. Imagine the farmer doing that!
Most companies are paying dividends out of earnings. Your farmer example would be akin to Colgate-Palmolive selling the toothpaste manufacturing machines and sending the cash to shareholders. They don’t do that. Your farmer should sell the wheat for profit instead of the land, just like Colgate sells the toothpaste and not the machines that made it.

I agree that borrowing solely to accelerate dividends is generally a stupid behavior. Borrowing to fund growth of the company can make sense though, if done conservatively by prudent management.

My point is that paying interest reduces earnings and cash flow. Suppose a company with $100B in debt costing 5% per year decides to pay $10B of its cash to investors as dividends. The company and its investors thereby forego the opportunity to pay off $10B of the debt, which would have saved them $500M each and every year in the future. Instead, the cash moves from one account owned by investors (the company’s account) to other accounts owned by the investors (their brokerage accounts). Meanwhile, the value of the shares in everyone’s brokerage accounts declines by exactly $10B when those $10B leave the company’s account. Investors break even, before taxes, even if they use the dividend to buy more shares. The company’s owner’s equity account shrinks by $10B and liabilities stay the same. The company shrinks.

The alternative would have been to pay the debt down by $10B. This move would have reduced the company’s debt from $100B to $90B, so when it’s time to refinance next year they have avoided borrowing $10B because they didn’t pay a dividend. This is the same as saying the company would have had to borrow an extra $10B if they had paid that $10B dividend. By extension, any company with any debt that pays a dividend is borrowing to finance the dividend. Investors are essentially borrowing against their shares at the cost of the company’s interest rate.

Remember how investors broke even on the dividend payment? The kicker is that the stock market would consider the company less risky if it paid off $10B of debt, so its stock would probably sell for a higher multiple than otherwise. Also, the company’s earnings would be $500M higher because it avoided paying that much interest. These two factors together would have boosted the company’s stock price to the benefit of stockholders. But instead of all this good stuff they paid a dividend.

@ChpBstrd I generally like reading your investing posts here but you are a long way off the mark here.

If a company is funded entirely by equity instead of an *appropriate* amount of debt, I’d argue they have an entirely lazy balance sheet and they are damaging their return on equity and hence returns to shareholders.

You’re smart, you can do the maths. You know from basic capital markets theory that the cost of debt is much cheaper than the cost of equity, and for a company to find the lowest WACC it needs to find an *appropriate* balance sheet mix of debt and equity.

I’m, within reason, totally supportive of companies that refinance their balance sheet with debt, at the same time as paying out dividends. This allows capital to be reallocated across the market to its most efficient use, which is entirely consistent with index investing. I don’t want to see executives sitting on excess capital. As you know, they tend to blow it up spectacularly on a regular basis.

True, debt-free and low-debt companies are usually sub-optimally capitalized IF cash flows are reliable, interest rates will never go up, and future liquidity can be assumed. But I can also see many companies whose executives leveraged to the hilt in a bid to boost ROE and perhaps cash out their stock options.

Chesapeake (CHK) for example used to pay a dividend while cranking up their debt. When fossil fuel prices fell, the plan fell apart too and their dividend-chasing shareholders got creamed. Now their cost of capital is prohibitively high.

AT&T (T) larded up on debt, and their stock yields 5.4%. That’s about the same percentage they pay on the debt (5.635% for one bond series, for example). Oh, and the interest rate on their debt is higher than their ROA of about 3.3%. But despite their hair being on fire, the dividend must continue! They plan to pay down the debt gradually instead of ASAP. I suppose the investors can reinvest their dividends and earn better than 5.625% risk-free?

The kicker is that a rising debt/assets ratio causes the average cost of capital for BOTH equity and debt to rise. This is because both equity and debt investors demand more upside for riskier companies than they do for less indebted companies (The exact risk/cost of capital curve is a subject of vigorous debate, and changes over time.). This creates a neat exploit when an exec takes over a lightly leveraged company without restricting debt covenants and can then run up a bunch of new debt while paying the lower interest rate on the original debt, earning an artificially high ROE - at least until refinancing time, which hopefully occurs after stock option cash-out time! A familiar chain reaction ensues in which rising debt leads to higher interest rates and rising equity risk premiums, leaving the company with a higher WACC and lower stock returns than they’d otherwise have.

The bottom line is that high leverage is a simplistic way to boost ROE, and executives have incentive to go well beyond optimal leverage. Hidden off the books is an increase in risk that inflates the entire company’s weighted average cost of capital (WACC) over time. From a stockholder’s perspective, highly indebted companies are more likely to go bankrupt like Sears, become zombie debt shells like Chesapeake, or become unable to meaningfully innovate like AT&T - which is about to be made obsolete by a web of satellites by SpaceX and others that deliver 5G broadband more cheaply than fiber. A few of these in one’s “dividend portfolio” can sink one’s long term returns.

To me, high debt + high dividend signifies a company that has fallen into a trap and cannot easily get out. These are good short candidates. They almost always underperform the index, even on a total returns basis.

Stimpy

  • Stubble
  • **
  • Posts: 163
  • Age: 36
  • Location: Middle of Nowhere
Re: Why are dividends the rage?
« Reply #56 on: January 14, 2020, 09:53:23 AM »

You are correct, SOME dividends get cut in a down market.  But not ALL dividends get cut.  I would have to look it up, as I am unsure on indexes but I would be willing to bet some of those didn't "cut" either.  (Granted, those dividends are not stable enough to always tell, but I assume it should be obvious for 2008-09 data.)


In 2007 dividends grew by 11.45%, in 2008 they grew by 2.36%, in 2009 they were cut by 21.07% and grew by 1,45% in 2010 before growing every year since by ~5-20% YoY. These figures are not adjusted for inflation and cover all stocks in the S&P 500.

Form here:
https://www.multpl.com/s-p-500-dividend-growth/table/by-year

In 2009 a lot of companies cut dividends, but some of the usual suspects kept payouts unchanged.

My point is still true, not all dividends were cut.   I won't disagree that there were cuts, no one with a brain will.  But not all were. 

As long as you can know ahead of time which will get cut you're all set!

Why?  If you have a plan, you should be set whether they get cut, or go up right?
No? You're not OK. If you depend on $40k a year in dividends to live of (to "not touch principal" *rolleyeys), and this gets cut to 20k then what do you do?

Someone said dividends are safer, since you don't have to sell in a downturn. I said how?

It sounds like the clever plan is to only invest in companies that WONT cut dividends, which is obviously a moronic, unworkable strategy. I don't care if they've raised them the last 25 years, that predicts nothing.

"Past performance is not indicative of future results." - True for ALL things in the market.

I could ask you the same, your 40k you want at to live off off drops to 20k due to a recession.   What plan do you have?  Probably a similar plan.  Go back to work/try to figure out how to make up that extra 20k.   So it IS ok in the sense that you know what to do yes?

No dividend is "safe".  Just like no stock investment is "safe", indexes included.  However like indexes there are SOME dividends that are safer then others just due to things like business cycles, types of business, age of the business, etc.  Those whom have actually done the research and are aware know that.  Anyone stating differently does NOT know what they are taking about.

Are Dividends safer in a recession, the answer to that is the same as indexes.  Yes and No.  They aren't going to just go away (ie the concept isn't but individual stocks, indexes and dividends may) but as with any investment you need a plan.  Hence a why I state such.

Understand I am not saying that the biggest index/stocks are going to vanish, but if Apple falls 80%, you can bet other stocks/indexes will follow to some similar extent.   Does that mean you just leave that index/stock when it drops 80%?   Answer, just like with dividends, is, it depends on your plan.

Do I think YOU personally should do dividend investing?   No, you already have a plan, (I at least HOPE you do) and it works for you, so you should stick with it.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2300
  • Location: EastCoast
Re: Why are dividends the rage?
« Reply #57 on: January 14, 2020, 10:27:43 AM »
I could ask you the same, your 40k you want at to live off off drops to 20k due to a recession.   What plan do you have?  Probably a similar plan.  Go back to work/try to figure out how to make up that extra 20k.   So it IS ok in the sense that you know what to do yes?

No dividend is "safe".  Just like no stock investment is "safe", indexes included.  However like indexes there are SOME dividends that are safer then others just due to things like business cycles, types of business, age of the business, etc.  Those whom have actually done the research and are aware know that.  Anyone stating differently does NOT know what they are taking about.

No, the plan is to withdraw 4% of the original portfolio, and continue to do so through the recession. Since that has been proven to work, and relies on a globally diversified portfolio. And probably withdraw cash/bonds first before stocks.

So from what I see you're saying the dividend investor has two plans:
a) go back to work, since they don't want to sell shares, and don't have enough dividend
b) do "research" to pick companies that won't cut dividend in a recession

Are some dividends safer than others? Sure! Right after the next recession we'll know which those are! We don't know where the crash will originate, and thus which businesses will be worst affected, so can't tell which are the safe ones.
(yesyes I know you'll say YOU can, good for you)

So except for the part where you predict the future better than every wall st big-brain, that plan is flawless..

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1223
Re: Why are dividends the rage?
« Reply #58 on: January 14, 2020, 10:40:12 AM »
Except that's not always the case and I'd argue there are a lot of companies that got driven into the ground because someone tried to diversify outside of their core market.

Aka diworsification (in the original sense of the term).

Padonak

  • Pencil Stache
  • ****
  • Posts: 522
Re: Why are dividends the rage?
« Reply #59 on: January 14, 2020, 10:46:52 AM »
The 4% rule has NOT been proven to work 100% of the time. In the US, it worked for most vintages assuming you could get a low cost VTSAX-like fund in the past (hint - you couldn't until relatively recently). When it comes to international markets, the 4% rule performed much worse compared to the US. This is a major blind spot for those who use the 4% rule. The US has done exceptionally well in the 20th century vs the rest of the world, which is unlikely to happen this century.

Stimpy

  • Stubble
  • **
  • Posts: 163
  • Age: 36
  • Location: Middle of Nowhere
Re: Why are dividends the rage?
« Reply #60 on: January 14, 2020, 12:45:35 PM »

No, the plan is to withdraw 4% of the original portfolio, and continue to do so through the recession. Since that has been proven to work, and relies on a globally diversified portfolio. And probably withdraw cash/bonds first before stocks.

So from what I see you're saying the dividend investor has two plans:
a) go back to work, since they don't want to sell shares, and don't have enough dividend
b) do "research" to pick companies that won't cut dividend in a recession

Are some dividends safer than others? Sure! Right after the next recession we'll know which those are! We don't know where the crash will originate, and thus which businesses will be worst affected, so can't tell which are the safe ones.
(yesyes I know you'll say YOU can, good for you)

So except for the part where you predict the future better than every wall st big-brain, that plan is flawless..

Right so example being 4% = 40k, prices are now in half, so about 4% = 20k....   Done.  I WILL grant you that it's probably more like 27-33K (or there abouts) pending timing etc.   And if that is your plan, good, does it work, yes.  I know math same as you.

Using 40k in Dividends and the 20ish percent drop from 2008 would mean I have about 32K for the year, maybe more or less again, pending timing of cuts etc.  Would I go back to work for 8k a year..... Nope.  Will I have to make up for that, maybe.  Again, like you I will have to see what my plan says.   We aren't both screwed we BOTH, should be able to live in our means.

As for options, B is impossible to guarantee that as I ALREADY stated.  Cuts happen, you just have to be aware so you can act.   As for A, sure, there are probably a few others as well.  Like reinvesting in another company or index which will probably give you back some of that 8k.

Also, not sure where you say I am predicting the future.  Pretty sure I laid out the risks and said, yup, cuts happen.  Plan for it so you can take action when they do.  Just like stock market drops happen, we all have plans for what happens when they do.  Stop putting words out there, I will not say.

Edit: Cause I sometimes I math real good. :[
« Last Edit: January 14, 2020, 01:09:46 PM by Stimpy »

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2300
  • Location: EastCoast
Re: Why are dividends the rage?
« Reply #61 on: January 14, 2020, 12:55:40 PM »

No, the plan is to withdraw 4% of the original portfolio, and continue to do so through the recession. Since that has been proven to work, and relies on a globally diversified portfolio. And probably withdraw cash/bonds first before stocks.

So from what I see you're saying the dividend investor has two plans:
a) go back to work, since they don't want to sell shares, and don't have enough dividend
b) do "research" to pick companies that won't cut dividend in a recession

Are some dividends safer than others? Sure! Right after the next recession we'll know which those are! We don't know where the crash will originate, and thus which businesses will be worst affected, so can't tell which are the safe ones.
(yesyes I know you'll say YOU can, good for you)

So except for the part where you predict the future better than every wall st big-brain, that plan is flawless..

Right so example being 4% = 40k, prices are now in half, so about 4% = 20k....   Done.  I WILL grant you that it's probably more like 27-33K (or there abouts) pending timing etc.   And if that is your plan, good, does it work, yes.  I know math same as you.

Using 40k in Dividends and the 20ish percent drop from 2008 would mean I have about 36K for the year, maybe more or less again, pending timing of cuts etc.  Would I go back to work for 4k a year..... Nope.  Will I have to make up for that, maybe.  Again, like you I will have to see what my plan says.   We aren't both screwed we BOTH, should be able to live in our means.

As for options, B is impossible to guarantee that as I ALREADY stated.  Cuts happen, you just have to be aware so you can act.   As for A, sure, there are probably a few others as well.  Like reinvesting in another company or index which will probably give you back some of that 4k.

Also, not sure where you say I am predicting the future.  Pretty sure I laid out the risks and said, yup, cuts happen.  Plan for it so you can take action when they do.  Just like stock market drops happen, we all have plans for what happens when they do.  Stop putting words out there, I will not say.

you don't understand the 4% rule, read up on it. I would take out 40k. (And you'd get $32k with a 20% cut, which isn't a very severe downturn)

Someone else (to be fair to you) said advantage of dividends were "not selling during downturn". Hence why I asked what's the plan in case of cuts. From what you say it sounds like cut back, or go back to work? Sure.

You did say something to the effect of "choosing solid companies/more safe dividends etc", that's what I meant by predicting future. Will MCD, coke, PNG, exxon, etc always be safe? maybe? maybe not..

posted elsewhere here, this was actually fascinating. 44% of companies dropped off dividend aristocrats in a decade!
https://seekingalpha.com/article/3884316-26-dividend-aristocrats-wont-let-you-sleep-well-night
« Last Edit: January 14, 2020, 12:59:46 PM by Scandium »

marty998

  • Walrus Stache
  • *******
  • Posts: 6580
  • Location: Sydney, Oz
Re: Why are dividends the rage?
« Reply #62 on: January 14, 2020, 01:36:39 PM »
Snip!
Snip!
Snip!
Snip!
Snip!

Noted and agree with the sentiments. It really depends on the stock. There's capacity to employ quite a bit of leverage in, say, a utility with long term government regulated prices to a captive market, whereas a cyclical stock like a home retailer or mining company is going to come unstuck really quickly.

Horses for courses.

Stimpy

  • Stubble
  • **
  • Posts: 163
  • Age: 36
  • Location: Middle of Nowhere
Re: Why are dividends the rage?
« Reply #63 on: January 14, 2020, 04:10:16 PM »
you don't understand the 4% rule, read up on it. I would take out 40k. (And you'd get $32k with a 20% cut, which isn't a very severe downturn)

Someone else (to be fair to you) said advantage of dividends were "not selling during downturn". Hence why I asked what's the plan in case of cuts. From what you say it sounds like cut back, or go back to work? Sure.

You did say something to the effect of "choosing solid companies/more safe dividends etc", that's what I meant by predicting future. Will MCD, coke, PNG, exxon, etc always be safe? maybe? maybe not..

posted elsewhere here, this was actually fascinating. 44% of companies dropped off dividend aristocrats in a decade!
https://seekingalpha.com/article/3884316-26-dividend-aristocrats-wont-let-you-sleep-well-night


I think we both understand the 4% rule, and if your stocks were at peaks and 40k was = 4% then you would pull out that much, then at the bottom (2008 specifically) it would be 20k or 4%.   If you are still pulling out 40k at the bottom that is 8%, the amount is based on what the investment is worth, not what you think you should pull out.  I think we have a different idea of where we are starting at for that 4%, which is something I think we both can agree on.

I'd love to dismiss the article, but I've read many of them.   It (and many like it) have some VERY good points within that anyone wanting to invest in DGI (Dividend Growth Investing) or Dividends in general should read.  It probably would scare away quite a few foolish people.  Alas, I assume most will never read it.   (Also, comments have make the article that much better... Just saying.)

Only fun lesson I will highlight is that half of these are stocks are banks, which we all know screwed the pooch in 2008.  Easy lesson from those is, diversify or get a broad index if you would rather.  Both are just fine as far as I am concerned, though one is admirably much less work and research (And in general where I would aim most people).

I don't really want to dig too deep, but with the exception of the obvious bank stocks (which looks like and I am sure I am wrong, 10% or so of the index) it looks like it's 1-2 stocks a year which honestly, is high for turnover in a DGI portfolio, but not unheard of.  This also is in line with how the index seems to operate.  So no big surprise here.   If you would have had that exact same make up at the time, it would have hurt, no doubt, but if there was a plan it wouldn't have resulted in a terrible income loss.  (As stated previously.)
(https://en.wikipedia.org/wiki/S%26P_500_Dividend_Aristocrats)

So yes, you've proven what we already know, companies cut dividends and that I've pointed out again and again that it happens from time to time.  I mean lets be honest, eventually ALL companies that pay dividends today, will stop operation and vanish.  But that is true of ALL stocks, like indexes (Only more manual) those whom invest for dividends should have a plan/rules so that when things happen they can react.  The same is true of indexers, they have a plan, and react.


Davnasty

  • Handlebar Stache
  • *****
  • Posts: 2187
Re: Why are dividends the rage?
« Reply #64 on: January 14, 2020, 06:10:33 PM »
I think we both understand the 4% rule, and if your stocks were at peaks and 40k was = 4% then you would pull out that much, then at the bottom (2008 specifically) it would be 20k or 4%.   If you are still pulling out 40k at the bottom that is 8%, the amount is based on what the investment is worth, not what you think you should pull out.

https://www.madfientist.com/safe-withdrawal-rate/

Stimpy

  • Stubble
  • **
  • Posts: 163
  • Age: 36
  • Location: Middle of Nowhere
Re: Why are dividends the rage?
« Reply #65 on: January 15, 2020, 07:45:51 AM »
I think we both understand the 4% rule, and if your stocks were at peaks and 40k was = 4% then you would pull out that much, then at the bottom (2008 specifically) it would be 20k or 4%.   If you are still pulling out 40k at the bottom that is 8%, the amount is based on what the investment is worth, not what you think you should pull out.

https://www.madfientist.com/safe-withdrawal-rate/

I do agree it IS flexible, but I am assuming straight 4% period for this.  And what you linked agrees, as well as the definition.   

That having been stated, if a plan has other assets outside the market (ie Other options) then in theory, yes 40k could be possible.   and I did not acknowledge it, but it seems that is part of Scandium's plan to pull the extra 20k from somewhere else.  Though as stated, that is the part of the "other options" in whatever plan is written, cause I am not going to define ever option available to someone. 

Edit: Not sure if I had a brain fart or just read enough to misinterpret but ok, I admit I got the 4% rule wrong, other points still stands.
« Last Edit: January 16, 2020, 02:19:50 PM by Stimpy »

Davnasty

  • Handlebar Stache
  • *****
  • Posts: 2187
Re: Why are dividends the rage?
« Reply #66 on: January 15, 2020, 08:33:22 AM »
I think we both understand the 4% rule, and if your stocks were at peaks and 40k was = 4% then you would pull out that much, then at the bottom (2008 specifically) it would be 20k or 4%.   If you are still pulling out 40k at the bottom that is 8%, the amount is based on what the investment is worth, not what you think you should pull out.

https://www.madfientist.com/safe-withdrawal-rate/

I do agree it IS flexible, but I am assuming straight 4% period for this.  And what you linked agrees, as well as the definition.   

That having been stated, if a plan has other assets outside the market (ie Other options) then in theory, yes 40k could be possible.   and I did not acknowledge it, but it seems that is part of Scandium's plan to pull the extra 20k from somewhere else.  Though as stated, that is the part of the "other options" in whatever plan is written, cause I am not going to define ever option available to someone.

Safe withdrawal rate is based on your portfolio's value at the beginning of retirement. If the 4% was based on present value, it couldn't possibly fail.

https://en.wikipedia.org/wiki/Trinity_study

Quote
Note that the 4% is calculated against the balance of the account only in the first year: withdrawal amounts in subsequent years are calculated by adding inflation to the previous year's amount, and not 4% of account balance in later years

FIPurpose

  • Handlebar Stache
  • *****
  • Posts: 1220
  • Location: WA
    • FI With Purpose
Re: Why are dividends the rage?
« Reply #67 on: January 15, 2020, 08:52:03 AM »

AT&T (T) larded up on debt, and their stock yields 5.4%. That’s about the same percentage they pay on the debt (5.635% for one bond series, for example). Oh, and the interest rate on their debt is higher than their ROA of about 3.3%. But despite their hair being on fire, the dividend must continue! They plan to pay down the debt gradually instead of ASAP. I suppose the investors can reinvest their dividends and earn better than 5.625% risk-free?

The part you missed here is that companies get to deduct bond interest. At their bracket of almost certainly 38% that means their effective interest rate is ~3.5%. T is paying it down because they're debt-to-equity ratio spiked at 1.2 after they bought Time Warner. They currently have it now around .8. I assume their target is to get it down to .5 and then hold around there.

T also only has a payout ratio of about 60%, so they aren't funding their dividend with debt. So yeah, 5.5% dividend fully covered by capital is an awesome deal. (Not to say that T doesn't have its problems, if T was such a solid bet you'd see them priced closer to $50-60 rather than $35.)

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6637
  • Location: BC
Re: Why are dividends the rage?
« Reply #68 on: January 15, 2020, 11:26:34 AM »


2)  I think that if you have a constant withdrawal, that dividends do better than selling the underlying stock. that is, if you have sufficient dividends to cover your minimum income.   It is only a wash (or truthfully, dividend payers are a bit worse) if you aren't in "income" or "withdrawal" mode.

I dont understand why this would be the case? Or if it is? Do you have a citation for this?

It's like selling in a down market.   It is always better to hold to let the stocks recover.   

A good simulator of the concept would be cFiresim  - fixed withdrawals versus varying withdrawals based on how well the market does.  Not a 1:1 comparison, but avoiding selling when the market is low is a key strategy for the first several years of retirement.

I have seen studies, just don't feel like double checking the database to pull it up right now....  :-)

This makes no sense. Dividends get cut in a down market. So either a) you sell stocks anyway (likely much lower since everyone bought them just for the dividend). Or b) you have a big buffer and are ok, in which case you would have been ok no matter what.
Dividends actually don't get cut in a down cycle, at least not very quickly or by most of the companies.   Sure, a sustained recession will impact dividends, but it takes a while for it to flow to the bottom line of the company's sales and for them to cut dividends because cutting a dividend is a price lowering cycle that is harder to recover from. 

A lot of price fluctuation is not correlated to the underlying performance of the company.   For example, a growth stock that starts paying dividends and then becomes a solid "cash cow" income producer may have its stock price decline by 15%, while keeping its dividends in full and even increasing them.  The perception that the company is not likely to double in value over the next 5 years (it stopped being a growth company) is what drives down the price... despite the fact that they continue to have strong income and pay consistent dividends.

According to this (quick google search) there are 267 companies who have rising dividends over the last 10 to 50 years.
https://www.suredividend.com/blue-chip-stocks/

I do note, that the non-growth companies are also likely to return slightly less overall gains and profit to the investor.  Is this balanced by the fluctuation of the market risk?  IDK, but in my limited investing experience, blue chip stocks with dividends or any steady dividend paying group of companies has less overall growth in share price.

So, to that point, I recommend a balance VTI type fund for people with a lot of years before withdrawals begin.  It is simpler, and more likely to have higher overall returns.  Plus the person likely has it invested in non-taxable accounts and / or has another income stream so dividend taxes are higher than cap. gains taxes.

Then into early retirement, switching to have more dividend players to generate at least $20k/yr of dividend income.  (Forboth  tax reasons due to low income and protection against early retirement declines in value).

The USA has some nice cap gains tax exemptions, so the tax reason may not apply, but the consistent income without needing to sell the investment is a huge plus... and dividend payers return better than bonds or other fixed income securities, albeit with a bit more risk.

SparkyPeanut

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Why are dividends the rage?
« Reply #69 on: January 15, 2020, 07:30:40 PM »

You are correct, SOME dividends get cut in a down market.  But not ALL dividends get cut.  I would have to look it up, as I am unsure on indexes but I would be willing to bet some of those didn't "cut" either.  (Granted, those dividends are not stable enough to always tell, but I assume it should be obvious for 2008-09 data.)


In 2007 dividends grew by 11.45%, in 2008 they grew by 2.36%, in 2009 they were cut by 21.07% and grew by 1,45% in 2010 before growing every year since by ~5-20% YoY. These figures are not adjusted for inflation and cover all stocks in the S&P 500.

Form here:
https://www.multpl.com/s-p-500-dividend-growth/table/by-year

In 2009 a lot of companies cut dividends, but some of the usual suspects kept payouts unchanged.

My point is still true, not all dividends were cut.   I won't disagree that there were cuts, no one with a brain will.  But not all were. 

As long as you can know ahead of time which will get cut you're all set!

Why?  If you have a plan, you should be set whether they get cut, or go up right?
No? You're not OK. If you depend on $40k a year in dividends to live of (to "not touch principal" *rolleyeys), and this gets cut to 20k then what do you do?

Someone said dividends are safer, since you don't have to sell in a downturn. I said how?

It sounds like the clever plan is to only invest in companies that WONT cut dividends, which is obviously a moronic, unworkable strategy. I don't care if they've raised them the last 25 years, that predicts nothing.

A dividend ETF would solve that.

FIPurpose

  • Handlebar Stache
  • *****
  • Posts: 1220
  • Location: WA
    • FI With Purpose
Re: Why are dividends the rage?
« Reply #70 on: January 15, 2020, 09:10:13 PM »
My current portfolio has an average dividend of about 2.6%. So any typical FIRE person with >1MM portfolio is likely already receiving >20k in dividends.

There was a time where I was buying individual dividend stocks, but after trying to find a blend of growth and blue chip I ended up with an average yield of around 3%. I put in all this work managing and (mostly) buying stocks only to come out .4% ahead of indexing in straight yield. I could have switched out more stocks for higher yielding ones, but honestly, the highest yielders were usually my worst bets.

Stocks that yield 5% tend to have no additional growth. (telecoms, utilities)
Stocks that yielded more were mostly paying dividends through debt.
Stocks that yielded less were usually overpriced or good stocks that just weren't paying a huge dividend.

I did make a few good trades, but I also made plenty of bad ones. I didn't come out ahead of indexing. And even on yield, I didn't really beat indexing by that much.

k9

  • Stubble
  • **
  • Posts: 246
  • Age: 39
Re: Why are dividends the rage?
« Reply #71 on: January 16, 2020, 05:41:19 AM »
I am newer here, but I know the general consensus here on growth funds vs dividend funds. Personally all of my tiny, puny IRA is in VTSAX and BND. But there are so many videos on YouTube and blogs showing how to build wealth through dividends and talk about eventually living off the dividends. They have to be privy to the same info you fine people are. Why do they mean that way?
I’ve also noticed they never talk about the tax implications either.

Tax implications depend on where you live.

Dividend investing frees you from the "hassle" of selling anything. It's even more passive. That's a big plus for elderies. Sure, it's easy for us to sell just the right amount of funds required, but it might not be so easy when you're 80 or something and can't even remember what year it is.

The other advantage is that you don't run the risk of depleting your nest egg and worry about the infamous "can I really sell 4% of my capital each and every year? I might run out of money eventually!"

The drawback is that you need to work longer if you want to build a never-ever-depleting nest egg.

theoverlook

  • Stubble
  • **
  • Posts: 233
Re: Why are dividends the rage?
« Reply #72 on: January 16, 2020, 02:09:04 PM »
I have some company stock that produces dividends but does not have a simple way to reinvest them so we get a check twice a year.  Getting a couple grand twice a year was really nice but once I started tracking the stock value in my NW spreadsheet I realized that the stock price always dropped by the dividend amount and so in the end the dividend was a forced sale of my stock.  I still find myself hesitant to sell that stock near the dividend date because I enjoyed getting magic checks in the mail but rationally I know dividends are already baked into the price.  Physiology is a powerful tool.

I think you all would be shocked at how many people don't know that the dividend is taken out of the share price when it's paid. I didn't know that until I bought and held a dividend paying stock for a while. I put $10k into Shell stock during the oil price crash a few years ago, thinking the awesome dividend was a guaranteed return and that any price appreciation would be a cherry. Well, years go by and the dividend has been basically the only return. Which isn't bad, at 8% based on my buy-in price, but pales in comparison to the total market return. Additionally, I was poorly educated on the stock and didn't realize that the RDS.A stock I bought was subject to additional Dutch dividend withholding, which lessened my returns even more. Thankfully that was just a "play money" lesson. I've liquidated that stock, but not until after some good lessons were learned.

I'd say the average rookie investor has no idea that the dividend is taken out of the stock price.

habaneroNorway

  • Bristles
  • ***
  • Posts: 462
Re: Why are dividends the rage?
« Reply #73 on: January 16, 2020, 03:10:27 PM »

I'd say the average rookie investor has no idea that the dividend is taken out of the stock price.

And also that it isn't like you bought a bond with a fixed payout until maturity.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1689
Re: Why are dividends the rage?
« Reply #74 on: January 16, 2020, 07:00:27 PM »

I'd say the average rookie investor has no idea that the dividend is taken out of the stock price.

And also that it isn't like you bought a bond with a fixed payout until maturity.

Some arguments I encounter online - even here - in favor of a high-dividend portfolio don't make sense unless one assumes dividends are not reducing the stock price. There are people who know obscure tax rules about IRA transfers and capitalization of rental property improvements who are not aware of this simple truth.

It's like dividend stocks trick people into thinking they are buying a bond with the appreciation potential of a stock. Once ingrained, this idea is hard to dislodge with logic or evidence. It's almost like arguing with a goldbug, but not quite that bad of course :) .

The most persuasive argument I've heard for a dividend portfolio is that after a stock crash, there is a lag of a few months to a year before the dividend cuts start - and these somehow hit people by surprise. If this argument holds, this time - when dividend companies are bleeding money but haven't yet made a decision to conserve capital - would be a good time to pivot to growth stocks, which is not the point fans of dividends are making but that's my take. However, I doubt this argument holds water; markets would have to be pretty inefficient. It's probably more an argument for a low beta portfolio that can pivot to high beta in a crash.

Shane

  • Pencil Stache
  • ****
  • Posts: 922
  • Location: Independent
Re: Why are dividends the rage?
« Reply #75 on: January 16, 2020, 07:19:27 PM »
Quarterly dividends from VTI and monthly interest from BND in our taxable account makes up ~25% of our spending in FIRE. Purposely buying individual stocks, just because they pay high dividends, seems like a poor strategy to me. Since I have no way of accurately and consistently predicting which dividend stocks will perform well, and which will not, I just stick with index funds. When I was in my 20's and 30's, I wasted a lot of time and money trying to time the market, using all different strategies. In hindsight, if I had just stuck with a good, low-cost index fund, I could've easily shaved 5-10 years off of the 24 years I worked after college, before FIRE.

vand

  • Bristles
  • ***
  • Posts: 431
  • Location: UK
Re: Why are dividends the rage?
« Reply #76 on: January 17, 2020, 02:59:41 AM »
Quarterly dividends from VTI and monthly interest from BND in our taxable account makes up ~25% of our spending in FIRE. Purposely buying individual stocks, just because they pay high dividends, seems like a poor strategy to me. Since I have no way of accurately and consistently predicting which dividend stocks will perform well, and which will not, I just stick with index funds. When I was in my 20's and 30's, I wasted a lot of time and money trying to time the market, using all different strategies. In hindsight, if I had just stuck with a good, low-cost index fund, I could've easily shaved 5-10 years off of the 24 years I worked after college, before FIRE.

This is just crap.

You can get a VERY good idea which stocks will continue to pay good dividends. Look at earnings, stock price, dividend cover, and read the company's financial statements with regard to their dividend policy. It's far from just pot luck.

The dividend aristocrats have a long history of reliable and increasing dividend payouts. As unfashionable as it may be, there's a school of thought in investing that track records speak far louder than current analysts' forecasts.

One of my holdings is currently yielding over 6% and holders have not suffered a dividend cut since WWII. In the past decade there were even opportunites to buy it for up to 14% yield based on hysterical short term selloffs. Of course a track record can't guarantee that it will never have to cut its dividend, but given a choice I'll take happily it over the analyst du jour who say the company's best days are behind them.

If you are not prepared to put the work in then by all means stick to index funds. For those who still like to indulge in stock picking like myself we are prepared to back out judgement with our own money, but we have a firm strategy in place.
« Last Edit: January 17, 2020, 03:03:08 AM by vand »

sfb

  • 5 O'Clock Shadow
  • *
  • Posts: 15
  • Location: Northern VA
Re: Why are dividends the rage?
« Reply #77 on: January 17, 2020, 06:50:07 AM »
I track the dividends of a few Vanguard funds and the dividend cuts are much smaller than equity draw downs.  Reits (VNQ) had the biggest cut in dividend and the least dividend growth.  For utilities (VPU) there has only been 1 very small dividend cut since 2007.  Its also interesting that according to Portfolio Visualizer, VPU had a higher CAGR and lower standard deviation than VTI since 2005.

           VPU      VNQ      VYM     VTI
2007   $2.19   $3.11   $1.36   $1.30
2008   $2.36   $3.00   $1.44   $1.26
2009   $2.47   $1.96   $1.17   $1.11
2010   $2.54   $1.89   $1.09   $1.15
2011   $2.66   $2.05   $1.33   $1.23
2012   $3.00   $2.34   $1.59   $1.56
2013   $3.13   $2.79   $1.75   $1.67
2014   $3.09   $2.92   $1.91   $1.87
2015   $3.41   $3.13   $2.15   $2.07
2016   $3.41   $3.98   $2.15   $2.22
2017   $3.71   $3.51   $2.40   $2.34
2018   $3.81   $3.53   $2.65   $2.60
2019   $4.04   $3.14   $2.68   $2.77

Stimpy

  • Stubble
  • **
  • Posts: 163
  • Age: 36
  • Location: Middle of Nowhere
Re: Why are dividends the rage?
« Reply #78 on: January 17, 2020, 07:56:16 AM »
Purposely buying individual stocks, just because they pay high dividends, seems like a poor strategy to me.

This one, gets a yeah, completely agree for the most part.   Buying a stock JUST because of Yield will get you in trouble, almost every time.  BUT, there are time where the a stock drops with the market just cause, and has no real reason to drop, this can create a high yield in the short term and make a great buying opportunity.  That being said, if you haven't taken the time to know how the company makes it's money (ie. Fundamentals and understanding why), and are just going by the yield, even if it's a "safe" dividend, it's a stupid buy!

As stated above, it take time, effort and MORE planning this just indexing.   I won't argue with anyone who is put off by that.  You SHOULD buy an index and I think most stock pickers that are here would agree with that.  Hell, looking at the guys who i consider as my "mentors" they recommend the hell out of indexes, but they still buy individual stocks for the dividend.

Shane

  • Pencil Stache
  • ****
  • Posts: 922
  • Location: Independent
Re: Why are dividends the rage?
« Reply #79 on: January 17, 2020, 08:14:58 AM »
Dividends are just one part of an equity investment. Overall return is more important. If dividend investing really produced better overall returns, wonder why Warren Buffet won his bet against the hedge funds?

Davnasty

  • Handlebar Stache
  • *****
  • Posts: 2187
Re: Why are dividends the rage?
« Reply #80 on: January 17, 2020, 08:22:46 AM »
Purposely buying individual stocks, just because they pay high dividends, seems like a poor strategy to me.

BUT, there are time where the a stock drops with the market just cause, and has no real reason to drop, this can create a high yield in the short term and make a great buying opportunity.

Is this reasoning more applicable to dividend paying stock than non-dividend paying stock?

ETA: referring to the bolded, not the "high yield" portion, in case that wasn't clear
« Last Edit: January 17, 2020, 08:27:58 AM by Davnasty »

theoverlook

  • Stubble
  • **
  • Posts: 233
Re: Why are dividends the rage?
« Reply #81 on: January 17, 2020, 09:01:33 AM »
I'd say the average rookie investor has no idea that the dividend is taken out of the stock price.
Considering that's not very accurate, I would hope the average rookie investor doesn't know.

- Declarations of cash dividends cause a drop in the share price because either a) purchases after the ex-dividend date don't want to pay a premium for a dividend they will not receive or b) the dividend reduces the value of the company (ex., debt to pay dividends).

- Stock dividends dilute the number of shares outstanding by issuing shares of the stock as dividends to holders of the stock.

In the case of cash dividends, a profitable company should be able to pay them without negatively impacting their book value since there has been no change to their underlying assets. That's were the argument about how the company should be managed (i.e., for growth or not) comes into play.
From here: https://www.investopedia.com/articles/stocks/07/dividend_implications.asp

“On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades.”

As I understand it, the value of the dividend is subtracted from the share price of the company. That’s done automatically by the exchange the stock is traded on. Do you have information to the contrary?

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1689
Re: Why are dividends the rage?
« Reply #82 on: January 17, 2020, 11:39:04 AM »
^ Incorrect. A share of equity is a claim on ALL the company’s net assets. In the example above, if a company earns $1,000, those $1,000 are deposited in an account owned by the company. When this happens, the company’s assets increase in value by exactly $1,000. Reasonable investors will pay a $1,000 higher market cap to buy the company that has an extra $1,000 in its bank account.

Example: ChpBstrd Dump Truck Service owns one truck worth $14,000 and $1,000 cash in the bank. Thus, a reasonable price to pay for my little company (truck plus account) is about $15k. Suppose the company earns another $1,000 tomorrow and the truck does not depreciate by anything. It now has a $14k truck, plus $2k in its account. Reasonable value: $16k. But now, CBDTS announces a $500 dividend to be paid to whomever is its owner on the ex dividend date. At the moment the dividend is committed to me (the ex dividend date), the net assets of the company go from $16k to $15,500. These assets include a $14k truck and $1,500 cash in the bank.

It’s not that the stock price is automatically adjusted, as the investopedia article implies, it’s that investors are willing to pay less for a company with fewer assets than they are for a company with more assets. When CBDTS reduces its assets by $500 by giving its funds to someone else, it becomes worth $500 less than before.

For a real life example, observe how NLY fell by exactly the amount of their 25 cent dividend on their last ex div date. Next quarter, it will do the same.

Of course, the broader market is swinging around at the same time, so the effect is harder to see than it is to infer, but logically it has to exist. Otherwise there would be a simple arbitrage opportunity where one could buy stocks on their ex dividend dates, sell the next day, and collect the dividends for dozens of stocks per year without suffering capital losses. Returns would be astronomical if the stocks never fell.

theoverlook

  • Stubble
  • **
  • Posts: 233
Re: Why are dividends the rage?
« Reply #83 on: January 17, 2020, 12:25:38 PM »
Quote from: Cash Dividend
A company has 100 shares outstanding, a market cap that matches their book value of $10,000, and you have 1 share that trades at $100. At the end of the year they declare profits of $1,000 to be paid to shareholders ($10 per share) with no change in book value. At the ex-dividend date the stock opens at $90 per share, but since the book value remains unchanged, bidding returns to reflect the market cap ($100 per share). When dividends are paid you have 1 share of stock trading at $100 and a check for $10.

That directly conflicts with the sources I've seen. You say "bidding returns to reflect the market cap," but do you mean it should or does?

https://finance.zacks.com/stock-price-change-dividend-paid-3571.html

Also says that the dividend is removed from the share price on the ex-dividend date. And that it MAY be bid back up but may not. That is distinct from is bid back up. The dividend amount causing the share to drop may be lost in market movements, but that doesn't mean it isn't there. Do you have a source that states otherwise?

Stimpy

  • Stubble
  • **
  • Posts: 163
  • Age: 36
  • Location: Middle of Nowhere
Re: Why are dividends the rage?
« Reply #84 on: January 17, 2020, 01:13:39 PM »
Purposely buying individual stocks, just because they pay high dividends, seems like a poor strategy to me.

BUT, there are time where the a stock drops with the market just cause, and has no real reason to drop, this can create a high yield in the short term and make a great buying opportunity.

Is this reasoning more applicable to dividend paying stock than non-dividend paying stock?

ETA: referring to the bolded, not the "high yield" portion, in case that wasn't clear

No, especially at this time of zero commissions.  It would equate to being more of a temporary value proposition.   I would say the same is true for an index.  A price dropping for no reason means you can get more for less.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3605
  • Age: 37
Re: Why are dividends the rage?
« Reply #85 on: January 17, 2020, 01:20:48 PM »
Taking that Cash Dividend example, and filling in the flaw in the logic.

Book value before the stock goes ex-divided is not 10,000, but 11,000. Paying the dividend then pushes the book value back to 10,000.

Just because they haven't reported it yet does not mean this is not so. And any company that declares that dividend has revealed information that could be used by rational investors to estimate the earnings and therefore the book value of the company.

So our pool of rational investors that collectively value this company at exactly book value would have bid the market value up to $11K before the ex-dividend date.

Now, once the stock goes ex-dividend, $1K of that book value is "spoken for" and so a rational pool of investors now values the company at $10K again - $11K less the $1K dividend that is a committed outflow at this point. Which is why the price is adjusted downward.

Mighty-Dollar

  • Bristles
  • ***
  • Posts: 384
Re: Why are dividends the rage?
« Reply #86 on: January 18, 2020, 09:32:22 PM »
You should be concerned with TOTAL return -- not dividends. Just invest in an S&P 500 index fund or a total stock market index fund. Not generating enough income? Simply sell off some of your principal (that has been growing and compounding much more than those high dividend stocks and funds).

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6637
  • Location: BC
Re: Why are dividends the rage?
« Reply #87 on: January 18, 2020, 10:36:31 PM »
You should be concerned with TOTAL return -- not dividends. Just invest in an S&P 500 index fund or a total stock market index fund. Not generating enough income? Simply sell off some of your principal (that has been growing and compounding much more than those high dividend stocks and funds).
Yes, of course, but....
 
how long have you been FIRED and doing this strategy?   Even those that are used to it and do it regularly acknowledge that there are some drawbacks when it comes to executing it.

theoverlook

  • Stubble
  • **
  • Posts: 233
Re: Why are dividends the rage?
« Reply #88 on: Today at 07:32:05 AM »
Not really a flaw so much as a way of simplifying things for the sake of illustration. Recall that this entire point arose out of the differences between stock and cash dividends and the differences between them (i.e., dilution of the number of shares).
The whole thing started because I stated that dividends are deducted from the share value, which I still believe to be the case. You've stated otherwise, including examples, but I haven't been convinced, sorry. I think that the market cap of the company would go down by an amount equal to the dividend. Otherwise they're manufacturing value out of thin air. The stock price already has the anticipated earnings priced into it, and they pay out part of those earnings, so they are removed from the book value of the company and removed from the share price. If the stock is seen as undervalued then yes it will be bid up but that's true both before and after the ex-dividend date. The overall value of the company goes down after the dividend payment, regardless of an opinion of whether it's under- or over-valued.

theoverlook

  • Stubble
  • **
  • Posts: 233
Re: Why are dividends the rage?
« Reply #89 on: Today at 08:38:56 AM »
However, the key concept that you need to remember is that cash dividends are deducted from the book value of the company to pay the shareholders.
That's my entire point. The book value of the company goes down, and the share price of the company is also marked down, in an amount equal to the dividend paid. That's all I'm claiming, and it's what I said in the first post that you took issue with. I don't see where any confusion comes into it from my end.