Philosophy of dividend investing?

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strathglass
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Philosophy of dividend investing?

Post by strathglass » 14 Sep 2015 19:53

Currently, based on my prior research, my equity investments are in broad/whole-market ETFs like XIC for Canada.
I hear so much "talk"/"noise" (or whatever you want to call it) about investing in dividend paying stocks that I have to ask:
What is the theory on investing in dividend stocks instead of alternatives such as whole-market-type investments?
And given that theory and practice are only the same in theory,...in practice what use if any should be made of dividend stocks or ETFs? :D

Also wondering if there is any value in keeping to the whole-market ETFs in the larger RRSP portfolio but putting the TFSA money into Canadian dividend payers?
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Re: Philosophy of dividend investing?

Post by deaddog » 14 Sep 2015 20:25

If you are interested in Dividend Investing check out this Blog.

Elite Wall Street Investor
https://dividendgrowthinvesting.wordpress.com/

Harold invests for dividend growth. He is concerned about the ups and downs of the market only as it presents him with low risk buying opportunities.

Scroll back to May 27 2015 for a review of the basics. If nothing else an interesting strategy.
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Re: Philosophy of dividend investing?

Post by Lazy Ninja » 14 Sep 2015 20:32

strathglass wrote:What is the theory on investing in dividend stocks instead of alternatives such as whole-market-type investments?
viewtopic.php?f=33&t=113114&p=412930&hi ... th#p412930

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Re: Philosophy of dividend investing?

Post by ghariton » 14 Sep 2015 20:41

As far as I know, there are three broad theories as to why to invest in dividend payers, and lots of subdividiond within each.

First, some see dividends, and especially growing dividends, as a signalling mechanism. Dividends show that company management really think the company is doing well. After all, cutting a dividend is deeply unpopular and may be downright disastrous, so management makes sure that dividends are sustainable in the long run before declaring them.

As a variant on this, some see dividends as a secondary indicator of a "value" stock (the market-price-to-book-value ratio being the primary indicator).

Second, some see dividends as a way to get cash away from the company's management and into the shareholders' pockets. The theory is that any retained earnings left sloshing around will be wasted by management on empire building or perhaps private perquisites for themselves, or otherwise wasted.

Third, some in the withdrawal stage see dividends as a way to generate income without actually having to sell any securities. Selling securities seems to be a big psychological problem to some, whether they are fearful of selling at a low point in the market, or fretting about the time and commissions of selling, or just the idea of eroding their principal.

There has been considerable empirical study of the first two, and the evidence is decidedly mixed. If there is a positive effect of dividends on total returns (dividends plus capital gains) of a stock, the effect is likely to be small (else it would have been vigorously confirmed by now).

As to choice of TFSA or RRSP, there is the bigger question of which you should be placing any of your money in. At the risk of considerable simplification, if your tax rate is likely to be lower in retirement than now, choose a RRSP; otherwise choose a TFSA. Once you have allocated your money between TFSA and RRSP, try to avoid U.S. securities in your TFSA (put them in your RRSP). The reason is that the U.S. charges a withholding tax on dividends to a TFSA or a non-registered account, but it charges none to dividends into an RRSP. While withholding tax in a non-registered account can be claimed and recovered at tax return time, in a TFSA it is gone forever. Depending on your allocations to various classes, your Canadian dividend-payers should probably go to your TFSA (once you have taken care of all your fixed income between the TFSA and RRSP).

See our finiki for more details.

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Re: Philosophy of dividend investing?

Post by ig17 » 14 Sep 2015 20:45

Historically, dividend investing was a proxy for value investing. High dividend to price ratio is the same as low price to dividend ratio. Low P/D is a value filter, similar to low P/E filter, low P/B filter, etc. Knowingly or unknowingly, dividend investors harvested the value premium.

This relationship between dividend investing and value investing may be broken at the moment. At least in the US. Due to low bond yields, income investors are forced to chase dividends in the stock market. They bid up the prices of the dividend payers. Dividend ETFs trade at higher multiples than broad market ETFs, while their dividend yields are comparable.

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Re: Philosophy of dividend investing?

Post by Heav3ns » 14 Sep 2015 20:46

This wiki articule may be helpful for you: http://www.finiki.org/wiki/Tax-efficien ... -taxtips-1

As far as I understand. Investing in high dividend paying equities makes sense when looking to receive income from your portfolio. Companies that have consistently paid dividends are generally safer and have shown to be able to profit in good times and bad. This is considered safer than a small tech start ups, etc. Investing in the market collectively gives you a better exposure to growth and potentially better returns as well as more volatility.

Not 100% sure on this: but investing in high dividend paying stocks may not be worth it if you have other considerable sources of income, as income from dividends cannot be deferred as capital gains can. This all comes down to what your goals are and what stage of life you're in. Some people / retirees may choose to keep their investments in high dividend paying stocks to preserve their portfolio while only relying on the income of the portfolio to provide for their day to day expenses.

I'm no expert and this is all opinion based, I stand to be corrected.

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Re: Philosophy of dividend investing?

Post by BRIAN5000 » 14 Sep 2015 22:32

Currently, based on my prior research, my equity investments are in broad/whole-market ETFs like XIC for Canada.
Some investing journey's start at the beginning but yours seemed to start at the end. IMHO lots of investors start out with junior mining stocks as they progress through their investing journey and gain knowledge and capital they may change to different strategies. In the end, some will reason that the time involved to maintain a dividend portfolio vs possible extra return is just not worth it. They start to use ETF's either in conjunction with existing portfolio or stand alone. The last step is relenting/relinquishing control and complexity and just use broad-based ETF's. So you've arrived at the end in the beginning.
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Re: Philosophy of dividend investing?

Post by BRIAN5000 » 17 Sep 2015 13:29

There are a nearly infinite amount of different styles of investing. I believe dividend investing in general – and investing in high quality dividend growth stocks specifically – to be the best fit for individual investors; especially individual investors looking for growing passive income streams.
http://www.suredividend.com/early-retir ... -193765921
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Re: Philosophy of dividend investing?

Post by Flaccidsteele » 17 Sep 2015 13:58

BRIAN5000 wrote:IMHO lots of investors start out with junior mining stocks as they progress through their investing journey and gain knowledge and capital they may change to different strategies.
Really? Investors start out with junior mining stocks? That seems like a difficult way to start?
Retired @ 40 after reading Munger/Buffett. I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation). "Put 90% in a very low-cost S&P 500 index fund...the long-term results will be superior" - Warren Buffett

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Re: Philosophy of dividend investing?

Post by SQRT » 17 Sep 2015 18:28

This tends to be a pretty emotional topic around here. My view:
- finance theory very clearly says divs shouldn't matter
-but in practice they seem to offer some practical benefits, esp for someone in the spend down phase
Eg. Regular cash flow that isn't impacted by market ups and downs (usually)
Easy to generate regular cash flow of 3-4% of equity portion of portfolio. This may represent a reasonable SWR
Well established div payers tend to be less volatile and will cause less sequence of return risk and will likely support a higher SWR
Divs much more stable than equity prices so this might help nervous investors in major corrections
As mentioned by George, divs create more management discipline and scrutiny ( may be this us why Warren doesn't like to pay them but seems quite happy to receive them)

Anyway, lot of ways to succeed in investing but this approach has been quite successful for me.

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Re: Philosophy of dividend investing?

Post by AltaRed » 17 Sep 2015 18:41

I would quibble mostly on one thing... the ease of which it is to get 3-4% dividend yield on an equity portfolio. Perhaps if one is skewed towards financials and utilities/pipelines (example XDV), but not with most others, including virtually all ex-Canada ones. I'd aim for 2.5-3% as being more likely for a well diversified portfolio.
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Re: Philosophy of dividend investing?

Post by ghariton » 17 Sep 2015 18:53

Flaccidsteele wrote:Really? Investors start out with junior mining stocks?
That would be me. First stock purchase was Patricia Silver. Second was Peruvian Mines. Third was International Helium (a very junior energy play). Fourth was a consulting outfit that had lost its way (I still have the stock certificate, suitably framed, hanging in the laundry room.) Fifth was Meguma Gold (reopening a gold mine in Nova Scotia that had been played out in 1908.) Sixth was Bell Telephone (as it was then called).

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Re: Philosophy of dividend investing?

Post by AltaRed » 17 Sep 2015 19:11

I still believe it is an anomaly starting investing via junior mining stocks, at least in the past 2 decades. The availability of mutual funds and especially more recently via brick and mortar banks would suggest otherwise. Never mind discount brokerages and DIY options in the last 15 years in particular.

I did know a few guys back in the '70s scewing around with penny/mining stocks and losing pretty much everything. Never considered that investing even as a tender 20something. I did get caught up in full service commissioned investing with their miserable DSC mutual funds and some stocks.
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Re: Philosophy of dividend investing?

Post by StuBee » 17 Sep 2015 19:59

It is true that it is a fairly emotional topic around here....

I fully agree with SQRT's post (as everyone probably imagined...). IOW div's are not important in theory but yes in practice. Practical considerations trump theory.

I also think that a few years ago, the atmosphere on this board surrounding dividend investing (especially in the context of individual stock portfolio's) was considerably different.

I attribute this change to the "rise of the ETF". I have doubts/worries about this, especially as I see the number of ETF's rapidly approaching the number of individual stocks. Does not this appear odd or unnatural? On what basis is buying and selling taking place? On the basis that company "X" actually is worth "such and such"? Or do all we want to do is just "buy the market"? And, if so, who are the "market makers"?

I am somewhat biased by success. I never purchased "junior mining stocks". Two decades ago I was persuaded (for my first ever individual stock purchases by a full service stock broker) to buy Bell, Royal Bank and what was to me an obscure pipeline which was called (at the time) IPL (apparently, its future was promising...). I forgot about them for a decade or so. Today, I both cannot and do not want to get rid of these "dividend machines"...

I agree with the diversification crowd which is why there are 14 names in my dividend portfolio.

But, to be honest, if I were to start today, perhaps I too would be on the ETF bandwagon...

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Re: Philosophy of dividend investing?

Post by chufinora » 17 Sep 2015 20:16

Not sure about starting out in penny stocks, but I like I suspect many others did dabble in them at one time, before I developed a sounder investment strategy. Fortunately it was only play money and I was aware I was speculating/gambling. I still keep one of these stocks in my portfolio watching as my $500 investment is declining over time (Along with the other detritus such as Nortel stock) as a sober reminder.

As for dividend investing I find in my job less/retired(?) mode that the dividend income is a big psychological boost.

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Re: Philosophy of dividend investing?

Post by ghariton » 17 Sep 2015 20:32

AltaRed wrote:I still believe it is an anomaly starting investing via junior mining stocks, at least in the past 2 decades.
My experiences were in the late 1960s.

I am not recommending what I did. I'm just pointing out that it does happen.

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Re: Philosophy of dividend investing?

Post by Flaccidsteele » 18 Sep 2015 00:11

I'm also biased by success.

I never invested in 'junior mining stocks' (it never even crossed my mind as an idea) nor did I consider dividend stocks (same).

From my indoctrination, dividend investing was for individuals who wanted income. I was just starting my career in my 20s and earning income myself, I didn't want the business to distribute more income to me.

I already had difficulty allocating excess capital as it was. Adding more capital for me to allocate wasn't practical nor wanted.

Dividend investing was also never emphasized by Munger or Buffett. They tended to espouse (at the time), for a good business to retain earnings.

I was told that time in the U.S. market was the best advantage I had. So I decided to buy stocks as early as possible. Whether they paid dividends or not, wasn't a factor in my decisions. Being invested for a long period of time in a decent business was my blinding focus. At the time.

Later, I was stuck with the 'problem' of large unrealized capital gains (still am). I felt that I couldn't stop working because working was where my income came from.

I kinda felt trapped.

Thankfully the U.S. RE market eventually blew up and I joined 500,000 Canadians in a U.S. RE shopping spree.

If I had to start over, I would consider dividend investing. I realize that I was just lucky that the U.S. RE market imploded. Otherwise I'm not sure what I would have done.
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Re: Philosophy of dividend investing?

Post by SQRT » 18 Sep 2015 10:24

AltaRed wrote:I would quibble mostly on one thing... the ease of which it is to get 3-4% dividend yield on an equity portfolio. Perhaps if one is skewed towards financials and utilities/pipelines (example XDV), but not with most others, including virtually all ex-Canada ones. I'd aim for 2.5-3% as being more likely for a well diversified portfolio.
If you are talking balanced portfolio, I certainly agree. The problem is with the FI component, though not equity. I am indeed overweight financials, pipes, telco's and that makes getting 3.5-4% pretty easy.

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Re: Philosophy of dividend investing?

Post by AltaRed » 18 Sep 2015 10:37

SQRT wrote:
AltaRed wrote:I would quibble mostly on one thing... the ease of which it is to get 3-4% dividend yield on an equity portfolio. Perhaps if one is skewed towards financials and utilities/pipelines (example XDV), but not with most others, including virtually all ex-Canada ones. I'd aim for 2.5-3% as being more likely for a well diversified portfolio.
If you are talking balanced portfolio, I certainly agree. The problem is with the FI component, though not equity. I am indeed overweight financials, pipes, telco's and that makes getting 3.5-4% pretty easy.
I am actually only talking about the equity component of a portfolio. A diversified equity portfolio likely does not yield more than 3% in dividends. One only has to look at some of the sector ETFs to see that result. You have to include Consumer Staples, Industrials, etc. in a diversified portfolio.

Added: FWIW, the yield on my equity portfolio is right around the 3% mark and that includes REITs and Prefs. Ex-Canada holdings like VXC and/or SPY and/or VTI bring down aggregate dividend yield.
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Re: Philosophy of dividend investing?

Post by BRIAN5000 » 18 Sep 2015 11:58

A diversified equity portfolio likely does not yield more than 3% in dividends.
4.0% Financial
4.5% Utility
3.5% Consumer
3.0% Manufacturing
3.0% Resource
4.0% Multi/Alternative
3.0% For/Etf'S/Muts

Using the above as a guide you can easily get to 3.75 to 3.9 % with @ 4% average on Canadian stocks and @ 3% average on US stocks with each sector equal weighted. Depending on where you put preferred shares makes it even easier. I put Reits and preferred shares in the "Multi/Alternative" equity class with a minimum yield of 5%. Right now my total equity yield is 3.9% but not totally equal sector weighted.
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Re: Philosophy of dividend investing?

Post by AltaRed » 18 Sep 2015 12:25

I beg to differ based on sector ETFs as the proxy for each, but I will leave the argument at that.

Added: I meant to include my rationale for ETFs. Stock pickers are a small (very small?) minority of retail investors. Hence ETFs (or even index mutual funds) really are the proxy for investing.
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Re: Philosophy of dividend investing?

Post by OnlyMyOpinion » 18 Sep 2015 14:01

I consider our Cdn acc porfolio fairly conservative and diversified (usual financial,telcos,utilities,consumer - no energy). Overall yield is 4.6% on market value - comprised of 16 common (avg 4.4% yield), 3 REIT (4.2%) and 11 pref (5.5%) holdings.

Changes to reflect yield/MV per AltRed's comment.
Last edited by OnlyMyOpinion on 18 Sep 2015 17:14, edited 1 time in total.

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Re: Philosophy of dividend investing?

Post by AltaRed » 18 Sep 2015 14:21

Market value is the only thing that matters because that is the basis on which an investor would make buy or sell decisions relative to alternatives. Cost (book) basis is only a bookkeeping exercise... and perhaps bragging rights (or lamentable regret). That discussion has been beaten to death many times.
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Re: Philosophy of dividend investing?

Post by SkaSka » 18 Sep 2015 14:25

SQRT wrote:... As mentioned by George, divs create more management discipline and scrutiny ( may be this us why Warren doesn't like to pay them but seems quite happy to receive them)...
You'd have to take Warren's word for it (and I do) the reason being that BRK does not pay out dividends is because he believes that him and Munger can allocate the excess capital more effectively.

He does state in the most recent annual report that decades down the line, there will be too much excess capital coming into head office and it would be prudent to initiate either a dividend policy or share buybacks to return capital to the shareholder.

So for the time being, you have to take his word for it that he can put the excess shareholder capital to better use than the shareholders could if they received it as a dividend.
ghariton wrote:
Flaccidsteele wrote:Really? Investors start out with junior mining stocks?
That would be me. First stock purchase was Patricia Silver. Second was Peruvian Mines. Third was International Helium (a very junior energy play). Fourth was a consulting outfit that had lost its way (I still have the stock certificate, suitably framed, hanging in the laundry room.) Fifth was Meguma Gold (reopening a gold mine in Nova Scotia that had been played out in 1908.) Sixth was Bell Telephone (as it was then called).
I have to say this forum really has been an integral kickstart of my financial education those many years ago. Aside from index funds, first stock purchase was Berkshire. Second was Exxon. Third was Chevron. Fourth was Johnson and Johnson. Fifth was Hershey. Ownership time horizon is forever.

I figured I should start with the obvious and do a top down approach, as the large caps are more or less "efficiently" priced vs smaller companies. This should give me time to continue building up general knowledge of the major sectors and increase proficiency in accounting. Perhaps I'll be more suited to analyze mid-to-small caps many, many years down the line.

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Re: Philosophy of dividend investing?

Post by Taggart » 18 Sep 2015 14:58

I've been investing or should I say making attempts at investing since the early 80's when I was just over 30 years of age and trying all sorts of things. I would say my first twenty years or so were just a waste or a learning experience, however you want to look at it.

Now all these years later I'm finding that the wonderful thing about equal sector weight dividend growth investing in Canadian stocks for the taxable account and using broad based index funds and ETF's in the tax deferred and tax free accounts is that I don't waste my time playing Walter Mitty anymore. I don't have the intellect of a Ben Graham or Warren Buffett all wrapped up in one, and I don't have to play that game. I don't spend money on expensive investment books and magazines anymore either.

Aside from the occasional pruning, I just let dividend growth investing and index investing run on auto pilot. Both are dead simple, but both highly effective. I've found that the simpler I keep it, the better I do at investing.

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