Philosophy of dividend investing?

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ghariton
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Re: Philosophy of dividend investing?

Post by ghariton »

I think that this has come up in the past, but I couldn't find the thread.

Larry Swedroe on the evils of dividend juicing.
Mutual funds can meet investors’ desire for large dividend payments in two ways. Either they can buy high-dividend-yield securities, or they can artificially increase their dividend yields by “buying the dividends” (or “juicing” them). The process involves purchasing stocks before the day on which the dividend will accrue to investors (known as the “ex-dividend day”), collecting the dividend and then selling the stock afterward.

<snip>

Not unexpectedly, the authors found that juicing is costly to investors through higher trading costs (commissions, bid/offer spreads and market impact costs). They found that funds with an excess dividend ratio above 1.38 have turnover 11% higher (with a t-stat of 4.2). Funds with an excess dividend ratio above 2 have turnover 17% higher (with a t-stat of 4.0). In addition, juicers incur increased taxes, ranging from 0.6% to 1.5% of fund assets per year. And this assumes that all dividends are qualified.

The implication is striking: “Investors who seek an income stream are better off creating it by selling fund shares than by investing in a fund that juices.”

<snip>

Finally, the authors noted their results are consistent with investors who psychologically distinguish between consuming income produced by their assets and consuming the capital value of their assets. This is simply a labeling error (or a framing problem), and thus leads to irrational behavior. Unscrupulous mutual funds, however, cater (or pander) to unsophisticated investors, charging higher fees and delivering lower returns with less tax efficiency.
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Re: Philosophy of dividend investing?

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Another piece by Larry Swedroe, on the irrelevance of dividends.

This time he notes that people have been trying to develop better stock valuation models for a long time. We have had CAPM. Fama-French 3-factor models, Carhart's four factor model (including momentum), and a wide variety of less notorious factor models. Yet none of these models include dividends (or dividend policy) as a separate factor. To the degree that dividends are important, their importance is subsumed by value, and to a lesser extent the other factors.

Swedroe makes the further point that, in the U.S., investors are pursuing dividend-bearing stocks to a degree that the prices of these have gotten out of line with the over all market. Hence, he speculates, in the next little while, returns on dividend-bearers will likely be lower than for the market as a whole.

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Re: Philosophy of dividend investing?

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Nobody really disputes that dividends shouldn't matter. There are several reasons why they could matter including signalling, better capital discipline at the company, convenience, income taxes. The issue, at least in Canada, is that most of the best companies pay dividends so tough to avoid.

Also, the idea that div stocks have been bid up to unreasonable values flies in the face of the modest valuations of the arguably best div stocks in Canada, ie the Banks. P/E about 11X. And current yields mostly over 4%.
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Re: Philosophy of dividend investing?

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http://www.financejourney.com/canadian- ... portfolio/

62 stocks and 7 ETF's if I counted right whole lot of time to look after this.

My principal goal for this portfolio is to create a growing cash flow by investing in dividend paying companies for long term. I hope that showing my Canadian dividend stock portfolio on my blog help me track my holding, stay focus, share ideas and specially receive great feedback from follow dividend investors.

Maybe doesn't want any feedback from index investors?

http://www.financejourney.com/net-worth ... gust-2016/
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http://www.etf.com/sections/features/22 ... nopaging=1

When trades get overcrowded, the endings can be ugly. One reason for this is that, as author William Bernstein has pointed out, when a strategy becomes popular, not only will it have low expected returns due to the crowding, but the investors are now “weak hands” that tend to panic at the first sign of trouble. That leads to the worst returns occurring at the worst times, when the correlations of all risky assets move toward 1.
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Re: Philosophy of dividend investing?

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Hello Brian5000,

I follow the blog you mentioned (http://www.financejourney.com) for quite sometimes. I don't completely agree with the blogger's leverage investing strategies, but he/she is doing pretty good in picking good stocks at the right time. He has built quite a big portfolio using Canadian dividend stocks.

Does his/her dividend philosophy work? I don't have the answer now. We need to wait and see for few years or wait for another market crash...

What do you think?
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Re: Philosophy of dividend investing?

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BRIAN5000 wrote:When trades get overcrowded, the endings can be ugly. One reason for this is that, as author William Bernstein has pointed out, when a strategy becomes popular, not only will it have low expected returns due to the crowding, but the investors are now “weak hands” that tend to panic at the first sign of trouble. That leads to the worst returns occurring at the worst times, when the correlations of all risky assets move toward 1.
This is a misconception because the individual traders make up such a small portion of all trades and even company share ownership. It's the funds\etfs\hedges that make up the bulk of trades and share ownership.

For me I was able to get away from trying to match\do or care what the market was doing or providing. I concentrated on growing my annual income and doing so by holding just a small number of companies. It was simple and easy to manage and overall the companies did what I hoped, provided me with more income than I needed to meet my expenses and allowed me to retire without worrying about money. I'm 74, almost 75 (with no defined pension) and my income continues to grow each year.

If I had it to do over again and I knew what I know now, I'd only invest and hold only 12 Canadian stocks. I might add some US stocks in an rrsp but not many. For beginners set up DRIP's and transfer shares to a TFSA when tax becomes a concern (taxable earnings over $40,000).
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Re: Philosophy of dividend investing?

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cannew wrote:
BRIAN5000 wrote:When trades get overcrowded, the endings can be ugly. One reason for this is that, as author William Bernstein has pointed out, when a strategy becomes popular, not only will it have low expected returns due to the crowding, but the investors are now “weak hands” that tend to panic at the first sign of trouble. That leads to the worst returns occurring at the worst times, when the correlations of all risky assets move toward 1.
This is a misconception because the individual traders make up such a small portion of all trades and even company share ownership. It's the funds\etfs\hedges that make up the bulk of trades and share ownership.

For me I was able to get away from trying to match\do or care what the market was doing or providing. I concentrated on growing my annual income and doing so by holding just a small number of companies. It was simple and easy to manage and overall the companies did what I hoped, provided me with more income than I needed to meet my expenses and allowed me to retire without worrying about money. I'm 74, almost 75 (with no defined pension) and my income continues to grow each year.

If I had it to do over again and I knew what I know now, I'd only invest and hold only 12 Canadian stocks. I might add some US stocks in an rrsp but not many. For beginners set up DRIP's and transfer shares to a TFSA when tax becomes a concern (taxable earnings over $40,000).
We still agree. My divs are growing about 7% per year next year and this is down from about 9% over the past 2 years. My divs now represent close to 60% of our total income with the rest being non cola pension. I am staying well ahead of inflation although higher taxes on divs a concern.

We seem pretty entrenched on this. Not sure anybody is changing their views. I don't think our strategy has been successful due to focusing on growing divs per se, but rather, at least in Canada, div growers happen to be some of the best companies.
Last edited by SQRT on 19 Aug 2016 14:13, edited 1 time in total.
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Re: Philosophy of dividend investing?

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SQRT wrote: We still agree. My divs are growing about 7% per year next year and this is down from about 9% over the past 2 years. My divs now represent close to 60% of our total income with the rest being non cola pension. I am staying well ahead of inflation although higher taxes on divs a concern. We seem pretty entrenched on this. Not sure anybody is changing their views.
That's the nice part about our strategy, our income continues to grow regardless....!
Was really glad when the PC's dropped the Min RRIF withdrawals, saved us $10,000 in taxes per year. Hope they consider another adjustment to the withdrawal rate.
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Re: Philosophy of dividend investing?

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SQRT wrote:
cannew wrote:For beginners set up DRIP's and transfer shares to a TFSA when tax becomes a concern (taxable earnings over $40,000).
We seem pretty entrenched on this. Not sure anybody is changing their views.
I'm quite entrenched in my conviction that DRIPs are an unnecessary PITA with close to no advantage, and will still avoid them like the plague.
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Re: Philosophy of dividend investing?

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adrian2 wrote:
SQRT wrote:
cannew wrote:For beginners set up DRIP's and transfer shares to a TFSA when tax becomes a concern (taxable earnings over $40,000).
We seem pretty entrenched on this. Not sure anybody is changing their views.
I'm quite entrenched in my conviction that DRIPs are an unnecessary PITA with close to no advantage, and will still avoid them like the plague.
Right. I meant the idea of div growth investing. Drips aren't of interest to me as I spend all my divs.
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Re: Philosophy of dividend investing?

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SQRT wrote:
adrian2 wrote:I'm quite entrenched in my conviction that DRIPs are an unnecessary PITA with close to no advantage, and will still avoid them like the plague.
Right. I meant the idea of div growth investing. Drips aren't of interest to me as I spend all my divs.
I think there should be pretty few "Goldilocks" types for which they have nothing to invest but the exact amount of dividends.
Either you need to spend at least the dividend amount (nothing therefore to invest), or you have more to invest (in which case you lump the dividends with additional money and invest the total).
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Re: Philosophy of dividend investing?

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We seem pretty entrenched on this. Not sure anybody is changing their views. I don't think our strategy has been successful due to focusing on growing divs per se, but rather, at least in Canada, div growers happen to be some of the best companies.
No one needs to change views but can read articles and post articles that confirm their biases.


Summary
While dividends may comprise a significant portion of total returns, they don't add any explanatory power to future returns.
Approximately 60 percent of U.S. stocks and 40 percent of international stocks don't pay dividends. The total returns to investors come from capital gains.
Corporate dividends can be replaced with self-made dividends.
http://seekingalpha.com/article/2093953 ... agic-pants
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Re: Philosophy of dividend investing?

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I believe dividend (or dividend growth) investing has had a particular advantage in Canada, because of the construction of the TSX. But everywhere else I index.
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Re: Philosophy of dividend investing?

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Shakespeare wrote:I believe dividend (or dividend growth) investing has had a particular advantage in Canada, because of the construction of the TSX. But everywhere else I index.
I tend to agree even if the dividend yield of a lot of good TSX companies like CNR, Couche-Tard are low. One can get really non-diversified looking for 3-5% yields almost exclusively. In which case, total return has its place in Canada too and I won't waver from that entrenched position either. :wink:
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Re: Philosophy of dividend investing?

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adrian2 wrote:I think there should be pretty few "Goldilocks" types for which they have nothing to invest but the exact amount of dividends.
Either you need to spend at least the dividend amount (nothing therefore to invest), or you have more to invest (in which case you lump the dividends with additional money and invest the total).
Count me in. Consider a TFSA or RRSP into which one places the full annual contribution at the beginning of the year. Dividends arrive monthly/whatever. Unless it's a really big holding, or a really big dividend, a $9.99 fee is not justifiable for each dividend reinvestment. But DRIPs use up most of the dividends (and sometimes with a 2% - 5% bonus) at no cost. The dregs from that process (in my experience) eventually provide enough cash for an occasional $100 no-fee MF purchase.

I'm quite entrenched in my conviction that DRIPs are pretty useful, and I use them whenever I can. Even in a non-registered account (which has had no new contributions since TFSAs became available). YMMV.
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Re: Philosophy of dividend investing?

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SQRT wrote:Right. I meant the idea of div growth investing. Drips aren't of interest to me as I spend all my divs.
I only recommend starting DRIP's for beginners. Yes there are low cost, even no cost etf's, but still fees along the line and a bunch of garbage. With DRIP a beginner will, IMO, get better returns on their small investments.

We have several DRIP's started years ago which we continue to hold because we don't need to draw down the div's, while for others we hold the shares with the Transfer Agent because we want the div's deposited into our bank, without fees. All of our other shares are with ShareOwners because they provide full div reinvestment, again because we don't need to draw them down and we no longer add to our accounts.
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Re: Philosophy of dividend investing?

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pmj wrote:Consider a TFSA or RRSP into which one places the full annual contribution at the beginning of the year. Dividends arrive monthly/whatever. Unless it's a really big holding, or a really big dividend, a $9.99 fee is not justifiable for each dividend reinvestment.
I would be horrified to use any single dividend for a separate purchase, but that's where your broker ISA gets used for. Even if one accumulates the dividends for 12 months in an ISA and invests the total, plus new contributions, on an annual basis, it's going to make a negligible difference in the grand scheme of things.

I remember, decades ago, reading about picking a bank account with daily compounding of interest, what a difference it makes over time vs. monthly compounding. Not so much nowadays...
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Re: Philosophy of dividend investing?

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adrian2 wrote: Either you need to spend at least the dividend amount (nothing therefore to invest), or you have more to invest (in which case you lump the dividends with additional money and invest the total).
Agree for someone in the accumulation phase, but for a retiree in the decumulation phase, it just could be that he has decided to simply spend the divs.
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Re: Philosophy of dividend investing?

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BRIAN5000 wrote:
We seem pretty entrenched on this. Not sure anybody is changing their views. I don't think our strategy has been successful due to focusing on growing divs per se, but rather, at least in Canada, div growers happen to be some of the best companies.
No one needs to change views but can read articles and post articles that confirm their biases.


Summary
While dividends may comprise a significant portion of total returns, they don't add any explanatory power to future returns.
Approximately 60 percent of U.S. stocks and 40 percent of international stocks don't pay dividends. The total returns to investors come from capital gains.
Corporate dividends can be replaced with self-made dividends.
http://seekingalpha.com/article/2093953 ... agic-pants
Agree. But still not changing my stategy after all this time ( and success).
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Re: Philosophy of dividend investing?

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SQRT wrote:
adrian2 wrote:Either you need to spend at least the dividend amount (nothing therefore to invest), or you have more to invest (in which case you lump the dividends with additional money and invest the total).
Agree for someone in the accumulation phase, but for a retiree in the decumulation phase, it just could be that he has decided to simply spend the divs.
You're echoing my point. It makes no sense for a retiree spending the dividends to use DRIP's either.
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Re: Philosophy of dividend investing?

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adrian2 wrote:You're echoing my point. It makes no sense for a retiree spending the dividends to use DRIP's either.
Except maybe by those who are so overwhelmed by dividend income that it gives them bragging rights. Still, I'd collect the divys and make a new $10k purchase once in awhile instead.

The ongoing argument is rather silly though. None of this really matters to the 99? 95?% of retirees who have to tap into capital as part of their SWR plan.
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Re: Philosophy of dividend investing?

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adrian2 wrote:
SQRT wrote:
adrian2 wrote:Either you need to spend at least the dividend amount (nothing therefore to invest), or you have more to invest (in which case you lump the dividends with additional money and invest the total).
Agree for someone in the accumulation phase, but for a retiree in the decumulation phase, it just could be that he has decided to simply spend the divs.
You're echoing my point. It makes no sense for a retiree spending the dividends to use DRIP's either.
Agree , we are in violent agreement. We must be bored. Looking for something to disagree about?
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Re: Philosophy of dividend investing?

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adrian2 wrote:
pmj wrote:Consider a TFSA or RRSP into which one places the full annual contribution at the beginning of the year. Dividends arrive monthly/whatever. Unless it's a really big holding, or a really big dividend, a $9.99 fee is not justifiable for each dividend reinvestment.
I would be horrified to use any single dividend for a separate purchase, but that's where your broker ISA gets used for.
The min HISA purchase at TDDI is $1000: https://www.tdassetmanagement.com/solut ... /index.jsp
- typical, I think, for most brokers, except $5k at BMO: https://iladqa01f.bmofg.com/selfDirecte ... ISA_EN.pdf
Summary: http://www.canadiancapitalist.com/high- ... t-brokers/

.. which would need a $100k investment portfolio, yielding 4% across the board, to make quarterly purchases. Probably 10 years before many investors are at that stage. Meanwhile, DRIPs would get most of the divs invested immediately, with no action required by the investor.
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Re: Philosophy of dividend investing?

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pmj wrote:The min HISA purchase at TDDI is $1000:
I know it says that, but in reality, once the initial HISA purchase is made, you can add to it in any amount you wish. I've never been refused on any teeny amounts I've added.

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Re: Philosophy of dividend investing?

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pmj wrote:The min HISA purchase at TDDI is $1000
Officially at TDDI, in a registered account, the minimum is $100.
Unofficially, you may get away with less.

The growth / compounding of anything less than $100 is truly inconsequential vs. waiting to invest a few months or even a year.
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