Philosophy of dividend investing?

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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scomac
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Re: Philosophy of dividend investing?

Post by scomac »

AltaRed wrote:
ockham wrote:The conclusion: Therefore, shareholders who like firm dividends rather than self-dividends are irrational.
Perhaps, but I'd call it human nature than being irrational. Humans generally prefer certainty and clarity over the alternative and I suspect most retail investors are best served with the former. Less potential for panic attacks and making poor decisions.
Agreed. It simply comes down to what side of the question your point-of-view rests on.

I might add that one thing that hasn't been mentioned here, at least directly, is the ease of receiving a dividend payment. No action is required, no decisions to be made. The money shows up in your account on cue regardless of what the market is doing.

Conversely, self dividends require action on the part of the investor. What to sell? How much to sell? When to sell? Therein lies the uncertainty unless you are working with some sort of systematic withdrawal plan. There are lots of those in existence, but they are almost always attached to high fee funds or discretionary accounts. In light of the alternatives, receiving dividends seems like a "rational option" based on simplicity and costs. It may not be more rational than a self-dividend approach, but I doubt that it's any less. When seeking dividends becomes irrational is when you maintain ownership in a security solely for the dividend when there are superior alternatives available -- IOW ignoring opportunity costs.
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ockham
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Re: Philosophy of dividend investing?

Post by ockham »

StuBee wrote:
ockham wrote:The conclusion: Therefore, shareholders who like firm dividends rather than self-dividends are irrational.

Does this more or less capture the essence of the debate??
:shock: I sure hope not!!! :lol:
Beware of economists bearing idealizing analytical models as gifts.

What I was trying to highlight is that the conclusion -- that a shareholder preference for firm dividends over self-dividends is irrational -- rests on an idealized conception of the firm and on an idealized conception of the market. Insofar as real world firms and real world markets do not operate in accordance with those idealized conceptions, the real world shareholder need not feel threatened by the conclusion. That's how I see the argument at the moment (though, as I said, I'm late to the party).
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Re: Philosophy of dividend investing?

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scomac wrote:I might add that one thing that hasn't been mentioned here, at least directly, is the ease of receiving a dividend payment. No action is required, no decisions to be made. The money shows up in your account on cue regardless of what the market is doing.
So true - good point.

I know if I've been busy and haven't been paying attention, and I log into my account and see a long list of cash deposits, nothing makes me happier, and I didn't have to do a darn thing - they just gave me a bunch of money, and I still have the same number of stocks.

Alternatively, if I needed cash flow and I had to decide on which beaten down stock to sell to get some cash, and then pay them for the transaction, I wouldn't be happy at all.

I'll take the irrational option. :wink:

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Re: Philosophy of dividend investing?

Post by gaspr »

So, let us assume that it is true that many buy dividend stocks or funds for irrational reasons. Doesn't it follow that the prices of these stocks or funds will be driven up? If so, there is a cost here. Another cost is the actual dividend payout costs...check writing, mailing, processing etc. Larry Swedroe points out in the boglehead blog link that there is a rather noticeable and measurable difference between the total returns of dividend payers and non payers.

Here is the quote form Larry

"And here's little bit of data worth considering. The zero rate policy of the Fed led many who follow a cash flow approach to investing instead of what I believe is the most efficient way, a total return approach (and note Vanguard's Research paper on subject fully agrees) to buy dividend paying stocks. That demand pushed up prices. And here's the result. For the eight-year period from 2008 through 2015 the annualized return to dividend paying stocks was 68.7 percent. The annualized return to the non-dividend payers was 92.8 percent. Valuations matter and the dividend "craze" impacted prices and we've seen the result."
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Re: Philosophy of dividend investing?

Post by like_to_retire »

gaspr wrote:...check writing, mailing,
What's a cheque? - mailing? - no, this is 2016.

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Re: Philosophy of dividend investing?

Post by pmj »

scomac wrote:I might add that one thing that hasn't been mentioned here, at least directly, is the ease of receiving a dividend payment. No action is required, no decisions to be made. The money shows up in your account on cue regardless of what the market is doing.
Hmm. Http://www.financialwisdomforum.org/for ... 54#p567954
pmj wrote:Even if "income" from capital gains were exactly equal to "income" from dividends, receiving dividend income is simply less work. It's just sitting there waiting to be withdrawn.
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Re: Philosophy of dividend investing?

Post by gaspr »

like_to_retire wrote:
gaspr wrote:...check writing, mailing,
What's a cheque? - mailing? - no, this is 2016.

ltr
I am willing to bet a beer that there are several who still love getting a cheque in the mail...just more irrationality. :)
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scomac
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Re: Philosophy of dividend investing?

Post by scomac »

pmj wrote: Hmm. Http://www.financialwisdomforum.org/for ... 54#p567954
pmj wrote:Even if "income" from capital gains were exactly equal to "income" from dividends, receiving dividend income is simply less work. It's just sitting there waiting to be withdrawn.
I stand corrected! I guess that's what I get for skimming through posts too quickly. :oops:
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Re: Philosophy of dividend investing?

Post by ghariton »

Let a hundred flowers bloom.

I'll make one more point, which nobody seems to be talking about, and then I'll be quiet.

I really, really believe in diversification. It's the one free lunch in finance, and an important one in my opinion. Limiting oneself to dividend payers (or even concentrating on dividend payers) greatly reduces one's scope for diversification. To my mind, that is a major cost of screening for dividends.

I'll take a broad index fund, comprising both dividend payers and non-dividend payers, any day.

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Shakespeare
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Re: Philosophy of dividend investing?

Post by Shakespeare »

In withdrawal phase, variance becomes very important.

Dividends reduce variance. Also, many dividend payers are low-beta stocks.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: Philosophy of dividend investing?

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Shakespeare wrote:In withdrawal phase, variance becomes very important.

Dividends reduce variance.
I don't think so. I think that they merely reallocate the variance from the dividend stream to the rest of one's portfolio. But then I've argued that above.
Also, many dividend payers are low-beta stocks.
If one really believes in low-beta investing, and I think that's still very controversial, why not screen on low-beta stocks directly?

More generally, if one is trying to reduce variance of one's portfolio, why not increase one's allocation to fixed income?

(Now I really will shut up.)

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Shakespeare
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Re: Philosophy of dividend investing?

Post by Shakespeare »

why not increase one's allocation to fixed income?
Because you can't achieve the desired return. IOW, you must consider not only the future returns but the variance in those returns, and try to optimize as best you can (given that neither returns nor variance are stable).
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Re: Philosophy of dividend investing?

Post by kcowan »

gaspr wrote:For the eight-year period from 2008 through 2015 the annualized return to dividend paying stocks was 68.7 percent. The annualized return to the non-dividend payers was 92.8 percent. Valuations matter and the dividend "craze" impacted prices and we've seen the result."
That aligns with my thinking. When a company decides to pay dividends, it is because they anticipate lower equity growth and need to compensate by appealing to the investors that like to get paid to wait for their returns. This is especially true if their stock prices display volatility. IBM and AAPL come to mind.
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Re: Philosophy of dividend investing?

Post by Taggart »

The first stock in my portfolio to give a dividend increase for 2016 came through yesterday (CU) and what a whopper it was in this low inflation rate environment at 10%. When I was a working stiff, I can't remember the last time I got anywhere near a 10% annual raise from the boss. Perhaps way back in the early 80's when I first started investing? In retirement, I do a lot of high fives every year with dividend growth stocks....and then there's also the secondary issue of the occasional multi-bagger. This way of investing is not boring, trust me. You can make this form of investing as difficult or as easy as you want. I'm personally mathematically challenged, so I tend to take the easy path. This is no more difficult for me than passively investing in index funds and ETF's.

Every day of my life I take John Bogle's message to heart in anything I do including investing.

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Re: Philosophy of dividend investing?

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After many years of trying to Beat the Market, Match the Market, Find the best stocks, Sell to take profits, Etc, and failing (actually my wife did much better than I), I read the following line "If a company does not pay a dividend, don't buy it. If a company does not grow its dividend, don't buy it either".

Not an all inclusive strategy, but it sounded reasonable and for the first time I felt there might be an easier way to invest. Since then, well over 10 years ago, I've followed Tom Connolly's advice (he does not make recommendations) and for me the goal of investing changed from comparing my portfolio to market returns, to determining how much Income my portfolio generates.

I've been retired for over 9 years and thanks to Tom, I feel (know!) I've achieved my goal.
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Re: Philosophy of dividend investing?

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cannew wrote:After many years of trying to Beat the Market, Match the Market, Find the best stocks, Sell to take profits, Etc, and failing (actually my wife did much better than I), I read the following line "If a company does not pay a dividend, don't buy it. If a company does not grow its dividend, don't buy it either".

Not an all inclusive strategy, but it sounded reasonable and for the first time I felt there might be an easier way to invest. Since then, well over 10 years ago, I've followed Tom Connolly's advice (he does not make recommendations) and for me the goal of investing changed from comparing my portfolio to market returns, to determining how much Income my portfolio generates.

I've been retired for over 9 years and thanks to Tom, I feel (know!) I've achieved my goal.
I was starting to follow what Tom was doing through newspaper reports way back in the 80's. Although I dabbled a little bit in dividend stocks, I was one of those investors who wanted to try a little of this and a little of that using different methods and generally getting nowhere. Tom was different. He was always and still is focused on only one thing, high yield Canadian dividend growth stocks. I admire him for that.
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Re: Philosophy of dividend investing?

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cannew wrote:. I read the following line "If a company does not pay a dividend, don't buy it. If a company does not grow its dividend, don't buy it either".

for me the goal of investing changed from comparing my portfolio to market returns, to determining how much Income my portfolio generates.
This has been my approach from the beginning. Has worked exceptionally well. Since I retired in 2006 my divs have increased by about 70%. I do still compare the portfolio to market returns and I am way ahead. My biggest issue now is the increased tax on divs.
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Re: Philosophy of dividend investing?

Post by pmj »

Last time I did a major re-balancing (at the time of investing a lump sum), I decided also to consider the percentage of income provided by each sector, not only the percentage of assets held in each sector. I think this helps to reduce the worry caused by changes in market values.
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Re: Philosophy of dividend investing?

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SQRT wrote:
cannew wrote:. I read the following line "If a company does not pay a dividend, don't buy it. If a company does not grow its dividend, don't buy it either".

for me the goal of investing changed from comparing my portfolio to market returns, to determining how much Income my portfolio generates.
This has been my approach from the beginning. Has worked exceptionally well. Since I retired in 2006 my divs have increased by about 70%. I do still compare the portfolio to market returns and I am way ahead. My biggest issue now is the increased tax on divs.
I've been following the same approach for about 10 years. My portfolio goal is primarily to generate income. I don't bother comparing my portfolio to market returns. I've been keeping track of my portfolio distributions since 2004. The annual distributions generated by my portfolio have more than doubled from 2004 to 2015.
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Re: Philosophy of dividend investing?

Post by Arby »

pmj wrote: I decided also to consider the percentage of income provided by each sector, not only the percentage of assets held in each sector. I think this helps to reduce the worry caused by changes in market values.
I do the same. I try to make sure that my distributions come from various sectors. The key sectors are the obvious choices - REIT, pipeline, power, telecom, and financial. I've made an effort to increase my industrial sector income over the past few years. My consumer sector is quite light.
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Re: Philosophy of dividend investing?

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Arby wrote:
pmj wrote: I decided also to consider the percentage of income provided by each sector, not only the percentage of assets held in each sector. I think this helps to reduce the worry caused by changes in market values.
I do the same. I try to make sure that my distributions come from various sectors. The key sectors are the obvious choices - REIT, pipeline, power, telecom, and financial. I've made an effort to increase my industrial sector income over the past few years. My consumer sector is quite light.
I do exactly the same as you two. I've mentioned graphing on other threads and this helps to 'paint' a picture of asset and sector allocation. I've recently added a new graph that shows my overall allocation to renewables as this is a direction I hope to move more heavily in as the future unfolds. The key is to move slowly, I think.

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Re: Philosophy of dividend investing?

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SQRT wrote: My biggest issue now is the increased tax on divs.
Income splitting but tax is only a percentage, so your still ahead.
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Re: Philosophy of dividend investing?

Post by SQRT »

cannew wrote:
SQRT wrote: My biggest issue now is the increased tax on divs.
Income splitting but tax is only a percentage, so your still ahead.
Yes, I am still way ahead, just not as much as before.
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Re: Philosophy of dividend investing?

Post by cannew »

Actually you are correct. The three things I constantly watch for are Fees, Taxes & Inflation. But fortunately my dividends have kept me ahead of Inflation, I always look to reduce taxes and I don't buy etf's even though the fees are small, so no fees.
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Re: Philosophy of dividend investing?

Post by SkaSka »

Shakespeare wrote:
SkaSka wrote:I'm talking loosely here (YMMV, etc etc), but the general idea is that the dividend paying stock will *probably* decrease its stock value as time goes on after the dividend cut announcement, so you would sell automatically at the announcement of a dividend cut, then if on your inspection feel like the business will survive and prosper again, you would either:

a) wait for the stock price to get even lower than it was at the announcement of the dividend cut, or

b) buy back into the stock as it starts improving its fundamentals (hopefully at or around the price you sold at).

Is this the basic idea?
Yes, although the time the stock is on your fecal roster may be a few years.

IIRC, the study suggested the majority of the stocks do not recover. In either case, immediate sale is the best move.

Added: See Price reactions to dividend initiations and omissions: Overreaction or drift? - Price Reactions to Dividend Initiations and Omissions.pdf
divcut.png
I know it's just one counter example - and if one were managing a large diversified portfolio of dividend payers, one would follow the probabilities because the probability is that immediate sale is the best option most of the time in the event of a dividend cut - but I do find it surprising that BHP Billiton has moved up almost 14% since the announcement of their dividend cut of ~75% on February 23, 2016.
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