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I'm Mike, and I'm back after nine years. Here's what's happened since...
Old 04-26-2019, 09:04 AM   #1
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I'm Mike, and I'm back after nine years. Here's what's happened since...

First, thank you for clicking on this link! Got a bit busy in 2010, when I appear to have last posted and, well, stuff happens.

Second, this is going to be long. I'm sorry. I'm just going stream of consciousness today.

Okay, here goes. After eight years with my most recent firm, our office was shut down due to profitability (or lack thereof). No sympathy necessary. I'm having a grand ol' time (Check back in six months.) and I remembered this forum, so it's a double bonus.*

The last thread that I started was this one from 2009, about dividend growth investing. I don't think FIRE had become big yet, and don't know if that's exactly what I had in mind, but it's what I've become ever since:

Any dividend growth investors out there?

My plan was to take a portion of my portfolio and dedicate it to dividend growth stocks, with the rest in cash or growth stocks. I was 37 at the time and am now 46.

Since that time, I'm happy to say that I've been largely successful. The dividend growth portion of the portfolio (our non-retirement assets, which are the majority of our portfolio). I'm estimating that my dividends grew at an average rate of 5-6% per year, including two companies that eliminated their dividends (Thank you Latin America.) and one that cut it significantly (I'm looking at you, Kinder Morgan.). Remember, that doesn't include capital gains, of which there have been few, since 19 of the 32 stocks that I now own are ones that I started with in 2009. Things I learned:
  1. I was incredibly lucky in terms of my timing. We started the plan in 2009, about eight months after the 2009 bottom and at the beginning of a historic bull market. Sometimes, there is no substitute for blind luck.
  2. Knowing what I know now, I should have invested every penny in Amazon and Netflix. Do I care? Well, sure. But the point is, I didn't know what I know now, and I did it the right way for us.
  3. The power of compounding is truly extraordinary. We never withdrew a dollar of dividends.
  4. Taxes are truly extraordinary, as well. The worst thing about dividends is their double taxation (at the corporate and individual level). And while those tax payments adjust my cost basis for when I eventually quit the working world altogether, I have a relatively big tax bill now. Also, international stocks are a pain in the neck when it comes to taxes. If you want a portion of your portfolio in international (and you should), do it with an ETF.
  5. Just because a company has a lot of cash doesn't mean that it will pay you dividends. And just because a company pays you dividends doesn't mean that it can afford you. Please, learn the very basics of income statements if you own indvidual stocks. Heck, I'll teach it to you. But you must know how much cash your company has.

Here's what I've learned most, though: I'm extraordinarily happy. I was living with stress levels that I didn't know I had. I was following the international stock markets for a living*, so my "day" actually began the night before when the Japanese markets opened at 7pm, and it ended at 4pm, when the US markets closed. I wasn't on my laptop the whole time, of course, but I was certainly cognizant that the markets were open. Waking up at 2am was common.

As I mentioned above, I was extraordinarily lucky, and there's nothing better than blind, stupid luck. But the FIRE lifestyle can be done. The bit above about the magic of compounding? Huge. Tremendous. We've all heard the stories about the investors in high paying stocks 25-30 years ago and now earn more in dividends on those shares than the shares originally cost. The ability to reinvest dividends for no cost? Awesome. The ability to buy stocks for next to nothing? Incredible. Don't trade a lot!

But let's say that have an additional $100 to invest. If you buy a stock that pays a 3% dividend, you'll earn $3 today. But let's say that the dividend grows at 8%. In nine years, you'll earn $6. Nine years after that, you'll earn twelve. And nine years after that, $24 per share in dividends. In 27 years, your income will have octupled (Yup, I looked it up. It's actually a word. As a wise man once said, words are, in my not so humble opinion, our most inexhaustible source of magic). And that doesn't include any capital gains! Think 27 years sounds like a long time? Guess what? It is. But do you plan on being around in 27 years? Yup, I thought so.**

I'm not ready to be done with the workforce. Heck, I liked what I was doing and would do it again. But now, I have the freedom to pick and choose what I want to do. And my current "job?" Well, I'm a frequent flyer junkie, so when a friend offered me the opportunity to write the miles and points section of a website, I jumped. For years, I've been boring my family and friends with mileage "advice." And now, someone is going to pay me to do it.

Several years ago, my friend Henry left his job in my industry in his mid-40s. He was laid off and decided to retire. Henry is even more "Type A" than I am, and I couldn't imagine how he was handling all his free time. I saw him not too long ago, and he told me that he was happier than ever. Seriously. This guy was the Bill Belichick of the investing world. I swear, I don't think I had ever seen him smile before.

Anyway, I hope to be more active now that I have some free time. And again, I apologize for the length of this post.

-Mike


*I have worked as an equity analyst (the guy on the mutual fund who recommends stock to the portfolio manager) and, for a short time, portfolio manager for mutual fund companies for the past 19 years. If you want to know how the sausage is made, and I assure you that you don't, I'm happy to do an AMA. Suffice it to say: I was let go because people have moved into index funds and dumped actively managed funds. And I will state unequivocally that that's the right thing to do. An index fund, over any extended period of time, will almost always outperform an actively managed fund. That's not the kind of attitude that generates PMs offering me jobs, but what the heck, I'm on a message board.

So why did I keep doing it? Because it's a heck of a lot of fun, incredibly intellectually stimulating and paid decently. Emphasis on the first two, though, since there are a lot of jobs that pay well. Until the last few years, there weren't many days that I wasn't happy to go into work. And finally, while very few mutual funds beat the market, I have yet to meet either a portfolio manager or analyst who doesn't think that they personally can beat the market.

**And I know the statistics of "If you give up Starbucks twice a week and invest all that money..." Yup, you'll end up with more than you started with. Two $5 coffees per week will get you that $100 in a few months. But if you are dying for that latte, go for it! I've found saving to be like dieting: Self-control is important, but if you deny yourself everything, you'll eventually binge.
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Old 04-26-2019, 09:53 AM   #2
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I used to be into the dividend growth thing. Over a number of years, I bought individual, dividend-paying stocks that were known to increase their dividend on an annual basis. At some point I held stock in approximately 60 companies. This was in addition to index funds that I held.

But at some point, I wondered if this was truly worthwhile or if I was actually introducing more risk into my portfolio. I'm in the process of liquidating my individual stocks and moving the proceeds to my index funds.

Are dividends something that non-dividend-growth investors are missing out on? I don't think so. After all, when a company pays out dividends, doesn't the value of the shares lose value accordingly? If so, then what's the benefit? If you want to control your income for tax purposes, dividends make that a bit more difficult no? You get hit with a higher tax bill whether you need the income or not.

And what about risk? Sure, 60 companies is a lot of companies when holding individual stocks, but it doesn't compare to the diversification of an index fund. Am I right?

I'm not challenging you. I'm just curious to hear your thoughts.
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Old 04-26-2019, 10:15 AM   #3
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Dividends are a hot topic round these parts, Mike.

You will no doubt hear a lot more on the subject.

Our past nine years? For comparison, the growth of steady mutual fund investing has been a great thing. Most of it is broad market stuff. Then we have about 15% in a dividend-focused brokerage. Yeah, that is fun to participate in, but I can see it getting simplified into indexed ETFs in the future.

Good luck with your retirement.
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Old 04-26-2019, 01:40 PM   #4
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Originally Posted by Vincenzo Corleone View Post
I used to be into the dividend growth thing. Over a number of years, I bought individual, dividend-paying stocks that were known to increase their dividend on an annual basis. At some point I held stock in approximately 60 companies. This was in addition to index funds that I held.

But at some point, I wondered if this was truly worthwhile or if I was actually introducing more risk into my portfolio. I'm in the process of liquidating my individual stocks and moving the proceeds to my index funds.

Are dividends something that non-dividend-growth investors are missing out on? I don't think so. After all, when a company pays out dividends, doesn't the value of the shares lose value accordingly? If so, then what's the benefit? If you want to control your income for tax purposes, dividends make that a bit more difficult no? You get hit with a higher tax bill whether you need the income or not.

And what about risk? Sure, 60 companies is a lot of companies when holding individual stocks, but it doesn't compare to the diversification of an index fund. Am I right?

I'm not challenging you. I'm just curious to hear your thoughts.
Understood. And challenging is good! A couple thoughts on the strategy:

1) Over time, dividend paying companies have outperformed those that don't. Dividend growers tend to outperform the group of stocks that pay dividends (i.e., if you're not growing your dividend, nobody is going to pay a premium for it). Dividends also help reduce volatility in a stock.

2) There's no question about it, the double taxation of dividends is evil. I do end up paying current taxes on dividends. I could, if I wanted to, sell stock to pay the taxes, but it's still using current dollars that I'd rather save. The only benefit is that it increases the cost basis of the stock, so I'll have that much lower of a tax base when I eventually sell the stock.

3) Most of the academic research that I've read indicates that the standard deviation in a portfolio of 30 stocks is not noticeably different than the S&P 500. Of course, that means not owning 30 stocks in the same sector. I keep my portfolio in roughly the same sector proportion as the index. It only represents half of our portfolio, as well.

4) The stock price does drop by the amount of the dividend, so you end up with more shares at a slightly lower price. I'm more worried about the long-term trends. Obviously, the short-term is a wash, except for that nuisance of a tax event. Special divvies cause a slightly different reaction. Typically, when a special is announced, the stock increases by about the amount of the dividend (give or take), as investors anticipate a one-time payout. From a balance sheet point of view, it makes the overall entity a little less valuable, since it now has less cash on its balance sheet, but for a well-capitalized company, that won't matter much. Next week, by the way, there may be an interesting test of that last thought. I'm anticipating a special dividend announcement from Costco. I think the market has been anticipating it, so the stock may have run into the announcement in advance, so it may not run up as much as expected. Of course, if a special isn't announced, the stock will go down.

I think I got everything!

Mike
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Old 04-26-2019, 01:42 PM   #5
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Thanks for the very interesting update, Mike. Hope you'll have time to hang around and give us your insights going forward!
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Old 04-26-2019, 01:46 PM   #6
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"Over time, dividend paying companies have outperformed those that don't."

Source?
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Old 04-26-2019, 02:53 PM   #7
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"Over time, dividend paying companies have outperformed those that don't."

Source?
That caught my eye as well. But heck, even if it were true, it isn't relevant. Why single out "non-dividend paying stocks" from the entire market?


"Dividend paying companies" are a sector of the market. "Non-dividend paying companies" are a sector of the market. So the relevant question, and the one most easily implemented by anyone, is why not invest in the total market?

Can the average investor choose a selection of "Dividend paying companies", and expect them to outperform something like VTI? How? (no rear-view mirror selection allowed!)

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Old 04-26-2019, 03:06 PM   #8
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Total return after taxes and expenses? That's what matters...I'm sure someone has studied this...?
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Old 04-30-2019, 07:39 PM   #9
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"Over time, dividend paying companies have outperformed those that don't."

Source?
Here's one, but there are a bunch:

https://www.heartlandadvisors.com/In...ividend-Payers

Mike
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Old 04-30-2019, 08:34 PM   #10
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Here's one, but there are a bunch:

https://www.heartlandadvisors.com/In...ividend-Payers

Mike
So...it's great that you're getting dividends in down markets, regardless of whether your total investment in the equities falls or rises...except, you pay taxes on the divedends, even if your equity has fallen in value. Has anyone looked at the AFTER TAX implication of the dividend-paying stocks or funds?

I remember back in 2008-2009, paying taxes on $10K in dividends, when my investments had losses totalling 30% was very painful.
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Old 04-30-2019, 09:51 PM   #11
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Here's one, but there are a bunch:

https://www.heartlandadvisors.com/In...ividend-Payers

Mike
In addition to taxes, and as I mentioned before, that study doesn't compare 'high dividend payers' to 'the market'. It breaks out these sectors by dividend rates. But who goes out and says "I want an ETF of the 2nd Quartile of dividend payers"?

The comparison should be to 'the market', It's easy and cheap for the individual investor to buy 'the market'. So that's much more relevant.

For me it's a red flag that they don't include the broad market in that study. I bet I know why.


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Old 05-01-2019, 02:45 PM   #12
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So...it's great that you're getting dividends in down markets, regardless of whether your total investment in the equities falls or rises...except, you pay taxes on the divedends, even if your equity has fallen in value. Has anyone looked at the AFTER TAX implication of the dividend-paying stocks or funds?

I remember back in 2008-2009, paying taxes on $10K in dividends, when my investments had losses totalling 30% was very painful.
Yep, with dividend payers you're forced to take income & pay the taxes even if you don't need/want it at that time.
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