Can we do this dividend stock thing one more time?

[karluk]

Wait a minute, it sounds as if you had the same thoughts/feelings/intuition I had. By the way, I did not play it correctly either. I paid attention to the news, I just didn't know what to do about it.

I did the highlighting in the above quote which was taken from another thread.

Nope, our "thoughts/feelings/intuition" were exactly the opposite. By the time WaMu folded in late September I was in full-fledged buy mode. I put about $150,000 into stocks between September, 2008 and March 2009. Only the first few purchases took more than a year to show a profit. Unless your intuition was already telling you to sell early in 2008, you get no points from me for wanting to sell during the crash. The buying I did in those six months was by far the most profitable investing I've ever done.

That's why I think the jury's still out on whether you actually would have outguessed the market in 2008, even though you are convinced you could have done better than your mutual fund managers. Sure, maybe you would have sold before the bottom of the crash, but would you have had enough courage to buy back in while the market was still down? Maybe, maybe not. Most people who sell stocks during a crash are relieved to be out of the market and take far too long to buy back in, thereby missing the best bargains.

 

[clifp]

Well we certainly have had this discussion before.

The only areas about dividend stocks that concern me are A. it has become so popular almost trendy the last few years,and B. will I be able to move to a simpler portfolio before senility sets in.

When I first started investing seriously on dividend stocks 10 years ago, it certainly was a recognized but hardly popular investing style. Relying on 5% dividend yields with 5-15% dividend growth is hardly a path to getting rich quickly. The 2008 crash, coupled with crashing of bond yields have tuned dividend stocks into a hot investing style. It is not even Cramer is touting it that bothers me, but that on board like MrMoneyMustache, twenty-something that should be all excited about investing in the latest social media stock that will be a 10 bagger, are buying McDonald for the 3% yield instead. So this makes me think that after 5 years of relative over performance dividends stocks are likely to lag the market. I am also concerned that they will react negatively to higher interest rate.

It also requires more time and energy, and mental acuity to manage a portfolio of individual stocks than 3 or 4 index funds. I just wonder if I'll still be able to do it in 20 or 30 years.

 

[Lsbcal]

I have to commend Redduck for putting himself in the line of fire and listening to a lot of contrary opinion. It's all too easy to get caught up in our cherished opinions letting ego take over. It takes a strong person to be willing to hear other opinions.

I think holding equities is a difficult task for a lot of us here i.e. it is tough to deal with the volatility. So several methodologies that have you stay the course so to speak are likely to be winners in the long run. Some of them are:
1) Buy-hold index funds
2) Buy-hold individual equities, maybe higher dividend types
3) Even market timing where one sticks to the plan and it is well researched (a very rare thing)

 

[NW-Bound]

I'm not sure what unnerves me more - the possibility of loss of principle, or loss of principal. As someone who has a somewhat flexible stance on some issues, I'll pick the latter...

Does it matter?

One is just money. And who says the other one has to be inflexible, particularly when it involves just money and not ethical or moral issues. Let me just quote Groucho Marx.

"Those are my principles. If you don't like them, I have others" -- Groucho Marx

 

[dtbach]

I am certainly willing to believe that your intent was more innocuous than how you came across. Written language is notoriously bad at conveying emotions, and I guess we just have to ascribe your earlier post to the limitations of the medium.

I really think, though, that you've already gotten the answer to your original question. Lsbcal, for example, posted the chart of VHDYX vs. VTSMX vs. VBTLX. The two stock funds tracked each other closely when the stock market crashed in 2008, whereas the bond fund was steady as a rock. Relying on dividend producing blue chip stocks instead of bonds is almost certainly not going to allow you to avoid this kind of potential for crazy price fluctuations in the future. If you need to avoid the volatility, you really should stick with bonds.

You have cited one example where you may very well have outguessed the broad market indexes and come out ahead. Can you do this sort of market timing consistently and successfully? I doubt it, but if you want to try you certainly don't need my input or approval to buy a basket of high dividend producers and monitor them for reasons to sell. As I said before, I wish you well and hopefully your investments will generate a nice profit.

Bonds have certainly done well in the last 3 decades. But when (not if) interest rates start rising, they may not be "Steady as a Rock"

 

[Dash man]

Bonds have certainly done well in the last 3 decades. But when (not if) interest rates start rising, they may not be "Stead as a Rock"

Not to mention what might happen if China decides to stop buying our debt!

 

[jimnjana]

Not to mention what might happen if China decides to stop buying our debt!

Don't worry about that, remember we have the Federal Reserve. They can buy it all.

 

[redduck]

<snip>
Anyway, as long as Redduck does not go overboard with dividend stocks, and stays diversified with something like at least 20 stocks, I do not see that his is a high-risk approach. Redduck may not beat professional managers, but then he might.

And then, a retiree needs something to do with all his free time too. What else would Redduck spend his time on? Measuring speaker open-air responses in the backyard by frequency sweeping? Get into cooking and try different French dishes?

I hold many individual stocks, and as I do not trade daily, still have plenty of time to spend on above diversions because it's not the season for RV'ing, nor the time to ride my motorcycle into forest trails. Heh heh heh...

Well, I just came in from the backyard after spending two hours measuring speaker open-air responses by frequency speaking. I would have stayed out longer but I ran out of string. And, NW-B is correct, I have to do something with my free time and I don't think it will be cooking French meals.

One thing I have found to be enjoyable is following dividend stocks. I think that the people who follow dividend stocks really enjoy doing it. I may be wrong about this, but it doesn't seem all that complicated. I imagine, though, that this can be as complicated as one chooses to make it--and that's OK, because I'm sure those people enjoy the process. Small caps, bonds, emerging markets--those seem complicated so I use mutual funds or ETFs.

Darn, it's still light outside, I wish I hadn't run out of string.

 

[Dash man]

Don't worry about that, remember we have the Federal Reserve. They can buy it all.

A good read is the book "Code Red." Spoiler alert...there are no good outcomes at this point.

 

[Mulligan]

Well, I just came in from the backyard after spending two hours measuring speaker open-air responses by frequency speaking. I would have stayed out longer but I ran out of string. And, NW-B is correct, I have to do something with my free time and I don't think it will be cooking French meals.

One thing I have found to be enjoyable is following dividend stocks. I think that the people who follow dividend stocks really enjoy doing it. I may be wrong about this, but it doesn't seem all that complicated. I imagine, though, that this can be as complicated as one chooses to make it--and that's OK, because I'm sure those people enjoy the process. Small caps, bonds, emerging markets--those seem complicated so I use mutual funds or ETFs.

Darn, it's still light outside, I wish I hadn't run out of string.

I bought about 10k of Intel last year just for the dividend which was 4.4% at the time of purchase. I enjoy watching it bounce around and snagging the dividend. I just signed up for a brokerage account from my HSA a few weeks ago. Tired of watching it earn 0.75%. I have about 20k in HSA and contribute the full $3,000 plus each year. My intentions unless I chicken out is to buy 3/4 dividend stocks like ConAgra, Chevron, and something maybe in another area. I will pay out of pocket my medical expenses if I ever have any. I figure even if they all go to zero, I didn't lose the full amount only 69% as I got my 31% instant returns from the yearly tax deductions sitting in the bank.

 

[ESRwannabe]

I am using a dividend strategy in my taxable account. So my plans for early semi-retirement are based on this. My tax-protected accounts are more conservative as I only use funds in them and I have a good portion of that in bonds.

Basically my taxable account is where I am attempting to "shoot the moon". If it works out I will be able to switch to ESR sometime in my 40s mid to late. If it blows up on me, well I will still be able to retire just fine when I am 60+ using my other investments.

 

[Senator]

The S&P has a ~1.5% dividend ratio. If you are happy with 1.5%, you can also get some growth.

 

[Running_Man]

Originally Posted by ERD50 View Post
Well, what does this sound like:

I know that there are mutual funds that concentrate on dividends. I was once in one—DVY. I watched it crash and burn. I remember thinking as it was crashing (and burning): “Why are they still holding all those financial-type companies?” I also remember thinking, “Well, duck, they surely know better than you.” They didn’t.

-ERD50

Yep, OP has clearly staked a claim to being a better money manager than the professionals who are in charge of large mutual funds. Nobody is going to convince him otherwise, so best of luck to him and I hope he never finds out otherwise

When anyone invests in DVY they are investing in a mechanical trading system, that in my view is inferior to the OP's trading selection. There is no financial manager thought process going on here, merely a mechanical trading system to take the highest yielding stocks of the total universe of US stocks that meet it's very minimal criteria. It is an "index fund" only in the sense that ISHARES declares their mechanical trading strategy as an index fund.


The problem with DVY that I have with it is that it makes no attempt to to diversify out of industries, has the most minimal of criteria to avoid stocks likely to suffer distress and only rebalances annually so that if a stock cuts it's dividend in February (making it ineligible for inclusion in the index), it will still hold it till the next rebalancing on December 31st and that is why it was 45% financials in 2008 and why it is 35% utilities today. It is a lot to pay for a .4% expense ratio, which must take them all of 15 minutes to rebalance at year end and adjust the selections. I would imagine ISHARES spends more time allocating the bonus paid to it's "fund managers" than it does in "managing" DVY.

The criteria are:

The Underlying Index is comprised of 100 of the highest dividend-yielding securities (excluding real estate investment trusts (“REITs”)) in the Dow Jones U.S. Index, a broad-based index representative of the total market for U.S. equity securities. To be included in the Underlying Index, the securities (i) must have a current year's dividend per-share ratio which is greater than or equal to their five year average dividend per-share ratio; (ii) must have an average five-year dividend payout ratio of 60% or less; and (iii) must have a minimum three-month average trading volume of 100,000 shares a day. “Dividend payout ratio”
reflects the percentage of a company’s earnings paid out as dividends. A ratio of 60% would mean that the company issuing the security paid out approximately 60% of its earnings as dividends. A company with a lower dividend payout ratio has more earnings to support dividends, and adjustments or changes in the level of earnings are therefore less likely to significantly affect the level of dividends paid. Positive dividend growth rate is a measure of dividend consistency, since it provides some indication of a company’s ability to continue to pay dividends. The Underlying Index is reviewed and rebalanced annually.

 

[HFWR]

Something to consider...

The 15-Stock Diversification Myth

The "market return" (all 500 stocks held in equal proportion) was 24.15%. This is considerably higher than the 18.94% return of the actual S&P for two reasons: First, the S&P is a cap-weighted, not an equal-weighted, portfolio. Second, and much more important, many of the stocks in the S&P on 11/30/99 were not in the index at the beginning of the period. The recently-added stocks obviously had much higher returns than the companies they replaced, upwardly biasing the entire series of returns. Nonetheless, these flaws in the methodology do not change the basic conclusion; the TWD of these 15-stock portfolios is staggering—three-quarters of them failed to beat "the market." (Had the study been done with the S&P stocks extant on 12/1/99, it seems certain that the positive kurtoskewness of the present sample would have been replaced with a significant negative kurtoskewness—a much more important descriptor of risk. If anybody wants to give me a survivorship-bias-free S&P database for the past 10 years, my modem and mailbox are in fine working order.) Even so, the scatter of returns was quite high, with more than a few portfolios underperforming "the market" by 5%-10% per annum.

 

[target2019]

I’m old, so I’m supposed to have about 60-70% of my investments in bonds. Two reasons I don’t like this idea: 1. it doesn’t seem to generate much income; 2. it’s not very interesting.

So, I have been slowly changing over my bond funds to a group of individual dividend paying stocks. I’m planning on having maybe 40-50% of my bonds funds morph into these individual stocks.

I know that there are mutual funds that concentrate on dividends. I was once in one—DVY. I watched it crash and burn. I remember thinking as it was crashing (and burning): “Why are they still holding all those financial-type companies?” I also remember thinking, “Well, duck, they surely know better than you.” They didn’t.

This transition of mine (bonds-to-stocks) has been going on for about two years.
It seems the transaction fees compare favorably to mutual fund fees as there is very little selling of dividend stocks.

Also, it does not take much research (at least the way I do it) to pick individual dividend stocks. But, it is kind of fun and interesting. It’s kind of like Midpack enjoying creating graphs and charts). Well, maybe it’s not, but that’s what came to mind.

I select what I consider “safe stocks.” They need to be safe, because I am substituting them for the safety of bonds (in bond funds).

Why do I consider these stocks safe? I check them out on Value Line (OK, stop that eye-rolling right now!). The stocks that I almost always pick have the highest rating for Safety (rank 1) and the highest rating for Financial Strength (A++). (OK, when I feel frisky I may buy a stock that has a financial strength of A+). I also want a stock that has a dividend yield of 2.8% or higher. That minimum in the past has dropped to 2.5%.

Then, I see how many years in a row they have been raising their dividends.
This is sort of amazing (at least to me) because MCD (McDonalds) has raised their dividend 37 years in a row; PG (Procter & Gamble), 60 years; Exxon (XOM) 31 years--even when the Exxon Valdez had that minor oil leak and destroyed an ocean, XOM kept raising its dividend. Anyhow, there are others that have pretty good track records and seem safe (to me). Oh, yeah, KO (Coke) 51 years. (I own all of the above). There are a bunch that fall into the 8-15 year increased dividends category. I realize that this is “cherry picking,” but, many dividend investors do pick pretty much the same cherries.

I understand there have been many companies that were “safe” at one time that cut or stopped their dividends or went bankrupt. But, these were probably not companies that dividend investors would be holding when this bad stuff actually took place.

I also understand that this dividend stuff is definitely the “flavor of the month” and that it will never replace chocolate, but it seems it’s still a pretty good way of generating an income stream. Or, it might be a lot of fuzzy and wishful thinking. Seniors often don’t see clearly and may end up wandering down paths that they shouldn’t wander down. The thing is, I know there must be danger on this path, I just don’t see it.

Anybody with clearer vision (and a thought or two)?

Here's a tale of two taxable accounts (not mine).

$117K Brokerage earned $6K or 5.1%. This account is largely comm stocks.

$128K MF AUM earned $4,8K or 3.75%. This account has .75 AUM fee, and invests in a 20/80 bond/stock portfolio of index funds.

The large difference I see is that dividends are largely qualified in the brokerage, but the AUM account has lots of expensive bond funds and unqualified dividends.

Obviously the results would be very different if one account were not under AUM, and included tax-efficient VG bond funds.

 

[Lsbcal]

The OP was about dividend stocks. It would be nice to stick to that topic. Maybe someone should start an audio thread for other folks.

 

[FLD3C]

A few questions for the OP:
1) Will dividends + SS meet your "usual level of comfort" budget?
2) If not how long can a bear market persist before you need to sell stocks ?
3) Can you sleep well when your stocks are down 40 or 50%?
4) How important is leaving an estate?

 

[redduck]

A few questions for the OP:
1) Will dividends + SS meet your "usual level of comfort" budget?
2) If not how long can a bear market persist before you need to sell stocks ?
3) Can you sleep well when your stocks are down 40 or 50%?
4) How important is leaving an estate?

Hi, FLD3C,
I hope you are well. ...
I see that you have some questions for me-- but, first I'd like to have a better understanding (right now I have no understanding) of why you are asking these questions.

 

[karluk]

The thing is, I know there must be danger on this path, I just don’t see it.

Hi redduck, I suppose you saw that one of your dividend stocks, KO, lost nearly 4% today after releasing a disappointing earnings report. I don't know how you define "danger", but I would say having over a year's worth of dividends wiped out in one trading day would qualify by most peoples' standards. Several of us have pointed out that high yield stocks have the same sort of volatility as a broad-based stock fund, and that buying your own basket of individual stocks wasn't going to allow you to avoid the volatility. I would present KO's performance today as exhibit A.

I don't necessarily think one bad day should cause you to abandon a respected company like KO, but then again, how do you decide? Is a 4% decline a minor blip that will soon be erased, or is it an omen of more weak earnings ahead? Do you have any criteria for reevaluating a stock after a company reports weak earnings, or do you just hope for the best and continue to hold it?

 

[Ronnieboy]

When I started thinking about retirement, not just early retirement, but retirement in general. I was always interested in some kind of investment that would throw off enough money that I could live and never have to touch principal. Mostly for fear of running out of money, if I was generating enough to live off then I could never run out. Now if I knew exactly when I and DW would croak all bets would be off and I would only save till I knew that the bank account would have a zero balance after the funeral(s). But that is a completely different post....

At first I was thinking along the lines of Wellesley or Wellington combo to get quarterly payments. The problem I first noticed is that the quarterly payments are all over the place. You might get within $0.03 in the first three quarters but the last quarter due to ST and LT capital gains you might get as much as 60% of the years distribution paid in December and you don't know how much you'll get. In a good year it could be double what you get in an average year or it might be zero in others. Looking at a 20 year history of Wellesley dividends alone it ranges from $796 to $974 per year on a $10k investment (1998-2007). With some capital gains ranging from $0 (for 4 years) and up to the best of $1100 (1997).

The problem was that the dividends listed didn't keep up with inflation at all. From year 1 to year 20 there was only a $174 increase in income, not to mention the 19 years in between were all similar or less. That wouldn't cut it.

I read about dividend growth investing and that seemed to fit the bill. Buy about 40 stocks, each with $50k for a total of $2M. Diversify the 40 stocks by purchasing across the board, banking, retail, reits, gas, insurance, tobacco, utilities, food, drugs, consumer goods, etc. Choose only stocks that are paying a current dividend of 2.5-3%, have an annual dividend growth of >5%, have been increasing for 20 years, etc. Since I am still accumulating I am shooting for a yield on cost of 4% or a $80k income stream.

You need a set of rules to follow, don't mind the price of the stock as long as they are paying their dividend. Sell if they freeze, cut the dividend or growth falls below 5%.

When a stock freezes a dividend there might be a price blip but it doesn't drop to zero overnight (typically). You should have enough time to sell without a major loss, but just for S&G say that one of the 40 stocks went to zero and you lost everything....the other 39 would have paid out their dividend and with the dividend growth would have still paid out $1900 more than the previous year.

I owned some Intel and when they surpassed the 5th quarter of no dividend increase I sold the stock at a slight profit and moved to another growth stock. My only concern is similar to Clifp, I am not going to want to keep track of this when I am losing my mental capacity, maybe keeping track of it will keep my mental sharpness, who knows?

 

[clifp]

Hi redduck, I suppose you saw that one of your dividend stocks, KO, lost nearly 4% today after releasing a disappointing earnings report. I don't know how you define "danger", but I would say having over a year's worth of dividends wiped out in one trading day would qualify by most peoples' standards. Several of us have pointed out that high yield stocks have the same sort of volatility as a broad-based stock fund, and that buying your own basket of individual stocks wasn't going to allow you to avoid the volatility. I would present KO's performance today as exhibit A.

I don't necessarily think one bad day should cause you to abandon a respected company like KO, but then again, how do you decide? Is a 4% decline a minor blip that will soon be erased, or is it an omen of more weak earnings ahead? Do you have any criteria for reevaluating a stock after a company reports weak earnings, or do you just hope for the best and continue to hold it?

One of the whole points in investing in dividend stocks is that even if you can't complete ignore the fluctuations of stock you can certainly ignore minor things like a 4% drop. It isn't like the other assets don't have volatility.

Last June the Vanguard Total Bond market lost one years interest over the course of a week. Stock holders routinely experience volatility during earning seasons. Bond holder have to put up with reaction to the Fed Open Market committee announced and to a less extent the European and Chinese central banks. What is the difference between losing a years dividends in one day and year interest in one week for the typical retiree? It seems to me very little; KO is still going to be paying its dividend and BND is still going to be distributing interest payments monthly.

I'd argue regardless of if you are buying stocks, or bonds, or real estate, individual issues or ETFs/Fund, REITs or rental properties one should be focus on the income potential of the asset. This is especially true for folks in retirement and even more so for those in early retirement. One common way of evaluating stocks (or really any financial asset) is it equal to the present value of the all of future dividends (or interest) distributions at particular discount rate.


Now it is certainly true that there more work involved in selecting individual dividend stocks than in buying an index fund. But in many ways
there is substantially less work than buying individual growth stocks.

If I have buy Netflix, Google, or Tesla stock I have figure out not only when to buy, but eventually when to sell in order to provide cash to pay the bills. In contrast since the ideal holding period for a dividend stock is forever, I could easily envision buying Coke at age 50 and holding until I die at 100, with the dividends keeping up with inflation and providing me cash to pay the bills. It is also conceivable that something bad may happen to Coke and may go bankrupt in the next 3 to 50 years, but it seems pretty unlikely.

 

[NW-Bound]

Sorry for the diversion on audio stuff earlier. I was teasing redduck, whom I consider a friend, then I got carried away. And most of the readers do not know about our jesting in past threads.

I do not invest just for dividends, and I do not think redduck does either. His OP said he has 60-70% in bonds, and is going to put 1/2 of that in dividend stocks. So, that's 30% of portfolio that he is actively managing. That's not too risky from my viewpoint. As it is right now, I have only about 30% in MF, and actively manage the rest.

Again, I do not invest solely for dividends, but saw that Quicken said that I got 2.7% of dividend+interest income last year. How did that happen, despite me holding 25% in low-yielding cash like I-bonds, short-term money markets, etc?

I try to diversify across all industries, and got dividends from utilities, healthcare, consumer staples, even tech stocks, etc... But how do I get more dividends than that of the S&P? I guess I tend to pick stocks that have the same PEG or lower than that of S&P aggregate. And these tend to be reasonably valued stocks within their industries, and they tend to pay dividends too. I use projected earnings rather than past proven earnings, so I may be susceptible to analyst's follies here. However, relying totally on past performance may delay your detection of a problem until it's too late.

And I do pay attention to price movements. And the price movement of a stock must be judged relative to the market as a whole, and also to the industry the stock is in. Once I have bought a stock, I generally hold it until a big price movement catches my eyes. Many a successful institutional investors have said that one should let his winners run, and pay more attention to the losers. If I had stuck more to that philosophy, I would have done a lot better.

On the other hand, if I saw that an entire group's price gain has greatly surpassed the S&P's, I would wonder why. In the time frame of 2003-2008, I made a bit of money by getting in on material stocks early, not financial, and saw that they were going up like crazy due to the Chinese production boom. I did not get out at the top, but bailed out in late 2008 when I saw them coming down faster than the S&P when panic broke out. Still made money though.

A long and wordy post, just to say that I do not believe in a hard-and-fast rule, and will decide what to do based on current economic events.

And by the way, although I set my WR at 3.5%, my income is only 2.7% as noted earlier. So, I have to dip into principal, but going for yield of 3.5% would entail too much risk, in my view. And as I mentioned earlier, that 2.7% yield was just a by-product of me picking reasonably valued stocks.

 

[karluk]

Warren Buffett, speaking last April at Coca-Cola Co. (KO)'s annual meeting, warned that the beverage giant shouldn't get complacent about its success. Ten months later, those words could come back to haunt the company.
The world's largest soft-drink maker, facing sluggish growth overseas and concerns about the healthiness of its product at home, posted its fourth straight quarter of declining sales yesterday. The results sent the stock on its biggest one-day decline in more than two years -- bad news for both Coke and Buffett, the company's largest shareholder.
...
Coca-Cola's stock fell 3.8 percent to $37.47 in New York yesterday, marking the biggest one-day decline since August 2011. The shares have dropped 9.3 percent this year, compared with a 0.4 percent decrease for the Standard & Poor's 500 Index. PepsiCo Inc. (PEP), the company's biggest competitor, has fallen 5.7 percent.

Buffett's Coca-Cola Complacency Warning Foretells Troubled Year - Yahoo Finance

 

[redduck]

You're doing exactly what Suze Orman just told her viewers to do - invest in dividend stocks to generate income since bonds are not paying a high enough yield. So if following Suze's advice isn't enough to make you second guess yourself, I'll keep typing...

Dividends are just another way of receiving compensation for the risk involved with holding stocks. Whether stocks pay dividends or simply appreciate in value, the money is all the same. Dividends are taxable, whereas stocks that appreciate in price don't generate taxes until you sell them. And a stock that you buy for $100 to get a $3 dividend doesn't look so attractive to me if the NAV goes down to $70 during a correction.

But if it makes you feel better to see your investments generating activity, dividend stocks will certainly get you there.

Yeah, the Suze Orman thing is pretty scary. Wish you hadn't brought it up.

But, I do have a question re: your example: If I paid a $100 for a stock that has a $3.00 dividend, and you paid $100 for a mutual fund that pays a dividend of $1.80 and the market has a 30% correction, we both now have $70 worth of funds. Are you and I then in the same place? Yes?No? I'm not sure.

 

[FLD3C]

The questions relate to the market risk of dividend paying stocks.
The primary risk of a dividend stock portfolio is selling in a bear market.
The benefits include both probably ending up with a larger estate and having more inflation protection vs bonds