Can we do this dividend stock thing one more time?

[redduck]

Whoops....while I was writing this post below, I see that
clifp had written pretty much (and more) of what was on my mind:

So, here goes anyway...

It should be pointed out that Dividend Investors are not really the same group of those people who own Indexed Dividend Funds. Dividend Investors buy individual stocks. So, I'm not sure that comparing Dividend Index funds to Dividend Investors works well or can work at all.

I also wonder if the Individual Investor has an advantage in this style of investing. Let's just say in the very unlikely and unrealistic event that Coke goes down 4 points in one day--many, many Dividend Investors would immediately pounce on it. I'm not sure how or if DVY would respond to such an "opportunity." Individual Investors such as the ones on Seeking Alpha tend to wait around (sometimes for years) for "stocks to go on sale." I don't think they ever buy a stock at its high. I don't know if that's true for DVY.

 

[aja8888]

This thread is interesting but has it changed anyone's future equity choices?

Anyone?

Not mine.

I will still dabble with individual stocks. A good friend of mine does it and we meet occasionally for breakfast and discuss our holdings, successes, failures, etc. My golf game is gone to hell so this may be my only way to gamble.

85 - 90% of my portfolio is still funds, ETF's, short term bond funds, CDs and cash.

 

[MichaelB]

This thread is interesting but has it changed anyone's future equity choices?

Anyone?

That's not the purpose of the thread. Redduck shared his view with us, we give feedback. There are multiple conversations underway, one of which is " does investing in individual dividend stocks create the same amount of risk as investing in dividend funds? Hopefully that conversation will continue, it has over 3700 views so lots of interest.

 

[karluk]

This thread is interesting but has it changed anyone's future equity choices?

Anyone?

I think it's a truism that nobody ever changes his or her mind based on a message board discussion, at least not concerning strongly held beliefs.

Nor do I think that this particular thread has a clear-cut right or wrong answer, even though I have been extremely skeptical about OP's intention to move half his bonds into dividend producing stocks. I think the people who have pointed out that OP is moving from a portfolio with a risk profile of 30-40% stocks into a portfolio with a risk profile of about 60-65% stocks have clearly won the factual argument. OP is taking on more risk and nothing he says is going to change that. But so what? There are lots of people on this forum who have a balanced portfolio consisting of 60-65% stocks and are doing very well. OP has decided to join them. In my opinion it's a little late in the bull market to make such a big move into stocks, but what do I know? OP may very well get his dividend income and see his stocks grow as well. It all depends on what the market does in the future. As I've said several times, I wish him well and here's hoping everything works out for the best.

 

[ERD50]

This thread is interesting but has it changed anyone's future equity choices?

Anyone?

That's not the purpose of the thread. Redduck shared his view with us, we give feedback. There are multiple conversations underway, one of which is " does investing in individual dividend stocks create the same amount of risk as investing in dividend funds? Hopefully that conversation will continue, it has over 3700 views so lots of interest.

I should probably read clifp's response first, but I saw this and wanted to respond -

First - I agree completely with MichaelB. People can discuss proc/cons, learn, maybe consider something they never considered before. That might change their mind or not, but I don't think it's the point.

I think it's a truism that nobody ever changes his or her mind based on a message board discussion, at least not concerning strongly held beliefs. ...

Well, since it only takes one case to disprove a 'never' statement, that is not true! I have had my mind changed on some previously held beliefs, from things I've learned on this and other forums.

I'll probably cover one of those in my reply to clifp - if not a full 'change of mind', maybe a little head scratching like - hmmmm, OK, maybe I need to think more about this once aspect.

-ERD50

 

[Lsbcal]

...(snip)...
First - I agree completely with MichaelB. People can discuss proc/cons, learn, maybe consider something they never considered before. That might change their mind or not, but I don't think it's the point.
...

You guys are far too sensible.

My own investment methods are a hybrid of different, sometimes discordant methods and techniques.

 

[Texas Proud]

I still understand the OPs point....

My mom has had Exxon since about 1982 and Texaco since 1984 (now Chevron)....

She has not worried about the ups and down of their stock price.... and has been getting dividends from them all along...


It is also not bad that the stock price has increased over 2,000%....



The problem that I see is that you do not know what will cause the stock to go down big time and you have to take a loss.... look at GM vs Ford... look at JPMorgan vs Citi (or any other big bank).... Which one of those would you have sold and which ones would you have held

 

[target2019]

I don't make large changes based on forum discussions. But I find that I test some of the statements made with my beliefs. Then I fine-tune my future actions. I realize this is not what everyone does. Some are very comfortable with their portfolio design, as I am. However, I'm always listening...

 

[ERD50]

OK, so here goes!

A couple of points. I am honestly not interested in dividend ETF or funds particularly.

OK, that's certainly your prerogative, but it does make trying to make any kind of a generalized 'conclusion' on it near impossible. There's just no basis for comparison, unless there was some formulamatic definition for those stocks that could be back-tested. We can still discuss, and learn, but I don't see any way to put numbers to it.

Anecdotally in seems that most of those of in the dividend school buy individual stocks so it probably difficult for you to replicate our results with a mutual funds.

I guess this makes me wonder - what do you do to convince yourself this is the right way for you to go? For example, I always 'felt good' about re-balancing, it just makes sense to me. But since then I've seen data that says 'not so much'. So I've really walked away from re-balancing. I might do it if I really, really get strong feeling/data that I'm out of whack. Call me a DMT!

A while ago I did looked at DVY and reached the same conclusion as Running Man, why would I want to own this weird fund.

Now that's funny, because this is where I'm thinking maybe I should own some DVY (yes, minds can be changed)! I was thinking about the earlier charts/links I posted. OK, so the div funds didn't reduce volatility much in the 2007 melt-down. But they sure helped in the 2000 meltdown. So my thinking became, rather than expecting them to always have less drop in a downturn, maybe I should consider that they might help - the (extremely limited) data says they helped 50% of the time. That's better than a stick in the eye!

Most importantly the popularity of dividend stocks and lower dividend yields have made the yield difference between "dividend" stocks and the broad market average small enough say 1% that it hardly makes a practical difference.

Yes, at least looking at the funds, there was not as much delta as I was expecting, so I agree, little practical difference.

Still I wanted to highlight the benefits of having a high percentage of your return being dividends for the retiree.

I agree with you that stock B is better than Stock A if you don't need the money for 10 years. But retiree do need the money every year.

Must be a communication breakdown here, I didn't mean to say that B was better than A. I was trying to point out it was all the same. And in that example, you don't wait 10 years, you sell the $10 gain each year.


And for simplicity, I left volatility out. Three reasons for that beyond keeping it simple. One, I don't think it is all that clear that the high div stocks are all that much less volatile. Two, with the highs you sell a lower %, with the lows you rebalance/draw on the fixed side - mostly a wash?. Three, since the broad market funds are generally kicking off~ 2% divs, there really isn't all that much selling going on for a conservative WR.

I am positive that as retired who needed to withdraw X% + inflation, that a stock that paid 10% dividends reliably is better that stock that had CAGR of 10% over 10 years, but during those 10 years the price fluctuated wildly.

OK, give us some examples.

My holy grail in retirement investment has been looking for a way to transform the high returns of stocks but highly volatility into something more predictable. .... and second way is with covered call. ...

Yes, and I was just going to mention the buy-write indexes like BMX. For those unfamiliar with it, that is an approach of selling just out-of-the-money covered calls on SPY. You collect the premium on flat or down months, but your gains are capped in high months. Almost by definition (maybe no almost required?), that reduces volatility. Total return can be higher in flat down cycles, but usually less in up cycles. With recent run ups, it probably isn't very popular right now, which might be a good sign?

-ERD50

 

[Running_Man]

Before people rein off and believe Bernstein when he says that most stocks have gone bankrupt and picking stocks will result in your family being poor and you have to invest in indexes consider this:
Stocks from the DJIA in 1933:

Coca Cola
IBM
Std Oil California (CHEVRON)
Std Oil of NJ (EXXON MOBIL)
General Electric
American Tobacco (Altria)
Proctor and Gamble

I believe every one of these stocks with dividends reinvested has far surpassed any index. Investing in one of these stocks and reinvesting dividends would have resulted in an incredibly wealthy individual. Yes this is cherry picking survivors, but these are solid stable dividend type companies that continued to perform for extended periods of times.

Further to see the value of dividends, imagine you split the investment world into two investment models. The first is all the stocks that pay no dividends, then all the stocks that do pay dividends. Over the history of the stock market, it is the stocks that paid the dividends that made an investment pay off so well as the individual with dividends in 1933 with the stock market at lows earning a 9% dividend yield would be increasing the ownership in shares from an undervalued point. The owner of the stocks paying no dividend would be selling stocks each year to survive on. The idea that the non-dividend paying stocks would grow faster to make up for this is a fallacy. This is discussed by Jeremy Siegel how the top dividend paying stocks outperform non-dividend paying stocks.

S & P Top 10 Dividends | Jeremy Siegel

The best ETF for dividends I have found is SDOG which is the top 5 highest paying dividend stocks in each of 10 sectors of the S&P500. Relatively new but the logic to me is compelling.

 

[clifp]

I just one to say that more than any other discussion board I've been on I have made actionable changes based on the forum discussion. Not many 180 degree turns, except for one personal issue, but a ton of 45 degree turns.

 

[ERD50]

Before people rein off and believe Bernstein when he says that most stocks have gone bankrupt and picking stocks will result in your family being poor and you have to invest in indexes consider this:
Stocks from the DJIA in 1933:

Coca Cola
IBM
Std Oil California (CHEVRON)
Std Oil of NJ (EXXON MOBIL)
General Electric
American Tobacco (Altria)
Proctor and Gamble

I believe every one of these stocks with dividends reinvested has far surpassed any index. Investing in one of these stocks and reinvesting dividends would have resulted in an incredibly wealthy individual. Yes this is cherry picking survivors, ...

Well, yes, that certainly is cherry-picking! Can we make any conclusion from a pick of 7 of 30 stocks? What are we to gather from this?

I found this interesting - Historical components of the Dow Jones Industrial Average - Wikipedia, the free encyclopedia

The 1976 DOW had a bunch of steel companies, Woolworths(!), and the troubled Kodak. It would be interesting if there is any data on what equal amounts of those would be worth with re-invested dividends, bankruptcies, mergers, etc. That would take some effort.

Over the history of the stock market, it is the stocks that paid the dividends that made an investment pay off so well ... The idea that the non-dividend paying stocks would grow faster to make up for this is a fallacy.

Maybe you are taking something I was saying out of context (or maybe you aren't referring to my comments at all). In an earlier example, I was saying that all else being equal (total return), a stock paying no divs would have to grow faster than the div paying stock. That's just math on a hypothetical, not a value judgement on one versus the other.

Stocks will do what stocks will do. I don't think the div rate is a good measure of much of anything.

The best ETF for dividends I have found is SDOG which is the top 5 highest paying dividend stocks in each of 10 sectors of the S&P500. Relatively new but the logic to me is compelling.

So it that the 'Dogs of the S&P'? Sounds like a rehash of Dogs of the Dow, not new, and it worked until it didn't. Interesting though, I will take a look.

Ahhh, here we go - only been around since JUNE 2012, but so far, total return tracks pretty close to S&P500:

PerfCharts - StockCharts.com - Free Charts

(stretch the timeline bar for full history)


-ERD50

 

[Running_Man]

Well, yes, that certainly is cherry-picking! Can we make any conclusion from a pick of 7 of 30 stocks? What are we to gather from this?

I found this interesting - Historical components of the Dow Jones Industrial Average - Wikipedia, the free encyclopedia

The 1976 DOW had a bunch of steel companies, Woolworths(!), and the troubled Kodak. It would be interesting if there is any data on what equal amounts of those would be worth with re-invested dividends, bankruptcies, mergers, etc. That would take some effort.

I am quizzical as to your exclamation point of Woolworth's. That stock would have made you fabulously wealthy, spun off a bunch of companies and changed it's name to Foot Locker up a whole bunch, not to mention a multitude of British and Canadian spinoff's that would have come from that.

 

[target2019]

So it that the 'Dogs of the S&P'? Sounds like a rehash of Dogs of the Dow, not new, and it worked until it didn't. Interesting though, I will take a look.

Ahhh, here we go - only been around since JUNE 2012, but so far, total return tracks pretty close to S&P500:

PerfCharts - StockCharts.com - Free Charts

(stretch the timeline bar for full history)
-ERD50

This link should show a 2-year comparison of SDOG and VOO (S&P 500 ETF). I believe Yahoo does not show dividends reinvested.

ALPS Sector Dividend Dogs ETF ETF Chart - Yahoo! Finance

SDOG significantly ahead, but that is a secondary goal, I think, if someone invests in SDOG. The primary goal is the dividends: 3.58% SDOG vs. 1.90% VOO. Expense ratios: 0.40% SDOG vs. 0.05% VOO.

Something to ponder...

 

[ERD50]

I am quizzical as to your exclamation point of Woolworth's. That stock would have made you fabulously wealthy, spun off a bunch of companies and changed it's name to Foot Locker up a whole bunch, not to mention a multitude of British and Canadian spinoff's that would have come from that.

Simple explanation - Ignorance on my part!

I had assumed Woolworths had gone into bankruptcy, I didn't realize they were still around under another name.

But my question still stands, if someone had purchased equal amounts of the DOW 30 in say 1966 (one of the years that causes failures in most FIRECalc scenarios), and held them and never looked back, how would they have done over the next 45 years?

As I mentioned, with splits, mergers etc, that seems like a daunting calculation. But it also sounds like something some economics professor would look into (with the help of students). I have googled survivor bias and DOW and have not found anything quite like that yet, but I'd bet it is out there.

Survivor bias is the issue. If you learn Grandma owns a bunch of some old blue chip stock that has grown and grown and grown, and has held it forever, it's easy to say 'Wow, what a fantastic investment!". But what about the stocks they may have owned that went bankrupt? They probably tossed those paper shares, and you have no idea how they did over all.

This link should show a 2-year comparison of SDOG and VOO (S&P 500 ETF). I believe Yahoo does not show dividends reinvested.

ALPS Sector Dividend Dogs ETF ETF Chart - Yahoo! Finance

SDOG significantly ahead, but that is a secondary goal, I think, if someone invests in SDOG. The primary goal is the dividends: 3.58% SDOG vs. 1.90% VOO. Expense ratios: 0.40% SDOG vs. 0.05% VOO.

Something to ponder...

This one includes divs (stretch the time bar for full history), SDOG looks fine, but < 2 years is not enough info to say much of anything, IMO.

PerfCharts - StockCharts.com - Free Charts

-ERD50

 

[MRG]

Simple explanation - Ignorance on my part!

I had assumed Woolworths had gone into bankruptcy, I didn't realize they were still around under another name.

But my question still stands, if someone had purchased equal amounts of the DOW 30 in say 1966 (one of the years that causes failures in most FIRECalc scenarios), and held them and never looked back, how would they have done over the next 45 years?

As I mentioned, with splits, mergers etc, that seems like a daunting calculation. But it also sounds like something some economics professor would look into (with the help of students). I have googled survivor bias and DOW and have not found anything quite like that yet, but I'd bet it is out there.

Survivor bias is the issue. If you learn Grandma owns a bunch of some old blue chip stock that has grown and grown and grown, and has held it forever, it's easy to say 'Wow, what a fantastic investment!". But what about the stocks they may have owned that went bankrupt? They probably tossed those paper shares, and you have no idea how they did over all.




This one includes divs (stretch the time bar for full history), SDOG looks fine, but < 2 years is not enough info to say much of anything, IMO.

PerfCharts - StockCharts.com - Free Charts

-ERD50

I've been interested in SDOG. I stayed away at first since it appeared thinly traded. Now my concerns are how it's priced. Looks like the mid point of bid ask at close is the price. Does that make sense, or is this a more common pratice than I'm aware of?
Thanks for any input.
MRG

Sent from my SAMSUNG-SGH-I337 using Early Retirement Forum mobile app

 

[Running_Man]

I see SDOG with a bid ask spread of one penny, not sure of how a site would price it, but a penny difference would not enter into my calculations. At present it is not a real popular ETF, but popularity but personally I like the strategy, the rebalancing more frequently than annually, and the exposure to all the sectors of the S&P 500 as a reason to correlate strongly with the S&P while providing a better dividend.

This ETF will still not change my individual stock focus, only this is the first dividend ETF that has a strategy that seems reasonable. I actually think the OP's strategy would make a better ETF dividend fund as well.

 

[Running_Man]

Simple explanation - Ignorance on my part!

I had assumed Woolworths had gone into bankruptcy, I didn't realize they were still around under another name.

But my question still stands, if someone had purchased equal amounts of the DOW 30 in say 1966 (one of the years that causes failures in most FIRECalc scenarios), and held them and never looked back, how would they have done over the next 45 years?

As I mentioned, with splits, mergers etc, that seems like a daunting calculation. But it also sounds like something some economics professor would look into (with the help of students). I have googled survivor bias and DOW and have not found anything quite like that yet, but I'd bet it is out there.

Survivor bias is the issue. If you learn Grandma owns a bunch of some old blue chip stock that has grown and grown and grown, and has held it forever, it's easy to say 'Wow, what a fantastic investment!". But what about the stocks they may have owned that went bankrupt? They probably tossed those paper shares, and you have no idea how they did over all.




This one includes divs (stretch the time bar for full history), SDOG looks fine, but < 2 years is not enough info to say much of anything, IMO.

PerfCharts - StockCharts.com - Free Charts

-ERD50

I am not sure but I seem to recall that Siegel also did a study on every stock that was dropped by Dow Jones Industrial and the S&P 500 over a long period and found they over performed. This is from an old brain ingram however.

 

[ChrisC]

I have adopted the dividend re-investment route with my retirement accounts. Dividends are re-invested commission free(through my Fidelity account) in each stock I hold. Have been doing this for the last 10+ years. Sort of like Buy & Hold with double compounding. Dividends buy additional shares, plus any dividend increases that companies give out. Plan on living off the dividend stream in retirement, along with SS and small pension.
Using the EZBacktest software Free Download: EzBackTest I have run many different back tests and allocation models
I took David Fish's spreadsheet The DRiP Investing Resource Center - DRiP Information, Tools, And Forms, sorted the dividend champions by number of years increased dividends. I came up with 53 companies that have increased their dividends 40 years or more.
I used the following 50 companies for the back test: DBD,AWR,DOV,NWN,EMR,GPC,PH,PG,MMM,VVC,CINF,KO,JNJ,LANC,LOW,CL,NDSN,CB,HRL,TR,ABM,CWT,FRT,SJW,SWK,SCL,TGT,
MO,CBSH,CTWS,FUL,SYY,BKH,NFG,UVV,BDX,BCR,HP,LEG,MSA,PPG,TNC,GWW,GRC,KMB,MSEX,NUE,PEP,VFC,MHFI.
I started the back test January 1,2000 and ran to the present day. Based on $100,000 total investment. Each company was equal weighted in the portfolio. There was no rebalancing. Dividends were re-invested back into each company.
I own many of the companies above, plus additional companies. Currently 51 in total.
The numbers speak for themselves.
Portfolio Value as of 2/14/14: $479,142.72
S&P 500 Value as of 2/14/14: $126,347.22
Standard Deviation: 14.40
Sharpe Ratio: 0.67
Of course, past performance does not guarantee future returns. Along with all the other disclaimers.

How do I sign up for your program?

 

[clifp]

Survivor bias is the issue. If you learn Grandma owns a bunch of some old blue chip stock that has grown and grown and grown, and has held it forever, it's easy to say 'Wow, what a fantastic investment!". But what about the stocks they may have owned that went bankrupt? They probably tossed those paper shares, and you have no idea how they did over all.


-ERD50

]

This is so true, my great great aunt, left my dad 30 shares of AT&T which over the years has turned into 50K worth of stocks in a variety of companies and many tens of thousands worth of dividends.

My grandfather gave me quite a few shares of Penn Central when I was child. It went into bankruptcy when I was 11 and I remember no details.

 

[Live And Learn]

I wanted to comment MichaelB's post about interest in this discussion. I have a lot of dividend ETFs and last week (or was it the week before) when the market was down a bit I bought some DIA instead of more dividend ETFs. Was that influenced by this particular thread ? No - but its discussions like this one that have me thinking about my investment habits.

As to dividend stocks re bonds. I have a 50/50 portfolio. The bond funds reduce volatility but if rates slowly rise that would result in a slow downward slope on my bond ETF principal (rather than big stock pops) - it makes me antsy to think about it so most of my bond funds are shorter duration (half 2 year, half 5 year). I'm hoping that helps reduce the long downward slope but the yields are close to the dividend stocks, certainly different than the days when bonds would yield 2x the dividend portion of the equity market.

 

[redduck]

I still understand the OPs point....

My mom has had Exxon since about 1982 and Texaco since 1984 (now Chevron)....

She has not worried about the ups and down of their stock price.... and has been getting dividends from them all along...

It is also not bad that the stock price has increased over 2,000%....

The problem that I see is that you do not know what will cause the stock to go down big time and you have to take a loss.... look at GM vs Ford... look at JPMorgan vs Citi (or any other big bank).... Which one of those would you have sold and which ones would you have held

Stocks going down big-time? I think there usually are warning signs --unless it's something like BP's oil spills. And, I'm assuming we are talking about, big, safe stocks going down big-time. From what I've read, I look for dividend freezes, dividend cuts, and dividends discontinued. I look to see trends re: dividends to net profits. I also look to see if there have been downgrades of Value Line's safety rating and financial rating for the stock in question. There are a dozen more things to look for. These are the ones that just came to mind--and they are basic and not very sophisticated. Hopefully some members here will come along and give you (and me) better guidelines.

Another test is: Have someone ask you why you are holding a particular stock. If you find you are stammering or stuttering or looking down at your feet as you answer, maybe that stock should no longer be in your portfolio. ( I guess that last suggestion doesn't really take the place of rigorous research or due diligence).

Oh, and to answer your question about which of those four stocks I would have sold or kept: I know this isn't quite fair, but I wouldn't have owned the car manufacturers--not stable enough. As for the banks, as an individual dividend investor, I'm not sure.

As for Exxon and Chevron: they both have the highest safety and financial strength rankings from Value Line. They have been increasing their dividends a very long time. Chevron is involved in a $11 billion lawsuit with Ecuador (Ecuador is suing Chevron). I'm not sure how significant that all is.

 

[redduck]

My Dividend Portfolio consisting of 24 stocks and XLU (ETF utilities) finished out the year up 7.62%

 

[Running_Man]

Just an update to this old thread, since Feb 2014 the S&P500 is up 18 percent DVY is up 33 percent and SDOG is up 36%, double the performance of the S&P500 from the same universe of stocks.

 

[NW-Bound]

When I used Morningstar, it said over the period of 2/2014 till now, a $10K invested in VFINX, the S&P MF, becomes $12,911 while DVY becomes $13,549 and SDOG $13,897.

So, I do not see the large performance disparity as the above post. Some Web site is wrong?