Dividend investing: a ripoff

[FIRE'd@51]

Most of the dividend cuts so far have been in the banks due to regulatory capital requirements, which have forced them to choose between cutting the dividend to raise capital, or going a more dilutive route (such as issuing common stock or convertible preferred while the stock price is depressed). So cutting the dividend for these companies has been an easier way to raise capital initially. Industrial companies do not face these regulatory capital requirements, and thus, are loathe to cut the dividend until it becomes absolutely necessary from a cash-flow perspective.

[jIMOh]

Quote:

Originally Posted by Zathras *snip* This also seems likely to have more of the companies that are cutting their dividend. Also, do they incur additional expenses if they buy or sell a lot? *snip* I would suggest your issue isn't with dividends 'per se' but with the management and trading in this particular fund.

Two points- most dividend funds are heavily into financials and energy/utility stocks. Because many financial stocks have cut their dividend, the funds which invest in them will see similar impacts to payout.

I have read somewhere that the dividend payout of the S&P 500 was cut by around 33% for 2008. Not sure what was used to measure this, but if you compare the S&P 500 yield over same time period, I believe it dropped too.

If your fund increased payout when S&P 500 was cutting payout, I think you have a solid fund.

[jIMOh]

Quote:

Originally Posted by jazz4cash I always look at the yield calculation based on my cost. If I buy a stock for $20/sh and it pays $1 dividend, the yield is 5%. If the stock price declines to $15 the yield appears to be 6.6% but my basis is STILL $20, my yield is STILL 5%. Is that analysis faulty? I think the funds report yield for a specific period based on dividends and NAV at the beginning of the period. When prices are volatile, the yield appears out of whack.

Depends on what you did with the dividend...

If you reinvested it, your basis went up to $21.

I measure my dividend performance for my equity income funds by payout per share. Sometimes it is 2.2% yield, sometimes 2.5% yield.

I have looked all over for mutual funds which have more than a 3% yield, and my experience is these funds will be more volatile both in terms of payout and NAV. To get a 3% yield on a pool of 100-150 stocks, the fund manager will need to invest in many stocks which yield around 4-5% to offset the steady ones which yield around 1-2%.

[Zathras]

Quote:

Originally Posted by jIMOh I have read somewhere that the dividend payout of the S&P 500 was cut by around 33% for 2008. Not sure what was used to measure this, but if you compare the S&P 500 yield over same time period, I believe it dropped too.

I would be interested in where that came from. I have had two stocks cut their yield this year, I have had 13 that raised their yield and 3 yet to declare one way or another.
Actually, considering the loss of stock prices, I would be shocked to see the yield of the S&P lower. However I still would be interested to see the stats.

Quote:

Originally Posted by jIMOh If your fund increased payout when S&P 500 was cutting payout, I think you have a solid fund.

No fund, individual stocks for dividends.

[FIRE'd@51]

Quote:

Originally Posted by jIMOh I have read somewhere that the dividend payout of the S&P 500 was cut by around 33% for 2008.

This can't be right. In 2007 the Vanguard S&P 500 index fund (VFINX) paid a per-share dividend of 2.49. In the first three quarters of 2008 the fund has paid a dividend of 1.81. So even if the fund paid no dividend (which it won't) for the fourth quarter of 2008, the yearly dividend would be down 27% (not 33%) from last year.

BTW, for the first three quarters of 2008, the dividend was actually 4% above that of 2007 (1.81 vs 1.74).

[jIMOh]

Quote:

Originally Posted by FIRE'd@51 This can't be right. In 2007 the Vanguard S&P 500 index fund (VFINX) paid a per-share dividend of 2.49. In the first three quarters of 2008 the fund has paid a dividend of 1.81. So even if the fund paid no dividend (which it won't) for the fourth quarter of 2008, the yearly dividend would be down 27% (not 33%) from last year. BTW, for the first three quarters of 2008, the dividend was actually 4% above that of 2007 (1.81 vs 1.74).

Please know I read something about the dividend payout of the S&P 500 dropping. Because payout can only be measured going forward, I would expect it would lag in mutual fund performance (if a company just announced a dividend cut, it would not be seen in yearly payout until 2009, correct?). In addition because people use various statistics what you might see as a drop of one thing, another reporter might take that as a drop in something else.

For example in one of below articles I think I read about a 10% drop in payout. If last year payout dropped 7.5%, then this year it dropped 10%, 2.5/7.5=33% which meant the payout percentage dropped by 33% but not the payout itself.


Here are some links from a yahoo search "2008 dividend payout of S&P500".
S&P 500 firms cutting dividends | Philadelphia Inquirer | 10/22/2008

Good-bye, corporate dividends - Financial Week

reportonbusiness.com: S&P 500 4th-quarter dividend dive likely to be worst in 50 years

It appears all 3 articles suggest payout is dropping going forward.

[haha]

http://aida.econ.yale.edu/~shiller/data/ie_data.htm (Click on the tab that says "data".)

When you look at this, you will see that as of August 2008, S&P dividends are at an alltime high. Real (deflated) dividends seem to have peaked in February, 2008, but although inflation seems to be slightly greater than dividend growth over the last 6 months, it is a very small effect.

Ha

[kumquat]

Quote:

Originally Posted by jazz4cash I agree completely. It's not responsible for a company (e.g. BOA) to hang onto a 9% dividend unless mgt believes the stock price will bounce back.

Why would a company cut its dividend just because its stock price falls? The ability to pay dividends depends on its earnings. If they don't fall, the stock price is irrelevant.

Granted BOA is an example of a company with falling earnings. How about POT (granted its dividend is tiny). Stock price down from ~240 - 70 since June. 3rd 1/4 profits up 500% YOY, projected earnings growth next year ~50%.

[Gone4Good]

Quote:

Originally Posted by soupcxan But lo and behold, the current reported yield on the fund is only 3.8%. I guess those dividends weren't so reliable after all. So now I have a fund that has lost tons of value and isn't even paying a decent yield. What a ripoff.

There seems to be some disconnect with how Vanguard is calculating its yields. This seems like an across the board problem. Even the S&P 500 index fund is showing a yield that is lower than the yield reported elsewhere for the index. But I don't know why. It could be an issue with the 30-day yield concept (most companies don't pay dividends monthly).

It's probably worth a call to Vanguard to get an explanation.

[FIREd]

I have done a bit more research on VEIPX (which I own myself) and what the SEC yield truly is. This is what I found:

When the dividend was paid in Q3 2007 (close to market top), the reinvest share price was $27.14 and the 12 month trailing dividend yield was 2.69%.

Today the share price is $16.73 (down 38.4% from Q3 2007), and the SEC yield (as quoted by Vanguard) is 3.79%. So since Q3 2007 the yield has gone up 40.9% and the 12 month (annual) trailing dividend has gone up 8.2% from $0.73 in Q3 2007 to $0.79 in Q3 2008 despite a declining market.

Also, I have learned that the SEC yield is a tool that was developed by the SEC to help investors compare fund yields (in other words, it's a normalization tool). It wasn't designed to accurately predict future distributions for a particular fund.

Even if the SEC yield was 100% accurate, the current SEC yield says that we could expect an annual distribution of $0.634 for the fund. It would be a drop of 20% from the current $0.79 12 month trailing dividend, significantly smaller than the 40% drop in share price.

BUT, for the annual dividend to go from $0.79 to $0.634, the Q4 2008 dividend would have to be $0.07. That would represent a 63% dividend cut from Q3 2008 (when the dividend was $0.19). I think it is extremely unlikely. So in the end, we might see a bit of a drop in dividends, but I suspect that it will be far less than the 20% cut implied by the current SEC yield.

So before burying dividend investing, let's wait and see what happens in the next few quarters...

[jIMOh]

Quote:

Originally Posted by FIREdreamer I have done a bit more research on VEIPX (which I own myself) and what the SEC yield truly is. This is what I found: When the dividend was paid in Q3 2007 (close to market top), the reinvest share price was $27.14 and the 12 month trailing dividend yield was 2.69%. Today the share price is $16.73 (down 38.4% from Q3 2007), and the SEC yield (as quoted by Vanguard) is 3.79%. So since Q3 2007 the yield has gone up 40.9% and the 12 month (annual) trailing dividend has gone up 8.2% from $0.73 in Q3 2007 to $0.79 in Q3 2008 despite a declining market. Also, I have learned that the SEC yield is a tool that was developed by the SEC to help investors compare fund yields. It wasn't designed to accurately predict future distributions for a particular fund. Even if the SEC yield was 100% accurate, the current SEC yield says that we could expect an annual distribution of $0.634 for the fund. It would be a drop of 20% from the current $0.79 12 month trailing dividend, significantly smaller than the 40% drop in share price. BUT, for the annual dividend to go from $0.79 to $0.634, the Q4 2008 dividend would have to be $0.07. That would represent a 63% dividend cut from Q3 2008 (when the dividend was $0.19). I think it is extremely unlikely. So in the end, we might see a bit of a drop in dividends, but I suspect that it will be far less than the 20% cut implied by the SEC yield. So before burying dividend investing, let's wait and see what happens in the next few quarters...

Is SEC yield the trailing 12 months dividend divided by share price?

[FIREd]

Quote:

Originally Posted by jIMOh Is SEC yield the trailing 12 months dividend divided by share price?

No it's not. I suspect that in normal times, the SEC yield and the yield obtained by dividing the annual dividend by the share price are pretty close. But in volatile time, there might be a significant deviation between the two.

At any rate, this is how you can calculate the 30-day SEC yield:

30-day yield - Wikipedia, the free encyclopedia

For bond funds, Vanguard's reports a "distribution yield". As of today for example, there are significant differences between the "distribution yield" and SEC yield for many of Vanguard bond funds. Using the yield obtained by dividing the annual dividend by the share price, I get something close what Vanguard calls the "distribution yield".

For example: VG LT investment grade, distribution yield 6.11%, SEC Yield 7.42%; VG IT investment grade, distribution yield 5.55%, SEC yield 7.47%. VG High yield corporate, distribution yield 8%, SEC yield 13.02%, etc...

[FIREd]

I analyzed the top 10 holdings of VEIPX (representing almost 30% of the fund's total assets):

1 cut its dividend (Bank of America -50%)
7 kept their dividend unchanged (ATT, Chevron, GE, JPM,USB, PFE, Dominion)
2 have increased their dividends (Philip Morris +17% and Verizon +7%)

So, overall no widespread dividend cuts so far...

[Canadian Grunt]

Quote:

Originally Posted by soupcxan I have always favored dividend paying stocks (despite the reasonable arguments that total return is all that matters) for a variety of reasons. Chief among them was that if stock prices declined, at least the dividend payments would be steady, and therefore the yield would increase. So I put this plan into action by buying Vanguard's equity income fund (VEIPX). Last year shares were trading around 24 and the yield was 3.3%. The fund is now trading around 16. At the lower price, the yield should be 5%, which is some comfort given that my principal has declined 33%. I would be happy with a 5% yield, that's pretty juicy. But lo and behold, the current reported yield on the fund is only 3.8%. I guess those dividends weren't so reliable after all. So now I have a fund that has lost tons of value and isn't even paying a decent yield. What a ripoff.

You need to calculate your actual yield based on the dividend payout ratio for 12 months trailing divided by your average base cost for the units. Each investor will have their own average base cost determined by when they bought units. You can estimate yield moving forward by multiplying the current quarterly payout by 4 and then dividing by your average unit base cost. But this method assumes no dividend cuts moving forward.

You cannot determine your yield by looking at the current yield of the fund as your average cost will be different from the current NAV.

[haha]

Quote:

Originally Posted by Canadian Grunt You need to calculate your actual yield based on the dividend payout ratio for 12 months trailing divided by your average base cost for the units. Each investor will have their own average base cost determined by when they bought units. You can estimate yield moving forward by multiplying the current quarterly payout by 4 and then dividing by your average unit base cost. But this method assumes no dividend cuts moving forward. You cannot determine your yield by looking at the current yield of the fund as your average cost will be different from the current NAV.

Other than for internal tracking resons, the current yield is most important, as presumably we are comparing what we own to what we could exchange it for in today's market.

Ha

[Canadian Grunt]

Quote:

Originally Posted by haha Other than for internal tracking resons, the current yield is most important, as presumably we are comparing what we own to what we could exchange it for in today's market. Ha

Ha,

Theoretically, you can't exchange an asset you already have for the same asset with a higher yield without giving up capital. On a dividend producing stock there is a high correlation between yield and stock price, so the higher yield would come with a lower stock price. So you would sell at a lower price for a higher yield, thus giving up capital. It would be a wash.

[haha]

Quote:

Originally Posted by Canadian Grunt Ha, Theoretically, you can't exchange an asset you already have for the same asset with a higher yield without giving up capital. On a dividend producing stock there is a high correlation between yield and stock price, so the higher yield would come with a lower stock price. So you would sell at a lower price for a higher yield, thus giving up capital. It would be a wash.

I am not sure what you are trying to say. Of course if you stick with the same stock nothing can be gained. What could be the point, only lsing trading spreads. That is why I used the word "exchange".

If you believe in absolute price efficiency nothing is ever to be gained from doing anything. If you have been awake over the last 6 months and still believe in that, well...

Ha

[Canadian Grunt]

Quote:

Originally Posted by haha I am not sure what you are trying to say. Of course if you stick with the same stock nothing can be gained. What could be the point, only lsing trading spreads. That is why I used the word "exchange". If you believe in absolute price efficiency nothing is ever to be gained from doing anything. If you have been awake over the last 6 months and still believe in that, well... Ha

The Op was talking about a fund he owned so I stayed on topic. But jumping from fund to fund doesn't help too much as you are still locking in losses and hoping for a similar gain in price from the fund you jump to.

Not talking about stocks here as that is a different ball game. But statistically, a top fund is just as likely to be a bottom fund in the same year...much statistics to that record. So it's hit or miss that the fund you jump to will outperform the one you left for a higher yield.

That is the premise for ETF's.

Best way to increase yield is to average down or rebalance your portfolio.

[haha]

Quote:

Originally Posted by Canadian Grunt The Op was talking about a fund he owned so I stayed on topic. But jumping from fund to fund doesn't help too much as you are still locking in losses and hoping for a similar gain in price from the fund you jump to. Not talking about stocks here as that is a different ball game. But statistically, a top fund is just as likely to be a bottom fund in the same year...much statistics to that record. So it's hit or miss that the fund you jump to will outperform the one you left for a higher yield. That is the premise for ETF's. Best way to increase yield is to average down or rebalance your portfolio.

I like it when we stick to facts. When we start saying "best way" we open ourselves to a lot of errors, especially since there is no reason to suppose that you know a "best way" even for yourself, let alone for someone else.

Even within the narrow domain that you have defined, still much can be gained from timely switching. Not "jumping", which is a colored way of naming the activity that is meant to be disparaging.

Say you can offset realized CGs with a loss taken by a cost free switch from one fund to another. You may put $5000 in your pocket, right now.

Ha