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Old 08-21-2011, 02:53 AM   #21
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im not debating whether dividend stocks outperform or not. only the dividend is being discussed and is it really a proxy for cash and fixed income.?..
im my opinion its not the same by a wide margin.

if you need to pull the max you can from your nest egg it can be a dangerous way of paying bills.

the point is whether you sell a piece or the company sells a piece the effect is the same. giving the same total return you can create your own dividend off any stock. you got those who think they are getting paid to wait during downturns. like interest from a bank they think.

you are not. each dividend comes right out of the principal.

dividend payers tended to do better as a group because a rising dividend proudly proclaimed look at me i have money to give away. they generated more confidence because of it historically .

by the way dvy took an awful pounding in 2008-2009 more than the markets so the fact it may have not fallen as much now or yet isnt showing a thing.

2008-2009 saw dividends suspended and dropped like mad. folks i knew who used to live off those dividends directly got burned big time when they had to sell shares at a loss to make up the income.

shares in dividend paying stocks should be left to grow and not counted to be lived on directly . when markets are up you can sell some and refill cash buckets .

the dividend pay out is no different than when a mutual fund does it. the prices are adjusted downward after payout automatically by the exchanges.

you may not see it each time because of market action that day but if the stock was up 1.00 and payed a .50 cent dividend it may have been up 1.50 that day if it didnt.

its not like interest where your principal isnt reduced on payout and people forget that part.
you are reduced in principal value by the amount of the payout.


then you get those who argue they arent selling off shares when they get a dividend and actually are increasing shares when they re-invest unlike selling off pieces of a non dividend payer to create an income stream.


really?

playing around with the numbers i tried to see what would happen under the extreme rediculious chance that there was no appreciation for 30 years but you still got a dividend or tried to make a dividend from your non payer.


its strictley to show the math is the same in either case.

assuming you started out with 10 shares at 10 bucks each and a 3% dividend

the dividend payer would have had 30 pointer resets back by 3% each time a dividend was paid so you would have your origonal 10 shares but now at a remaining value of about 1.00 each for a total worth of 10 bucks 30 years later.

the non dividend payer would have 9 shares siphoned off selling off shares for 30 years to equal the same dividend leaving about 1 share but because no pointer resets took place the stock is still 10 bucks. total value 10 bucks left

in either case both will end up at just about zero eventually.

of course thats not real world but the point is that you can create your own dividend for income if you wanted to and there is no difference in the numbers except for a slight commission on your own and you need to hold it a year for the same tax rate . applying it to the real world if the total returns on both are the same the results will be the same .


even re-investing the dividends produce the same results in either case. re-investing the dividends from the dividend payer is no different than the non dividend payer taking the money from the shares he sold and re-buying more shares. it still math wise works out the same.

'
ill say it again its all about total return and not whether or not a stock pays a dividend that determines your success rate. its not like your being compensated any more or less with that payment. its nothing anyone cant do with any stock. assuming same total return.
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Old 08-21-2011, 06:05 AM   #22
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i think an area of confusion for alot of folks is just how these dividends work.

lets take a hypothetical company.

they sell on jan1 for 100 bucks a share and pay a 4 buck dividend.

all quarter they are earning profits and returns on their investments. in a perfect world a managment teams dream is a dollar of earnings should equal a dollar in market capitalization.

so xyz company is earning profits and its share price is rising with those profits. lets say we hit 104.00

when it goes ex dividend and the pay out is made of earnings the pointer goes back to 100 bucks a share again and the process starts over.

nyse rule 118 and amex rule 132 say all open orders have to be reduced by the payout effectively dropping the share price by that amount. no different than a mutual fund payout.

so with that dividend goes an offsetting drop in share price.

the days market action clouds that . on an up day xyz may have been up 10 bucks a share that day but in reality if i wasnt for the dividend reset it would have been up more.


on a down day you may be down more exagerating the drop than you would have been if it wasnt for the reset.


once you realize what a dividend is you also realize its not like an interest payment where your principal is intact and that payment is over and above. my opionion is it should not be used when spending down as a proxy for cash and fixed income payments.. its a stock first , it behaves as a stock and is in no way a proxy for cash and fixed income payments.

if interest rates drop your not selling cash at a loss to make up the shortfall in income with principal and thats a big difference.

its a stock and has to be treated as such the same as if you created your own income stream off any other stock by selling a little each year.

those dividend cuts and suspensions can have you selling shares at a loss when markets take a downturn. thats death to a portfolio when in the decumulation stage.

dividends are best re-invested and allowed to grow along with all your other equities . later on in up markets you can sell shares and creat more of that reliable income stream from your cash buckets.

do people live off dividends ? sure they do.. but in my opinion its not the best way to utilize them. just treat all stocks as stocks is the safest way .
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Old 08-21-2011, 07:43 AM   #23
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mathjak107, you are confusing the mechanics of the dividend with the dynamics of the investment. The Tweedy Brown link, which I reference above and HaHa originally referenced earlier this year, makes a strong case that businesses that pay a regular dividend prove to be superior investments over time.

There is a certain attraction to an equity portfolio that pays a dividend rate equal to or above one's withdrawal rate.
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Old 08-21-2011, 07:45 AM   #24
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im not disputing that fact. i agree they have out performed but because investors like companies that give away cash. its a show of strength.

as i said im only refering to the "smartness" of using that dividend as you would a cash stream to pay bills directly and the reason i would not and the fact that even a non dividend payer with equal total return is capable of spinning off the same amount of cash if the owner wanted to sell some each year...

there are those who are blind to the fact that just because they are getting a dividend they feel its okay their principal is falling because they are paid to wait. im saying thats bull. any stock can pay you to wait if you sell some off on your own just the same. in both cases that payment is coming out of principal regardless of who is selling a piece off.
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Old 08-21-2011, 07:47 AM   #25
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Mathjack I am pretty confident that most of the people on thread understand that math behind the process, certainly HaHa, myself and Nords do. Mathematically you are correct there is no difference between spending dividends and reinvesting dividends and then selling a fix portion of the shares.

I think what you aren't grasping is that from a practical and psychological perspective it makes a pretty big difference between having to sell X% of your portfolio and having a good deal of confidence that you collect $Y in dividends.

Imagine that a retiree has a equity portfolio that consist of 20,000 shares of VTI. His withdrawal model is the Clyatt method which is each year spend the greater of the 4% of the remaining portfolio, or 95% last years spending. (If I switch to total return investing this is what I'll use). This means he needs to sell 800 shares of VTI put the proceeds in his checking account. So how much does have to spend this year.

Gee well it depends a heck of lot on when he sells.
Jan 4 (1st trading day) $52,480
July 1 $55,504
Yesterday $46,120
Now that is pretty dramatic difference in spending levels.
Ok lets that you decide to smooth out the selling and sell 1% (200 share) per quarter. Now normally I'd want to avoid selling at the end of the quarter because of portfolio window dressing, so I'd pick some dates like 3/15 6/15 etc. However this year selling at the end of the quarter is 5% more income than the middle of the quarter. (Now if you want say I am just going to sell $40,000+ each year than I'll point the number of shares you have to sell each year varies significantly when you sell them.)

Prior to 2008/2009 I had never seen a dividend cut in my life, but after several banks, and Pfizer cut there's I saw 10% decrease in income. Now given that lots of private companies, and latter quite a few state and local governments imposed similar pay cuts on employees I didn't feel too bad.
Overall I think the stability/safety of the dividend income while far below a government or most private pensions, or Federal government jobs, is superior to most sources of income. Probably jobs at most private employers, possibly a bond fund, and almost certainly selling 4% of my portfolio on fixed schedule.


All of this assume that you are perfectly logically investor and won't be tempted to do a bit of market timing when it comes down to your annual/quarter withdrawal. If you are human type of investor you may have been tempted to sell yesterday or on Aug 8th.
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Old 08-21-2011, 07:55 AM   #26
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many of the companies prior to 2008 and 2009 that didnt cut those dividends out of fear, all along should have but instead took hits in principal. many raised dividends even though investors lost money all along the way. their total return sucked. investors were poorer .

some of the names were the bluest of blue chips. kiplingers had a list of some . yes some were tech stocks but in the day they were still best of breed. and still raised dividends in spite of principal falling for share holders right up to today..

heres a few.

microsoft had a stock market value in 2000 of 508 billion ,it paid no dividend.
today its worth only 213 billion and pays 2.6%

merck in 2000 was worth 184 billion in stock market value and paid 1.4%
today 107 billion 4.4%

general electric in 2000 was 438 billion in market value, it paid 1.2%
today 194 billion and pays 3.3%

walmart was 244 billion in 2000 and paid .3%
today its 182 billion in value and pays 2.8%

cisco systems in 2000 was 375 billion in value ,it paid no dividend
today its 83 billion and pays 1.6%

intel in 2000 was 331 billion in market value,dividend was .1%
today its 113 billion in value and pays 3.2%


again i do like dividend payers but i dont single them out as superior for their cash payments. its only about total return to me and what they are doing to my net worth over all..

they all go right into my stock bucket ,if they pay dividends i re-invest them right back in. in now way are they counted on as an income proxy.

my income stream is a steady stream of cash instruments and bonds and soon an immeadiate annuity thrown in to steady things even more..
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Old 08-21-2011, 08:06 AM   #27
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Mathjack,

I have to disagree, not with your numbers but with the real situation with good dividend paying stocks. It has been my experience that, for such stocks, even in a flat market, the drop resulting when the stock goes x-dividend is very quickly made up. Potential buyers of the stock are attracted by the prospect of the future dividend, and are not concerned with the supposed decrease in company value from the previous dividend. This keeps the price of the stock stable, even when profits are not growing.
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Old 08-21-2011, 08:11 AM   #28
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your assuming the pointer resets are a non event and im saying they are just as much an event as a funds price is from its resets over time.

while your fund may be up nicely add back in all those distributions over the years and see what it might have been. yes hypothetical but still real numbers
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Old 08-21-2011, 08:43 AM   #29
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again i do like dividend payers but i dont single them out as superior for their cash payments. its only about total return to me and what they are doing to my net worth over all..

they all go right into my stock bucket ,if they pay dividends i re-invest them right back in. in now way are they counted on as an income proxy.

my income stream is a steady stream of cash instruments and bonds and soon an immeadiate annuity thrown in to steady things even more..

Are you still working? If so when are you retiring?. If not when did you retire and did you do so with a pension?
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Old 08-21-2011, 09:19 AM   #30
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Mathjak107, are you saying there is no difference to total return over time whether or not a company pays dividends, as long as those dividends are reinvested?
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Old 08-21-2011, 10:30 AM   #31
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correct that is my point. a total return is a total return no matter what. a 3% dividend and 4% capital appreciation is no different than any other stock that has a 7% annual return yet folks tend to not treat them the same.

the fact is they are both stocks and if one chooses to sell a piece of the non dividend payer quarterly or yearly for all purposes there is no difference.

but the entire point im making is folks tend to treat those dividend paying stocks as a proxy for fixed income and they are not.

no matter how you slice it they have all the risks and issues any stock has and as such needs to be treated as such because any stock can be treated in a manor to spin off income.. market action in any case will obscure that fact in a rising market.
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Old 08-21-2011, 10:36 AM   #32
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Are you still working? If so when are you retiring?. If not when did you retire and did you do so with a pension?

still working.. im 59 and my wife is 60. we were going to pull the plug last june and retire and move from nyc to where we have a 2nd home in the poconos of pa.

we are realizing we really dont want to be there for the harsh winters and put the house up for sale.

we may continue to work another 2 years or so until we decide what and where we want to do.


we will have a small pension of around 20k but everything else will be our nest egg.

i use 2 portfolios. one is the do it yourself version of the permanent portfolio.. the other is a model portfolio from fidelity insight newsletter. been following them since 1987 with great success.

its all incorporated into a 3 bucket plan for withdrawls.
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like divy stocks
Old 08-21-2011, 11:32 AM   #33
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like divy stocks

I also started buying individual dividend paying stocks and one mutual fund in 2008 and keep adding to them. I have only invested in telecom, nat gas and oil, tobbaco, drugs, and some small banks. I don't buy a stock above $35, they must have a divy of 5%+ when I buy it and I never own more that 500 shares of any company.
I have ridden the ups and downs of pricing but have used this as a buying opportunity. I have 43% of my retirement portfolio in these types of stocks. This seems to be working for me.
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Old 08-21-2011, 12:00 PM   #34
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I think what you aren't grasping is that from a practical and psychological perspective it makes a pretty big difference between having to sell X% of your portfolio and having a good deal of confidence that you collect $Y in dividends.
I get that part. When my father died in 1972, I set up my mother's investments to include some growth stock mutual funds. But then over a decade later, I went over her accounts and noticed all those growth funds were gone. She explained that she didn't get any money from them, so she sold them and bought things that would bring her regular checks. I tried to explain that if she wanted money from those growth funds, all she had to do was take it. Or even have the funds send her monthly checks. But no, that made no sense to her at all. That would be spending her principle. So the growth stocks had to go.
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Old 08-21-2011, 11:14 PM   #35
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correct that is my point. a total return is a total return no matter what. a 3% dividend and 4% capital appreciation is no different than any other stock that has a 7% annual return yet folks tend to not treat them the same.

the fact is they are both stocks and if one chooses to sell a piece of the non dividend payer quarterly or yearly for all purposes there is no difference.

but the entire point im making is folks tend to treat those dividend paying stocks as a proxy for fixed income and they are not.

no matter how you slice it they have all the risks and issues any stock has and as such needs to be treated as such because any stock can be treated in a manor to spin off income.. market action in any case will obscure that fact in a rising market.

Mathjak107, no stock is a proxy for fixed income and I do not see anyone making that argument. The Tweedy Brown paper referred to earlier makes that case that higher dividend paying stocks are superior investments compared with lower paying or no dividend stocks. To quote them
Quote:
High Dividend Yield Stocks in the U.S. Have Produced More Return with Less Risk than their Low-Yield Counterparts

According to Tweedy Brown, dividend stocks offer less risk and higher returns.
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Old 08-21-2011, 11:44 PM   #36
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Jeremy Siegel (Stocks for the Long Run) and his friend Jeremy Schwartz (Wisdom Tree) not surprisingly makes a strong case for buying stocks in general and dividend paying stocks in particular.

Quote:
A year ago in these pages, in a piece called "The Great American Bond Bubble," we wrote that yields on Treasury bonds were unsustainable and those rushing into bond funds were in for a rude awakening when interest rates rose. Long-term rates did in fact rise sharply last fall, but recently, on the heels of the economic slowdown and the Federal Reserve's "pledge" to keep interest rates low for the next two years, U.S. Treasury rates plunged to even lower levels than last summer, reinflating the bubble to the bursting point.
One market that now makes no sense to us is the popular Treasury Inflation Protected Securities (TIPS), where recent yields should be enshrined in Ripley's "Believe It or Not!" The yield on the benchmark 10-year TIPS turned negative for the first time in history, meaning investors are now lending money to the government with the hope of receiving a sum 10 years from now that is worth less in purchasing power than the dollars they fork over today.

This astounding situation can only be justified by extraordinary pessimism about the prospects for the U.S. economy. Economic theory predicts that the real yield on long-term TIPS should approximate the real growth in the economy. And when these securities were first floated in 1997, investors received a 3.4% yield, which was very close to the 3.6% average GDP growth over the previous 50 years. The average yield on the 10-year TIPS since it was floated has been 2.5%.
To be sure, real growth since 2000 has been a much lower 1.3%, but there have been two recessions over the past decade, the last one being the most severe since the Great Depression. Even those forecasters who believe in Pimco's pessimistic "New Normal" for the U.S. economy predict real growth at 2%.



...
Prior to the recent recession, there were only five years in the S&P 500's history when dividends declined, and the maximum yearly decline was just 3.3%. In the 2000s, financial companies paid increasing dividends out of unsustainable profits, and S&P 500 dividend growth accelerated. When the housing bubble burst, these financial firms' profits and dividends collapsed. Yet it is little known that the entire decline in dividends of U.S. stocks during the recession was due to the fall of the financial sector. The sum of the dividends paid by firms in the other nine sectors of the U.S. equity markets was actually higher in 2009—at the bottom of the worst recession and bear market in the past 75 years—than it was in 2007, when stocks and the economy were at their peak.
Today the aggregate dividends paid by the nonfinancial sectors are about 20% higher than they were at the 2007 peak. Furthermore, the dividends of financial firms today comprise only 16% of the total dividends paid, less than half their proportion in 2007. In other words, another financial crisis cannot have the same impact on either the earnings or dividends of the U.S. equity markets. Finally, dividend growth in the last two years has averaged over 10% per year, more than twice the long-term dividend growth rate, as firms rightly begin to return their record cash balances to shareholders.
Thanks Jeremys I'll invite them to this thread..
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Old 08-22-2011, 03:35 AM   #37
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Mathjak107, no stock is a proxy for fixed income and I do not see anyone making that argument. The Tweedy Brown paper referred to earlier makes that case that higher dividend paying stocks are superior investments compared with lower paying or no dividend stocks. To quote them

According to Tweedy Brown, dividend stocks offer less risk and higher returns.
im not singling anyone out in this particular thread but in other threads in this section there are folks who said they do count on stock dividends directly for their income . they are loaded up on dividend payers with little cash or fixed income .

in my opinion that works until it doesnt. once we hit a snag like 2008-2009 there is a good chance those dividends will be suspended or cut forcing you to sell stock just at the worst time to make up that shortfall.


if your withdrawals have enough slack or you have other income to absorb those cuts fine but if not you can have a real delema.

its okay to say you arent concerned about where the share price is headed in the accumulation stage because they are getting that dividend but its a far different story when in the decumulation stage and spending those dividends as cash..


but you hear it all the time by retirees about why buy a bond or cd when you can buy a stock yielding 3%.

the answer of course is they are not comparing apples to apples .they serve different purposes .

its my belief that dividend or not its all still a stock and alot of retirees are trying to live off that income directly to pay bills..

i believe its wise that a retiree should not do anything more than re-invest those dividends for future growth. it should not be planned to provide an income stream off these dividend payouts directly. they are no different than selling a piece of any stock for income and that was the point of my long winded post above..

if you yourself wouldnt sell a piece each year of a stock to pay bills than dont look at the fact the company sells a piece off for you as anything but that.

im in agreement that there are some great dividend payers out there, im just saying its smart to keep them soley as stocks and not anything pertaining to feeding that income stream directly.


why am i so adamant about that

i am involved in a huge class action law suit against a popular un-traded reit right now. they paid nice 6-7% dividends for years with no issues.

well now with the downturn what they didnt disclose clearly is that since earnings fell off those dividends were being paid with our own money that was supposed to buy more property . worse was they were borrowing money to meet the dividend payouts.

loads of retirees were counting on that dividend for their income source and were spending that dividend directly and not re-investing it ,they are in a real mess as they have been un-knowingly spending their principal. i thought something was up when the 1099 showed little taxable income.

i figured it was just the depreciation allowance we get offsetting things.

its estimated we may actually be down now about 40% in principal. but the dividends keep coming.

i dont want to go off track here but its just a reason why its bad procedure to try to live off dividends directly.
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Old 08-22-2011, 06:38 AM   #38
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CD's & Treasuries are paying nothing, we shouldn't be spending dividends........I guess we should all go back to work like mathjak107.
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Old 08-22-2011, 06:53 AM   #39
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We seem to be talking about dividend stocks versus a stock market index fund. But, how do the high dividend stocks compare against a portfolio (say 50/50) of the total market index and total bond index? I am not arguing against high dividend stocks. But, I want to make sure the comparisons are fair. For examle, picking certain starting dates can give high dividend stocks a huge advantage over index funds. Picking another starting date, give the advantage to the index funds. But, we all know that already, don't we.
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Old 08-22-2011, 07:03 AM   #40
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QUOTE Today the aggregate dividends paid by the nonfinancial sectors are about 20% higher than they were at the 2007 peak. Furthermore, the dividends of financial firms today comprise only 16% of the total dividends paid, less than half their proportion in 2007. UNQUOTE



But, how does one know this ahead of time? It's easy to look back in time and say 'if I had avoided the loss in XYZ I would have made 25% that year'. But, we can't know that ahead of time. How do we know that 5 years from now it may be retail that drags us down, or manufacturing, or whatever.



These backward looking comparisons seem dangerous to me since they assume we can predict the future as accurately as we can predict the past.
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