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Dividends disappearing so fast my head is spinning!
Old 02-25-2009, 11:06 PM   #1
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Dividends disappearing so fast my head is spinning!

Wow!

A couple of days ago, JP Morgan Chase cuts their dividend from 38 cents to 5 cents a share, even though they are well capitalized and in no danger. They decided it was prudent to hoard cash.

Several companies slashed dividends today.

I see the flood gates opening. I suspect that now it is "politically correct" to slash the dividend and a lot of companies are going to do that justifying it by stating that they are being prudent to hoard cash. I always suspected that may company executives hated paying dividends anyway (they'd rather spend the money on the company and line their pockets than give it back to shareholders) - so now they have cover to reduce them severely.

Anyone living off a stock dividend income must really be hurting. (They probably were already hurting since that strategy tended to be high in financial stocks which have already been slashed).

Are stock dividends going the way of the dinosaur? I never imagined seeing this happen in my lifetime.

Audrey
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Old 02-26-2009, 01:37 AM   #2
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My understanding is that there are restrictions on what they can pay since they have taken TARP money. The treasury statement is here but I am not quite sure what the restrictions are.
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Old 02-26-2009, 01:41 AM   #3
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Are stock dividends going the way of the dinosaur? I never imagined seeing this happen in my lifetime.

Audrey
Actually they may becoming more important. I will be paying a lot of attention to dividends now that I have retired. I know that a lot of folks go by total return but I like dividends.
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Old 02-26-2009, 02:56 AM   #4
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Anyone living off a stock dividend income must really be hurting. (They probably were already hurting since that strategy tended to be high in financial stocks which have already been slashed).

Are stock dividends going the way of the dinosaur? I never imagined seeing this happen in my lifetime.

Audrey
I am retired and living off the dividends of my 100% individual stock portfolio.

I have been fortunate enough to see only dividend increases. I did have 3 financial stocks, but sold 2 in 2007 and GE in late 2008 after deciding that their assets could no longer be accurately valued, even by them.

I do not think that financially strong businesses that throw off alot of cash on a consistent basis are going to change their dividend culture. I would be very surprised if JNJ / PG / KO etc reduced their dividends unless economic conditions get much worse than they are today.
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Old 02-26-2009, 03:09 AM   #5
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we had this discussion a few times put i still dont see the merit in "dividend paying stocks" in the first place.

anything that gives me something and takes it away in the form of a price per share reduction isnt a benefit.

imagine the bank paying you interest then reducing your principal by the same amount. thats exactly what happens when a stock pays out its dividend, the next morning the price is automatically reduced by the payout amount.

people felt more comfortable i guess getting some money from a company because it was a sign the company still had money to give you but overall it really dosnt make much sense... you can sell off 5% a year of anystock on your own .

when share prices were rising and burying the fact the payout was reducing your share price no one payed attention as to how much more the appreciation might have been if part of it wasnt simply just recovering from what was payed out.but now the real effect of giving away the company every quarter is making it show itself

i guess going back to the great depression people were very distrusting of stocks and so they were more comfortable with companies paying out their profits quarterly rather then building up the company assets . so those stocks based on certain studies tended to do better but i think it was alot of the emperors new clothes as even today people look at a dividend like bank interest and never even realize they are having their per share price cut by the same amount they just got automatically by the exchange computers the next morning before the open..


want me to think of the dividend as as a bonus? dont take it back with the other hand reducing my stocks value by that amount... aaaah good trick!
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Old 02-26-2009, 04:49 AM   #6
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Well its like this.

A company can either pay out cash to its shareholders or retain it to invest in its business.

If a company has fantastic investment opportunities it makes sense to retain earnings and invest in the business, acquisitions etc.

Most companies do not have fantastic investment opprtunities.

The cash they retain is squandered on executive excess, stupid acquisitions, idiotic products, unintelligent expansion abroad etc etc.

So, far from enhancing the asset base of the company, retained earnings often have no or negative impact on the assets.

So, it's far better, in many cases, for you to take the money and decide whether to invest in a company you like or buy some baked beans for lunch.

Diviends are also less volatile than share prices. So you don't get quite so many dividend posters fretting about their portfolio values.

Oh and you also don't have to worry about SWR. You just live off your dividend income.
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Old 02-26-2009, 04:54 AM   #7
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but its still a wash.... get a dollar in a dividend, subtract a dollar off the stock price.... im not debating which hands are better for holding corporate money these days ,im only saying its a non event , your not getting a "bonus" with a dividend pay out.. you still have exactley the same amount of net worth after the payout... bank interest you are up by the interest payout plus what you had before the interest was payed out..

so many times i see folks go "the stock pays a 5% dividend while i wait for it to come back"

it should say the stock gives you back 5% of your principal while you wait
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Old 02-26-2009, 07:14 AM   #8
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My understanding is that there are restrictions on what they can pay since they have taken TARP money. The treasury statement is here but I am not quite sure what the restrictions are.
.01 per share, per quarter.
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Old 02-26-2009, 07:54 AM   #9
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.01 per share, per quarter.
This is true for the banks that took the second round of TARP funds, but there were no restrictions related to the first round.
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Old 02-26-2009, 08:06 AM   #10
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it should say the stock gives you back 5% of your principal while you wait
Not so. Were it so you would expect (higher) dividend stocks to increase less, or decrease more, than non (higher) dividend paying stocks.

Research shows the opposite to be the case.
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Old 02-26-2009, 08:13 AM   #11
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so many times i see folks go "the stock pays a 5% dividend while i wait for it to come back"

it should say the stock gives you back 5% of your principal while you wait
Of course, if you're reinvesting dividends, you might say "I got 16 extra shares through reinvested dividends this year when I got only 11 last year."

Half empty, half full.

And yes, it's a taxable event in a taxable account. But at least for 2009 (and probably 2010) the dividends are capped at a 15% rate and the taxable amount is added to your cost basis, which will "come back" to you when you sell. Dividend investing in a taxable account will be a harder approach to justify if they are again taxed as ordinary income down the road, but we're not down that road yet.
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Old 02-26-2009, 08:38 AM   #12
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Oh and you also don't have to worry about SWR. You just live off your dividend income.
You might, however, have to worry about having a larger portfolio, assuming you want to leave your principal intact, or finding "low risk", high dividend-paying stocks, somewhat of an oxymoron...
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Old 02-26-2009, 08:52 AM   #13
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Financial dividends have been getting hit hard this year.
However, more of my dividend payers have increased this year than have been cut. Coca Cola just raised theirs 8% this week.
This dividend investor is very happy and confident in the current environment.
Mathjak, if you sell 4% of your portfolio each year how much do you have left?
If I take my dividends, and don't reinvest them I still have the same sized portfolio I did at the beggining of the year. You don't. Diversification is still very important (maybe more so), but the method is sound and has worked for many people over the years.
The return of the dividends makes up for the accounting adjustment done each ex-date.
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Old 02-26-2009, 08:56 AM   #14
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You might, however, have to worry about having a larger portfolio, assuming you want to leave your principal intact, or finding "low risk", high dividend-paying stocks, somewhat of an oxymoron...
This is a great point and very true in most times.
You also need to be able and willing to do research into a number of individual companies. Some people can't or don't want to take the time, which is fine, it just means dividend investing isn't for them.
It isn't for everyone, but it is a very valid method for those who have the time and inclination.

As for high yield - low risk, they are rare, but right now you can find a few.
JNJ, KFT and PG are all paying north of 3% (KFT is almost 5%).
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Old 02-26-2009, 08:59 AM   #15
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Financial dividends have been getting hit hard this year.
However, more of my dividend payers have increased this year than have been cut. Coca Cola just raised theirs 8% this week.
This dividend investor is very happy and confident in the current environment.
I think it just once again points out the importance of a dividend portfolio that's properly diversified around a lot of different sectors. In particular, "safe" recession-resistant areas like consumer staples work well (such as Coke). Notice how these "safe" recession plays never get those nosebleed dividends north of 5-6%? The market's not stupid. Not perfect, but not stupid. It trusts the security of these dividends, and in this environment with pitiful yields on assets, it's not going to price a "safe" dividend to yield more than that in the vast majority of cases.

When a stock is priced to yield more than 5%, my Spidey sense starts to tingle. When it hits north of 6-7%, the market is sending a very clear signal about what likely (not certain) to happen to either the company's performance or the dividend. In general, I don't trust dividend plays with yields higher than that. People simply chasing yield in the last year chased the financials and got horribly mauled in the process.

But there are a lot of solid companies in diverse, recession-resistant industries that are paying 3-5% today and look like they can continue to do so barring total meltdown. These are the ones I tend to seek.
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Old 02-26-2009, 09:02 AM   #16
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You might, however, have to worry about having a larger portfolio, assuming you want to leave your principal intact, or finding "low risk", high dividend-paying stocks, somewhat of an oxymoron...
There are plenty of companies which have raised their dividends an average of 5-10% or more per year for a quarter to a half century or more and are financially sound. This keeps you well ahead of inflation, so your principle (in terms of dividend generating ability) keeps increasing each year even while you are taking out all of your dividends to live on.

I am not saying this method beats total return investing. I am saying it allows me to sleep better, however.
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Old 02-26-2009, 09:06 AM   #17
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I think there's merit to the dividend method, but was pointing out that Firecalc and the 4% rule assumes the spending down principal.
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Old 02-26-2009, 09:29 AM   #18
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Financial dividends have been getting hit hard this year.
However, more of my dividend payers have increased this year than have been cut. Coca Cola just raised theirs 8% this week.
This dividend investor is very happy and confident in the current environment.
Mathjak, if you sell 4% of your portfolio each year how much do you have left?
If I take my dividends, and don't reinvest them I still have the same sized portfolio I did at the beggining of the year. You don't. Diversification is still very important (maybe more so), but the method is sound and has worked for many people over the years.
The return of the dividends makes up for the accounting adjustment done each ex-date.

...

you have to imagine we would be comparing a 4% dividend paying company to a company that say rose 8% in value because they havent payed out a dividend worth 4% of net asset value and grew the same 4% as the dividend paying company... its theoretically the same.... my non dividend paying stock rose 8% and i pulled 4% vs the divident paying stock rising 4% because it payed out 4%
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Old 02-26-2009, 09:54 AM   #19
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Even easier to see.. you have 1 share of xyz at 1.00 .. it rose 4% and is now 1.04... they pay a 4% dividend.... you get .04 and your share is 1.00 now


the none dividend paying stock was 1.00 and did not pay out a dividend and also rose
and is now 1.04.... i could sell the same 4 cents off and have the same thing
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Old 02-26-2009, 09:58 AM   #20
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Even easier to see.. you have 1 share of xyz at 1.00 .. it rose 4% and is now 1.04... they pay a 4% dividend.... you get .04 and your share is 1.00 now
True, if you assume zero long-term growth in the company. High dividend payers do tend to grow more slowly -- which makes sense, since if the company was growing rapidly they'd be more likely to reinvest profits into the business rather than subject them to double taxation -- but they do tend to have EPS growth over time.

If there's no growth -- if EPS remained flat over time and dividends were never changed -- you'd basically have a 4% bond in perpetuity with added stock market risk. Not a particularly enticing investment. But add in just enough long-term EPS growth to allow continued dividend increases (to at least match inflation) and a little bit of share price appreciation over time, and you have a much better investment.
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