Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 12-02-2014, 11:35 AM   #61
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,160
Quote:
Originally Posted by UnrealizedPotential View Post
I realize that the price per share adjusts down to compensate for the dividend payment.Let us say the dividend payment is $5000.The price per share adjusts down.If the net worth is the same,where is my $5000?How are you accounting for that?I also realize dividend payments are not free.I pay 15%.It is not hard.It maybe for others,it's not for me.
Let's say you had $100K worth of a stock that earned $5K in dividends. If you reinvested the dividends you still have $100K worth of stock, because you have more shares but the share prices is lower. If you pocketed the dividends you have $95K worth of stock and $5K in your pocket. Either way your net worth is still $100K. I'm ignoring taxes because some pay 0% on dividends, and if you invest in growth stocks you'll eventually pay cap gains on those.

And really, your posts without spaces between sentences are a headache to read, so I won't be reading or responding to those anymore. I'm not telling you how to post, just telling you what I am doing.
__________________

__________________
RunningBum is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-02-2014, 11:37 AM   #62
Full time employment: Posting here.
UnrealizedPotential's Avatar
 
Join Date: May 2014
Posts: 573
Quote:
Originally Posted by RunningBum View Post
Let's say you had $100K worth of a stock that earned $5K in dividends. If you reinvested the dividends you still have $100K worth of stock, because you have more shares but the share prices is lower. If you pocketed the dividends you have $95K worth of stock and $5K in your pocket. Either way your net worth is still $100K. I'm ignoring taxes because some pay 0% on dividends, and if you invest in growth stocks you'll eventually pay cap gains on those.

And really, your posts without spaces between sentences are a headache to read, so I won't be reading or responding to those anymore. I'm not telling you how to post, just telling you what I am doing.
Then we can agree to disagree.Who needs you anyways?
__________________

__________________
Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. Charlie Munger
UnrealizedPotential is offline   Reply With Quote
Old 12-02-2014, 11:39 AM   #63
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,406
All right folks, lets disagree without being disagreeable.
__________________
MichaelB is online now   Reply With Quote
Old 12-02-2014, 04:31 PM   #64
Recycles dryer sheets
 
Join Date: Nov 2013
Posts: 103
to have a piece of my share price liquidated and handed back to me is no longer the best way to compound investor returns.

reinvesting the dividend only sets your net worth right back to where it was before the payment only now i have a tax bill.

That's not how dividends work...especially over the long term, and it ignores the typical price run up in the days prior to the ex div date. You are making a big decision about what happens in a 48 hr period around when a stock pays a dividend vs 10 year periods or longer.

Reinvesting has a compounding effect, although one can debate how efficient it is, but over time dividends are seen as the majority component of total return for stocks. Study after study has confirmed this. Dividends account for 90+% of total return of stocks over the long term, so I'd say the compounding effect is pretty darn dramatic.

The Importance of Dividends: The Critical Role of Dividends in Stocks' Long-Term Total Return

Eagle Asset Management, in a June 2012 white paper tilted "Dividends Deliver," noted: "From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks came from reinvesting dividends. Only three percent came from capital gains."


John Bogle, writing on the website IndexUniverse.com, writes the following: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) – an amazing gap of $32 million. Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500.” In other words, the reinvestment of dividends accounted for almost all of stocks’ long-term total return.

as chuck akre said ,free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound.

This is not supported by any research. FCF used for buybacks is typically wasted and doesn't create shareholder value. Just ask those poor IBM shareholders where they squandered something like 100B in buybacks over the past several years. Buying companies typically is a losing proposition as well, as few companies see the advertised benefits realized and many companies overpay so much, that even under the best scenario the combined entity can't produce acceptable returns. This is all textbook MBA/corporate finance stuff.

http://dealbook.nytimes.com/2014/10/...buybacks/?_r=0
__________________
bad_LNIP is offline   Reply With Quote
Old 12-02-2014, 06:00 PM   #65
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,396
Quote:
Originally Posted by dallas27 View Post
Personally, I like brunettes.
I personally like blonds and redheads, but for some silly reason I married a brunette.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-02-2014, 06:05 PM   #66
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,396
Quote:
Originally Posted by MichaelB View Post
All right folks, lets disagree without being disagreeable.
Yes, but RunningBum's example makes perfect sense. The payment of a dividend doesn't change your net worth (ignoring taxes, but for many people the tax rate would be 0% and it would be totally true).
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-04-2014, 04:20 AM   #67
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Quote:
Originally Posted by bad_LNIP View Post
to have a piece of my share price liquidated and handed back to me is no longer the best way to compound investor returns.

reinvesting the dividend only sets your net worth right back to where it was before the payment only now i have a tax bill.

That's not how dividends work...especially over the long term, and it ignores the typical price run up in the days prior to the ex div date. You are making a big decision about what happens in a 48 hr period around when a stock pays a dividend vs 10 year periods or longer.

Reinvesting has a compounding effect, although one can debate how efficient it is, but over time dividends are seen as the majority component of total return for stocks. Study after study has confirmed this. Dividends account for 90+% of total return of stocks over the long term, so I'd say the compounding effect is pretty darn dramatic.

The Importance of Dividends: The Critical Role of Dividends in Stocks' Long-Term Total Return

Eagle Asset Management, in a June 2012 white paper tilted "Dividends Deliver," noted: "From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks came from reinvesting dividends. Only three percent came from capital gains."


John Bogle, writing on the website IndexUniverse.com, writes the following: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) – an amazing gap of $32 million. Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500.” In other words, the reinvestment of dividends accounted for almost all of stocks’ long-term total return.

as chuck akre said ,free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound.

This is not supported by any research. FCF used for buybacks is typically wasted and doesn't create shareholder value. Just ask those poor IBM shareholders where they squandered something like 100B in buybacks over the past several years. Buying companies typically is a losing proposition as well, as few companies see the advertised benefits realized and many companies overpay so much, that even under the best scenario the combined entity can't produce acceptable returns. This is all textbook MBA/corporate finance stuff.

http://dealbook.nytimes.com/2014/10/...buybacks/?_r=0



not quite how it works.

each quarter you start out with x-amount of money invested in a stock. that worth is the same before the dividend is payed and after it is payed and reinvested ,as the exchange computers reduce automatically at the open the share price by the same amount .

out of the starting gate each quater your starting value is identical with dividends reinvested as before the adjustment.

where the markets take it over the next quarter is anyones guess .

no matter what the stock appreciates percentage wise each quarter with dividends re-invested the gain would be identical in both cases whether a dividend was payed or not since your gain or lose is based on a percentage of your starting amount assuming identical total returns.


the reinvested dividends are no different than reinvesting a mutual fund distriubution. nothing gained nothing lost. it will still be the same percentage gain or loss applied to the same amount of money out of the gate over the quarter or the year...


reinvesting dividends does not add anything extra to the mix mathamatically had you not received the dividend but got the same total return .

the math does not care if the 9% average return is 9% appreciation or 3% dividends and 6% capital appreciation.
__________________
mathjak107 is offline   Reply With Quote
Old 12-04-2014, 04:38 AM   #68
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Quote:
Originally Posted by RunningBum View Post
Let's say you had $100K worth of a stock that earned $5K in dividends. If you reinvested the dividends you still have $100K worth of stock, because you have more shares but the share prices is lower. If you pocketed the dividends you have $95K worth of stock and $5K in your pocket. Either way your net worth is still $100K. I'm ignoring taxes because some pay 0% on dividends, and if you invest in growth stocks you'll eventually pay cap gains on those.

And really, your posts without spaces between sentences are a headache to read, so I won't be reading or responding to those anymore. I'm not telling you how to post, just telling you what I am doing.
this is exactly the case. for some reason folks think reinvesting the dividend is some magical event increasing their compounding.

it is not , it is mathamatically neutral because gains and losses are based on a percentage of a value at a starting point .

there will be a change in value of your investment if you do not reinvest the dividends since if you pocket the dividend you now have less money at the starting gate to apply those percentage gains to.

it is all akin to not reinvesting a mutual fund distribution.


that is not the same thing that happens when you rebalance and buy more shares INCREASING allocations to that stock or to equities. very different situation rebalancing or buying more when markets are down vs reinvesting dividends when markets are lower.


dividends reinvested are a non event , while rebalancing and adding more money increases compounding.

think about it,.
__________________
mathjak107 is offline   Reply With Quote
Old 12-04-2014, 04:45 AM   #69
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Quote:
Originally Posted by UnrealizedPotential View Post
It's not really true to say reinvesting dividends only sets your net worth back to where it was.You are not accounting for the extra shares you have working for you now.That is huge.As the price per share rises one makes money faster because you have more shares working for you.Otherwise what would be the point of reinvesting anything at all?
this is false, coming out of the starting gate each quarter or year with the same dollar amount yields no additional compounding because x-amount is made up of more shares /lower price vs less shares/ higher price but maintaing the same dollar value as a starting point..

just think of the mechanics of a stock split where you start out the next open with a whole lot more shares and a reduced stock price. no matter what you still have the same identical dollar amount you had before to compound over the next quarter or year.
__________________
mathjak107 is offline   Reply With Quote
Old 12-04-2014, 04:56 AM   #70
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Quote:
Originally Posted by UnrealizedPotential View Post
Then we can agree to disagree.Who needs you anyways?
sorry ,but running bum is correct.
__________________
mathjak107 is offline   Reply With Quote
Old 12-04-2014, 07:33 AM   #71
Thinks s/he gets paid by the post
target2019's Avatar
 
Join Date: Dec 2008
Posts: 3,705
Not disputing the excellent analyses of dividend processing.

When the dividend is reinvested the number of shares has increased. Very small dividend, then the effect is less pronounced. But the number of shares being increased has a positive effect on future dividends.
__________________
target2019 is offline   Reply With Quote
Old 12-04-2014, 08:07 AM   #72
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
nope it does not anymore than a stock split does. it is only about the fact you start the quarter or year with x-amount and it goes up x amount in total return.

since dividends are part of the total return the same total return is not compounded more or less by additional shares .

think about it.

a 100k investment spins off 10k in dividends that are reinvested.

the next open that kicks off the quarter you have that 100k made up of 90k in share value and 10k in reinvested dividends at the open .

if the stock is up 10% over the next quarter in total return you will start the very next quarter coming up and compounding at the exact same amount as if that 100k never spun that dividend off.

it has nothing to do with number of shares when the value remains constant at the start of each compounding time frame.


amount x total return x amount x total return always compounds the same if the starting amounts are the same regardless if made up of more shares at a lower price or less shares at a higher price.
__________________
mathjak107 is offline   Reply With Quote
Old 12-04-2014, 08:08 AM   #73
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,447
It seems like reinvesting dividends has a compounding effect, as you will be earning the same yield on increasingly more shares.

But reinvesting capital gains distributions has no such effect guaranteed, as that is not a function of yield, but is rather selling one set of securities to buy a different set. If a fund manages to sell high and buy low most of the time, your investment will increase in value over time, but it might have also done if it had simple left the investments alone. Often funds seem to have a bunch of turnover without it being clear that it has increased the fund value.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Old 12-04-2014, 08:13 AM   #74
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
try the math on an example. you will see, dividend reinvestment vs not paying a dividend at all in the first place will compound the same if the stock has the same total return.


if a stock goes up 9% in a year ,it only matters what the dollar value you started with is as it is A 9% gain on your starting amount not how many shares vs share price.
the dividends are already FIGURED IN THAT TOTAL RETURN NUMBER.


the markets typically returned 9% with 6% being capital appreciation and 3% being reinvested dividends.


that will compound the same as any other stock that paid no dividend but averaged that same 9%.


Like I said try an example , and follow it through for lets say 3 years.


compare the same starting amount , a total return of 9% and compare no dividend to reinvesting the dividends and compound both at the same rate.


adjust for the dividend just as the exchange does and make that your starting point each year..


the math will be the same regardless .


in fact no matter how much the dividend increases the subtraction off share price will always have you starting out with the same dollars as before the payout adjustment.


you will just have more shares and a lower price but each time you leave the gate you are no better or worse than prior.


like I said try it.



each payout begins the new quarter at the same amount you ended with before the payout regardless of getting that dividend or getting it and reinvesting it.


the same total return will always have the same effect.
__________________
mathjak107 is offline   Reply With Quote
Old 12-04-2014, 11:07 AM   #75
Recycles dryer sheets
 
Join Date: Sep 2012
Posts: 406
Quote:
Originally Posted by LOL! View Post
I hate dividend distributions because they cause me to pay more taxes. Instead, if needed I would rather sell shares to get the same money because I can offset the capital gains with carryover losses. This drops my AGI and allows me to get more tax credits and do larger Roth conversions.

So if you like to pay taxes, then by all means get more dividends. I think they suck.
+1 I hate them too! I've about 300K CG loss carried over from Y2K days and this dividend distribution forces me to pay more taxes and also pushes my AGI over Roth IRA limit so can not contribute to Roth IRA for my wife.(I'm already using backdoor for myself)
__________________
Retired at age 52 on 12/1/2016
AA:60/40 WR:3% until 2022 then 4% is the plan
retire2020 is offline   Reply With Quote
Old 12-04-2014, 11:21 AM   #76
Full time employment: Posting here.
UnrealizedPotential's Avatar
 
Join Date: May 2014
Posts: 573
I just talked to a mutual fund specialist from T.Rowe Price. The opinion there was that the reinvested capital gains and dividends will compound at a faster rate going forward compared against a scenario in which no dividends and capital gains were available to reinvest.
__________________
Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. Charlie Munger
UnrealizedPotential is offline   Reply With Quote
Old 12-04-2014, 12:38 PM   #77
Full time employment: Posting here.
dtbach's Avatar
 
Join Date: Apr 2011
Location: Madison
Posts: 750
Quote:
Originally Posted by retire2020 View Post
+1 I hate them too! I've about 300K CG loss carried over from Y2K days and this dividend distribution forces me to pay more taxes and also pushes my AGI over Roth IRA limit so can not contribute to Roth IRA for my wife.(I'm already using backdoor for myself)
My heart goes out to your woeful situation. . . . .
__________________
Wild Bill shoulda taken more out of his IRA when he could have. . . .
dtbach is offline   Reply With Quote
Old 12-04-2014, 02:29 PM   #78
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Quote:
Originally Posted by unrealizedpotential View Post
i just talked to a mutual fund specialist from t.rowe price. The opinion there was that the reinvested capital gains and dividends will compound at a faster rate going forward compared against a scenario in which no dividends and capital gains were available to reinvest.
call them back and tell them to do the math. They are wrong.

it is mathematically impossible. this is simple math,.


lets take a 100 stock ,10 shares. that is 1000.00 dollars.


lets make it easy and have it pay 1 dividend a year.


so your 1,000 goes up 20% so you have 1200.00 and a dividend is declared .
a 10% dividend is paid, that is 120 bucks and you reinvest it so the next open is adjusted downward and you start the new year with 11.111 shares worth 108 at the open .


now market action will take over and take the stock over the next year to wherever it lands. we are figuring a once a year dividend to make it simple , if it was quarterly then it would move from the open to wherever the quarter takes it.

your starting balance for the new year in this case is 1200.00 bucks.


11.111 shares at 108.00 a share = 1200.00 dollars.


it is exactly the same as if there was no dividend and the stock went up the same 20%.


if there was no dividend your starting balance for this new year would have been 10 shares at 120 a share. the same opening balance of 1200 bucks.


1200.00 dollars is the new watermark for the new year and now that compounds the same way over and over each year..

there is zero difference in compounding..


it is the total opening dollar value the gains or losses apply to not the amount of shares.


the mechanics of a dividend and reinvestment can't play out any other way. total return is total return is total return no matter how you figure .
__________________
mathjak107 is offline   Reply With Quote
Old 12-04-2014, 03:43 PM   #79
Thinks s/he gets paid by the post
redduck's Avatar
 
Join Date: Mar 2005
Location: yonder
Posts: 2,052
Quote:
Originally Posted by mathjak107 View Post
...a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding...
try as I might, i can't get anybody to give me this deal. so, is this just a theory or has it actually been done in real life? also, i was wondering, would two pennies doubled and compounded every day, one for 15 days and one for 16 days, would be over 10 million bucks?

thank you.
__________________
Carpe cōleī
redduck is offline   Reply With Quote
Old 12-04-2014, 04:29 PM   #80
Thinks s/he gets paid by the post
 
Join Date: Jun 2014
Posts: 1,035
Quote:
Originally Posted by mathjak107 View Post
call them back and tell them to do the math. They are wrong.

it is mathematically impossible. this is simple math,.


lets take a 100 stock ,10 shares. that is 1000.00 dollars.


lets make it easy and have it pay 1 dividend a year.


so your 1,000 goes up 20% so you have 1200.00 and a dividend is declared .
a 10% dividend is paid, that is 120 bucks and you reinvest it so the next open is adjusted downward and you start the new year with 11.111 shares worth 108 at the open .


now market action will take over and take the stock over the next year to wherever it lands. we are figuring a once a year dividend to make it simple , if it was quarterly then it would move from the open to wherever the quarter takes it.

your starting balance for the new year in this case is 1200.00 bucks.


11.111 shares at 108.00 a share = 1200.00 dollars.


it is exactly the same as if there was no dividend and the stock went up the same 20%.


if there was no dividend your starting balance for this new year would have been 10 shares at 120 a share. the same opening balance of 1200 bucks.


1200.00 dollars is the new watermark for the new year and now that compounds the same way over and over each year..

there is zero difference in compounding..


it is the total opening dollar value the gains or losses apply to not the amount of shares.


the mechanics of a dividend and reinvestment can't play out any other way. total return is total return is total return no matter how you figure .
If only the dividend payment speed/price were so efficient. I have a feeling the time between ex-div and pay date provides and opportunity for some middle man to screw everyone by a penny. The price ex-div is market set, the company doesn't' set a "Fair" price base on payout asset loss.
__________________

__________________
dallas27 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Capital gains and dividend distributions from taxable account trustee FIRE and Money 9 12-19-2013 07:10 PM
Can Acting in Love Help You Stay in Love? obgyn65 Other topics 20 01-26-2013 01:19 PM
IRA - Dividend distributions mmgoebe FIRE and Money 2 02-06-2012 09:20 PM
Ultimate Dividend Playbook; Dividend Harvest Portfolio FUEGO FIRE and Money 22 08-12-2008 12:16 PM
Understanding dividend distributions from VBMFX? soupcxan FIRE and Money 3 02-08-2005 08:26 PM

 

 
All times are GMT -6. The time now is 05:26 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.