I love Dividend Distributions

[mathjak107]

i wonder if i can ever go back to using all the finger tips one day. after so long of typing with one finger i am so used to it i think i can type faster than both my hands could . but without the punctuation and cap keys of course.

now back to our regular scheduled disageements.

 

[eta2020]

+1 to all, but particularly to bullet #1.

Perhaps we should all chip in and buy him a shift key for Christmas.

Thanks

 

[mathjak107]

and i suppose that is different than the same amount obtained by capital appreciation alone and the same total return ?

you are arguing about something that is not what this hole thread was about which is given the same total return reinvesting dividends vs capital appreciation offers no inherent advantages.

anyway i am done with this

 

[eta2020]

You have a point.....

We all like our decisions....that is a human nature

 

[Strevlac]

I'd like to make my first post to strongly agree with mathjak107 as far as the math of dividends are concerned.

It's understandable how people new to investments can misunderstand how dividends and compounding work. But the math is not complex at all and one explanation should be enough.....but it seems like certain folks just like to keep on arguing just to argue.

To reiterate:

Forget the concept of shares. This is about the total $ value of your bucket of money.

You own a stock or a mutual fund that pays dividends. The value of your investment is $100,000.

You get a dividend of $3,000.

Immediately, the value of your stock/mutual fund investment is $97,000.

You take the dividend and reinvest it back into the stock/mutual fund.

The value of your stock/mutual fund investment is now $100,000.

The same result as if the stock/fund did not pay a dividend. Only now, you have a tax bill.

This is somewhat separate from the concept of compounding:

Stocks/equity funds do not really compound the way interest from a fixed income/cash investment does. The value of a company simply grows, or it doesn't. The company can keep the money and reinvest it in new business and "compound" the value of the company that way, or they they can take excess cash and pay shareholders. Then the shareholder can decide to compound his investment or just spend the money. It's just that the dividend event creates a tax bill.

No one is saying not to reinvest your dividend. By all means do so as not reinvesting results in no compounding at all.

The math of how this works is completely different than the perceived benefits based on outside factors such the psychology of seeing dividend paying companies as "healthier" or "more/less likely to grow in the future." Those are intangibles that are impossible to predict in advance.

 

[target2019]

mathjak,
I don't have a Nook, but after you type a period, doesn't the system insert a space and auto-capitalize the next letter key you press?

If this is not so, then tap the shift key one time to make the next letter typed a CAP. It is one extra tap, I agree.

 

[pb4uski]

I'd like to make my first post to strongly agree with mathjak107 as far as the math of dividends are concerned.....

For a first sentence of a first post, I'm trying to decide whether it is bold or stupid. No matter what, it is like a bull in a china shop. You make this bold claim and then babble on with some "perceptive glimpse of the obvious" statements that seem to have no particular point.

Oh, and by the way..... welcome.

 

[Zathras]

The math doesn't tell the whole story.

Mathjak is absolutely correct on the mechanism and math behind dividend distributions.

However, that makes zero difference to why I like dividends.

Companies with a solid record of dividend growth tend to be very good long term investments.

During recessions, I have no concerns about selling stocks at a loss, and the dividends tend to hold up far, far better than the stock prices. This is just one case, but for me, in the last recession, my portfolio lost about 40% of its value, my income stream from dividends was down 3% for one year and then recovered.

The psychological benifit of having less volatility is very valuable to some.

The fact that my dividend income stream grows by 7-8% a year is also very helpful.
So in good years, I contirbute more to charities, reinvest some, or a bit of both. In the worst of years, I hold pat. No need to sell anything with the exception of now as we plan to build a new house.

The math is important for everyone to understand, but the math is not the whole story.

 

[redduck]

I was going to say everything that Zathras just said, except I was having a difficult time placing the words in the right order. Oh, I guess there is one difference, we have no plans to build a new house.

 

[pb4uski]

With all due respect, this whole argument about dividend payers vs non-dividend payers is much ado about not much. Attached is a chart of the value of $10k of the Vanguard Growth Index Fund and Vanguard Value Index Fund for the last 20 years with dividends reinvested. The former group is a universe that pay less in dividends (currently 1.19% dividend yield) and the latter group is a universe of higher dividend payers (currently 2.33% dividend yield). As you can see on the chart, there have been periods of time where dividend payers have outperformed non-dividend payers and vice versa and over long periods of time the accumulated value of $10k with dividends reinvested are not all that different. So is it "toe-may-toe" or "toe-mah-toe"?

VVIAX Vanguard Value Index Adm Fund VVIAX chart

 

[Strevlac]

For a first sentence of a first post, I'm trying to decide whether it is bold or stupid. No matter what, it is like a bull in a china shop. You make this bold claim and then babble on with some "perceptive glimpse of the obvious" statements that seem to have no particular point.

Oh, and by the way..... welcome.

I didn't think it was particularly bold or stupid or reckless.

There is obviously a misperception by some that dividends are "new money" that magically appear out of nowhere when this is not so. It is more than apparent that is the case with the OP and a few have made attempts to explain it. I tried to restate what has been stated already in more simple terms because some appear to have completely misinterpreted/disregarded/didn't read those explanations.

I fail to see how any of my "babbling" was pointless. But maybe I'm wrong.

 

[mathjak107]

There are so many paths that can lead to the exact same results . the important thing though is to just understand why the results can be the same .

but folks get some thoughts in their head that their way is the only way and they will argue that point mistakingly forever without investigating the facts.

 

[Strevlac]

The math doesn't tell the whole story.

Mathjak is absolutely correct on the mechanism and math behind dividend distributions.

However, that makes zero difference to why I like dividends.

Companies with a solid record of dividend growth tend to be very good long term investments.

During recessions, I have no concerns about selling stocks at a loss, and the dividends tend to hold up far, far better than the stock prices. This is just one case, but for me, in the last recession, my portfolio lost about 40% of its value, my income stream from dividends was down 3% for one year and then recovered.

The psychological benifit of having less volatility is very valuable to some.

The fact that my dividend income stream grows by 7-8% a year is also very helpful.
So in good years, I contirbute more to charities, reinvest some, or a bit of both. In the worst of years, I hold pat. No need to sell anything with the exception of now as we plan to build a new house.

The math is important for everyone to understand, but the math is not the whole story.

Absolutely agreed. After understanding the mechanics, it's all about what you are comfortable with. As stated earlier:

The math of how this works is completely different than the perceived benefits based on outside factors such the psychology of seeing dividend paying companies as "healthier" or "more/less likely to grow in the future." Those are intangibles that are impossible to predict in advance.

But then again that might just be babbling with no coherent point.

 

[eta2020]

As I said we like decisions that we make.

To explain benefit of owning ETF that pays growing dividend and currently yields 2% to somebody who feels mortgaging house is good way to "invest" is impossible task.

I understand very well that dividend is not a magic money that appears from nowhere and mathematically Mathjak is correct.

 

[mathjak107]

it is good now that we are all on the same page.

i have to be honest , when i first looked at this issue it took me a while to pin down just why reinvesting dividends in down markets was not producing the effects i thought it would.

for the life of me i am going lower prices and buying more shares has to produce better results.

but if you sit and dwell on something long enough the answer eventually pops out .

that is when i realized gains are always based on a starting value and ending value. what happens in the middle is irrelevant. it could be a thousand shares or 1 share. if the dollars are the same results have to be the same.

i believe the biggest problem we have is in the financial world much of what is spewed is wrong or taken out of context.

just look at the 4% rule and the endless debates on that. how many folks think you can just pull 4% inflation adjusted without ever knowing it was based on certain allocations being true.

we are fortunate in this forum as we have some of the the most intelligent members who question everything . i have learned a wealth of stuff here over the years and my views on so much are a total opposite of what i started with.

 

[target2019]

I didn't think it was particularly bold or stupid or reckless.

There is obviously a misperception by some that dividends are "new money" that magically appear out of nowhere when this is not so. It is more than apparent that is the case with the OP and a few have made attempts to explain it. I tried to restate what has been stated already in more simple terms because some appear to have completely misinterpreted/disregarded/didn't read those explanations.

I fail to see how any of my "babbling" was pointless. But maybe I'm wrong.

Some may mis-perceive the dividend thing. But most of us get it.

The math doesn't tell the whole story.

I think you may be confusing attempts to tell other parts of the story with not agreeing with the math. Read Zathras' post. It is note-worthy.

 

[mathjak107]

The math doesn't tell the whole story.

Mathjak is absolutely correct on the mechanism and math behind dividend distributions.

However, that makes zero difference to why I like dividends.

Companies with a solid record of dividend growth tend to be very good long term investments.

During recessions, I have no concerns about selling stocks at a loss, and the dividends tend to hold up far, far better than the stock prices. This is just one case, but for me, in the last recession, my portfolio lost about 40% of its value, my income stream from dividends was down 3% for one year and then recovered.

The psychological benifit of having less volatility is very valuable to some.

The fact that my dividend income stream grows by 7-8% a year is also very helpful.
So in good years, I contirbute more to charities, reinvest some, or a bit of both. In the worst of years, I hold pat. No need to sell anything with the exception of now as we plan to build a new house.

The math is important for everyone to understand, but the math is not the whole story.

actually yes , the math is the whole story when it comes to your total return.

once again though whether you sell stocks at a loss to generate that dividend or the company sells off a piece of your share price and hands it to you with the same loss there is no difference.

a growing dividend just means bigger reset in value when it is paid out . all in all this is also an area where there is zero difference.


a stock paying a dividend out in a downturn not only has a market action loss but it also has the loss from the reset in price from the dividend adding to the down trend.

a stock in a downturn has the starting bar lowered each quarter out of the gate producing a lower and lower share price based on what was paid out each time.

where ever the markets leave it for the quarter it takes an extra hit by the payout amount .

sorry once again that makes little mathamatical sense.


a stock starts out the quarter at a certain value , from the open, market action takes it up or down a percentage. at the end of the quarter that dividend is payed and the price lowered by the same amount.

the bar is lowered and the next quarter kicks off and does its thing.

whether that action is up or down for the quarter given the same total return selling off a piece of on your own of a non dividend payer leaves you exactly even steven.

the not selling shares at a loss vs the dividend payout being better is false logic.


by selling on your own and not having a share price adjustment you need to sell less and less of a share to equal that dividend over time .


there is no way around the fact same total returns always equal the same results whether all capital appreciation or a mix of dividends and appreciation and it does not matter if markets are up or down.

 

[MRG]

Are there any other parties that benefit from the reinvestment of dividends? I'm thinking of the cost of printing checks and mailing them to individual investors.

 

[mathjak107]

all the dividend really does is save you the job and possible commission on selling a piece off on your own.. gains and losses are the same and taxes will be the same.

 

[MRG]

I'm really talking about the stock's transer agent. They print out and mail the checks post distribution. Seems like they promoted dividend reinvestment. Perhaps it was to lower their costs of servicing the shareowner account? Some of this has changed since their are more brokerage accounts. They just have a house account at the transfer agent and divvy up distribution to their customers.

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

 

[pb4uski]

Any benefit to the transfer agent since everything is so automated would be a nit in the whole scheme of things. Also, in some cases, they might get reimbursement for certain direct costs that could vary a lot, like postage.

 

[Strevlac]

Some may mis-perceive the dividend thing. But most of us get it.

I think you may be confusing attempts to tell other parts of the story with not agreeing with the math. Read Zathras' post. It is note-worthy.

I read Zathras' post, and indeed responded to it.

It is correct that some prefer dividend paying stocks for other reasons. Some people might think management is not investing profits in new ventures that are likely to generate a worthwhile return and thus they prefer the company send profits directly to them instead. Some people do not trust "the market" to value managements wise investment choices correctly. That's all personal choice.

Warren Buffet has been mentioned. Surely people realize he doesn't just screen for companies with a history of increasing dividends and throw money at them. IMO that is hardly a reason for preferring dividend paying stocks "because Warren does it"

None of us here are Warren Buffet.

 

[mathjak107]

one of the problems is i see on alot of forums is folks looking in the mirror and waiting for the next big drop and seeing themselves as warren buffet snatching up stocks.

as i said earlier one of the biggest reasons folks lose money is they try to buy low and sell high.

we all thought low was when the dow fell 2000 points.

well low was actually 4000 points lower. that attempt led to tripped stop losses and investors panicking ,bailing out and licking their wounds.

many swore off investing forever.

trying to be buffet can be one dangerous vision.

know what mantra has made more money than any other?

buy high and sell higher.

the trend is your friend and an object in motion stays in motion until it hits something.

odds are you will make money and while you may not catch the peak most will not lose money bailing out if they were inclined to sell out..

to sell at a loss you would have to be that unlucky guy at the end of the line who just bought when the trend ended.

of course the above would only apply to those dirty lil market timers, certainly not the folks here. lol

 

[clifp]

You could go and teach Warren Buffet one or two things Since he for most will buy only dividend growers.

I don't think that Buffett looks for business which pay dividends. I think he looks for companies that have an established moat and are therefore easy for him to value. The classic example is Coke, large numbers of people will continue to drink Coke products into the foreseeable future. It is a very profitable business and the company has only limited need for capital (modest R&D, building new bottling plants). The excess cash is return to shareholders in the form of dividends or stock buybacks. These established companies tend to have growing dividends. Given Berkshire's size its pretty much impossible for him to make meaningful investment in companies that aren't big established companies

 

[mathjak107]

correct. it just so happens the largest companies today that fit his size requirement and are large enough to be worth it to berkshire to buy pay dividends.

it is a size thing more than the fact they pay dividends or not.