It's all about the dividends

[mickeyd]

In a similar finding, only 39 percent of investors answered that tax-deferred variable annuities are most appropriate outside a qualified retirement plan.

To be sure, annuity sellers contend that the insurance features of variable annuities, including the option to receive guaranteed lifetime income, make them appropriate for qualified plans and justify the additional insurance costs. Every year since 1999, industry figures show most sales of variable annuities have been as part of qualified plans.

The last sentance in the above quote makes me ill.

Among this above-average group in terms of assets, a mere 3 percent knew that 64 percent of the historical return of stocks, as measured by the Standard & Poor's Index, has come from reinvested dividends. (Most thought the portion of returns attributed to dividends would be 33 percent or less). Only 15 percent knew that, over the past 10 years, dividend-paying stocks have outperformed nondividend payers in the index (they have, by more than 8 percent).

Who needs more proof that value investing is the key to a long term success formula?

http://www.sun-sentinel.com/business/columnists/sfl-zsave13dec13,0,1274280.column

 

[Bram]

The last sentance in the above quote makes me ill.

The old saying, "Misery loves company" fits right me about now. At least I know I'm not the only ding-dong who has purchased an annuity inside a qualified plan!

I am sooo glad to have found this forum,,,, only wish it had been sooner!

 

[Rich_by_the_Bay]

The old saying, "Misery loves company" fits right me about now. At least I know I'm not the only ding-dong who has purchased an annuity inside a qualified plan!

Don't assume you are completely stuck with that decision. I once paid over $5k to roll over a 120K annuity (penalty for early out). Did the math, and the expense ratios of the annuity offerings alone, compared to much cheaper replacement IRA investments at Vanguard, made for a break-even on that decision of about 5 years even if performance were the same.

Factor in the better performance of the Vgd funds (other than that due to expense ratio) and I bet it was a 4 year break-even.

So check it out and even if you have to leave some money on the table, you may well be better off biting the bullet and switching. Just consider it a cheap lesson learned.

 

[maddythebeagle]

not arguing the importance of dividends, but thought Better Investing had quoted something in the range of 40% from dividends in recent years (something like 20-30 year period)...I suppose you can get the 60%+ by looking at some down years and sure makes for a better column by this dude....to make it seem like everyone is so out of touch....

 

[LOL!]

The old saying, "Misery loves company" fits right me about now. At least I know I'm not the only ding-dong who has purchased an annuity inside a qualified plan!

See also: http://money.cnn.com/magazines/moneymag/moneymag_archive/2007/01/01/8397404/

BTW, many 401(k) and 403(b) are wrapped in annuities. It is one way for small businesses to offer these plans without the employer paying the expenses to run them. It's the employees who pay and pay and pay.

 

[ForeignExchange]

"From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains."

Page 126 of "The Future For Investors", by Jeremy Siegel.

 

[maddythebeagle]

"From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains."

Page 126 of "The Future For Investors", by Jeremy Siegel.

boy, why not just turn it around and say that the dividend is burned up by inflation, and what is left is the cap. gain....

 

[Rich_by_the_Bay]

boy, why not just turn it around and say that the dividend is burned up by inflation, and what is left is the cap. gain....

Yeah, that 97% number is bogus for the reasons you mention.

But it even the 50-65% figure for the dividend contribution to total returns is pretty impressive. It's internal DCA'ing, I guess.

 

[ForeignExchange]

Yeah, that 97% number is bogus for the reasons you mention.

But it even the 50-65% figure for the dividend contribution to total returns is pretty impressive. It's internal DCA'ing, I guess.

I don't think so. Professor Elroy Dimson found much the same thing, both in the U.S. and the U.K.

"For the full period studied (1926 through 2003) in all income producing asset classes, the income component represented substantially all of the returns."

Examining The Income Component Of Total Returns

As for the effect of inflation, from 1900 to 2005, Dimson, Marsh and Staunton from the London Business School found a real dividend growth rate of 1.32% in the U.S.

The Worldwide Equity Premium: A Small Puzzle.

 

[Rich_by_the_Bay]

I don't think so. Professor Elroy Dimson found much the same thing, both in the U.S. and the U.K.

If 97% of return is dividend-generated, that implies that capital gains/appreciation approaches zero, no?

Thus, it appears they are applying the full impact of inflation to the appreciation side of the equation only, leaving dividends unaffected. After all, there are many stocks that pay little or no dividends, as I understand it.

Or, equally likely, I am totally misunderstanding the concepts here. Can you explain further?

 

[ForeignExchange]

If 97% of return is dividend-generated, that implies that capital gains/appreciation approaches zero, no?

For change in valuation, I only have the Robert Arnott figure of 0.6% from 1802 to 2000.

Dividends and the Three Dwarfs

Thus, it appears they are applying the full impact of inflation to the appreciation side of the equation only, leaving dividends unaffected. After all, there are many stocks that pay little or no dividends, as I understand it.

Or, equally likely, I am totally misunderstanding the concepts here. Can you explain further?

My interpretation of the results from the dividend studies is that over the long term most of the appreciation of equities comes from the reinvestment of dividends. In Robert Arnott's study, where he talks about the "real growth in dividends of 0.8%, he says "That dollar figure is way less than most people would have expected." I have to admit it surprised me.

The problem is, the yields are so low now, that the dividends are only supplying a third of the returns they once did.

As for stocks that pay little or no dividends, the older I get, the less interested I am in them. I leave these for others to invest in.

 

[Nords]

If 97% of return is dividend-generated, that implies that capital gains/appreciation approaches zero, no?
Thus, it appears they are applying the full impact of inflation to the appreciation side of the equation only, leaving dividends unaffected. After all, there are many stocks that pay little or no dividends, as I understand it.
Or, equally likely, I am totally misunderstanding the concepts here. Can you explain further?

Dimson et al pulled in a lot of numbers for their research. It took an entire team of data crunchers and they didn't just whip something out before deadline.

The disconnect is that dividends used to be a lot higher at the beginning period of their study, and they've steadily declined in the last half of the 20th century.

I'm pretty sure that D&M didn't pay taxes on their dividends, and I don't know whether they reinvested them or not. Those effects can accumulate significantly over a few decades, let alone a century.