large stable dividend stocks vs diversified funds

[mathjak107]

I waded through 26 pages of passive tense to locate this:  "He finds that abnormal ex-day returns are induced by NYSE Rule 118 and AMEX Rule 132, which dictate that specialists must adjust all open limit buy orders by the amount of the dividend and round down to the next tick if necessary."

Great, so it says that there are rules requiring specialists to reduce open limit buy orders by the amount of the dividend.

That has nothing to do with Mathjak's claim that all limit orders and stop losses are automatically lowered.  I suspect the reality is that open limit buy orders are affected but not "all" limit orders, and certainly not sell-stop losses.

I have to point out that the entire paper is dedicated to figuring out whether stock prices drop by the amount of the dividend on the ex-dividend date.  As near as I can tell from the prose they're presenting, the answer is "We find dividend drop ratios to be higher than suggested in the previous literature for our sample other than 2003 and averages that are remarkably resilient to changes in the minimum price increment. The findings are somewhat inconsistent with the tax hypothesis and suggest that tax indifferent market participants have some influence in setting marginal prices in recent years. We also note a considerable dispersion about the mean for dividend drop ratios which suggest that the dividend event is often easily overwhelmed by the price impact of other events. Considering a longer event window we note price appreciation commensurate with the market prior to record day of a dividend and a notable underperformance of the market over the month after." "Not the way we think that they're supposed to."

ill try to find where i saw it...but it makes sence,if the stocks price drops by a certain amount if llimits arent adjusted it would cause triggering...ill poke around and see if i can find something....

 

[mathjak107]

I've never seen a stop-loss adjusted either. Maybe the stop-loss isn't a native NYSE order type?

As far as the paper, if a dividend stocks pays out 1 and only drops by .8-.9, a dividend strategy isn't a zero-sum game compared to a capital gains strategy, as suggested.

it has to adjust for the exact amount of the payout as far as i can see unless you can find something that shows different

 

[mathjak107]

found it on fidelity's site.........looks like limits are auto adjusted unless dnr option is used............... excerpt from their brokerage handbook

Brokerage Handbook
Types of Orders You Can Place.


Brokerage Services from Fidelity, Brokerage Handbook- Types of Orders
On Open limit orders to buy and Open stop orders to sell listed stocks, the limit price will be automatically reduced on the "ex- dividend " date by approximately the amount of the upcoming dividend unless you note it as a Do Not Reduce (DNR) when you place the order. 

 

[mathjak107]

Where do you get this stuff, Mathjak?  That doesn't happen at Fidelity-- none of my stop-loss orders have ever been altered by a dividend payment.

If you'll post a link to show how this works, I'll take it up with my broker.

guess it does! tell your broker i said hi when you speak to him ha ha ha

 

[brewer12345]

Brewer, you can't be serious.  You know why investors value dividends.

1. You can't fake a dividend.  So you do have to actually have the cash there (or be able to borrow it)  You know that GAAP is crap, which I guess is good because it does keep a lot of CFA charterholders employed

2. we know that historically much of the return from stocks have been in the form of dividends.  More recent research has shown that higher payouts lead to better returns and governance. 

3. Even though I don't buy individual stocks, if I did I would want a 100% payout.  We know all the crap that executives do with retained profits.  I'd like to see them have to go to the shareholders for each new "investments"

Yes, I am well aware of all that. My post wasn't so much questioning why investors like dividends. What I was really driving at was whether what was valued was the cash flow stream or the stability of the cash flows of a traditional dividend. I definately prefer dividend payors over non-payors, no question, and I have been steadily eliminating non-payors from my holdings unless there is a compelling reason not to (main one I can think of is PPD, which returns huge gouts of cash to shareholders, but mostly does so via buybacks). But given all of the sweating that seems to go on when a company changes its dividend payment downwards (or even appears likely to do so), I have to wonder if investors are just overvaluing the highly maassaged stability of dividend payments.

Oh yeah, and while I like full-payout structures, it doesn't work with every industry. Whe cash flows are not stable, the firm either has to be willing to let payouts vary or pay considerably less than 100%. I think both can work, but the variable payout startegy seems to be somewhat rare.

 

[haha]

Oh yeah, and while I like full-payout structures, it doesn't work with every industry.  Whe cash flows are not stable, the firm either has to be willing to let payouts vary or pay considerably less than 100%.  I think both can work, but the variable payout startegy seems to be somewhat rare.

Seems to me that if a company has a high ROI, and opportunities to invest at that ROI, and you trust management (think Buffet) then it is more efficient to have no dividend or a small dividend. These are pretty narrow requirements though, and it is a somewhat separate issue from living off dividends vs living off stock sales.

Ha

 

[Zathras]

What I was really driving at was whether what was valued was the cash flow stream or the stability of the cash flows of a traditional dividend.

In my case the combination is unbeatable However, I could see people attracted more by one than the other.

If you are well diversified and can live of the dividends I think that is a wonderful way to go.

 

[Nords]

found it on fidelity's site.........looks like limits are auto adjusted unless dnr option is used............... excerpt from their brokerage handbook
Brokerage Handbook
Types of Orders You Can Place.
Brokerage Services from Fidelity, Brokerage Handbook- Types of Orders
On Open limit orders to buy and Open stop orders to sell listed stocks, the limit price will be automatically reduced on the "ex- dividend " date by approximately the amount of the upcoming dividend unless you note it as a Do Not Reduce (DNR) when you place the order.

guess it does!  tell your broker i said hi when you speak to him   ha ha ha   

Well, I have my experience and you have your rulebook. I'll dig into this with Fidelity and see what's happening.

I'll point out that when I set up a sell-stop loss order that it's placed with Fidelity on a "not held" basis. I don't think the order is actually open until the price drops below the stop, so perhaps the vast majority of sell-stop loss orders aren't adjusted because they're not open. But I'll have to check.

To get back to your original claim-- stock prices aren't adjusted and that study shows that stock prices don't drop ex-dividend. Stock prices do not behave like mutual fund NAVs and there are many more investor-behavior forces at work than the amount of the dividend. I think market makers like it that way...

 

[mathjak107]

i never had any open orders either when stocks go ex-div so i never witnessed it....i think it should be easy though to see the drops thaT happened after dividends were paid to see if they fell about as much at the open the next day...im kind of jammed time wise right now but if anyone wants to pick a few dow stocks and get the historical prices vs dividends for a few dates lets actually see what happens

 

[Nords]

i never had any open orders either when stocks go ex-div so i never witnessed it....i think it should be easy though to see the drops thaT happened after dividends were paid to see if they fell about as much at the open the next day...im kind of jammed time wise right now but if anyone wants to pick a few dow stocks and get the historical prices vs dividends for a few dates lets actually see what happens

It only takes one negative example to prove a theory is wrong.

EGLE paid its quarterly dividend of 50 cents on 3 Aug. I'm pretty sure the money went out on the 3rd because that's the day it hit my brokerage account.

The stock rose every day from 1-3 Aug (opening higher each day) and on the 4th it only opened two cents lower.

there is always a drop in the price of the stock by the amount of the dividend paid..no question..it may appear different depending on the days action on the day the dividend is paid but a dividend is always offset by a corresponding drop in value by that amount....
a dividend paid is a non event total return wise...its a zero gain or loss.

Contrast this quote to your clarification above.

You appear to be making statements as if they're incontrovertible facts, but after a little digging it turns out to be either different from your version of reality or just plain wrong. Finding the error in this claim makes me wonder what other affirmations you've made that are also incorrect, and I'd think that would call your credibility into question.

It's ironic that you have the name "math" in your poster name because you don't seem to be applying that skill to your affirmations.

 

[mathjak107]

its still what i said...the price drops by the amount of the dividend...thats published information on every brokerage website .......i dont buy individual dividend paying stocks so i have never personally tracked it but as evidence that everything you read about dividends doing this track it thru yourself...that will confirm it is in deed as explained .

 

[mathjak107]

nords your confusing the days market action with the sole effect of the dividend payment when combined.........a stock can rise on the day after it goes ex-dividend..it would be just that much higher by the amount of the dividend paid out if it didnt pay one

 

[mathjak107]

just for the heck of it i took a look at altria....there really is no way we can proof this out...looking at days when there is no dividend paid the close and the open vary already so on the days the dividends are subtracted out you cant tell how much is the bids that are in and how much is the dividends paid.......

 

[Zathras]

It still doesn't follow what we see happening.
Here is another example:

Citibank is paying their dividend tomorrow. The dividend is currently 4% or 49 cents per quarter.

So according to Mathjak107 the stock will take a $0.49 hit tomorrow when they pay their $0.49 dividend?

If so, this should be easy to spot as it is very rare for Citibank to move that much in a day.

 

[brewer12345]

It still doesn't follow what we see happening.
Here is another example:

Citibank is paying their dividend tomorrow.  The dividend is currently 4% or 49 cents per quarter.

So according to Mathjak107 the stock will take a $0.49 hit tomorrow when they pay their $0.49 dividend? 

If so, this should be easy to spot as it is very rare for Citibank to move that much in a day.

You;ve got the right idea, but the wrong date. citi would have adjusted downward by $.49 on the ex-div date, not the payment date.

 

[Zathras]

My bad, thanks for the correction.

Citibank may not be as clear cut as I was thinking. 49 cents is not that unusual. However, we should be able to find a stock that has a dividend larger than it's standard dayly range?

 

[brewer12345]

My bad, thanks for the correction.

Citibank may not be as clear cut as I was thinking.  49 cents is not that unusual.  However, we should be able to find a stock that has a dividend larger than it's standard dayly range?

Easy. Look at TOPT when they went ex-div for the mammoth special dividend they paid out wthin the last year.

 

[mathjak107]

the problem is the normal market action covers up the dividend payment and its not easy to document the days move.i cant find anyway for someone to proof this out  other than just call the companies share holder department and ask them what effect the dividend had on the share price...even the from the nights close to the mornings open on days with no dividend the price is different .....the fact is every brokerage and financial site echoes everything fidelity's website does when they explain dividends and market orders so we have to believe thats how the system works,they all cant be fibbing to us.....

 

[Zathras]

They aren't I think you are mis-interpreting and they have worded it poorly.

For example, IF there is some sort of automatic adjustment to the stock price you would never see the hi-low range during the ex date less than the amount of the dividend, right?

While I could see day traders automatically adjusting for the ex date, I don't think it really affects anyone else. All the activity is market/trader based, not any automatic adjustment.

For example, Aug 3rd was Citibanks last ex date. The dividend was $0.49. The high for the day was $48.60, the low $48.20. If the dividend 'adjustment' took place on the market day the math simply doesn't add up. The span from high to low is less than the amount of the dividend.

However, even if this were not the case, it seems that the adjustment is negligable. The return over time of dividend stocks is very good. The stability and extra income is very attractive to many people.

 

[CyclingInvestor]

For example, IF there is some sort of automatic adjustment to the stock price you would never see the hi-low range during the ex date less than the amount of the dividend, right?

For example, Aug 3rd was Citibanks last ex date. The dividend was $0.49. The high for the day was $48.60, the low $48.20. If the dividend 'adjustment' took place on the market day the math simply doesn't add up. The span from high to low is less than the amount of the dividend.

The 'adjustment' takes place on commercial data feeds about an hour before market open.
On Aug 2 C closed at $48.72. At around midnight all of the stats (hi, lo, volume, etc) are
cleared out and the close is moved to the "yesterdays close" field. About an hour before
market trading begins the dividend adjustment occurs and the "yesterdays close" field
jumps back to $48.23. C then proceeded to open at $48.24.

 

[mathjak107]

The 'adjustment' takes place on commercial data feeds about an hour before market open.
On Aug 2 C closed at $48.72. At around midnight all of the stats (hi, lo, volume, etc) are
cleared out and the close is moved to the "yesterdays close" field. About an hour before
market trading begins the dividend adjustment occurs and the "yesterdays close" field
jumps back to $48.23. C then proceeded to open at $48.24.

so then yes it did automatically drop the .49 dividend ?

 

[Zathras]

That would seem to fit.
Where can I look up opening costs for a given day, I would like to try a few other stocks.
I am still lean towards market action adjusting, however this case seems to follow the pattern of a correction by the dividend amount.

 

[brewer12345]

That would seem to fit.
Where can I look up opening costs for a given day, I would like to try a few other stocks.
I am still lean towards market action adjusting, however this case seems to follow the pattern of a correction by the dividend amount.

If you pull up historical prices on Yahoo Finance, I believe that you can get opening and closing prices.

I think the adjustment is reakky the market reacting to ex-divs, but it has become so ingrained that the pricing services automatically do it now.

 

[terminator]

I'm pretty sure mathjak is right.  It is what I have observed.  As noted by brewer it happens on the ex-div date, not the payment date.  And it's not exact, but it's usually close to the dividend amount.

The cited example of EGLE did close at 15.43 and then re-opened at 14.95.  Historic prices at this link:
http://finance.yahoo.com/q/hp?s=EGLE&a=06&b=20&c=2006&d=07&e=10&f=2006&g=d

I have 30+ dividend stocks and I know I've seen it with the others as well. Whether it is market forces or market makers changing it, I do not know.

 

[Zathras]

I still think it is market activity that causes this as if it was a mechanism it would always happen. It may always happen, I just need to see a few more examples

JNJ has their ex date today. They closed at $65.00 yesterday, we will just see where they open. The high was $65.13 so there was no apparent $0.375 adjustment yet.

Wether this happens or not though, I still prefer a large diversified portfolio WITH a good number of dividend paying stocks (best of both worlds). If this does happen as Math indicates, the market seems to absorb these corrections much faster than you could recoup from liquidating the dividend amount. Not sure why if Math is correct, but historically it seems to happen.