large stable dividend stocks vs diversified funds

[Nords]

Quote:

Originally Posted by mathjak107 its interesting how the system works when a dividend is payed..automatically the prices are adjusted downward by the amount of the dividend at the next open by the exchanges computers .all limit orders and stop losses are automatically lowered too...otherwise all stop losses and limit orders would be triggered or be closer to being triggered..

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.

[eridanus]

The NYSE does adjust open prices on ex-dividend days.


http://www.fma.org/SLC/Papers/Buying...dend_FMA06.pdf


"The dividend drop ratio is the amount that a stock’s price falls on the record day due to the declaration of a dividend relative to the amount of the dividend. In the absence of trading costs and taxes, the dividend drop ratio is expected to be one. Elton and Gruber (1970) and Kalay (1982) both find empirically that this figure is closer to 0.8. Various theories have been proposed to explain this value...."

"However, a common criticism of taking opening prices on the ex-day is
that the opening prices are a biased indicator of the drop ratio because all the orders on the books of specialists in American markets are reduced by the amount of the dividend when a stock goes ex-dividend."

[Nords]

Quote:

Originally Posted by eridanus The NYSE does adjust open prices on ex-dividend days.

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."

[eridanus]

Quote:

Originally Posted by Nords 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.

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.

[haha]

Anyway, this argument misses the whole point, which is that dividends are more stable than stock prices. If you need to sell stock to live, you are vulnerable, and may eventually get whacked. People implicitly recognize this with their 2 years of cash, or buckets or whatever.

Ha

[brewer12345]

Quote:

Originally Posted by HaHa Anyway, this argument misses the whole point, which is that dividends are more stable than stock prices. If you need to sell stock to live, you are vulnerable, and may eventually get whacked. People implicitly recognize this with their 2 years of cash, or buckets or whatever. Ha

Funny you should bring this up. Dividends are stable because they are heavily managed to be tha way. For whatever reason, people get very excited about these modest streams of cash. I own a stock that from inception has always said that they will pay out as a dividend all the cash generated each quarter and have never made any pretense of the dvidend being stable. Not surprisingly, they seem to be getting dinged for their (highly) variable quarterly dividend.

So is the "magic" the dividend or the appearance of stability?

[uncledrz]

The point that Ha makes is that dividends are in the control of the company, while the stock price is not. That is, a dividend paid from cash flow, provided that the company is profitable, can and often does continue and often will increase (choose your income stream carefully). The price of any stock, however, is subject to a market force that is separate and distinct from the comapny. So selling 4% of one holding each year is not the same as a well chosen stock that pays a 4% dividend.

Uncledrz

[haha]

Quote:

Originally Posted by uncledrz The point that Ha makes is that dividends are in the control of the company, while the stock price is not.* That is, a dividend paid from cash flow, provided that the company is profitable, can and often does continue and often will increase (choose your income stream carefully).* The price of any stock, however, is subject to a market force that is separate and distinct from the comapny.* So selling 4% of one holding each year is not the same as a well chosen stock that pays a 4% dividend. Uncledrz

What he says!*

Ha

[saluki9]

Quote:

Originally Posted by brewer12345 Funny you should bring this up. Dividends are stable because they are heavily managed to be tha way. For whatever reason, people get very excited about these modest streams of cash. I own a stock that from inception has always said that they will pay out as a dividend all the cash generated each quarter and have never made any pretense of the dvidend being stable. Not surprisingly, they seem to be getting dinged for their (highly) variable quarterly dividend. So is the "magic" the dividend or the appearance of stability?

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"

[Ed_The_Gypsy]

saluki9,

If memory serves, REITs are required to pay out 100% of their earnings. I like them!

Quote:

1. You can't fake a dividend. So you do have to actually have the cash there (or be able to borrow it)

Borrowing to pay dividends sounds like faking it to me. brewer, didn't Oxidental Petroleum used to do that?

Ed

[mathjak107]

Quote:

Originally Posted by Nords 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]

Quote:

Originally Posted by eridanus 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]

Quote:

Originally Posted by Nords 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]

Quote:

Originally Posted by saluki9 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]

Quote:

Originally Posted by brewer12345 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]

Quote:

Originally Posted by brewer12345 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]

Quote:

Originally Posted by 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.

Quote:

Originally Posted by mathjak107 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]

Quote:

Originally Posted by 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

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.

Quote:

Originally Posted by mathjak107 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.