silly question re: dividends

[haha]

Why don't I see how to make money from this supposed advantage?

-ERD50

ah, the $64,000 question.

 

[purplesky]

It goes back to your earlier post (bold mine this time)-



And I asked:



That's the question - what is it about dividend stocks that make them stand out? How can I benefit from this (I like money)?




A tongue in cheek comment to make the point that dividends are just a portion of the stock paid out to you.

-ERD50

Part of my strategy with solid large cap companies that pay dividends is that they will continue to pay a decent dividend even during a bear market.

I won't need to sell shares low to get income.

 

[RunningBum]

Stocks are a bad thing to pass on to children. Usually they will not fit someone else's investment plan and asset allocation plan. Also folks tend to put sentimental value on "Dad's old stock shares he gifted to us on his deathbed." Such sentiments cloud rational thinking about them. If someone gets such shares, I almost always recommend they sell them before there are more taxes to be paid and invest in passively-managed, low-expense-ratio index funds in the asset allocation that one has.

Bottom line: Inherited individual stocks are like an albatross around one's neck. That's my broad blanket statement that A is worse than B.

This sounds kind of odd and misleading. If you have a large appreciation on stocks you own, holding onto them and passing them on to your children sounds ideal, because they get the step up in basis.

Now, I do agree they should probably sell them right away unless they are still solid investments and fit the heir's investment plan. Basically, if you inherit stocks you wouldn't be buying on your own, you should sell them.

Passing on stocks isn't the issue. What the heir does with them is.

That's probably what you meant but the way you stated it was very misleading the way I read it. It makes it sound like you should sell off the stocks before you die so your heir doesn't have to deal with them. That's the worst plan because of the tax hit when the original owner sells. By far.

 

[Totoro]

Are they based on the number of shares you own rather than a % of the stock's worth? So if there is a stock market crash then unless the companies decrease dividends, the actual % would in a sense increase?

Correct. Dividend policies however vary per company. Many blue chip ones focus on a constant or slowly increasing fixed dividend (in USD) per share, so yes.

Others pay out a fixed % of yearly profits. Still others pay out what they think the company can miss.

And there is also the dividend + buyback approach. Steady dividends + buybacks for windfalls (or when CEO options are almost due ..).

So if I consider that somewhat of a income stream then even if market crashes, the actual $ distributed wouldn't necessarily drop a ton?

Not unreasonable to expect that.

In general dividends in absolute USD drop/rise less than market valuations. They are more closely linked to overall earnings which also fluctuate, but a lot less.

A 2009 type scenario however can still seriously ruin your day.

 

[Davis65]

To give you an example of what Totoro is talking about, let's look at AT&T, one of my favourite American dividend stocks. It is paying $1.88 per share this year. At its current price, $34.65, it has a 5.4% yield. When the share price goes down, you still get the $1.88 per share dividend, so your % yield goes up. If the share price goes up, your yield is going down, but your cash dividend is the same.

Many companies do cut their dividends when times are bad. Others, like AT&T try to avoid doing so. It has increased its dividend in dollars every since 1987. (If you look at its dividend history, you will see some years where the dividend has gone down, but those are years when the shares were split, so if you had 100 shares paying $2.00 dividend each, now you'd have 200 shares paying $1.00 each.)

 

[DEC-1982]

To give you an example of what Totoro is talking about, let's look at AT&T, one of my favourite American dividend stocks. It is paying $1.88 per share this year. At its current price, $34.65, it has a 5.4% yield. When the share price goes down, you still get the $1.88 per share dividend, so your % yield goes up. If the share price goes up, your yield is going down, but your cash dividend is the same.

Just to confirm, these are "qualified" dividends for tax purposes? Tax free for somebody in the 15% tax bracket?

 

[ERD50]

Originally Posted by ERD50 View Post
Why don't I see how to make money from this supposed advantage?

-ERD50

ah, the $64,000 question.

Yep, that's where the rubber meets the road.

To give you an example of what Totoro is talking about, let's look at AT&T, one of my favourite American dividend stocks. ...
Many companies do cut their dividends when times are bad. Others, like AT&T try to avoid doing so. It has increased its dividend in dollars every since 1987. ...

Nice, but I demand diversification. Look at DVY, dividend payers are its raison d'êtr, and yet, we find its dividends dropped 41.74% from 2008-03-25 to 2009-09-22. In that same time frame, SPY (adjusted for divs), dropped only 17.66% (20.6% NAV only).

http://finance.yahoo.com/q/hp?s=DVY&a=10&b=7&c=2003&d=06&e=12&f=2015&g=v

http://finance.yahoo.com/q/hp?s=SPY&a=09&b=01&c=2007&d=01&e=01&f=2009&g=d&z=66&y=330

Or, picking the worst drop in SPY in that time frame, I get 46.32%, 44.73% (adj, non-adj) - about the same ballpark.

Here:

PerfCharts - StockCharts.com - Free Charts

You can slide both ends of that time bar and even cherry-pick any time frame you want. I'm hard pressed to see any significant difference/trend, even when I pick peak/troughs of bear markets, where I should expect this supposed dividend strength strategy to shine. Where's the beef?

So again, is there really an advantage, and if you find one that you can share (not a few specific stocks, anyone can do that in hind-sight), how do I ride that train in a diversified manner?

-ERD50

 

[haha]

So again, is there really an advantage, and if you find one that you can share (not a few specific stocks, anyone can do that in hind-sight), how do I ride that train in a diversified manner?

-ERD50

Don't bother. Whoever would try to convince you is nuts.

Ha

 

[ERD50]

Don't bother. Whoever would try to convince you is nuts.

Ha

Well, anyone who thinks they can convince me w/o data might as well be nuts.

And I guess I might say the same about anyone who believes in something w/o the data to back it up. Well, anything important that is, and maybe this doesn't qualify. But it's just my nature, if some one says "A is true", and it isn't clear to me why A would be true, I'm curious as to why they say this.


-ERD50

 

[Davis65]

Just to confirm, these are "qualified" dividends for tax purposes? Tax free for somebody in the 15% tax bracket?

Sorry, I can't help you with US tax questions. Not an issue for me

 

[karen1972]

Owning a 'silly' ('silly', really? SPY or VTSMX is 'silly?) mutual fund with hundreds of stocks protects you against the Enrons of the world, and some blue chips like GM and IBM that have had some dark days that might have a newcomer sell low.

-ERD50

No offense ERD50, I didn't mean VTSMX itself was silly, just that these funds are just not the way to teach people about how stocks work. They are too broadbased and most people wouldn't understand. You have three types of people, those that want to understand how stocks work and pick their own and those that understand how stocks work, but just want a general solid basket of stocks that someone else manages averaging the market and lastly those that have no clue and are fearful of the market because one time they put some money in a 401k and it went down...or they heard about that one time their dad lost money.. I'm talking about the 3rd... I really only know the 3rd type, the ones too afraid to own stock so if you passed on them an IRA, they would either do nothing or sell it all, take the money and blow it whether its a mutual fund or a stock. My point was whether its a stock or a mutual fund it really doesn't matter as long as you teach them or ensure they have the knowledge to handle it once you've passed.

 

[ERD50]

No offense ERD50, I didn't mean VTSMX itself was silly,

None taken, I just didn't understand what is silly about a mutual fund.

just that these funds are just not the way to teach people about how stocks work....

OK, I'm going to (and beyond!) extremes here just to make a point, but to me, that's like saying "Let's go out and drive drunk w/o our seat belts on to understand just how dangerous that is"!

I think a mutual fund, (a basket of stocks) is an excellent way to teach people how personal investing works. They learn diversification among other things.

A single stock, even a former 'blue chip' can tank. What will an inexperienced investor do? A single stock can go to the moon, will an inexperienced investor learn that taking long shots is the way to riches?

You have three types of people, those that want to understand how stocks work and pick their own and those that understand how stocks work, but just want a general solid basket of stocks that someone else manages averaging the market and lastly those that have no clue and are fearful of the market because one time they put some money in a 401k and it went down...or they heard about that one time their dad lost money.. I'm talking about the 3rd... I really only know the 3rd type, the ones too afraid to own stock so if you passed on them an IRA, they would either do nothing or sell it all, take the money and blow it whether its a mutual fund or a stock. My point was whether its a stock or a mutual fund it really doesn't matter as long as you teach them or ensure they have the knowledge to handle it once you've passed.

OK, but that sounds different to me from what you first said. At any rate, if they are just going to sell it, true, it makers no difference, but so what?

I guess we will just disagree on whether inheriting a few individual stocks is 'better' for someone, because they might learn from those stocks, versus a diversified fund. I don't think it is clear that they will learn anything because of it, and there are risks to a lack of diversification that a newcomer may not understand.

My MIL inherited stocks in the 60's - she knows nothing about them other than she gets dividend checks, and she doesn't want to sell them for emotional reasons. Just one example, but if it were up to me I'd start harvesting losses and those with little/no gain (they were stepped up at my FIL's passing), maybe sell some with gains to offset losses, and move to an index fund, and maybe hold remaining gainers so that they possibly get stepped up in basis to the heirs. She could lower her taxable income by $3,000 each year, but she won't do it because of emotional ties to some initials on a piece of paper.

-ERD50

 

[Danmar]

Mr. Buffett may not like dispensing dividends but he sure loves to invest in companies that give dividends to him.....But it goes back to the non answerable question of who will spend the money more wisely. The company or the individual. Your logic is certainly sound ERD, but I guess it comes down to individual taste. Kevin O'Leary cant get on CNBC to discuss the weather without going into his religious passion of only buying stocks of companies that pay dividends. He wants his cash, and he wants to get paid to wait. If nothing else you like a person true to his convictions as he gives the same speech week after week, year after year.


Sent from my iPad using Tapatalk

Yes, I wonder if Buffet really is just an old guy over the hill. His results since 1997 have been about 8.5% CAGR total return. I have done much better. Agree that the div debate tends to obscure the fact that many div payers own excellent business franchises, earn high ROe's, have mature business models, and good management. These are the type of co's that retirees should like.
Finance theory states emphatically that divs or no divs should not matter. But I sure like my divvies. Just more convenient and my yield approximates a good SWR I think. Anyway, to each their own but once retired divs seem a lower risk way to generate cash flow.

 

[Mulligan]

Yes, I wonder if Buffet really is just an old guy over the hill. His results since 1997 have been about 8.5% CAGR total return. I have done much better. Agree that the div debate tends to obscure the fact that many div payers own excellent business franchises, earn high ROe's, have mature business models, and good management. These are the type of co's that retirees should like.

Finance theory states emphatically that divs or no divs should not matter. Doesn't seem to be working that way recently though. I sure like my divvies.

I agree with you Danmar. I am worse though. I freely admit I am not investing for maximum returns, I am investing for maximum income within a degree of relative safety. I wont panic knowing I am clipping 7% dividends on a downdraft. But I cant put it past myself to buy high and sell low in equities. But psychologically knowing if my stocks dropped 25% I am still in the good 4 years later with 7% divvies, I will not panic. In fact I will continue to reinvest and get even a better yield if that happens.


Sent from my iPad using Tapatalk

 

[mathjak107]

based on the discussion we had on dividends in another thread there is no such thing as getting paid to wait because you are getting a dividend.

as we said you can sell off a piece of a stock and have the same cash flow with the same effect. either the company gives you a piece of the share price or you can sell a piece of the share without the reduction of a dividend . it is the same thing and you are just as down in both cases ..

 

[Mulligan]

based on the discussion we had on dividends in another thread there is no such thing as getting paid to wait because you are getting a dividend.

as we said you can sell off a piece of a stock and have the same cash flow with the same effect. either the company gives you a piece of the share price or you can sell a piece of the share without the reduction of a dividend . it is the same thing and you are just as down.

That is not true with preferred stocks in which I was inferring but didn't state . They trade under different variables as you definitely know. No they are not a panacea for investing excellence, but they fit my investing emotional criteria.
But we have discussed this before as you mentioned in a long ago post you would gladly take my money and give me 7% annually in return, so this is not "your cup of investing tea". And I should also state I was willing to do this provided I had investment grade rating backing it!


Sent from my iPad using Tapatalk

 

[mathjak107]

oooh okay , you had not said you were referring to preferred stock.

 

[Mulligan]

oooh okay , you had not said you were referring to preferred stock.

My bad on that. I stated in post I couldn't buy equities for fear of selling low and mentioned 7%. I am not well versed in individual equities, but I doubt many kick out a 7% very safe dividend. In the cross post you mentioned, I should have clarified the stocks that were not moving ExD were also preferreds. My brokerage account says I am 100% invested in equities, but when I need to call them to buy a preferred stock that cannot be bought online, they route me to fixed income department. So who knows what they are.


Sent from my iPad using Tapatalk

 

[ERD50]

... But I cant put it past myself to buy high and sell low in equities. ...

But a more typical situation is that someone is say, 60/40 AA or 75/25 AA, and maybe a fairly conservative 3.5% WR. Something like SPY already kicks out a 2% div. And if you rebalance when AA is out of whack, you sell equities when they are high. In a market downturn, to rebalance your AA you sell fixed income when equities are low.

You aren't selling equities low and buying high. And you only make up the diff from your SPY divs plus fixed income divs, which isn't much. Why do people fixate on this myth of buy high and sell low in equities ? It doesn't work that way.

-ERD50

 

[Mulligan]

But a more typical situation is that someone is say, 60/40 AA or 75/25 AA, and maybe a fairly conservative 3.5% WR. Something like SPY already kicks out a 2% div. And if you rebalance when AA is out of whack, you sell equities when they are high. In a market downturn, to rebalance your AA you sell fixed income when equities are low.



You aren't selling equities low and buying high. And you only make up the diff from your SPY divs plus fixed income divs, which isn't much. Why do people fixate on this myth of buy high and sell low in equities ? It doesn't work that way.



-ERD50

I dont think its a complete myth to people without a systematic plan. (Not individuals such as yourself or others here). They buy when the market is good and when it drops they reach a point where they cant stand it anymore and sell. Invariably probably at the worst possible time. Especially when looking at individual securities. Now I own some Total Stock and International, but no individual regular equities. I don't even pay attention to it as it is about 25% of my money. But I wouldn't be surprised if I became a nervous nellie and sold if I had individual stocks thinking it was dropping more. And of course it wouldn't, and head back up.
That is why I prefer investing for safe higher income in preferreds. If they drop I get an even better investing yield on my reinvesting of divvies and monthly contributions.
If I had a huge portfolio and had to live off of it, I wouldn't invest the way I do. I leave proper investment strategies to my pension fund manager. I am just investing this way to someway keep me in the game. Over a period of 20 years, I believe this will net me more money than just having it all in IBonds or CDs which is where it would be if it wasn't in preferred stocks.


Sent from my iPad using Tapatalk

 

[ERD50]

I dont think its a complete myth to people without a systematic plan. (Not individuals such as yourself or others here). They buy when the market is good and when it drops they reach a point where they cant stand it anymore and sell. Invariably probably at the worst possible time. ...

Sure, but I thought the discussion was among the people on this forum.

Heck, we could turn every strategy on its head if we viewed it in terms of what some (most?) people might do, a few examples:

Get CC rewards and pay off the bill each month? - But 'people' won't pay it off and get charged high interest rates!

Keep the mortgage and invest the rest? - But people will just spend it, they won't invest!

Don't buy whole life insurance, buy term for the amount and time you'll need it and invest the rest? - But people will just spend it, they won't invest!

Delay SS to 70 for the 'longevity insurance'? - But people don't have enough saved to make it to 70 w/o SS!

and so on.

-ERD50

 

[Mulligan]

Sure, but I thought the discussion was among the people on this forum.



Heck, we could turn every strategy on its head if we viewed it in terms of what some (most?) people might do, a few examples:



Get CC rewards and pay off the bill each month? - But 'people' won't pay it off and get charged high interest rates!



Keep the mortgage and invest the rest? - But people will just spend it, they won't invest!



Don't buy whole life insurance, buy term for the amount and time you'll need it and invest the rest? - But people will just spend it, they won't invest!



Delay SS to 70 for the 'longevity insurance'? - But people don't have enough saved to make it to 70 w/o SS!



and so on.



-ERD50

But that is what we do here, or there wouldn't be much to talk about.
You replied to my post ERD, because you said buying low and selling high is a myth. I was just responding the way I believe I would react. I believe I very likely I would fall into that camp. And no that is not something I am proud of.
If we hit one of those 15 year bear markets I will look great. If we hit a late 70s interest rate market, I will get smoked but eventually recapture the money. But that is also based on assumed variables that may or may not happen. It boils down to what your personal tolerance is.


Sent from my iPad using Tapatalk

 

[pb4uski]

From a cash flow perspective a dollar of dividends is the same as a dollar of realized gains... in fact, they are both taxed the same assuming the dividend is qualified and the gain is long term.

When a dividend is declared it is the declaration is $x per share for shareholders of record on a specified date.

In times of financial stress some companies curtail or cut back on dividends and those company actions would flow through to index investors.

 

[ERD50]

But that is what we do here, or there wouldn't be much to talk about.
You replied to my post ERD, because you said buying low and selling high is a myth. I was just responding the way I believe I would react. I believe I very likely I would fall into that camp. And no that is not something I am proud of.
If we hit one of those 15 year bear markets I will look great. If we hit a late 70s interest rate market, I will get smoked but eventually recapture the money. But that is also based on assumed variables that may or may not happen. It boils down to what your personal tolerance is. ...

OK, and I think it is smart to for one to recognize their limitations and act accordingly - sure (Spock speaking), it is smarter to 'get over it', but we are humans.

I don't have any problem with someone admitting they might freak out and sell at the bottom, they should act accordingly. But I get the impression that some people here are saying dividend payers are just 'better' overall, and I'm just not seeing it. Again, I don't think there's anything 'wrong' with a diversified holding of dividend payers (hmmm, but sometimes the dividend payers are concentrated in a few market segments, so diversification might suffer?), I just don't see the overall attraction.

-ERD50

 

[haha]

OK, and I think it is smart to for one to recognize their limitations and act accordingly - sure (Spock speaking), it is smarter to 'get over it', but we are humans.

I don't have any problem with someone admitting they might freak out and sell at the bottom, they should act accordingly. But I get the impression that some people here are saying dividend payers are just 'better' overall, and I'm just not seeing it. Again, I don't think there's anything 'wrong' with a diversified holding of dividend payers (hmmm, but sometimes the dividend payers are concentrated in a few market segments, so diversification might suffer?), I just don't see the overall attraction.

-ERD50

I agree. Why would anyone do anything this weird? I am going to check into detox and re-education this week. Thank you for pulling the scales from my eyes.