silly question re: dividends

[MichaelB]

As I recall, over a long period of time a dividend paying stock outperforms a non-dividend stock when the dividends are reinvested, this advantage is the result of price volatility and "buying low" of the reinvested dividend. Although it is a clear advantage, it may not apply to every portfolio and also may have limited application if the investor rebalances among multiple asset classes in a disciplined manner.

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Originally Posted by Gumby If I recall correctly, in The Intelligent Investor, Benjamin Graham recommended that one limit stock holdings to those that had a solid history of paying dividends (for 20+ years, I think), on the theory that it proved management was disciplined and dedicated to providing a return for investors rather than pursuing their own frolics and detours. Other than that, I see no reason not to invest on a total return basis.

Graham would probably also say that dividends are paid from positive cash generation, more often than not an unmistakable sign of financial health, as buyers of businesses only are repaid if the company generates cash. Not all dividend payers today meet this criteria, but a portfolio built on a diversified group should perform well.

[pb4uski]

Pretty much right. You can see this by comparing the Vanguard Value Index Fund (highest dividend payers) vs the Vanguard Growth Index Fund (lowest dividend payers).


1 Year 3 Year 5 Year 10 Year Since Inception 11/13/2000
Value Index Fund Adm 5.48% 17.12% 16.22% 7.15% 5.61%
Growth Index Fund Adm 9.61% 17.93% 18.65% 9.14% 4.73%

[pb4uski]

Quote:

Originally Posted by mathjak107 Dividends can also force a nasty tax situation on you at times . this being my first retirement year we are pretty much funding it with cash we set a side. since i am 62 i would have loved a subsidy on medical insurance for a year or 2 but because the " forced " dividends put us over the limit we can't .

Good point, but really....those who receive significant dividends and desire Obamacare subsidies is a very small subset of the population... plus, I suspect that the designers of Obamacare would say that we didn't intend for subsidies to go to "rich" people who are collecting over 400% of FPL in dividends.

[RunningBum]

Quote:

Originally Posted by MichaelB As I recall, over a long period of time a dividend paying stock outperforms a non-dividend stock when the dividends are reinvested, this advantage is the result of price volatility and "buying low" of the reinvested dividend .

Quote:

Originally Posted by pb4uski Pretty much right. You can see this by comparing the Vanguard Value Index Fund (highest dividend payers) vs the Vanguard Growth Index Fund (lowest dividend payers). 1 Year 3 Year 5 Year 10 Year Since Inception 11/13/2000 Value Index Fund Adm 5.48% 17.12% 16.22% 7.15% 5.61% Growth Index Fund Adm 9.61% 17.93% 18.65% 9.14% 4.73%

You're saying that proves MichaelB's point? I'd say the opposite. Non-dividend payers outperformed dividend payers in every period except when you include the dotcom bubble burst. If this chart had gone back into the 90s for the dotcom bubble run up, Growth would probably outperform value again.

Value/dividend stocks may be better suited to a retirement portfolio because they probably have a lower beta. You may miss on growth hot runs, but you'll also miss on their bigger drops. Volatility is less desirable when you have less time to overcome a bad run.

[Running_Man]

The study I posted showed that over 85 years from 1928 dividend paying stocks outperformed non paying stocks by about 1.5% per year for 85 years. The top 40% highest yielding stocks have earned more than 2 percent per year greater than non-dividend payers. Additionally this is with 1/3 less volatility.

The other study Jeremy Siegel studied the S&P500 since 1957 and found that the dividend payers do better over long terms than non dividend payers.

These studies show what happens over long periods of time, when considering the entire market. If one wants to ignore these studies and say not relevant any more that is fine, but to state there is no evidence that dividend payers outperform is an incorrect statement.

Looking at the graphs you can see that in times of severe bear markets the non paying dividend stocks (1929- 1932) (1973-1975) (2000-2002) drop dramatically off compared to the dividend paying brethren. Lower volatility, higher returns over time as proven by major studies of the entire stock market only confirms what individuals who invest in dividend stocks over long periods of time experience, saying this is not so does not make it not so.

[ERD50]

Quote:

Originally Posted by Running_Man The study I posted showed that over 85 years from 1928 dividend paying stocks outperformed non paying stocks by about 1.5% per year for 85 years. The top 40% highest yielding stocks have earned more than 2 percent per year greater than non-dividend payers. Additionally this is with 1/3 less volatility. The other study Jeremy Siegel studied the S&P500 since 1957 and found that the dividend payers do better over long terms than non dividend payers. These studies show what happens over long periods of time, when considering the entire market. If one wants to ignore these studies and say not relevant any more that is fine, ...

How about: If one wants to ignore these studies or say not relevant any more that is fine, ...

I certainly would not ignore them, but I will question the relevancy of divs in today's market versus last century. Again, I've been posting a bunch of total return graphs, though most go back only to ~ 1999-2000 (less if the div fund is 'younger'), we've had some bears in that time, and there is almost no difference in the chart, with the bias in favor of total return. Yes, we might see a divergence right after the dot-com bust, but that is only relevant if you got in right at the peak - include the run up and/or DCA in during the 90's and I think you'd see the total market come out ahead.

This chart (posted earlier, and slide the bars to max):

PerfCharts - StockCharts.com - Free Charts

goes back to just Jan 1999, and it catches just a bit of the dot-com bust run up, and all the bust, and SPY still outperforms the div funds. If I try to find a start period that favors the divs, only one of these 2 div funds rises above SPY, and only for the period of ~ Feb 2000 to Oct 2000. That would take some impressive market timing over a 16 year period.

I'll guess (and that's all it is), that before the days of cheap stock transactions and instant access, people were more likely to buy and hold, so a dividend stream was more important to them? Today, I can sell 100 shares of anything in an instant for a few dollars in fees, and have the money available in my checking account tied to my broker instantly (or 3 day settling time?). What would that take in the 70's? Would you need to walk into a B&M (before the term existed!) with some paper stock certificates, process them or get them reissued in a smaller share # ? I dunno, but I do think it is possible that those older studies have less relevance than our charts from the past 15 years?

I'll turn it around (not to be argumentative, I'm just trying to illustrate a point) - should we ignore how the div funds have performed over the last 15 years?

-ERD50

[karen1972]

One thought is that starting in 1999 timeframe doesn't really capture anytime where interest rates were high, so not sure if that impacts the numbers, but it is one thing I think that isn't covered in the short term which may impact different companies based on their need to borrow which may be one reason non-dividend (which tends to be well vested companies vs. startups) may be outperforming.. just a thought if the numbers change if you go back even to the early 1990s as I remember paying 8.5% on my first mortgage mid 90s.


My personal feelings on this is that I like a floor of my portfolio to be in high dividend stock as they tend to be less volatile. Ie while the market took a haircut last week there is something about receiving a hefty dividend to offset that which makes it not seem quit to devastating and allow me to stay the course. I think of dividends as my safety blanket, its a mental thing and maybe at some point I'll be ok with losing $50k in a week, but right now I need that income stream to let me mentally believe things are ok.

[MichaelB]

Quote:

Originally Posted by ERD50 I certainly would not ignore them, but I will question the relevancy of divs in today's market versus last century. ./. I'll turn it around (not to be argumentative, I'm just trying to illustrate a point) - should we ignore how the div funds have performed over the last 15 years?

15 years isn't very long, especially when it doesn't cover a complete interest rate cycle. How can you be sure you're not choosing the data that fits your view? After all, unless you have a clear criteria to exclude it, it would seem more historical data is leads to a more thorough analysis.

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Originally Posted by ERD50 I'm an engineer! I need histograms! Standard Deviations! Confidence factors!

[ERD50]

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Originally Posted by karen1972 One thought is that starting in 1999 timeframe doesn't really capture anytime where interest rates were high, so not sure if that impacts the numbers, but it is one thing I think that isn't covered in the short term ...

That's a good point. If anyone knows of a div focused fund that goes back to the 80's, I'll try to research it.

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Originally Posted by MichaelB 15 years isn't very long, especially when it doesn't cover a complete interest rate cycle. How can you be sure you're not choosing the data that fits your view? After all, unless you have a clear criteria to exclude it, it would seem more historical data is leads to a more thorough analysis.

Because I'm using the max data I can find (I think I pointed this out in most of those posts), it's not my choice, it is what is available from those charts. From what I can find, and the tickers of funds that people have posted, the div-focused funds don't go back further. See above, if you can name some I would appreciate it.

This isn't dogma for me, just the opposite. If we can show that div focused funds outperform the broader market, I'm all in. I think I said this before, I like money!

-ERD50

[MichaelB]

Quote:

Originally Posted by ERD50 From what I can find, and the tickers of funds that people have posted, the div-focused funds don't go back further. See above, if you can name some I would appreciate it. This isn't dogma for me, just the opposite. If we can show that div focused funds outperform the broader market, I'm all in. I think I said this before, I like money!

Running_Man posted some links with studies showing of historical data. If you accept that, the conclusion is that dividend stocks have outperformed. The questions then become: Will that continue? and What is the best way to implement that strategy?

[Running_Man]

http://sdogx.snetglobalindexes.com/p...esentation.pdf

This is a link that discusses how SDOG is calculated and implemented and includes a chart comparing total return from 1999 to March 2015for SDOG S&P500, Dow Jones Select dividend index and the Dividend aristocrat index. The S&P500 has returned about 1/2 of any of the other 3

[ERD50]

Quote:

Originally Posted by MichaelB Running_Man posted some links with studies showing of historical data. If you accept that, the conclusion is that dividend stocks have outperformed. ...

Yes, but over the very long term. I will take a closer look later, to see if I can parse out results from more recent times, including the inflationary 80's.

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The questions then become: Will that continue? ...

Yes, but no one can answer that either way - darn future! But I am trying to get some evidence that might point one way or the other

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and What is the best way to implement that strategy?

Right. And to get more pragmatic, and I'll just roughly paraphrase here, but some posters are claiming the div-focused funds will be more stable and/or continue paying solid divs during a downturn. I showed(post #32) that that was not the case for DVY in the 2008 period. So the point there is, regardless of what we might think, or think we learned from the past, it simply didn't hold up in recent history (at least with DVY, which I think is probably the best, most common proxy for a diversified div-focused holding).

It's one thing for me to hold a large % of SPY, aware that it can be volatile. I think it might be more dangerous for some people to hold a div-focused fund, thinking it will be safer, and then see it act very similar to SPY. Are they prepared for that?

Quote:

Originally Posted by Running_Man http://sdogx.snetglobalindexes.com/p...esentation.pdf This is a link that discusses how SDOG is calculated and implemented and includes a chart comparing total return from 1999 to March 2015for SDOG S&P500, Dow Jones Select dividend index and the Dividend aristocrat index. The S&P500 has returned about 1/2 of any of the other 3

Thanks, I'll take a closer look later, but on first glance, I could not find chart data on SDOGX, I guess it is a pure index (yahoo finance shows a ^SDOGX - but no history? They use the "^" to indicate indexes I think), and not a fund with a history? That's fine, but is there a fund built on this that I can track with these other tools? Again, for this to matter, we need something we can invest in, a pure index is a hypothetical thing, good for study, but then what?

When I look at SDOG, I can only go back to June 2012,

PerfCharts - StockCharts.com - Free Charts


-ERD50

[mathjak107]

Quote:

Originally Posted by pb4uski Good point, but really....those who receive significant dividends and desire Obamacare subsidies is a very small subset of the population... plus, I suspect that the designers of Obamacare would say that we didn't intend for subsidies to go to "rich" people who are collecting over 400% of FPL in dividends.

just like our tax system , your fair share is whatever you can legally fifure out you have to pay.

[NW-Bound]

400% FPL for 2 = $15930 x 4 = $63720. Many ER's spend more than that a year.

You can shelter the dividends in tax-deferred accounts, but if you withdraw from them to spend, that counts as income too. The only way is to spend out of after-tax savings, but eventually you will have to sell stocks, then get hit with capital gain which is income.

One cannot shuffle or hide his income forever.