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Tweedy Brown on Importance of Dividends in Total Return
Old 04-28-2011, 11:46 AM   #1
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Tweedy Brown on Importance of Dividends in Total Return

Tweedy, Browne: Papers and Speeches

This is an accessible report on what really drives returns. The article is heavily grounded in data.(Turns out that reinvested dividends supply most of the return.) Furthermore, highest returns some from those low payout ratio stocks, which nevertheless have high yields. Click on "download this paper" at end of first head on dividends.

Ha
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Old 04-28-2011, 01:19 PM   #2
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Hello Ha. Interesting link. My view on dividends has tended to be that they shouldn't make such a difference vs a portfolio that is rebalanced regularly. Still, one point stood out
Quote:
8. The reinvestment of dividends from high-yield stocks can dramatically shorten the time necessary to recoup losses in declining markets.
I had not considered this but it might explain much of why dividend stock heavy portfolio can outperform.
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Old 04-28-2011, 02:37 PM   #3
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That's consistent with the report published in the Credit Suisse Year Book: https://publications.credit-suisse.c...il&aoid=300847

After looking at data going back over 100 years (for some markets), the authors concluded that higher yielding stocks outperformed lower yielding stocks by a material margin and were less risky. This was true for almost all of the countries they looked at. The differences in tax treatment between dividends and capital gains and the way those have changed over time complicated the analysis but were unlikely to affect the conclusion.
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Old 05-02-2011, 11:25 AM   #4
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The reinvestment of dividends during stock market declines has also been shown to lessen the time necessary to recoup portfolio losses.
This stuck in my mind so I went back and reread the Tweedy Browne paper over the weekend.

All of the studies referenced look at dividend paying stocks but only in the context of 100% stock portfolios. There is no reference to or analysis of total portfolio return.

If some of the outperformance of a higher-paying dividend stock is due to dividend reinvestment at low prices, this is no different than simple portfolio rebalancing between equities and fixed income. Portfolio rebalancing between uncorrelated assert classes might result in greater total return because the rebalancing percentages are much broader, while rebalancing with dividends is limited to the yield.

Some of the studies classify equities by yield, categorize them into tiers, and highlight the outpermance of the top tier (or tiers) but reclassify annually for long term analysis. This too is an exercise in yearly rebalancing. Move out the stocks that rose most in price and now have lower yields, replace them with new stocks that have higher yields – some the result of declining equity prices.

There’s nothing wrong with high dividend paying stocks, but it is not evident that they contribute to higher total portfolio returns, and their role in a diversified portfolio with uncorrelated assets is not at all clear.
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Old 05-02-2011, 12:17 PM   #5
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There’s nothing wrong with high dividend paying stocks, but it is not evident that they contribute to higher total portfolio returns, and their role in a diversified portfolio with uncorrelated assets is not at all clear.
Don't want to disagree with this position, as it may be right or may be wrong like most other positions.

But, finding "uncorrelated assets" has not been very easy during recent downturns.

Ha
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Old 05-02-2011, 02:13 PM   #6
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I don't know that the Tweedy report refers to high dividends, haven't read it recently. Another good read is The Little Book of Value Investing by Christopher H Browne.
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Old 05-02-2011, 03:18 PM   #7
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I read the profile of Tweedy Brown on their website and their strategy is to invest in high dividend and value companies.....so to see them publishing a paper that supports that approach to investing isn't much of a surprise. I take advice or research from a company with a vested interest with a big pinch of salt.
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Old 05-02-2011, 04:50 PM   #8
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I read the profile of Tweedy Brown on their website and their strategy is to invest in high dividend and value companies.....so to see them publishing a paper that supports that approach to investing isn't much of a surprise. I take advice or research from a company with a vested interest with a big pinch of salt.
My friends, I apologize for introducing non Bogle/Bernstein ideas.

Ha
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Old 05-02-2011, 06:38 PM   #9
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Originally Posted by haha View Post
Tweedy, Browne: Papers and Speeches

This is an accessible report on what really drives returns. The article is heavily grounded in data.(Turns out that reinvested dividends supply most of the return.) Furthermore, highest returns some from those low payout ratio stocks, which nevertheless have high yields. Click on "download this paper" at end of first head on dividends.

Ha
Interesting link. Thanks.
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Old 05-02-2011, 07:48 PM   #10
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My friends, I apologize for introducing non Bogle/Bernstein ideas.

Ha
While Bogle might argue against value investing as adding complexity when none is really needed many Bogleheads (myself included) have a small/value tilt in their portfolios. Bernstein is also a fan of adding a tilt to both value and small cap stocks. Note it is a tilt, not an all eggs in one basket approach - and easily done with low cost index funds/ETF's .

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Old 05-02-2011, 08:07 PM   #11
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My friends, I apologize for introducing non Bogle/Bernstein ideas.

Ha
For all I know a portfolio of high dividend and value oriented stocks may significantly out perform other flavors of allocation......I was just pointing out a potential conflict of interest.

Financial advice is often self serving and given from a biased perspective....Heck look at Vanguard, but at least they don't charge much for their perspective.
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Old 05-02-2011, 08:58 PM   #12
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Originally Posted by nun View Post
I read the profile of Tweedy Brown on their website and their strategy is to invest in high dividend and value companies.....so to see them publishing a paper that supports that approach to investing isn't much of a surprise. I take advice or research from a company with a vested interest with a big pinch of salt.
I think they've been around long enough to have the credibility to handle self-criticism.

But oy are their funds expensive. We rode Global Value for a long time in the 1990s but got out as soon as it recovered from 2001-02.
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Old 05-02-2011, 09:11 PM   #13
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My friends, I apologize for introducing non Bogle/Bernstein ideas.

Ha
No apology needed. Keep the ideas coming for those of us that are less informed. I like the way you break things down.
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Old 05-02-2011, 11:25 PM   #14
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As stated in the beginning of the paper,
"The deepest sin against the human mind is to believe things without evidence." -T.H. Huxley
My corollary is,
"Some people use facts to extract some of your hard earned money." - Target2019
Have acquired a few free dinners from one local investment firm (part of nationwide franchise) that really pushes the idea of high-yield stocks, and individual bonds. It is no surprise that the company pushes a strategy where "none of our investors have lost money," and they make nice fees on the stock portfolio, and bond purchases.
As I diversify away from the Total Bond Fund formula of Boglehead strategy, I consider something like Vanguard High Dividend Yield Index Fund a part of a future solution. So, I don't bash ideas, but look for the kernels of truth, and use them for my personal strategy. High dividends are a great thing.
Thanks for posting the link.
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Old 05-03-2011, 08:30 AM   #15
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Have acquired a few free dinners from one local investment firm (part of nationwide franchise) that really pushes the idea of high-yield stocks, and individual bonds. It is no surprise that the company pushes a strategy where "none of our investors have lost money," and they make nice fees on the stock portfolio, and bond purchases.
As I diversify away from the Total Bond Fund formula of Boglehead strategy, I consider something like Vanguard High Dividend Yield Index Fund a part of a future solution. So, I don't bash ideas, but look for the kernels of truth, and use them for my personal strategy. High dividends are a great thing.
Thanks for posting the link.
The papers published by investment firms may well provide ideas for your portfolio. However, it's really "caveat emptor" with their research as I believe they all too often start out with a conclusion and choose the data to fit and support the strategy they are pushing. Such papers fill a PR requirement and will attract many unsophisticated investors willing to pay the expense ratios to get "superior performance". The sensible investors read the papers critically and then implement a strategy using EFTs or low cost mutual funds.
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