Would selling right now be such a poor decision?

[ERD50]

...

I've noticed many of the buy and hold indexers are now silent.

I recall a very heated debate about buying dividend companies vs buying the total market index funds. Some very vocal people, who have been very quiet with regard to the recent pull back.

What were you expecting? Maybe you don't understand passive investing. Market gyrations like this are irrelevant to the long term, except to provide a little temporary entertainment as spectator sport. What we know, statistically, as passive investors is that over the long term we will outperform all but a tiny fraction of stock pickers and those we do not outperform are simply lucky monkeys, not identifiable in advance.

So ... really nothing to say. Hence "silent."

Agreed. Are we supposed to post everyday "still doing nothing"? This little blip isn't even enough for most re-balancers to take any action. It's a yawn. And when things did drop 40%, I was buying (re-balancing from fixed to equities).

I have no idea what the recent volatility has to do with the whole div-focused versus broad-based index approach. What would being "very quiet" recently have to do with that?

-ERD50

 

[pb4uski]

+1 with OldShooter and ERD50. If anything, my AA is telling me to buy equities right now...but only ~1.2% of my total portfolio as of Friday's close..... even less as I type this with markets currently up about 1.6% so far today... probably reduces that 1.2% down to 0.2%.... yawn... gotta go take a nap.

 

[marko]

I've noticed many of the buy and hold indexers are now silent.

This is just another version of "quiet money".

 

[redduck]

Furthermore...

I learned some interesting stuff along the Dividend trail.

A. If you don't have a large amount of money invested in each dividend stock, it makes selling a portion of that dividend stock a nuisance. Because then your stuck with a portfolio which includes somewhat inconsequential amounts of each individual stock. From what I gather, the goal of many Dividend stock investors is to have 30-60 (or more) stocks to own. Selling is going to be tougher and more intricate than they thought.

B. One major argument the Dividend Investors put forth is not having the need to ever sell a stock because the dividends will take care of their financial needs. Seems as if that's only in theory, because those who started buying dividends stocks in the last few years are going to have trouble getting enough dividends to live on (unless they enthusiastically buy--if and when the market crashes).

C. Turns out it's incredibly easy to sell off some of a Mutual Fund or ETF. I thought it would be an emotionally difficult process seeing your portfolio take a hit by selling. Wrong, yet again.

I am neutral on the choice between pure dividend, growth, and total (index) portfolio choices. Different styles, different risk/reward profiles.

I am curious on your points above.

A. I have a lot of individual stocks, and they are spread out on many accounts (his/her/IRA/after-tax/Roth). Without Quicken to show me everything on one screen, I will not be able to track them. The cost of trading smaller lots added up to a couple of thousands/year, back when I did not have accounts at Merrill Edge that were commission-free. I do all my trading there now for portfolio rebalancing or market timing.

B. The dividend yield is going down, but even these dividend payers have big capital gain now. Like Boeing. Is that a problem? Cap gain or dividend, it's money just the same. Of course you need to sell a few shares here and there, but that's where choosing a low or no-cost brokerage is important.

C. The only difference between selling MF and individual stock shares for me is with the MF one sells/buys in dollar amounts, while with the individual stocks I usually deal in round lots. And with high-priced shares like Boeing, that's $33K for a round lot. Not a small amount. However, I like to have round lots so I can write options on them if I want. Just a habit that I have. Of course, because there is no commission, there's nothing to prevent me from buying/selling an odd lot of Boeing stocks.

A. All my dividend stocks are in one portfolio. I call it my "Dividend Portfolio." There are no transaction fees. I make sure that I don't have too many individual stocks at one time. "Too many" is defined by "does the portfolio fit on my computer screen?"-- (without making any adjustments to the print size).

B. Yes, the dividend yields are going down, but the dollar amount received per share is going up. Using Boeing for example (and it's not a typical example) the dividend was raised by 20% last year. I've been retired about three and a half years and never had to sell any shares of anything. That's probably because I have so much cash in my RMD portfolios and because I don't reinvest my cap gains. My dividend portfolio is not tax-advantaged.

C. I hardly ever buy stock in a round lot--but I do try to buy in easy numbers to add up. I don't know how options work, however I am familiar with a straddle (but, perhaps this is not the thread for that). So, I just buy dividend stocks and ETF and MF's and very occasionally sell them. That's it. Since my dividend stocks are mostly all long-term gainers, taxes aren't much of a concern (unless I would decide to dump them all in the same year).

 

[marko]

B. Yes, the dividend yields are going down, but the dollar amount received per share is going up. Using Boeing for example (and it's not a typical example) the dividend was raised by 20% last year. I've been retired about three and a half years and never had to sell any shares of anything.

My dividend income has remained essentially the same for the past 10 years. This past year, my CGs were the second highest in a decade. For me, whether dividends or CGs, they go into one pot as income (high CGs this year allowed me to re-invest about 50%--not a usual event).

Like you, we haven't sold shares for expenses. Ever.

But I'm not sure how you claim that "yields are down but the dollar amount per share is going up". Not a challenge, a question.

 

[redduck]

But I'm not sure how you claim that "yields are down but the dollar amount per share is going up". Not a challenge, a question.

Well, I'll try. Here goes:

McDonalds price per share in 2010 was $70 (close enough) and in 2011 the price per share increased to $80. (numbers from Value Line and redduck, the numbers are very ballpark).

In 2010 McDonalds paid out $2.26 per share in dividends.
In 2011 it paid out $2.53 per share in dividends. (numbers from Value Line).

In 2010 an investor received a dividend yield of 3.2%
In 2011 an investor received a dividend yield of 3.0% (numbers from Value Line).

What happened as I think I understand it is that the increased price of the stock outstripped the increase of the dividend raise.

I'm sure someone will explain this better than I just did (and maybe more accurately).

 

[NW-Bound]

... What happened as I think I understand it is that the increased price of the stock outstripped the increase of the dividend raise...

... and the P/E of the stock has also increased. And that got you concerned?

Yes, investors were bidding up most stocks, in the anticipation that earnings will improve further. The stock market always looks ahead. If it thinks the E will be going up, it will bid up the P in advance. If things work out, eventually the E will improve to match the P.

But things do not always work out as planned. If there's any hint that there is trouble ahead, investors cash out faster than you and I can say "Ouch".

A quote I posted in another thread:

"Capital is like a rabbit. It flees at the first sign of danger" -- Anon.

 

[NW-Bound]

I often have a stock that has run up so much that I suspect that it is topping out, or has become overvalued. I do not want to sell it outright, because it may just go up further, and I will kick myself when it does. So, I write a covered call.

Take Boeing for example. It closed today at $343. The call option for someone to buy it from me at $345 before Aug 17 is almost $30. So, I sell that call and pocket the $30.

1) If Boeing drops or stays at $345, that $30 is mine to keep, and I will do the same again in Aug after the option expires.

2) If Boeing goes up to, say $360, the other party will get my stock for only $345. But he still loses and I still win, because I in effect sell my share for $345+$30 = $375. I can turn around and buy back Boeing for $360, and am still ahead by $15. Or as the option is near expiry, its price goes down to $15, and I can buy back the option and keep the $15 difference in premium.

3) If Boeing goes up to $400, I will kick myself for selling it for only $345+$30=$375. In this case, I console myself that I could have sold it for only $343 if I did not do the option thing.

4) If Boeing drops down to $300, I still have the now-lousy stock, but that premium of $30 means that I still have $330. My loss has been reduced.

PS. I will have to pay income tax on the $30. And if the option gets assigned, I will have to pay cap gain tax on the stock sale too. Hence, I do this only in an IRA account. Or as a case above, I may be able to buy back the option cheaper, and pay tax only on that premium difference.

PPS. As I am a greedy person, instead of selling option at the strike price of $345, I would sell at an out-of-the-money price of, say, $370. The premium for that is $18.50. If Boeing shoots up really high, say $400, I have to sell at an effective price of $370+$18.50 = $388.50, which is less than that $400. I will remind myself that it is still a heck of a lot better than selling it back then at $343, when I was thinking that it was overpriced.

 

[sengsational]

Nice summary of covered call writing. One aspect I'd mention is that in the cases where you end up with cash, you have the getting back in timing and selection "problem". I think that's just good entertainment for you, but would be finger nails on the chalk board for others.

 

[GravitySucks]

Thanks NW-Bound. That was more informative than the Fido hour long tutorial.

 

[NW-Bound]

... One aspect I'd mention is that in the cases where you end up with cash, you have the getting back in timing and selection "problem"...

Exactly. I did not want to write a lot in a single post.

I definitely do not want to be wrong in a bull market, and find myself sitting on a pile of cash while the whole market goes up and leaves me behind. So, I do not write calls on "everything". Only some selected stocks, and also on a portion of the shares.

I have been using this as a way of trimming/rebalancing/taking profits, I do not care what one calls it. I do not own Boeing right now, but suppose I find myself having 10% of my stash in Boeing, and want to cut it down to 5%. As greedy as I am, instead of selling 1/2 the shares outright, I would write call options on them, trying to squeeze a bit more money out of them. If they don't sell, I will write more calls at expiry. If they sell, well that's what I was going to in the 1st place.

This may not be for everybody, as it takes some work to follow the stocks and the sectors they are in. It's fun for me, but some may find it too much work. It gives me another diversion to get me away from the soldering iron and software writing.

I have been doing this since 2000, starting small and slow at first. Never read any book, nor attend any seminar (not once in my life, of any kind of seminars). I watched the market and slowly found my way around, trying to understand how it worked, and how other investors reacted.

 

[NW-Bound]

Usually, I set the covered call strike price higher than I think the stock will reach. The premium is smaller, but most of the times the options expire worthless, and I still have my stocks. I will do that again, and again for additional income.

But in January, the market went nuts, and took away more of my beloved semiconductor stocks. So, instead of buying them back at a higher price, and that would wipe out the gain I had, I sold put options.

In the case of Boeing, suppose Boeing went up to 370, while my covered call was at 360. If I see new fundamental info that convinces me that Boeing deserves to go higher, I would sell a put option to buy it back at 360. If Boeing keeps on going up to 400, my put option at 360 expires worthless, and I keep the premium. If it goes down from 370 to 350, and I have to buy it at 360, my effective price is $360-$20 premium = $340. I still win.

Please don't get me wrong. It does not work out as nicely as I describe above, but on the average, it's not too bad for me.

Last year, doing this on only 10% of my shares got me an additional 2.5% of return. That's about the same as my expenses, and I feel pretty good. If I was wrong, you can see that it could not wipe me out. I just made less in a bull market than if I sat still. I use covered calls and puts as a way to mitigate risks. It often resulted in additional money.

 

[redduck]

Nice summary of covered call writing.

NW-Bound, That was an incredibly clear and helpful post about covered call writing (but, you probably already knew that).

Speaking of clear and helpful posts, there is a specific question about yields--which I couldn't answer clearly or helpfully (or accurately).
So, if anyone wants to take a shot at it, take a peek at posts #130 and 131.

 

[redduck]

One time when I was bored I did some Value Line Analysis of dividend payments after the 1929 crash to see how well dividend flows were in the depression. What I found (going on my failing memory now) is that dividends were dramatically impacted, falling something like 80% or more from the peak in 29.

I say this as a warning. If we ever get in a true long term economic depression, all so called "safe" investments become impacted.

Many, many moons ago (or last Thursday, I forget which) I thought about putting my portfolio together in terms of protecting against a depression. Never did because that sort of portfolio would just be too conservative, not all that protective and hard to explain. But, I do tend to think about a long(ish) term great recession. In reading about high quality dividend stocks during the great recession, for the most part they kept on paying dividends.

 

[marko]

In reading about high quality dividend stocks during the great recession, for the most part they kept on paying dividends.

While not a depression or long term recession, my dividends still came in pretty much the same from 2006, 2007, through 2008, 2009, 2010, to present.

Cap gains however were another story.....

 

[marko]

Speaking of clear and helpful posts, there is a specific question about yields--which I couldn't answer clearly or helpfully (or accurately).
So, if anyone wants to take a shot at it, take a peek at posts #130 and 131.

Duck, I ran the numbers in your example and, once I did, it made sense.
I see how it is tied to the NAV insofar as the yield but from what I see, the real number that counts is the per share dividend.

I'm now trying to connect the two in my math-addled brain.

 

[redduck]

^ ^ ^
I'd love to get into this more, but I've disseminated enough sketchy information for one thread. My concern is that you'll have to unlearn whatever "information" I've posted.

I guess it's true: there's never a STEM guy around when you need one.

 

[copyright1997reloaded]

Here's a correction to my previous post on dividends during the great depression. I just did some clicking and searching and found this:

So, looking at the chart (sourced from Shiller data), it looks like the drop was in the 50% or so range. Note that the nominal drop was even more, since during the 30's there was deflation, not inflation.

 

[NW-Bound]

I do not understand the above chart. It shows that for more than 100 years, the dividends mostly went down.

In bad years, they went down. In good years, they broke even. And bad years far outnumbered the good ones.

I must not know how to read this chart.

 

[NW-Bound]

Redduck, there's nothing wrong with your math.

Well, I'll try. Here goes:

McDonalds price per share in 2010 was $70 (close enough) and in 2011 the price per share increased to $80. (numbers from Value Line and redduck, the numbers are very ballpark).

In 2010 McDonalds paid out $2.26 per share in dividends.
In 2011 it paid out $2.53 per share in dividends. (numbers from Value Line).

In 2010 an investor received a dividend yield of 3.2%
In 2011 an investor received a dividend yield of 3.0% (numbers from Value Line).

What happened as I think I understand it is that the increased price of the stock outstripped the increase of the dividend raise.

I'm sure someone will explain this better than I just did (and maybe more accurately).

Yes, the price increase of stock is higher than the increase of dividend. People are willing to pay more to get less, and I guess that bothers you.

Do you feel that the stocks you own now are overvalued, and want to sell them, and get other stocks with a higher dividend yield?

 

[copyright1997reloaded]

I do not understand the above chart. It shows that for more than 100 years, the dividends mostly went down.

In bad years, they went down. In good years, they broke even. And bad years far outnumbered the good ones.

I must not know how to read this chart.

It is showing % down from peak. So the highest it can be is 0% down from peak. As the peak goes up, it remains 0% down from peak.

ETA: Here's the article the graphic is from: http://www.ndir.com/SI/articles/0705.shtml

 

[NW-Bound]

It is showing % down from peak. So the highest it can be is 0% down from peak. As the peak goes up, it remains 0% down from peak.

That's what I thought, but I did not believe it was that severe. When it pegged at 0, it was setting a new high, but looked how infrequently it was.

PS. Of course new highs have to be infrequent. I understand it now. See 2 posts below.

Here's another chart showing the Price/Dividend ratio. Up until 1955, it bounced around 20. That means for $20 in stock, you get $1 in dividend. The yield is about 5%, reaching 10% in the Great Depression. Then, in 1957-1972, it averaged about 30, for a dividend yield of 1/30 = 3.3%.

This chart shows the average yield is nowhere as low as I would imagine from the chart that you linked.

The effect of dividend yield reducing did not go unnoticed. The yield started dropping at the same time the P/E started expanding in 1990. And of course the two are related.

Now, what can we do about that? You can stop buying stocks, but then where to keep your money? In CD? What a dilemma.

See, that's why Bogle said a few years ago that investors had the toughest prospect that he saw in his life.

While the P/E is high, the Price/Dividend of the total market is even worse because companies do not pay out the earning as dividends, preferring to keep it to reinvest.

And that's the reason to have some growth stocks in your portfolio. I do not want to have all dividend stocks for that reason.

 

[NW-Bound]

It is showing % down from peak. So the highest it can be is 0% down from peak. As the peak goes up, it remains 0% down from peak.

ETA: Here's the article the graphic is from: Stingy Investor: Is Dividend Income Safe?

That's what I thought, but I did not believe it was that severe. When it pegged at 0, it was setting a new high, but looked how infrequently it was...

Thought about it some more, and it became clear.

As the chart shows declines from the peak, of course by definition that peak is not a normal "operating" condition.

We cannot count on the market being there all the time. Rather, we can only count on the average yield. And if we plot the average yield as the baseline, then we will see more years above that baseline. And the plot will not look as scary.

By the same token, if we take the peak return year of the S&P (was it 50% or something in the past) as the baseline, then even years with returns of 30% look dismal.

PS. The author of the blog article makes the point that dividends varied quite a bit in the past, and one cannot make the assumption that they will stay constant through future market cycles. And that, I have to agree with.

 

[Lsbcal]

I noticed that the SP500 is just above the 50 day moving average right now and just about half way between the high water mark and the recent low.

Not that I'm a technician but just thought that was interesting. Will it continue up or will it go down below that low? Only retirees watch this stuff.

 

[copyright1997reloaded]

PS. The author of the blog article makes the point that dividends varied quite a bit in the past, and one cannot make the assumption that they will stay constant through future market cycles. And that, I have to agree with.

Yes, that is my point and why I posted about the drop originally. There are plenty of folks out there (and on the ER forum) who think they don't have to worry about stock market drops because they just rely on the dividend flow. But dividends are a mechanism for returning capital based on expected profits...and if the future for those diminishes, the dividend flow will also (but usually with a delay as companies are at first too reluctant to cut the dividend to match their new reality.) [Hm, I wonder if GE is an example of that.]

If the storm gets too bad, there is no safe harbor and very few places to hide.