Dividend paying Stocks

[swodo]

Many of the pundits now say that high quality dividend paying stocks are currently a good investment to have in the current economy.
I hold such quality investments and they in total pretty much follow the performance of the Dow. Hardly seems like a relatively safe investment.
Your thoughts please?

 

[Gatordoc50]

If you are going for income then dividend paying stocks may be a good idea. However a 4% dividend doesn't mean much if the stock loses 50 % of it's value if you are going for appreciation. There are a lot of so called good companies that haven't come close to regaining there stock price in over a decade.

 

[Gatordoc50]

If you are going for income then dividend paying stocks may be a good idea. However a 4% dividend doesn't mean much if the stock loses 50 % of it's value if you are going for appreciation. There are a lot of so called good companies that haven't come close to regaining there stock price in over a decade.

Sorry for the misspells and grammar. Lol

 

[MichaelB]

Many of the pundits now say that high quality dividend paying stocks are currently a good investment to have in the current economy.
I hold such quality investments and they in total pretty much follow the performance of the Dow. Hardly seems like a relatively safe investment.
Your thoughts please?

It depends on your investment objectives and risk tolerance. Here are a couple of threads on dividends you might find interesting.
http://www.early-retirement.org/for...tance-of-dividends-in-total-return-55897.html
http://www.early-retirement.org/forums/f28/dividend-stock-portfolio-provide-higher-swr-52046.html

 

[freebird5825]

My answer to getting into dividend paying stocks is VHDYX. I freely admit my shortcomings when it comes to buying individual stocks. I have a low to medium risk tolerance.

I opened an account in VHDYX in Spring 2009.

VHDYX Vanguard High Dividend Yield Index Inv, mutual funds, quote, price - Morningstar

 

[haha]

Many of the pundits now say that high quality dividend paying stocks are currently a good investment to have in the current economy.
I hold such quality investments and they in total pretty much follow the performance of the Dow. Hardly seems like a relatively safe investment.
Your thoughts please?

The purpose of dividend investment is income, not market returns.

If what you are intersted in is market returns, save yourself a lot of work and grief and buy indexes according to your AA.

Ha

 

[grumpy]

I don't know which dividend payers you are looking at but many of mine have held up pretty well lately. I started buying many of these near their lows following the 2008 debacle. Even with the Dow down from 12800 to 10400 they are still above my average cost and I have been collecting (and reinvesting dividends).

Some examples are: AEP, EXC, JNJ, MMP, MMC, VZ, . I hold positions in 14 other dividend payers with an overall average yield on my cost over 5%. I am continuing to buy on the dips.

 

[Nords]

Many of the pundits now say that high quality dividend paying stocks are currently a good investment to have in the current economy.
I hold such quality investments and they in total pretty much follow the performance of the Dow. Hardly seems like a relatively safe investment.
Your thoughts please?

Here's a blog post of the Dividend Growth Investor laying a direct smackdown on the 4% SWR:
Dividend Growth Investor: Why I am a dividend growth investor?

Of course they don't assess the relative amounts of capital between the two portfolios needed to achieve the same dollar amount of inflation-adjusted annual spending. I guess the trick would be rigorous screening and regular purchases of individual stocks to achieve above-average returns which would also produce above-average dividends.

In other words, if you want to avoid consuming principal then you gotta be willing to work longer or harder.

 

[mathjak107]

its all about total return just like any stock. there is no magic in a dividend. in fact dividends are cut just at the worst of times if your trying to live off them directly.

usually you end up selling shares at a loss to make up the income shortfall.

you can create a dividend off any stock. just sell a little piece each year. whether the company does it or you do it the net effect is the same.

watch your total return ,its all that counts.

 

[haha]

its all about total return just like any stock. there is no magic in a dividend. in fact dividends are cut just at the worst of times if your trying to live off them directly.

usually you end up selling shares at a loss to make up the income shortfall.

you can create a dividend off any stock. just sell a little piece each year. whether the company does it or you do it the net effect is the same.

watch your total return ,its all that counts.

Thank you. I guess I must be deluded, because I have been living off dividend stocks for over 2 decades. Perhaps I have unknowingly joined the communion of the undead?

Ha

 

[GregLee]

its all about total return just like any stock. there is no magic in a dividend.

That's the way it seems to me, but I keep suspecting I must be missing something when I keep reading stuff about "preserving principle" or "living off dividends". What are they talking about? I know there are some tax differences between dividends and capital appreciation, but they seem relatively trivial. Aside from that, it's all just money. If you invest through mutual funds, you can instruct your fund manager to reinvest dividends and distributions, and then you can just be concerned with the market value and how it changes from year to year as you contribute and withdraw. If you no longer contribute, you might consider the initial market value as the "principle" and withdraw any excess that accumulates as your "dividend".

 

[Ronnieboy]

Thank you. I guess I must be deluded, because I have been living off dividend stocks for over 2 decades. Perhaps I have unknowingly joined the communion of the undead?

Ha

Zombie alert!!

At least your dividends will continue to pay either way

I believe CyclingInvestor will have the same comment.

Dividend stocks will be part of my retirement plan.

 

[REWahoo]

Unclemick will be along shortly to psst on this thread...

 

[DblDoc]

Zombie alert!!

At least your dividends will continue to pay either way

I believe CyclingInvestor will have the same comment.

Dividend stocks will be part of my retirement plan.

And mine...as part of my index funds

More than one way to Rome. Just don't fall into the trap of thinking it is less risky than a total return approach. TANSTAAFL.

DD

 

[clifp]

The purpose of dividend investment is income, not market returns.

If what you are intersted in is market returns, save yourself a lot of work and grief and buy indexes according to your AA.

Ha

Here's a blog post of the Dividend Growth Investor laying a direct smackdown on the 4% SWR:
Dividend Growth Investor: Why I am a dividend growth investor?

Of course they don't assess the relative amounts of capital between the two portfolios needed to achieve the same dollar amount of inflation-adjusted annual spending. I guess the trick would be rigorous screening and regular purchases of individual stocks to achieve above-average returns which would also produce above-average dividends.

In other words, if you want to avoid consuming principal then you gotta be willing to work longer or harder.

Despite mine and others love for dividend investing (it has become even more popular in the last few years even Cramer talks about dividends several times per show) there isn't a lot of data that it is superior to total return investing. Part of the reason I think this is true is because so much of the research has focused on the accumulation phase, and for the most part (there is a Vanguard study which is an exception) the withdrawal stage studies are awfully simplistic. The other possibility is that Mathjack and other are right, and dividends aren't a magic bullet.

It is undoubtedly simpler to buy index funds and do annual rebalancing.

As Nords says it is does require more capital to get portfolio that lets you live off the dividends. For instance the yield on VHDYX is 2.72% and the yield for the 10 stocks suggested the Dividend growth investor is 3.0%. So if you want to withdraw 40k/year strictly from the income requires 1.33 to 1.47 million. My portfolio has yield of 4.2% but that is because I have number of MLP like KMP,MMP, BLP, and SPH that yield in the 6-7.5% range and my largest holding Intel has 4.4% yield, so that balances out my index funds like VTI 1.8% yield or Well Fargo WFC at 2.0%.

The benefit to me is that I am pretty confident that next year I'll receive at least $44,697 in dividends and I actually expect that amount to increase by a couple of thousand due to dividend increases. The dividend plus additional interest from CDs and Vanguard GNMA fund and rental income is what I can budget for living expenses. Having the high degree of confidence on next years income, makes it easier to cope with market volatility and reduces the chance I'll do something silly like sell at the bottom.

I have only been doing this for a 11 years, so HaHa and I must have Folie a Deux

 

[haha]

One thing frequently ignored is that serious dividend investors like to get a lot more information on their intended investments than most indexers or total return investors. It takes considrable amount of work and time and some skill.

This doesn't guarantee that it will be successful for a given investor, but this type of investing does have a much longer history than modern total return investing.

Dividend investors are not disinterested in total return, they just are not planning to harvest any of the price increases for living expenses.

Ha

 

[JPatrick]

I hold such quality investments and they in total pretty much follow the performance of the Dow. Hardly seems like a relatively safe investment.
Your thoughts please?

Well they have not all followed the DOW.
Take DVY for instance, it has fallen, but roughly half as much as the DOW over the past 6 months. The magic is probably as simple as the fact that it is an index and one or two, or twenty failures won't sink it.
Up against most any index, DVY comes out on top and you get that nice 3.5 div. My figures are for the past 6 months.
I've bought quite a lot of DVY over the past two weeks, and I'm planning to pick up more if it falls back to its recent low.

 

[heirloom]

I haven't seen anyone mention utility stocks. They have a nice dividend and are a safe investment.

Index funds...I'm not that crazy over them even though their rates are cheaper. My 401K is Vanguard, so you know mostly what it consitsts of. When the mkt hits bottom, they will be a great investment because everything will go up.

But when the mkt hits the top, you need a good managed fund imo.

Plus...I love PTTRX for a total return fund. Can't wait until Dec to see the HUGE CG we get. VTBIX is a good bond.

I sold all my index funds right before the correction and will get back in when I think the upcoming recession is over. YES...a recession is on its way.

 

[bbbamI]

Unclemick will be along shortly to psst on this thread...

heh heh heh

 

[Nords]

I have only been doing this for a 11 years, so HaHa and I must have Folie a Deux

I've noticed that most of the dividend-investing skeptics appear to still be in the accumulation phase, while most of the dividend-investing believers are in the ER phase.

It's possible that correlation does not equal causation. But in this instance I think dividend investing is a better path to ER than most.

 

[mathjak107]

im not debating whether dividend stocks outperform or not. only the dividend is being discussed and is it really a proxy for cash and fixed income.?..
im my opinion its not the same by a wide margin.

if you need to pull the max you can from your nest egg it can be a dangerous way of paying bills.

the point is whether you sell a piece or the company sells a piece the effect is the same. giving the same total return you can create your own dividend off any stock. you got those who think they are getting paid to wait during downturns. like interest from a bank they think.

you are not. each dividend comes right out of the principal.

dividend payers tended to do better as a group because a rising dividend proudly proclaimed look at me i have money to give away. they generated more confidence because of it historically .

by the way dvy took an awful pounding in 2008-2009 more than the markets so the fact it may have not fallen as much now or yet isnt showing a thing.

2008-2009 saw dividends suspended and dropped like mad. folks i knew who used to live off those dividends directly got burned big time when they had to sell shares at a loss to make up the income.

shares in dividend paying stocks should be left to grow and not counted to be lived on directly . when markets are up you can sell some and refill cash buckets .

the dividend pay out is no different than when a mutual fund does it. the prices are adjusted downward after payout automatically by the exchanges.

you may not see it each time because of market action that day but if the stock was up 1.00 and payed a .50 cent dividend it may have been up 1.50 that day if it didnt.

its not like interest where your principal isnt reduced on payout and people forget that part.
you are reduced in principal value by the amount of the payout.


then you get those who argue they arent selling off shares when they get a dividend and actually are increasing shares when they re-invest unlike selling off pieces of a non dividend payer to create an income stream.


really?

playing around with the numbers i tried to see what would happen under the extreme rediculious chance that there was no appreciation for 30 years but you still got a dividend or tried to make a dividend from your non payer.


its strictley to show the math is the same in either case.

assuming you started out with 10 shares at 10 bucks each and a 3% dividend

the dividend payer would have had 30 pointer resets back by 3% each time a dividend was paid so you would have your origonal 10 shares but now at a remaining value of about 1.00 each for a total worth of 10 bucks 30 years later.

the non dividend payer would have 9 shares siphoned off selling off shares for 30 years to equal the same dividend leaving about 1 share but because no pointer resets took place the stock is still 10 bucks. total value 10 bucks left

in either case both will end up at just about zero eventually.

of course thats not real world but the point is that you can create your own dividend for income if you wanted to and there is no difference in the numbers except for a slight commission on your own and you need to hold it a year for the same tax rate . applying it to the real world if the total returns on both are the same the results will be the same .


even re-investing the dividends produce the same results in either case. re-investing the dividends from the dividend payer is no different than the non dividend payer taking the money from the shares he sold and re-buying more shares. it still math wise works out the same.

'
ill say it again its all about total return and not whether or not a stock pays a dividend that determines your success rate. its not like your being compensated any more or less with that payment. its nothing anyone cant do with any stock. assuming same total return.

 

[mathjak107]

i think an area of confusion for alot of folks is just how these dividends work.

lets take a hypothetical company.

they sell on jan1 for 100 bucks a share and pay a 4 buck dividend.

all quarter they are earning profits and returns on their investments. in a perfect world a managment teams dream is a dollar of earnings should equal a dollar in market capitalization.

so xyz company is earning profits and its share price is rising with those profits. lets say we hit 104.00

when it goes ex dividend and the pay out is made of earnings the pointer goes back to 100 bucks a share again and the process starts over.

nyse rule 118 and amex rule 132 say all open orders have to be reduced by the payout effectively dropping the share price by that amount. no different than a mutual fund payout.

so with that dividend goes an offsetting drop in share price.

the days market action clouds that . on an up day xyz may have been up 10 bucks a share that day but in reality if i wasnt for the dividend reset it would have been up more.


on a down day you may be down more exagerating the drop than you would have been if it wasnt for the reset.


once you realize what a dividend is you also realize its not like an interest payment where your principal is intact and that payment is over and above. my opionion is it should not be used when spending down as a proxy for cash and fixed income payments.. its a stock first , it behaves as a stock and is in no way a proxy for cash and fixed income payments.

if interest rates drop your not selling cash at a loss to make up the shortfall in income with principal and thats a big difference.

its a stock and has to be treated as such the same as if you created your own income stream off any other stock by selling a little each year.

those dividend cuts and suspensions can have you selling shares at a loss when markets take a downturn. thats death to a portfolio when in the decumulation stage.

dividends are best re-invested and allowed to grow along with all your other equities . later on in up markets you can sell shares and creat more of that reliable income stream from your cash buckets.

do people live off dividends ? sure they do.. but in my opinion its not the best way to utilize them. just treat all stocks as stocks is the safest way .

 

[MichaelB]

mathjak107, you are confusing the mechanics of the dividend with the dynamics of the investment. The Tweedy Brown link, which I reference above and HaHa originally referenced earlier this year, makes a strong case that businesses that pay a regular dividend prove to be superior investments over time.

There is a certain attraction to an equity portfolio that pays a dividend rate equal to or above one's withdrawal rate.

 

[mathjak107]

im not disputing that fact. i agree they have out performed but because investors like companies that give away cash. its a show of strength.

as i said im only refering to the "smartness" of using that dividend as you would a cash stream to pay bills directly and the reason i would not and the fact that even a non dividend payer with equal total return is capable of spinning off the same amount of cash if the owner wanted to sell some each year...

there are those who are blind to the fact that just because they are getting a dividend they feel its okay their principal is falling because they are paid to wait. im saying thats bull. any stock can pay you to wait if you sell some off on your own just the same. in both cases that payment is coming out of principal regardless of who is selling a piece off.

 

[clifp]

Mathjack I am pretty confident that most of the people on thread understand that math behind the process, certainly HaHa, myself and Nords do. Mathematically you are correct there is no difference between spending dividends and reinvesting dividends and then selling a fix portion of the shares.

I think what you aren't grasping is that from a practical and psychological perspective it makes a pretty big difference between having to sell X% of your portfolio and having a good deal of confidence that you collect $Y in dividends.

Imagine that a retiree has a equity portfolio that consist of 20,000 shares of VTI. His withdrawal model is the Clyatt method which is each year spend the greater of the 4% of the remaining portfolio, or 95% last years spending. (If I switch to total return investing this is what I'll use). This means he needs to sell 800 shares of VTI put the proceeds in his checking account. So how much does have to spend this year.

Gee well it depends a heck of lot on when he sells.
Jan 4 (1st trading day) $52,480
July 1 $55,504
Yesterday $46,120
Now that is pretty dramatic difference in spending levels.
Ok lets that you decide to smooth out the selling and sell 1% (200 share) per quarter. Now normally I'd want to avoid selling at the end of the quarter because of portfolio window dressing, so I'd pick some dates like 3/15 6/15 etc. However this year selling at the end of the quarter is 5% more income than the middle of the quarter. (Now if you want say I am just going to sell $40,000+ each year than I'll point the number of shares you have to sell each year varies significantly when you sell them.)

Prior to 2008/2009 I had never seen a dividend cut in my life, but after several banks, and Pfizer cut there's I saw 10% decrease in income. Now given that lots of private companies, and latter quite a few state and local governments imposed similar pay cuts on employees I didn't feel too bad.
Overall I think the stability/safety of the dividend income while far below a government or most private pensions, or Federal government jobs, is superior to most sources of income. Probably jobs at most private employers, possibly a bond fund, and almost certainly selling 4% of my portfolio on fixed schedule.


All of this assume that you are perfectly logically investor and won't be tempted to do a bit of market timing when it comes down to your annual/quarter withdrawal. If you are human type of investor you may have been tempted to sell yesterday or on Aug 8th.