The div fund reliably kicks off 4% / $40,000 a year in divs (once a year, again for simplicity) which come from its $40,000 of income, and it maintains its per share value year after year. As your $1M portfolio approaches the ex-div date it is worth $1,040,000. After paying out a 4% div to everyone, the value of the portfolio drops back to $1M. And we assume this continues in perpetuity.
OK so far?
Now if we give the same attributes to a zero-div fund, it also approaches $1,040,000 after a year, which come from its identical $40,000 of income. But there is no div, so no ex-div date, so it retains its value. So we sell $40,000 worth, and since it is now $104 per share, we sell fewer than 400 shares (384.615384615385 shares per my calcs).
So if you extend this out, yes indeed, you get to the point of owning a single share (236 years later...)! But (drum roll...) that share is worth $1M!
-ERD50
Yes! And no beef here.
Of course in actual practice, a non-div payer and a div payer do grow in value over time but your example here is clear and straightforward!
"Where's the beef?" is a catchphrase in the United States and Canada introduced in 1984. The phrase originated as a slogan for the fast food chain Wendy's. Since then it has become an all-purpose phrase questioning the substance of an idea, event or product.[1]
OK, I started putting together a spreadsheet, and as soon as I put the formulas together, the answer is obvious. Well, obvious to me - now how to explain it...
To make this apples-apples, we of course have to assume that we have two funds, the same in every other way, except one pays divs, the other does not. Let's start with $1M and $40,000 divs or sales, and keep inflation at zero for simplicity. The fund manager set the IPO at $100/sh, so we bought 10,000 shares.
The div fund reliably kicks off 4% / $40,000 a year in divs (once a year, again for simplicity) which come from its $40,000 of income, and it maintains its per share value year after year. As your $1M portfolio approaches the ex-div date it is worth $1,040,000. After paying out a 4% div to everyone, the value of the portfolio drops back to $1M. And we assume this continues in perpetuity.
OK so far?
Now if we give the same attributes to a zero-div fund, it also approaches $1,040,000 after a year, which come from its identical $40,000 of income. But there is no div, so no ex-div date, so it retains its value. So we sell $40,000 worth, and since it is now $104 per share, we sell fewer than 400 shares (384.615384615385 shares per my calcs).
So if you extend this out, yes indeed, you get to the point of owning a single share (236 years later...)! But (drum roll...) that share is worth $1M!
Another way to think if it, if you didn't sell, your portfolio would increase by $40,000 every year, because that income is retained in the fund and reflected in the NAV.
All this is just restating what was said before, but sometimes a fresh angle is what it takes for the light to come on.
In essence, it seems that any claims about the div-payers being superior is based on circular logic that they are better (they provide steady income, they don't go down as much, etc, etc)! The divs don't make a difference, but some assumption of superior performance will of course, show them to be superior. And if they are superior, then we should see it in the charts. Where's the beef?
-ERD50
I've discovered the solution to the debate is simple. My allocation of 1/3 to CD's. 1/3 to Bond funds, 1/3 to Dividend ETF's and another 1/3 to Total Stock Market provides me with more than I'll ever need.
Since you already have the spread sheet. Adjust a 35% market drop in year 1 then run it out, pulling the same 40,000 each year. After 10 years plop multiply the balance remaining by 1.55, and let us know where you end up. at year 20.
I've discovered the solution to the debate is simple. My allocation of 1/3 to CD's. 1/3 to Bond funds, 1/3 to Dividend ETF's and another 1/3 to Total Stock Market provides me with more than I'll ever need.
I read the paper. You are correct it didn't directly compare dividend payers to a total market strategy. However, it did evaluate the total market across 4 criteria, identifying 2 sub categories that showed lower risk and higher returns then the other 2 sub categories.
By the very fact that when you are buying the total market you are also buying the two under performing categories which would result in a lower over all return wouldn't it? Or am I missing something here?
So as others have said "it just feels safer" is now fully explained in a highly technical paper.
Maybe this will help (or not):
It's not an apples-to-apples comparison, it's more of an apples-to-mashed potatoes comparison. Dividend stocks are more like comfort food--soothing. Basically, that's the feeling. You can count on them to be fairly predictable, yet less profitable for most dividend investors (me included).
I don't think that you will find any clear measurable advantage to the dividend payers. I haven't. However, I have found a place in my portfolio for them.
^^^ ^^^ ^^^
It was a circuitous journey to get back to this place. Didn't even need no stinkin' spreadsheet (though it was helpful).
YOC is not only non-useful, it is meaningless. You divide the dividend at one point in time by the price at another arbitraty point in time. Meaningless.YOC is another non-useful measurement. Money is fungible. The current value could be moved to another investment. The future outlook of a stock is not changed because one person bought it @ $10, and another bought it @ $50.
The latter.Were these stocks picked in 2001 (as far back as the analysis went), or are they current picks based on current results (survivor bias)?
What we really need (and it seems it should be available, somewhere?) is what I mentioned earlier - the list of recommendations made back at the time -
Historical Dividend Champions spreadsheets:
David Fish's lists of Dividend Champions, Contenders, and Challengers
The oldest one is Dec 2007. http://www.tessellation.com/david_fish/071231.xls
I downloaded them all a few years ago when I was seriously investigating DGI. Note to myself in 2016: "Note: 2016 CCC summary tab shows 133 Champs on Dec 2007, and 36 of them have dropped off the list. This is 27%."
This was symbol comparisons only, so it overstates the number that dropped off. For example, Walgreens symbol went from WAG to WBA. By that point, I had seen enough to be reject DGI as a good investment idea so I didn't look closer to clean it up.
Historical Dividend Champions spreadsheets:
David Fish's lists of Dividend Champions, Contenders, and Challengers
The oldest one is Dec 2007. http://www.tessellation.com/david_fish/071231.xls
I downloaded them all a few years ago when I was seriously investigating DGI. Note to myself in 2016: "Note: 2016 CCC summary tab shows 133 Champs on Dec 2007, and 36 of them have dropped off the list. This is 27%."
This was symbol comparisons only, so it overstates the number that dropped off. For example, Walgreens symbol went from WAG to WBA. By that point, I had seen enough to be reject DGI as a good investment idea so I didn't look closer to clean it up.
What I didn't see was how the old picks performed going forward. Now if that was something to brag about, why not show it? Occam's Razor suggests the answer, that there is nothing worth showing (to their intended audience).
-ERD50
What is the chance that these people would be ignoring a bit of superior risk-free money which they and all their super-computers somehow can't see but which is obvious to small part-time pajama-clad investors?
I'm not convinced we have . I've been running several random scenarios with various portfolios against VTI. Some general observations:
1) The heavily concentrated dividend portfolios are producing slightly better results then the VTI. 8.47% Vs 8.17% CAGR
2) The risk of the heavily concentrated dividend portfolios is actually less than VTI, according to the Sharpe & Sorintino ratios.
3) The max draw down is less with the dividend portfolios. 14.73% Vs 36.98%
It would be interesting if we could find the VTI stocks that paid a dividend at the inception of the portfolio and back test an equal weighted portfolio of only those stocks that had the middle of the road dividend payers as mentioned in the paper referenced earlier.
Playing around with this tool. Thank you ERD50! I've been able to get some nice results for lower risk portfolios.
https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
I think where people get stuck is this:
If you own a TR that were to pay no dividends, every time you need cash you must sell from your total fixed set of shares. In theory you could eventually sell down and end up with 1 share. That share may eventually grow to $50K but if you need $50K, then what?
I covered this in post #150. Yes, a $1M portfolio of 10,000 shares goes down to 1 share after around 235 years, but that 1 share is worth $1M.Warren Buffet makes the an argument against dividends in his 2012 Berkshire Hathaway annual shareholder letter starting on page #19.
http://www.berkshirehathaway.com/letters/2012ltr.pdf
I admit I have a hard time getting my head around this too. I guess its a lack of math skills on my part but how does one refrain from eventually selling the hypothetical total return fund down to a single share? With VFIAX partial shares can be sold to equal a non-share specific amount so I guess its not so much an issue unless you are talking about an ETF or non-dividend paying stock. ...
The two stocks in portfolio 1 were actually held during this span of time. Portfolio 2 is total market. One might say I "cherry picked" the specific 6 year span, but it's really the only span I ran. That's the first time I've been to that site. Nice! I really don't know how it would look on other spans. I certainly picked the span with the 2000 bear market in mind because, for my mom and her utility stocks, we don't want to have to wait too many years for the total market to recover.
Portfolio Analysis Results (Jan 1998 - Dec 2017)
Portfolio Returns
# Initial Balance Final Balance CAGR
1 $1,000,000 $4,181,343 7.42% VTSMX
2 $1,000,000 $6,165,966 9.52% DUK,SO
3 $1,000,000 [B]$317,843,833 [/B] 33.39% AAPL,AMZN