"Beware of Financial Alchemy"

[target2019]

An argument for dividend investing (I posted this as its own thread, but it didn't show up)

https://seekingalpha.com/article/43...on-in-retirement-for-post-covidminus-19-world

His argument is you don't want to be forced to sell in a downturn, so you either need sufficient income or a bunch of cash

You'll have a difficult time gaining traction on this forum with SeekingAlpha (SA) articles. Almost everyone here knows how it all turns out. Dividends? Say what?

It's good that you're thinking independently and reading about various investing strategies. Are there particular SA authors you're following?

 

[qwerty3656]

You'll have a difficult time gaining traction on this forum with SeekingAlpha (SA) articles. Almost everyone here knows how it all turns out. Dividends? Say what?

It's good that you're thinking independently and reading about various investing strategies. Are there particular SA authors you're following?

I follow most of the "Dividend Growth Investor" authors. I also subscribe to simplysafedivdends and fastgraphs. I've tried a bunch of different investing styles and while it may not be the optimal way to create wealth, I have found dividend investing to be a less stressful way (at least to me) for spending it.

 

[target2019]

I follow most of the "Dividend Growth Investor" authors. I also subscribe to simplysafedivdends and fastgraphs. I've tried a bunch of different investing styles and while it may not be the optimal way to create wealth, I have found dividend investing to be a less stressful way (at least to me) for spending it.

My F-I-L influenced me on dividend stocks. He got lucky with telcom stocks and the dividends were his spending money. I spent a few years helping him diversify, and that drove my DGI reading for quite awhile. Now that he is gone I've stuck with Fastgraphs. But TBH it is something we're simplifying by focusing on 5-10 ETFs in taxxable brokerage. In everything else (say 85%) we are passive index funds.

Most mornings I start at my "bank" desk and peruse the accounts. The vast majority of days I take no action. Of course there was that day last week when a close friend got me started on which cruise lines wil recover more quickly. But I do keep a good distance from the financial alchemy warned about in the OP.

 

[ERD50]

His argument is you don't want to be forced to sell in a downturn, so you either need sufficient income or a bunch of cash

Ahhh, the old "won't be forced to sell in a downturn" argument! So compelling! So comforting! It's intoxicating, seductive even!

It's also completely meaningless BS.

Data. I tweaked my earlier portfolio backtest link that had the 7 dividend funds in it. That link had a 70/30 blend of broad Index stock/bond funds, and 7 dividend funds that I could find that had a reasonably long history (also with a 70/30 mix). The blend of div funds under performed the index blend and that included a 3.5% inflation adjusted withdrawal. This new link adds a 3rd portfolio with just those 7 div funds, no bonds, as one could view the div funds as replacing bonds. Again, no real difference in real-world performance, but the 7 div funds alone do slightly worse w/o the bond fund. The div funds lag behind the basic stock/bond index.

https://bit.ly/2J9FehF

Let me explain (as I have many times in the past), why the "forced to sell in a downturn" mantra is meaningless. Two reasons:

1) A 70/30 stock/bond portfolio will provide ~ 2.5% in divs on its own. So a conservative investor with a 3.5% W/D plan, only needs to pull ~ 1% from principal on average. And in a down year, to maintain a 70/30 balance, the investor draws from the fixed side. There is no " forced to sell in a downturn", not for many, many, many years. In over-simple math to illustrate, that 30% fixed buffer would provide almost 30 years of the 1% W/D requirement (like I say, over-simplified, the fixed side would be dropping providing lower div amounts, but you get the picture - make a spreadsheet if you want a more specific number - but it is a long time). As these graphs show, the average growth of this blend exceeds that W/D, so your portfolio grows while providing you income. It a win-win. And it does outperform even if you don't re-balance.

2) In effect, every dividend payout is 'selling' the stock. If a company did not make the div payment, it would be retained on its books, and be reflected in the stock price. It's all fungible.

Everyone is free to do what they want, but I do think they should understand the consequences. Div concentrations have not provided the benefits that many people believe. It's costing you real money. I like money (as do my heirs and charities), so I stay diversified.

PS: Instead of an 'argument' for/against an idea, could you provide some actual data? That would be helpful. I'm open, very open, to having my mind changed, but that takes data/facts, not "someone said".

-ERD50

 

[ERD50]

I follow most of the "Dividend Growth Investor" authors. I also subscribe to simplysafedivdends and fastgraphs. I've tried a bunch of different investing styles and while it may not be the optimal way to create wealth, I have found dividend investing to be a less stressful way (at least to me) for spending it.

I'm curious how this approach reduces stress for you.

When I look at the charts I provided, I would be stressed to find that approach left me more than $385,000 poorer with a $1M start in 2007.

ETA: To put that another way, instead of a $35,000 annual, inflation adjusted W/D, I could take a $47,000 W/D with the index fund blend, and still be ahead of the dividend funds pulling $35,000. An extra $12,000 a year, over a $35,000 baseline (a 34% 'raise') is nothing to sneeze at. That buys me a *lot* of comfort!

-ERD50

 

[qwerty3656]

I'm curious how this approach reduces stress for you.


-ERD50

I think the basic premise is that the market can be irrational for periods of time. If you are withdrawing money during an extended period of negatively, you may be "locking in" that negatively. In March of this year my portfolio was down close to 1/3rd of it's value, but my dividend income saw hardly a blip. If the market would not have recovered so quickly, there could have been a real negative impact of selling those deflated securities.

To be clear, I agree with you that as your building wealth you should just have a broad based portfolio. It's in the spending period where I think you could encounter scenarios (e.g. retiring at the beginning of a recession) where the Dividend strategy is less risky.

I also don't think the future is going to be as rosy as the past - with interest rates approaching 0% I'm not comfortable holding any material value in bonds.

Also, a huge part of why your strategy beats the Dividend Growth strategy is investments like Tesla - I point to the dot com bubble to say the market can be irrational on the upside as well.

Finally, it simplify's the math. If I make $100 in income and spend $90, I don't need to spend a lot of time running Monte Carlo Simulations to see if I'm going to run out of money.

 

[ERD50]

I think the basic premise is that the market can be irrational for periods of time. If you are withdrawing money during an extended period of negatively, you may be "locking in" that negatively. In March of this year my portfolio was down close to 1/3rd of it's value, but my dividend income saw hardly a blip. If the market would not have recovered so quickly, there could have been a real negative impact of selling those deflated securities. ...

Go back and re-read my post. This is simply not a valid concern, it doesn't work that way with a 70/30 blend. You just would not sell stocks in a down market, that's what the bonds do for you. And they do it better than div payers.

... It's in the spending period where I think you could encounter scenarios (e.g. retiring at the beginning of a recession) where the Dividend strategy is less risky. ...

Again, do you have any data to back that up? I'm all eyes/ears, but I respond to data/facts, not statements presented with no backing.

... I also don't think the future is going to be as rosy as the past - with interest rates approaching 0% I'm not comfortable holding any material value in bonds. ... .

Well, no one has a crystal ball. And we've seen some highly regarded Blue Chip stocks that were long considered "forever" stocks lose a lot of value or go away entirely. That's why I like diversification. It's worked comparatively well over quite a few scenarios, no reason to think it won't work well in the future.

... Also, a huge part of why your strategy beats the Dividend Growth strategy is investments like Tesla - I point to the dot com bubble to say the market can be irrational on the upside as well. ...

No, it's because it is diversified, and holds a wide range of stocks. And it is simply not true that the div payers hold up better in a downturn. Look again at this the 70/30 index vs the 7 div paying funds. You'll see the div payer portfolio dropped more than the 70/30 blend in both the 2008-2009 drop, and the early 2020 drop, while providing the same $35,000 income. The difference is, it is the div payers that don't recover as well.

https://bit.ly/3l2fMrP

... Finally, it simplify's the math. If I make $100 in income and spend $90, I don't need to spend a lot of time running Monte Carlo Simulations to see if I'm going to run out of money.

I don't use and don't believe in Monte Carlo simulations for this sort of financial analysis (they can be useful for engineering analysis). The charts I provided were actual historical results.

And history says, and I showed it to you, that I can W/D much more from a 70/30 index than you can from a div paying sector, and I still have more money than you.

I simply cannot understand why these div payers are so attractive to some people, after they have seen this evidence. And when will the div paying fans ever present evidence?

Here's the pic for those not following the link. The Blue line (port#1) is 70/30 Stock/Bond Index, the lagging Red line (Port#2) is 7 div paying funds equally weighted.

FVD
VIG
SDY
IDV
DTD
VYM
DVY

Yeah, yeah, yeah, I know. You wouldn't hold the stocks in those funds, you have better ones. Well, anyone can play that game, I could cherry pick some growth stocks that would blow the index away. But I can't rely on that going forward.

You could start a new thread with your div paying picks and weighting, and update it when/if you change allocation. It would be pretty easy to enter them in that web page and test them as we go, matching the annual divs to W/D from the index blend.

And a pic with the 2009 drop highlighted, that's an unsettling difference in portfolio value, $609K for the index, and $450K for the div payers? Yikes!

-ERD50

 

[jimbee]

You cannot reason people out of something they were not reasoned into.

 

[OldShooter]

An argument for dividend investing (I posted this as its own thread, but it didn't show up) https://seekingalpha.com/article/43...on-in-retirement-for-post-covidminus-19-world

Seeking Alpha is populated by people hawking products, like this guy. If he actually had a strategy that he believed in, he would not be hustling customers for his advisory service. The fact that he is doing so is probably due to one of two reasons: (1) He doesn't have the courage to rely on his own advice for earning an income or (2) He tried and it didn't work.

Either way, the hustle is not worth the reading time IMO. The likelihood of cherry picking investments, cherry picking time periods, and outright falsehoods is simply too high.

 

[Chuckanut]

I simply cannot understand why these div payers are so attractive to some people, after they have seen this evidence. And when will the div paying fans ever present evidence?

I think it's the same kind of thinking that told people to acquire as much debt as possible since you can "deduct the all the interest", which one could do a few decades ago. Imagine that. Pay $1 in interest and maybe get as much as 35¢ back from Uncle Sam. Such deal! Yet, people focused on the tax deduction rather than the total amount of interest paid.

But, there are people who find it more comfortable to have that stream of dividend coming in regularly, and if they had to invest with the more realistic 'money is fungible' method, they would never invest. To each his own.

 

[qwerty3656]

-ERD50 - I'm not sure I understand your analysis - what is the 1985 date? Does your analysis start in 1985 and then not take withdrawals til 2009?

 

[OldShooter]

... I simply cannot understand why these div payers are so attractive to some people, after they have seen this evidence. And when will the div paying fans ever present evidence? ...

You are a guy who is doomed to be frustrated on this matter. The dividend investors have been giving you evidence. It is that they prefer the dividend investing approach to a probably more lucrative total return approach.

I do lots of things that are non-optimum, things where I prefer a non-optimum situation to one that is maybe financially wiser. For example, I do not chase basis points from CD issuer to CD issuer because I don't want to screw with transferring money from place to place. With a few keystrokes @pb4uski could bury me with evidence that this is financially unwise. Because it is. But I don't care and I think that many of the dividend investors that so frustrate you are in the same mode.

I prescribe a nice glass of cabernet (PRN) and some good cheese, like a Brie or Camembert. Crackers optional.

 

[Koolau]

You are a guy who is doomed to be frustrated on this matter. The dividend investors have been giving you evidence. It is that they prefer the dividend investing approach to a probably more lucrative total return approach.

I do lots of things that are non-optimum, things where I prefer a non-optimum situation to one that is maybe financially wiser. For example, I do not chase basis points from CD issuer to CD issuer because I don't want to screw with transferring money from place to place. With a few keystrokes @pb4uski could bury me with evidence that this is financially unwise. Because it is. But I don't care and I think that many of the dividend investors that so frustrate you are in the same mode.

I prescribe a nice glass of cabernet (PRN) and some good cheese, like a Brie of Camembert. Crackers optional.

All words to live by!

Life is too short and, for heaven's sake, retirement is too short. If it were a question of being ABLE to retire or to STAY retired, I guess it would be okay to drive ourselves nuts getting the very last penny out of our stash. For most of us, we'll die with way more than we need whether we did it "right" or just "okay." I KNOW I've left money (a lot of money) on the table because I don't emphasize equities. I'm okay with that and I have enough. I'm happy. I don't worry (much). As always, YMMV.

 

[CardsFan]

All words to live by!

Life is too short and, for heaven's sake, retirement is too short. If it were a question of being ABLE to retire or to STAY retired, I guess it would be okay to drive ourselves nuts getting the very last penny out of our stash. For most of us, we'll die with way more than we need whether we did it "right" or just "okay." I KNOW I've left money (a lot of money) on the table because I don't emphasize equities. I'm okay with that and I have enough. I'm happy. I don't worry (much). As always, YMMV.

+1

 

[ERD50]

-ERD50 - I'm not sure I understand your analysis - what is the 1985 date? Does your analysis start in 1985 and then not take withdrawals til 2009?

That web site is very well designed. You can start all the way back, and it automatically restricts the dates to the start of the newest fund/stock. It gives a notice that it has done that, you should be able to see it if you scroll around a bit (maybe hit the "Analyze Portfolios" button again, it shows up right under that:

"Note: The time period was constrained by the available data for iShares International Select Div ETF (IDV) [Jul 2007 - Oct 2020]. "

You are a guy who is doomed to be frustrated on this matter. The dividend investors have been giving you evidence. It is that they prefer the dividend investing approach to a probably more lucrative total return approach.

I do lots of things that are non-optimum, things where I prefer a non-optimum situation to one that is maybe financially wiser. For example, I do not chase basis points from CD issuer to CD issuer because I don't want to screw with transferring money from place to place. With a few keystrokes @pb4uski could bury me with evidence that this is financially unwise. Because it is. But I don't care and I think that many of the dividend investors that so frustrate you are in the same mode.

I prescribe a nice glass of cabernet (PRN) and some good cheese, like a Brie of Camembert. Crackers optional.

Oh, I'm not frustrated. Just are just a few different things that compel me to challenge an idea like this:

1) What the heck, I may learn something. Maybe someone has found an easy method to implement that gives a better trade-off between gains and volatility/risk than just balancing an index stock fund with an index bond fund? There's no valid reason I can think of that would make that impossible (though many things make it unlikely?).

2) Hopefully, other readers learn that this "dividend stocks are better" pitch isn't what it is cracked up to be. I've learned from others here, hopefully I can return the favor.

3) It's well known that one of the best ways to make sure you understand something is to see if you can explain it to someone else. This gives me a chance to practice that skill and test my knowledge. And if I'm proven wrong, great - I learned something and will be better off for it.

4) OK, I kinda enjoy the challenge.

Funny thing you mention cheese - we received one of our gift packs from a cheese club today. I've had a couple beers, so not sure I' up for a wine right now, and I'm trying to finish a technical project (hobby) tonight, involving hot soldering irons, so I'll put off additional alcohol for now. But a little later, I think I will imbibe.

What kind of cheese goes well with Elijah Craig?

-ERD50

 

[Onward]

If I see one more article trying to sell me on the wisdom of "dividend investing," I'm gonna yak.

It's a mirage, folks. A very alluring mirage, with faint Victorian overtones.

That's not to say you can't make money with it. But it's not the safest or best use of your capital, whether you're accumulating or distributing.

 

[target2019]

Life is too short and, for heaven's sake, retirement is too short. If it were a question of being ABLE to retire or to STAY retired, I guess it would be okay to drive ourselves nuts getting the very last penny out of our stash. For most of us, we'll die with way more than we need whether we did it "right" or just "okay." I KNOW I've left money (a lot of money) on the table because I don't emphasize equities. I'm okay with that and I have enough. I'm happy. I don't worry (much). As always, YMMV.

What a great way to put it. Thanks for posting.

There are many roads to Dublin.

 

[ERD50]

If I see one more article trying to sell me on the wisdom of "dividend investing," I'm gonna yak.

It's a mirage, folks. A very alluring mirage, with faint Victorian overtones. ...

I have no idea what " with faint Victorian overtones" means in this context, but I like the sound of it, and it made me laugh!

All words to live by!

Life is too short and, for heaven's sake, retirement is too short. If it were a question of being ABLE to retire or to STAY retired, I guess it would be okay to drive ourselves nuts getting the very last penny out of our stash. For most of us, we'll die with way more than we need whether we did it "right" or just "okay." I KNOW I've left money (a lot of money) on the table because I don't emphasize equities. I'm okay with that and I have enough. I'm happy. I don't worry (much). As always, YMMV.

I really don't understand the above. It's not like running a 70/30 AA of common broad index funds and pulling your 1% a year takes much effort/thought at all, certainly not the level of "to drive ourselves nuts getting the very last penny out of our stash". And it isn't about pennies either, look at the delta between those div paying funds and the broad index.

As I posted previously, a $47,000 W/D with the index fund blend, would still be ahead of the dividend funds pulling $35,000. An extra $12,000 a year. That is not "pennies" (well OK, 1,200,000 pennies!), and it is near zero effort. How much effort goes into reading p and selecting these 'special' dividend payers that some internet guru recommends?

-ERD50