large stable dividend stocks vs diversified funds

[maddythebeagle]

I invest in several individual dividend paying stocks with increasing dividends....There are advantages to this and and just doing an index and I think it depends more on the individual. I do believe that folks that can ignore market psychology can do better than an index...Also my expenses are much lower than indexing...I can control the taxes better......I enjoy it and dont feel that I am taking on excessive risk since my individual stock ownership is not a large percentage of my total net worth.

 

[unclemick]

My wildly emotional non math view of the whole deal is this:

Taking my dividends every year is like a steady job with a regular paycheck vs

Taking 4 or 5% variable out my rebalanced portfolio each year is like hustling up a new job each and every year.

Since I have started to do both as of last year - will take a while to see which is the most comfortible. Did do non cola pension plus dividends from 98 to 2004. 2005 was the first year starting 5% variable after rebalancing.

We'll see. we'll see - heh heh heh heh heh - at year 13, it's time to loosen up and spend a tad more.

 

[2B]

We'll see. we'll see - heh heh heh heh heh - at year 13, it's time to loosen up and spend a tad more.

Go for it big guy! DW and I have hopefully finished getting my in-laws house ready for the estate sale. Then the house goes. They can't possibly enjoy all of their money now (1 in nursing/1 in assisted living) and they really never enjoyed it before IMHO. I intend to enjoy it for them and my kids can get their own.

I'm mostly hoping to get my life back since my MIL broke her hip a year ago June.

 

[maddythebeagle]

We'll see. we'll see - heh heh heh heh heh - at year 13, it's time to loosen up and spend a tad more.

oops...I thought I read "now at age 13....." and thought you were finally coming out as the girl in missoula....

 

[Zathras]

i was questioning the dividends being a better source of money to spend as opposed to selling some stock...maybe im missing something but getting a 4% dividend and having a corrosponding drop of 4% in the stock price seems no different to me than liquidating 4% of your stock holdings on a none paying dividend stock......

What 'corrosponding drop of 4%? There isn't necessarily a 4% drop in value of the stock with a 4% dividend payment. And, if there is a drop in the stock value, there is not a corresponding drop in the dividends (although the company may decide to cut their dividend payouts).

Personally if you have the funds I like the dividends idea. Especially if you research and find companies with a solid history of dividend growth.

 

[haha]

actually i was replying to some thing ha ha had written...

" believe that given a comfortable amount of assets, say 40 to 50x income needs, individual dividend paying stocks are far superior as a source of living cash, as dividends as a source of spending money are more stable than stock prices which must be liquidated periodically to get the needed cash."


i was questioning the dividends being a better source of money to spend as opposed to selling some stock...maybe im missing something but getting a 4% dividend and having a corrosponding drop of 4% in the stock price seems no different to me than liquidating 4% of your stock holdings on a none paying dividend stock......
"

All these guys have in different ways answered your question, but in case you still need another look, make or find a plot of 30 or 40 years of S&P dividends vs. time. Then get another of the S&P index itself vs. time. Look at these plots; then decide which is more stable. If this doesn't speak to you, ignore it.

Ha

 

[mathjak107]

What 'corrosponding drop of 4%?  There isn't necessarily a 4% drop in value of the stock with a 4% dividend payment.  And, if there is a drop in the stock value, there is not a corresponding drop in the dividends (although the company may decide to cut their dividend payouts).

Personally if you have the funds I like the dividends idea.  Especially if you research and find companies with a solid history of dividend growth.

there is always a drop in the price of the stock by the amount of the dividend paid..no question..it may appear different depending on the days action on the day the dividend is paid but a dividend is always offset by a corresponding drop in value by that amount....
a dividend paid is a non event total return wise...its a zero gain or loss.

 

[haha]

there is always a drop in the price of the stock by the amount of the dividend paid..no question..it may appear different depending on the days action on the day the dividend is paid but a dividend is always offset by a corresponding drop in value by that amount....
a dividend paid is a non event total return wise...its a zero gain or loss.

I certainly appreciate that explanation. Good luck!

Ha

 

[mathjak107]

its interesting how the system works when a dividend is payed..automatically the prices are adjusted downward by the amount of the dividend at the next open by the exchanges computers .all limit orders and stop losses are automatically lowered too...otherwise all stop losses and limit orders would be triggered or be closer to being triggered..
the idea of a stock returning some of your money goes back to the time after the 29 crash so the story goes..people were very leary of stocks and of what companies do with idle cash and so a return of your money little by little was founded......basically people became trained to think this was a good thing..
the problem is alot of people out there equate a dividend paying stock with say bank interest....they are not the same,,,the bank interest is over and above your account value...the dividend is a return of your own equity....

 

[bpp]

the idea of a stock returning some of your money goes back to the time after the 29 crash so the story goes..people were very leary of stocks and of what companies do with idle cash and so a return of your money little by little was founded......basically people became trained to think this was a good thing..

Really? I thought the main reason stocks have value is because they pay dividends, or are expected to pay them some day. Other than that you are just holding a claim ticket for the eventual liquidation value of the company (and how much of that ever typically makes its way back to the common stock shareholders anyway?)

 

[Texas Proud]

Really? I thought the main reason stocks have value is because they pay dividends, or are expected to pay them some day. Other than that you are just holding a claim ticket for the eventual liquidation value of the company (and how much of that ever typically makes its way back to the common stock shareholders anyway?)

I would say almost correct... but not a liquidaiton value.. unless you consider some other company buying at a premium a liquidation...

You are buying future cash flows of the company.. or should I say expected future cash flows... that is why some seem to have very high PEs as they are expected to have oversized future cash flows..

Some of those cash flows might be a dividend...

 

[mathjak107]

you are buying the value and future value of the company...if many dividend paying companies never payed dividends they would just have huge cash hordes most likley making their per share price just that much more..as warren buffet once said the reason companies pay dividends is because they cant find anything better to do with their extra cash...since value sitting in cash dosnt earn much as far as the projected future value of the company,companies will shed their excess cash as dividends so as not to dilute the future blue sky value...warren buffet also said berkshire wont pay a dividend until the day he can no longer grow that money by investing in his companies

 

[mathjak107]

you can create your own dividend on any company...just sell off the 3 or 4% a year and bingo a dividend......

 

[bpp]

I would say almost correct... but not a liquidaiton value.. unless you consider some other company buying at a premium a liquidation...

True, buyouts and having a company go private are also ways to get one's money back if one holds forever.

To the original question, I hold my allocation to Japanese stocks in the form of individual stocks, for tax reasons. Mindful of Bernstein's diversification point, I aim to hold as many positions as possible; I have about 60 stocks now, half large-cap, half small-cap. All dividends and new money go towards new names; I never buy the same company twice, and I never sell.

I would rather just buy an ETF, but unless the dippy tax laws change, this seems to be the best I can do. I do not expect to beat an index fund, but merely hope, through diversification, not to lag one too badly.

 

[grumpy]

i
the problem is alot of people out there equate a dividend paying stock with say bank interest....they are not the same,,,the bank interest is over and above your account value...the dividend is a return of your own equity....

Mathjak,

Maybe this is a terminology quibble but I don't think it is proper to say that a dividend is a return of your own equity. If it were, it would not be taxable, would it? Also, I have several dividend paying stocks in which, over the years I have sold shares equivalent to my original investment. I receive a dividend on the shares I still hold but I have none of my own equity in those shares. Maybe we can say it is a return of some of my capital gains?

Grumpy

 

[Nords]

its interesting how the system works when a dividend is payed..automatically the prices are adjusted downward by the amount of the dividend at the next open by the exchanges computers .all limit orders and stop losses are automatically lowered too...otherwise all stop losses and limit orders would be triggered or be closer to being triggered..

Where do you get this stuff, Mathjak? That doesn't happen at Fidelity-- none of my stop-loss orders have ever been altered by a dividend payment.

If you'll post a link to show how this works, I'll take it up with my broker.

 

[eridanus]

The NYSE does adjust open prices on ex-dividend days.


http://www.fma.org/SLC/Papers/Buyingthedividend_FMA06.pdf


"The dividend drop ratio is the amount that a stock’s price falls on the record day due to the declaration of a dividend relative to the amount of the dividend. In the absence of trading costs and taxes, the dividend drop ratio is expected to be one. Elton and Gruber (1970) and Kalay (1982) both find empirically that this figure is closer to 0.8. Various theories have been proposed to explain this value...."

"However, a common criticism of taking opening prices on the ex-day is
that the opening prices are a biased indicator of the drop ratio because all the orders on the books of specialists in American markets are reduced by the amount of the dividend when a stock goes ex-dividend."

 

[Nords]

The NYSE does adjust open prices on ex-dividend days.

I waded through 26 pages of passive tense to locate this: "He finds that abnormal ex-day returns are induced by NYSE Rule 118 and AMEX Rule 132, which dictate that specialists must adjust all open limit buy orders by the amount of the dividend and round down to the next tick if necessary."

Great, so it says that there are rules requiring specialists to reduce open limit buy orders by the amount of the dividend.

That has nothing to do with Mathjak's claim that all limit orders and stop losses are automatically lowered. I suspect the reality is that open limit buy orders are affected but not "all" limit orders, and certainly not sell-stop losses.

I have to point out that the entire paper is dedicated to figuring out whether stock prices drop by the amount of the dividend on the ex-dividend date. As near as I can tell from the prose they're presenting, the answer is "We find dividend drop ratios to be higher than suggested in the previous literature for our sample other than 2003 and averages that are remarkably resilient to changes in the minimum price increment. The findings are somewhat inconsistent with the tax hypothesis and suggest that tax indifferent market participants have some influence in setting marginal prices in recent years. We also note a considerable dispersion about the mean for dividend drop ratios which suggest that the dividend event is often easily overwhelmed by the price impact of other events. Considering a longer event window we note price appreciation commensurate with the market prior to record day of a dividend and a notable underperformance of the market over the month after." "Not the way we think that they're supposed to."

 

[eridanus]

That has nothing to do with Mathjak's claim that all limit orders and stop losses are automatically lowered. I suspect the reality is that open limit buy orders are affected but not "all" limit orders, and certainly not sell-stop losses.

I have to point out that the entire paper is dedicated to figuring out whether stock prices drop by the amount of the dividend on the ex-dividend date.

I've never seen a stop-loss adjusted either. Maybe the stop-loss isn't a native NYSE order type?

As far as the paper, if a dividend stocks pays out 1 and only drops by .8-.9, a dividend strategy isn't a zero-sum game compared to a capital gains strategy, as suggested.

 

[haha]

Anyway, this argument misses the whole point, which is that dividends are more stable than stock prices. If you need to sell stock to live, you are vulnerable, and may eventually get whacked. People implicitly recognize this with their 2 years of cash, or buckets or whatever.

Ha

 

[brewer12345]

Anyway, this argument misses the whole point, which is that dividends are more stable than stock prices. If you need to sell stock to live, you are vulnerable, and may eventually get whacked. People implicitly recognize this with their 2 years of cash, or buckets or whatever.

Ha

Funny you should bring this up. Dividends are stable because they are heavily managed to be tha way. For whatever reason, people get very excited about these modest streams of cash. I own a stock that from inception has always said that they will pay out as a dividend all the cash generated each quarter and have never made any pretense of the dvidend being stable. Not surprisingly, they seem to be getting dinged for their (highly) variable quarterly dividend.

So is the "magic" the dividend or the appearance of stability?

 

[uncledrz]

The point that Ha makes is that dividends are in the control of the company, while the stock price is not. That is, a dividend paid from cash flow, provided that the company is profitable, can and often does continue and often will increase (choose your income stream carefully). The price of any stock, however, is subject to a market force that is separate and distinct from the comapny. So selling 4% of one holding each year is not the same as a well chosen stock that pays a 4% dividend.

Uncledrz

 

[haha]

The point that Ha makes is that dividends are in the control of the company, while the stock price is not.  That is, a dividend paid from cash flow, provided that the company is profitable, can and often does continue and often will increase (choose your income stream carefully).  The price of any stock, however, is subject to a market force that is separate and distinct from the comapny.  So selling 4% of one holding each year is not the same as a well chosen stock that pays a 4% dividend.

Uncledrz

What he says! 

Ha

 

[saluki9]

Funny you should bring this up. Dividends are stable because they are heavily managed to be tha way. For whatever reason, people get very excited about these modest streams of cash. I own a stock that from inception has always said that they will pay out as a dividend all the cash generated each quarter and have never made any pretense of the dvidend being stable. Not surprisingly, they seem to be getting dinged for their (highly) variable quarterly dividend.

So is the "magic" the dividend or the appearance of stability?

Brewer, you can't be serious. You know why investors value dividends.

1. You can't fake a dividend. So you do have to actually have the cash there (or be able to borrow it) You know that GAAP is crap, which I guess is good because it does keep a lot of CFA charterholders employed

2. we know that historically much of the return from stocks have been in the form of dividends. More recent research has shown that higher payouts lead to better returns and governance.

3. Even though I don't buy individual stocks, if I did I would want a 100% payout. We know all the crap that executives do with retained profits. I'd like to see them have to go to the shareholders for each new "investments"

 

[Ed_The_Gypsy]

saluki9,

If memory serves, REITs are required to pay out 100% of their earnings. I like them!

1. You can't fake a dividend. So you do have to actually have the cash there (or be able to borrow it)

Borrowing to pay dividends sounds like faking it to me. brewer, didn't Oxidental Petroleum used to do that?

Ed