Can we do this dividend stock thing one more time?

[redduck]

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Originally Posted by FLD3C A few questions for the OP: 1) Will dividends + SS meet your "usual level of comfort" budget? 2) If not how long can a bear market persist before you need to sell stocks ? 3) Can you sleep well when your stocks are down 40 or 50%? 4) How important is leaving an estate?

OK, FLD3C, let me try to answer your questions:

1. No, dividends +SS won't meet my "usual level of comfort" budget. I don't actually have a budget, but, I have an idea of what the budget looks like. I will have to do the RMD thing starting this year, so with that, I might be pretty close to the "comfort budget." But, I won't have to sell any stocks to fund the RMD--I will use cash (finally, I will use the cash for something--it's almost a relief).

2. I imagine I could go 3-4 years without selling any stocks (I have a bunch of cash and a 10 month CD).

3. Don't know about sleeping well if the market goes down 50%. I didn't do a good job as per the Great Recession. Didn't sell everything, but did sell too much. However, with that experience and Running_Man's explanation of how DVY was run, I think I will be more confident. And, not to upset anybody here, I think I could make sound investments with Dividend stocks.

4. The importance of leaving an estate: it seems real important to the kids; to me, not so much. Nah, I really do want to leave them something.

[NW-Bound]

Well, anytime someone talks about picking stocks, people immediately cry out "Risk, risk", but nobody says that when someone talks about buying an index or a broad-based ETFs. But redduck is not talking about finding the next Google or Facebook. And people like to say that buying the S&P 500 would get you some growth stocks like Google and Facebook, but that is wrong. These growth stocks do not get picked by the S&P 500 committee until they have already grown significantly from their IPO!

Look at what redduck said.

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Originally Posted by redduck ...I select what I consider “safe stocks.” They need to be safe, because I am substituting them for the safety of bonds (in bond funds). Why do I consider these stocks safe? I check them out on Value Line (OK, stop that eye-rolling right now!). The stocks that I almost always pick have the highest rating for Safety (rank 1) and the highest rating for Financial Strength (A++). (OK, when I feel frisky I may buy a stock that has a financial strength of A+). I also want a stock that has a dividend yield of 2.8% or higher. That minimum in the past has dropped to 2.5%.

He wants some dividend stocks that are "safe" and he is not going way out for ridiculous dividends. I guess "safe" here means lower volatility than the S&P.

So, let's look at the recent Great Recession and see what stocks went down less than the S&P. There are a bunch of stocks, mostly consumer staples that fared fairly well, such as Clorox, Colgate Palmolive, Procter & Gamble, Walmart, Johnson & Johnson, etc... They all did better than the S&P during the crash, and they are all paying better dividends. I won't put everything I have in these stocks, but I would feel as secure with a mixture of them as I do bonds.

During go-go years, these stocks may trail the S&P, but are we expecting more go-go years ahead?

[Vincenzo Corleone]

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Originally Posted by karluk Hi redduck, I suppose you saw that one of your dividend stocks, KO, lost nearly 4% today after releasing a disappointing earnings report. I don't know how you define "danger", but I would say having over a year's worth of dividends wiped out in one trading day would qualify by most peoples' standards.

You may be speaking in loose terms here, but you do realize, Karluk, that a drop in share price doesn't do ANYTHING to the dividends received unless the company decides to cut their dividend, right? That's the whole point to dividend growth investing. Coca-Cola can have a 4% drop and, if their business model remains sound, a shareholder can just yawn at the news and continue to collect his dividends, because more likely than not, that 4% drop is temporary.

Coca-Cola has managed to reward shareholders with higher dividends for 51 years in a row. That means, through wars, through major corrections, through recessions, and this most recent "Great Recession", Coca-Cola raised its dividend. Over the past decade the company has managed to raise distributions by 9.80% per year. In comparison, earnings per share have increased by 12.30% per year. Do you really think that Coca-Cola will not bounce back from this 4% drop? I'd venture to say that Coca-Cola has experienced several 4% drops throughout its history and has done just fine.

[photoguy]

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Originally Posted by ERD50 I can't get my head wrapped around why anyone would care if the total return of the portfolio came in the form of divs or growth, as long as they are diversified.

In my mind, growth is preferable as you have more control over taxes. But I think the argument for divs is that they are more "stable". I also wouldn't discount the *strong* psychological benefit (perhaps a placebo, perhaps not) of not spending the principle in staying the course.

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Originally Posted by clifp I I have read some (older) research that while the total returns on dividends vs non dividends stocks are similar the volatility is a lower.

My guess is that most studies don't properly normalize stock portfolios for things like beta or Fama French value/size factors. Given that dividend's don't tend to appear in factor models, I would think that this means that once one controls for size/value etc, div's don't make a difference.

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In order for a dividend investor to withdraw 4% all they have to do is cash the dividend check. The total return investor has to sell some portion of their stock holding each year and hope they pick the right day of the year to sell and furthermore hope they don't start retirement during a bear market.

When I get my dividend, the stock/etf/mutual fund drops by the same amount.

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In order to mitigate the bad sequence of returns most retiree have cash bucket which the plan is use during a bear market. This in turn requires some guessing as to what the market will do over the next few years. My observation is that most total return investor have a larger cash bucket than dividends investor, which in turn creates a drag on their portfolio.

The counter argument I've heard is that dividend stocks tend to have lower exposure to beta (market returns and hence less volatility and an expectation of lower than market returns) so one could have more cash and the same expected returns as the div portfolio. I think this goes back to the factor models and why dividends don't appear in them.

[samclem]

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Originally Posted by NW-Bound He wants some dividend stocks that are "safe" and he is not going way out for ridiculous dividends. I guess "safe" here means lower volatility than the S&P.

Well, apparently that's not what "safe" means:

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Originally Posted by Vincenzo Corleone That's the whole point to dividend growth investing. Coca-Cola can have a 4% drop and, if their business model remains sound, a shareholder can just yawn at the news and continue to collect his dividends, because more likely than not, that 4% drop is temporary.

It's all about the dividend, and the likelihood that the dividend will continue/go up. If the stock will never be sold, if it's just a factory for dividends, then the stock price is irrelevant.
I'm not sure how an investor would know if he was keeping up with inflation without counting the value of stocks. I suppose you just see if your dividends are matching inflation and don't bother looking behind the curtain.

[ERD50]

I'm taking some of this out of order, I think the answers flow better that way (and emphasis mine) ...

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Originally Posted by clifp I agree that money is fungible, ... However for person in retirement I think on practical and psychology reasons it is much better to have the dividend stocks. In order for a dividend investor to withdraw 4% all they have to do is cash the dividend check. The total return investor has to sell some portion of their stock holding each year and hope they pick the right day of the year to sell and furthermore hope they don't start retirement during a bear market.

OK, but IMO, you are overstating it to say 'much better'. I tried to search out some DIV weighted mutual funds/ETFs, and they seemed to mostly have ~ 3.5% divs, versus ~ 2% for SPY. So maybe one would need to sell ~ 1~ 1.5% per year (also depending on divs from their bond holdings). I just don't think there would be any big emotional trick to selling a 1/2% per quarter, maybe less with any distributions. And in a down market, rebalancing would probably have you selling bonds. And, as you stated that the expected total returns are about the same, what is it we would be selling? We would be selling the gains that did not materialize in the div portfolio, because they were distributed as divs! Isn't it really all the same?

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First the returns on the dividend stock are far less lumping than the growth stock.

But you are not just selling growth - you sell your WR minus divs minus fixed income divs.

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I have read some (older) research that while the total returns on dividends vs non dividends stocks are similar the volatility is a lower.

That means div stocks are a better investment overall (greater alpha). I charted the first div-fund/ETFs that came up in a search (both NAV and total return), and I just wasn't seeing any obvious differences in volatility or total return. If we are talking about a lot of individual stock picks, comparisons are hard, and it would probably be easy for someone to select some low div stocks that did as well or better. Not sure what any of that means relative to the typical investor who probably prefers a fund or ETF for diversification.

I found these: DTD,DVY,PFF,VIG - maybe you can suggest others for a more complete view. PFF had a 6% yield, but it looked to have higher volatility and lower total return (data only goes back to 2007).

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In order to mitigate the bad sequence of returns most retiree have cash bucket which the plan is use during a bear market. This in turn requires some guessing as to what the market will do over the next few years. My observation is that most total return investor have a larger cash bucket than dividends investor, which in turn creates a drag on their portfolio.

I'm having trouble with the math here. If the total return is very close, and there is some fixed income buffer in each case (say a 60/40 or 75/25 portfolio), then why is more cash needed? Who is guessing the market? I'd probably factor my near EOY CG distributions and rebalancing into how much I would sell each quarter/month over the next year.

Maybe I've got a built-in bias (I honestly don't think so, I'm always looking for something better - if div stocks are it, I'm all over them!), but it seems to me you are building a lot of questionable constructs against a broader index. I just don't see these differences as a problem.

-ERD50

[34rlsa]

On a related note...

Does anyone have experience with M*'s Dividend Investor newsletter?

Have you found it useful and worth the $189 subscription fee?

[ERD50]

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Originally Posted by redduck Yes, thanks Texas Proud, it's good to have a reminder every few posts as to what the question is. Now, back to ERD50...

Ah yes, the original question was trading off bonds for div stocks - we did drift over to div stocks versus non-div stocks.

But really, it all comes full circle. Maybe it would be best to state the question more generally - 'what is a good replacement for bonds, since bond yields are currently low?'

Well, we already expect long term bond yields to be lower than long term stock yields. So why hold bonds at all? Mainly to buffer volatility. So is there an asset class that has historical returns and volatility in-line with bonds? From my recent research, I don't think any div stock funds/ETFs fit that bill (but maybe someone will mention some).

Can you select stocks to fit the bill? Maybe, but I think you need so many to diversify, you are back to funds/ETFs.

I'll throw another into the mix - how about a Hi-Yield Bond Fund (Junk), like SPHIX or VWEHX? The divs on these are over 5% (more than 2x SPY and higher than other bond funds), and the volatility is about 1/2 SPY. Now, there are many warnings around the junk bond market, so tread carefully.

Basically, I think it comes down to that old MoTown song - "There's nowhere to run, No place to hide.!"

-ERD50

[redduck]

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Originally Posted by 34rlsa On a related note... Does anyone have experience with M*'s Dividend Investor newsletter? Have you found it useful and worth the $189 subscription fee?

I find it useful and look forward to receiving it (but, keep I mind that I like to buy things). I would suggest you go to their website, and get what ever free information you can get (Don't give them your credit card number). They will eventually offer you a free, but out-of date issue. Then they will start making you offers on the price. I currently am looking at two offers they mailed me. One for $159 and one for $99. I am currently paying $69, but that's only because I used an old coupon. I only pay by check, because when a subscription ends they roll over that old subscription at the full price using your credit card, if that's how you paid them. They will also offer you an out-of-date ETF Newsletter and maybe some other newsletters. These newsletters are a bit more technical/complicated, but they will give you and idea of how their products are set up.

The Dividend News Letter has 19 pages of information.

[Vincenzo Corleone]

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Originally Posted by samclem Well, apparently that's not what "safe" means: It's all about the dividend, and the likelihood that the dividend will continue/go up. If the stock will never be sold, if it's just a factory for dividends, then the stock price is irrelevant. I'm not sure how an investor would know if he was keeping up with inflation without counting the value of stocks. I suppose you just see if your dividends are matching inflation and don't bother looking behind the curtain.

In my opinion, that is definitely partially what "safe" means. But even the "safest" stocks will have days when traders (notice I said "traders" and not "investors") will overreact to bad news and punish the stock by 4%. C'mon. Coca-Cola?? We're not talking Enron here. A 4% drop in a stock like Coke, assuming that their business remains sound, only means a buying opportunity. Remember what Buffet said, "Be fearful when others are greedy, and greedy when others are fearful".

[redduck]

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Originally Posted by samclem Well, apparently that's not what "safe" means: It's all about the dividend, and the likelihood that the dividend will continue/go up. If the stock will never be sold, if it's just a factory for dividends, then the stock price is irrelevant. I'm not sure how an investor would know if he was keeping up with inflation without counting the value of stocks. I suppose you just see if your dividends are matching inflation and don't bother looking behind the curtain.

samclem...

I think you might have inadvertently become an icon in the dividend investment world with your line "just a factory for dividends."

[redduck]

What I consider safe? Let's go way back to the original post:

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Originally Posted by redduck <snip, snip, snip>... I select what I consider “safe stocks.” They need to be safe, because I am substituting them for the safety of bonds (in bond funds). Why do I consider these stocks safe? I check them out on Value Line (OK, stop that eye-rolling right now!). The stocks that I almost always pick have the highest rating for Safety (rank 1) and the highest rating for Financial Strength (A++). (OK, when I feel frisky I may buy a stock that has a financial strength of A+). I also want a stock that has a dividend yield of 2.8% or higher. That minimum in the past has dropped to 2.5%. Then, I see how many years in a row they have been raising their dividends. This is sort of amazing (at least to me) because MCD (McDonalds) has raised their dividend 37 years in a row; PG (Procter & Gamble), 60 years; <snip> ...The thing is, I know there must be danger on this path, I just don’t see it. Anybody with clearer vision (and a thought or two)?

[MRG]

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Originally Posted by redduck I find it useful and look forward to receiving it (but, keep I mind that I like to buy things). I would suggest you go to their website, and get what ever free information you can get (Don't give them your credit card number). They will eventually offer you a free, but out-of date issue. Then they will start making you offers on the price. I currently am looking at two offers they mailed me. One for $159 and one for $99. I am currently paying $69, but that's only because I used an old coupon. I only pay by check, because when a subscription ends they roll over that old subscription at the full price using your credit card, if that's how you paid them. They will also offer you an out-of-date ETF Newsletter and maybe some other newsletters. These newsletters are a bit more technical/complicated, but they will give you and idea of how their products are set up. The Dividend News Letter has 19 pages of information.

No you need to checkout this guy.. He goes by: Musca domestica - The House Fly.

Pay him to get told what to do, when to do it, other stuff, and some advice.:what:

Sorry couldn't resist.
MRG

[clifp]

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Originally Posted by ERD50 I'm taking some of this out of order, I think the answers flow better that way (and emphasis mine) ... OK, but IMO, you are overstating it to say 'much better'. I tried to search out some DIV weighted mutual funds/ETFs, and they seemed to mostly have ~ 3.5% divs, versus ~ 2% for SPY. So maybe one would need to sell ~ 1~ 1.5% per year (also depending on divs from their bond holdings). I just don't think there would be any big emotional trick to selling a 1/2% per quarter, maybe less with any distributions. And in a down market, rebalancing would probably have you selling bonds. And, as you stated that the expected total returns are about the same, what is it we would be selling? We would be selling the gains that did not materialize in the div portfolio, because they were distributed as divs! Isn't it really all the same?

It seems to me that a true total return investor should ignore dividend all together. Capital gains and dividends are the all the same thing they just got reinvested and are part of the total return. So you are being inconsistent when you talk about taking the 1.8-2% dividends from the index funds.

Now I maybe overstating the case that is is a big difference, but certainly can be a big difference between somebody who reinvest their dividends and sells 1-4 days a year to pay for their expense and dividend investor who doesn't sell stocks on a periodic basis. For instance take last year.

In Jan 1, 2013 $1 million 75/25 portfolio would have consisted of 10,160 shares of VTI and 2980 shares of BND. If you chose to take your $40K withdrawal in Jan 1 that would require selling 406 VTI shares and 119 BND shares. If on on the other hand you waited until Dec 31 to get your $40K that would require selling 314 VTI shares and 125 shares of BND. The additional 92 shares of VTI you ended up with and 6 less shares of BND is worth an additional $8,400 which seems to me a non trivial amount of money. Even if you decide to sell once a quarter, you still end up with more than $4,000 less than waiting for the end of the year or $4,000 more than doing it at the beginning. There is actually a few thousand dollars difference as to which week of the quarter you decide to sale it turns in 2013 the 10th week of the quarter was the best and worst was the 6 or 7th.

Now I suppose over many years I guess this would average out. But what if in fact you are a truly an awful market timer and you habitually pick the worse days to sell. A substantial fraction of the annual gains of the market are condensed into 20 trading days. In the Oct 19, 1987 crash. I put in a sell order to sell Magellan fund the weekend before the crash. I couldn't reach Fidelity to cancel the order and was shell shocked that day anyhow. That was a 22% hit just by selling on the wrong day of the year. Now I am older and wiser and I don't think I'd repeat that particular mistake. But it is entirely possible that plenty of folks would decide argh the market is crashing lets re-balance, and do what I did and sell at the bottom.

In contrast the dividend investor with his portfolio paying 4% isn't sell at all during year, just seeing the dividends appear in his brokerage account. So one of the practical effects of dividend investing is greatly reduces the need to sell stocks, and so avoids the consequences of being a bad market timer.

[MichaelB]

Here's an article from Morningstar that suggests a couple of funds that seem to meet the criteria expressed in the OP: lower risk, focused on dividends. Looking for Dividends and Quality in One Package

[misanman]

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Originally Posted by 34rlsa On a related note... Does anyone have experience with M*'s Dividend Investor newsletter? Have you found it useful and worth the $189 subscription fee?

Yes, and yes. YMMV.

[ERD50]

clifp's response to my post #86 -

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Originally Posted by clifp It seems to me that a true total return investor should ignore dividend all together. .... So you are being inconsistent when you talk about taking the 1.8-2% dividends from the index funds. ...

? I'm not sure where you are coming from on this. I used ~ 2% divs in my examples for a stock fund, because the most common broad market index funds that a "Couch Potato" type investor would use (like SPY) do produce ~ 2% divs. I didn't see it as inconsistent, I was trying to be realistic.

If you know of a broad market index fund/ETF that pays near zero divs, please share - that could be a good thing in a taxable account.

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Now I maybe overstating the case that is is a big difference, but certainly can be a big difference between somebody who reinvest their dividends and sells 1-4 days a year to pay for their expense and dividend investor who doesn't sell stocks on a periodic basis. For instance take last year. ....Now I suppose over many years I guess this would average out. But what if in fact you are a truly an awful market timer and you habitually pick the worse days to sell.

Well that sure was a lot of cherry-picking!

But OK, in the more general case, we do expect (hope?) that our equities rise over the long term. So you have a point, selling some of them off along the way is giving up some of those gains (reverse DCA - good going in, not so good on the exit). But...

All things being equal - this does not seem any different from a div portfolio. The divs payers are essentially 'selling off' their growth in the form of divs, right? If that was not the case, then they would just have a higher total return, and that is a 'no-brainer' decision, divs or no divs.

Simple number example-wise, Stock A & B @ $100 each grow to $200 over 10 years. Stock A pays zero div, so stock price ends @ $200, growing by $10 each year. Stock B pays a 10% div, paying out $10 per year. At the end of 10 years, you pocket $100 in divs and you have $100 in stock. Plus, for the no-div stock, only a portion of the amount you sold off would consist of a capital gain, there would be a tax (and MAGI) advantage in a taxable account.

The only way I can follow your story, is if div stocks outperform a broad index. But that's a construct I would never debate - total return is then higher, so I'd be all over it.

I've been looking at a bunch of div funds/ETFs (some from the article MB posted earlier), and mostly they did well (versus SPY) in the 2000 melt-down (but many were not around that long to compare). But when I look at the recent crash, their volatility looks about in line with SPY, some worse, some better. So if a low-intestinal-fortitude investor is going to sell out at a low, I'm not sure a div fund is going to help them. It might be worse psychologically, if they were expecting to be protected (which they may be thinking based on the 2000 response).

OK, here's some links. For the total return graphs, you need to adjust the timeline bar, it defaults to 200 trading days. Set back to OCT-2007 to MARCH-2009 gets you around the recent peak and following drop. The divs held up somewhat better as a group, but some were worse, some very close. DVY was worse than even the expected volatile QQQ (Nasdaq small cap index)!

PerfCharts - StockCharts.com - Free Charts

Here's another, with symbols that go back to 1999:

PerfCharts - StockCharts.com - Free Charts

Those are busy, mouse over to highlight a single line, and delete some to focus in easier.


Here's a ref list of some div funds etfs I found:

SPY,QQQ,DVY,AMANX,VDAIX,VHDYX,VDIGX,VEIPX,PRDGX,SD Y,VIG,PFF,DTD,LBSAX,MMUFX | Stock Prices | Quote Comparison | YAHOO! Finance

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Originally Posted by MichaelB Here's an article from Morningstar that suggests a couple of funds that seem to meet the criteria expressed in the OP: lower risk, focused on dividends. Looking for Dividends and Quality in One Package

Interesting list. Up to the OP of course, but based on the research I did, they don't really smooth volatility as much as one might expect (hope?).

-ERD50

[karluk]

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Originally Posted by ERD50 The only way I can follow your story, is if div stocks outperform a broad index. But that's a construct I would never debate - total return is then higher, so I'd be all over it.

As you might guess, this issue has been studied extensively. Here is link to a M* article which concludes that high dividend stocks outperform the broad market indexes when interest rates are falling, but underperform the market when interest rates are rising. In fact, according to the article high dividend stocks have a negative expected return during periods of rising interest rates. If you believe these numbers, that would be another good reason to avoid replacing bonds with high dividend stocks when you expect higher interest rates in the future.

http://ibd.morningstar.com/article/a...d%3D12,+brf295

[clifp]

A couple of points. I am honestly not interested in dividend ETF or funds particularly. A while ago I did looked at DVY and reached the same conclusion as Running Man, why would I want to own this weird fund. In general when I look at the top 25 holding of any dividend fund, I find that I own a decent percentage 1/3 to 1/2 of the stocks and the vast majority (80%) are on my radar screen. There are also some stocks that the ETFs own that I have zero interest in owning.

Anecdotally in seems that most of those of in the dividend school buy individual stocks so it probably difficult for you to replicate our results with a mutual funds.


Most importantly the popularity of dividend stocks and lower dividend yields have made the yield difference between "dividend" stocks and the broad market average small enough say 1% that it hardly makes a practical difference. Back in 2009 it was easy to construct a portfolio of high quality blue chip stocks with 5% yield, by 2012 you needed to throw in some REIT and energy MLP to get to 4%. Now days the M* Dividend portfolio has a 3.1% yield which is higher than my 2.7% and not much higher than VTI at 1.9%. So I don't disagree with you that today it isn't a big difference. Hell, last year I wrote a post declaring myself a total return investor in 2013 .

Still I wanted to highlight the benefits of having a high percentage of your return being dividends for the retiree.

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Simple number example-wise, Stock A & B @ $100 each grow to $200 over 10 years. Stock A pays zero div, so stock price ends @ $200, growing by $10 each year. Stock B pays a 10% div, paying out $10 per year. At the end of 10 years, you pocket $100 in divs and you have $100 in stock. Plus, for the no-div stock, only a portion of the amount you sold off would consist of a capital gain, there would be a tax (and MAGI) advantage in a taxable account.

I agree with you that stock B is better than Stock A if you don't need the money for 10 years. But retiree do need the money every year. As you said DCA is great when you are in the accumulation stage bad in the withdrawal stage. I am positive that as retired who needed to withdraw X% + inflation, that a stock that paid 10% dividends reliably is better that stock that had CAGR of 10% over 10 years, but during those 10 years the price fluctuated wildly. It is a lot easier to find stocks that pay X% in dividends with a history of increasing the dividends than a stock that goes up $100 that increases a flat $10 a year.

To put it another way. Retirement planning would be a lot simpler if the ~10% average equity return consisted of 7% dividends and 3% dividend growth/capital gain than the current 2% dividend/8% capital gains. Our SWR rates would be probably be in 6% range and AA would be 80-90% equities.

My holy grail in retirement investment has been looking for a way to transform the high returns of stocks but highly volatility into something more predictable. By doing so I can maintain a higher equity AA, but keep overall portfolio risk to an acceptable level. One way is with a bias toward dividend yield, and second way is with covered call. So yes I am Seeking Alpha, but I think compared to most folks on Seeking Alpha, I am truly looking for a way of lowering volatility, rather than higher returns.

[Lsbcal]

This thread is interesting but has it changed anyone's future equity choices?

Anyone?