Dividend investing: a ripoff

[soupcxan]

I have always favored dividend paying stocks (despite the reasonable arguments that total return is all that matters) for a variety of reasons. Chief among them was that if stock prices declined, at least the dividend payments would be steady, and therefore the yield would increase.

So I put this plan into action by buying Vanguard's equity income fund (VEIPX). Last year shares were trading around 24 and the yield was 3.3%. The fund is now trading around 16. At the lower price, the yield should be 5%, which is some comfort given that my principal has declined 33%. I would be happy with a 5% yield, that's pretty juicy.

But lo and behold, the current reported yield on the fund is only 3.8%. I guess those dividends weren't so reliable after all. So now I have a fund that has lost tons of value and isn't even paying a decent yield. What a ripoff.

 

[haha]

But lo and behold, the current reported yield on the fund is only 3.8%. I guess those dividends weren't so reliable after all. So now I have a fund that has lost tons of value and isn't even paying a decent yield. What a ripoff.

See if you can dig into this and report back. It may be some odd accounting aspect. Or Vanguard employed spectacularly inept fund managers.

Ha

 

[FIREd]

There is actually no evidence that VEIPX is paying fewer dividends this year. In fact the evidence points at the opposite:

First 3 quarters of 2007: $0.52 per share
First 3 quarters of 2008: $0.565 per share, almost a 9% increase YOY.

I am too puzzled by the dividend yield quoted by Vanguard, for this fund and others. I am not quite sure I understand how they come up with that number.

To come up with a yield I can understand, I add up the dividend distributions of the past 4 quarters and divide that number by the current NAV. For VEIPX, I get close to 5% right now. I have been buying VEIPX lately on that premise.

 

[socca]

I ran into a similar problem when I invested in Vanguard's Intermediate-Term and Long-Term Investment Grade Bond Funds in my IRA. Well, we all know what the label 'investment grade' is worth these days. What's worse, a couple of weeks ago I checked the holdings, and instead of the nicely diversified holdings I was expecting, I found a gross overweighting in the financial sector. Hey, nice bet, guys! Keep up the good work!

I don't blame VG for this, though. It's my own fault for not doing sufficient due diligence before investing. However, in our new version of American capitalism, losses are socialized while gains are privatized, so I fully expect Secretary Paulson to send me a check from the $700B bailout fund to cover my losses. Thanks, taxpayers! Keep up the good work!

 

[cashflo2u2]

This is the definition of the published vanguard "sec yield" according to VG website "BASED ON HOLDINGS' YIELD TO MATURITY/DIVIDEND FOR LAST 30 DAYS OF PRIOR MONTH". Would this have something to do with your question/problem?

 

[Bikerdude]

"Morningstar" says the fund is yielding 3.67%.

 

[soupcxan]

My reading of Vanguard's website is that their quoted yield of 3.7% is reported for the last 30 days net of expenses - since this is much less than what the historical 12 month yield would be, dividends over the last month must have been much lower than the 12 month average. I expect when the 4Q dividend distribution is made in December it will be in line with their current reported yield, not the 5% you would get by dividing the previous year's payments by current NAV. Hence my frustration.

 

[Zathras]

If the yield is after expenses, doesn't that mean that increased expenses would also result in decreased yield?
It looks like the concept is to buy low priced companies with very high yields. This also seems likely to have more of the companies that are cutting their dividend. Also, do they incur additional expenses if they buy or sell a lot?
I could give you examples of dividend portfolios that are doing well just as you have an example of one that isn't.
I would suggest your issue isn't with dividends 'per se' but with the management and trading in this particular fund.

 

[FIREd]

My reading of Vanguard's website is that their quoted yield of 3.7% is reported for the last 30 days net of expenses - since this is much less than what the historical 12 month yield would be, dividends over the last month must have been much lower than the 12 month average. I expect when the 4Q dividend distribution is made in December it will be in line with their current reported yield, not the 5% you would get by dividing the previous year's payments by current NAV. Hence my frustration.

I am not really interested in how much dividends I will receive in December 2008 or next year for that matter. Going forward, we could certainly see a temporary drop in dividends as companies try to bolster their balance sheets to prepare for a long recession (and as panicky investors force fund redemptions hence temporarily increasing trading costs). But I figure that, when the economy recovers and dividends start increasing again (hopefully to the levels they reached in the past 12 months, levels that historically speaking were still quite low), I will be receiving a 5% yield on those shares I bought last week. In the mean time, if you want a less volatile income, you can try fishing for yield elsewhere (corporate bonds, CDs, munis, etc...).

 

[jazz4cash]

I always look at the yield calculation based on my cost. If I buy a stock for $20/sh and it pays $1 dividend, the yield is 5%. If the stock price declines to $15 the yield appears to be 6.6% but my basis is STILL $20, my yield is STILL 5%. Is that analysis faulty?

I think the funds report yield for a specific period based on dividends and NAV at the beginning of the period. When prices are volatile, the yield appears out of whack.

 

[Zathras]

Not wrong, but unnecessarily complicated if you have many dividend payers or have multiple purchases.
You can make 20 purchases over three years and still quickly run the calculation quickly in your head knowing the current value of the stock/fund and dividend rate per share.
In addition, using your analysis, how do you ajust when the dividend/share changes?

 

[jazz4cash]

Not wrong, but unnecessarily complicated if you have many dividend payers or have multiple purchases.
You can make 20 purchases over three years and still quickly run the calculation quickly in your head knowing the current value of the stock/fund and dividend rate per share.
In addition, using your analysis, how do you ajust when the dividend/share changes?

I don't track the yield constantly, I buy when the yield exceeds a general threshold of 3-4%....The more I want the stock, the lower the threshold

 

[samclem]

Reading this thread and others, I'm struck by the number of us who have a great deal of faith in the constancy of dividends given the anticipated economic conditions. I don't mean that as some sort of snarky criticism--I just always viewed dividends as something that was nice, and was expected in "normal" times, but certainly not something that a company would hesitate to modify in the face of significant setbacks. As a stockholder, I'd want them to cut dividends rather than simply continuing to pay them out while neglecting other needs during rough times, thus hurting the value of the stock.

 

[samclem]

Reading this thread and the one on GE, I'm struck by the number of us who have a great deal of faith in the constancy of dividends given the anticipated challenging economic conditions ahead. I don't mean that as some sort of snarky criticism--I just always viewed dividends as something that was nice, and was expected in "normal" times, but certainly not something that a company would hesitate to modify in the face of significant setbacks. As a stockholder, I'd want them to cut dividends rather than simply continuing to pay them out while neglecting other needs during rough times, thus hurting the value of the stock.

 

[Bikerdude]

As a stockholder, I'd want them to cut dividends rather than simply continuing to pay them out while neglecting other needs during rough times, thus hurting the value of the stock.

I would think retiree's who depend on dividend paying equities to disagree with you. I purchase dividend paying companies for income during market setbacks like this. If they cut their dividend I would be inclined to sell.

 

[jazz4cash]

Reading this thread and the one on GE, I'm struck by the number of us who have a great deal of faith in the constancy of dividends given the anticipated challenging economic conditions ahead. I don't mean that as some sort of snarky criticism--I just always viewed dividends as something that was nice, and was expected in "normal" times, but certainly not something that a company would hesitate to modify in the face of significant setbacks. As a stockholder, I'd want them to cut dividends rather than simply continuing to pay them out while neglecting other needs during rough times, thus hurting the value of the stock.

I agree completely. It's not responsible for a company (e.g. BOA) to hang onto a 9% dividend unless mgt believes the stock price will bounce back. It also implies the stock is risky. I nearly choked hearing Suze O, of all people say something like "stock prices may vary but companies don't cut dividends"...yeah, right! Another strike against her in my book.

 

[haha]

I agree completely. It's not responsible for a company (e.g. BOA) to hang onto a 9% dividend unless mgt believes the stock price will bounce back. It also implies the stock is risky. I nearly choked hearing Suze O, of all people say something like "stock prices may vary but companies don't cut dividends"...yeah, right! Another strike against her in my book.

This is a simple thing to check. Companies do indeed cut dividends, but not nearly as often or as severely as they have their market quotations cut.

Most of us are adult. We aren't expecting perfection- just something that will likely work better than something else, based on the fact that it has done so before.

Ha

 

[Olav23]

ETFs with High Yields to Help You Sleep at Night - Morningstar Specialists

 

[Gardnr]

Reading this thread and the one on GE, I'm struck by the number of us who have a great deal of faith in the constancy of dividends given the anticipated challenging economic conditions ahead. I don't mean that as some sort of snarky criticism--I just always viewed dividends as something that was nice, and was expected in "normal" times, but certainly not something that a company would hesitate to modify in the face of significant setbacks. As a stockholder, I'd want them to cut dividends rather than simply continuing to pay them out while neglecting other needs during rough times, thus hurting the value of the stock.

Oh, no doubt. I agree, thus my comment on GE (talking about relative strength and likelihood of cutting div rate). When I look at div yields right now I always think about what they'd be when cut by 25-50%. Even with that in mind there are still some very good buys out there.

 

[Zathras]

There are reasons dividend payers tend NOT to cut their dividends. Sure it happens, but generally it is as a last option.
Companies like GE and JNJ have not cut their dividends for decades through recessions and down years.
I am not saying it isn't possible, just that it is less likely for a dividend to be cut as it is for the stock price to fall

 

[FIRE'd@51]

Most of the dividend cuts so far have been in the banks due to regulatory capital requirements, which have forced them to choose between cutting the dividend to raise capital, or going a more dilutive route (such as issuing common stock or convertible preferred while the stock price is depressed). So cutting the dividend for these companies has been an easier way to raise capital initially. Industrial companies do not face these regulatory capital requirements, and thus, are loathe to cut the dividend until it becomes absolutely necessary from a cash-flow perspective.

 

[jIMOh]

*snip*
This also seems likely to have more of the companies that are cutting their dividend. Also, do they incur additional expenses if they buy or sell a lot?
*snip*
I would suggest your issue isn't with dividends 'per se' but with the management and trading in this particular fund.

Two points- most dividend funds are heavily into financials and energy/utility stocks. Because many financial stocks have cut their dividend, the funds which invest in them will see similar impacts to payout.

I have read somewhere that the dividend payout of the S&P 500 was cut by around 33% for 2008. Not sure what was used to measure this, but if you compare the S&P 500 yield over same time period, I believe it dropped too.

If your fund increased payout when S&P 500 was cutting payout, I think you have a solid fund.

 

[jIMOh]

I always look at the yield calculation based on my cost. If I buy a stock for $20/sh and it pays $1 dividend, the yield is 5%. If the stock price declines to $15 the yield appears to be 6.6% but my basis is STILL $20, my yield is STILL 5%. Is that analysis faulty?

I think the funds report yield for a specific period based on dividends and NAV at the beginning of the period. When prices are volatile, the yield appears out of whack.

Depends on what you did with the dividend...

If you reinvested it, your basis went up to $21.

I measure my dividend performance for my equity income funds by payout per share. Sometimes it is 2.2% yield, sometimes 2.5% yield.

I have looked all over for mutual funds which have more than a 3% yield, and my experience is these funds will be more volatile both in terms of payout and NAV. To get a 3% yield on a pool of 100-150 stocks, the fund manager will need to invest in many stocks which yield around 4-5% to offset the steady ones which yield around 1-2%.

 

[Zathras]

I have read somewhere that the dividend payout of the S&P 500 was cut by around 33% for 2008. Not sure what was used to measure this, but if you compare the S&P 500 yield over same time period, I believe it dropped too.

I would be interested in where that came from. I have had two stocks cut their yield this year, I have had 13 that raised their yield and 3 yet to declare one way or another.
Actually, considering the loss of stock prices, I would be shocked to see the yield of the S&P lower. However I still would be interested to see the stats.

If your fund increased payout when S&P 500 was cutting payout, I think you have a solid fund.

No fund, individual stocks for dividends.

 

[FIRE'd@51]

I have read somewhere that the dividend payout of the S&P 500 was cut by around 33% for 2008.

This can't be right. In 2007 the Vanguard S&P 500 index fund (VFINX) paid a per-share dividend of 2.49. In the first three quarters of 2008 the fund has paid a dividend of 1.81. So even if the fund paid no dividend (which it won't) for the fourth quarter of 2008, the yearly dividend would be down 27% (not 33%) from last year.

BTW, for the first three quarters of 2008, the dividend was actually 4% above that of 2007 (1.81 vs 1.74).