Dividend paying stocks

[timemoveson]

Taking it out of order...

I 100% agree with you on that. I'll just add that it is helpful when people present the thought process behind their opinion. It's usually pretty hard to get anything useful from the opinion alone.



I'm not sure what "clear bias" you are talking about, so I guess it's not clear? And to explain, yes, to me your comment was in vacuum. You said:



Without putting that in %, or providing the portfolio amount so we can put it in %, it's pretty meaningless, and it can be done without restricting yourself to dividend payers. In practical terms, OK, a portfolio made up of higher than average dividend rate stocks would kick off more income (w/o selling anything) than a broad-based index of stocks. But that only means one might decide to sell off some of the stock fund from time to time (like once per year) to make up the difference. That also provides a good time to re-balance an AA if desired.

In practical terms, making a sale once a year isn't a meaningful amount of effort, so to me, your "doing absolutely nothing" comment strikes me as more "dogma" and "bias" - just what you accuse the forum of in general?

There's nothing "wrong" with you deciding you want to focus on dividend payers, and I'm certainly not going to try to convince you otherwise. But I am usually tempted to respond when someone makes a post that seems to indicate "their way" has clear advantages, when the data doesn't back it up. That's not "doctrine" at all, that's letting the numbers speak.

-ERD50

Good challenge, no problem. I'm happy if you're happy.

About $7.5M working for me, 4% yield per annum, roughly 70% common stock, 5% preferred, 5% REITs, and 20% privately placed fixed income. Perpetual construct.

I think I may have more choices than do others. Will adapt as needed just like you.

 

[JPatrick]

VYM is my favorite ETF dividend payer.
If you would like a good divie stock, one of the most consistent is EMR.
I got into it quite a few years ago through their dividend reinvestment program and it has paid off nicely. One of those "set it and forget it" deals.

 

[GrayHare]

Good challenge, no problem. I'm happy if you're happy.

About $7.5M working for me, 4% yield per annum, roughly 70% common stock, 5% preferred, 5% REITs, and 20% privately placed fixed income. Perpetual construct.

I think I may have more choices than do others. Will adapt as needed just like you.

But what are the income taxes? That portfolio instead invested for growth but with equivalent annual withdrawals can incur little income tax, perhaps even none some years via loss harvesting.

 

[timemoveson]

But what are the income taxes? That portfolio instead invested for growth but with equivalent annual withdrawals can incur little income tax, perhaps even none some years via loss harvesting.

Totally agreed. It doesn't change the concepts behind this type of larger, perpetual portfolio but it influences the execution a lot. In Canada, but like the US it depends on:

- mix of taxable and non-taxable assets
- tax treatment of qualified (eligible) dividends which are favorable up to a quite high income point, particularly with assets and incomes spread across spouses.

I'm not stuck on the concepts at all and will watch carefully to see if another approach or a mix would yield similar or better results on a risk adjusted basis.

 

[Live And Learn]

I have to admit - I have predominately dividend players (SDY and DVY specifically). The divs fund most of my annual budget sparing me the need to decide what to sell to fund my annual spend when I do my rebalance on Jan 1. I also haven't needed to rebalance because I have a 10% range in my target AA. Maybe I need to change my name to "Ostrich"

 

[Bruceski44]

The total return and dividend growth arguments don't align, because most dividend growth investors are happy if the stock price is flat or declining. This way they can buy more of that issue at the same or higher yield. Many people use DRIP (Dividend Reinvestment Programs) to reinvest in the company. This is especially fruitful if the stock price stays flat or declines.

DGI (dividend growth investing) can also be lucrative on a case-by-case basis. I bought Cummins when it was out of favor and it has since doubled. I sold my gain and bought another stock on the house! Walmart is another example which has nearly doubled since I bought it. Looking for value in the DGI universe is especially rewarding. The ETF may benefit from this, but it's far easier to make individual stock selections on your own. They don't always work out, but you still have the solid dividend stream to fall back on.

 

[ERD50]

The total return and dividend growth arguments don't align, because most dividend growth investors are happy if the stock price is flat or declining. This way they can buy more of that issue at the same or higher yield. Many people use DRIP (Dividend Reinvestment Programs) to reinvest in the company. This is especially fruitful if the stock price stays flat or declines. ...

This seems contrary to what most div investors discuss. The div investors tell me their stocks are more stable, because they pay dividends.

Further, if we are being apples-apples, and reinvesting any divs, then the more volatile non-div payers would have more "buy low" opportunities (granted, less would be bought).

Regardless - if this was a measurable effect, it would show up when you compare a basket of div paying stocks to the total market of stocks. I have yet to see any clear measurable advantage to the div payers.

... DGI (dividend growth investing) can also be lucrative on a case-by-case basis. ...

The same can be said of any sector.

edit/add: Check this link (set slider to "ALL") -

http://stockcharts.com/freecharts/perf.php?VTI,vym,vig,dvy,fdl,sdy

I picked the first five DIV paying ETF/Funds I could find with histories that go back to 2006 or earlier. The total return of VTI (Total Stock Market) beat every single one of them. If you move the slider, sure, some swapping of positions, but no clear advantage to the div payers that I can see. At least w/o cherry-picking, which can only be done in hindsight.

I'll spend 5 minutes a year figuring out an amount of my broad-based index to sell, in favor of any sector investment. Something I may need to do to rebalance anyhow.

-ERD50

 

[ScaredtoQuit]

My portfolio of dividend stocks and individual bonds returned only 6% last year at a time when the S&P provided a total return of over 20%. I had to think hard about my strategy and the almost $500K I passed up in order to pursue a so called "safe" yield. After some very difficult consideration, I decided to stand fast. As was mentioned earlier, if the market goes up, I get paid every month and if the market goes down, I still get paid. Plus, I expect to over-perform when the market finally corrects.

I suppose this is a psychological choice I am making so that I avoid extreme ups and downs of the market.

 

[redduck]

This seems contrary to what most div investors discuss. The div investors tell me their stocks are more stable, because they pay dividends.

Further, if we are being apples-apples, and reinvesting any divs, then the more volatile non-div payers would have more "buy low" opportunities (granted, less would be bought).

Regardless - if this was a measurable effect, it would show up when you compare a basket of div paying stocks to the total market of stocks. I have yet to see any clear measurable advantage to the div payers.

note: bolding by redduck

-ERD50

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.

 

[ERD50]

My portfolio of dividend stocks and individual bonds returned only 6% last year at a time when the S&P provided a total return of over 20%. I had to think hard about my strategy and the almost $500K I passed up in order to pursue a so called "safe" yield. After some very difficult consideration, I decided to stand fast. As was mentioned earlier, if the market goes up, I get paid every month and if the market goes down, I still get paid. Plus, I expect to over-perform when the market finally corrects. ...

Except, there is no evidence I can find that indicates you should expect over-performance after a correction. Look at this chart again, move the slider (both ends) to slid it to start at troughs, and see who is in the lead at each peak - no discernible trend at all. PerfCharts | Free Charts | StockCharts.com

... I suppose this is a psychological choice I am making so that I avoid extreme ups and downs of the market.

But you aren't avoiding the ups and downs with div payers. See the chart?

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). ...

That's what bonds are for. Again, looking at the charts, I just can't pick out this added stability that people talk about.

Again, nothing "wrong" with dividend payers, I just cringe when I hear people attribute qualities to something when there is no evidence of it.

-ERD50

 

[GrayHare]

That's what bonds are for. Again, looking at the charts, I just can't pick out this added stability that people talk about.

Look at a multi-year period ending around 2010 and I think you'll find the high div payers, utilities and such, held up much better than growth equities.

 

[ERD50]

Look at a multi-year period ending around 2010 and I think you'll find the high div payers, utilities and such, held up much better than growth equities.

And why did you think that?

Based on my earlier scans, I didn't expect to see that, and I didn't. In these screen-shots, I ran the mouse over the VTI line to make it stand out - (pay no attention to the numbers in the box, those are specific to the date the mouse was at, and I just moved it so the box would be out of the way of the ending lines). In each case, VTI was in the middle or near the top.

I'm not cherry-picking data, those are your dates. I chose the first 5 divs I found with histories that go back a few years.

Here ya go. What do you see?

-ERD50

 

[ERD50]

And one I forgot to post earlier (can only do 3 at a time I think)...

-ERD50

 

[GrayHare]

And why did you think that?

Now you have me puzzled. My father was fond of dividend payers and I recall seeing a graph of his account value from about 2005 to 2012. That graph barely budged down when all else was tanking around 2009. AA was about 60/40 IIRC, and the stock side was mostly electric and telephone companies with a smattering of other div payers like JNJ. Now I am curious about the difference between that and the graphs you attached here.

 

[foxfirev5]

And one I forgot to post earlier (can only do 3 at a time I think)...

-ERD50

From 18" away it all looks the same to me.

 

[ERD50]

Now you have me puzzled. My father was fond of dividend payers and I recall seeing a graph of his account value from about 2005 to 2012. That graph barely budged down when all else was tanking around 2009. AA was about 60/40 IIRC, and the stock side was mostly electric and telephone companies with a smattering of other div payers like JNJ. Now I am curious about the difference between that and the graphs you attached here.

Well, any smaller group of individual stocks would be expected to deviate from the broader group.

If we picked apart the components of those div ETFs, we'd end up with some subsets doing better, worse, and some similar to the broad group. I imagine there was some sector that didn't get hurt too bad in that downturn, and that was what your Farther was in, but of course that doesn't mean they did better over longer or other periods.

But for practical purposes, we can't really evaluate some individual's stock picking capability for or within a sector, we need to look at publicly available indexes. And all my studies of those show no real advantages, not even in terms of (reasonably expected) stability.

And if it was clear they held up in down markets, and did well in good markets, everyone would want them, driving up the price and... well, you know the rest.

-ERD50

 

[ERD50]

From 18" away it all looks the same to me.

Well, that's kind of the point.

But in case you were not aware, if you click them you get a larger view, and some details should be seen. Still not all that different though.

-ERD50

 

[foxfirev5]

Well, that's kind of the point.

But in case you were not aware, if you click them you get a larger view, and some details should be seen. Still not all that different though.

-ERD50

Yeah, in the big picture we're a pretty fortunate group to be debating the merits of a TR or Dividend approach to investing. I must confess I'm indirectly a TR investor, since DW's IRA is 80/20 VTSAX and VBILX.

 

[Another Reader]

When you buy a stock for the dividend income, you are buying a relatively predictable, growing cash flow. The stock market goes up and down, but your income remains consistent, and likely grows at least at the rate of inflation. You don't really care what Mr. Market thinks on any given day. You just care that the managers of the business keep running and growing the business efficiently and you get your check when due.

When you buy growth stocks, the business operators are using your capital to grow the business, not pay you a cash return. You take a flier on those to grow your portfolio faster by investing in growth stock funds. You accept volatility and the risk of some business failures along the way to achieve the desired growth.

Most people here buy some version of the total market and get some of both growth and income. My question is, when you are older and can't wait out a long term bear market to recover your portfolio value, would you rather have growth stocks or the relatively predictable income of dividend payers?

 

[Dash man]

Entirely incorrect, plus there are no "long term dividends".

Okay, call them qualified and unqualified. Bottom line is stocks paying dividends that have been owned more than a year have a lower tax rate on dividends than those stocks owned less than a year.

 

[ERD50]

When you buy a stock for the dividend income, you are buying a relatively predictable, growing cash flow. The stock market goes up and down, but your income remains consistent, and likely grows at least at the rate of inflation. You don't really care what Mr. Market thinks on any given day. You just care that the managers of the business keep running and growing the business efficiently and you get your check when due.

When you buy growth stocks, the business operators are using your capital to grow the business, not pay you a cash return. You take a flier on those to grow your portfolio faster by investing in growth stock funds. You accept volatility and the risk of some business failures along the way to achieve the desired growth.

Most people here buy some version of the total market and get some of both growth and income. My question is, when you are older and can't wait out a long term bear market to recover your portfolio value, would you rather have growth stocks or the relatively predictable income of dividend payers?

All that sounds good, until you look at the charts I posted.

Where is this protection against a long term bear market you speak of?

I'm not saying this to criticize. Believe me, if someone here is posting an antidote to a long term bear market, I'm all ears. But I can't find justification for the claims.

Can you provide some evidence? Please?

-ERD50

 

[Another Reader]

All that sounds good, until you look at the charts I posted.

Where is this protection against a long term bear market you speak of?

I'm not saying this to criticize. Believe me, if someone here is posting an antidote to a long term bear market, I'm all ears. But I can't find justification for the claims.

Can you provide some evidence? Please?

-ERD50

In 2008-2009, my stock investments dropped around 50 percent overall IIRC. Other than the banks, the dividends kept coming. My dividend income dropped maybe 10 or 15 percent. This was great news for me - my dividends were reinvested and bought more shares at lower prices, because I wasn't pulling out the income to spend.

You don't eat your assets. You eat your income. You can cannibalize your portfolio by selling low and spending the money that produces, or you can cut your spending a little and eat the dividend income. If you had been pulling out 4 percent of your money every year, you might be pulling out 8 percent of what's left after a prolonged 50 percent drop in the market to maintain your income. If you base your withdrawals on the dividend income initially, you are not going to have to do that. When the market recovers, you still own all those little pieces of businesses that produce income for you every year.

I'm focused on income at this stage of life. For me, real estate and dividends are two productive income sources. I can afford to own some growth stocks at this stage precisely because I have a solid income base.

 

[marko]

In 2008-2009, my stock investments dropped around 50 percent overall IIRC. Other than the banks, the dividends kept coming. My dividend income dropped maybe 10 or 15 percent. This was great news for me - my dividends were reinvested and bought more shares at lower prices, because I wasn't pulling out the income to spend.

You don't eat your assets. You eat your income. You can cannibalize your portfolio by selling low and spending the money that produces, or you can cut your spending a little and eat the dividend income. If you had been pulling out 4 percent of your money every year, you might be pulling out 8 percent of what's left after a prolonged 50 percent drop in the market to maintain your income. If you base your withdrawals on the dividend income initially, you are not going to have to do that. When the market recovers, you still own all those little pieces of businesses that produce income for you every year.

My sentiments exactly!

 

[ERD50]

All that sounds good, until you look at the charts I posted.

Where is this protection against a long term bear market you speak of?
...

Can you provide some evidence? Please?

-ERD50

In 2008-2009, my stock investments dropped around 50 percent overall IIRC. Other than the banks, the dividends kept coming. My dividend income dropped maybe 10 or 15 percent. This was great news for me - my dividends were reinvested and bought more shares at lower prices, because I wasn't pulling out the income to spend.

You don't eat your assets. You eat your income. You can cannibalize your portfolio by selling low and spending the money that produces, or you can cut your spending a little and eat the dividend income. If you had been pulling out 4 percent of your money every year, you might be pulling out 8 percent of what's left after a prolonged 50 percent drop in the market to maintain your income. If you base your withdrawals on the dividend income initially, you are not going to have to do that. When the market recovers, you still own all those little pieces of businesses that produce income for you every year.

I'm focused on income at this stage of life. For me, real estate and dividends are two productive income sources. I can afford to own some growth stocks at this stage precisely because I have a solid income base.

Thanks for the reply. Please note, I asked for evidence. You didn't provide it, you repeated the story of how you think div payers should work.

But it got me thinking. My earlier total return charts didn't include withdraws on the portfolio. Would divs provide the cushion against withdraws that is promoted?

So I used another tool that allows for inflation adjusted withdraws. I started with 4%, but the results followed the same path all the way up to 9.x% and failure of one of the portfolios (guess which one). Just like my earlier charts (evidence), I used VTI for the broad market, and for the div payers, I spread the portfolio across those 5 symbols I found, 20% each. The rebalancing option gave a slight improvement for the divs (obviously a moot point for the single VTI symbol portfolio), so I gave the div payers the edge and included rebalancing.

As you'll see, VTI stays ahead at all points. There was one year of a deeper annual loss for VTI, but since VTI grew more earlier, that point was still higher than the divs at that time. If cannibalization had the effect you say, VTI would be the loser here, but it is not.

Portfolio # 1 = VTI; Portfolio # 2 = VYM,VIG,DVY,FDL,SDY

https://www.portfoliovisualizer.com...allocation8_2=20&symbol9=SDY&allocation9_2=20

-ERD50

 

[dixonge]

ERD50 - perhaps it might help to look at it this way, without measuring total return...

Let's assume two equivalent portfolios. One is in an index fund, the other a dividend fund (or representative portfolio). The index fund owner has to make decisions in order to pay the bills. On some schedule they must sell shares (presumably ones held longer than a year) of 4% or whatever SWR they use, *OR* adjust their spending if the market is down. That seems to be the generally acceptable methodology discussed here most often. It's not particularly difficult, but does include the possibility of needing to spend less on some occasions (depending on the size of your portfolio and lifestyle, of course)

In comparison, the dividend fund that spits out 4% will match that income but requires no decision points. If the market is flat, you lose no net worth while maintaining your lifestyle. If it stays down awhile, it might produce less cash, requiring a lifestyle decision. However, the main difference is that it is automatic. It removes most of the decision-making process.

This seems to be part of the 'comfort' point many people speak of. No, it isn't particularly difficult or time-consuming for most people to just sell shares and fund the checking account. But many people avoid a lot of anxiety that way.

Just yesterday I sat in a room full of older nerds/geeks discussing financial software. Many mentioned checking their balances every day, both to watch bill-paying and to monitor stock performance. I personally can't imagine needing Quicken for that level of monitoring *in retirement*, but they discussed the decades of file records they have kept. That tells me they are concerned about the details, and perhaps worried about things in general. Those people seem like the type that would benefit from the 'set-and-forget' reputation of dividend stocks.