Dividend paying stocks

[ERD50]

And just for "fun", here I set the withdraw to get an ending portfolio as close to zero as I could. That was $92,158, or 9.2158% WR. Note this is 2006-2017, just 11 years, so these figures don't compare directly to the Trinity 4% and 30 year starting point.

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

My sentiments exactly!

As my crusty old Uncle would say "You can't buy a ham sandwich with sentiments!".

-ERD50

 

[ERD50]

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.

I addressed that earlier.

Sure, if someone wants to tell us that they have a portfolio that provides divs that are >= their annual withdraws, and that saves them the "effort" of making a sale once a year, fine, and if that is the case, nothing to challenge (assuming the divs keep up with inflation).

But how much "effort" or decision making does it take to make a once-a-year sale? Is it really worth what we've seen as generally sub-par performance?

I won't "argue" that it would be marginally (and IMO, insignificantly) easier, but we have people claiming the div portfolio won't dip as much due to the divs, and I don't see the evidence for that, so yes, I will challenge that statement, and ask for evidence.

edit/add: And don't forget that the broad-based index pays a decent div as well, not zero. So not the entire 4% WR needs to be met with selling.

-ERD50

 

[redduck]

ERD"ShowMetheEvidence"50:

I think I became a bit lost here: So, let me ask, what is it that you want evidence of?

 

[ERD50]

ERD"ShowMetheEvidence"50:

I think I became a bit lost here: So, let me ask, what is it that you want evidence of?

It's right there a few posts back, looks clear to me:

Arghhh, the forum SW not displaying the embedded quotes makes this a pain... look at posts #33/35 and #44/46:

#44: "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?"

I asked for evidence that a div paying portfolio would recover faster/better than a broad-based index. My evidence showed it didn't, even when you are selling into the downturn.

#33: " 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."

and my reply was that there is no evidence I can find that indicates you should expect over-performance after a correction. Look at the charts I posted...

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

If someone want to say they "feel" better with a div portfolio, fine - I can't really challenge someone's 'feelings' - but I can challenge the basis for those 'feelings'.

-ERD50

 

[Another Reader]

I never said the portfolio would not dip less, the same or more than your VTI. On any given day, I don't care about market value.

And in my example I'm not withdrawing a set percentage. I would withdraw some or all of the income, which is likely lower than your 4 percent, indexed for inflation. It might be 2.5 or 3 percent. As long as it's enough to pay all the bills, that's what matters.

In my case it can be low, because it's balanced with higher income real estate. Plus pensions and Social Security.

Finally, I repeat what I said before about individuals (and pension funds for that matter) investing in the paper asset markets. It's a recent phenomenon and we all agree that future performance may differ from past performance. I prefer to be conservative and hedge against the risks that "future performance" entails.

 

[Another Reader]

It's right there a few posts back, looks clear to me:

Arghhh, the forum SW not displaying the embedded quotes makes this a pain... look at posts #33/35 and #44/46:

#44: "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?"

I asked for evidence that a div paying portfolio would recover faster/better than a broad-based index. My evidence showed it didn't, even when you are selling into the downturn.

#33: " 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."

and my reply was that there is no evidence I can find that indicates you should expect over-performance after a correction. Look at the charts I posted...

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

If someone want to say they "feel" better with a div portfolio, fine - I can't really challenge someone's 'feelings' - but I can challenge the basis for those 'feelings'.

-ERD50

I don't think you correctly read what I said. If the market drops into a prolonged bear and does not recover during my retirement, I would rather have the income than liquidate a large chunk of the portfolio over ten or more years and not be able to recover if I live longer. It's no different than my real estate. As long as there are renters, the market value can do whatever and it's not relevant.

To me, your metrics are not applicable to what I am saying. The heirs can deal with the asset base when it's their turn. I'm focused on income over my lifetime.

 

[ERD50]

I never said the portfolio would not dip less, the same or more than your VTI. On any given day, I don't care about market value.

And in my example I'm not withdrawing a set percentage. I would withdraw some or all of the income, which is likely lower than your 4 percent, indexed for inflation. It might be 2.5 or 3 percent. As long as it's enough to pay all the bills, that's what matters.

In my case it can be low, because it's balanced with higher income real estate. Plus pensions and Social Security.

Finally, I repeat what I said before about individuals (and pension funds for that matter) investing in the paper asset markets. It's a recent phenomenon and we all agree that future performance may differ from past performance. I prefer to be conservative and hedge against the risks that "future performance" entails.

I'm having trouble parsing that into any sort of testable hypothesis. Nothing materially changes with a lower WR%. It turns into "I like it because I like it, I don't need any data"?

It just reinforces to me that the people who say they like the div payers are looking at the situation with blinders on - they look at the divs, and choose to ignore total return, draw-down, and most other measures. Their call, but I just can't see any advantage to not looking at the big picture.

OK, horse beaten to death - I learned a bit from this thread, well, it just reinforced in various ways what I've already seen, I don't think there's any more to be learned here.

-ERD50

 

[ERD50]

cross posted....

...
To me, your metrics are not applicable to what I am saying. The heirs can deal with the asset base when it's their turn. I'm focused on income over my lifetime.

So if you don't care about the assets you leave heirs (which is fine), there should be no problem with selling off some assets for income, versus only spending the income they generate.

Six of one, half dozen of the other, no?


Real Estate/rental income is a separate discussion, one I don't care to delve into, as being a landlord is just not in my future, even though it may appeal and work out well for some. I don't recall if it was part of your responses or not, but I'd be hard pressed to see owning real estate as less work than making an annual ETF sale/re-balance (again, that may not be directed as you, just the 'extra work' avoided with div payers comment made by someone).

edit/add - another useful way to look at the div payer portfolio versus broad index, is that the div payer is effectively selling off some of their assets each quarter, while the lower div payer retains those divs as part of their asset base - and you decide if/when to sell. The differences are pretty minor - I prefer the flexibility of a lower div payers, I wish there was a broad based index of zero div payers, Berkshire is as close as I can come.

-ERD50

 

[Rustward]

OK, horse beaten to death - I learned a bit from this thread . . . ,
-ERD50

. . . and you own 28% of it! Congratulations!

 

[ERD50]

. . . and you own 28% of it! Congratulations!

Well, if people were not making unsubstantiated claims, I probably would not have posted at all.

And what did your post add to the conversation?

-ERD50

 

[redduck]

I agree that in the long-term Total Return ETF's outperform Dividend ETF's. I've been well aware of that for a long time (I saw the charts as well). However, I think most of the responses to your posts are from investors who aren't using Dividend ETF's but are involved in investing in individual dividend stocks. If you hear that these individual stock investors expect they can ride out a downturn maybe it's because they are loaded up with low-beta dividend payers that have a past-record of increasing dividends in bear markets. VIG has a bit over 170 stocks in it portfolio, with a bunch with rather high betas, it would be not as stable as someone's portfolio who invests in low-beta dividend stocks.

Unfortunately, since we (I) am talking about individual portfolios and not ETF's, there probably is no evidence to back this. Individual investors have different reasons for wanting to have individual dividend stocks in their portfolios--highest total return is not a universal goal.

You have these graphs that show Dividend ETF's underperform Total Return ETF's. OK, that might only be significant if someone is planning to be in 100% Dividend ETF's. That is probably nobody.

 

[Luck_Club]

I do always enjoy the pithy discussions about differing investment strategies.

 

[Danmar]

Surprising this debate continues. Clearly all research points to the fact that divs shouldn’t matter. Total return is obviously the only metric that matters. In the end, it will be the stock’s or ETF’s you chose that will determine your results.

Having said that, there are certainly more insignificant topics that garner a lot of attention here. We seem willing to “debate” almost anything. It’s just that we have heard all of this several times over.

 

[ERD50]

.... If you hear that these individual stock investors expect they can ride out a downturn maybe it's because they are loaded up with low-beta dividend payers that have a past-record of increasing dividends in bear markets. VIG has a bit over 170 stocks in it portfolio, with a bunch with rather high betas, it would be not as stable as someone's portfolio who invests in low-beta dividend stocks.

Unfortunately, since we (I) am talking about individual portfolios and not ETF's, there probably is no evidence to back this. Individual investors have different reasons for wanting to have individual dividend stocks in their portfolios--highest total return is not a universal goal. ....

Right, we can't really have a meaningful, evidence-based conversation based on someone's individuals picks. But...

I would still expect to see some trend in the larger self-proclaimed "high dividend" funds/ETFs.

And if there is a guideline to follow that would get us there with a smaller number of picks, why don't we see mutual funds with say, a dozen or so of these stocks, to market to this group (lord knows we have a large number of mini-sector funds). Seems we should see something results based if it can be done?

-ERD50

 

[Bruceski44]

One final attempt to show some evidence, although I suspect everyone already knows this and the discussion is just for discussion's sake.

First, the goal is for the portfolio to provide reliable income regardless of portfolio value. This income is designed so that the portfolio need not be sold off piecemeal to fund income needs. Any capital gains attributed to the stock price is gravy.

The image below shows the dividend payouts for all time for the core DGI stocks in my portfolio. There are many other stocks like this which I don't happen to own right now.

image shown below

The Y-axis is dividend payout (for each payment, usually quarterly) in dollars.

Note that none have ever been zero at any point over their entire lifetimes, although two get mighty close and might effectively be equal to zero.

Note that there are only a few cuts and ONLY TWO COINCIDING WITH THE GREAT RECESSION (F and UL). This triggers a sell or hold decision.

Note that many have frozen their dividends at some point in time. This triggers a sell or hold decision.

The whole point of applying a portion of my portfolio to DGI is that dividends are sticky. Corporations try to maintain them for very long periods of time and freezing or cutting them is a notorious warning sign.

These are special stocks BECAUSE they maintain their dividends and many more may be found at David Fish's excellent site:
http://www.dripinvesting.org/tools/tools.asp

The difference between ERD50's analysis and this data is that DGI funds include a multitude more stocks than this and that very volume waters down the result. Focusing on Dividend Kings introduces a lot more stability. In this case a DGI ETF or mutual fund does not represent the best result possible.

If I get frisky I may compare the growth shown here to CPI to prove the income stream is inflation protected.

These stocks pay between 2% and 5% now, although my yield on cost (YOC) is much higher, because I bought them carefully.

 

[Bruceski44]

...why don't we see mutual funds with say, a dozen or so of these stocks...
-ERD50

I believe the funds are restricted to owning 10% or less of an issue. This restricts the size and NAV of the fund and, consequently, the number of investors in the fund. To the point where the fund is not viable as a mass-market offering.

 

[Another Reader]

I never sell anything, unless it loses some or all of its' ability to produce income or there is a much better asset to trade it for.

Dividends are paid out of income, not assets. It's all part of the capital allocation decisions...

 

[njhowie]

The Schwab exchange-traded fund Schwab US Dividend Equity (SCHD) has been a good performer over the last several years. Yield is 2.63%; expenses are 0.07%.

Of course it's been a good performer with the markets rallying higher and interest rates going lower over the last several years.

What will be more interesting to see is how it will perform going forward, as interest rates rise.

I would not buy any stock or fund using 2.63% yield as any kind of justification to myself...I can buy 5 year CDs today that pay 2.75% and are guaranteed not to lose value. I believe that between now and year end, as the continuing interest rate hikes come, these types of funds will stop their upward rise in share price and feel some pressure to have the yield higher via companies increasing payouts or share prices dipping lower. My mother has been contributing monthly faithfully for many years (and continues to) into Fidelity Growth and Income (FGRIX) which looks the same as SCHD and just this week I redeemed about 15% of it for her and will actively redeem more should it continue higher at the rate which it has recently.

 

[ERD50]

I believe the funds are restricted to owning 10% or less of an issue. This restricts the size and NAV of the fund and, consequently, the number of investors in the fund. To the point where the fund is not viable as a mass-market offering.

So they could still construct a fund from as few as 11 stocks. There is a DOW 30 fund. Your chart shows ~ 14 holdings - shouldn't be a problem, even if they had to 'water it down' a bit with some lower div payers, or bonds (you could adjust your AA in other areas)?

... First, the goal is for the portfolio to provide reliable income regardless of portfolio value. ....

And part of what some us are trying to get across, is that this an objectively silly and unhelpful way to view an investment.

If that is your stated goal, then an investor looking in hindsight at an investment choice of:

A) One that kicks off 10% divs a year, and is down 50% in market value at the end of 10 years , and

B) One that has only 2% divs, but after selling ~ 8% each year for 10 years to provide the same cash flow, has a market value that is up 50%.

would chose "A". Yes, that's an extreme hypothetical, but it fits your "goal", so clearly that goal is not helpful.

.... The image below shows the dividend payouts for all time for the core DGI stocks in my portfolio. There are many other stocks like this which I don't happen to own right now.


These are special stocks BECAUSE they maintain their dividends and many more may be found at David Fish's excellent site:
The DRiP Investing Resource Center - DRiP Information, Tools, And Forms

...

These stocks pay between 2% and 5% now, although my yield on cost (YOC) is much higher, because I bought them carefully.

YOC is another non-useful measurement. Money is fungible. The current value could be moved to another investment. The future outlook of a stock is not changed because one person bought it @ $10, and another bought it @ $50.

So I plugged that stock list into the portfolio analyzer (yes, I'm a sick puppy! ), and the results were very impressive.

But that leads me to two questions:

Were these stocks picked in 2001 (as far back as the analysis went), or are they current picks based on current results (survivor bias)?

If they were 2001 picks, then I have to ask again, if this is something that can be defined by an algorithm, then why don't we see mutual funds ETFs with this kind of performance (even watered down would be fine)? And if it can't be condensed to a reliable, repeatable algorithm, it is a moot point for others. IOW, is there any public, forward looking data based on a high-dividend 'system' that shows performance of picks made years ago?

https://www.portfoliovisualizer.com...llocation23_3=8&symbol24=NNN&allocation24_3=8

-ERD50

 

[explanade]

FWIW, VIG has done very well for me. I've had it about 10 years, always reinvesting dividends.

But I also own a lot more in market index funds.

 

[ERD50]

Originally Posted by Mr._Graybeard
The Schwab exchange-traded fund Schwab US Dividend Equity (SCHD) has been a good performer over the last several years. Yield is 2.63%; expenses are 0.07%.

Of course it's been a good performer with the markets rallying higher and interest rates going lower over the last several years. ....

And not even that. Looks to be neck and neck with the market. Nothing special at all.

https://www.portfoliovisualizer.com...&symbol3=VSMGX&symbol4=SCHD&allocation4_2=100

cross posted:

FWIW, VIG has done very well for me. I've had it about 10 years, always reinvesting dividends.

But I also own a lot more in market index funds.

VIG has done well the past 10 years, but not as well as "the market". So what's the point?

https://www.portfoliovisualizer.com...location4_2=100&symbol5=VIG&allocation5_3=100

-ERD50

 

[dixonge]

https://www.marketwatch.com/story/d...-the-returns-of-the-sp-500-in-2016-2016-09-06

I may be missing something, but I can't find it yet. Seems legit... looks at total return, which should include dividends from both.

 

[Bruceski44]

And part of what some us are trying to get across, is that this an objectively silly and unhelpful way to view an investment.
-ERD50

Here's the crux of it. I'm having a lot of trouble understanding how my goal could be silly and unhelpful. What could be less silly and more helpful than getting my required income, through thick and thin, without touching the principal? But if that's the way you feel, then nothing I say is likely to change your mind or even be considered a valid point. I understand your point: you sell a little of your portfolio when needed, counting on LT growth to bring it back. I considered that approach and after considering projections for slow overall growth and inevitable corrections and crashes, decided it wasn't reliable enough for me. I'm guessing 10% of my dividend income may be at risk in the next recession, but I can survive that.

I agree YOC is not a helpful benchmark because it cannot be replicated at the current prices. But the fact that my YOC is higher than current yields represents a capital gain due to price appreciation. This should not be glossed over, but it's not the primary goal. Unloading part or all of an appreciated asset (cyclical for example) is wise and can increase portfolio yield.

For the benefit of others, there's no secret sauce here, and no fund that I'm aware of. I do own VDIGX as it provides exposure to some large-cap dividend payers I don't own, but I'm not bragging about VDIGX with its 2% payout. A solid DGI portfolio can be created by anyone willing to consult the DRIP investing website I referenced earlier and doing their own due diligence to determine entry points and diversification.

 

[camfused]

...I would not buy any stock or fund using 2.63% yield as any kind of justification to myself...I can buy 5 year CDs today that pay 2.75% and are guaranteed not to lose value...

I am not sure I follow that. The CD would be worth the issue price + the 2.75% each year. The fund would be paying dividends of 2.63% + hopefully have growth in the share price of maybe 5% or so per year, right

 

[njhowie]

+ hopefully have growth in the share price of maybe 5% or so per year, right

Bingo!

My favorite saying...Hope is not an investment thesis.

The problem we have today is that nobody considers what if there a loss of 5%, 10%, 20% or more...maybe for an extended number of years.

The 2.75% CD has no risk, you will get it all back at maturity. What guarantees have you got with the fund?