Dividend paying stocks

[ownyourfuture]

In addition to individual dividend aristocrats Johnson & Johnson, 3M, etc
I own VIG for US companies & IDV for foreign.

 

[ERD50]

I understand in theory, but in practice if one has a portfolio of dividend paying stocks plus some allocation to cash & FI, presumably one can ride out most downturns without taking a real loss. If I had fewer dividends, I think I’d want to have a higher allocation to cash & FI to reduce the risk of incurring real losses. Even if the equity part of the portfolio performed better with a total return strategy, my overall return would be dragged down by holding more cash & FI. So overall, my returns are enhanced by having dividend payers because it enables me to have a more aggressive asset allocation than I otherwise would.

If this thinking is flawed, please help me understand why.

Yes, I think it is flawed - your example of "in practice" doesn't match the actual, factual history I've reported, or an analysis of the situation. It ios a false construct. I've done the analysis with/without withdrawals and with/without bonds, and the story doesn't change (which is why I didn't post them, but feel free to replicate my 'experiment').

I've already explained it - there really is no difference between a company paying a dividend, and me deciding to sell off some of my shares to provide the same $.

Wherever the market is, let's say at a trough - if that $50 company makes a $2 div payment (4%), and drops to $48 ex-div, there is no material difference between that and selling off 4% of the investment in that $50 company. In either case, you have $2 cash and a $48 stock.

Do you see - it's really as if the company sold off $2 worth. If it wasn't, their stock would still be at $50. Any way you slice it, $50-$2 = $48, whether I sell off the $2 worth, or the company does it. It was a pert of the company's value, until they gave it (sold it) to you.

And if I'm really selling at a loss - I'll pay no taxes on my $2, while you might pay 15%. But we still own the same $ worth of stock.

The next argument presented by the high-div crowd is that their stock won't drop as much, bla-bla-bla (despite them claiming they won't sell them anyhow and don't care?). But they do. If they didn't, that would mean that the divs plus NAV would show a higher total return than the broad-market index. If you can show me that, I'd love to buy into it - that's what I'm looking for. But I don't see it - do you?

-ERD50

 

[Scuba]

I’m not trying to make an argument. What I’m trying to do is think about how the execution of a total return approach would work for me vs a dividend income approach. With dividends, I just sit back and collect the income, which for me is taxable, but at a low rate. And my principal is fully intact.

If I were to replace my dividend paying stocks with a total market fund, to have the same lifestyle, any gap in cash flow net of tax would need to be made up by selling stocks, correct? And in a down market, I’d have to lock in losses that would only be on paper if I didn’t sell.

Of course I could avoid these losses by carrying a higher cash/fixed income amount and drawing on that during downturns instead. However my overall portfolio returns would likely be lower in this case.

I’m not aware of any charts or graphs showing this, nor do I want to take the time to try to “prove” this. It’s logical to me and I’m not sure what if anything I’m missing.

 

[Ed B]

Excellent points ERD. In the comparisons of Divs vs TV, you are correct about future predictably in the general “know one knows” sense. But (and I’m not a div person per se, though I am weighted in utilities) I think that most Div preferred investors would argue that most aristocrat div stocks have less volitility and less chance of a total meltdown compared to new kids on the block general funds. GE is a prime example of how wrong that can be. And most of the Div people here seem to claim a “buy it and leave it if it is maintaining or growing” position, and prefer the automatic quarterly influx. The granularity at that level is more comfortable. Charts (especially historical) never show the whole picture. In hindsight, many stocks appear far more sure footed and “how could I have missed that” average performance. But on a live granular experience they are often far from that. Too much information updates hourly can lead to a totally wrong representation. I have not seen, but suspect, that a comparison of noble div paying stocks volatility to index volatility, the extremes are far less for the Div payers, regardless of the actual NV and performance.

I’m not a good investor. But compared to most people I know, I’m a freaking genius, ( not here by any stretch) only because my returns during this bull have been on the low side of what is typical here, like 16% overall per year the last 2 years. 2015 stunk (about 5%), but 2013 & 14 were stellar as well. The difference is I keep pouring in money (still working), with a general long term mindset and stay in. We all know people that got out in 2012 because “ the crash is imminent “ mentality, and never got back in. I can easily show that had I put the vast majority in an S&P index for the last 10 years, I would be well ahead. Instead, I take some educated guesses and end up with some vastly better than and some vastly lower than the S&P with the average being under.

I know plenty of bright, intelligent people at work that are financial morons. I have to constantly watch what I say and keep my thoughts to myself unless asked. I know 2 different engineers that never even took the 3/6 401k match because they knew they could do better investing outside the 401k, yet actually never got around to doing just that, or lost much of it (real estate, sure things etc) . They are both back working after retiring because of that one simple decision. And I know many more that put everything always in to company stock, never considered a safe move. In our case, that actually was the best performer of all the funds if one looks at the last 25 years. I did the dutifully diversified thing and ended up with an overall lower return vs them.

I would venture to say that whatever keeps you invested and not panicking or selling at the wrong time is the best choice. There is less selling by the Div crowd, so that alone could be the performance edge vs them only looking at Total value.

Excellent post, and I particularly like your closing paragraph.

 

[ERD50]

... What I’m trying to do is think about how the execution of a total return approach would work for me vs a dividend income approach. ...

I’m not aware of any charts or graphs showing this, nor do I want to take the time to try to “prove” this. It’s logical to me and I’m not sure what if anything I’m missing.

I don't know what more to say. You say you want to learn how this works, but you are making some false assumptions, yet don't want to use charts and graphs to prove anything?

Sometimes things appear logical on the surface, or maybe even after digging a bit, but don't hold up under further scrutiny. It happens to me, and it is always a head-scratcher until the light comes on.

No offense, and of course you can do as you please (and I've never 'objected' to anyone deciding to use high-div payers, and they'll probably do fine, I only object to them assigning false attributes to them), but that comes across as "I've made up my mind, don't confuse me with the facts"?

... If I were to replace my dividend paying stocks with a total market fund, to have the same lifestyle, any gap in cash flow net of tax would need to be made up by selling stocks, correct? And in a down market, I’d have to lock in losses that would only be on paper if I didn’t sell. ...

If you really want to learn, go back to my $48 + $2 = $50 thought process. There is no meaningful difference between you selling $2 worth of the stock, and the company "selling" you a $2 dividend, which comes out of their stock price. It's not coincidence that they refer to it as "buying the dividend" You buy it and they sell it.

Until you understand this, you will be stuck in a "but, but, but, with a low div portfolio I'm selling" non-helpful, false paradigm.

And I already did the work for you (for me actually) - review post #49. I added 4% inflation adjusted withdrawals, and the charts show that VTI (Total Market) still beat the high div payer funds/ETFs - even with the requirement to sell to make the withdrawals during the monster 2008-2009 drop. Isn't that the 'proof' you are looking for (or the best we can do with an unknown future)? Selling even into this historic downturn didn't hurt VTI, and the divs didn't help the high-div-payer funds.

http://www.early-retirement.org/forums/f28/dividend-paying-stocks-90316.html#post2000116

It's all there. If someone can show where I'm going off the rails (and maybe I am?), rather than just say that they believe div-payers have these powers, I'm all eyes & ears.

Hope that helps, I think I'm out explanations and examples.

-ERD50

 

[marko]

I would venture to say that whatever keeps you invested and not panicking or selling at the wrong time is the best choice. There is less selling by the Div crowd, so that alone could be the performance edge vs them only looking at Total value.

Wow. This is an excellent insight.

I'll assume there is "less selling by the Div crowd" but don't know of any proof. Anecdotally I sell less often because with dividends I'm in the 'what problem am I trying to fix?' mode.

Still an excellent point IMO

 

[ERD50]

Originally Posted by Perryinva
I would venture to say that whatever keeps you invested and not panicking or selling at the wrong time is the best choice. There is less selling by the Div crowd, so that alone could be the performance edge vs them only looking at Total value.

Excellent post, and I particularly like your closing paragraph.

Wow. This is an excellent insight.

I'll assume there is "less selling by the Div crowd" but don't know of any proof. Anecdotally I sell less often because with dividends I'm in the 'what problem am I trying to fix?' mode.

Still an excellent point IMO

Except, it's an illusion. From the charts I posted, there is no need to sell off any more value from the broad-index than there is from the high-div payers.

I could understand the point if I were saying ignore volatility, and pay attention only to total return, but I'm not. I think it is perfectly rational to trade return for volatility, and that is exactly why very few people here are 100% stocks (which is also fine if you understand and accept the tradeoffs).

But the studies I have done show little difference in the volatility of the value of either portfolio. So why should this give anyone 'comfort'?

Or allow me to restate that in the positive. If the high-div funds did show reduced volatility with lower returns, I'd see it as a choice and little to discuss. No different to me than someone who decides a 50/50 AA is more suitable for them than a 70/30 AA, because they are willing to trade a likely lower total return for likely lower volatility. But we aren't seeing reduced volatility with these div-payers, so what's the point in moving away from the total market? People seem to be deceiving themselves.

-ERD50

 

[Bruceski44]

I alluded to this in one of my earlier posts, but it bears repeating. Two yeras ago, all the forecasts were for slow growth, maybe 6% max. With this low growth, I decided a TR approach was too risky for me. Would my portfolio actually outlast my 30-35 year drawdown period, considering the corrections and crashes we would experience during that time. This is what drove me to create a DGI portfolio which is designed to provide the needed cash flow without needing to sell any stocks. My forecasts show my relatively small cash cushion will last until just a few months prior to my FRA for SSA, because it should be replenished with dividends every year.

So this moves me to ask what growth rate you're planning for your TR portfolio. A backtest, even since the Great Recession will include some pretty fabulous growth rates. Can those still be expected? I no longer pay attention to forecasters, because my portfolio should be fine even with no growth. What growth is expected, and what growth is the minimum needed for your portfolio to outlive you?

 

[sengsational]

A dividend is essentially the same as the company "selling off" themselves.

You've said that before, and I bit my tongue. This thread seems to ignore the fact that some companies are simply not in the position to reinvest profits. Let's take a utility, for example. They have their "patch" and pay their people to negotiate rates with the utilities commission. They keep things running and put in a new power pole now and then. They might be looking for geography to expand into, but in the mean time, they're making money and that needs to go somewhere. None of the company assets are being sold-off so that the stock holders get a dividend! These companies have book values that hold over decades. Ok, I'm done.

 

[ERD50]

You've said that before, and I bit my tongue. This thread seems to ignore the fact that some companies are simply not in the position to reinvest profits. Let's take a utility, for example. They have their "patch" and pay their people to negotiate rates with the utilities commission. They keep things running and put in a new power pole now and then. They might be looking for geography to expand into, but in the mean time, they're making money and that needs to go somewhere. None of the company assets are being sold-off so that the stock holders get a dividend! These companies have book values that hold over decades. Ok, I'm done.

Utilities are a special case, being regulated and such. But if they didn't have those restrictions which require them to distribute their income, they would retain it (there is no other choice, is there?). If it was retained, it would be reflected in their NAV in that case, no? If not, where would it go? So it's the same thing.

Isn't the cash they collect from their customers an "asset"? So when they distribute it, it is the same as "selling it" (like I said earlier, it's why they call it "buying a dividend", for every buyer there is a seller, right?).

If it's not, please enlighten me, I just don't see it.

I've never researched Utility sector funds, I'm not really interested in sector picks, I like the Total Market. I would imagine utilities tend to act more like bonds. So I'm probably fine with Bonds and whatever utilities are in a Total Market fund.

You don't have to be done, I'd appreciate you filling me in if that doesn't square.

-ERD50

 

[Scuba]

I don't know what more to say. You say you want to learn how this works, but you are making some false assumptions, yet don't want to use charts and graphs to prove anything?

Sometimes things appear logical on the surface, or maybe even after digging a bit, but don't hold up under further scrutiny. It happens to me, and it is always a head-scratcher until the light comes on.

No offense, and of course you can do as you please (and I've never 'objected' to anyone deciding to use high-div payers, and they'll probably do fine, I only object to them assigning false attributes to them), but that comes across as "I've made up my mind, don't confuse me with the facts"?




If you really want to learn, go back to my $48 + $2 = $50 thought process. There is no meaningful difference between you selling $2 worth of the stock, and the company "selling" you a $2 dividend, which comes out of their stock price. It's not coincidence that they refer to it as "buying the dividend" You buy it and they sell it.

Until you understand this, you will be stuck in a "but, but, but, with a low div portfolio I'm selling" non-helpful, false paradigm.

And I already did the work for you (for me actually) - review post #49. I added 4% inflation adjusted withdrawals, and the charts show that VTI (Total Market) still beat the high div payer funds/ETFs - even with the requirement to sell to make the withdrawals during the monster 2008-2009 drop. Isn't that the 'proof' you are looking for (or the best we can do with an unknown future)? Selling even into this historic downturn didn't hurt VTI, and the divs didn't help the high-div-payer funds.

http://www.early-retirement.org/forums/f28/dividend-paying-stocks-90316.html#post2000116

It's all there. If someone can show where I'm going off the rails (and maybe I am?), rather than just say that they believe div-payers have these powers, I'm all eyes & ears.

Hope that helps, I think I'm out explanations and examples.

-ERD50

What isn’t gelling for me is that I believe there is a difference between my selling shares of a stock and locking in a permanent loss, vs a company “selling” me a dividend which provides me with cash flow and a temporary on paper loss. I don’t get too concerned about paper losses. Cash is king, at least for me.

 

[ERD50]

I alluded to this in one of my earlier posts, but it bears repeating. Two years ago, all the forecasts were for slow growth, maybe 6% max. ...

As you say later, forget about forecasts, they are not useful.

... With this low growth, I decided a TR approach was too risky for me. ...

Again, Total Return is not an "approach". It is the way value is measured. It is arithmetic.

You can call focusing on high-div payers an "approach", or a Total Market portfolio an "approach", but Total Return is accounting.

... Would my portfolio actually outlast my 30-35 year drawdown period, considering the corrections and crashes we would experience during that time. This is what drove me to create a DGI portfolio ...

And as I've shown, there is no indication/evidence that a "DGI" (Dividend Growth..Investing?) portfolio holds it's value any better than the Total Market.

... This is what drove me to create a DGI portfolio which is designed to provide the needed cash flow without needing to sell any stocks. ...

And I don't think you've ever shown me why this is important enough to invest in a market sector versus the Total Market. And as I've pointed out, it could be a disadvantage tax-wise.

Sure, if a DGI portfolio kicks off the 4% divs you want, and VTI kicks off 2%, you need to sell to make up that 2%. So you can do that once a year. Please don't repeat your fear of selling in a down market - the charts showed that wasn't an issue even in the 2008-2009 meltdown.

Bottom line, the market held its value even with the selling. Because those DGI are not magic, the extra divs came out of their NAV, and that's a wash. If we start with $1M and after X years of 4% withdraws, we both end up with $800K, what difference does it make where we got our income from?

After all the examples and explanations, I'm not sure why this is not getting through. One explanation is that I'm 100% wrong - but then why has no one shown me where I am wrong?

... So this moves me to ask what growth rate you're planning for your TR portfolio. A backtest, even since the Great Recession will include some pretty fabulous growth rates. Can those still be expected?...

I don't look at it in terms of expectations. Since neither of us trusts forecasts, how can I have expectations? That makes no sense to me. So I've prepared for the worst of the worst in our history, and what comes will come. All I'll be able to say is, that should put me far ahead of average, and unlikely to need assistance from anyone (much more likely to leave an inheritance). So I'm at peace with that.

... I no longer pay attention to forecasters, because my portfolio should be fine even with no growth. What growth is expected, and what growth is the minimum needed for your portfolio to outlive you?

And this and the above gets to the crux of this. Since I see no evidence that a DGI approach has provided any more security to a portfolio than the Total Market approach, so why ask this question? Div payers do go bust, divs do get cut, or don't keep up with inflation. How is questioning the growth of the Total Market (which isn't "handicapped by paying out as much in divs), any different than me questioning if your companies can continue to pay divs? For all we know, a long record just means they are due for a crash! No, I'm not saying that's true, just that you can't know anymore about the security of the companies paying those divs, than I do about the Total Market. Again, some evidence please.

There is no difference between the growth required to pay 2% divs and 2% sales, and the growth required to support 4% divs. Do you still not see that the divs would contribute to NAV if they were retained? In one case you see it as "growth", in the div-payer case, some of that "growth" is distributed each year. Show me the difference.

-ERD50

 

[ERD50]

What isn’t gelling for me is that I believe there is a difference between my selling shares of a stock and locking in a permanent loss, vs a company “selling” me a dividend which provides me with cash flow and a temporary on paper loss. I don’t get too concerned about paper losses. Cash is king, at least for me.

Then why don't the charts I posted show a huge benefit for the "DGI" funds at any point? Not during the collapse, not after the collapse, not from beginning to end? What "paper loss" are you talking about? Those charts showed the values to be similar.

If your $50 stocks pays you a $2 div and drops to $48 (it will, plus/minus other market effects), and mine pays a $1 div (and drops to $49), and I make up $1 with sales, we both have a $48 investment. There is no difference, paper or otherwise, that I can see.

Regardless, paper losses turn into real losses if you hit an unexpected bind and need to sell.


I learned long ago that if I designed a circuit to provide 12V, and I'm only getting 9V, and I've checked my meter calibration, tried different meters, and different ways of measuring it, like an oscilloscope, to make sure I'm not missing an AC component something that is affecting the reading, and I keep getting 9V, it's time to question my design, not the result.

I can't understand why some people here keep saying that DGI provides this or that result, but we don't see it in the charts?

-ERD50

 

[limeyx]

Utilities are a special case, being regulated and such. But if they didn't have those restrictions which require them to distribute their income, they would retain it (there is no other choice, is there?). If it was retained, it would be reflected in their NAV in that case, no? If not, where would it go? So it's the same thing.

Isn't the cash they collect from their customers an "asset"? So when they distribute it, it is the same as "selling it" (like I said earlier, it's why they call it "buying a dividend", for every buyer there is a seller, right?).

If it's not, please enlighten me, I just don't see it.

I've never researched Utility sector funds, I'm not really interested in sector picks, I like the Total Market. I would imagine utilities tend to act more like bonds. So I'm probably fine with Bonds and whatever utilities are in a Total Market fund.

You don't have to be done, I'd appreciate you filling me in if that doesn't square.

-ERD50

I think this horse is dead, mate.

 

[target2019]

Horse was dead at the gate.

I think this horse is dead, mate.

 

[dixonge]

Horse was dead at the gate.

Or is it? LOL

"We evaluate the investment benefits of dividend-paying stocks and identify three major findings. First, high-dividend payers have the least risk yet return over 1.5% more per year than do nondividend payers. Second, the benefit of targeting dividend payers is conditional on investment style. Surprisingly, the benefit is largest for growth and small-cap stocks, the stocks of companies usually thought to benefit the most from reinvesting their cash flows. Third, long–short managers exploiting the value premium should focus on nondividend-paying stocks as non-dividend-paying small-cap value stocks return 1% more per month than do non-dividend-paying small-cap growth stocks."

No, I haven't read this whole paper yet, but I find the summary pretty interesting. I've bolded a statement there...

https://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n6.1

 

[Senator]

I bought real estate to replace my W2 income. I am now buying dividend ETFs to replace my rental income.

I think the dividend ETFs have a more stable income flow than non-dividend ETFs. Not as stable as a bond, but maybe a small substitute for a higher allocation in bonds.

If you can reduce your bond exposure by 10%+, and have a dividend ETF instead, how does that relate to a higher overall return?

The dividends may allow you to ride out some downturns better than a bond. At a 3.25%+ return, a dividend ETF is better then most bond funds.

 

[ERD50]

Or is it? LOL

"We evaluate the investment benefits of dividend-paying stocks and identify three major findings. First, high-dividend payers have the least risk yet return over 1.5% more per year than do nondividend payers. Second, the benefit of targeting dividend payers is conditional on investment style. Surprisingly, the benefit is largest for growth and small-cap stocks, the stocks of companies usually thought to benefit the most from reinvesting their cash flows. Third, long–short managers exploiting the value premium should focus on nondividend-paying stocks as non-dividend-paying small-cap value stocks return 1% more per month than do non-dividend-paying small-cap growth stocks."

No, I haven't read this whole paper yet, but I find the summary pretty interesting. I've bolded a statement there...

https://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n6.1

Let me know what you find when you've read it all. I skimmed it, and I didn't see any comparison to the total market. It looks to me that they (and your bold excerpt) are comparing two sectors, high div and NO div.

I'm not interested in comparing sectors to sectors, my standard is the total market. I don't see a ten year 16% ( 1.015^10 = 1.015^10 ≈ 1.1605408 ) kicker for the high-div funds in the charts I posted. Why not?

Is this just academic, or can an personal investor achieve this? Why isn't it reflected in those DGI-style funds? And when reading, can you see if they selected the stocks based on their history at the start of the study, or like we saw earlier, are they just reporting the history of stocks paying high-divs now , effectively weeding out stocks that fell from grace - something we can only do in hindsight (survivor bias)? The investor would be holding those stocks that fell from grace. That can make a big difference.

-ERD50

 

[ERD50]

I bought real estate to replace my W2 income. I am now buying dividend ETFs to replace my rental income.

I think the dividend ETFs have a more stable income flow than non-dividend ETFs. Not as stable as a bond, but maybe a small substitute for a higher allocation in bonds.

If you can reduce your bond exposure by 10%+, and have a dividend ETF instead, how does that relate to a higher overall return?

The dividends may allow you to ride out some downturns better than a bond. At a 3.25%+ return, a dividend ETF is better then most bond funds.

Using high-div stocks as a replacement for bonds is an interesting idea (and very different from the discussion so far). I was thinking about that when utilities were just mentioned.

But the high-div funds I charted acted pretty much like the Total Market, so they don't seem to be a good bond substitute. But maybe a Utility sector would (monopoly, captive audience means steady income?)? I'd say it is worth investigating.

Now I recall from years ago, one of the very well respected authors (Bernstein?) talked about high yield stocks in the portfolio, and his studies indicated that it wasn't helpful - he basically said stocks for growth, bonds for stability. The high-yield didn't really provide any "goldilocks" effect. But that was a long time ago, my memory isn't great. An interesting thought.

-ERD50

 

[Luck_Club]

Nice Paper

Or is it? LOL

"We evaluate the investment benefits of dividend-paying stocks and identify three major findings. First, high-dividend payers have the least risk yet return over 1.5% more per year than do nondividend payers. Second, the benefit of targeting dividend payers is conditional on investment style. Surprisingly, the benefit is largest for growth and small-cap stocks, the stocks of companies usually thought to benefit the most from reinvesting their cash flows. Third, long–short managers exploiting the value premium should focus on nondividend-paying stocks as non-dividend-paying small-cap value stocks return 1% more per month than do non-dividend-paying small-cap growth stocks."

No, I haven't read this whole paper yet, but I find the summary pretty interesting. I've bolded a statement there...

https://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n6.1

Thanks this was very informative, though boring and extremely technical. I almost fell asleep reading it and it's 9:00 AM!

 

[Luck_Club]

Let me know what you find when you've read it all. I skimmed it, and I didn't see any comparison to the total market. It looks to me that they (and your bold excerpt) are comparing two sectors, high div and NO div.

-ERD50

I read the paper. You are correct it didn't directly compare dividend payers to a total market strategy. However, it did evaluate the total market across 4 criteria, identifying 2 sub categories that showed lower risk and higher returns then the other 2 sub categories.

By the very fact that when you are buying the total market you are also buying the two under performing categories which would result in a lower over all return wouldn't it? Or am I missing something here?

So as others have said "it just feels safer" is now fully explained in a highly technical paper.

 

[marko]

If you really want to learn, go back to my $48 + $2 = $50 thought process. There is no meaningful difference between you selling $2 worth of the stock, and the company "selling" you a $2 dividend, which comes out of their stock price. It's not coincidence that they refer to it as "buying the dividend" You buy it and they sell it.

Until you understand this, you will be stuck in a "but, but, but, with a low div portfolio I'm selling" non-helpful, false paradigm.
-ERD50

I think where people get stuck is this:
If you own a TR that were to pay no dividends, every time you need cash you must sell from your total fixed set of shares. In theory you could eventually sell down and end up with 1 share. That share may eventually grow to $50K but if you need $50K, then what?

From my perspective, unless you're at the extreme ends, it's not an either/or decision as many of my growth funds still deliver a nice dividend and many of my dividend funds deliver a decent growth.

The "$48 + $2 = $50" seems to be a different discussion but I do think one needs to realize that just because a fund/stock is TR it doesn't mean it doesn't have the ability to add shares via dividends.

 

[ERD50]

I read the paper. You are correct it didn't directly compare dividend payers to a total market strategy. However, it did evaluate the total market across 4 criteria, identifying 2 sub categories that showed lower risk and higher returns then the other 2 sub categories.

By the very fact that when you are buying the total market you are also buying the two under performing categories which would result in a lower over all return wouldn't it? Or am I missing something here? ...

Thanks, I just skimmed, but I thought I saw the same thing, and would expect the results you mention (basic math). But...

... So as others have said "it just feels safer" is now fully explained in a highly technical paper.

That still leaves me with two questions.

1) How can I act on this, since the available funds don't appear to be capturing this claimed advantage?

2) Was this a backwards look? To replicate an investor, it must be forward looking, I didn't see that in my skimming.

If I can't act on it, it's just academic. And if it utilized a crystal ball, it's only "interesting".

-ERD50

 

[ERD50]

I think where people get stuck is this:
If you own a TR that were to pay no dividends, every time you need cash you must sell from your total fixed set of shares. In theory you could eventually sell down and end up with 1 share. ...

Well, that didn't seem to be a problem in practice, and the charts I did included the big 2008 meltdown.

I'll see if I can explain that with a spreadsheet or something. Maybe someone will beat me to it.

-ERD50

 

[ERD50]

I think where people get stuck is this:
If you own a TR that were to pay no dividends, every time you need cash you must sell from your total fixed set of shares. In theory you could eventually sell down and end up with 1 share. ...

Well, that didn't seem to be a problem in practice, and the charts I did included the big 2008 meltdown.

I'll see if I can explain that with a spreadsheet or something. Maybe someone will beat me to it.

-ERD50

OK, I started putting together a spreadsheet, and as soon as I put the formulas together, the answer is obvious. Well, obvious to me - now how to explain it...

To make this apples-apples, we of course have to assume that we have two funds, the same in every other way, except one pays divs, the other does not. Let's start with $1M and $40,000 divs or sales, and keep inflation at zero for simplicity. The fund manager set the IPO at $100/sh, so we bought 10,000 shares.

The div fund reliably kicks off 4% / $40,000 a year in divs (once a year, again for simplicity) which come from its $40,000 of income, and it maintains its per share value year after year. As your $1M portfolio approaches the ex-div date it is worth $1,040,000. After paying out a 4% div to everyone, the value of the portfolio drops back to $1M. And we assume this continues in perpetuity.

OK so far?

Now if we give the same attributes to a zero-div fund, it also approaches $1,040,000 after a year, which come from its identical $40,000 of income. But there is no div, so no ex-div date, so it retains its value. So we sell $40,000 worth, and since it is now $104 per share, we sell fewer than 400 shares (384.615384615385 shares per my calcs).

So if you extend this out, yes indeed, you get to the point of owning a single share (236 years later...)! But (drum roll...) that share is worth $1M!

Another way to think if it, if you didn't sell, your portfolio would increase by $40,000 every year, because that income is retained in the fund and reflected in the NAV.

All this is just restating what was said before, but sometimes a fresh angle is what it takes for the light to come on.

In essence, it seems that any claims about the div-payers being superior is based on circular logic that they are better (they provide steady income, they don't go down as much, etc, etc)! The divs don't make a difference, but some assumption of superior performance will of course, show them to be superior. And if they are superior, then we should see it in the charts. Where's the beef?

-ERD50