Dividend Stocks in place of Bonds

[Nords]

Quote:

Originally Posted by mathjak107 the open is set just before trading at that reduced level by exactley the amount of the dividend.

You're more than welcome to make up your own explanations, but you can't make up your own facts. I'd appreciate it if you'd stop blathering telling us how it is and show us the rule that says that's how it's done. Because I don't think there is such a rule!

Quote:

Originally Posted by mathjak107 point is whatever the exchages do it works.

That's because they don't do anything...

[mathjak107]

im not following what it is your looking to see. the exchange rules which you can look up yourself just state that when stocks go ex-div the exchage computors will automatically reduce all bids downward by that amount causing the stock to open lower by the same amount. where investors take it from the lower opening is up to the markets. there is nothing else that happens.

[mathjak107]

Dividend Facts You May Not Know
February 27, 2007 | By Jim Mueller

Email this Article Print this Article Comments Add to del.icio.us
Other RSS Readers



Price Implications
When a dividend is paid, several things can happen. The first of these is what happens to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movement of a normal day's trading. However, this becomes easily apparent on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.

[Gone4Good]

Quote:

Originally Posted by Nords But all I'm asking for is someone to point me to a rule that clearly states what mathjak is claiming happens. I understand the open-order stuff, but that has to do with open bids to buy at a certain price. I haven't ever seen anything applicable to the ask price, and since as CFB says it changes from one msec to the next, I suspect that there isn't any "rule" for ask prices because it's just unecessary. . . .

On January 6, 1994, the Securities and Exchange Commission (SEC) approved an amendment adding a new Section 46 to the NASD Rules of Fair Practice that requires members holding open orders to adjust the price and the size, if necessary, of the order by the amount of any dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest. The text of the amendment, which takes effect May 16, 1994, follows the discussion below . . .

Open orders, also known as "good 'til cancelled," "limit," or "stop limit" orders, are orders to buy or sell that remain in effect until they are executed or canceled, or that expire.



Don't really understand what the big brew-ha-ha is all about.

[Nords]

Quote:

Originally Posted by 3 Yrs to Go Don't really understand what the big brew-ha-ha is all about.

Just trying to get a claim backed up by a brokerage rule.

Plenty of conjecture and media bites but nothing like the reference you just quoted. And while I understand that one, it doesn't apply to the actual distribution of the dividend.

I think the journalist had it right-- you can't tell what's happening because the price is moving. But I don't think there's any exchange rule requiring that the price be adjusted and I'm just trying to get mathjak to stop making claims that he can't reference with a shred of rules or other requirements.

I think posters should be responsible for documenting their claims about the way the market works, especially when they feel entitled to state so in such an authoritative manner... or at least until they're asked to simply provide the reference for such a statement.

[Gone4Good]

Quote:

Originally Posted by Nords And while I understand that one, it doesn't apply to the actual distribution of the dividend.

Maybe I'm not understanding your point, but the price is changed on the ex-dividend date . . . not the distribution date.

Market makers adjust downward for the dividend the day it begins trading ex (i.e. without the dividend). When the market opens that day it will push the stock up, or down, or sideways from there. On the dividend payment date, nothing happens with the stock price . . . because it is already trading ex-the dividend.

[saluki9]

Quote:

Originally Posted by Nords You need to state a reference to back up your opinion. In the past you've quoted a rule that says open orders are adjusted by the amount of the dividend (which protects people with tight sell stops or limit buy orders) but you've been unable to show a credible source for your speculative statement on how the market works. I'd be happy to learn about such a rule adjusting ex-dividend prices at the open, but IMO there is no such rule. It's just market-makers matching up the orders. The stock's opening price may coincidentally drop by the dividend amount-- but it could also drop more, drlp less, stay flat, or rise. There's no legislation affecting it, and you're confusing correlation with causality.

Nords there is such a rule (at least for NYSE stocks) it's called Rule 118 and it applies only to open to buy orders (at market) and open stop orders.


Just checked and NASDAQ has the same rule (#3220)

[Nords]

Quote:

Originally Posted by saluki9 Nords there is such a rule (at least for NYSE stocks) it's called Rule 118 and it applies only to open to buy orders (at market) and open stop orders. Just checked and NASDAQ has the same rule (#3220)

Thanks, Saluki.

Are those references available on the Internet or just Bloomberg terminals & professional manuals?

[mathjak107]

i didnt bother to re-post the exchange rules again because the last time we had this discussion and there were quite a few dis-believers i posted it.

non the less here it is:
Rule 118 . Orders To Be Reduced and Increased on Ex-Date
When a security is quoted ex-dividend, ex-distribution, ex-rights or ex-interest, the following kinds of orders shall be reduced by the value of the payment or rights, and increased in shares in the case of stock dividends and stock distributions which result in round-lots, on the day the security sells ex:

(1) Open buying orders;

(2) open stop orders to sell.

The following shall not be reduced:

(1) Open stop orders to buy;

(2) open selling orders.

(See 124.40 [¶2124.40] for the reduction of odd-lot orders)

• • • Supplementary Material: ------------------

.10 Reduction of orders—Odd amounts.—When the amount of a cash dividend is not equivalent to or is not a multiple of the fraction of a dollar in which bids and offers are made in the particular stock, orders shall be reduced by the next higher variation.

.20 Reduction of orders—Optional amounts.—When a dividend is payable at the option of the stockholder either in cash or securities, the stock will be ex-dividend the value of the cash or securities, whichever is greater.

.21 Reduction of orders—Proportional procedure.—Open buy orders and open stop orders to sell shall be reduced by the proportional value of a stock dividend or stock distribution on the day a security sells ex-dividend or ex-distribution. The new price of the order is determined by dividing the price of the original order by 100% plus the percentage value of the stock dividend or stock distribution. For example, in a stock dividend of 3%, the price of an order would be divided by 103%.

is otherwise permitted by this rule. The specialist must document the status of a converted percentage order on the book as a limit order at the price it was converted.

Notwithstanding the provisions of this Rule permitting percentage orders to be converted on destabilizing ticks, where a member holds orders of 10,000 shares or more or a quantity of stock having a market value of $500,000 or more (whichever is less) to buy or sell a particular stock which he proposes to cross at or within the prevailing market, the specialist may not, unless asked to do so by the member with the cross (assuming the cross is at or within the 0.25 point price parameter of this Rule), convert any percentage order on a destabilizing tick for execution in such proposed cross transaction unless the specialist can (at or within the 0.25 of a point price parameter specified in this Rule, and within the limit price of the order) provide a better price to one side or the other of the proposed cross.

[ats5g]

Nords,

NASD Rule 3220: Adjustment of Open Orders

NASDAQ Rule 3220: Adjustment of Open Orders

NYSE Rule 118: Orders To Be Reduced and Increased on Ex-Date

[cute fuzzy bunny]

I think once again we're tied up in the mechanics and missing the point.

I believe Mathjak's original point was that dividends dont really matter because the stock price is adjusted to offset the dividend.

Which does happen so that open orders dont get screwed up when the stock 'drops'.

But actual market action does not bear out mathjaks assertion. Seems to me that most issues are immediately marked back up (or down) in line with buyers and sellers psychology and existing market action.

This is sort of like telling a nascar driver that going so far wears out the tires and uses a lot of gasoline. Technically correct but not particularly interesting or applicable.

[mathjak107]

i think the point to the whole thing is you cant predict whether the market will let the stock re-cover from the dividend or not . looking at the 10 highest dividend paying dow stocks ,if you bought them 2 or 3 years ago depending whether you bought all or some your principal could be in a real pickle. so using dividend paying stocks in place of bonds is a bad idea in my opinion

[cute fuzzy bunny]

I cant predict what i'm having for breakfast today (okay, I can...homemade chorizo, eggs on green chili corn tortillas...). What I can predict is that using a worst case example, like the doggiest dogs of the dow, isnt going to be the plan i'd implement either...

Funny but we just had a big discussion where a fair number of people felt that the near-intermediate markets would be terrible for bonds. Seems that the arguments for those conditions would favor a big basket of dividend paying value stocks.

[Gone4Good]

Quote:

Originally Posted by Cute Fuzzy Bunny But actual market action does not bear out mathjaks assertion. Seems to me that most issues are immediately marked back up (or down) in line with buyers and sellers psychology and existing market action.

It seems that both parties are standing on a patch of ground which is technically correct and neither will admit the truth in the other's point. So I'll say it . . . both mathjak and CFB/Nords have factually correct points.

1) The open orders are adjusted downward when stocks go ex-dividend. (Score for mathjak)

2) However, open orders carrying over from the prior day do not constitute the whole market. New orders coming in the morning the stock trades ex, are added to the book and settled at the open resulting in an opening price that can be wildly different from the closing price - the dividend. (Score for CFB/Nords)

What this has to do with buying dividend stocks, or stocks in general, I haven't a clue. The relevant fact, stated earlier (by me), is that it doesn't matter whether a firm pays dividends or does not . . . total returns (which is what matters) will be the same regardless.

[cute fuzzy bunny]

As I said, Mathjak's point was that dividends didnt matter because the stock price was adjusted.

Which is irrelevant because the price immediately moves, without necessarily any correlation with the exchanges 'adjustment'.

I'd dispute your claim of total returns being the same...in the short to intermediate term, market prices may or may not have a bearing on the companies earnings and financials. Long term, if identical companies XYZ and ABC both earn the same and have the same financials, but XYZ pays a dividend while ABC burns a billion dollars in R&D that bears no fruit...I think long term you'd have a better valued investment in XYZ.

[mathjak107]

hmmmm what would microsoft or apple think of that

[cute fuzzy bunny]

Probably a lot differently than Altria or General Electric?

[Gone4Good]

Quote:

Originally Posted by Cute Fuzzy Bunny Long term, if identical companies XYZ and ABC both earn the same and have the same financials, but XYZ pays a dividend while ABC burns a billion dollars in R&D that bears no fruit...I think long term you'd have a better valued investment in XYZ.

Well gee, if you assume that company ABC wastes money and XYZ doesn't then sure. We could just as easily assume that ABC reinvests in projects that earn returns greater than its cost of capital . . . in which case ABC would provide better long run returns then XYZ.

However, if we start with the fair assumption that besides the dividend, all else is equal, then XYZ and ABC will have the same long-run returns.

[clifp]

Quote:

Originally Posted by mathjak107 i think the point to the whole thing is you cant predict whether the market will let the stock re-cover from the dividend or not . looking at the 10 highest dividend paying dow stocks ,if you bought them 2 or 3 years ago depending whether you bought all or some your principal could be in a real pickle. so using dividend paying stocks in place of bonds is a bad idea in my opinion

To some extent who cares about the principal, what matters is the income.
First holding bonds doesn't protect from losing principal. If you hold bond funds (prudent I think for holding corporate bonds, and even some Government securities like GNMAs), if interest rates increase you have a paper loss of principal (one which potentially permanent if interest rate stay high for a long period of time). The alternative is to hold individual bonds, which again are subject to a temporary loss of principal. If you hold individual government bonds while your principal and interest are safe your returns are quite low,on the other hand individual corporate bonds, suffer almost the same fate as stockholder if the company goes bankrupt. In fact bond holder often have even worse company risks. For example in a situation like we see with Sallie Mae, a good thing for stockholders like a takeover, is a bad thing for bond holders.


Lets take a look at at dividend stocks. Below I've listed the yearly dividend payout history of all of the highest yielding stocks in the DJIA. Depending on when you bought in the last 4 1/2 years these stocks would have pretty much covered the dogs of the Dow.

2003 2006

Alteria 2.44 3.32
Citigroup 1.99 3.52
AT&T 1.07 1.33
Caterpillar .70 1.20
Dupont 1.40 1.48
Exxon .92 1.28
GE .73 1.03
GM 2.00 1.00
Honeywell .75 .91
JP Morgan 1.36 1.36
Johnson Johnson .80 1.46
Merck 1.42 1.52
MMM 1.24 1.84
Pfizer .52 .96
Verizon 1.38 1.56

Eastman Kodak* 1.80 .50

*2003 Dog dropped from Dow Jones Average

I think the importance thing to note is that except for Eastman Kodak and General Motor which cut dividends, and JP Morgan which maintained dividends, all other company on the list increased dividends, in most cases much faster than inflation. The result is that unlike the buyers of 10 year T-Bill the retirees income would have increased, even after suffering a dividend cut from GM and Kodak.

Morever in Dec 2002 the Dogs of the dow were yielding 4.2% vs a 10 Year T-Bill of 4.0%. Even in 2006 the dogs were yielding 3.6% vs a 4.6% 10 year T-Bill. So the dividend investor was starting off with more income than the bond investor, and ended this year with more income. This year you'd take a 1% hit but you'd have more favorable tax treatment. The nice thing is all of the numbers are pretty close to a 4% SWR and as long as dividend growth increases near the inflation rate you don't have to worry about the current stock prices of your portfolio. Although obviously, with more than 1/2 of the DOW on the list and the DJIA at record levels there has been a good capital appreciation also.

I still think you should have some money in bonds/MM/CDs, but I do think dividend stocks can be used as a substitute for much of the bond allocation portfolio, allowing you to keep your cash/bond allocation to 10-25% level.

[mathjak107]

tell you what if principal dosent matter give me 10,000 bucks and ill gladley pay you 10% for 5 years but i keep the principal. of course it matters.


the average swing for a stock price is between 35-40% a year. i highly doubt any high quality treasury or corporate bond will swing like that. tell the people who retired in 2000 principal dosnt matter as 40% of their nest egg evaporated in the s&p alone.

and these bonds will pay off in full at maturity if held .. they behave in a way like cd's. you are no more or less exposed to interest rate fluctuations than you are with a cd.you get exactly what you bargained for. if you stay with treasuries there is no risk to speak of. if you planned properly you still get the income you need and your principal remains to fight another day.

if you planned properly the numbers work based on the anticipated cash flow from the interest levels you are going to get .

i have a place for my dividend paying stocks but it isnt in my income bucket, its in my stock bucket WHERE THERE IS NO CHANCE ILL EVER HAVE TO LIQUIDATE THEM IN A DOWN MARKET in case dividends are cut and i need more income..


reminds me of the junk bond thinking of the 80's . oh the income stream was fabulous but your principal was gone .