I love Dividend Distributions

[eta2020]

Buffet bough KO in late 1980s loooong before his company became huge as it is today.

It is this type of investing that made him rich.

The rest of the reasoning of Clifp is something that I agree with. Yes those high quality companies do tend to pay raising dividend.

 

[clifp]

The math doesn't tell the whole story.

Mathjak is absolutely correct on the mechanism and math behind dividend distributions.

However, that makes zero difference to why I like dividends.

Companies with a solid record of dividend growth tend to be very good long term investments.

During recessions, I have no concerns about selling stocks at a loss, and the dividends tend to hold up far, far better than the stock prices. This is just one case, but for me, in the last recession, my portfolio lost about 40% of its value, my income stream from dividends was down 3% for one year and then recovered.

The psychological benifit of having less volatility is very valuable to some.

The fact that my dividend income stream grows by 7-8% a year is also very helpful.
So in good years, I contirbute more to charities, reinvest some, or a bit of both. In the worst of years, I hold pat. No need to sell anything with the exception of now as we plan to build a new house.

The math is important for everyone to understand, but the math is not the whole story.

I completely agree, MATH isn't everything.

Arguably the biggest question on early retirement is how much can I safely withdraw from my portfolio. It certainly was my biggest question for the first few years I retired (99/2000). The market tanking and being in my early 40s, FIRECalc runs for 30 years weren't entirely comforting nor appropriate.

I wasn't also thrilled with the idea of taking a fixed percentage (4 or 5%) from my portfolio, while its true you can't go broke with this approach the variability of spending was too great.

So I settled on keeping my spending to below my dividends plus interest. The volatility of dividends paying stock is lower than non dividend paying stocks,and even more important dividend income is much less volatile my total income dropped by 6% (but that was also due to declining interest rates in 2009).

Now it is certainly true now days that relying on solely dividends&interest is going to result in lower SWR mine is 2.7% last I checked, down from 3.6% in 2009. But just like Zatharas and most retirees I cut back in 2008 and 2009. I didn't change my daily spending very much, but the big ticket items I deferred. The last couple of years have seen crazy spending, on my part, a Tesla lots of home improvement stuff, increased charitable giving. I'm able to justify it because of capital gains from my non dividend stocks (mostly Berkshire).

 

[eta2020]

Zathras and clifp you both are talking my language.

I would not mind withdrawing 2 .7 % instead of 3.6 from portfolio that grew 200 or 250 percent

 

[bad_LNIP]

But what the fairly predictible price runup in stocks leading up to the Ex dividend date that was noted 30 years ago? Someone asked about the math, and there's the math in an academic study from 1984 that noted prices tend to run up in anticipation of the Ex dividend date.

https://www.minneapolisfed.org/research/sr/sr173.pdf Page 4.

I would hardly say it is a non-event in reality, when you are actually trading and making/losing money as opposed to an academic exercise. What tends to happen in reality is that there is an ex-dividend price runup, usually the amount of the dividend, at which point you have your 100k investment worth 110k and then it comes back down to 100k after the dividend paid for a 10% example.

If it were truely a non-event, dividend capture funds would have performed much better than they have in the past, which is to say they have performed very poorly.



Looking at a very, very short timeframe, say the closing price the day before ex div and the opening price the day after, yes, the dividend is subtracted, but that is kinda missing the point if the stock rallied 2% leading up to the 2% dividend, and just happens to do so every quarter.



Sure, total return 10% in dividends is the same as 10% in capital gains, but in reality,

Mr. Market isn't always so agreeable and you rarely have a situation where stocks reliably go up 10% each and every year with capital gains,

but you do have stocks that have reliably paid dividends each and every year or month. That's a huge IF to say that your total returns would be the same if they pay a dividend vs retained earnings.

It seems that you are suggesting that if the company just kept the funds as retained earnings, the market is going to neatly value the retained earnings at the proper multiple to grant a 10% capital gain at the end of the year where you could just sell for the same gain at a lower tax rate. In reality, it just isn't so.

In reality, the market does all sorts of bonkers stuff and may wind up valuing the stock at a 10% loss despite improving revenue and earnings. Mr. Market may value the earnings at a 10x multiple or a 20x multiple or a 5x multiple. I have no idea and neither do you.

I'm not talking about end of the year pay out with actively managed funds, but stocks, CEF's, and ETF's which actively trade.

No mention in this discussion has been made about dividend capture strategies, dividend stripping, dividend spread arb, and the impact it has on stock prices around dividend dates.

Professional investors have created funds to trade off the phenomenon of dividend capture and the dividend price runup, so it is very real and very predictable.

I just happen to know about the dividend runup from investing in high dividend paying stocks for many years.

There is study:

http://www.theglobeandmail.com/globe-investor/personal-finance/rotating-between-dividend-payers-sounds-simple-but-is-tough-to-execute/article625355/

after study:

http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2014-Rome/papers/EFMA2014_0113_fullpaper.pdf

After study that cover the pre-ex dividend runup:

http://faculty.bus.olemiss.edu/rvanness/Working%20Papers/ShortDividend.pdf

The relation between trading behavior and dividend payments is not a new area of re search (Kalay, 1982, Miller and Scholes, 1982, Lakonishok and Vermaelen, 1986, and Koski and Scruggs, 1998

Amen to that.

Empirical results (Michaely and Vila, 1995, 1996, and Koski and Scruggs, 1998) find an increase in trading volume a fter the dividend announcement and before t he ex - dividend date suggesting that some t raders engag e i n dividend capture strategies. Lakonishok and Vermaelen ( 1986 ) show positive abnormal returns prior to the ex - dividend day and negative abnormal returns after, suggesting that increased (decreased) demand for dividend - paying stocks by divid end capture traders drives prices up prior to (after) the ex - dividend day. Lakonishok and Vermaelen show that ex - dividend return patterns are driven by stocks with larger dividend yields, which are likely stocks that generate the most demand by dividend ca pture traders. Koski and Scruggs (1998) find abnormal trading activity prior to the ex - dividend date


Dividend spread arb, another strategy designed to capitalize on the phenomonon:

http://thismatter.com/money/options/dividend-spread-arbitrage.htm

more studies on the price runup before the ex date:

http://www.stockopedia.com/content/dividend-stripping-is-it-worth-playing-the-ex-div-calendar-67048/

It happens in australia:

http://www.macquarie.com.au/mgl/au/personal/investments/specialist/dividend-run-up-fund

 

[mathjak107]

But what the fairly predictible price runup in stocks leading up to the Ex dividend date that was noted 30 years ago? Someone asked about the math, and there's the math in an academic study from 1984 that noted prices tend to run up in anticipation of the Ex dividend date.

https://www.minneapolisfed.org/research/sr/sr173.pdf Page 4.

I would hardly say it is a non-event in reality, when you are actually trading and making/losing money as opposed to an academic exercise. What tends to happen in reality is that there is an ex-dividend price runup, usually the amount of the dividend, at which point you have your 100k investment worth 110k and then it comes back down to 100k after the dividend paid for a 10% example.

If it were truely a non-event, dividend capture funds would have performed much better than they have in the past, which is to say they have performed very poorly.



Looking at a very short timeframe, say the closing and opening price of a stock going ex div, yes, the dividend is subtracted, but that is kinda missing the point if the stock rallied 2% leading up to the dividend, and just happens to do so every quarter.



Sure, total return 10% in dividends is the same as 10% in capital gains, but in reality,

Mr. Market isn't always so agreeable and you rarely have a situation where stocks reliably go up 10% each and every year with capital gains,

but you do have stocks that have reliably paid dividends each and every year or month. That's a huge IF to say that your total returns would be the same if they pay a dividend vs retained earnings.

It seems that you are suggesting that if the company just kept the funds as retained earnings, the market is going to neatly value the retained earnings at the proper multiple to grant a 10% capital gain at the end of the year where you could just sell for the same gain at a lower tax rate. In reality, it just isn't so.

In reality, the market does all sorts of bonkers stuff and may wind up valuing the stock at a 10% loss despite improving revenue and earnings. Mr. Market may value the earnings at a 10x multiple or a 20x multiple or a 5x multiple. I have no idea and neither do you.

I'm not talking about end of the year pay out with actively managed funds, but stocks, CEF's, and ETF's which actively trade.

No mention in this discussion has been made about dividend capture strategies, dividend stripping, dividend spread arb, and the impact it has on stock prices around dividend dates.

Professional investors have created funds to trade off the phenomenon of dividend capture and the dividend price runup, so it is very real and very predictable.

I just happen to know about the dividend runup from investing in high dividend paying stocks for many years.

There is study:

http://www.theglobeandmail.com/globe-investor/personal-finance/rotating-between-dividend-payers-sounds-simple-but-is-tough-to-execute/article625355/

after study:

http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2014-Rome/papers/EFMA2014_0113_fullpaper.pdf

After study that cover the pre-ex dividend runup:

http://faculty.bus.olemiss.edu/rvanness/Working%20Papers/ShortDividend.pdf

The relation between trading behavior and dividend payments is not a new area of re search (Kalay, 1982, Miller and Scholes, 1982, Lakonishok and Vermaelen, 1986, and Koski and Scruggs, 1998

Amen to that.

Empirical results (Michaely and Vila, 1995, 1996, and Koski and Scruggs, 1998) find an increase in trading volume a fter the dividend announcement and before t he ex - dividend date suggesting that some t raders engag e i n dividend capture strategies. Lakonishok and Vermaelen ( 1986 ) show positive abnormal returns prior to the ex - dividend day and negative abnormal returns after, suggesting that increased (decreased) demand for dividend - paying stocks by divid end capture traders drives prices up prior to (after) the ex - dividend day. Lakonishok and Vermaelen show that ex - dividend return patterns are driven by stocks with larger dividend yields, which are likely stocks that generate the most demand by dividend ca pture traders. Koski and Scruggs (1998) find abnormal trading activity prior to the ex - dividend date


Dividend spread arb, another strategy designed to capitalize on the phenomonon:

http://thismatter.com/money/options/dividend-spread-arbitrage.htm

more studies on the price runup before the ex date:

http://www.stockopedia.com/content/dividend-stripping-is-it-worth-playing-the-ex-div-calendar-67048/

It happens in australia:

http://www.macquarie.com.au/mgl/au/personal/investments/specialist/dividend-run-up-fund

not exactly the same thing .

when talking about the same exact stock paying a dividend or not and trying to guess whether the stock would advance or fall the same amount in either case is impossible to predict.

but what is very predictable is stocks with the same total return will perform the same whether one pays a dividend and one does not.

 

[eta2020]

when talking about the same exact stock paying a dividend or not and trying to guess whether the stock would advance or fall the same amount in either case is impossible to predict.

but what is very predictable is stocks with the same total return will perform the same whether one pays a dividend and one does not.

Mathaj,

Can you please give us an example of company that grows and grows for last 50 years but does not pay/grow dividend?

Skip brk which owns growers

 

[Sunset]

Lets say 20k of your income were qualified dividends.

Try computing taxes while having those 20k as Bond yield instead of qualified dividends. I would be extremely surprised if you end up with identical tax bill.

Yea it is better That is why Mitt Romney pays less then 14% taxes on tens of millions of annual income.

WRONG, Mitt benefits from the special "carried interest" tax loophole that treats earned income by folks like him as if it were long term capital gains. Even though that is all he gets every 2 weeks as a paycheck.

I just love it when the tiny people with less than 5MM think they are like the big folks with 115MM in the KIDS 529 plan, and G-d only knows how much in the parents stash.

Yes, life is not fair, and sometimes I feel that is not right.

 

[haha]

This thread deserves nomination in the Strangest of the Strange Competition.

In fact, I nominate it.

Ha

 

[bad_LNIP]

when talking about the same exact stock paying a dividend or not and trying to guess whether the stock would advance or fall the same amount in either case is impossible to predict.

But that's what you have to do if you are going to say capital gains, which are anything but predictable, are superior to dividends which in many cases are fairly predictable. Predicting total return? That is pretty much impossible, particularly given the uncertainty of capital gains.

but what is very predictable is stocks with the same total return will perform the same whether one pays a dividend and one does not.

Right, and 4 quarters equals a dollar. Nothing profound there. The problem is that neither you nor I nor anyone else can predict or any sort of accuracy what your end of year total return will be for any given stock any more than we can predict the exchange rate between the dollar and Euro a year in advance.

I think you can generally have some idea of what a stock portfolio will yield, although some stocks will eliminate their dividends ala SDRL, there are companies like O that pride themselves on paying regular and increasing dividends that are more likely than not likely to be paid.

 

[pb4uski]

This thread deserves nomination in the Strangest of the Strange Competition.

In fact, I nominate it.

Ha

I second the nomination.

(And I agree with Ha? How in the world did that happen?)

 

[mathjak107]

what is interesting is that 387 stocks of the 502 in the s&p 500 pay dividends .

many appear to be growing dividends but in fact dividends are shrinking.

dividends paid by companies in the s&p 500 are less than 2% of their share price.

the long term average was actually 4.4% according to data from shiller.

dividends have been falling steadily as a share of earnings with about 1/3rd of profits being paid out compared with nearly 50% in the 1980's and 1990's.


if the s&p companies paid out the same percentage of profits as they did during the decade ending last december share holders would have gotten 1 trillion more in dividends than they did.

instead these dividend payers have actually been scaling back paying out no where near what they were as a percentage of earnings even though to the public it appears they are raising dividends . in reality they raise dividends only a fraction of what they should be based on earnings.

most of that money was spent in stock buy backs which companies realized are a far better thing to do with excess cash than give it away.

the s&p 500 companies bought trillions of dollars worth of stock buy backs the last decade . last year they spent 540 billion on buy backs alone. that surpassed the prior record which was 504 billion in 2007.


ironic that alot of growth the s&p 500 has seen was not because they paid a dividend but actually because they didn't and retained the earnings for better use.

 

[clifp]

most of that money was spent in stock buy backs which companies realized are a far better thing to do with excess cash than give it away.

the s&p 500 companies bought trillions of dollars worth of stock buy backs the last decade . last year they spent 540 billion on buy backs alone. that surpassed the prior record which was 504 billion in 2007.


ironic that alot of growth the s&p 500 has seen was not because they paid a dividend but actually because they didn't and retained the earnings for better use.

I think there is very little evidence that stock buy back are better for shareholders than dividends. There is a lot of evidence that stock buybacks are better for the guys in the C suite, since it makes their stock options a lot more valuable than merely increasing dividends.

 

[redduck]

a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding.

This thread deserves nomination in the Strangest of the Strange Competition.

In fact, I nominate it.

Ha

I second the nomination.

(And I agree with Ha? How in the world did that happen?)

Yeah all that's fine: nominate it and second it all you want. But, I still don't know where I can get my penny doubled and compounded everyday for thirty-one days and walk away with ten million bucks. I just hope the pay-off isn't in pennies. It would make it real hard to walk away carrying my hard-earned money.

 

[bad_LNIP]

I think there is very little evidence that stock buy back are better for shareholders than dividends.

Correct.

There is a lot of evidence that stock buybacks are better for the guys in the C suite, since it makes their stock options a lot more valuable than merely increasing dividends.

Also correct. IBM is the classic example of this where they used some 100B in buybacks to juice their EPS figure, which was well received by wall st and analysts. Oh, btw revenue DECLINED over the past few years, yet EPS increased.

 

[redduck]

I was just thinking about this penny compounding thing. Why doesn't everybody do it? Then, people could figure out exactly when they wanted to retire, get a penny, start the doubling and compounding process and retire 32 days later. This would eradicate the OMY disease. Biggest thing since the polio vaccine. (OK, maybe Seventh Day Adventists wouldn't go for it).

 

[pb4uski]

redduck,

I can see this penny thing is really bothering you so I tell you what.... I'll take on the first 10 days if you can find someone to cover off days 11 to 31.

pb4uski

 

[redduck]

pb4uski,

You are a visionary.

That said...
We might want to keep this a secret just between us because some people here will probably be jealous and claim we were just lucky. Not to put pressure on you, but, if this works, I'll be able to completely retire before I'm 71.

I remain...
redduck

ps: Since you're taking the first 10 ten days, you'll have to come up with that first penny or the deal is off.

pps. Do we have to give anything to that mathjak guy for his idea?

 

[mathjak107]

I think there is very little evidence that stock buy back are better for shareholders than dividends. There is a lot of evidence that stock buybacks are better for the guys in the C suite, since it makes their stock options a lot more valuable than merely increasing dividends.

well buffet seems to think so and that facts speak for themselves i think.

dividends are actually reduced compared to what they should be and stock buy backs are way up.

so companies basically are saying we can't do better than invest in ourselves . whether true or not this has been the trend the last decade. and this is how things are being done now.

while investors are happy with those dividend raises the reality is they have actually been seeing dividend cuts on a percentage basis and that money deployed elsewhere. the 1 trillion dollars not payed out is reflecting that fact.

 

[eta2020]

pb4uski,

You are a visionary.

That said...
We might want to keep this a secret just between us because some people here will probably be jealous and claim we were just lucky. Not to put pressure on you, but, if this works, I'll be able to completely retire before I'm 71.

I remain...
redduck

ps: Since you're taking the first 10 ten days, you'll have to come up with that first penny or the deal is off.

pps. Do we have to give anything to that mathjak guy for his idea?

If you can not find that penny than Mr. Second Nominator will advise you how to take a mortgage on 80% of your house. (He is very proud of his mortgage )

That should give you plenty of pennies to work with.

 

[pb4uski]

....ps: Since you're taking the first 10 ten days, you'll have to come up with that first penny or the deal is off.

pps. Do we have to give anything to that mathjak guy for his idea?

The first penny is principal, not compounding, so I'm afraid you are on your own for that. If you don't have the cash, you can always take out a mortgage.

On the second one, since it is simply math, and well-known, I don't think we owe mathjak a penny.

Let me know when you find the [-]suckers[/-] financiers for days 11 to 31.

 

[Zathras]

...
while investors are happy with those dividend raises the reality is they have actually been seeing dividend cuts on a percentage basis and that money deployed elsewhere. the 1 trillion dollars not payed out is reflecting that fact.

You can't take the total amount of dividends paid and apply the results to individuals.
That is like saying the global average temperature is climbing therefore the temperature on any day in any selected location is also going up.

This individual investors dividend income stream is increasing. The reality is that there are many companies out there that do continue to grow their dividends faster than inflation.

 

[redduck]

pb4: I'm all over it. Thanks again.

eta2020: Very impressive about predicting pb4uski's mortgage strategy. Makes me think you had some inside information (which is also very impressive).

I think I'll take out a mortgage and put myself on the retirement list before the year is out.

 

[eta2020]

pb4: I'm all over it. Thanks again.

eta2020: Very impressive about predicting pb4uski's mortgage strategy. Makes me think you had some inside information (which is also very impressive).

I think I'll take out a mortgage and put myself on the retirement list before the year is out.

Yea I saw his postings on another thread about 80% cash out mortgage on his house. Excellent strategy indeed... beats dividend growth and not having any mortgage.

I will also take to heart his advice on not holding shift key down and buying a new keyboard.