Question about how much dividends fall during recesssions

[ER Eddie]

Yeah, it's refraining from buying shares, which is different than selling them.

[steelyman]

Quote:

Originally Posted by bloom2708 First lowered dividend. Occidental. From 77 cents to 11 cents. https://www.zerohedge.com/markets/it...dividend-capex

That’s a pretty large cut. First I’ve heard, thanks for the update. I think the prior payout was 79 cents.

[ncbill]

ERD's results are what you also see on boglehead threads...versus a dividend strategy a total return approach always has a higher risk-adjusted return.

Most people pursuing a dividend strategy, especially high-yield don't seem to understand that their portfolio's risk is always going to be higher than a market portfolio.

[HarveyS]

Dividends, as bloom2708 accurately pointed out, don't always go up or stay the same. The SP500 12 month, real dividend in inflation-adjusted $ (to Jan 2020) dropped from $34.83 paid in 2008 to $26.76 in 2009. That's a 23% hair cut. I don't know which companies may have changed in the SP500 in 2009, but I believe the bulk of the reduction was due to dividend cuts by companies. By the end of 2012 the payout was above $35. The link has a table and a graph.
Source: SP500 and Robert Shiller
https://www.multpl.com/s-p-500-dividend/table/by-year

[ER Eddie]

OP here. I think my original question (am I accurately understanding the amount that dividends will drop during a recession) has been answered in the affirmative or at least not contradicted. That's reassuring, thank you.

The thread seems to have wandered into territory I'm not really tracking or interested in, so I'll let you ladies and gentlemen continue your perambulations while I take my hat and mosey out the door.

[ERD50]

Quote:

Originally Posted by ncbill ERD's results are what you also see on boglehead threads...versus a dividend strategy a total return approach always has a higher risk-adjusted return. Most people pursuing a dividend strategy, especially high-yield don't seem to understand that their portfolio's risk is always going to be higher than a market portfolio.

Right. And one reason I pursue it is, these people are almost always thinking that the dividend approach is lower risk. But it doesn't appear to be the case at all.

I find it interesting. It seems when shown this information, rather than re-evaluating their strategy, often times they just want to ignore it, which also appears to be the case here. I don't understand that. If I learn that a belief I held was not true, I'm glad to be shown the light so I can take corrective action. Why would I want to remain in the dark, especially if it looks pretty convincing that it is hurting my financial situation to this degree?

And it's not some small difference. In the example I gave, that's ~ $300K under-performance on a $1M portfolio after 14 years. That ain't chump change.

Oh well, there's the info, anyone can do with it what they will, or they can show me where I'm wrong, I'll listen. I guess it's the old "lead a horse to water....".

-ERD50

[Running_Man]

A portfolio of selected companies for their dividends analyzed on the basis of being able to pay and grow the dividend going forward would be far preferable to any indexed dividend fund.

I would recommend to use the Value Line to restrict to companies that have not reduced their dividend since 2008, have a financial Strength of A or better and Safety of 1. Additionally any stock with a timeliness of 4 or lower has something very negative on the horizon and should be sold immediately upon that drop to 4 and not repurchased assuming the stock meets all the other criteria until Timeliness hits 2 or better.

Expected growth should exceed the inflation rate easily and so you want dividend and earnings to each be expected to grow by more than 5% per year for the next 5 years.
Companies that do not have earning surprises are the best for secure divdends, so Earnings Predictability should be 75 or greater and you'd want Price stability so that the stock is not subject to wild stock swings due to company changes and keep Price Stability at 75 as a minimum as well. Looking at the Dow Jones 30 there are only the following 9 companies that make the grade, the other 21 fail the dividend protection method yet would be in many many index funds:

https://research.valueline.com/resea...dow30&sec=list

AXP American Express
JNJ Johnson and Johnson
MSFT - Microsoft
MRK - Merck
NIKE - NIKE
HD - Home Depot
UNH - United Healthcare
MCD - Mcdonalds
V- VISA

My personal rule is for a stock to have a dividend yield of at least 1.5% and to sell a stock when the dividend yield expected for the next 12 months falls below 1%, which for me eliminates MSFT, NKE and V, but those three are fine companies with fast growing dividends that would be ok to hold but I'd wait for Corona to cut the price to make the dividend more attractive.

Right now I am waiting for 1300 on the S&P500 when a portfolio like this would earn about 4 percent per year in dividends, or else evaluate the market a minimum one year before getting back to any of these names in order for the market to decide what prices should be but the dividends in any case are as solid as any companies can be at the present time.

[Sunset]

Quote:

Originally Posted by ERD50 Right. And one reason I pursue it is, these people are almost always thinking that the dividend approach is lower risk. But it doesn't appear to be the case at all. I find it interesting. It seems when shown this information, rather than re-evaluating their strategy, often times they just want to ignore it, which also appears to be the case here. I don't understand that. If I learn that a belief I held was not true, I'm glad to be shown the light so I can take corrective action. Why would I want to remain in the dark, especially if it looks pretty convincing that it is hurting my financial situation to this degree? And it's not some small difference. In the example I gave, that's ~ $300K under-performance on a $1M portfolio after 14 years. That ain't chump change. Oh well, there's the info, anyone can do with it what they will, or they can show me where I'm wrong, I'll listen. I guess it's the old "lead a horse to water....". -ERD50

Sometimes, it's members of the audience that learn.

I don't pursue high dividend paying stock, but a number of stocks/etfs I have do pay out dividends, which is where my input comes from.

I did step into the gopher hole of preferred stocks just a little, later I recognized long term it has a low return rate for a passive buy and hold investor. Preferreds are much more like a Bond to me.

[mrfeh]

Quote:

Originally Posted by bloom2708 You do know that taking the dividend out of an account is the same as selling shares and withdrawing? No difference at all. Except in taxable where tax is due on the dividend.

+1

I'll never understand the desire for dividends.

https://www.passiveinvestingaustrali...turn-investing

[MichaelB]

Quote:

Originally Posted by mrfeh +1 I'll never understand the desire for dividends. https://www.passiveinvestingaustrali...turn-investing

Would you please provide a snippet or descriptive so members know what the link is about?

[ncbill]

Quote:

Originally Posted by Running_Man A portfolio of selected companies for their dividends analyzed on the basis of being able to pay and grow the dividend going forward would be far preferable to any indexed dividend fund. I would recommend to use the Value Line to restrict to companies that have not reduced their dividend since 2008, have a financial Strength of A or better and Safety of 1. Additionally any stock with a timeliness of 4 or lower has something very negative on the horizon and should be sold immediately upon that drop to 4 and not repurchased assuming the stock meets all the other criteria until Timeliness hits 2 or better. Expected growth should exceed the inflation rate easily and so you want dividend and earnings to each be expected to grow by more than 5% per year for the next 5 years. Companies that do not have earning surprises are the best for secure divdends, so Earnings Predictability should be 75 or greater and you'd want Price stability so that the stock is not subject to wild stock swings due to company changes and keep Price Stability at 75 as a minimum as well. Looking at the Dow Jones 30 there are only the following 9 companies that make the grade, the other 21 fail the dividend protection method yet would be in many many index funds: https://research.valueline.com/resea...dow30&sec=list AXP American Express JNJ Johnson and Johnson MSFT - Microsoft MRK - Merck NIKE - NIKE HD - Home Depot UNH - United Healthcare MCD - Mcdonalds V- VISA My personal rule is for a stock to have a dividend yield of at least 1.5% and to sell a stock when the dividend yield expected for the next 12 months falls below 1%, which for me eliminates MSFT, NKE and V, but those three are fine companies with fast growing dividends that would be ok to hold but I'd wait for Corona to cut the price to make the dividend more attractive. Right now I am waiting for 1300 on the S&P500 when a portfolio like this would earn about 4 percent per year in dividends, or else evaluate the market a minimum one year before getting back to any of these names in order for the market to decide what prices should be but the dividends in any case are as solid as any companies can be at the present time.

As long as one understands such an approach is riskier than an indexed dividend fund, which in turn is riskier than a market portfolio.

And that historically one has NOT been rewarded for taking on the higher risk...instead such an approach has resulted in lower risk-adjusted returns.

[target2019]

Quote:

Originally Posted by bloom2708 You do know that taking the dividend out of an account is the same as selling shares and withdrawing? No difference at all. Except in taxable where tax is due on the dividend.

Quote:

Originally Posted by target2019 Dividends are paid to my account, without reinvesting. Before and after the event I have the same number of shares. It is not the same as selling shares.

Quote:

Originally Posted by mrfeh +1 I'll never understand the desire for dividends. https://www.passiveinvestingaustrali...turn-investing

Please see my reply to bloom2708 which I quoted above. It is true that total performance has meaning. But for a dividend investor, it is understood that the number of shares remain the same before and after the dividend, so long as the dividend is not reinvested.

There are several reasons why a dividend may be desirable, and they get repeated in every thread about dividends.

Myself, I'm dividend-neutral.

[audreyh1]

Quote:

Originally Posted by HarveyS Dividends, as bloom2708 accurately pointed out, don't always go up or stay the same. The SP500 12 month, real dividend in inflation-adjusted $ (to Jan 2020) dropped from $34.83 paid in 2008 to $26.76 in 2009. That's a 23% hair cut. I don't know which companies may have changed in the SP500 in 2009, but I believe the bulk of the reduction was due to dividend cuts by companies. By the end of 2012 the payout was above $35. The link has a table and a graph. Source: SP500 and Robert Shiller https://www.multpl.com/s-p-500-dividend/table/by-year

Thank you!

Now I have a good reference. I use that site all the time, but hadn’t paid much attention to their dividend data.

So, an investor should be prepared for a 23% haircut after a big bear market, and that it could take several years to get back to get back to a peak.

[USGrant1962]

Quote:

Originally Posted by audreyh1 Thank you! Now I have a good reference. I use that site all the time, but hadn’t paid much attention to their dividend data. So, an investor should be prepared for a 23% haircut after a big bear market, and that could take several years to get back to get back to a peak.

I've observed that unlike prices, which tend to rebound, dividend cuts stay around for a long time.

[Running_Man]

Quote:

Originally Posted by ncbill As long as one understands such an approach is riskier than an indexed dividend fund, which in turn is riskier than a market portfolio. And that historically one has NOT been rewarded for taking on the higher risk...instead such an approach has resulted in lower risk-adjusted returns.

If one is actually analyzing with a credit evaluation in mind and the goal is to have continually rising dividends faster than the rate of inflation, then meeting that goal is what is important and what the index does is of little concern. I am not impressed at any given time what Mr Market is offering other than if the returns have sufficient value to me over the long term.

[pb4uski]

It seems to me that investing in a 60/40 portfolio using broad based equity index funds, pulling inflation adjusted withdrawls of 4% or less based on the retirement date balance and rebalancing periodically (or not) is a lot easier than the mental gymnastics of skewing equities to generate a target amount of dividends. Just sayin...

[ER Eddie]

Quote:

Originally Posted by ERD50 Right. And one reason I pursue it is, these people are almost always thinking that the dividend approach is lower risk. But it doesn't appear to be the case at all. I find it interesting. It seems when shown this information, rather than re-evaluating their strategy, often times they just want to ignore it, which also appears to be the case here. I don't understand that. If I learn that a belief I held was not true, I'm glad to be shown the light so I can take corrective action. Why would I want to remain in the dark, especially if it looks pretty convincing that it is hurting my financial situation to this degree? And it's not some small difference. In the example I gave, that's ~ $300K under-performance on a $1M portfolio after 14 years. That ain't chump change. Oh well, there's the info, anyone can do with it what they will, or they can show me where I'm wrong, I'll listen. I guess it's the old "lead a horse to water....". -ERD50

Are you talking about me after I've left the room? How rude!

Actually, ERD, I just don't understand what you're saying. I'm not a financial wonk, so dumb it down for me. I'm an index fund investor for a reason, and that's partly because I don't have a lot of interest in the minutae of portfolio management; I like keeping things simple and on auto-pilot.

I just wasn't getting your point; that's why I tuned out. I had asked a clear question about how much dividends decline in a recession, and you seemed to go off on a tangent about the value of dividend stocks in general, a discussion which I wasn't terribly interested in or didn't seem to apply to me.

But since you say I'm putting my head in the sand, I'll ask you to clarify what you're saying. Are you saying I'm at risk because I'm using dividends from general index funds to meet my living expenses? Are you saying I'd be better off if I lived off capital gains instead, or some mix of dividends and capital gains? Are you saying I should select "better" dividend funds instead of relying on dividends thrown off by general index funds?

I'm just not getting what you're trying to tell me.

[ERD50]

Quote:

Originally Posted by Running_Man A portfolio of selected companies for their dividends analyzed on the basis of being able to pay and grow the dividend going forward would be far preferable to any indexed dividend fund. I would recommend to use the Value Line to .... https://research.valueline.com/resea...dow30&sec=list AXP American Express JNJ Johnson and Johnson MSFT - Microsoft MRK - Merck NIKE - NIKE HD - Home Depot UNH - United Healthcare MCD - Mcdonalds V- VISA .....

OK, what was their list on Dec 2006, or Jan 1999 so we can see how their past picks have done against a basic broad-index? Restricting the picks to past success only tells us about the past, it may or may not hold in the future.

-ERD50

[mrfeh]

Quote:

Originally Posted by target2019 Please see my reply to bloom2708 which I quoted above. It is true that total performance has meaning. But for a dividend investor, it is understood that the number of shares remain the same before and after the dividend, so long as the dividend is not reinvested.

Don't know why I'm bothering, because this simple math problem gets beaten to death over and over...

Question for the dividend folks: what's the difference between 100 shares at $95 and 95 shares at $100?

[ERD50]

Quote:

Originally Posted by ER Eddie Are you talking about me after I've left the room? How rude! Actually, ERD, I just don't understand what you're saying. I'm not a financial wonk, so dumb it down for me. I'm an index fund investor for a reason, and that's partly because I don't have a lot of interest in the minutae of portfolio management; I like keeping things simple and on auto-pilot. I just wasn't getting your point; that's why I tuned out. I had asked a clear question about how much dividends decline in a recession, and you seemed to go off on a tangent about the value of dividend stocks in general, a discussion which I wasn't terribly interested in. But, let me ask you to clarify. Are you saying I'm at risk because I'm using dividends from general index funds to meet my living expenses? Are you saying I'd be better off if I lived off cashing out stocks instead, or some mix of the two? Are you saying I should select "better" dividend funds instead of relying on general index funds? I'm just not getting what you're trying to tell me.

It was more of a general comment, you were a bit vague about your positions, so I'm not sure if it applied directly to you or not.

So you are saying you are in broad-based index funds (SPY or Total Market and Total Bond market)? OK, that's good, sector funds by definition limit your diversification. I got the (apparently mistaken) impression (but wasn't sure) that you concentrated on dividend paying funds.

So if you are in broad-based index funds, and want to only use the divs, that's your decision, nothing right/wrong about it. But what I am saying is that it is a totally artificial restriction. A dividend is just a distribution of some of the value of the stock. It makes absolutely no difference (outside of tax implications) whether that company distributed some of their value to you in the form of a dividend, or if you sold some of their stock to obtain that value. If the company didn't distribute that dividend, it would be retained and reflected in their stock price, You could then sell it, when and in the amount you choose.

Some div paying fans will say the dividend doesn't affect the stock price. To cut to the chase, they are wrong. That's getting into "magic". We've gone over it before. 2+2 = 4 ; 3+1 = 4. The money comes from somewhere, it doesn't appear magically.

I just don't see the point of restricting myself to whatever a BOD decides to distribute. If history says I can safely take a 3.5% inflation adjusted amount, and I decide to add a little buffer in case the future is worse than the worst of the past, then it is totally irrelevant as to whether that amount comes from divs or sales or a combination. My safety factor is the same.

What is your AA? That does factor into your safety.

Does that help?

-ERD50