Question about how much dividends fall during recesssions

[ERD50]

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/research?=#list=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]

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]

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.passiveinvestingaustralia.com/dividend-investing-vs-total-return-investing

 

[MichaelB]

+1

I'll never understand the desire for dividends.

https://www.passiveinvestingaustralia.com/dividend-investing-vs-total-return-investing

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

 

[ncbill]

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/research?=#list=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]

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.

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.

+1

I'll never understand the desire for dividends.

https://www.passiveinvestingaustralia.com/dividend-investing-vs-total-return-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]

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]

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]

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]

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]

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/research?=#list=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]

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]

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

 

[NW-Bound]

Please, people. The OP was asking about the dividend of the S&P.

Some indexers live on dividend+cap gain of the S&P. The OP is counting only the divvies. Is that wrong?

I am withdrawing even less than the dividend. The cap gain is for me to feel rich. Am I even more wrong?

 

[Sunset]

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.

I believe that big dividend cut back in 2009 was (IMHO) the banks, which cut their dividends to about 1 cent.

I remember this, as I had wanted to buy something safe, and what could be safer than buying a bank .

 

[pb4uski]

Please, people. The OP was asking about the dividend of the S&P.

Some indexers live on dividend+cap gain of the S&P. The OP is counting only the divvies. Is that wrong?

I am withdrawing even less than the dividend. The cap gain is for me to feel rich. Am I even more wrong?

No, not wrong. You just may have worked longer than you needed to but not at all wrong.

 

[NW-Bound]

No, not wrong. You just may have worked longer than you needed to but not at all wrong.

Nah.

During the 2007-2009 Great Recession, I still had two children in college. Could not stop working my part-time contract work then. Wife already quit.

I finally fully retired in 2012, and the bull market propelled my stash up, while my expenses declined even more than I thought, despite long travels and still having two homes. And my wife started her SS.

Nope, I feel no need to blow any dough to be happy. Maybe later when I run across a nice, nice class B motorhome for sale.

 

[ER Eddie]

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.

Yes, that's right -- I'm in broad-based index funds like Total Market, Total Bond, SP500, etc.. My expenses run a little less than 2% of my total investment pool, so I'm covering that with the dividends that these general index funds throw off.

I'm not a "dividend investor" in the sense of concentrating on dividend stocks. I just take what the general, broad-based index funds throw off.

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.

Okay, I get that. If the company didn't issue the dividend, the company would be worth more, which would be reflected in its stock price. So in some sense, the company is trading its stock value for dividends -- and so are we, when we take dividends.

That makes sense. The money for dividends has to come from somewhere, after all -- i.e., out of the company's value in some way.

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.

Sure. Of course. Dividends don't grow on trees.

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?

Yes, thanks for explaining.

My AA is 65/35 -- or at least it was, lol.

 

[ERD50]

Yes, that's right -- I'm in broad-based index funds like Total Market, Total Bond, SP500, etc.. My expenses run a little less than 2% of my total investment pool, so I'm covering that with the dividends that these general index funds throw off.

I'm not a "dividend investor" in the sense of concentrating on dividend stocks. I just take what the general, broad-based index funds throw off.



Okay, I get that. If the company didn't issue the dividend, the company would be worth more, which would be reflected in its stock price. So in some sense, the company is trading its stock value for dividends -- and so are we, when we take dividends.

That makes sense. The money for dividends has to come from somewhere, after all -- i.e., out of the company's value in some way.



Sure. Of course. Dividends don't grow on trees.



Yes, thanks for explaining.

My AA is 65/35 -- or at least it was, lol.

Sounds like we are on the same page.

So if your divs do drop below what you desire for your chosen lifestyle, and the market is still down, you would still have plenty on the fixed side to draw from to cover any small div shortfall. So there is no selling of stocks at a low anyhow, at least not for a very long time.

I'm glad you understood there is no magic to dividends, some people have argued that (and will probably continue) and just won't accept it, but how can it be otherwise (excluding 'magic')?

-ERD50

 

[Lawrence of Suburbia]

I wonder how the current turmoil will affect "managed payout"-type funds.

 

[MichaelB]

I wonder how the current turmoil will affect "managed payout"-type funds.

I’m sure they’ll manage.

 

[audreyh1]

I believe that big dividend cut back in 2009 was (IMHO) the banks, which cut their dividends to about 1 cent.

I remember this, as I had wanted to buy something safe, and what could be safer than buying a bank .

Some major economic sector always seems to get creamed now and then. Dividends are cut.

 

[target2019]

I wonder how the current turmoil will affect "managed payout"-type funds.

I’m sure they’ll manage.

Ok, I'm laughing out loud!