silly question re: dividends

[newtoseattle]

This is one of those silly questions I've researched and think I understand, but want to double check.

I'm an index investor and mostly in the total stock market vanguard funds. I'm thinking about "cash flow" once I retire and want to make sure I understand dividends. I get the "total returns" idea, but think it'd be nice to have dividends distributed once retired as sort of a simple "income" - aka I don't have to sell shares, etc...

Are they based on the number of shares you own rather than a % of the stock's worth? So if there is a stock market crash then unless the companies decrease dividends, the actual % would in a sense increase?

Are there any charts showing dividend yields and overall market value?

I guess I'm thinking that right now the approx 2% yield of the total stock market is a little low historically. So if I consider that somewhat of a income stream then even if market crashes, the actual $ distributed wouldn't necessarily drop a ton?

thank you all...

[ERD50]

I'll let the people who monitor dividends more closely answer your other questions on dividend stability, but...

Quote:

aka I don't have to sell shares, etc...

what's wrong with selling shares? In effect, that is all the dividend payers are doing (by not reinvesting that dividend back in the company, which would drive the stock price up).

-ERD50

[karen1972]

The dividend paid is not closely tied to the value of the stock but the value of the stock determines the yield. Take my example (using round numbers to make the math easy)


ie I buy a stock for $10 and it is yielding 2%, you would get 20 cents for every share you own. However, whether the stock goes up or down a good dividend payer will be increasing their dividends, so I expect that next year say it would pay 25 cents. So on my original investment that would be 2.5% yield.. however say the stock price is now $20..well for you its still 2.5% yield, but for the person buying today its only 1.25% yield.


So from your investment standpoint, you are trying to get dividend increases so that from your standpoint an investment of say $100K would yield $2000 in dividends this year, maybe $2250 next year..and $2500 the next year and so on. Whether that original $100K is now worth $50K or $250K is not relevant to the cash flow you are generating from that investment, unless of course you need to sell that investment to raise more cash.


Now when the economy tanks, you may find companies cutting their dividends, haulting them for awhile, etc which is why when you pick dividends as your strategy, you really need to be looking at debt ratio and ability for that company to continually have the cash flow to weather the storms and increase dividends YoY to keep up (and hopefully beat) inflation.

[purplesky]

Dividend stocks can also be a great gift to pass on to your children.

Produce retirement income and leave the shares to your heirs.

[ERD50]

Quote:

Originally Posted by purplesky Dividend stocks can also be a great gift to pass on to your children. Produce retirement income and leave the shares to your heirs.

Yes, but why would they be better than any other stocks?

If anyone wants to pass on any Berkshire Hathaway to me (zero dividend), I'd very gladly accept it! The holders could have sold a share occasionally if they needed retirement income.

That actually seems better to me, than letting a company decide when and how much you get, which can have tax consequences.

-ERD50

[Mulligan]

Quote:

Originally Posted by ERD50 Yes, but why would they be better than any other stocks? If anyone wants to pass on any Berkshire Hathaway to me (zero dividend), I'd very gladly accept it! The holders could have sold a share occasionally if they needed retirement income. That actually seems better to me, than letting a company decide when and how much you get, which can have tax consequences. -ERD50

Mr. Buffett may not like dispensing dividends but he sure loves to invest in companies that give dividends to him.....But it goes back to the non answerable question of who will spend the money more wisely. The company or the individual. Your logic is certainly sound ERD, but I guess it comes down to individual taste. Kevin O'Leary cant get on CNBC to discuss the weather without going into his religious passion of only buying stocks of companies that pay dividends. He wants his cash, and he wants to get paid to wait. If nothing else you like a person true to his convictions as he gives the same speech week after week, year after year.


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[Running_Man]

According to Jeremy Siegel who actually studied the data dividend paying stocks outperform non dividend paying stocks while having a lower risk factor, he reccomends low cost dividend index funds.
Real Returns Favor Holding Stocks

Quote:

JS: Dividends are an important component of stock returns. Those stocks that pay higher dividends have, over the last half-century, given investors higher returns with lower risk than the low- and non-dividend-paying stocks. We’ve examined the record completely over very long-term periods, particularly an analysis of the entire S&P 500 index, which was created in 1957. We find that in the long run dividend-paying stocks give investors a much better risk/return trade-off.

Here is another paper.
http://www.suredividend.com/wp-conte...al-Returns.pdf

And using berkshire hathaway as a "proxy" for non dividend paying stocks when it really is a closed end managed portfolio with very low fees is not correct in my mind, it makes most of it's overperformance from investing in dividend paying stocks.

[ERD50]

Quote:

Originally Posted by Running_Man According to Jeremy Siegel who actually studied the data dividend paying stocks outperform non dividend paying stocks while having a lower risk factor, he reccomends low cost dividend index funds. Real Returns Favor Holding Stocks Here is another paper. http://www.suredividend.com/wp-conte...al-Returns.pdf And using berkshire hathaway as a "proxy" for non dividend paying stocks when it really is a closed end managed portfolio with very low fees is not correct in my mind, it makes most of it's overperformance from investing in dividend paying stocks.

Some data! Thank you, I'll take a look.

I agree, BRK is not a proxy for non dividend paying stocks, I just used it to make a point, as it is a zero-div payer.

Quote:

Originally Posted by Mulligan ... Your logic is certainly sound ERD, but I guess it comes down to individual taste. ...

I have no problem with people having an individual taste for something, I just object to broad blanket statements that imply A is better B, w/o anything to back it up.

I generally prefer Chocolate ice cream to Vanilla. I don't need to defend that, it is individual choice. But if I tell you that you will lose weight eating Chocolate ice cream, but Vanilla ice cream will make you fat, I should expect to be challenged and present some data - or there is no point to it.

Quote:

than Kevin O'Leary cant get on CNBC to discuss the weather without going into his religious passion of only buying stocks of companies that pay dividends. He wants his cash, and he wants to get paid to wait. If nothing else you like a person true to his convictions as he gives the same speech week after week, year after year.

Nah, I don't like those people - I can't learn anything from them if they are just repeating based on dogma. Give me well founded reasons, and I'll listen.

-ERD50

[LOL!]

Quote:

Originally Posted by purplesky Dividend stocks can also be a great gift to pass on to your children. Produce retirement income and leave the shares to your heirs.

Stocks are a bad thing to pass on to children. Usually they will not fit someone else's investment plan and asset allocation plan. Also folks tend to put sentimental value on "Dad's old stock shares he gifted to us on his deathbed." Such sentiments cloud rational thinking about them. If someone gets such shares, I almost always recommend they sell them before there are more taxes to be paid and invest in passively-managed, low-expense-ratio index funds in the asset allocation that one has.

Bottom line: Inherited individual stocks are like an albatross around one's neck. That's my broad blanket statement that A is worse than B.

[ERD50]

Quote:

Originally Posted by LOL! Stocks are a bad thing to pass on to children. Usually they will not fit someone else's investment plan and asset allocation plan. Also folks tend to put sentimental value on "Dad's old stock shares he gifted to us on his deathbed." Such sentiments cloud rational thinking about them. If someone gets such shares, I almost always recommend they sell them before there are more taxes to be paid and invest in passively-managed, low-expense-ratio index funds in the asset allocation that one has. Bottom line: Inherited individual stocks are like an albatross around one's neck. That's my broad blanket statement that A is worse than B.

I agree 100%. Now I realize my response to purplesky should have been:

No, and why would they be better than any other stocks? instead of my original:

Yes, but why would they be better than any other stocks?

It might be a broad blanket statement that you made, but I think it has plenty of founding in the general guidelines of AA, diversification, tax issues, emotional over economic decisions, etc.

-ERD50

[Mulligan]

Quote:

Originally Posted by ERD50 Some data! Thank you, I'll take a look. I agree, BRK is not a proxy for non dividend paying stocks, I just used it to make a point, as it is a zero-div payer. I have no problem with people having an individual taste for something, I just object to broad blanket statements that imply A is better B, w/o anything to back it up. I generally prefer Chocolate ice cream to Vanilla. I don't need to defend that, it is individual choice. But if I tell you that you will lose weight eating Chocolate ice cream, but Vanilla ice cream will make you fat, I should expect to be challenged and present some data - or there is no point to it. Nah, I don't like those people - I can't learn anything from them if they are just repeating based on dogma. Give me well founded reasons, and I'll listen. -ERD50

In fairness to him which I didn't mention, he will mention specific stocks and the reasons for them. But they all are always under the dividend yield umbrella.


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[MichaelB]

Tweedy Browne is an advocate of investing in higher dividend stocks and has some research on their website. Here's one paper http://www.tweedy.com/resources/libr...UND2014Web.pdf

[target2019]

The data you requested is at:
https://finance.yahoo.com/q/hp?s=VTS...=11&f=2015&g=v

Very easy to click on the download link to spreadsheet, and do a little data mining.

It looks to me like the dividends were lower in 3 years, 2008-2010, by 10% or more. That's just eyeballing things on my part.

So, in a crash, the dividends are lower in an index fund. Some companies cut the dividend, some do not pay, some pay the same dividend or more.

This article was just posted on SeekingAlpha (need a free account to read all).
Designing A Retirement Portfolio That's Just Right For You | Seeking Alpha
It actually discusses S&P500 dividend being cut, and how that contrasts with what happened with some very well known companies, like JNJ.

[karen1972]

Quote:

Originally Posted by LOL! Stocks are a bad thing to pass on to children. Usually they will not fit someone else's investment plan and asset allocation plan. Also folks tend to put sentimental value on "Dad's old stock shares he gifted to us on his deathbed." Such sentiments cloud rational thinking about them. If someone gets such shares, I almost always recommend they sell them before there are more taxes to be paid and invest in passively-managed, low-expense-ratio index funds in the asset allocation that one has. Bottom line: Inherited individual stocks are like an albatross around one's neck. That's my broad blanket statement that A is worse than B.

While I agree logically they are a bad thing, I still think they are a key learning tool for people and encourage them to be gifted (if said individual may not have the money to buy). Why? Because no one has any idea what the heck VTHHX or any other silly mutual fund is or why it goes up or down (yes of course smart literate financial people do, but I'd say 70% of the US population couldn't adequately explain it). Thus if one were to plan on giving their child a large some of money, I'd assume they would teach them about said money first.

Its a lot easier for me to gift my nieces Mcdonalds shares, give them the dividend every year, and slowly teach them about how the $50 stock I bought them and gift them each year is a gift that keeps on giving than some random mutual fund. My brothers wife was gifted XOM, same as you described, won't sell it, has no idea even what it is, didn't even have a brokerage account to receive it in upon inheritance... so of course my brother reached out to me and I had to start explaining all these things ..now he calls and talks about the price of oil and other commodities as he works in refrigeration so copper is a big deal. Just sayings its been a great learning tool, and once they are taught about stocks, it doesn't matter what you gift them...you have to trust they know when to sell/buy/hold.

[newtoseattle]

Thanks to everyone for their replies. I was actually not talking about switching from broad index funds to a dividend tilt. Only trying to estimate "cash flow" from the total market if I didn't reinvest dividends. It is largely an emotional thing, rather than clear financial. But because I'm hoping to be <50 y/o when I retire I'll be relying on my taxable accounts. Most of my bond funds are in 401k. So if the market sinks, I'd have to be withdrawing from sinking stocks. Also - if I reinvest dividends, and just withdraw then my "income" would go up, no? B/c of capital gains. Given that I'll likely want to maximize ACA subsidies, it makes sense to me to take the dividend distributions since they will show as income anyways and leave the capital gains for later...

I'm planning on a very small (<10% total savings) SPIA to provide a minimal "floor" and then also some low percentage of dividends from the taxable account + some 457 distributions...

Thanks again to everyone- I always learn a lot from this forum

[haha]

Quote:

Originally Posted by LOL! Stocks are a bad thing to pass on to children. Usually they will not fit someone else's investment plan and asset allocation plan. Also folks tend to put sentimental value on "Dad's old stock shares he gifted to us on his deathbed." Such sentiments cloud rational thinking about them. If someone gets such shares, I almost always recommend they sell them before there are more taxes to be paid and invest in passively-managed, low-expense-ratio index funds in the asset allocation that one has. Bottom line: Inherited individual stocks are like an albatross around one's neck. That's my broad blanket statement that A is worse than B.

I own Exxon that has been passed down for 3 generations, and it has paid very well for all of us. My had had RJR (formerly Reynolds) that made his mother and him even more money. My cousin has never rally worked, but he take a villa in Italy every year on money that his Dad got from RJR and the various offspring of Philip Morris.

The late Ashley Priddey formed Sabine Royalty Trust in 19825. He told his wife to never sell it, and he was right. It has paid out many times over since then, and continues to disgorge royalty cash.

So while anybody can say anything, often enough it is false..

So your broad statement while interesting is certainly no general rule.

Ha

[haha]

Quote:

Originally Posted by LOL! Stocks are a bad thing to pass on to children. Usually they will not fit someone else's investment plan and asset allocation plan. Also folks tend to put sentimental value on "Dad's old stock shares he gifted to us on his deathbed." Such sentiments cloud rational thinking about them. If someone gets such shares, I almost always recommend they sell them before there are more taxes to be paid and invest in passively-managed, low-expense-ratio index funds in the asset allocation that one has. Bottom line: Inherited individual stocks are like an albatross around one's neck. That's my broad blanket statement that A is worse than B.

I own Exxon that has been passed down for 3 generations, and it has paid very well for all of us. My had had RJR (formerly Reynolds) that made his mother and him even more money. My cousin has never rally worked, but he take a villa in Italy every year on money that his Dad got from RJR and the offspring of Philip Morris.

The late Ashley Priddey formed Sabine Royalty Trust in 1982. He told his wife to never sell it, and he was right. It has paid out many times over since then, and continues to disgorge royalty cash.

So while anybody can say anything, often enough it is false..

So your broad statement while interesting is certainly no general rule.

Ha

[purplesky]

Quote:

Originally Posted by LOL! Stocks are a bad thing to pass on to children. Usually they will not fit someone else's investment plan and asset allocation plan. Also folks tend to put sentimental value on "Dad's old stock shares he gifted to us on his deathbed." Such sentiments cloud rational thinking about them. If someone gets such shares, I almost always recommend they sell them before there are more taxes to be paid and invest in passively-managed, low-expense-ratio index funds in the asset allocation that one has. Bottom line: Inherited individual stocks are like an albatross around one's neck. That's my broad blanket statement that A is worse than B.

I own a large share number of dividend stocks in my Roth IRAs. This will be my gift to my DS. Trying to manage tax issues for him.

UPS,T,GE,BA,LMT, are the types of stocks I own in my Roth.

I do also buy dividend ETFs in my Roth.

I also have some dividend payers in my Roth 401k.

He can always sell these companies down the road if he wants but I try to buy solid long term players like UPS and Boeing and Microsoft,etc.

[ERD50]

Quote:

Originally Posted by karen1972 While I agree logically they are a bad thing, I still think they are a key learning tool for people and encourage them to be gifted (if said individual may not have the money to buy). Why? Because no one has any idea what the heck VTHHX or any other silly mutual fund is or why it goes up or down ...

I think a much better learning tool is to teach a bit about diversification. It's not a hard concept. Owning a 'silly' ('silly', really? SPY or VTSMX is 'silly?) mutual fund with hundreds of stocks protects you against the Enrons of the world, and some blue chips like GM and IBM that have had some dark days that might have a newcomer sell low.

Quote:

Originally Posted by haha I own Exxon that has been passed down for 3 generations, and it has paid very well for all of us. My had had RJR (formerly Reynolds) that made his mother and him even more money. My cousin has never rally worked, but he take a villa in Italy every year on money that his Dad got from RJR and the offspring of Philip Morris. The late Ashley Priddey formed Sabine Royalty Trust in 1982. He told his wife to never sell it, and he was right. It has paid out many times over since then, and continues to disgorge royalty cash. So while anybody can say anything, often enough it is false.. So your broad statement while interesting is certainly no general rule. Ha

Well, the low cost no-load mutual funds haven't been around for 3 generations, so not really possible to relate such a story. But I suspect that many of these stories about the great stocks that were handed down are the subject of survivor-ship bias. How many 'wall paper' (worthless) stocks have been handed down as well? How many people talk about not being able to take a villa in Italy every year, because they inherited a stock that went bust? People don't usually talk about their failures.

Come to think of it, DW did relate a story about a family she knows that had a very large % of their money in an old family banking stock. Held for a couple generations, and always thought to be a good investment. Until the bank folded during the stress test. They lost almost everything. I don't recall the ticker now, but I looked at the time, and it was sad.

People can do what they want, but I find it tough to make a sound argument against diversification.

-ERD50

[purplesky]

Quote:

Originally Posted by ERD50 I agree 100%. Now I realize my response to purplesky should have been: No, and why would they be better than any other stocks? instead of my original: Yes, but why would they be better than any other stocks? It might be a broad blanket statement that you made, but I think it has plenty of founding in the general guidelines of AA, diversification, tax issues, emotional over economic decisions, etc. -ERD50

I have owned companies like SWA and I bought it super low about 7 years ago and just recently sold my shares.

I just prefer companies that payback the shareholders with a solid dividend.

I might buy SWA again if we ever get another real correction . I love SWA as a company.