Total Return - Capital Appreciation & Dividend/Income

[Lsbcal]

I looked at Vanguard Apprecation fund (VDAIX, inception was in 2006). It did do better then the SP500 and VIVAX in the 2008 crash, held up better. It also has somewhat outperformed since 2006. Can't show the M* chart since I'm on another computer (I'm up in the Sierras).

VDAIX is a large blend and in 2008 it lost -28%. So still not a smooth ride.

 

[clifp]

and how many origonal dividend paying dow stocks are still around today ? in fact i can rattle off so many biggies that burned investors right from the s&p 500.

i am a total return man myself,. couldn't give a hoot about dividend yield, never did.

i want a safe ,consistant reliable income stream and never count on spending dividends directly.

to much variation when they are cut or suspended at the worst times leaving shortfalls in income.

i know lots do it but i like a nice ole consistant buck of cash that does not vary by market action.

Actually dividends have been remarkably stable far less volatile than stock prices.

SPY dividends
2007 2.70
2008 2.18
2009 2.18
2010 2.27
2011 2.58
2012 3.10

There have been only 3 other years where the S&P dividends were cut and the 19% drop from 2007 to 2008 was the worst in history. Despite including several banks stocks, and GE and Pfizer all of which cut dividends in 2008 and 2009. My dividend income portfolio only dropped by 5% during the crisis.

As far as does it generate superior returns to total return probably not.

But as Ha says. "Dividends are a steadying and calming influence for the portfolio manager.
"
While 2008 was definitely a trying time as retiree dependent entirely on portfolio. I had an easier time dealing with the market crash than I think most total return retirees. I knew exactly when every dividend check came in so that I could pay the bills. So never ever was tempted to sell now and preserve what I had left. The only real aww crap moment came when BB&T a bank with 102 year history of paying (generally rising dividends other than a penny shared cut in 1933) slashed its dividend in half followed by Wells Fargo.

Cutting spend by 5% wasn't particular painful.

 

[ERD50]

...
While 2008 was definitely a trying time as retiree dependent entirely on portfolio. I had an easier time dealing with the market crash than I think most total return retirees. I knew exactly when every dividend check came in so that I could pay the bills. ....

I think this overstates it. For a conservative retiree, taking say 3.5% or less - the divs from SPY cover roughly 2% of the 3.5%. So they really don't have to sell much SPY while it is down.

Assuming they have some fixed income in their AA, a rebalance would tell them to sell some of the fixed income to bring back the balance - they probably would not sell any equities at all in a downturn.

Bottom line - with a conservative WR, I don't think a 'dividend approach' to investing is really all that different from the general 'pick an AA and rebalance approach'.

Now if one feels that they can do a better than average job of selecting dividend paying stocks, and those stocks will provide a better than average total return over the long haul, that's great. I'm not confident that I can do that.

As far as does it generate superior returns to total return probably not.

In the long run, that's really all that matters, no?

-ERD50

 

[clifp]

I think this overstates it. For a conservative retiree, taking say 3.5% or less - the divs from SPY cover roughly 2% of the 3.5%. So they really don't have to sell much SPY while it is down.

Assuming they have some fixed income in their AA, a rebalance would tell them to sell some of the fixed income to bring back the balance - they probably would not sell any equities at all in a downturn.

Bottom line - with a conservative WR, I don't think a 'dividend approach' to investing is really all that different from the general 'pick an AA and rebalance approach'.

Fair points but a true total return person would not have looked at the dividends from his index funds, or the income from their total bond market in Jan 2009 . Instead he would have said my AA has fallen from say 70/30 to 55/45 which would have been outside their bounds. Now maybe it is just me but it would have psychologically hard for me to just see the two numbers; total stock market index fund and total bond market index fund price. Sell 1/3 of the bonds, use some to pay bills, and the rest to buy stock funds. Now I am well aware that disciplined members of the forum did exactly that. I am curious what did you do during the crisis as far as rebalancing?

But at the time there were a host of blue chips, Coke, Johnson & Johnson, P&G, Intel, Chevron along with most DOW stocks that were all yielding around 4% and had nothing to do with the banking crisis. It wasn't hard for me to say those GNMA are paying less than 4%, God knows what is going to happen with mortgages in this country, but people will still buy Tylenol and Johnson Baby Shampoo and I'm pretty sure they'll continue to raise dividends at least enough to keep up with inflation. On relative basis I get more income from stocks than bonds, sell bonds buy stocks.

You didn't even need to be a stock picker, a dividend fund would have achieved the same result.

In the long run,{returns} that's really all that matters, no?

-ERD50

Not completely I think volatility matters also and dividends stocks are less volatile than non dividend stocks. But what matters most is avoiding doing stupid financial things and I guess I am in favor of any approach that keeps people from doing stupid things like panic selling.

 

[haha]

Not completely I think volatility matters also and dividends stocks are less volatile than non dividend stocks. But what matters most is avoiding doing stupid financial things and I guess I am in favor of any approach that keeps people from doing stupid things like panic selling.

I believe this is an underappreciated feature. When I look at some index, I see some good stocks and some crap, some well priced stocks and some expensive ones. If I buy any of the securities like you mention above, I am sure that I won't mind keeping them for a good long time, and they will make that worth my while with reasonably stable and most often growing earnings and dividends. With JNJ, I know my mother was buying their baby shampoo when I was a baby, and I bought it when my children were little, and my son is buying it for his daughter. And it is not just consumer product companies, but also well entrenched, conservatively financed industrials.

I do use index products for emerging market stocks.

Ha

 

[ERD50]

Fair points but a true total return person would not have looked at the dividends from his index funds, or the income from their total bond market in Jan 2009 .

But once you are in the withdraw phase, you most likely have the divs/interest pour into an account that you spend from (at least from taxable accounts). So you may not be 'looking at them', but it would affect how much you need to withdraw each year.

Instead he would have said my AA has fallen from say 70/30 to 55/45 which would have been outside their bounds. Now maybe it is just me but it would have psychologically hard for me to just see the two numbers; total stock market index fund and total bond market index fund price. Sell 1/3 of the bonds, use some to pay bills, and the rest to buy stock funds. Now I am well aware that disciplined members of the forum did exactly that. I am curious what did you do during the crisis as far as rebalancing?

Well, it wasn't quite such a crisis for me, since DW still works at a part-year job that covers ~ 1/3 ~ 1/2 of our spending, so my WD% is/was fairly low. But I did a bit of rebalancing then, moving from an intermediate bond fund to a high yield bond fund (I treat high yield as 50-50, beta is about half of SPY), so it did effectively move from bonds to equities. But I'm not putting much faith in rebalancing anyhow. Some of the reading and work I've done shows that gains are offset by selling on the way up in a multi-year bull market. Couple that with the relative insensitivity to AA we see in FIRECalc, and I'm likely to not do much rebalancing at all, other than maybe adjust when I need to sell something.

The real test would be between DW retiring and starting pensions/SS. That will likely be my highest draw-down phase. But that would only be a few years, and I could take SS/Pension early, though I hope that things look good enough (and 'not real bad' would be 'good enough') over the next decade that I can hold off on those.

You didn't even need to be a stock picker, a dividend fund would have achieved the same result.

Not completely I think volatility matters also and dividends stocks are less volatile than non dividend stocks. But what matters most is avoiding doing stupid financial things and I guess I am in favor of any approach that keeps people from doing stupid things like panic selling.

Yes, volatility matters. All things equal, no sane person would want a wild ride over a smooth one (roller-coaster and sky jumping fans excepted!). But I'm not so sure it's so easy to pick div stocks that are clearly less volatile. Here's DVY versus SPY (total return) from AUG 2007 to present, and they track pretty close. If you go back into 2000-2003 you'll see more divergence, but at least this latest swoop didn't create a huge disparity. That chart doesn't go back much further.

PerfCharts - StockCharts.com - Free Charts

(You need to manually set the slider for the time-frame)


I'm not really advocating one over the other, I think both can work fine. I'm not sure there really is a big difference. For me personally, I prefer the diversity of SPY, and we have the market history in FIRECalc as a reference. I don't think I can pick a div portfolio with FIRECalc, but it would be interesting.

-ERD50

 

[FIREd]

Over the past 5 years, about 80% of my total return came from capital gains while 20% came from dividends and interests. Yet I am foremost an income investor. Being an income investor does not mean that you buy dividend-paying stocks willy-nilly. You buy when you can maximize the income produced by your capital investment, meaning when stocks are cheap. So often times the strategy also yields great capital gains down the road. I see no contradiction in that.

 

[Lsbcal]

It is interesting to read all of the different ways we come up with to essentially do the same thing.

As severe as 2008 was, the 1930's were far worse. Would the dividend stocks hold up well under the modern equivalent of such a decline? Hopefully we will never have to test that.

There may indeed be some companies out there that produce essential products so that they are more immune to severe economic events as occurred in the 1930's. But I'm not sure I could pick a good diverse group of them and that I would not be paying a premium price for what might be insurance (essential businesses as opposed to discretionary ones) I'll never need. It's all a bit too theoretical to me.

BTW, I've mentioned before about the book by Benjamin Roth, The Great Depression, A Diary. I think that the author mentioned some stocks that held up very well such as ATT. Blue chips that got creamed but came back.