Total Return Strategy vs. Income and Dividend Strategy for a Nestegg

[clifp]

While most people here I assume consider income to be dividends from higher paying commons, CDs, and bond funds, there is a subset of investors truly invested solely for income. I feel for them because many have had their head handed to them in capital losses stretching for yield in debt/preferred issues of Mreits, Hospitality Reits, shippers, and energy.
I reviewed the thread which started a ways back. I noticed a March post where I was 40% utility preferred. Im up to almost 80% now. Though I am mostly income invested, not stretching for yield has kept my head on my neck and very profitable the past 2 years since I started this. 500 basis points above present inflation with investment grade issues is good enough for me.


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Last year was pretty ugly for dividend investors. Although the M* dividend investor newsletter barely beat the S&P 500. I certainly didn't, although I haven't really calculated my performance in detail.

On the other hand, with the notable exception of KMI none of my stocks cut their dividends, in fact almost all increased their payouts. So the market correction doesn't bother me.

 

[mathjak107]

so the fact your investment may fall 40% but you get a dividend makes it ok ? ? not in my book

 

[marko]

so the fact your investment may fall 40% but you get a dividend makes it ok ? ? not in my book

You surprise me mathjak!

No one thinks it's ok to lose any money on their investments, but gains and losses are a fact of investing with a long term trend in looking at gains. One step backward, two steps forward.

While not pleasant, getting paid a dividend while you wait for your investment to get back to parity and then on to an eventual gain at least takes the sting off of the wait.

Many/most here rely on equities that pay dividends to create a 'paycheck'. The stock's monthly/annual value is of less importance than getting a fairly reliable/predictable paycheck every quarter or so without the stress of having to sell that equity in down times like now.

But you know that.

Now, I expect that you'll come back saying that the dividends only reduce the price of the equity; that you're actually eating into your own value (or however you have clearly explained it before) and that's true, but IMHO a dividend provides a regular and predictable income stream without trying to figure out market timing.

I think a lot of us are finding solace in getting that paycheck knowing that over time we'll get our investment back.

 

[mathjak107]

but that premise is false . all they pay out does is reduce the stock price by the same amount . there is no advantage at all in a down market .

all that counts is the dollars compounded on over each quarter not number of shares or anything else ..

giving you a 2% dividend and dropping the share price 2% leaves you no better off . there is no such thing as being paid to wait . your dollars invested are the same both before and after for the most part if you reinvest or you have less dollars compounding at the opening bell over the next quarter if you don't . .

it is not like rebalancing or adding more money where you are actually altering the dollars invested in your allocation .

just pulling the same 2% out of a portfolio would be the same thing regardless of dividends .

paid to wait does not exist . you are switching the money from one pocket to th other and are just as down .

 

[marko]

but that premise is false . all they pay out does is reduce the stock price by the same amount . there is no advantage at all in a down market .

just pulling the same 2% out of a portfolio would be the same thing regardless of dividends .

paid to wait does not exist . you are switching the money from one pocket to th other and are just as down .

Understood.

Question, not a challenge:
I haven't run any numbers (and I'm a self avowed math illiterate) but wouldn't selling SHARES that are down 40% in order to achieve an income of $X be worse than getting the same dollars in dividends and keeping those shares intact, knowing/hoping that those shares will be worth more in the future?
I expect you're going to say 'the same'.

 

[mathjak107]

all that counts is dollars invested not number of shares .

the dollars invested left compounding each quarter at the opening bell are all that count , not whether it is made of of more shares at a lower price or less shares at a higher price .

you are no richer or poorer each dividend payout compared to the night before as long as you reinvest the dividends . . your remaining share balance plus the dividend will always equal pretty close to what you had at the prior close . exchange computers automatically make sure your balance is adjusted at the open .

all compounding is always on your opening dollar balance .

that is why getting paid to wait is a myth . each payment just knocks your share price down farther by the same amount ..

 

[papadad111]

Understood.



Question, not a challenge:

I haven't run any numbers (and I'm a self avowed math illiterate) but wouldn't selling SHARES that are down 40% in order to achieve an income of $X be worse than getting the same dollars in dividends and keeping those shares intact, knowing/hoping that those shares will be worth more in the future?

I expect you're going to say 'the same'.

It's the same. ... Except for taxes....

treatment of dividends being different compared to the tax treatment for either short term or long term capital gains.

Stocks are valued based on the present value of future cash flows discounted at a risk adjusted rate.

Whether the dividends are paid out to stockholder or held as retained earnings is irrelevant from a purely financial valuation theory standpoint.

 

[mathjak107]

even taxes can work out the same .. for dividends there are slightly different rules as far as being qualified but both can see 15% or zero if certain parameters are met .

in fact for most folks their investments are usually in a deferred account making taxes irrelevant . fidelity says 71% of all assets under mgmt are in a retirement plan off sort . that number increaes when you look just at stock funds .

 

[RunningBum]

marko, again I think you are missing that most of us has some non-equity investments that we would sell rather than take a 40% loss. Also, total return people aren't usually avoiding dividend payers entirely, so we are also getting better return yields as well, just not as good as you are.

I think you have a good point that if stocks drop 40%, it's easy to stay the course if you are getting dividends, because unless they cut the dividend, you are still getting the same dividend money. For much this reason, dividend paying stocks tend to be less volatile. If a 4% dividend payer drops 40%, the dividend is now paying over 6% to it's current price. As long as the fundamentals are good, people will tend to buy and get the stock back to the 4% yield, driving the price back up.

On the other side, that tends to make dividend payers grow more slowly in good times. Certainly they can and do increase the dividend to keep the yield attractive, but this tells me that the company doesn't have a good use of the money to grow the company, which is almost always what makes the share price go up in the long term.

 

[mathjak107]

the pro's and cons of why you may want to go for the dividend payers really is a separate issue .

the main point is there is no such thing as getting paid to wait .

having the dividend subtracted off the share price makes sure of that . whether they hand you back your money or you do it on your own it is the same in the end .

FINRA MANUAL :

5330. Adjustment of Orders

(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01), as follows:
(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.
-------------------------------------------------------------------------------

market action acts on the stock all quarter but all compounding is based on the amount invested and compounded on at the opening bell .

. that is why reinvesting the dividends gives you the same value that you had prior to the payment .

 

[ERD50]

Question, not a challenge:
I haven't run any numbers (and I'm a self avowed math illiterate) but wouldn't selling SHARES that are down 40% in order to achieve an income of $X be worse than getting the same dollars in dividends and keeping those shares intact, knowing/hoping that those shares will be worth more in the future?
I expect you're going to say 'the same'.

So avoiding math - look at it this way:

Two hypothetical companies - their business, profits, cash flow, balance sheet, sales, etc are equal in every way, except... one pays a consistent 4% dividend, one does not pay any dividend at all.

See, the 4% cannot just appear out of thin air. All things are equal in the valuations of these companies, so the price of the shares of the dividend payer drop as those dividends are paid out. For the non-div payer, that money is retained in the value (and price) of that company.

In effect, issuing a dividend is the same as selling shares.

The same. And in most cases, I think, Long Terms gains are treated the same as qualified dividends, so even tax-wise little/no difference (I'm on my first cup, so please correct me if I'm wrong on the tax issue).

So the downside of a div payer is that they decide when you make a withdraw, instead of you deciding. There are times that may increase your taxes.

-ERD50

 

[mathjak107]

i have to say , the number of people on this forum who get this fact is amazingly high .

other forums argue and argue this and don't understand how getting more shares when you are down isn't benefiting them .

this is why i always refer new folks here and tell them this is the biggest collection of well versed folks in the area of retirement planning that they can find anywhere .

 

[mathjak107]

So avoiding math - look at it this way:

Two hypothetical companies - their business, profits, cash flow, balance sheet, sales, etc are equal in every way, except... one pays a consistent 4% dividend, one does not pay any dividend at all.

See, the 4% cannot just appear out of thin air. All things are equal in the valuations of these companies, so the price of the shares of the dividend payer drop as those dividends are paid out. For the non-div payer, that money is retained in the value (and price) of that company.

In effect, issuing a dividend is the same as selling shares.

The same. And in most cases, I think, Long Terms gains are treated the same as qualified dividends, so even tax-wise little/no difference (I'm on my first cup, so please correct me if I'm wrong on the tax issue).

So the downside of a div payer is that they decide when you make a withdraw, instead of you deciding. There are times that may increase your taxes.

-ERD50

yep , sometimes you are better off being in control of the selling and not them .

i would have qualified for an aca subsidy had it not been for the spin off of all my dividends that i can't control .

 

[Mulligan]

the pro's and cons of why you may want to go for the dividend payers really is a separate issue .

the main point is there is no such thing as getting paid to wait .

having the dividend subtracted off the share price makes sure of that . whether they hand you back your money or you do it on your own it is the same in the end .

FINRA MANUAL :

5330. Adjustment of Orders

(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01), as follows:
(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.
-------------------------------------------------------------------------------

market action acts on the stock all quarter but all compounding is based on the amount invested and compounded on at the opening bell .

. that is why reinvesting the dividends gives you the same value that you had prior to the payment .

Mathjack, I personally think your first sentence no matter how separate that issue is (which it is), will always be hard to separate from the total issue in discussion. It shouldn't, but why you buy something probably gets mixed into the mechanics of the actual dividend paying event.
As you and most people know why people buy dividends is usually this point by Kevin O'Leary.
“Over the last 40 years, 71% of the stock market’s return came from dividends, not capital appreciation,” O’Leary says, reciting the statistics like a form of gospel. That knowledge is the bedrock on which he built his rules for investing:
Yes, again, I agree technically, it is separate from your point, but I think the above statement from O'Leary will always be argued into the point. Funny point....Just as I was typing this two financial experts were recommending high dividend paying stocks just right now on tv. But again, the reasons they cited of safety and paid to wait are separate from the mechanical transaction of the event.



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[mathjak107]

as anyone who owned the darling of wall street in 2008 , DVY like i did can tell you just because they paid dividends and had a great history doesn't mean they are any safer .

DVY still got pounded worse then the s&p 500 did .


it is still all about the company and most important the sector . kmi had a great dividend history and it was on sooooo many stocks you must own lists . , but it lost a ton of value when the sector got hit .

today nothing is safer . i know you like preferred stocks and they stood up better , but when it comes to common stock all bets are off .

 

[Mulligan]

as anyone who owned the darling of wall street in 2008 , DVY like i did can tell you just because they paid dividends and had a great history doesn't mean they are any safer .

DVY still got pounded worse then the s&p 500 did .


it is still all about the company and most important the sector . kmi had a great dividend history and it was on sooooo many stocks you must own lists . , but it lost a ton of value when the sector got hit .

today nothing is safer . i know you like preferred stocks and they stood up better , but when it comes to common stock all bets are off .

Which reinforces the point, if you want dividends you need to make sure the company has the resources to continue paying them. The point of correctly picking company and sector for returns is precisely the reason I do not buy common stocks at all. I put no faith in my ability to do either.


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[ERD50]

...
As you and most people know why people buy dividends is usually this point by Kevin O'Leary.
“Over the last 40 years, 71% of the stock market’s return came from dividends, not capital appreciation,” O’Leary says, reciting the statistics like a form of gospel. That knowledge is the bedrock on which he built his rules for investing:
Yes, again, I agree technically, it is separate from your point, but I think the above statement from O'Leary will always be argued into the point. ...

Yes, they will use that to frame their argument, but it isn't valid.

Just because 71% of the stock market’s return came from dividends (assuming the statement is true, and I don't doubt it), this does not spell out cause/effect, or really give us anything actionable.

What if I peeled that statistic back a bit, and found that the non/low-div payers outperformed the averages based on total return? I'm not saying that is the case, but if it is, or even if they were equal, it makes the statement moot.

As mathjak just pointed out, DVY sure didn't provide safety in 2008. I think the last round in this discussion, some were pointing out that they didn't like DVY, it isn't a good benchmark. Well it's about as general as you can get for dividend payers, it is what it was made for. If one wants to go there, and claim their private portfolio of div payers are the good ones, then we get to cherry pick some non-div payers as well.

Here's a total return chart from around the 2008 crash. BRK (ZERO Divs) and SPY did better than DVY. Play with the slider a bit, I didn't cherry-pick those dates, the same trend shows up all around that crash.

PerfCharts - StockCharts.com - Free Charts

-ERD50

 

[mathjak107]

i only buy diversified funds for my serious investing . how my total returns are made up really isn't a factor . some pay dividends , some don't . in the end it really does not matter .

i create my own cash flow off the portfolio .

dividends historically only accounted for 1/3 of the growth of the s&p 500.

 

[marko]

So avoiding math - look at it this way:

Two hypothetical companies - their business, profits, cash flow, balance sheet, sales, etc are equal in every way, except... one pays a consistent 4% dividend, one does not pay any dividend at all.

See, the 4% cannot just appear out of thin air. All things are equal in the valuations of these companies, so the price of the shares of the dividend payer drop as those dividends are paid out. For the non-div payer, that money is retained in the value (and price) of that company.

In effect, issuing a dividend is the same as selling shares.

The same. And in most cases, I think, Long Terms gains are treated the same as qualified dividends, so even tax-wise little/no difference (I'm on my first cup, so please correct me if I'm wrong on the tax issue).

So the downside of a div payer is that they decide when you make a withdraw, instead of you deciding. There are times that may increase your taxes.

-ERD50

Ok. I get that. mathjak has been hammering this into me for about six months now! (some people just take a little longer!)

Then if (taxes aside) it mostly doesn't matter either way I personally prefer to get a quarterly dividend payment. It gives me a sense of a paycheck that gets automatically deposited into my account.

I realize that it's "six of one..." but having a fairly predictable income works for me.

As I'm writing, I'm beginning to wonder if so many of the threads here: SS, AA, Dividends/TR, all might come to the same conclusion: given enough time and avoiding 9 decimal places if all the paths comes out pretty close.

 

[REWahoo]

... given enough time and avoiding 9 decimal places if all the paths comes out pretty close.

Given enough time all paths come out exactly equal - we're dead.

 

[mathjak107]

Ok. I get that. mathjak has been hammering this into me for about six months now! (some people just take a little longer!)

Then if (taxes aside) it mostly doesn't matter either way I personally prefer to get a quarterly dividend payment. It gives me a sense of a paycheck that gets automatically deposited into my account.

I realize that it's "six of one..." but having a fairly predictable income works for me.

As I'm writing, I'm beginning to wonder if so many of the threads here: SS, AA, Dividends/TR, all might come to the same conclusion: given enough time and avoiding 9 decimal places if all the paths comes out pretty close.

dividends can be anything but predictable .

in fact have you ever seen how many times the dividend aristocrat's had to be swapped out ?

"these dividend aristocrats are not somehow immune to all the things that effect company's and stocks . Just like other companies, their outcomes change.

in 2009 there were 52 stocks that met the group’s strict criteria.

As of 2012, there were 51.

But of those 51, 13 were different than the original set. So over the course of just 3 years, there was a 27% change in the group’s composition.

in fact going back to 1989's list :

Of those 26, seven are still on the list today, ten were removed because they either cut or froze their dividend, four were removed for an unknown reason, and the remainder were acquired at some point. So at least ten of the 26 had an outcome that is different from the assumption of dividend growth every year through thick and thin."

 

[Mulligan]

A dividend payment can also be worded in this unorthodox but basically true wording .... Here is some cash for you. We cant figure out a way to increase shareholder value in a better manner by keeping it. Take it, spend it, reinvest it, or pay taxes on it...The cash is now your problem not ours!


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[marko]

See, the 4% cannot just appear out of thin air. All things are equal in the valuations of these companies, so the price of the shares of the dividend payer drop as those dividends are paid out. For the non-div payer, that money is retained in the value (and price) of that company.


-ERD50

After my second cup, here is where I'm getting stuck maybe:

Dividends are paid from the profits a company makes (in general) or COH.

The NAV is set by the market on what a buyer and seller agree what is a fair price.

On Day One of a dividend payment I can rationalize a drop in NAV (maybe) but if NAV is set by the market the next day, I'm having trouble seeing the connection.

Maybe I'm just dense!

 

[Mulligan]

After my second cup, here is where I'm getting stuck maybe:



Dividends are paid from the profits a company makes (in general) or COH.



The NAV is set by the market on what a buyer and seller agree what is a fair price.



On Day One of a dividend payment I can rationalize a drop in NAV (maybe) but if NAV is set by the market the next day, I'm having trouble seeing the connection.



Maybe I'm just dense!

The exD of a stock is an after hours adjustment. But that does not mean the next trade the following morning will occur at that price. Think of it in terms of an auctioneer starting the bidding process at lower point the following day on an item. It still depends on the buyer and seller coming to agreement on a mutual price.
Liquid stocks, this occurs in a blur so it is hard to see. Illiquid preferred stocks trade in such slow motion it is easier to see. Many a time I have bought a preferred day before exD, and the following day the first trade is higher than the previous day despite not capturing the dividend.


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[samclem]

On Day One of a dividend payment I can rationalize a drop in NAV (maybe) but if NAV is set by the market the next day, I'm having trouble seeing the connection.

Let's say that a used car is being sold by sealed bids in a very efficient market (hundreds of buyers who can each find out whatever they want to know about the car). They can all see that there's a $50 bill in the ash tray of the car (the dividend). They write out their sealed bids to buy the car. Then, the owner of the car comes over and removes the $50 bill from the ashtray. What is the car worth to the buyers now? $50 less. So they amend their bids.

When a company is going to pay a dividend to present stockholders, the stock price reflects that soon-to-be-paid dividend. After the dividend is gone, the stock is worth less to potential buyers.