Vanguard expert on total return vs. income producing

[soupcxan]

Quote:

Originally Posted by ERD50 Can you back this up with some data that is relevant to personal investors ?

Finance theory

• agency problem: managers with excess cash will spend it on poor investments just to make the firm larger when they should be returning it to shareholders.
• signaling: management knows that cutting the dividend is received negatively by investors. so a manager that establishes a dividend is signaling that the firm has good prospects and won't need to cut the div

I'm sure there are academic studies that support these theories. Probably an equal number that don't support it.

[ERD50]

Quote:

Originally Posted by soupcxan Finance theory agency problem: managers with excess cash will spend it on poor investments just to make the firm larger when they should be returning it to shareholders. signaling: management knows that cutting the dividend is received negatively by investors. so a manager that establishes a dividend is signaling that the firm has good prospects and won't need to cut the div I'm sure there are academic studies that support these theories. Probably an equal number that don't support it.

I don't disagree with that line of thinking, what I'm asking is, 1) does it play out in a meaningful way in real life? 2) Is the delta significant enough for me to change my investment strategy? 3) If so, at what point is it noticed and arbitraged away?

Answering my first two questions requires data. If an equal number of studies were to dispute/support the idea, there probably isn't anything significant there.

-ERD50

[soupcxan]

All I know is, I like cash on the barrelhead.

[ERD50]

Quote:

Originally Posted by soupcxan All I know is, I like cash on the barrelhead.

And I like to make my decisions based on data!

Hey, there's certainly nothing 'wrong' with a dividend approach, and it might be advantageous - it's just that if someone suggests that A is better than B, I like to understand why that might or might not be the case.

Total return provides cash on the barrel-head as well. The only difference is, you might need to sell some to obtain the delta in dividend payouts (which is pretty much all the dividend payers are doing internally, right?).


-ERD50

[mathjak107]

yep , they are just handing you back a piece of your share price.

nothing you can't do on your own.

[samclem]

Quote:

Originally Posted by soupcxan signaling: management knows that cutting the dividend is received negatively by investors. so a manager that establishes a dividend is signaling that the firm has good prospects and won't need to cut the div

And, for the same reason, management sometimes keeps paying a high dividend when it shouldn't (e.g. the company sacrifices its long-term future by reducing investment in order to avoid short-term pain).

If we seek out companies that focus too much on the dividend, we can end up with a stock worth a lot less than it should be--and eventually the dividends have to give. In these cases, we were really withdrawing from our principal every year, we just didn't realize it.

[RunningBum]

Yeah, I'm not saying a dividend approach is bad either. Dividends + gains in share prices may give the best overall return over lower dividend stocks, or maybe be close enough with a lower risk of loss. If I went for a dividend strategy I might lower my bond allocation.


What I'm saying, and I think the VG analyst is saying, is that just focusing on the income flow is a mistake, in our opinion. It might be analogous to the person who goes into a car dealer and says they want $XXX monthly payment on a car, not paying attention to the loan details and what it's actually costing you.

[mathjak107]

Quote:

Originally Posted by samclem [*][/LIST] And, for the same reason, management sometimes keeps paying a high dividend when it shouldn't (e.g. the company sacrifices its long-term future by reducing investment in order to avoid short-term pain). If we seek out companies that focus too much on the dividend, we can end up with a stock worth a lot less than it should be--and eventually the dividends have to give. In these cases, we were really withdrawing from our principal every year, we just didn't realize it.

that is a point i have been trying to get across to people for years.

your investment dollars available for compounding at the start of each quarter are either less if you pocket the dividend or identical to what you had before the dividend is paid .

it is only the value of your dollars that are compounded by market action over the next quarter that matter. .

if you had a 100k before the dividend and 95k after the exchange mandatory price reduction plus 5k in pocket all that matters is you have 95k compounding for you working for you now and not 100k.

reinvest the dividend and now you have your same 100k compounding at the ring of the bell.

[Mulligan]

Quote:

Originally Posted by mathjak107 that is a point i have been trying to get across to people for years. your investment dollars available for compounding at the start of each quarter are either less if you pocket the dividend or identical to what you had before the dividend is paid . it is only the value of your dollars that are compounded by market action over the next quarter that matter. . if you had a 100k before the dividend and 95k after the exchange mandatory price reduction plus 5k in pocket all that matters is you have 95k compounding for you working for you now and not 100k. reinvest the dividend and now you have your same 100k compounding at the ring of the bell.

I have no disagreements at all with what you are saying and personally believe it to be true. (I just enjoy the topic, personally) A nonpaying dividend stock can certainly be multitudes better than one that pays a dividend. And a company that pays dividends is not inheritantly safer than one that does not.
That being said investors expectations also matter on the stock, not just "the stock would automatically be 50 cents higher today if it hadn't gone Ex D today".
As a theoretical example take a high dividend illiquid stock. If it was a $10 stock with $1 annual dividend and never traded, in 10 years it would be worth zero in theory without a purchase. And we all know that is not possible assuming it is a profitable company.
I purchased a stock that last traded April 2014 at $102. It had paid out $9.69 in dividends since last traded, yet its price was not the implied $93.31. It was still sitting at $102 unchanged before I purchased some this week. One website (Fidelity) did move it down by the quarterly dividend to $100.06, but them immediately the following day adjusted right back to $102 without any shares trading hands.
So there can be an implicit value on a stock that pays a good safe dividend.



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[mathjak107]

your math is wrong .

trying to pull that 1 dollar dividend from the 10 buck non dividend payer will not take a share as the stock appreciates. it will take a smaller and smaller pice of a share over time to equal that dividend.

with no appreciation in theory the dividend payer will go to zero value and the non dividend payer will go to zero shares .

but if the stock appreciates at least enough to cover the dividend then the dividend payer will never go to zero and the appreciating non dividend payer will need a smaller and small piece of a share to equal the dividend never running out of shares . it does not stay 1 share would equal the dividend , less and less of a share gets sold to equal that dividend as the non dividend payer appreciates .

given same total return the non dividend payer will always be worth more . . .

[mathjak107]

Quote:

Originally Posted by Mulligan I have no disagreements at all with what you are saying and personally believe it to be true. (I just enjoy the topic, personally) A nonpaying dividend stock can certainly be multitudes better than one that pays a dividend. And a company that pays dividends is not inheritantly safer than one that does not. That being said investors expectations also matter on the stock, not just "the stock would automatically be 50 cents higher today if it hadn't gone Ex D today". As a theoretical example take a high dividend illiquid stock. If it was a $10 stock with $1 annual dividend and never traded, in 10 years it would be worth zero in theory without a purchase. And we all know that is not possible assuming it is a profitable company. I purchased a stock that last traded April 2014 at $102. It had paid out $9.69 in dividends since last traded, yet its price was not the implied $93.31. It was still sitting at $102 unchanged before I purchased some this week. One website (Fidelity) did move it down by the quarterly dividend to $100.06, but them immediately the following day adjusted right back to $102 without any shares trading hands. So there can be an implicit value on a stock that pays a good safe dividend. Sent from my iPad using Tapatalk

the stock didn't adjust back up on the same amount of money though. if you had 100k in stock before the dividend and 95k after and 5k in pocket a 10% move upward by market action means you have 104,500

you recovered the pay out but have only 104,500.


if you had the full 100k working for you in a non dividend payer you would have 110k not 104,500.00 assuming same cagr . .


it is all about the dollars in value you have invested at the opening bell and where you are compounding wise at the close of the next quarter.

as long as the stock appreciates it will look like you recovered the dividend but that fact is you would have been even higher if you didn't have the dividend pulled out of your investment amount.

if you reinvested the dividend it is just a wash and you have the original 100k back working for you , nothing gained ,nothing lost . . you just have the original amount of dollars .

if you pulled out that same 10% from the non payer you would have the same amount compounding in both cases .

[Mulligan]

Mathjack, I fully understand and agree with your thinking. But I must admit, I don't understand your explanation above relating at all to my illiquid stock example. The dividend was deducted, the stock should drop in relation to that amount of said dividend; as compared to an non dividend stock that would not have dropped.
An illiquid $102 no dividend stock that did not trade would remain at $102. An illiquid $102 stock that just went ex D of $1.94 should drop to $100.06, but yet it didn't. Point being is there are also forces at play in determining a value of a stock price. "Buying yield" can be in vogue at certain times, and at times it will not. This could then be in turn a detriment to said stock or a benefit depending on when in the cycle you purchased it.



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[mathjak107]

it did drop at the open , it has to , that is exchange law and done automatically before the open . so what ever balance you had the night before the deduct is starting out lower. there is no question .

from that point on for not just the day but the quarter , market action takes your balance to wherever it compounds to.

if you had 10k invested and got a 5% dividended which you did not reinvest all you have for the market action to work on is 9500 bucks .

market action will compound your dollars invested . the fact you saw it retrace what it paid out is meaningless since if the stock went up 10% for the year , you earned 10% on 9500 not 10% on 10k


follow that ? just because it was absorbed in the action does not mean the compounding wouldn't have been greater in dollars if that dividend was reinvested or in a mathematical seance not paid out .

[Mulligan]

Quote:

Originally Posted by mathjak107 it did drop at the open , it has to , that is exchange law and done automatically before the open . so what ever balance you had the night before the deduct is starting out lower. there is no question . from that point on for not just the day but the quarter , market action takes your balance to wherever it compounds to. if you had 10k invested and got a 5% dividended which you did not reinvest all you have for the market action to work on is 9500 bucks . market action will compound your dollars invested . the fact you saw it retrace what it paid out is meaningless since if the stock went up 10% for the year , you earned 10% on 9500 not 10% on 10k follow that ? just because it was absorbed in the action does not mean the compounding wouldn't have been greater in dollars if that dividend was reinvested or in a mathematical seance not paid out .

Yes I follow, and once again I agree with you as I have. Your explanation isn't following my situation, but that is fine. It is just an obscure thought on my end. Ultimately in the illiquid markets, Bid/Ask spread, and Market makers have way more influence on a stock price than an ex dividend does.


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[mathjak107]

market action is the biggest part , but everything is still based on the amount you start off with in value at the opening bell. if it is even 1 dollar less than all compounding will be on 1 dollar less.

[Mulligan]

Quote:

Originally Posted by mathjak107 market action is the biggest part , but everything is still based on the amount you start off with in value at the opening bell. if it is even 1 dollar less than all compounding will be on 1 dollar less.

I am going to try to word it differently as I probably have been wording this poorly. But I would like your opinion on why this happened because it did this week as it interests me.
The stock was at $102. Which it has been since April 2014. It went ex D of $1.94. My vanguard account didn't even acknowledge the distribution and kept stock at $102. Fidelity changed it for one day then reinstated it back to $102 pre exD trading price. Keep in mind ZERO shares have traded during this time. Zero shares have traded. $9.70 of dividends have passed through without a trade. If the exchange has to lower the stock price by the dividend amount as you say and there is zero stock purchases the price would have to reflect downward movement without a trade. Yet it continuously pops back up to original pre ExD date without a trade to bring it back there.
If you give up, I understand, but I am trying my best to explain it.


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[mathjak107]

i follow what you are saying but my feeling is there are actually bids going on you are not aware of so it appears to not have budged after the payment .

but according the laws of the exchanges that would not be possible.

[jim584672]

Ex dividend pricing is set by the buyer and seller ultimately, they can't dictate a drop.

[robertf57]

I'm not aware of any law that would set a price on the open exchange.... And because of the continuous bid ask process, even if there was an instantaneous price set by statute, it would have no practical effect on prices that occur in the market. Too many other forces at play.


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[Danmar]

Quote:

Originally Posted by RunningBum Yeah, I'm not saying a dividend approach is bad either. Dividends + gains in share prices may give the best overall return over lower dividend stocks, or maybe be close enough with a lower risk of loss. If I went for a dividend strategy I might lower my bond allocation. What I'm saying, and I think the VG analyst is saying, is that just focusing on the income flow is a mistake, in our opinion. It might be analogous to the person who goes into a car dealer and says they want $XXX monthly payment on a car, not paying attention to the loan details and what it's actually costing you.

Agree and this is the point. Focussing solely on divs is not usually optimal for the reasons you cite. As you point out, dividend investing may well be a successful strategy if implemented well. This may not be a result of the fact they are paying divs though.
Also, once retired divs are a convenient way to obtain cash. Not magic, just convenient. Selling the right stock to obtain cash needed for living expenses can introduce another risk, ie you sell the wrong one and up it goes. Div paying stock are often less risky and have lower betas. I have often wondered if SWR can be higher for div paying stock? Probably.
In my case my CDn bank heavy, telco, and pipes portfolio has outperformed all benchmarks over the 18 years I ave been investing. Not likely because it is a div growth portfolio, but rather because the underlying businesses have performed well. Currently living off divs but at some point will liquidate some stock since it has appreciated quite a lot. Just gave DD a big chunk of stock for an eventual down payment on an overpriced house in Toronto.