Anybody Rely Mostly on Dividend Funds? Questions

[target2019]

What articles can I read to understand how dividend work? I have one of those dividend aristocrat stock and struggle on whether to reinvest the dividends or withdrawal the dividend income quarterly. For retirement planning, I have included the quarterly dividend as a source of income for at least 3 years.

This article explains dividends.
https://www.investopedia.com/terms/d/dividend.asp

Time to play the card.

 

[Dash man]

Again, there is no financial benefit. If the dividend isn't paid, the value of the stock/fund simply increases.



And if divs are being reinvested, that amounts to nothing more than an additional purchase to keep track of and potentially cause a wash sale (as demonstrated by a lengthy thread a couple months ago on this site).



I get the impression that some folks here don't really understand how dividends work, or that they are somehow magical/free money.

I get the impression you don’t like others having differing opinions. [emoji12]
A company with growing dividends and a reasonable payout ratio is an indication of a healthy company. Reinvesting dividends is a good way to dollar cost average into additional shares. Dividends are a way of taking some off the top, without having to sell in a down market.
If you don’t like dividend stocks, then avoid them. I personally like them. It’s nice having a regular paycheck in retirement.

 

[ERD50]

Originally Posted by mrfeh View Post
Again, there is no financial benefit. If the dividend isn't paid, the value of the stock/fund simply increases.

And if divs are being reinvested, that amounts to nothing more than an additional purchase to keep track of and potentially cause a wash sale (as demonstrated by a lengthy thread a couple months ago on this site).

I get the impression that some folks here don't really understand how dividends work, or that they are somehow magical/free money.

I get the impression you don’t like others having differing opinions. [emoji12] ...

People are free to have opinions, mrfeh is outlining the facts. Attacking him in this way isn't helping your case.

... A company with growing dividends and a reasonable payout ratio is an indication of a healthy company. ...

That's a rear-view mirror look. We need to know about the future. Plenty of once healthy dividend (and non-dividend) payers have gone from healthy to sick, and it isn't clear until the stock has dropped and/or dividends have been cut, to do anything about it. And plenty of once healthy dividend (and non-dividend) payers have gone from sick to healthy - dividends don't have any special value here. If you believe they do, show some evidence of how an investor can take advantage of this with a diversified portfolio (not a handful of stocks).

... Reinvesting dividends is a good way to dollar cost average into additional shares. ....

No, it's an awful way to do it.

If the company did not distribute the dividend, it would be retained in the stock price. So there would be no need to go through the song/dance of distributing it, just to "reinvest it", and maybe pay taxes on that distribution. Without a dividend distribution, it was already invested, there is zero need to "re-invest" it. And retaining happens 365 days a year, better than dollar cost averaging once quarter.

Dividends are a way of taking some off the top, without having to sell in a down market.

This is another red-herring. In a balanced portfolio, the fixed income side will handle that. There is rarely ever a case where stocks must be sold when they are down.

... If you don’t like dividend stocks, then avoid them. I personally like them. It’s nice having a regular paycheck in retirement.

I don't avoid them - I take them in my broad based stock funds in the ratio they are represented. They are part of the market, I'm not going to discriminate. Though I would prefer that none of them paid a dividend, but that's not up to me.

All this talk about stocks that have paid a steady/growing dividend for 20 years. If you go back 20 years, the stocks that fit that category at the time (all that matters for stock picking w/o a crystal ball) did not outperform the market. Because the past was/is not a good indicator of future performance, and div payers tend to put you into a less diversified portfolio.

-ERD50

 

[thod]

In school we were taught that a company's value can be calculated as the "present value of future cash flows". The tricky part is figuring out what the future cash flows are. Of course, there are dividends and the sale/liquidation price.

In that equation, dividends are somewhat predictable (or at least most companies strive to keep them predicable.) If a company can increase its dividend over time, then it usually indicates there is confidence in the cash flows going forward. If they cannot not or even need to decrease them, it indicates that there might be something unhealthy with the company.

As far as a company that has no dividends, the only future cash flow is a buyout, bankruptcy, liquidation, or the company keeps operating 'forever'.
In the case of 'operating forever', what is the future cash flow? In that case, it becomes just the ability to hope there are more 'buyers' (positive on the stock), than 'sellers' (negative on the stock.)

Everyone buys a stock hoping to make money. If the only way to realize that money is to sell, then what happens if everyone decides to sell at the same time. Or what happens if everyone chooses to buy at the same time. Either way your investment is potentially at the mercy of the crowd/mob.

Dividends cannot necessarily stop any bad stuff from happening, but they can serve as a check on management taking too many risks or just doing stupid stuff. The flip side of that is that, sometimes taking risks can be very profitable.

So there really is no right or wrong answer. Either way, the market will decide, and I treat dividends as a check on management to not do something too stupid with my money.

 

[Dash man]

Here’s one of many charts you can find searching the Internet showing how dividend growing stocks outperform.

 

[ncbill]

Here’s one of many charts you can find searching the Internet showing how dividend growing stocks outperform.

View attachment 42113

Tells us nothing about risk.

Plenty of individual stocks outperform because they're risker than the total market...so their expected returns would be higher.

Similarly with bonds...junk bonds have an expected higher yield than corporate which have a higher expected yield than Treasury.

This seems to be a perennial problem on this forum...focusing on higher absolute returns while ignoring the higher risk involved.

Apples-to-apples when comparing total return index funds/ETFs to dividend index funds/ETFs the total return approach outperforms...plenty of threads over on bogleheads on that subject.

 

[Dash man]

People are free to have opinions, mrfeh is outlining the facts. Attacking him in this way isn't helping your case.

-ERD50

Nobody attacked anyone. The “facts” you cite are opinions. Yes, people are free to have opinions, as I am. There’s no reason to be condescending to another person expressing their opinions.

Dividend growth with a reasonable payout ratio is showing the company expects future cash flows to improve. They are forward looking.

 

[COcheesehead]

It’s like two ships passing in the night in this thread. One is called Dividends are Not Really Income and the other is called I like the Income from My Dividends. LOL.

Dividends are a forced sale of a portion of a stock. They are taxed as income or might be depending on your situation, but they add nothing to your net worth. It’s a process to tax, not a process for income. I think some folks think it’s like getting interest paid in a savings account or something like that.

 

[ERD50]

Here’s one of many charts you can find searching the Internet showing how dividend growing stocks outperform.

View attachment 42113

Show me the source for that. Every chart I've seen of div payers outperforming the market has been a rear view look - they go back and pick stocks from 20 years ago that had growing divs. But that was not predictable 20 years ago.

-ERD50

 

[target2019]

It’s like two ships passing in the night in this thread. One is called Dividends are Not Really Income and the other is called I like the Income from My Dividends. LOL.

Dividends are a forced sale of a portion of a stock. They are taxed as income or might be depending on your situation, but they add nothing to your net worth. It’s a process to tax, not a process for income. I think some folks think it’s like getting interest paid in a savings account or something like that.

For that moment in time, you are correct in that net worth does not increase or decrease when the dividend is paid out.

But the reality is that there are many moments after the dividend declaration, and excellent companies recover the NAV drop very quickly. Is anything 100% good or bad? Not really.

 

[ERD50]

Nobody attacked anyone. The “facts” you cite are opinions. Yes, people are free to have opinions, as I am. There’s no reason to be condescending to another person expressing their opinions.

Dividend growth with a reasonable payout ratio is showing the company expects future cash flows to improve. They are forward looking.

No they aren't opinions. A company either distributes some of it's value, or retains it, and that value becomes part of its NAV. How is that not a fact? We see it demonstrated most obviously in some of the large year end distributions that some funds make - the NAV drops as much as the distribution. It's just moving money, not creating value.

-ERD50

 

[VanWinkle]

From another post concerning dividends and comparing them to the dreaded bonds with a interest rate increase.


So if dividends stocks go down, the dividends remain the same as it is per stock owned dividend and not based on value. This appears to be the same story with bonds. As my bond value decreases, the actual dividend payout remains the same and actually increases due to the rising interest rate. If I am living on the income produced, nothing bad has happened unless I lock in my loss by selling the shares. So would dividends investors sell their shares if the stocks went down 5-10% like the bond market has done lately.....

Does this comparison hold water.......

VW
____________

 

[ERD50]

For that moment in time, you are correct in that net worth does not increase or decrease when the dividend is paid out.

But the reality is that there are many moments after the dividend declaration, and excellent companies recover the NAV drop very quickly. Is anything 100% good or bad? Not really.

Sometimes they do, sometimes they don't.

Can you provide data that shows I can partake in superior performance by buying a diversified group of div payers? And do it as easily as buying something like VTI?

-ERD50

 

[target2019]

For that moment in time, you are correct in that net worth does not increase or decrease when the dividend is paid out.

But the reality is that there are many moments after the dividend declaration, and excellent companies recover the NAV drop very quickly. Is anything 100% good or bad? Not really.

Sometimes they do, sometimes they don't.

Can you provide data that shows I can partake in superior performance by buying a diversified group of div payers? And do it as easily as buying something like VTI?

-ERD50

I don't see "superior performance" in my words. Why would you interject that?

 

[COcheesehead]

For that moment in time, you are correct in that net worth does not increase or decrease when the dividend is paid out.

But the reality is that there are many moments after the dividend declaration, and excellent companies recover the NAV drop very quickly. Is anything 100% good or bad? Not really.

Yes, the market over time goes up. So NAVs grow, just like most other stocks, but with a dividend payer, you now have a potential taxation event too.
I am just clarifying what some folks think of as income in reality is just a forced sale of a portion of their assets.

 

[COcheesehead]

From another post concerning dividends and comparing them to the dreaded bonds with a interest rate increase.


So if dividends stocks go down, the dividends remain the same as it is per stock owned dividend and not based on value. This appears to be the same story with bonds. As my bond value decreases, the actual dividend payout remains the same and actually increases due to the rising interest rate. If I am living on the income produced, nothing bad has happened unless I lock in my loss by selling the shares. So would dividends investors sell their shares if the stocks went down 5-10% like the bond market has done lately.....

Does this comparison hold water.......

VW
____________

The interest payment on a bond is locked. They don’t increase when rates rise. The yield increases, because the value of the bond has decreased, but not the amount of the payment.

 

[COcheesehead]

There was a guy, at least I think it was a guy based on the user name, that was pitching a “dividend recovery” scheme on another forum claiming he had a process for buying ex dividend payers that would then bounce on the NAV drop. He had so many folk’s believing it. None of it turned out to be true and he was ultimately banned. It was in the Fidelity Forum.

 

[target2019]

Yes, the market over time goes up. So NAVs grow, just like most other stocks, but with a dividend payer, you now have a potential taxation event too.
I am just clarifying what some folks think of as income in reality is just a forced sale of a portion of their assets.

And I am pointing out that the stock market consists of many slices of time, not just that one moment when the NAV is adjusted downward to compensate for the dividend.

FYI, it is called dividend income. My bank calls it income.

 

[COcheesehead]

And I am pointing out that the stock market consists of many slices of time, not just that one moment when the NAV is adjusted downward to compensate for the dividend.

FYI, it is called dividend income. My bank calls it income.

LOL. Well that clarifies it then.

 

[Dash man]

Show me the source for that. Every chart I've seen of div payers outperforming the market has been a rear view look - they go back and pick stocks from 20 years ago that had growing divs. But that was not predictable 20 years ago.



-ERD50

The original source is on the chart.

 

[ERD50]

I don't see "superior performance" in my words. Why would you interject that?

I'm sorry, my response was a bit misdirected, allow me to try again:

Originally Posted by target2019 View Post
For that moment in time, you are correct in that net worth does not increase or decrease when the dividend is paid out.

But the reality is that there are many moments after the dividend declaration, and excellent companies recover the NAV drop very quickly. Is anything 100% good or bad? Not really.

What I was trying to say is, it really isn't important that some "excellent companies recover the NAV drop very quickly. ". What 'some/excellent companies' do isn't actionable. If I knew ahead of time which companies would be 'excellent' in the future, I'd invest in those. But we don't know. And if that same company didn't distribute that div, it would all be reflected in their NAV anyhow. Divs aren't a factor.

The important thing (other than curiosity) is can an individual investor get improved performance at a risk level they are OK with. I don't see any evidence that a personal investor can put together a reasonably diverse group of any sector (div payers are a sector) that can be expected to out-perform the 'market' (which is easy to buy and be very diversified).

So then, what's the point? So some say they like the cash flow from divs, vs maybe having to do some selling once a year. Their choice, but I thinks it's a bit misguided, since most probably want to rebalance occasionally to manage their AA, and divs aren't as assured as some seem to think. So it just doesn't seem worth the risk of a sector play. If they want to play that game, their business. But I just don't like when some half-truths are spread (in general, not pointing at you) about the supposed advantages of the div paying sector.

-ERD50

 

[MichaelB]

It’s important to not lose sight of the OPs request. Not looking for a “dividends vs no dividends” debate or portfolio market outperformance. OP is looking for a “fairly safe” way to generate dividend income to help cover monthly expenses.

 

[OldShooter]

There's something wrong with that chart. The big thing is the "Dividend Non-Payers" line being almost flat, including through the tech bubble. The use of an "Equal Weighted S&P 500" index is also very odd and may be cherry picking. Finally, did a stock that started paying a dividend recently get its non-div history added to the whole 46 years of the div-payer chart?

There's probably survivorship bias too. No real way to tell how they handled, for example, dividend payers that went out of business.

I did a quick Google image search and the only instances of this chart I found were from div fund sales or newsletter sales sites. It is apparently from a Ned Davis subscription so the context is behind their paywall.

Hard to know what the chart really means but I don't think it's one to be trusted without a careful look at the methodology and the source data.

Edit: Another flag -- the chart is from "Ned Davis" data. Who made the chart and how? What was their objective?

 

[ERD50]

The original source is on the chart.

A quick skim raised a bunch of yellow flags (typical of anyone promoting the div sector), after that I didn't go deeper.

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

1) First yellow flag - rather than focusing on compound growth, they talk about how often some quintile of div payers ( a sector of a sector!) outperform the S&P index (*). Frequency doesn't tell the story, total return over the period does. Losses can overcome the gains, even if gains occur most often.

2) Second yellow flag (getting kind orange-red now) - Figure 7. OK, now they compare the total CAGR from 1973-2018 - good stuff, right? Div payers looking good!

-----------------------------Returns; Beta; Standard Deviation
--------------- Returns; Beta; Standard Deviation
Dividend Payers _ 9.60% _ 0.94 _ 16.78%
S&P 500 Index ___ 8.20% _ 1.00 _ 17.64%

Not so fast.... what's this I see? That's not the S&P 500 Index, it is something else.... it's the "Equal-Weighted S&P 500 Index". Hmmmmm. Google says:

The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.

Now why did they use the "Equal-Weighted S&P 500 Index", when most investors just buy the 'normal' (or as they say the 'widely used' capitalization weighted S&P 500)? Well, a skeptical person might wonder if maybe the Equal Weighted S&P tells a 'better' story for this 'research paper'? Nah, they wouldn't do that! There's no need to game the system if you are winning, right?

Well, whaddyaknow...

https://www.in2013dollars.com/us/stocks/s-p-500/1972?amount=100&endYear=2018

If you invested $100 in the S&P 500 at the beginning of 1972, you would have about $9,673.84 at the end of 2018, assuming you reinvested all dividends. This is a return on investment of 9,573.84%, or 10.22% per year.

I'm shocked The 'regular' S&P 500 beats the EWI and their 'dividend payers'.

That's enough for me, their approach is flawed, and in their favor. Got another source (and I'd suggest you critique it first).

-ERD50

 

[OldShooter]

... I just don't like when some half-truths are spread (in general, not pointing at you) about the supposed advantages of the div paying sector. ... ERD50

Well, err, in fairness I think the quick, intuitive, look at dividends makes them look like free money. In behavioral terms this is Kahneman's "System 1" running things. It takes a fairly sophisticated appreciation of the big investment picture to modify the easy intuitive conclusion. "Half truths" sounds a bit pejorative. How about "misunderstandings?"

People selling div funds, of course, want clients to stop at the "intuitive" point.