The Mystery of Spending Only Dividends Behavior

[Oz investor]

i should add that in Australia ( where i live ) the tax system for the small investor is skewed slightly favourably towards dividends and BASHES capital gains

( obviously billionaires still prefer off-shore accounts in low-tax nations )

 

[Montecfo]

While yes he's shorting a number of Canadian banks/financials, I'm not sure he's characterized them as being in a "bubble." Rather it sound like he expects them to go through a rough patch of quarterly results/earnings due to normalization credit from a period of expansion/heavy lending; ie a cyclical issue. I think he even says he's not characterizing it as a calamity situation.

He said Canadian housing is in a bubble and predicts damage to banks as a result.

 

[RunningBum]

I think we are actually in agreement. My point was simply that the market determines the price going forward, and the dividend is soon forgotten (or really lost in the volatility, as others have said).

It may be forgotten by you, but not by the market. Stock prices in general rise so you may think it's recovered the dividend, but it would've be even slightly higher had the dividend not been paid. Individual investors may be ignorant of this, but institutional investors that really drive market prices with their bulk are not.

Look at it this way, you have two companies in the same industry, similar size, similarly run, similar profits, similar outlook. ABC pays a 4% dividend, XYZ does not. If the ABC stock price also goes up 5% over a year along with that 4% dividend, do you think XYZ is also only going to go up ~5%, or will they go up around 9%?

 

[marko]

It may be forgotten by you, but not by the market. Stock prices in general rise so you may think it's recovered the dividend, but it would've be even slightly higher had the dividend not been paid. Individual investors may be ignorant of this, but institutional investors that really drive market prices with their bulk are not.

Look at it this way, you have two companies in the same industry, similar size, similarly run, similar profits, similar outlook. ABC pays a 4% dividend, XYZ does not. If the ABC stock price also goes up 5% over a year along with that 4% dividend, do you think XYZ is also only going to go up ~5%, or will they go up around 9%?

I'm not challenging your position as I'm a bit weak in this area.

But I remember reading somewhere that dividend paying stocks tend to outperform non payers. Then I found this: https://www.thebalance.com/why-dividend-stocks-outperform-non-dividend-stocks-357353

So...I may be out in the weeds here or, more likely miss your point, but thought I'd pass it on, FWIW.

 

[pb4uski]

^^^^ The differences are pretty small in the long run.

Since Jan 1993.... Vanguard Value Index Inv (higher dividend payers)...9.35%... Vanguard Growth Index Inv (lower/no dividend payers)... 9.59%... Vanguard Total Stock... 9.46%.

Higher dividend payers tend to give one a more stable ride. For shorter periods one can be quite a bit better than the other... growth has shined for the last 10 years, but value has shined for the last 20 years.

https://www.portfoliovisualizer.com...cation2_2=100&symbol3=VTSMX&allocation3_3=100

 

[Running_Man]

I'm not challenging your position as I'm a bit weak in this area.

But I remember reading somewhere that dividend paying stocks tend to outperform non payers. Then I found this: https://www.thebalance.com/why-dividend-stocks-outperform-non-dividend-stocks-357353

So...I may be out in the weeds here or, more likely miss your point, but thought I'd pass it on, FWIW.

Jeremy Siegel performed the only study on divdend stocks over the long run that I am aware of and found that over the past 45 years, the highest yielding 20% of S&P 500 stocks "produced an annualized return of over 14.3% versus an annualized return of 11.2% for the S&P 500 index, which resulted in three times the wealth accumulation of the index."

 

[retiredgeek]

Take a graph of dividends and stock price. They have very low correlation. Dividends have less volatility,. If one can afford living on dividends it is way better than having to stay your whole retirement worrying about SWR, bear marketing, risk of sequence of loss and so on. The latest SWR i have been reading lately (millenial revolution, ern) lies on about 3% in order to have 90+% success rate. So, it is not even that more expensive to live on dividends, specially if you consider investing outside US.

 

[marko]

^^^^ The differences are pretty small in the long run.

Could this subject be headed into the "it depends" category along with SS, paying off the mortgage and others?

 

[pb4uski]

Could this subject be headed into the "it depends" category along with SS, paying off the mortgage and others?

Perhaps, but the data is pretty clear to me.

 

[Montecfo]

Take a graph of dividends and stock price. They have very low correlation. Dividends have less volatility,. If one can afford living on dividends it is way better than having to stay your whole retirement worrying about SWR, bear marketing, risk of sequence of loss and so on. The latest SWR i have been reading lately (millenial revolution, ern) lies on about 3% in order to have 90+% success rate. So, it is not even that more expensive to live on dividends, specially if you consider investing outside US.

Not sure living off the dividends makes all these concerns go away. But it may allow them to be compartmentalized more easily. And that may in fact provide peace of mind.

If you invest for total return AND can live off dididends/interest of total return investments, then to me that could be a goal. I just would not delay retirement to get there.

I do need to look at my dividends/interest and see how that stacks up relative to my plans.

 

[redduck]

...Look at it this way, you have two companies in the same industry, similar size, similarly run, similar profits, similar outlook. ABC pays a 4% dividend, XYZ does not. If the ABC stock price also goes up 5% over a year along with that 4% dividend, do you think XYZ is also only going to go up ~5%, or will they go up around 9%?

Here's yet another place I get confused: Taking your example above, but extending it out for 10 years, is the non-paying dividend company's stock price going to be 45-55% higher than the dividend paying stock company?

 

[RenoJay]

I fall into the spend only dividends and interest camp. I’ll never claim it’s the most logical strategy; it simply feels better to see predictable income show up monthly/quarterly which allows me to take more risk in my business pursuits. I imagine it’s less tax efficient than a total return strategy but again, for me that’s not the point of why I do it.

 

[Dash man]

Sure, but that doesn't change the fact that the dividend affects that stock price.



I recall an example used a while back, not sure if I came up with it or not, might have been samclem? But consider this:



You have a car to sell. You have 10 serious buyers in your driveway take a serious look, and ask each of them to write down their offer on a piece of paper and you'll take the highest one. You have also pointed out the envelope on the dashboard with $1,000 cash in it.



You collect the bids, and then say - sorry, I need to remove the $1,000 cash from the deal. I guarantee you everyone will say, no fair, unless they are all allowed to drop their offer by $1,000.



How can it be otherwise?



And yet, each person may have put a different value on the car and cash. And each may have picked a different number on any given day. But I'm certain everyone would consistently say that removing $1,000 cash from the deal made the deal worth $1,000 less.



That happens when a stock goes ex-div, there's just a lot of noise riding along.



-ERD50

You can’t compare a car to a stock, because the stock will generate future earnings. All you have to do is follow several dividend stocks and you will see after a dividend some will go up when the market opens and some will go down, but not necessarily exactly by the the dividend. Prices fluctuate all day from open to close. The seller and buyer have to agree to a price. When I choose to buy a dividend stock, I don’t check when the ex-dividend date is, just that it’s at a price where I believe it will make me money in the long term.

 

[Live And Learn]

7 pages ! And I still remain in the camp of "only spend the dividends". Of course, it helps that dividends and interest fund everything I need and a good deal of what I want. The remaining wants would probably result in buyers remorse, so I am spared that too !

 

[OldShooter]

I fall into the spend only dividends and interest camp. I’ll never claim it’s the most logical strategy; it simply feels better to see predictable income show up monthly/quarterly which allows me to take more risk in my business pursuits. I imagine it’s less tax efficient than a total return strategy but again, for me that’s not the point of why I do it.

I'd suggest that the near-optimum strategy is to optimize the portfolio for total return, then take and spend only the dividends if that's your preference. The optimum total return portfolio is probably a total world market portfolio with whatever home country bias you prefer.

That should leave you with less current dividend income but richer overall.

 

[haha]

7 pages ! And I still remain in the camp of "only spend the dividends".

You are not alone. It's just that not everyone wants to discuss dividends with people who consider them quaint. Why bother?

Ha

 

[RunningBum]

I'm not challenging your position as I'm a bit weak in this area.

But I remember reading somewhere that dividend paying stocks tend to outperform non payers. Then I found this: https://www.thebalance.com/why-dividend-stocks-outperform-non-dividend-stocks-357353

So...I may be out in the weeds here or, more likely miss your point, but thought I'd pass it on, FWIW.

First off, my comparison was to make the point that dividends don't come out of thin air, and to dispel the notion dividend paying stock gives the dividends AND gets the same return. People here were saying the stock drop after a dividend gets lost, forgotten, after a short time. Just not true. I wasn't saying non-dividend stocks are better, just making that previous point.

I think you can manipulate the dates to favor either type of stock, but generally returns are similar.

In that link, the author weaves a fairy tale of a 50% stock drop among financial chaos but magically a dividend does not get cut. Of course that makes a dividend payer sound great. I could easily make up my own story to show a different outcome, but I'm not going to bother.

One thing to consider, some stocks pay dividends because they don't have any use for that money to grow their business. The business may be stagnant, or it may not be profitable to use the money. A profitable company that doesn't pay a dividend feels they can grow the business by reinvesting the profits back into the company.

Of course you could look at that in a different light, the first company may be making so much money they can't possibly use it all so they share it with stockholders, while the other one needs to hang onto the money just to survive.

I'm agnostic, I invest in all stocks but if I felt that dividend payers would give me a better outcome I'd do it. What I wouldn't do is have a plan that has me spending only the dividends without touching the principal. If it turns out my investments make enough for me to be able to do that, great, but it's not my guiding principle.

 

[RunningBum]

Here's yet another place I get confused: Taking your example above, but extending it out for 10 years, is the non-paying dividend company's stock price going to be 45-55% higher than the dividend paying stock company?

I'm not doing the math to check your numbers, but assuming it's correct, it would be. And if you've reinvested dividends with my example, you would have the same overall equity. More shares at a lower price in the higher dividend payer.

 

[retiredgeek]

Maybe living on dividends isnt compatible to investing only in index funds, and only in US market. Since the majority of FIRE community uses just indexed ETFs, with very low dividends, it might sound too "expensive" to live on dividends.

 

[OldShooter]

Maybe living on dividends isnt compatible to investing only in index funds, and only in US market. ...

I would say it slightly differently: Maybe living on dividends isn't compatible with portfolios optimized for total return.

 

[retiredgeek]

I would say it slightly differently: Maybe living on dividends isn't compatible with portfolios optimized for total return.

This is true. Although using ETF is far from optimized for total return. Its optimized for easy management, but not total return, not dividends.

 

[RunningBum]

Jeremy Siegel performed the only study on divdend stocks over the long run that I am aware of and found that over the past 45 years, the highest yielding 20% of S&P 500 stocks "produced an annualized return of over 14.3% versus an annualized return of 11.2% for the S&P 500 index, which resulted in three times the wealth accumulation of the index."

https://www.etftrends.com/should-you-invest-in-a-dividend-etf/

Vanguard also did a study. They looked at the top 25% dividend payers vs the rest and the total return was virtually identical.

When you're back-testing data, it's not surprising that you can come up with some "proof" to back your idea, but when a slightly different version of the data doesn't back your results, that tells me that going forward it's probably a crapshoot.

You have to wonder what Siegel's process was. Top 10%...no, that doesn't work. Top 25%, still no. Top 20%, yeah, a little better over 50 years. How about 45 years? YES! THERE IT IS! PROOF!

 

[retiredgeek]

“vs the rest” isnt “vs the optimized for total return”. But as a data scientist myself, I totally agree you can beat and present numbers to “prove” any statement you want.

https://www.etftrends.com/should-you-invest-in-a-dividend-etf/

Vanguard also did a study. They looked at the top 25% dividend payers vs the rest and the total return was virtually identical.

When you're back-testing data, it's not surprising that you can come up with some "proof" to back your idea, but when a slightly different version of the data doesn't back your results, that tells me that going forward it's probably a crapshoot.

You have to wonder what Siegel's process was. Top 10%...no, that doesn't work. Top 25%, still no. Top 20%, yeah, a little better over 50 years. How about 45 years? YES! THERE IT IS! PROOF!

 

[marko]

Maybe living on dividends isn't compatible with portfolios optimized for total return.

+1
Maybe this is the key.

Different people expect different things from their portfolio. Some people must have the greatest total return. Others who may not need the money just want to be risk free in CDs.

As one who lives on dividends, I just want my portfolio to 1) deliver enough dividends to live on and 2) make enough return for the balance* to stay ahead of inflation; something I've managed to do for almost two decades now.

If my total return is 1%-2% below what I could potentially get if fully optimized, that is fine as long as the first two conditions are met. YMMV

*Success for me is enough dividends to pay the bills and a portfolio balance at the end of the year that is greater than the start of the year.

 

[scrabbler1]

+1
Maybe this is the key.

Different people expect different things from their portfolio. Some people must have the greatest total return. Others who may not need the money just want to be risk free in CDs.

As one who lives on dividends, I just want my portfolio to 1) deliver enough dividends to live on and 2) make enough return for the balance to stay ahead of inflation; something I've managed to do for almost two decades now.

If my total return is 1%-2% below what I could potentially get if fully optimized, that is fine as long as the first two conditions are met. YMMV

Same here, Marko. About 58% of my taxable portfolio is in that big bond fund generating most of my dividends. Most of the rest of it is a stock fund which has growth and income elements in it. The dividends supplement the bond fund's dividends while the growth acts as a partial inflation guard. This system has been working well for 10 years although only the last 5 of them have I been using the stock fund's dividends to hemp pay the bills instead of always reinvesting them. I had always anticipated needing to do this at some point in my ER.

My rollover IRA, one I can't access for another 4 years, is one of my "reinforcements" and it has about half stocks and half bonds.