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

[photoguy]

Wasn't kodak one of the very first companies to research and start pushing digital cameras and sensors? I think under better management they could have navigated the shift much more successfully.

 

[samclem]

Wasn't kodak one of the very first companies to research and start pushing digital cameras and sensors? I think under better management they could have navigated the shift much more successfully.

Yes, they were in the digital biz at both the consumer and commercial levels. I don't know what they did wrong--they had a very powerful brand name and it seems they could have made something of it.
There are very few companies still doing business as they were 15 years ago, much less 50. If a company makes buggy whips, or has depended on out-of-date sales methods, etc, it is the responsibility of management to see the need for change and make it happen.

 

[HadEnuff]

Very interesting discussion. thanks to all.

 

[mathjak107]

I think that the advantage of targeting dividend payers is that they are usually strong existing businesses where management is less likely to be destroying capital by trying to re-invest it in businesses they know nothing about, or in a core business that doesn't require any more capital.

Take McDonald's. They are a very good business, but there isn't going to be much growth going forward for them. Rather than have them try to buy other businesses that they might run badly or overpay for, or try to open restaurants that will cannibalize sales from their existing stores, I would much prefer that they pay dividends and buy back stock (assuming their share price is reasonable). That is part of my return from a great business that management can't destroy.

Much of what Corporate America does is destructive to capital. All of the dumb M&A, or trying to expand into non-core businesses, or the constant re-orging. A rising dividend over decades is a signal to me that the company has management in place that destroys less capital over time than the average group of nimrods in charge of companies in this country.

For the used car analogy-- I would bid somewhat less than $50 for the $50 bill in the car, because there is a decent chance someone will grab it and spend it on fancy mudflaps before they turn the car over to me after I buy it.

So while I invest for a total return, I certainly trust most of the businesses with a long history of increasing dividend payouts more than the average company.

the failed product and business's grave yard is full of failed ventures by s&p 500 company's . if you don't trust the mgmt of a company to act responsible perhaps you should not own the stock regardless .

i don't need them to give me back my own money . i can sell any stock and take a bit out if i wanted .

most folks reinvest the dividends back in the same company anyway .

 

[Mulligan]

the failed product and business's grave yard is full of failed ventures by s&p 500 company's . if you don't trust the mgmt of a company to act responsible perhaps you should not own the stock regardless .

i don't need them to give me back my own money . i can sell any stock and take a bit out if i wanted .

most folks reinvest the dividends back in the same company anyway .

Although it may not be a stock that is suited for you, but a utility common stock would be an example of a company that if owned you would want the dividend. These companies are growth constrained by there very nature. History has not usually been kind to ones that have tried the other strategy.


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[mathjak107]

it really wouldn't matter . if they retained whatever growth they had in the share price instead i can take a piece whenever i wanted .

in either case the total return is the total return no matter how you get it .

 

[Mulligan]

it really wouldn't matter . if they retained whatever growth they had in the share price instead i can take a piece whenever i wanted .

in either case the total return is the total return no matter how you get it .

I agree...But that is the realm of theoretical. In reality, cash sitting on the balance sheet causes all sorts of problems from meddling activists, to buyout specialists using the cash against the company, to external pressure to invest in what isn't in the best interest of a utility. It has been tried before and with bad results.


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[mathjak107]

i think it boils down to you are either happy with the total return or you aren't

them handing me back my money and saying go find another investment really wouldn't do much for me in my accumulation stage . i would just find an investment that could compound my money .

on the other hand in retirement , at the end of the day it will only be about the total return when spending down . how it is arrived at is a moot point .

the return either meets goal or it doesn't .

since i buy only diversified funds what goes on in any one company does not really concern me . i have a mix of dividend paying funds and growth funds . at the end of the day they have to meet my retirement goals . how they get there is not so much a concern .

 

[Mulligan]

We aren't in disagreement. Just providing a little twist to the thread since it is getting a bit repetitive. A complete "total return" investor may thus have little interest in utilities. As they by the forced nature of the company become "bond type" proxies.


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[Hamlet]

the failed product and business's grave yard is full of failed ventures by s&p 500 company's . if you don't trust the mgmt of a company to act responsible perhaps you should not own the stock regardless .

i don't need them to give me back my own money . i can sell any stock and take a bit out if i wanted .

most folks reinvest the dividends back in the same company anyway .

My point is that a dividend is a great signal that they are acting responsibly. Many large companies have great core businesses that are much, much better than the average business. Many of those businesses can't deploy unlimited capital into those great businesses though. Rather than have them expand into poor businesses, I'd rather just have them deploy the capital that they can into the great businesses, and send me back the remainder.

Take Coke. For a long time in the 70s and early 80s, they took the profits from a great business and invested them in a whole slew of marginal businesses (shrimp farming was actually one of them). The overall return of the business was lackluster. I'd rather they just keep selling Coke, re-invest as much as makes sense into that business, and send me the excess in dividends or stock buybacks (when the stock is reasonably priced).

I can find other places to put the money. I'd rather own great businesses than the hodgepodge of junk that most companies end up with when they decide they can deploy the capital into other businesses with as much success as they have had in their core business.

Berkshire is the exception that proves the rule here for me. I trust Buffet to redeploy capital intelligently. That's what he is good at.

The managers of Coke, McDonald's, Microsoft, Fastenal, ADP, Walmart, Exxon, ect, are good at running their core businesses. They aren't always going to be good at deploying capital outside that circle of competence though. They also have an incentive to overpay for purchased businesses, because as a rule, the bigger the business gets (regardless of the return on capital), the more they are likely to get paid. So if management is good enough to say "keeping this capital will not get the same return on investment in our great business that the existing capital gets, our shareholders should find other great places to invest this money rather than have us deploy it sub-optimally", I take that as a really good trait in management.

 

[Hamlet]

the failed product and business's grave yard is full of failed ventures by s&p 500 company's . if you don't trust the mgmt of a company to act responsible perhaps you should not own the stock regardless .

i don't need them to give me back my own money . i can sell any stock and take a bit out if i wanted .

most folks reinvest the dividends back in the same company anyway .

Note that me reinvesting the dividends back in the same company gives me a larger share of their core great business rather than having that great business diluted by having them re-invest the money in a business getting a lower return.

 

[mathjak107]

true but if you don't trust the mgmt. then I can't see being in the stock .

 

[Running_Man]

true but if you don't trust the mgmt. then I can't see being in the stock .

Every individual should invest in what they are comfortable with, I am comfortable requiring dividends on my stocks and this is why:

When I take my money and invest it in stocks, I am looking for someone to lead a company with goals that align with mine and I trust none of them I expect regular reports and an annual audit by a respected auditing firm. Management adjusted numbers are typically taken for with a very large grain of salt as I prefer to look at financial statements from a GAAP perspective.

1) I expect an annual dividend initially upon investment over 1.5% annually and that the dividend will grow at least a minimum of twice the inflation rate over time. The amount of earnings allocated to the dividend should be between 20 percent and 60 percent. I expect this because a portion of the money earned I will need for either living expenses or to invest in other endeavors. I am not going to count on the valuation metrics of other investors to determine what the earnings are worth to provide these funds to me as my CEO has no control over those valuations but does have control over the earning performance of the company which provides for the dividends.

2) There should meetings quarterly to discuss the published financial results and take questions from other owners and interested parties in the business and lead to confidence the CEO and his staff understand the business and have good plans for growth going forward. If the CEO states that the dividend must be cut or not grown in order to provide for future growth I will no longer have that CEO work for me and will withdraw my funds from the company and into another.

3) How well a CEO can perform in growing a company while paying an adequate dividend is easily followed in the published financial results and future expectations are more easily measured and compared. Many companies are monitored in expectation that a CEO might become very disappointing to me, even after a good performance with him, Yes Richard Kinder I am thinking of you right now....

4) The goal is to create a stream of income that grows at twice the rate of inflation over time, how the other investors are valuing companies only affects me if I see the dividend percentage has declined below 1.5% due to an increasing stock price (dividend percentage that occurs because dividend decreased is always sold, hopefully long before it is cut) or if I feel valuations of companies as a whole has gotten to a level where I should for a time reduce my exposure to common stock equities.

If I succeed in these goals over time I have seen the prices of my investments have done very well, which should occur if these conditions are met, but my fellow investors are a rather fickle lot and you never know the time they are willing to drop prices by 50 percent.

 

[Hamlet]

true but if you don't trust the mgmt. then I can't see being in the stock .

It's one thing to trust a manager to run a great existing business that they've spent 20+ years working in, and quite another to trust them to acquire new businesses and expect them to do as well with them.

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." -- Warren Buffett

"Buy into a business that’s doing so well an idiot could run it, because sooner or later, one will.'” -- Warren Buffett

 

[Mulligan]

Every individual should invest in what they are comfortable with, I am comfortable requiring dividends on my stocks and this is why:

When I take my money and invest it in stocks, I am looking for someone to lead a company with goals that align with mine and I trust none of them I expect regular reports and an annual audit by a respected auditing firm. Management adjusted numbers are typically taken for with a very large grain of salt as I prefer to look at financial statements from a GAAP perspective.

1) I expect an annual dividend initially upon investment over 1.5% annually and that the dividend will grow at least a minimum of twice the inflation rate over time. The amount of earnings allocated to the dividend should be between 20 percent and 60 percent. I expect this because a portion of the money earned I will need for either living expenses or to invest in other endeavors. I am not going to count on the valuation metrics of other investors to determine what the earnings are worth to provide these funds to me as my CEO has no control over those valuations but does have control over the earning performance of the company which provides for the dividends.

2) There should meetings quarterly to discuss the published financial results and take questions from other owners and interested parties in the business and lead to confidence the CEO and his staff understand the business and have good plans for growth going forward. If the CEO states that the dividend must be cut or not grown in order to provide for future growth I will no longer have that CEO work for me and will withdraw my funds from the company and into another.

3) How well a CEO can perform in growing a company while paying an adequate dividend is easily followed in the published financial results and future expectations are more easily measured and compared. Many companies are monitored in expectation that a CEO might become very disappointing to me, even after a good performance with him, Yes Richard Kinder I am thinking of you right now....

4) The goal is to create a stream of income that grows at twice the rate of inflation over time, how the other investors are valuing companies only affects me if I see the dividend percentage has declined below 1.5% due to an increasing stock price (dividend percentage that occurs because dividend decreased is always sold, hopefully long before it is cut) or if I feel valuations of companies as a whole has gotten to a level where I should for a time reduce my exposure to common stock equities.

If I succeed in these goals over time I have seen the prices of my investments have done very well, which should occur if these conditions are met, but my fellow investors are a rather fickle lot and you never know the time they are willing to drop prices by 50 percent.

I thoroughly understand the "theory" of total return vs. income, and understand fully both sides of the issue. But I only care about reality. And the reality of the situation for me is... "If there is no dividend there is no purchase!"


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[marko]

I thoroughly understand the "theory" of total return vs. income, and understand fully both sides of the issue. But I only care about reality. And the reality of the situation for me is... "If there is no dividend there is no purchase!"


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One more whack at this. I promise!

Yes, I GET the NAV dropping to equal the dividend pay-out. I get that.

What I have noticed--at least in my holdings-- is that after the new lower NAV that (this year excepted) most of the time the NAV rebounds to it's original, pre-dividend pay-out price within a few weeks.

Sometimes within a few days and other times as long as two months. but in general it seems to gain in price quickly; more quickly than it might during the other 11 months.

Of course, it's possible that the price would've gone up anyway--there's no way to really know-- but I wonder if a 5% dividend and subsequent 5% drop in price makes that equity more attractive, attracting more buyers.

Just an observation of my own performance, not trying to restart a whole new discussion.

 

[photoguy]

Of course, it's possible that the price would've gone up anyway--there's no way to really know-- but I wonder if a 5% dividend and subsequent 5% drop in price makes that equity more attractive, attracting more buyers.

Actually there is a way to know. People do regression studies to see if dividends explain equity returns -- lots of studies on this and as far as I'm aware they do not once you control for other factors.

It's not that dividends aren't predictive it's just that they are subsumed by other more predictive factors (like value).

However, at the level of individual stocks I think you might not always have a choice simply because a matching company that doesn't pay dividends isn't available (or vice versa).

 

[Mulligan]

One more whack at this. I promise!



Yes, I GET the NAV dropping to equal the dividend pay-out. I get that.



What I have noticed--at least in my holdings-- is that after the new lower NAV that (this year excepted) most of the time the NAV rebounds to it's original, pre-dividend pay-out price within a few weeks.



Sometimes within a few days and other times as long as two months. but in general it seems to gain in price quickly; more quickly than it might during the other 11 months.



Of course, it's possible that the price would've gone up anyway--there's no way to really know-- but I wonder if a 5% dividend and subsequent 5% drop in price makes that equity more attractive, attracting more buyers.



Just an observation of my own performance, not trying to restart a whole new discussion.

I only buy preferred stocks so their dividends do matter in relationship to price, yield and safety of issuer. So my comment wasn't really directly related to normal common stock purchases. My worthless opinion of common stock dividends are they are an emotional pacifier for purchaser. And I do not mean that in a disrespectful way since I am all about dividends myself.


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[ERD50]

-- but I wonder if a 5% dividend and subsequent 5% drop in price makes that equity more attractive, attracting more buyers. ...

But if this extra buying occurred every quarter in significant numbers/amounts, it would be a growth stock as well!

Again (and again) - the dividends are not 'magic money' that appears from fairies and is sprinkled on investors - it comes out of the underlying value of the stock price. If paying dividends was the sign of a 'better than average' stock, there would be active mutual funds with managers picking these fairy dust emitting stocks, and routinely outperforming the market on a total return basis (allowing for any risk adjustments - there may be a volatility versus performance benefit to dividend payers, but we didn't see it in DVY in 2008 ).

But we don't see that, do we? Why not? Maybe because the advantage does not exist?

-ERD50

 

[RunningBum]

One more whack at this. I promise!

Yes, I GET the NAV dropping to equal the dividend pay-out. I get that.

What I have noticed--at least in my holdings-- is that after the new lower NAV that (this year excepted) most of the time the NAV rebounds to it's original, pre-dividend pay-out price within a few weeks.

Sometimes within a few days and other times as long as two months. but in general it seems to gain in price quickly; more quickly than it might during the other 11 months.

Of course, it's possible that the price would've gone up anyway--there's no way to really know-- but I wonder if a 5% dividend and subsequent 5% drop in price makes that equity more attractive, attracting more buyers.

Just an observation of my own performance, not trying to restart a whole new discussion.

Stocks, in general, go up. Dividends are usually paid quarterly, so a 5% payer is only paying 1.25% quarterly. A stock going up 1.25% in a few weeks is not at all spectacular, generally speaking.

It's also possible there is some confirmation bias here. When it does recover the dividend drop, you notice and see that as proof. When it doesn't, you don't notice, or attribute it to a bad overall market.

What are some specific stocks you are seeing this in?

 

[ERD50]

... It's also possible there is some confirmation bias here. ...

Possible?

Seriously, no charts of the dividend funds have convinced him. Yes, some people believe what they want to believe, and confirmation bias comes on strong.

Geez, I'd love to learn the secret sauce that makes one group of stocks obviously better than the average. But then, we'd need to keep it secret, before everyone else buys them up and drive them to the point there is no excess value left. Darn, I hate when that happens.

Not trying to bust your chops marko, it's just something you really ought to consider.

Even though I'm an index fund investor, I'm still looking for that active management style that seems to be a winner. Wellesley maybe? How do they do it? FAIRX was looking great for a very long time - is it's recent big drop a buy, or a warning?

PerfCharts - StockCharts.com - Free Charts

-ERD50

 

[marko]

Ok, ok, ok. Uncle!

 

[Mulligan]

Ok, ok, ok. Uncle!

That still doesn't mean change what you believe in. If your investment style is sound and you believe in it, you will be better off as you wont bail at the wrong time from lack of conviction. My style is not conventional but it is relatively conservative and safe and I am comfortable with it.


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[ERD50]

That still doesn't mean change what you believe in. If your investment style is sound and you believe in it, you will be better off as you wont bail at the wrong time from lack of conviction. My style is not conventional but it is relatively conservative and safe and I am comfortable with it.

Agreed. And I don't mean to give the impression that I think there is anything wrong with a dividend investment strategy. I just don't believe the claims that it is superior overall, or 'special', are warranted, at least not w/o some data that confirms it, in a plan that a poster here could implement (like "invest in DVY", or some other broad based div-payer selections).

-ERD50

 

[Mulligan]

Agreed. And I don't mean to give the impression that I think there is anything wrong with a dividend investment strategy. I just don't believe the claims that it is superior overall, or 'special', are warranted, at least not w/o some data that confirms it, in a plan that a poster here could implement (like "invest in DVY", or some other broad based div-payer selections).



-ERD50

The key is to deftly time market when value dividend payers are in, then switch to growth at appropriate time, sell out when market is about to swoon, then max out when market bottoms out. If you can do those four simple things getting maximum market returns is actually very simple to do.


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