Vanguard expert on total return vs. income producing

[Danmar]

I would like to nominate the previous "what happens ex-dividend" messages as the least interesting exchange of information of 2015--peppered with the most unexpected and ironic passion.

Agree. In retrospect, a little surprised I responded. Can we erase some of these?

 

[Mulligan]

Agree. In retrospect, a little surprised I responded. Can we erase some of these?

Sorry we cant for the reason below....

Those who do not remember the past are condemned to repeat it.

George Santayana




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[Danmar]

Some good recent posts (other than mine). Especially agree that the debate should not be "black and white". Total return is obviously the correct metric but there are many ways to achieve success.
Also agree that once retired, div stocks might be more convenient, less volatile and give a better risk adjusted reward profile. I think we often lose site of the fact that div paying stocks are often some of the more well run, mature, businesses with wide moats. Not surprising they have done so well, but can we be sure it is because they pay dividends?
I also disagree that div stocks have been bid up to unsustainably high values due to low interest rates. My portfolio is yielding historically high yields and is about 1% point higher than in 2007. Accordingly, I don't expect much effect due to the inevitable increase in rates. Granted my portfolio is 100% CDN and heavily weighted to banks, telco's, and pipes.

 

[ERD50]

I would like to nominate the previous "what happens ex-dividend" messages as the least interesting exchange of information of 2015--peppered with the most unexpected and ironic passion.

And whatever ranks as #2-#99 must be close!

Agree. In retrospect, a little surprised I responded. Can we erase some of these?

Sorry we cant for the reason below....

Those who do not remember the past are condemned to repeat it.

George Santayana

And repeat it, and repeat it, and repeat it ...

as has been repeated many times here: "It's what we do!" and the variant "What'll you do all day, indeed!".

A more serious reply to clifp is on its way after some research....

-ERD50

 

[ERD50]

I think the problem is that DVY algorithm is a lousy one. ...

OK, you don't like DVY. That's fine, but I still feel that since that is a common index for dividend producers, it makes the most sense to use as a benchmark. But I'm open to other ideas.

I'll take this one out of order:

... I'm not sure why it is cherry picking. Buy stocks that pay dividends but don't buy the ones with the highest yield, because they often are trouble. ...

I was referring to Wellington. I just don't think an actively managed fund that is 35% fixed income is a reasonable benchmark to measure dividend payers versus the broader market. I only meant cherry-picking in that I could go and select some actively managed fund that looked good historically, and claim that as the benchmark for 'the broader market'.

Morningstar did an interesting analysis between the mostly passive ETF Dividend Appreciation ETF VIG and the actively managed Dividend Growth VDIGX.

...have basically the same philosophy buy stocks of companies with growing dividends, but on virtually every measure the actively managed did better. VDIGX also beat the S&P 500 over 10 and 15 years periods and do so with significant lower volatility, with a sharpe ratio of .38 the same as Josh Peters findings.

I feel this is getting into an active versus passive discussion, rather than div-payers versus the broader market. But I decided to look at these two and check their performance, and...

OK, clifp, you got me ( watch out - it's a trap! ).

Again, I'm a little hesitant to turn to actively managed funds in this comparison, but let's go. Here's some total return charts for SPY, VDIGX, and SPY, VIG. VIG only goes back to ~ May 2006 and clips the data, so I ran them separately - and this total return source only seems to go back to Jan 1999 for older funds.

So what did I find?

Well, the chart of VIG versus SPY (May 2006 to current) shows a slight advantage for VIG I'd say, with VIG generally leading. And zoom in on the Oct 2007 peak to March 2009 trough, and you see VIG held up a bit better ( ~ -46% drop versus ~ -54% for SPY). But we can't compare the 2000 crash. And, I got the impression you were not a fan of VIG, and preferred VDIGX?

PerfCharts - StockCharts.com - Free Charts

So what does VDIGX tell us? Well, this chart, going back to JAN 1999, shows a slight advantage to SPY overall. However, like VIG, VDIGX did hold up better in the 2007 crash (~ -44% versus ~ -54% for SPY). Go back to March 2000-Oct 2002 though, and there is really very little difference (dropping ~ 43-44%). You can see that VDIGX actually peaked a bit later than SPY, so if you go from VDIGX peak, its drop is actually worse than SPY (~ -46%).

PerfCharts - StockCharts.com - Free Charts


Make of this what you will, but I just don't see anything giving these div-payers providing a clear advantage. And I'd like to re-address the comments about the past 15 years being a low interest rate period. Yes, true, and it could mean something. But I will re-iterate my 'pragmatic' comment/view on this - it seems that some posters are telling us these div-payers will be significantly more stable in a downturn. But we see that isn't the case. Does it matter what the environment is? They don't seem to be getting the protection they seek. Perhaps they should seek that protection elsewhere? A higher fixed income allocation? More TIPS? Annuitize a portion of their holdings?



OK, the 'trap'...

Here's the odd thing. After researching these, and finding a slight advantage for VIG and VDIGX in the 2007 crash, I noticed something funny:


VDIGX Yield: 1.89%

__VIG Yield: 2.23%

__SPY Yield: 1.96%

VDIGX has a lower yield than SPY? And VIG isn't much higher (~ 14% increase). So what is all this about high dividend payers? I'm confused!

-ERD50

 

[clifp]

I was referring to Wellington. I just don't think an actively managed fund that is 35% fixed income is a reasonable benchmark to measure dividend payers versus the broader market.

I guess my comment is more as Wellington Management as a group of money manager than Wellington as a specific fund. I'd love to know how much Wellington and Wellesley alpha was due to bond management vs stock selection. The fact that VDIGX is also managed by Wellington Management as is Windsor and have modest out performance, I don't think is a coincidence. I personally think there are at least 3 companies American funds, Dimensional Funds Advisers, and Wellington Management that have long history of adding alpha. American Fund sells load funds, DFA requires an financial adviser, so that leave Wellington as providing good management for a very modest 20-25 basis points fee. Which is a long winded way of saying having the Ws in your retirement portfolio is probably smart.

Make of this what you will, but I just don't see anything giving these div-payers providing a clear advantage. And I'd like to re-address the comments about the past 15 years being a low interest rate period. Yes, true, and it could mean something. But I will re-iterate my 'pragmatic' comment/view on this - it seems that some posters are telling us these div-payers will be significantly more stable in a downturn. But we see that isn't the case. Does it matter what the environment is? They don't seem to be getting the protection they seek. Perhaps they should seek that protection elsewhere? A higher fixed income allocation? More TIPS? Annuitize a portion of their holdings?

OK, the 'trap'...

Here's the odd thing. After researching these, and finding a slight advantage for VIG and VDIGX in the 2007 crash, I noticed something funny:


VDIGX Yield: 1.89%

__VIG Yield: 2.23%

__SPY Yield: 1.96%

VDIGX has a lower yield than SPY? And VIG isn't much higher (~ 14% increase). So what is all this about high dividend payers? I'm confused!

-ERD50

Well statistically companies that pay dividends have lower volatility than non dividend payers over a long period of time.(see M* data) Even if the benefits were pretty modest this century. 2009 was the worse year on record (even worse than Great Depression) for dividend cuts. It was pretty much impossible to have dividend oriented portfolio in 2007 and not have plenty of bank stocks, almost all of which slashed dividends and were hammered. But despite this heavy concentration these funds still did better/no worse than the broad market.

The stability most of us speak of is primarily income. My income dropped <5% from March 08 to March 09. So I guess the benefits are also psychologically,looking at the 2008/9 crash and saying well my income is only down 5% makes it a lot easier to avoid panic selling.

Hehe I figured you'd catch the minimal differences in yield between a dividend funds and the S&P. So yes frankly if you are relying on passive dividend ETFs than it's hardly worth the effort. There doesn't seem to be that many good dividend funds out there even if you include actively managed funds. Although I've spent minimal time researching them.

Most all of the dividend fans on the forum buy individual stocks. The yield on my portfolio is 2.8% which is more than adequate for my needs, but yes I believe in capital gains also and have happily harvested them recently. Berkshire is my largest holding drags down and my yield a lot. The dividend yield of the stock portfolio of Wellington has a 2.75% yield, Wellesley is 3.55% The bond portion of their portfolio actually decrease the overall yield

The yield on Josh's portfolio is 4.1% now a large part of this is because of Master Limited Partnership and REITs like O with 5% yield. So it is certainly possible to create a portfolio of stocks that is consistent with 3.5-4% withdrawal .

 

[Danmar]

Most all of the dividend fans on the forum buy individual stocks. The yield on my portfolio is 2.8% which is more than adequate for my needs, but yes I believe in capital gains also and have happily harvested them recently. Berkshire is my largest holding drags down and my yield a lot. The dividend yield of the stock portfolio of Wellington has a 2.75% yield, Wellesley is 3.55% The bond portion of their portfolio actually decrease the overall yield .

I am in a similar boat. Only have individual stocks. Yield is about 3.9% now but generally has been around 3.75%. This is generally enough for us and seems like a reasonable SWR. In Canada I would have to pay about 40-50bps for a good div ETF. This would represent about 15% of my div income and in my opinion this extra diversification would not be worth it. Only one div cut in 2008-9 representing an insignificant loss of earnings.

 

[ERD50]

... 2009 was the worse year on record (even worse than Great Depression) for dividend cuts. It was pretty much impossible to have dividend oriented portfolio in 2007 and not have plenty of bank stocks, almost all of which slashed dividends and were hammered. But despite this heavy concentration these funds still did better/no worse than the broad market.

The stability most of us speak of is primarily income.

I didn't do a detailed analysis, but I made a chart of divs from VDIGX and SPY, and it looked like SPY divs were actually very stable. Subject to some eyeball interpretation - SPY divs are increasing over the decades, VDIGX looks pretty flat; and while SPY does drop some in 2009, that looks to be more than offset by the rise in the years before. IOW, divs didn't drop below their pre-rise levels, they only dropped relative to the peak - there was only upside.

Hehe I figured you'd catch the minimal differences in yield between a dividend funds and the S&P. So yes frankly if you are relying on passive dividend ETFs than it's hardly worth the effort. ...Most all of the dividend fans on the forum buy individual stocks. ...

And that's the problem. Without being able to quote a specific fund for comparison, there really isn't a practical way for a personal investor to do much actual, meaningful comparisons. It becomes all about stock picking, active versus managed, etc. And it does beg the question - if the high-div-payers really are 'better' in some meaningful way, why isn't that reflected in a basic index fund/ETF of some sort? I could just as well say "Well, SPY doesn't include the best of the broad market, I can pick the best stocks and do better. So beat that (undefined group of stocks)!". OK, but how does a statement like that help an individual investor? What action can be taken (getting to that pragmatic side of things).


A side note on active management:

I guess my comment is more as Wellington Management as a group of money manager than Wellington as a specific fund. ... Which is a long winded way of saying having the Ws in your retirement portfolio is probably smart. ...

The W's are pretty amazing. Many of us reference the many studies that show active management does not reliably out-perform the indexes, and the active winners often rotate in/out, but are these the exception? And if so, why? I put it at as a question, because I'm not sure there is an appropriate index benchmark. But my proxy would be an equiv AA of a total bond fund and a total stock fund, and they appear to out-do that. Do they have the magic sauce?

-ERD50

 

[kcowan]

I am in a similar boat. Only have individual stocks. Yield is about 3.9% now but generally has been around 3.75%. This is generally enough for us and seems like a reasonable SWR. In Canada I would have to pay about 40-50bps for a good div ETF. This would represent about 15% of my div income and in my opinion this extra diversification would not be worth it. Only one div cut in 2008-9 representing an insignificant loss of earnings.

The good news is that advisor fees will be disclosed in a couple of years and that will bring downward pressure on them.

But it is tough to beat an occasional $10 trading fee!

 

[clifp]

And that's the problem. Without being able to quote a specific fund for comparison, there really isn't a practical way for a personal investor to do much actual, meaningful comparisons. It becomes all about stock picking, active versus managed, etc. And it does beg the question - if the high-div-payers really are 'better' in some meaningful way, why isn't that reflected in a basic index fund/ETF of some sort? I could just as well say "Well, SPY doesn't include the best of the broad market, I can pick the best stocks and do better. So beat that (undefined group of stocks)!". OK, but how does a statement like that help an individual investor? What action can be taken (getting to that pragmatic side of things).


A side note on active management:



The W's are pretty amazing. Many of us reference the many studies that show active management does not reliably out-perform the indexes, and the active winners often rotate in/out, but are these the exception? And if so, why? I put it at as a question, because I'm not sure there is an appropriate index benchmark. But my proxy would be an equiv AA of a total bond fund and a total stock fund, and they appear to out-do that. Do they have the magic sauce?

-ERD50

There are both interesting questions and my one word scientific wild ass guess (SWAG) is testosterone, or more specially lack of it.

The out performance of dividend stocks is modest 1% maybe 2% depending on what and when you measure, not particular large in the context of 10% annual returns. It can also disappear for lengthy periods of time. The volatility advantage I think is more significant but other than us old retired farts and some academics I don't think people care that much.
The headline of my dividend fund only lost 30% as opposed to 37% for SPY during 2008,isn't nearly as important as "I lost 30% of my money sell sell sell"

I'm somewhat puzzled why there isn't either a good algorithmic approach to picking dividend stocks. Perhaps there isn't or just as likely somewhat came up with one but the fund/etf never lasted long enough to show any significant advantages and it disappeared.

However among active money managers it is easy to see why dividend stocks aren't generally popular, they lack sex appeal. I know as 20 something investor buying a dividend stock would have been one small step up from buying an index fund in the excitement level and less interesting than buying the Janus 30 fund. I just bought some share of Emerson Electric,(EMR) a pretty dull company in a boring industry. Josh Peters and M* say its worth $65, I bought for $53.50 and it has a 3.4% dividend a perfect stock for me. But no twenty something HBS grad is going to get a million dollar bonus for recommending EMR, but he just might if he recommend Netflix, Tesla, Twitter earlier and loudly enough.

There is always going to be a new generation of smart 20 something wall street trader, with high testosterone levels looking to make a killing from this next generation of growth stocks. These get bid up to excessive levels on the aggravate, but there are always enough companies like Intel, Microsoft, Amgen, Apple, Google, Tesla, Netflix, Facebook, Uber, to make plenty of people rich. Meanwhile the analysis of the dull companies is left to the plodders, the hardworking grinders dutifully pouring over balance sheets, and pouring over railroad loading statistics. Other than Warren Buffett not many of these plodders get very famous or very rich, until much latter in life.

As for why do the W's do well. I believe that it isn't super difficult to do good analysis of value/dividend stocks. It just requires of a level of discipline and temperament that doesn't come naturally especially to 20 something year old males. My guess is that Wellington management does a good job of teaching this valuation process to its employees and doesn't give a lot of authority to money managers without grey hair. Everything I've heard about DFA and American Funds suggests a similar corporate philosophy.

As for myself, I'm generally too lazy to do the fundamental research so I rely on folks like Josh Peters to do it. There are folks on the forum like Brewer and RunningMan that do their own research and I suspect that makes them better investors. I do however do cross checking and I look for consensus among people who's opinions I values. So when I see that the number #2 owner of EMR was Vanguard Windsor that's signal to me that Josh probably isn't really wrong. Someday I'll tire of even doing this amount of work, hopefully I'll recognize my limitation before it cost me a ton of money. But the W's are looking like a perfectly good substitute for my individual stock purchases.

 

[Mulligan]

My endorsement means less than zero, but EMR is only one of a few stocks I have seriously considered pulling the trigger on. I just cant convince myself to stray from my present course. And one thing is for sure, buying at $53 is a heckuva lot better than buying it when it was 70 over a year ago. You certainly will not have to worry about the management destroying the company.


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[jerome len]

If you invest in dividend funds and ETFs that hold stocks with a record of increasing their dividends each year, why not? I hold Vanguard dividend mutual funds along with SDY ETF and they, along with some TE bond funds completely fund my retirement. And, SS and the ETF dividends increase each year so I'm protected against inflation. .....And, I'll leave my DW and kids a lot of money since I won't ever have to sell. To me this is a little more expensive but just as secure as an annuity. What's wrong with this, if you can afford it?

 

[Danmar]

If you invest in dividend funds and ETFs that hold stocks with a record of increasing their dividends each year, why not? I hold Vanguard dividend mutual funds along with SDY ETF and they, along with some TE bond funds completely fund my retirement. And, SS and the ETF dividends increase each year so I'm protected against inflation. .....And, I'll leave my DW and kids a lot of money since I won't ever have to sell. To me this is a little more expensive but just as secure as an annuity. What's wrong with this, if you can afford it?

Sounds good but certainly not as secure as an annuity. I do the same except I hold individual equities. I don't think the fees of a MF or ETF are worth it but for many it would be. Divs do get cut(fairly rare).