Did dividend stock funds provide "downside protection" in 2020?

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Did dividend stock funds provide "downside protection" in 2020?

Post by nisiprius »

I just noticed that Morningstar has an article entitled "Top Dividend-Stock Funds." I haven't looked at it yet. I'm going to use it as my reference for a choice of funds.

It is often claimed that dividend stocks provide downside protection. For example, the article, now that I've looked at it, quotes a Morningstar portfolio analyst as saying "they tend to hold up a bit better than average during times of market turbulence."

I'm going to ask a simple question: how did they perform compared to an S&P 500 index fund and a total market index fund during 2020. I'm going to use PortfolioVisualizer's calculations of maximum drawdown.

[Added] For example, here is my source for FDVV, QDF, SDY, and VFIAX

Ignoring duplicates (Mutual fund and ETF pairs), here are the 2020 drawdowns for Morningstar's thirteen "Top Dividend-Stock Funds," plus an S&P 500 fund; all adjective such as "better" refer to "drawdown during 2020."

Code: Select all

FDVV	-28.35%	Fidelity High Dividend ETF
QDF	-25.21%	FlexShares Quality Dividend ETF
SDY	-25.08%	SPDR S&P Dividend ETF
MADVX	-24.33%	BlackRock Equity Dividend Instl
LVHD	-24.32%	Legg Mason Low Volatility High Div ETF
VHYAX	-23.94%	Vanguard High Dividend Yield Index Adm
DLN	-23.03%	WisdomTree US LargeCap Dividend ETF
SOPYX	-21.85%	ClearBridge Dividend Strategy I
SCHD	-21.54%	Schwab US Dividend Equity ETF
--------------------------------------------
VTSAX	-20.87%	Vanguard Total Stock Market Index Fund Admiral
VFIAX	-19.61%	Vanguard 500 Index Admiral
--------------------------------------------
LBSAX	-19.45%	Columbia Dividend Income A
PRDGX	-18.79%	T. Rowe Price Dividend Growth
VDIGX	-17.48%	Vanguard Dividend Growth Inv
VDADX	-17.24%	Vanguard Dividend Appreciation Index Adm
1) The average drawdown for the 13 dividend stock funds was -22.4%, deeper the S&P 500 funds;

2) Nine of the dividend funds plunged deeper than Total Market and S&P 500. Only four of them did better.

3) In hindsight, the very best of them plunged -17.24%, compared to -19.61% for the S&P 500 fund. That is, the best of them fell 88% of the distance that the stock market fell. So even the four of them did not provide much "downside protection."

What I find interesting is something I've seen before in articles on dividend stocks, is that an article will make a "downside protection" claim--in this case a very guarded one, "they tend to hold up a bit better than average"--even when the statement did not hold for the actual funds named in the article.
Last edited by nisiprius on Tue Jun 22, 2021 11:08 am, edited 3 times in total.
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achillesheel
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by achillesheel »

Thank you Nisiprius for this valuable little comparison. So, less downside protection and less tax efficiency as well. Perhaps the dividends are a psychological trick to help many people stay invested, but that's still a hefty expense to pay for emotional-risk-management that could be addressed through proper diversification. People want higher returns without taking the associated risks, and I think the marketing plays into this.

Did you use Stata or something similar to run the numbers?
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by nisiprius »

achillesheel wrote: Tue Jun 22, 2021 9:23 am Thank you Nisiprius for this valuable little comparison. So, less downside protection and less tax efficiency as well. Perhaps the dividends are a psychological trick to help many people stay invested, but that's still a hefty expense to pay for emotional-risk-management that could be addressed through proper diversification. People want higher returns without taking the associated risks, and I think the marketing plays into this.

Did you use Stata or something similar to run the numbers?
PortfolioVisualizer... using "fund performance," four funds at a time, setting the starting date to 1/1/2020, and accepting the number it produces as "max drawdown" (which I think is based on end-of-month numbers).
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by Scooter57 »

This is not entirely fair.

The market dip in 2020 was extremely brief and the market, aka the S&P 500, recovered almost entirely because a handful of tech stocks took off at the same time that governments poured money into the accounts of everyone but those very well off.

The kinds of recessions in which dividend stocks show their value are ones that last longer, where job loss is sustained for a few years, and where companies that have depended on discretionary spending see their profits drop because people don't have the money for discretionary spending.

In such situations the stocks of staid, boring companies in companies selling essentials like food and hardware, companies that have paid dividends for decades, will see their prices drop with the market as a whole, but since the companies continue to earn money (being centered in industries that are NOT discretionary) their stock prices do tend to recover faster than the market as a whole, one reason being that when stock prices drop, the yield on the dividend of companies that keep paying rises. People who bought into many Dividend Aristocrats in 2009 were getting yields like 7% on their money. The Dividend Aristocrats are companies that have raised their dividends every year for at least 25 years, which takes in several recessions.

When you are getting 7% on your investment, it is not as big an an issue to wait 10+ years for a market recovery, as your investment returns will double the value of your initial investment in that 10 years no matter if the stock price languishes.

Right now we are in the midst of a huge, to my mind risky, experiment where the Fed is manipulating the stock market as never before. How sustainable that approach is in the long term has yet to be seen. You can safely ignore dividend stocks if you believe that we will never again have a recession that lasts more than three months, that the government can be counted on to put many thousands of dollars into the pockets of everyone but the very well off anytime the business environment is challenging, and that the market's value will always be driven by speculative tech companies with tiny or nonexistent profits,

That said, the Schwab Dividend Equity ETF, SCHD, which applies a value screen to dividend paying stocks has been handily outperforming VOO for the past year. It has also outperformed over the past three years. I have been VERY happy with total return of the well valued dividend-oriented stock investments I have made over that period, too. My modest goal was to generate 3.5% in income to replace the yield on matured 5 year CDs but with total return I am pretty close to having already earned 4.5 years worth of income in just a single year.

SCHD vs S&P 500 One Year Total Return
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SCHD vs S&P 500 Three Year Total Return
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Last edited by Scooter57 on Tue Jun 22, 2021 10:18 am, edited 1 time in total.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by CyclingDuo »

In spite of the dip in share prices and shutdown of the economy due to the pandemic, the S&P 500 dividends paid out $58.28 in 2020 which were 0.7% higher than in 2019 where the S&P 500 dividends paid out $58.24. That was the 9th consecutive year of dividend growth for the S&P 500.

https://www.reuters.com/article/us-usa- ... SKBN29421J

Some (most) look at the picture from the angle of total return investing. Others (income investors) look at it from the angle of the income that is being produced. I'm agnostic regarding the different strategies, but agree that dividend stocks or funds do not provide any special kind of downside protection. The amount of rotation in and out of sectors throughout 2020 and thus far in 2021 has been fascinating to watch as it has been more consolidated and happened much quicker than the usual slower moving business cycle rotations.

The underlying share prices, as nispirius points out in the OP, did not protect an investor if selling shares to create one's own DIY dividend to create income as part of one's total return strategy had to be tapped and sold at lower prices during the short and sharp downturn before shares recovered. For income investors who don't sell shares, but rely on the income that the underlying shares produce - the dividend checks came rolling in and provided the income throughout the short and sharp pandemic fueled downturn that made the year more or less equal to the prior year when you account for inflation.

When all was said and done, we were surprised to see our own personal portfolio end the year with a higher amount of dividends being paid out for 2020 than in 2019. Although the pandemic fueled market swoon was short and swift, it did allow for 2-3 quarters of those dividends to be reinvested into additional investments at lower share prices as part of our total return strategy.

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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by aj76er »

nisiprius wrote: Tue Jun 22, 2021 8:53 am I just noticed that Morningstar has an article entitled "Top Dividend-Stock Funds." I haven't looked at it yet. I'm going to use it as my reference for a choice of funds.

It is often claimed that dividend stocks provide downside protection. For example, the article, now that I've looked at it, quotes a Morningstar portfolio analyst as saying "they tend to hold up a bit better than average during times of market turbulence."

I'm going to ask a simple question: how did they perform compared to an S&P 500 index fund and a total market index fund during 2020. I'm going to use PortfolioVisualizer's calculations of maximum drawdown

Ignoring duplicates (Mutual fund and ETF pairs), here are the 2020 drawdowns for Morningstar's thirteen "Top Dividend-Stock Funds," plus an S&P 500 fund; all adjective such as "better" refer to "drawdown during 2020."

Code: Select all

FDVV	-28.35%	Fidelity High Dividend ETF
QDF	-25.21%	FlexShares Quality Dividend ETF
SDY	-25.08%	SPDR S&P Dividend ETF
MADVX	-24.33%	BlackRock Equity Dividend Instl
LVHD	-24.32%	Legg Mason Low Volatility High Div ETF
VHYAX	-23.94%	Vanguard High Dividend Yield Index Adm
DLN	-23.03%	WisdomTree US LargeCap Dividend ETF
SOPYX	-21.85%	ClearBridge Dividend Strategy I
SCHD	-21.54%	Schwab US Dividend Equity ETF
--------------------------------------------
VTSAX	-20.87%	Vanguard Total Stock Market Index Fund Admiral
VFIAX	-19.61%	Vanguard 500 Index Admiral
--------------------------------------------
LBSAX	-19.45%	Columbia Dividend Income A
PRDGX	-18.79%	T. Rowe Price Dividend Growth
VDIGX	-17.48%	Vanguard Dividend Growth Inv
VDADX	-17.24%	Vanguard Dividend Appreciation Index Adm
1) The average drawdown for the 13 dividend stock funds was -22.4%, deeper the S&P 500 funds;

2) Nine of the dividend funds plunged deeper than Total Market and S&P 500. Only four of them did better.

3) In hindsight, the very best of them plunged -17.24%, compared to -19.61% for the S&P 500 fund. That is, the best of them fell 88% of the distance that the stock market fell. So even the four of them did not provide much "downside protection."

What I find interesting is something I've seen before in articles on dividend stocks, is that an article will make a "downside protection" claim--in this case a very guarded one, "they tend to hold up a bit better than average"--even when the statement did not hold for the actual funds named in the article.
The four funds you listed with “dividend growth” or “dividend appreciation” or “dividend income” in the name did have less drawdowns. I believe these are designed to capture the “quality” factor and seemed to do their job based on the last recession. I would expect the quality factor to have higher lows and lower highs than a total market or S&P500 fund. Also note that I consider the S&P500 to have a very mild factor tilt (due to the profitability screen used to construct the index).

Overall I am sympathetic to owning the “quality” factor, but it is still a tilt away from the total market, and I would still be leery of sector biases creeping in (such that the more stable returns don’t always show up, and irrecoverable idiosyncratic risk is possible). For those that tilt to “quality”, I would suggest watching the index closely (e.g. once per year) to ensure adequate diversification. Alternatively, just hold 70% total market + 30% inter term treasuries and get the same result with far more diversification.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

nisiprius wrote: Tue Jun 22, 2021 8:53 am I just noticed that Morningstar has an article entitled "Top Dividend-Stock Funds." I haven't looked at it yet. I'm going to use it as my reference for a choice of funds.

It is often claimed that dividend stocks provide downside protection. For example, the article, now that I've looked at it, quotes a Morningstar portfolio analyst as saying "they tend to hold up a bit better than average during times of market turbulence."

I'm going to ask a simple question: how did they perform compared to an S&P 500 index fund and a total market index fund during 2020. I'm going to use PortfolioVisualizer's calculations of maximum drawdown

Ignoring duplicates (Mutual fund and ETF pairs), here are the 2020 drawdowns for Morningstar's thirteen "Top Dividend-Stock Funds," plus an S&P 500 fund; all adjective such as "better" refer to "drawdown during 2020."

Code: Select all

FDVV	-28.35%	Fidelity High Dividend ETF
QDF	-25.21%	FlexShares Quality Dividend ETF
SDY	-25.08%	SPDR S&P Dividend ETF
MADVX	-24.33%	BlackRock Equity Dividend Instl
LVHD	-24.32%	Legg Mason Low Volatility High Div ETF
VHYAX	-23.94%	Vanguard High Dividend Yield Index Adm
DLN	-23.03%	WisdomTree US LargeCap Dividend ETF
SOPYX	-21.85%	ClearBridge Dividend Strategy I
SCHD	-21.54%	Schwab US Dividend Equity ETF
--------------------------------------------
VTSAX	-20.87%	Vanguard Total Stock Market Index Fund Admiral
VFIAX	-19.61%	Vanguard 500 Index Admiral
--------------------------------------------
LBSAX	-19.45%	Columbia Dividend Income A
PRDGX	-18.79%	T. Rowe Price Dividend Growth
VDIGX	-17.48%	Vanguard Dividend Growth Inv
VDADX	-17.24%	Vanguard Dividend Appreciation Index Adm
1) The average drawdown for the 13 dividend stock funds was -22.4%, deeper the S&P 500 funds;

2) Nine of the dividend funds plunged deeper than Total Market and S&P 500. Only four of them did better.

3) In hindsight, the very best of them plunged -17.24%, compared to -19.61% for the S&P 500 fund. That is, the best of them fell 88% of the distance that the stock market fell. So even the four of them did not provide much "downside protection."

What I find interesting is something I've seen before in articles on dividend stocks, is that an article will make a "downside protection" claim--in this case a very guarded one, "they tend to hold up a bit better than average"--even when the statement did not hold for the actual funds named in the article.
What was the timeframe of your comparison?
Did you include the dividend payments in the calculation?
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by Ramjet »

Scooter57 wrote: Tue Jun 22, 2021 10:15 am This is not entirely fair.

The market dip in 2020 was extremely brief and the market, aka the S&P 500, recovered almost entirely because a handful of tech stocks took off...
Isn't this the exact reason one should hold the S&P 500 or total market fund
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by atdharris »

Without getting into this much, perhaps they fell more because people feared companies paying out dividends would not be able to meet those payments due to a slowdown in profits during the pandemic? In March 2020, we had no idea how long this would last or how long it would take to create a vaccine.

That said, I don't advocate people owning dividend funds unless you are retired and need the income.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

atdharris wrote: Tue Jun 22, 2021 10:53 am Without getting into this much, perhaps they fell more because people feared companies paying out dividends would not be able to meet those payments due to a slowdown in profits during the pandemic? In March 2020, we had no idea how long this would last or how long it would take to create a vaccine.

That said, I don't advocate people owning dividend funds unless you are retired and need the income.
How about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by nisiprius »

olyveoil wrote: Tue Jun 22, 2021 10:48 am What was the timeframe of your comparison?
As stated, it was maximum drawdown starting from 1/1/2020, where the drawdown calculation was that followed by PortfolioVisualizer.
Did you include the dividend payments in the calculation?
Yes.

I should have included an appropriate link in the original post, and I've now added it. Here's my source for FDVV, QDF, SDY, and VFIAX
Last edited by nisiprius on Tue Jun 22, 2021 11:09 am, edited 1 time in total.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by nisiprius »

aj76er wrote: Tue Jun 22, 2021 10:34 amThe four funds you listed with “dividend growth” or “dividend appreciation” or “dividend income” in the name did have less drawdowns...
I chose to let someone else do the choosing. Once you have seen the actual performance of a list of funds it is pretty hard to avoid being polluted by hindsight knowledge. Morningstar chose to identify these as "Top Dividend-Stock Funds" so I decide that this was a reasonable way to sample dividend-stock funds.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by dbr »

olyveoil wrote: Tue Jun 22, 2021 10:58 am
atdharris wrote: Tue Jun 22, 2021 10:53 am Without getting into this much, perhaps they fell more because people feared companies paying out dividends would not be able to meet those payments due to a slowdown in profits during the pandemic? In March 2020, we had no idea how long this would last or how long it would take to create a vaccine.

That said, I don't advocate people owning dividend funds unless you are retired and need the income.
How about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
Because it is so simple to obtain income from a store of investment wealth by any means of withdrawing from that store of wealth that there is no point in going to all the trouble to arrange for withdrawals to be the dividends paid on investments in the portfolio. You can sell assets and withdraw the proceeds in any amount you want at any time, including a practice of taking constant periodic withdrawals of your choosing. So far as the effect on the portfolio is concerned withdrawing a dividend payment rather than reinvesting it has the same effect as selling assets in the same amount of dollars. There is nothing to build.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by Scooter57 »

Ramjet wrote: Tue Jun 22, 2021 10:51 am
Scooter57 wrote: Tue Jun 22, 2021 10:15 am This is not entirely fair.

The market dip in 2020 was extremely brief and the market, aka the S&P 500, recovered almost entirely because a handful of tech stocks took off...
Isn't this the exact reason one should hold the S&P 500 or total market fund
Not necessarily. The S&P was dominated by speculative stocks in the late 1990s, too. There were very few dividend-oriented funds at that time, so I have used the Vanguard Dividend Growth Fund as a proxy. It was only a Dividend Growth Fund after Nov. 2002. Before that it was a Utilities Fund. Also note that it has a relatively high expense ratio compared to the Vanguard S&P 500 Fund. Even so, look how you would have done investing in it.


Total Return Vanguard Dividend Growth Fund Since Inception Vs. Vanguard S&P 500 Investors Shares Fund 2002-Now (Morningstar)

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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by CyclingDuo »

olyveoil wrote: Tue Jun 22, 2021 10:58 amHow about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
Both methods work, but if building early you have to pay special attention to taxes and utilize as much of the household income "sweet spot" to keep LTCG/Qualified Dividends tax rate at 0% while stuffing your tax-deferred accounts and Roth accounts. That keeps the tax drag in check. We keep all REITS in Roth accounts along with other alternative investments, and fill the remaining spots with any dividend payers before getting to the taxable account where keeping the amount of qualified dividends in check along with our ability to defer taxable income into tax-deferred retirement accounts which results in not having to pay current taxes on the dividends while the growth takes place. So a portion of our portfolio is directed at what you mention, where the other portion is directed at capital appreciation, bond income, and total return investing.

In retirement, whether the income comes from a dividend or LTCG in the taxable account - we'll remain agnostic.

If I was being flippant about it, I would say utilize your household income to be able to throw $1M in taxable, $1M in Roth, and $1M in tax-deferred over your 30-40 year working career and then enjoy the modern day three legged retirement income stool...

Image

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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

nisiprius wrote: Tue Jun 22, 2021 11:00 am
olyveoil wrote: Tue Jun 22, 2021 10:48 am What was the timeframe of your comparison?
As stated, it was maximum drawdown starting from 1/1/2020, where the drawdown calculation was that followed by PortfolioVisualizer.
Did you include the dividend payments in the calculation?
Yes.

I should have included an appropriate link in the original post, and I've now added it. Here's my source for FDVV, QDF, SDY, and VFIAX
Remedial question:
What is meant by maximum drawdown?
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

dbr wrote: Tue Jun 22, 2021 11:08 am
olyveoil wrote: Tue Jun 22, 2021 10:58 am
atdharris wrote: Tue Jun 22, 2021 10:53 am Without getting into this much, perhaps they fell more because people feared companies paying out dividends would not be able to meet those payments due to a slowdown in profits during the pandemic? In March 2020, we had no idea how long this would last or how long it would take to create a vaccine.

That said, I don't advocate people owning dividend funds unless you are retired and need the income.
How about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
Because it is so simple to obtain income from a store of investment wealth by any means of withdrawing from that store of wealth that there is no point in going to all the trouble to arrange for withdrawals to be the dividends paid on investments in the portfolio. You can sell assets and withdraw the proceeds in any amount you want at any time, including a practice of taking constant periodic withdrawals of your choosing. So far as the effect on the portfolio is concerned withdrawing a dividend payment rather than reinvesting it has the same effect as selling assets in the same amount of dollars. There is nothing to build.
So, Let's say I'm retired and need the income. Just retirement day queue up the income stream?
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

CyclingDuo wrote: Tue Jun 22, 2021 11:23 am
olyveoil wrote: Tue Jun 22, 2021 10:58 amHow about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
Both methods work, but if building early you have to pay special attention to taxes and utilize as much of the household income "sweet spot" to keep LTCG/Qualified Dividends tax rate at 0% while stuffing your tax-deferred accounts and Roth accounts. That keeps the tax drag in check. We keep all REITS in Roth accounts along with other alternative investments, and fill the remaining spots with any dividend payers before getting to the taxable account where keeping the amount of qualified dividends in check along with our ability to defer taxable income into tax-deferred retirement accounts which results in not having to pay current taxes on the dividends while the growth takes place. So a portion of our portfolio is directed at what you mention, where the other portion is directed at capital appreciation, bond income, and total return investing.

In retirement, whether the income comes from a dividend or LTCG in the taxable account - we'll remain agnostic.

If I was being flippant about it, I would say utilize your household income to be able to throw $1M in taxable, $1M in Roth, and $1M in tax-deferred over your 30-40 year working career and then enjoy the modern day three legged retirement income stool...

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CyclingDuo
We are doing similar. IE building some income now....not on day 1 of retirement.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by dbr »

olyveoil wrote: Tue Jun 22, 2021 1:12 pm
dbr wrote: Tue Jun 22, 2021 11:08 am
olyveoil wrote: Tue Jun 22, 2021 10:58 am
atdharris wrote: Tue Jun 22, 2021 10:53 am Without getting into this much, perhaps they fell more because people feared companies paying out dividends would not be able to meet those payments due to a slowdown in profits during the pandemic? In March 2020, we had no idea how long this would last or how long it would take to create a vaccine.

That said, I don't advocate people owning dividend funds unless you are retired and need the income.
How about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
Because it is so simple to obtain income from a store of investment wealth by any means of withdrawing from that store of wealth that there is no point in going to all the trouble to arrange for withdrawals to be the dividends paid on investments in the portfolio. You can sell assets and withdraw the proceeds in any amount you want at any time, including a practice of taking constant periodic withdrawals of your choosing. So far as the effect on the portfolio is concerned withdrawing a dividend payment rather than reinvesting it has the same effect as selling assets in the same amount of dollars. There is nothing to build.
So, Let's say I'm retired and need the income. Just retirement day queue up the income stream?
I would have said withdraw money from investments as desired or needed. I am not sure what "queue up" means. I suppose that could be a way to describe an option such as buying an SPIA or for when one makes the decision to start Social Security. You could also include starting a pension if there is one.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

dbr wrote: Tue Jun 22, 2021 1:29 pm
olyveoil wrote: Tue Jun 22, 2021 1:12 pm
dbr wrote: Tue Jun 22, 2021 11:08 am
olyveoil wrote: Tue Jun 22, 2021 10:58 am
atdharris wrote: Tue Jun 22, 2021 10:53 am Without getting into this much, perhaps they fell more because people feared companies paying out dividends would not be able to meet those payments due to a slowdown in profits during the pandemic? In March 2020, we had no idea how long this would last or how long it would take to create a vaccine.

That said, I don't advocate people owning dividend funds unless you are retired and need the income.
How about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
Because it is so simple to obtain income from a store of investment wealth by any means of withdrawing from that store of wealth that there is no point in going to all the trouble to arrange for withdrawals to be the dividends paid on investments in the portfolio. You can sell assets and withdraw the proceeds in any amount you want at any time, including a practice of taking constant periodic withdrawals of your choosing. So far as the effect on the portfolio is concerned withdrawing a dividend payment rather than reinvesting it has the same effect as selling assets in the same amount of dollars. There is nothing to build.
So, Let's say I'm retired and need the income. Just retirement day queue up the income stream?
I would have said withdraw money from investments as desired or needed. I am not sure what "queue up" means. I suppose that could be a way to describe an option such as buying an SPIA or for when one makes the decision to start Social Security. You could also include starting a pension if there is one.

Trying to explain my thought process below:

ATD: "I don't advocate people owning dividend funds unless you are retired and need the income."
ME: 'I am retiring and will want the income...why not start building it now?'
DBR: 'Just withdraw from your portfolio"
ME: I disagree with this philosophy. IE, I want a dividend income bucket. And, making the case to start building it early; not just buy dividend payers on day of retirement.
dbr
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by dbr »

olyveoil wrote: Tue Jun 22, 2021 1:35 pm
dbr wrote: Tue Jun 22, 2021 1:29 pm
olyveoil wrote: Tue Jun 22, 2021 1:12 pm
dbr wrote: Tue Jun 22, 2021 11:08 am
olyveoil wrote: Tue Jun 22, 2021 10:58 am

How about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
Because it is so simple to obtain income from a store of investment wealth by any means of withdrawing from that store of wealth that there is no point in going to all the trouble to arrange for withdrawals to be the dividends paid on investments in the portfolio. You can sell assets and withdraw the proceeds in any amount you want at any time, including a practice of taking constant periodic withdrawals of your choosing. So far as the effect on the portfolio is concerned withdrawing a dividend payment rather than reinvesting it has the same effect as selling assets in the same amount of dollars. There is nothing to build.
So, Let's say I'm retired and need the income. Just retirement day queue up the income stream?
I would have said withdraw money from investments as desired or needed. I am not sure what "queue up" means. I suppose that could be a way to describe an option such as buying an SPIA or for when one makes the decision to start Social Security. You could also include starting a pension if there is one.

Trying to explain my thought process below:

ATD: "I don't advocate people owning dividend funds unless you are retired and need the income."
ME: 'I am retiring and will want the income...why not start building it now?'
DBR: 'Just withdraw from your portfolio"
ME: I disagree with this philosophy. IE, I want a dividend income bucket. And, making the case to start building it early; not just buy dividend payers on day of retirement.
You aren't disagreeing with a philosophy. You are making a different choice for what mechanics you want to use to obtain cash flow income. That choice also involves a different selection of investment assets, for whatever difference that might make. But the key statement is that you want a dividend income bucket. That is certainly a choice you can make. It is up to you to decide on the pros and cons for your situation and preferences.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

dbr wrote: Tue Jun 22, 2021 1:39 pm
olyveoil wrote: Tue Jun 22, 2021 1:35 pm
dbr wrote: Tue Jun 22, 2021 1:29 pm
olyveoil wrote: Tue Jun 22, 2021 1:12 pm
dbr wrote: Tue Jun 22, 2021 11:08 am

Because it is so simple to obtain income from a store of investment wealth by any means of withdrawing from that store of wealth that there is no point in going to all the trouble to arrange for withdrawals to be the dividends paid on investments in the portfolio. You can sell assets and withdraw the proceeds in any amount you want at any time, including a practice of taking constant periodic withdrawals of your choosing. So far as the effect on the portfolio is concerned withdrawing a dividend payment rather than reinvesting it has the same effect as selling assets in the same amount of dollars. There is nothing to build.
So, Let's say I'm retired and need the income. Just retirement day queue up the income stream?
I would have said withdraw money from investments as desired or needed. I am not sure what "queue up" means. I suppose that could be a way to describe an option such as buying an SPIA or for when one makes the decision to start Social Security. You could also include starting a pension if there is one.

Trying to explain my thought process below:

ATD: "I don't advocate people owning dividend funds unless you are retired and need the income."
ME: 'I am retiring and will want the income...why not start building it now?'
DBR: 'Just withdraw from your portfolio"
ME: I disagree with this philosophy. IE, I want a dividend income bucket. And, making the case to start building it early; not just buy dividend payers on day of retirement.
You aren't disagreeing with a philosophy. You are making a different choice for what mechanics you want to use to obtain cash flow income. That choice also involves a different selection of investment assets, for whatever difference that might make. But the key statement is that you want a dividend income bucket. That is certainly a choice you can make. It is up to you to decide on the pros and cons for your situation and preferences.
OK.
Still gets back to my original question: why not start building the income portfolio now?
'Just withdraw from my portfolio is a different philosophy/different mechanics....not really relevant to my question about timing. Maybe ATD should answer?
atdharris
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by atdharris »

olyveoil wrote: Tue Jun 22, 2021 10:58 am
atdharris wrote: Tue Jun 22, 2021 10:53 am Without getting into this much, perhaps they fell more because people feared companies paying out dividends would not be able to meet those payments due to a slowdown in profits during the pandemic? In March 2020, we had no idea how long this would last or how long it would take to create a vaccine.

That said, I don't advocate people owning dividend funds unless you are retired and need the income.
How about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
VTI, VEA and VWO all pay dividends, and I own all 3 or their equivalents in my 401k at Fidelity. However, I have no interest in owning a fund that focuses on dividend payouts at this stage. I can always swap out to those funds without penalty in my retirement accounts when I am closer to retirement. I am less concerned about an income stream at the expense of capital appreciation while I am growing my salary and working full time.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

atdharris wrote: Tue Jun 22, 2021 2:00 pm
olyveoil wrote: Tue Jun 22, 2021 10:58 am
atdharris wrote: Tue Jun 22, 2021 10:53 am Without getting into this much, perhaps they fell more because people feared companies paying out dividends would not be able to meet those payments due to a slowdown in profits during the pandemic? In March 2020, we had no idea how long this would last or how long it would take to create a vaccine.

That said, I don't advocate people owning dividend funds unless you are retired and need the income.
How about building a portion of portfolio to be dividend payers while not yet retired. IE part of owning dividend payers is to have income stream already there. Buying that income stream at time of retirement is late. Why not build it early?
VTI, VEA and VWO all pay dividends, and I own all 3 or their equivalents in my 401k at Fidelity. However, I have no interest in owning a fund that focuses on dividend payouts at this stage. I can always swap out to those funds without penalty in my retirement accounts when I am closer to retirement. I am less concerned about an income stream at the expense of capital appreciation while I am growing my salary and working full time.
FAir enough.
We disagree.
I was replying specifically to your statement "I don't advocate people owning dividend funds unless you are retired and need the income."
IE if I need the income at retirement I believe it best to build that income stream early in lieu of day of retirement.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by dbr »

olyveoil wrote: Tue Jun 22, 2021 1:53 pm
dbr wrote: Tue Jun 22, 2021 1:39 pm
olyveoil wrote: Tue Jun 22, 2021 1:35 pm
dbr wrote: Tue Jun 22, 2021 1:29 pm
olyveoil wrote: Tue Jun 22, 2021 1:12 pm

So, Let's say I'm retired and need the income. Just retirement day queue up the income stream?
I would have said withdraw money from investments as desired or needed. I am not sure what "queue up" means. I suppose that could be a way to describe an option such as buying an SPIA or for when one makes the decision to start Social Security. You could also include starting a pension if there is one.

Trying to explain my thought process below:

ATD: "I don't advocate people owning dividend funds unless you are retired and need the income."
ME: 'I am retiring and will want the income...why not start building it now?'
DBR: 'Just withdraw from your portfolio"
ME: I disagree with this philosophy. IE, I want a dividend income bucket. And, making the case to start building it early; not just buy dividend payers on day of retirement.
You aren't disagreeing with a philosophy. You are making a different choice for what mechanics you want to use to obtain cash flow income. That choice also involves a different selection of investment assets, for whatever difference that might make. But the key statement is that you want a dividend income bucket. That is certainly a choice you can make. It is up to you to decide on the pros and cons for your situation and preferences.
OK.
Still gets back to my original question: why not start building the income portfolio now?
'Just withdraw from my portfolio is a different philosophy/different mechanics....not really relevant to my question about timing. Maybe ATD should answer?
Whether or not there is anything to build depends on where you are holding the assets. In tax deferred/tax exempt accounts you can sell one kind of asset and buy another at any time. In a taxable account it can cost a lot in capital gains taxes to sell one kind of asset that may have a lot of appreciation in order to replace it with something else. For that reason the best choice to accumulate in a taxable account is something that you will want forever and that is tax efficient even when you are not taking dividends.

Remember in a taxable account capital gain is tax deferred growth. At present selling appreciated shares is a combination of recovering already taxed principal plus taking gains at a preferred tax rate. Building dividend income in a taxable portfolio means taking taxes all along and probably at a higher tax rate. Dividends withdrawn are also 100% taxed with no recovery of already taxed principal. So, yes, in a taxable account you do need to build the position from early on, but there will be a loss of tax deferral to do it. Tax consequences are an exercise in detail, so a lot of work has to be done to see what will happen.

In practice total market funds do pay dividends anyway. It takes a lot of work to assemble a portfolio that does not pay dividends, and one may not want the choices that are required, investing everything in Berkshire perhaps. It also takes a lot of work to assemble and maintain a portfolio where most of the return is in dividends, and one may not want those choices either.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by firebirdparts »

I kinda feel like we're beating a dead horse here. When the whole event is over in 3 months, who cares? It's just not interesting.

It's much more interesting to look at how dividends themselves would hold up in a protracted breakdown, but we haven't had one in a long time, and even if we did, I don't think too many people are really that interested in anything other than simplistic arguments. You could look at the Nikkei 225, but dividends were really low when that bear market started, so i am sure somebody would say that "doesn't count" or whatever.
This time is the same
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by alex_686 »

olyveoil wrote: Tue Jun 22, 2021 1:53 pm OK.
Still gets back to my original question: why not start building the income portfolio now?
'Just withdraw from my portfolio is a different philosophy/different mechanics....not really relevant to my question about timing. Maybe ATD should answer?
Because building a income portfolio is pointless. It is a misspecification of the question. Why would you want dividends?

Let me lay out a analogy. You want a sports car because you like to drive fast. So you buy a Pontiac Fiero. It's red, it has a rear spoiler, and a mid-engine. While it sure looks the part, it certainly does not drive like one. Looks don't matter, it is what is under the hood.

You should care about total returns and risk. Ignoring taxes, a dollar of principle appreciation is worth just as much a dollar of dividends. What makes dividends special? Nothing. Worse than nothing, because dividends seem so simple people fall into cognitive traps around them.

For almost any goal there are metrics with a higher signal power. I am going to assume you are looking for a decent return, minimum volatility, and keeps up with inflation. Yeah, some dividend stocks fall into this category. Others don't. There are some low or no dividend stocks that fall into this category. It is just a poor measure. P/E ratio, minimum volatility factor, or the quality factor all deliver a better signal than dividends.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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patrick013
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by patrick013 »

I think dividends will recover just like they always have and a
good bull market preceded by earnings will help all stocks.

The 500 has a payout ratio over 40 usually and it's price is
strongly correlated to the dividends it pays.

If quality requires low LT debt then AT&T should be a quality
stock with a 7% dividend while the other phone and internet
companies pay out large amounts in debt service and little in
dividends. But quality or medium quality a good earnings cycle
is always needed. Good companies always recover don't they.
age in bonds, buy-and-hold, 10 year business cycle
olyveoil
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

alex_686 wrote: Tue Jun 22, 2021 2:35 pm
olyveoil wrote: Tue Jun 22, 2021 1:53 pm OK.
Still gets back to my original question: why not start building the income portfolio now?
'Just withdraw from my portfolio is a different philosophy/different mechanics....not really relevant to my question about timing. Maybe ATD should answer?
Because building a income portfolio is pointless. It is a misspecification of the question. Why would you want dividends?

Let me lay out a analogy. You want a sports car because you like to drive fast. So you buy a Pontiac Fiero. It's red, it has a rear spoiler, and a mid-engine. While it sure looks the part, it certainly does not drive like one. Looks don't matter, it is what is under the hood.

You should care about total returns and risk. Ignoring taxes, a dollar of principle appreciation is worth just as much a dollar of dividends. What makes dividends special? Nothing. Worse than nothing, because dividends seem so simple people fall into cognitive traps around them.

For almost any goal there are metrics with a higher signal power. I am going to assume you are looking for a decent return, minimum volatility, and keeps up with inflation. Yeah, some dividend stocks fall into this category. Others don't. There are some low or no dividend stocks that fall into this category. It is just a poor measure. P/E ratio, minimum volatility factor, or the quality factor all deliver a better signal than dividends.
um.
OK.
I disagree.
Your analogy is a misspecification of the question. I didn't misspecify my question. I meant it. I asked it. You misspecified it via your analogy and assumptions.

I want buckets of investments.
One of those buckets is income from Dividends at retirement.
What makes dividends special? They are a different type of equity. They behave differently than growth. They are not always better or worse. Investing is not binary. The metrics are not dividends only vs quality factor or dividends only vs minimum volatility, etc, etc.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by BV3273 »

achillesheel wrote: Tue Jun 22, 2021 9:23 am Thank you Nisiprius for this valuable little comparison. So, less downside protection and less tax efficiency as well. Perhaps the dividends are a psychological trick to help many people stay invested, but that's still a hefty expense to pay for emotional-risk-management that could be addressed through proper diversification. People want higher returns without taking the associated risks, and I think the marketing plays into this.

Did you use Stata or something similar to run the numbers?
Your point on tax efficiency is incorrect. No one said where they would be held. If held in an Roth IRA or other tax deferred account there is no tax inefficiency.
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JoMoney
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by JoMoney »

BV3273 wrote: Wed Jun 23, 2021 7:17 am
achillesheel wrote: Tue Jun 22, 2021 9:23 am Thank you Nisiprius for this valuable little comparison. So, less downside protection and less tax efficiency as well. Perhaps the dividends are a psychological trick to help many people stay invested, but that's still a hefty expense to pay for emotional-risk-management that could be addressed through proper diversification. People want higher returns without taking the associated risks, and I think the marketing plays into this.

Did you use Stata or something similar to run the numbers?
Your point on tax efficiency is incorrect. No one said where they would be held. If held in an Roth IRA or other tax deferred account there is no tax inefficiency.
It also doesn't address whether or not an income/dividend focus works as a "psychological trick to help many people stay invested".
They mention that perhaps it's better addressed "through proper diversification" but no mention of what that "proper diversification" is/was.
Holding more cash/bonds certainly would have lead to a safer less volatile portfolio, but also significantly less return (and less income, although more stable in bonds). Some people hear "diversification" and go off into tangents of more risky assets, which certainly would not have lead to a less risky portfolio. Small-Value stocks, REITS, or International stocks didn't provide "downside protection" to an investor either.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
dbr
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by dbr »

olyveoil wrote: Wed Jun 23, 2021 7:11 am
I want buckets of investments.
One of those buckets is income from Dividends at retirement.
What makes dividends special? They are a different type of equity. They behave differently than growth. They are not always better or worse. Investing is not binary. The metrics are not dividends only vs quality factor or dividends only vs minimum volatility, etc, etc.
You can certainly implement a separation of different asset classes of stocks into separate buckets realized by holding sets of funds that concentrate in one class or another. You can also create your own dividend "index" buy buying individual dividend stocks.

However, the total stock index already includes a large selection of dividend paying stocks. The question is whether something special is achieved by underweighting or overweighting dividend paying stocks relative to the index. A possible answer to that question is that dividend paying is somewhat correlated with value loading so that overweighting dividend stocks also means tilting to value. VHWAX, Vanguard high dividend yield fund, has a significant value loading of 0.33 and a negative alpha, barely significant.

Based on what you say your purpose is, one would think just holding the total stock index would serve that purpose. If you like seeing the components of your holdings in separate funds, then you can do that, but it seems like an awful lot of trouble for no meaningful difference in what you want your portfolio to do. If you do want to tilt to small and value factors, you can do that, and if you feel dividends are a better factor for a tilt, you can also do that.

It is true that in a taxable account you want to build that position all along because selling and buying at the point of retirement would be costly if you have to realize large gains selling something you no longer want. In the meantime you want to be aware of the tax consequences of absorbing return as dividends in a taxable account.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by achillesheel »

BV3273 wrote: Wed Jun 23, 2021 7:17 am
achillesheel wrote: Tue Jun 22, 2021 9:23 am Thank you Nisiprius for this valuable little comparison. So, less downside protection and less tax efficiency as well. Perhaps the dividends are a psychological trick to help many people stay invested, but that's still a hefty expense to pay for emotional-risk-management that could be addressed through proper diversification. People want higher returns without taking the associated risks, and I think the marketing plays into this.

Did you use Stata or something similar to run the numbers?
Your point on tax efficiency is incorrect. No one said where they would be held. If held in an Roth IRA or other tax deferred account there is no tax inefficiency.
True.
The unexamined life is not worth living.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by Rob Bertram »

People are allowed to disagree. Personally, I agree with nisiprius -- that there is nothing special about divided-paying stocks. From an expected future risk-adjusted return perspective, total-market index funds are the mathematically best choices. If people value something other than risk-adjusted returns, then total-market index funds might not be what is best for them.

Whatever makes you sleep better at night:
From a long-term net worth perspective, holding a home mortgage while investing is expected to be a better strategy than paying off your mortgage early while not investing (or investing less). Despite that, people pick the less optimal path because it allows them to sleep better at night. If picking dividend-paying index funds makes people more comfortable with their investing choices, then I do not see much point in arguing with them. It is what allows them to sleep better at night.

The major factors of building and maintaining wealth are in this priority order:
  1. Savings rate
  2. Time in the market
  3. Keeping costs low
  4. Asset allocation
If people get the first three correct, then asset allocation is really a personal preference based on their need, ability, and willingness to take risk. For me personally, I am 25+ years away from retirement, so my investing horizon is much longer than most and I am focused on total return. "Time in the market" for me means that I should be taking a leveraged position (e.g., Lifecycle Investing). Others might be on a different path, and preservation of capital may be a priority. They would instead be looking at CD ladders and I-bonds. These strategies are polar opposites, but they are perfectly rational and valid based on our respective priorities.

Less assumptions, more collaboration:
"There are many roads to Dublin." Focus on what is right for you, and let others choose what works for them. nisiprius provided objective data and analysis. Instead of judging people's strategies based on your priorities, ask them about their context or priorities and help them make an informed decision by providing additional data so that they get a complete picture of their strategy. I see some collaboration happening, so please continue that and re-think any criticism.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Good post
MindBogler
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by MindBogler »

Scooter57 wrote: Tue Jun 22, 2021 11:16 am Not necessarily. The S&P was dominated by speculative stocks in the late 1990s, too. There were very few dividend-oriented funds at that time, so I have used the Vanguard Dividend Growth Fund as a proxy. It was only a Dividend Growth Fund after Nov. 2002. Before that it was a Utilities Fund. Also note that it has a relatively high expense ratio compared to the Vanguard S&P 500 Fund. Even so, look how you would have done investing in it.
I did that same comparison in PV (VDIGX/VFIAX), except going back to 1985, and the returns are practically identical, well within the limits of simple noise.

Edit - I take it back, it truncates to Dec 2000 but the result is the same.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by alex_686 »

olyveoil wrote: Wed Jun 23, 2021 7:11 am um.
OK.
I disagree.
Your analogy is a misspecification of the question. I didn't misspecify my question. I meant it. I asked it. You misspecified it via your analogy and assumptions.

I want buckets of investments.
One of those buckets is income from Dividends at retirement.
I think we are talking past each other here.

I care about returns and risk, the ability to meet my goals.

Why do you want a income portfolio? Why do you want the particularly dangerous and high risk cash flow from dividends? I mean, dividends are technically returns on your investments.
olyveoil wrote: Wed Jun 23, 2021 7:11 am What makes dividends special? They are a different type of equity. They behave differently than growth. They are not always better or worse. Investing is not binary. The metrics are not dividends only vs quality factor or dividends only vs minimum volatility, etc, etc.
I think we are on the same page here. Sort of.

What character do you think they have?

From my review of the academic journals and white papers over many years dividend stocks do have a particular character. Barely. A thin wisp.

Dividend stocks can be steady produces. These have a strong signal on the Quality and Low Volatility factors. But we don't care about these companies because we are not screen on these factors. Some steady producers issue steady dividends. Others don't. They may do stock buy backs, pay down debt, or reinvest earnings.

Dividend stocks can be companies on the brink of irrelevances. Squeezing out the last dollars in a stagnate dead end business. Lots of bankruptcies. Tend to load on the Value factor. High risk.

What happens when you mix these 2 disparate pools of stock together? Not much.

I think I understand where you are coming from. I started where you are now. The problem with dividends is that they are so deceitfully simple that your intuition leads you down the wrong path.

As I said up above, dividends are not returns. They are cash flows. Had to work through a fair amount of accounting and investment theory to get there.

A stock's value is driven by its Free Cash Flow to Equity (FCFE). That is driven by earnings growth and risk. Focus on that. These signals have a high power. A company may pay out its FCFE in dividends, or maybe not. It does not matter much. The signal power is low.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by BV3273 »

JoMoney wrote: Wed Jun 23, 2021 8:25 am
BV3273 wrote: Wed Jun 23, 2021 7:17 am
achillesheel wrote: Tue Jun 22, 2021 9:23 am Thank you Nisiprius for this valuable little comparison. So, less downside protection and less tax efficiency as well. Perhaps the dividends are a psychological trick to help many people stay invested, but that's still a hefty expense to pay for emotional-risk-management that could be addressed through proper diversification. People want higher returns without taking the associated risks, and I think the marketing plays into this.

Did you use Stata or something similar to run the numbers?
Your point on tax efficiency is incorrect. No one said where they would be held. If held in an Roth IRA or other tax deferred account there is no tax inefficiency.
It also doesn't address whether or not an income/dividend focus works as a "psychological trick to help many people stay invested".
They mention that perhaps it's better addressed "through proper diversification" but no mention of what that "proper diversification" is/was.
Holding more cash/bonds certainly would have lead to a safer less volatile portfolio, but also significantly less return (and less income, although more stable in bonds). Some people hear "diversification" and go off into tangents of more risky assets, which certainly would not have lead to a less risky portfolio. Small-Value stocks, REITS, or International stocks didn't provide "downside protection" to an investor either.
I agree. I have built a portfolio of dividend payers in my Roth account simply because I am not one of those fortunate souls that have a pension. I like the income and enjoy adjusting my holdings every so often. I think it’s diversified enough.
dbr
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by dbr »

BV3273 wrote: Wed Jun 23, 2021 4:17 pm
I agree. I have built a portfolio of dividend payers in my Roth account simply because I am not one of those fortunate souls that have a pension. I like the income and enjoy adjusting my holdings every so often. I think it’s diversified enough.
A pension can be purchased by buying an SPIA. An advantage to that is that like a pension longevity risk is insured by pooling the risk with a large collection of annuity holders. The absence of inflation indexed SPIAs is a drawback, but many pensions are not inflation indexed. Another advantage of an SPIA is that there is not risk to the principal; it starts out a zero and stays there for life -- you don't have to worry about it. Currently an age 65 life SPIA can be obtained with a payout of close to 6%. An annuity also diversifies the income because it does not have risks in common with market prices of stocks.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

alex_686 wrote: Wed Jun 23, 2021 3:32 pm
olyveoil wrote: Wed Jun 23, 2021 7:11 am um.
OK.
I disagree.
Your analogy is a misspecification of the question. I didn't misspecify my question. I meant it. I asked it. You misspecified it via your analogy and assumptions.

I want buckets of investments.
One of those buckets is income from Dividends at retirement.
I think we are talking past each other here.

I care about returns and risk, the ability to meet my goals.

Why do you want a income portfolio? Why do you want the particularly dangerous and high risk cash flow from dividends? I mean, dividends are technically returns on your investments.
olyveoil wrote: Wed Jun 23, 2021 7:11 am What makes dividends special? They are a different type of equity. They behave differently than growth. They are not always better or worse. Investing is not binary. The metrics are not dividends only vs quality factor or dividends only vs minimum volatility, etc, etc.
I think we are on the same page here. Sort of.

What character do you think they have?

From my review of the academic journals and white papers over many years dividend stocks do have a particular character. Barely. A thin wisp.

Dividend stocks can be steady produces. These have a strong signal on the Quality and Low Volatility factors. But we don't care about these companies because we are not screen on these factors. Some steady producers issue steady dividends. Others don't. They may do stock buy backs, pay down debt, or reinvest earnings.

Dividend stocks can be companies on the brink of irrelevances. Squeezing out the last dollars in a stagnate dead end business. Lots of bankruptcies. Tend to load on the Value factor. High risk.

What happens when you mix these 2 disparate pools of stock together? Not much.

I think I understand where you are coming from. I started where you are now. The problem with dividends is that they are so deceitfully simple that your intuition leads you down the wrong path.

As I said up above, dividends are not returns. They are cash flows. Had to work through a fair amount of accounting and investment theory to get there.

A stock's value is driven by its Free Cash Flow to Equity (FCFE). That is driven by earnings growth and risk. Focus on that. These signals have a high power. A company may pay out its FCFE in dividends, or maybe not. It does not matter much. The signal power is low.
No idea why you think dividends are "particularly dangerous and high risk cash flow". They are not in my view.
If you feel ABBV, MRK, C, PSX, INTC, BMY, just for a few examples are "particularly high risk" then we certainly are talking past each other.

And what is wrong with cash flow to me, the investor? That is the point actually.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by alex_686 »

I might come back and tell some sad stories latter. I used to do performance reporting and attribution on some income & dividend mutual funds when I was in mutual fund accounting. Some of the worst products that I worked on. And yet they sold well. Financial advisor didn't have to spend time educating the clients to sell these front loaded products.
olyveoil wrote: Wed Jun 23, 2021 4:53 pmNo idea why you think dividends are "particularly dangerous and high risk cash flow". They are not in my view.
Well, what are you basing your view on?

I am basing my view on 2 points.

First, historically these stocks have been more volatile, more likely to declare bankruptcy, tend to be concentrated in limited sectors, and stop or reduce paying dividends at critical times. But this is a mild criticism. The statistically power he is pretty weak. After all, dividends is a poor signal.

Second, thinking of about dividends leads to all types of cognitive errors. On that point...
olyveoil wrote: Wed Jun 23, 2021 4:53 pm If you feel ABBV, MRK, C, PSX, INTC, BMY, just for a few examples are "particularly high risk" then we certainly are talking past each other.
O.k., I will bite. How does paying dividends make BMY a safer company? I don't see how. Or are you saying that since BMY is a safe company since it can pay dividends? I don't think you are saying that. There are lots of safe companies don't pay dividends and you are tossing those away. You are, however, including lots of dangerous company that do. You may be in a cognitive trap here.
olyveoil wrote: Wed Jun 23, 2021 4:53 pm And what is wrong with cash flow to me, the investor? That is the point actually.
Well, for me, I invest to earn a good return. If I want cash flow I can sell assets. Or If I am not interested in return I would just keep it in a savings account.

Or, maybe, are you implying that you won't need to sell stocks to meet your cashflow? Don't sell the stocks, just live off of the dividends? Are you assuming that because you will never sell the stocks that your principle is safe? Or that you assets might fluctuate but your cash flow won't?

It is a intuitive assumption that lots of people make, but it is another cognitive trap. It is not suggested in theory. It is not born out in historical data. Rather, the opposite. Higher volatility in returns, so a greater chance in failure.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by olyveoil »

alex_686 wrote: Wed Jun 23, 2021 5:23 pm I might come back and tell some sad stories latter. I used to do performance reporting and attribution on some income & dividend mutual funds when I was in mutual fund accounting. Some of the worst products that I worked on. And yet they sold well. Financial advisor didn't have to spend time educating the clients to sell these front loaded products.
olyveoil wrote: Wed Jun 23, 2021 4:53 pmNo idea why you think dividends are "particularly dangerous and high risk cash flow". They are not in my view.
Well, what are you basing your view on?

I am basing my view on 2 points.

First, historically these stocks have been more volatile, more likely to declare bankruptcy, tend to be concentrated in limited sectors, and stop or reduce paying dividends at critical times. But this is a mild criticism. The statistically power he is pretty weak. After all, dividends is a poor signal.

Second, thinking of about dividends leads to all types of cognitive errors. On that point...
olyveoil wrote: Wed Jun 23, 2021 4:53 pm If you feel ABBV, MRK, C, PSX, INTC, BMY, just for a few examples are "particularly high risk" then we certainly are talking past each other.
O.k., I will bite. How does paying dividends make BMY a safer company? I don't see how. Or are you saying that since BMY is a safe company since it can pay dividends? I don't think you are saying that. There are lots of safe companies don't pay dividends and you are tossing those away. You are, however, including lots of dangerous company that do. You may be in a cognitive trap here.
olyveoil wrote: Wed Jun 23, 2021 4:53 pm And what is wrong with cash flow to me, the investor? That is the point actually.
Well, for me, I invest to earn a good return. If I want cash flow I can sell assets. Or If I am not interested in return I would just keep it in a savings account.

Or, maybe, are you implying that you won't need to sell stocks to meet your cashflow? Don't sell the stocks, just live off of the dividends? Are you assuming that because you will never sell the stocks that your principle is safe? Or that you assets might fluctuate but your cash flow won't?

It is a intuitive assumption that lots of people make, but it is another cognitive trap. It is not suggested in theory. It is not born out in historical data. Rather, the opposite. Higher volatility in returns, so a greater chance in failure.
Front loaded dividend paying mutual funds from years ago are irrelevant. To me. It seems that you have scar tissue from them. Nothing to do with me.
I think you are basing your idea of dividend payers from 1970's - 1980's. Maybe not.
So....dividend payers and dividend growers --from the top of my head. -- MSFT, ABBV, BMY, MRK, C, PSX, CAH, NUSI, QYLD, RYLD, EPD, IRM, PRU, K, DUK, SO, LYB, NWL, GIS, KO, TSN, UNP, XYLD, YYY, PFFA, PFFD, PGX.--These are all bad investments, volatile, bankruptcy risks, limited in breadth of companies? I believe your frame of reference is dated and skewed. I also believe you have a cognitive blind spot. So, yeah we probably are talking past each other. Really curious why you believe dividend payers are ""particularly dangerous and high risk cash flow"

I am tossing nothing away. Again......I want A bucket of dividend payers...not THE only bucket of investments to be dividend payers. Again.....it is not a binary decision. Investors are not forced to choose one or the other. You keep framing the decision as if there is only one investment. It's not.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by alex_686 »

olyveoil wrote: Wed Jun 23, 2021 5:45 pm Front loaded dividend paying mutual funds from years ago are irrelevant. To me. It seems that you have scar tissue from them. Nothing to do with me.
I am chuckling at this. This was 5 years ago. They are still doing solid business. And I wouldn't say that I am scarred. My work has taken me even further into the bowels of this subject. It is in my job title.

OK, let us take a long formal crack at this:

What is your thesis? What is the specific portfolio character do you think you have?

Most academic studies that I have read over the years have framed it as risk / reward. Sharpe Ratio, semi-var, drawdown, low correlation, etc. The studies have not been particularly encouraging.

Why do dividend payers has a different character?

I assume we are not just data mining.

Here is a simplistic example. You have 3 identical companies worth 100m with 1,000k shares outstanding with a value of $100 per share. Company A issues 1m in dividends. Company B buys back 1m in shares. Company C pays down 1m in debt and issues no dividend. All companies have the same return - I think we can agree on that. We can't just magic money out of thin air. Which company is safer? I mean, the obvious answer is C. What is the mechanism that makes company A safer? I can't think of any.

For this, I will point to 2 items.

The first is Global Investment Performance Standards (GIPS). Connived in the 1980s and adopted by almost every reputable legal code there. You have no idea how much fraudulent hogwash marketing materials on dividend investing that standard has quashed.

The second is Modigliani-Miller Theory of Capital Structure from the 1950s. a.k.a. Dividend Irrelevance Theory. This Nobel winning theory knocks out the ideas under dividend investing.

There is stuff here for you. MM has very tight assumptions. While it kills all of the first order stuff on dividend investing, there is some interesting work on second order stuff. Taxes, cost of capital capital, signaling, etc. There is work on Investor preferences for dividends. unfortunately, one of the conclusions is that investors irrational prefer dividends because they are cognitively simple to understand.

What are we testing?
olyveoil wrote: Wed Jun 23, 2021 5:45 pm I think you are basing your idea of dividend payers from 1970's - 1980's. Maybe not.
So....dividend payers and dividend growers --from the top of my head. -- MSFT, ABBV, BMY, MRK, C, PSX, CAH, NUSI, QYLD, RYLD, EPD, IRM, PRU, K, DUK, SO, LYB, NWL, GIS, KO, TSN, UNP, XYLD, YYY, PFFA, PFFD, PGX.--These are all bad investments, volatile, bankruptcy risks, limited in breadth of companies?
Well, my basic position is that it doesn't matter much but lets dig into this. What universe of stocks are we talking about? If we want to argue about the character of dividend paying stocks then we have to included their opposites.

Survivorship Bias
We are going to want to pull in all stocks that were dividend payers and dividend growers that are no longer on the list. i.e., those that have blow up. Fun history here.

Spurious Correlations
You are arguing that because MSFT, ABBV, etc. pay dividends they have a special character. What if I can find stocks with the same character but don't pay dividends? What if I can find a 3rd variable that has a higher power of explanation for the character of stocks regardless if they pay dividends or not? You have not specified exactly what character you are looking for, but I suspect that it is the Quality and Low Volatility.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by alex_686 »

So, a sperate post.
olyveoil wrote: Wed Jun 23, 2021 5:45 pm I believe your frame of reference is dated and skewed. I also believe you have a cognitive blind spot. So, yeah we probably are talking past each other. Really curious why you believe dividend payers are "particularly dangerous and high risk cash flow"
So, I believe that dividend paying stocks are way to dangerous mainly due to psychological reasons. I have seen too many stories first hand were people believed that they could ignore risk because they had steady dividend paying stocks. Then the company goes bankrupt.

So, what do you think my cognitive blind spots are? For context, I have a long a varied history with this stuff, plus pertinent initials after my name.

So, let me tell you a story when I did reporting for Mineral Rights Trusts. They are great dividend payers. Oil wells will kick off a nice steady stream of dividends for years. Until they run dry.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by whodidntante »

A frequent dividend junkie standby is that with dividend stocks "you get paid to wait." Ironically, buying dividend stocks is more like paying for a subscription to taxes.
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Re: Did dividend stock funds provide "downside protection" in 2020?

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Reminder that the entire concept of owning stock - that is, in acquiring fractional ownership shares in a company - makes fundamentally no sense without dividends. A stock which never pays a dividend is like a rental property that generates no rental income. In each case you are relying entirely on some greater fool to take the asset off your hands in the future for more than you paid for it. That is literally the only way you can make money from it. There is an entire generation of investors who are blind to this fact, probably due to relentless Wall Street and corporate propaganda promoting an anti-dividend message that benefits those interests at the expense of the average shareholder.

Shareholders are entitled to a portion of the profits of the companies they own. It's that simple. And that money is best returned to them directly in the form of a dividend. "B-b-but what about share buybacks?" These are dishonest and should be illegal like they used to be. They are a tool designed to enrich management at the expense of shareholders. It's kind of sad how people don't seem to realize that executive compensation being tied into share price appreciation is conveniently and easily gamed by stock buybacks in conjunction with issuance of executive stock options. Company uses shareholder money to buy back its shares, driving up the share price, then issues new stock options to its executives to reward them. Congratulations, shareholder, the wealth to which you were entitled as an owner was just transferred to the CEO with one neat trick!

Wise up, people. Profitable, mature companies that don't pay dividends are a ridiculous, unnatural and thoroughly modern phenomenon. Your grandfather would have laughed you out of the room if you tried to explain the concept to him (probably after slapping you upside the head). Companies have limited lifespans, so waiting for some blessed, halcyon future day when your grossly overpriced tech stock grudgingly starts to pay a dividend (oh, what, now you're a dividend investor? LOL) is a sucker's bet. But you know that, of course. Because you're counting on finding another sucker to offload your shares to at some point down the line.

So many people in denial about the fact that they essentially own shares in baseball cards.
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Re: Did dividend stock funds provide "downside protection" in 2020?

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Janus887 wrote: Wed Jun 23, 2021 10:40 pm Reminder that the entire concept of owning stock - that is, in acquiring fractional ownership shares in a company - makes fundamentally no sense without dividends....
It can, just consider a 30 year zero coupon bond. A bond doesn't have to pay out regular periodic coupons to be of value. It can accumulate and compound at the agreed interest rate and pay out the interest and principal at maturity.
Similarly a company that (hopefully) is profitably using the business income to grow the balance sheet assets of the company, those balance sheet assets if/when the company is sold (or it's decided to dissolve the corporation) are owned by the shareholders and would be distributed to them.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by alex_686 »

Janus887 wrote: Wed Jun 23, 2021 10:40 pm Reminder that the entire concept of owning stock - that is, in acquiring fractional ownership shares in a company - makes fundamentally no sense without dividends.
And a major snip.

You get close but you fail. The value of a company is its Free Cash Flow to Equity. Dividends are a specific example. Simple and common. But not the only one.

There are stock buy backs and cash mergers. Why is a dollar from one of these different from a dollar of dividends?

Are you arguing that the share price of Berkshire Hathaway is a mirage? I can tell you the difference between my ownership in BRK and the Green Bay Packers. Neither have paid out any cash in a long time, but BRK is expected. The Green Bay Packers are more akin to baseball cards.
Janus887 wrote: Wed Jun 23, 2021 10:40 pm A stock which never pays a dividend is like a rental property that generates no rental income.
What about a development company? A REIT that takes a vacant piece of land and builds houses? Or builds a new apartment building? Then turns around and sells it, never collecting a dollar in rent? Is that phantom activity?

Or is a oil well better? 20 years of solid dividend payments and then a dry well?
Janus887 wrote: Wed Jun 23, 2021 10:40 pm "B-b-but what about share buybacks?" These are dishonest and should be illegal like they used to be. They are a tool designed to enrich management at the expense of shareholders.
Could you expound on this a bit? I will agree that buybacks can be used like dividends to enrich management. But you seem to favor dividends, even though the impacting the accounting statements are identical.
Janus887 wrote: Wed Jun 23, 2021 10:40 pm It's kind of sad how people don't seem to realize that executive compensation being tied into share price appreciation is conveniently and easily gamed by stock buybacks in conjunction with issuance of executive stock options.
Competent boards, and most are, shut this down 20 years ago.
Janus887 wrote: Wed Jun 23, 2021 10:40 pm Company uses shareholder money to buy back its shares, driving up the share price
Why are you saying this? It is not based in theory, see the M&M theorem upthread. Nor widely supported by historical fact.
Janus887 wrote: Wed Jun 23, 2021 10:40 pm Profitable, mature companies that don't pay dividends are a ridiculous, unnatural and thoroughly modern phenomenon. Your grandfather would have laughed you out of the room if you tried to explain the concept to him
This is true. However, they also thought that share price should be fixed to par and that dividends should be fixed to that par. i.e, stocks are just 2nd rate bonds. Do you believe that? I mean, you can't cherry just the bits of a theory that generate a emotional appeal.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by nisiprius »

A few thoughts, mostly about objections to my postings. First off, I don't think there's anything much wrong with dividend stock funds and ETFs. I'm not such a purist that I think any departure from cap weighting must be horrible because even the slightest departure from what I think is optimum must be horrible. The market factor explains 70% of stock behavior, which to me means all broadly diversified stock portfolios are about 70% the same as each other. However, I think it is always dangerous to kid yourself.

One pushback against my posting is that the 2020 drop was so short that it didn't actually hurt anybody, therefore the failure of dividend stocks to protect against it is irrelevant. My response is that dividend stocks didn't "know" that the drop was going to be short and didn't decide that it was OK to plunge this time. It's a reasonable example of "a downturn."

My second response is that at any given time, the ETFs people are talking about tend to be ones that are fairly new, so you are always faced with the problem of sharply reducing your sample size if you insist on (say) going back far enough to see behavior in 2008-2009. More than half the funds on Morningstar's list weren't around in 2008-2009 so we we don't know how they would have behaved. If we'd insisted on inception before 1999 in order to include that downturn, the number would be even smaller.

Another pushback is that I looked The Wrong Funds. Or that I included too many of The Wrong Funds along with The Right Funds. This is always a problem, because the phrase "dividend stocks" has several different meanings, the big one being "high dividend" versus "dividend growth." My answer is that I did my best to "choose not to choose." Morningstar chose to write a single article entitled "Top Dividend Stock Funds." I decided to look at 2020 performance before looking at anything more than the article headline. Morningstar chose not to write two different articles, not to create two different lists, not even to identify clearly which funds they think belong in each of the two categories.

The other question is "what is usually claimed?" It's hard to find an unbiased sample of "a claim" but I think you will find that mostly it is simply

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Often it is hedged with phrases like "potential downside protection" or "tend to."

To the extent that a distinction is made, there is a problem, too, because when it is made it is usually a claim that the dividend growers have the downside protection--but it is the high dividend stocks that pay bills in retirement.

The big problem is that it is often acknowledged that downside protection comes at the expense of return. I believe that, yes, it is possible to create simple rules that select broad stock categories that have coupled slightly lower downside risk and slightly lower return. The comparison that is to rarely made is the relative effectiveness of getting "slightly less downside risk with slightly less return" by selecting stock categories versus doing the same thing simply by reducing stock exposure.
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Re: Did dividend stock funds provide "downside protection" in 2020?

Post by BV3273 »

dbr wrote: Wed Jun 23, 2021 4:31 pm
BV3273 wrote: Wed Jun 23, 2021 4:17 pm
I agree. I have built a portfolio of dividend payers in my Roth account simply because I am not one of those fortunate souls that have a pension. I like the income and enjoy adjusting my holdings every so often. I think it’s diversified enough.
A pension can be purchased by buying an SPIA. An advantage to that is that like a pension longevity risk is insured by pooling the risk with a large collection of annuity holders. The absence of inflation indexed SPIAs is a drawback, but many pensions are not inflation indexed. Another advantage of an SPIA is that there is not risk to the principal; it starts out a zero and stays there for life -- you don't have to worry about it. Currently an age 65 life SPIA can be obtained with a payout of close to 6%. An annuity also diversifies the income because it does not have risks in common with market prices of stocks.
While I agree. I’m getting about 5.25% now and not paying any fees or tying up a large amount of capital for a stream of income. This is just compounding since I have no need for any of this income at this time. Granted this is a relatively small part of my portfolio. The majority of my holdings are index funds and a few iBonds/bond funds.
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