Dividend irrelevance for individual securities

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billaster
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Re: Dividend irrelevance for individual securities

Post by billaster »

The Modigliani and Miller Dividend Irrelevance Theory is only a simplified model of the real world. Few people who cite the theory have actually read the papers and considered all of the simplifying assumptions required in the model.

The new tax on stock buybacks in lieu of dividends starting in January is certainly not irrelevant.
alex_686
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

OverseasBH wrote: Tue Dec 06, 2022 12:24 pm Wow, so many answers and so much theory. I will try to wend my way through all of it and answer what people have posted.

I do completely understand that there is no magic and how any advantage would be arbitraged away. It is just that I am trying to understand that this outside of general bromides and certainties by using a simple example. In the simplest of investment analysis, while a buyer and seller have to arrive at a price, I am starting from the idea that the price to book (the net equity of the firm) ratio is not going to adjust much based on paying a cash dividend to the shareholders. If that starting premise is true (and why would it not be), then I would think my example holds.

So can someone please explain why, in the example I provided, why in this short time period of the dividend declaration and payment, would the P/B change?
First, ignore P/B. Well, you can consider P/B if you really want to go deep into accounting and investment pricing theory. Even then the value of P/B is pretty low unless you are talking about financials. "Book" tends to refer to physical assets and works well when physical assets matter. (Financials count their bonds and loans as part of their book and mark-to-market them - something other firms do not). Most of the economic assets that companies have today are intangibles. Book pricing does not work well here.

Hence my suggestion on using Enterprise Value. In large part because book value does not represent the net equity in the firm - that is Market Capitalization.

Second, I am not really following your question. We can use B but EV or P/E ratios would be better. These are a fixed value. Company issues dividend, P falls. Ergo we would expect P/E or P/B to fall. Note, cash held on the books is not counted in "book value". That would be cash and other liquid assets.
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vineviz
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Re: Dividend irrelevance for individual securities

Post by vineviz »

OverseasBH wrote: Tue Dec 06, 2022 12:24 pm I do completely understand that there is no magic and how any advantage would be arbitraged away. It is just that I am trying to understand that this outside of general bromides and certainties by using a simple example. In the simplest of investment analysis, while a buyer and seller have to arrive at a price, I am starting from the idea that the price to book (the net equity of the firm) ratio is not going to adjust much based on paying a cash dividend to the shareholders. If that starting premise is true (and why would it not be), then I would think my example holds.
A "simple example" is often not a useful way to analyze a complex problem, because it often results in important parameters being omitted or incorrectly specified.

Generally, cash dividends represent a small percentage of a firm's book value so observing the impact of dividends on the the price/book ratio is going to be difficult.

But we can clearly see that stock prices drop when a firm pays out a cash dividend, that such a drop is in fact a necessary part of market pricing, and that the price drop precisely matches the dividend payment. T

he evidence clearly shows this behavior, and the theory merely EXPLAINS the evidence.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
alex_686
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

billaster wrote: Tue Dec 06, 2022 12:36 pm The Modigliani and Miller Dividend Irrelevance Theory is only a simplified model of the real world. Few people who cite the theory have actually read the papers and considered all of the simplifying assumptions required in the model.
I am not sure what point you are trying to make. I have never read Galileo's original work nor do I have much experience with feathers and bowling balls falling in a hard vacuum. Yet this is one of the first things they taught me in high school physics. It is a fundamental principle and thus a excellent starting place for discussions.

Yes, in both cases things become more interesting when you start to relax and the assumptions. More realistic, more complex, more nuanced. But you need to learn how to crawl before you can walk.
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psteinx
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Re: Dividend irrelevance for individual securities

Post by psteinx »

OverseasBH wrote: Tue Dec 06, 2022 12:24 pm So can someone please explain why, in the example I provided, why in this short time period of the dividend declaration and payment, would the P/B change?
I don't know why you're so fixated on a stable P/B.

Maybe because P/B has elevated prominence in many value-tilting strategies?

A few years ago, Apple and other tech companies were, IIRC, sitting on heaps of overseas cash, because they were waiting/hoping/lobbying for tax code changes to allow them to bring it back into the US in a more favorable way. They ultimately got the tax changes they wanted, and I assume brought most of that cash back and returned it to shareholders (moreso via buybacks than dividends I'd think, but that shouldn't make a difference in your theory).

If a tech company has $1 of core assets that generate the (considerable) profit, $1 of excess cash (due to these laws), and a P/B (initially) of 3, and a P/E of 20, should the stock price fall in half if that $1 of cash is distributed, thus maintaining constant P/B, or should the P/E stay ~constant, and the P/B rise? I think, very much the latter...
alex_686
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

OverseasBH wrote: Tue Dec 06, 2022 12:31 pm Thanks, it will take me awhile to read up enough to understand your reply. But I do not understand your initial stamement:
Cash is not part of book value.
A reference to the same source you used states clearly that it is: https://www.investopedia.com/terms/p/pr ... kratio.asp
book value per share is calculated as follows: (total assets - total liabilities) / number of shares outstanding)... The book value of equity is an accounting measure based on the historic cost principle and reflects past issuances of equity, augmented by any profits or losses, and reduced by dividends and share buybacks... In other words, if a company liquidated all of its assets and paid off all its debt, the value remaining would be the company's book value.
Can you explain?
When posting on technical subjects there is always a balance between 1) free, 2) easy to read and 3) accurate. Most people don't have bookshelves lined with accounting, investment, and finance reference books. Investopedia tends to score well in 1 and 2 but 3 is always a bit of a crap shoot. That has to be one of the least accurate Investopedia articles that I have stumbled across in a long while.

Here is a slightly better link. After this you might want to find yourself a intermediate investment accounting book. And I am not trying to be snide here. Book Value is a complex technical question.

https://en.wikipedia.org/wiki/Book_value
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
NiceUnparticularMan
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Re: Dividend irrelevance for individual securities

Post by NiceUnparticularMan »

OverseasBH wrote: Tue Dec 06, 2022 12:24 pm I am starting from the idea that the price to book (the net equity of the firm) ratio is not going to adjust much based on paying a cash dividend to the shareholders. If that starting premise is true (and why would it not be), then I would think my example holds.
Well, why WOULD it be?

I form a company whose only business is owning a bank account with $10000 in it. I then sell 10000 shares in this company. All of this is transparent.

Why on earth would anyone pay me $3 for a share? Generally, I can assure you this company would not be valued by investors at $30000 in total.

The point is it would be irrational for people who actually price stocks to first decide on a "price to book" ratio, and then calculate stock prices based on that ratio, with no understanding of what the company actually owns or does as a business.

Instead, they look at the company's assets (typically including many not used in calculating the book value, or not accounted for in the same way), and operations and markets and so on, form an expectation of the company's future profits, and then figure out how to price that. And then someone else may calculate a price to book ratio, but that is just a way of describing (one thing) that happened in the pricing of the stock. It isn't an actual causal factor in the stock's price.

OK, so if a company actually does a lot of things, but one thing it does is hold a bank account with $10000 in it--you can rest assured that account is not adding $30000 to the company's total stock value. Because no one would value a cash account that way.

And conversely, if it then empties that account to pay a dividend, that will not subtract $30000 from the company's total stock value. Because that cash was never valued at $30000 to begin with.

And although that might end up changing (some) valuation measures, that isn't some big shock. Because those valuation measures were not driving the pricing in the first place. They were just reporting, in different ways, the results of how the company was priced.

And then when the company changes what it is doing, including by paying out a dividend, then so too can how it is priced change. Because of course it can.

Conversely, if you de facto insist on assuming that investors would ever value a $10000 bank account at $30000--then you are going to get the wrong answer.
billaster
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Re: Dividend irrelevance for individual securities

Post by billaster »

First you say this:
alex_686 wrote: Tue Dec 06, 2022 12:43 pm I have never read Galileo's original work nor do I have much experience with feathers and bowling balls falling in a hard vacuum. Yet this is one of the first things they taught me in high school physics. It is a fundamental principle and thus a excellent starting place for discussions.
And minutes later you say this:
alex_686 wrote: Tue Dec 06, 2022 12:57 pm When posting on technical subjects there is always a balance between 1) free, 2) easy to read and 3) accurate. Most people don't have bookshelves lined with accounting, investment, and finance reference books.
So which is it? Are simplistic explanations informative or are simplistic explanations possibly misleading?
alex_686
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

billaster wrote: Tue Dec 06, 2022 2:28 pm First you say this:
alex_686 wrote: Tue Dec 06, 2022 12:43 pm I have never read Galileo's original work nor do I have much experience with feathers and bowling balls falling in a hard vacuum. Yet this is one of the first things they taught me in high school physics. It is a fundamental principle and thus a excellent starting place for discussions.
And minutes later you say this:
alex_686 wrote: Tue Dec 06, 2022 12:57 pm When posting on technical subjects there is always a balance between 1) free, 2) easy to read and 3) accurate. Most people don't have bookshelves lined with accounting, investment, and finance reference books.
So which is it? Are simplistic explanations informative or are simplistic explanations possibly misleading?
You are not exactly being fair, but I will bite.

First, it can be hard to find free clear explanations on intermediate to advance topics. Wiki tends to be of high quality but a bit dry. Investopedia tends to be a bit more accessible, but the quality varies. The EV article is of better quality than the B/P article which contained basic errors. If you have a better idea then to reference proprietary text books and reference guides I would love to hear it.

Second, and maybe a bit more on point, I will quote Ernstine: Everything should be made as simple as possible, but no simpler.

Aristotelianism physics are much simpler then Newtonian physics. None of this "all objects accelerate at the same speed expect for air resistance, etc. Heavy objects fall faster than lighter objects. Simple, intuitive, actionable. What is not to love? Well, basically you can't build anything off of it. Everything is an exception. It is too simple.

Hence we teach Newtonian. Also the reason why we teach M&M. With M&M you get a basic key insight into corporate structure and how it finances itself, and how this can and can't be manipulated.
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Logan Roy
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Re: Dividend irrelevance for individual securities

Post by Logan Roy »

vineviz wrote: Tue Dec 06, 2022 10:01 am
Riprap wrote: Tue Dec 06, 2022 9:32 am
Logan Roy wrote: Tue Dec 06, 2022 2:01 amSo if you invest in stocks, you really want to be there for the effective employment of capital. Not just to sit tight and take the income.
It's not as binary as you make it seem.

This site's namesake most certainly advocated sitting tight and taking income.
I don't think that binary thinking was implied by Logan Roy. I don't read it that way, at least.

Sometimes dividends and/or share repurchases ARE the most effective use of capital for a business. When it is, investors should cheer that.

What is dangerous, IMHO, is for investors to encourage (directly, or merely through irrational preference for income over growth) companies to pay dividends EVEN WHEN that is not the most effective use of capital. Likewise, it would be dangerous for investors to exhibit an irrational preference for growth over income.

Of course, both types of irrationality do exist. Which, thankfully, nets out the effect to some degree. And some investors will have fully rational reasons for preferring growth over income, or vice-versa, for tax or other reasons.
That's a good way of framing it. An investor should look at the profitability and sustainability of a business, while the business hopefully makes the right decisions over capital deployment – be that dividends, buybacks, acquisitions, etc.
billaster
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Re: Dividend irrelevance for individual securities

Post by billaster »

alex_686 wrote: Tue Dec 06, 2022 5:05 pm
billaster wrote: Tue Dec 06, 2022 2:28 pm First you say this:
alex_686 wrote: Tue Dec 06, 2022 12:43 pm I have never read Galileo's original work nor do I have much experience with feathers and bowling balls falling in a hard vacuum. Yet this is one of the first things they taught me in high school physics. It is a fundamental principle and thus a excellent starting place for discussions.
And minutes later you say this:
alex_686 wrote: Tue Dec 06, 2022 12:57 pm When posting on technical subjects there is always a balance between 1) free, 2) easy to read and 3) accurate. Most people don't have bookshelves lined with accounting, investment, and finance reference books.
So which is it? Are simplistic explanations informative or are simplistic explanations possibly misleading?
You are not exactly being fair, but I will bite.

First, it can be hard to find free clear explanations on intermediate to advance topics. Wiki tends to be of high quality but a bit dry. Investopedia tends to be a bit more accessible, but the quality varies. The EV article is of better quality than the B/P article which contained basic errors. If you have a better idea then to reference proprietary text books and reference guides I would love to hear it.

Second, and maybe a bit more on point, I will quote Ernstine: Everything should be made as simple as possible, but no simpler.

Aristotelianism physics are much simpler then Newtonian physics. None of this "all objects accelerate at the same speed expect for air resistance, etc. Heavy objects fall faster than lighter objects. Simple, intuitive, actionable. What is not to love? Well, basically you can't build anything off of it. Everything is an exception. It is too simple.

Hence we teach Newtonian. Also the reason why we teach M&M. With M&M you get a basic key insight into corporate structure and how it finances itself, and how this can and can't be manipulated.
So in other words, you simply decide ad hoc when details matter and when they don't in a discussion as it suits you.

What I object to are simplistic arguments like:

"Dividends and buybacks. No difference. Modigliani and Miller. Boom." Mic drop.

They are about as useful as:

"It's Econ 101, dudes. Supply and demand. Done!"
Logan Roy
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Re: Dividend irrelevance for individual securities

Post by Logan Roy »

OverseasBH wrote: Tue Dec 06, 2022 12:24 pm Wow, so many answers and so much theory. I will try to wend my way through all of it and answer what people have posted.

I do completely understand that there is no magic and how any advantage would be arbitraged away. It is just that I am trying to understand that this outside of general bromides and certainties by using a simple example. In the simplest of investment analysis, while a buyer and seller have to arrive at a price, I am starting from the idea that the price to book (the net equity of the firm) ratio is not going to adjust much based on paying a cash dividend to the shareholders. If that starting premise is true (and why would it not be), then I would think my example holds.

So can someone please explain why, in the example I provided, why in this short time period of the dividend declaration and payment, would the P/B change?
I'd probably echo that P/B won't demonstrate the maths. Enterprise Value should make it work. I prefer to conceptualise it as if you owned the whole business – a lemonade stand. The value of the business is an estimate of how much money is going into your cash register, and for how long. The dividend is effectively whether you pocket the money at the end of the day, or keep it in a plastic safe. So it's a transfer of value between two things you already own. In an ultra-simple example, where the lemonade stand is valued based on how much money it pulls in from the neighbourhood, it shouldn't make any difference to the value of the business.
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OverseasBH
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Re: Dividend irrelevance for individual securities

Post by OverseasBH »

alex_686 wrote: Tue Dec 06, 2022 12:57 pm
OverseasBH wrote: Tue Dec 06, 2022 12:31 pm Thanks, it will take me awhile to read up enough to understand your reply. But I do not understand your initial stamement:
Cash is not part of book value.
A reference to the same source you used states clearly that it is: https://www.investopedia.com/terms/p/pr ... kratio.asp
book value per share is calculated as follows: (total assets - total liabilities) / number of shares outstanding)... The book value of equity is an accounting measure based on the historic cost principle and reflects past issuances of equity, augmented by any profits or losses, and reduced by dividends and share buybacks... In other words, if a company liquidated all of its assets and paid off all its debt, the value remaining would be the company's book value.
Can you explain?
When posting on technical subjects there is always a balance between 1) free, 2) easy to read and 3) accurate. Most people don't have bookshelves lined with accounting, investment, and finance reference books. Investopedia tends to score well in 1 and 2 but 3 is always a bit of a crap shoot. That has to be one of the least accurate Investopedia articles that I have stumbled across in a long while.

Here is a slightly better link. After this you might want to find yourself a intermediate investment accounting book. And I am not trying to be snide here. Book Value is a complex technical question.

https://en.wikipedia.org/wiki/Book_value
I looked at Investment Analysis: Portfolio Management (Reilly, Brown) and I cannot find support for how you are describing book value as not being a proxy for the net equity of a corporation.

The VG site also states "Price/book ratio:

The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the ratio is the weighted average price/book ratio of the stocks it holds."

Perhaps the difference in what we mean shows up with your Wikipedia reference. I understand that for a single asset, its book value is its purchase price less depreciation. But that is not what the "book" in the P/B ratio is discussing, is it? It is the net equity of the company and as such, should include all assets, including cash.

I am sure the EV is a better ratio, but as the P/B ratio is so commonly available and easily understood, that is what I started with. Thanks for your insights.
alex_686
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

OverseasBH wrote: Wed Dec 07, 2022 1:17 pm Perhaps the difference in what we mean shows up with your Wikipedia reference. I understand that for a single asset, its book value is its purchase price less depreciation. But that is not what the "book" in the P/B ratio is discussing, is it?
Yes, this is exactly how you calculate book value. Now, I will grant that this is a tricky subject because 2 different disciplines using the same word for slightly different things.

First, where are you getting the "net value" of the company?

If you are getting it from the annual statement then that is coming from the accountants. The company buys equipment and you put that purchase price on the book as a asset, less depreciation. Nice solid hard numbers. Accountants are not allowed to fiddle with the books and increase the value of something or forget to depreciate something.

If you are not getting the book value from the annual statements then things get tricker. I assume it is from some investment website where they are using the term fast and loose. In which case they probably mean some version of Market Capitalization. Or you may be running across some fundamental stock analysis.

As a test just look at a couple of stock. You have intangible heavy Microsoft with a B/P of 11, John Deere with has lots of plant and equipment with a B/P of 6, and asset heavy Bank of America at 1.4. You can figure this out yourself. Maybe, sort of.

Here is my one cavate. I am used to looking at adjusted financial numbers. There is a fairly standard set of procedures to strip away the noise of annual statements and just present the meat of the situation. For example, you always strip out cash when doing a economic analysis of the actual company. I mean, it is basically a asset sitting on the books that is doing nothing. This methodology is deeply embedded in my brain. I don't know how many times I had to review the methodology for my tests.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Logan Roy
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Re: Dividend irrelevance for individual securities

Post by Logan Roy »

OverseasBH wrote: Wed Dec 07, 2022 1:17 pm
alex_686 wrote: Tue Dec 06, 2022 12:57 pm
OverseasBH wrote: Tue Dec 06, 2022 12:31 pm Thanks, it will take me awhile to read up enough to understand your reply. But I do not understand your initial stamement:
Cash is not part of book value.
A reference to the same source you used states clearly that it is: https://www.investopedia.com/terms/p/pr ... kratio.asp
book value per share is calculated as follows: (total assets - total liabilities) / number of shares outstanding)... The book value of equity is an accounting measure based on the historic cost principle and reflects past issuances of equity, augmented by any profits or losses, and reduced by dividends and share buybacks... In other words, if a company liquidated all of its assets and paid off all its debt, the value remaining would be the company's book value.
Can you explain?
When posting on technical subjects there is always a balance between 1) free, 2) easy to read and 3) accurate. Most people don't have bookshelves lined with accounting, investment, and finance reference books. Investopedia tends to score well in 1 and 2 but 3 is always a bit of a crap shoot. That has to be one of the least accurate Investopedia articles that I have stumbled across in a long while.

Here is a slightly better link. After this you might want to find yourself a intermediate investment accounting book. And I am not trying to be snide here. Book Value is a complex technical question.

https://en.wikipedia.org/wiki/Book_value
I looked at Investment Analysis: Portfolio Management (Reilly, Brown) and I cannot find support for how you are describing book value as not being a proxy for the net equity of a corporation.

The VG site also states "Price/book ratio:

The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the ratio is the weighted average price/book ratio of the stocks it holds."

Perhaps the difference in what we mean shows up with your Wikipedia reference. I understand that for a single asset, its book value is its purchase price less depreciation. But that is not what the "book" in the P/B ratio is discussing, is it? It is the net equity of the company and as such, should include all assets, including cash.

I am sure the EV is a better ratio, but as the P/B ratio is so commonly available and easily understood, that is what I started with. Thanks for your insights.
Tangent, but I think P/B made a lot more sense 100 years ago, because businesses tended to be simpler affairs – a factory, an office, a machine – and what P/B represented was: what is the cost of building this business myself?

A friend's gym business buys equipment from a firm. Relatively simple business. You could have an office, a factory, some skilled labour. So I looked at their P/B in order to work out: should you acquire this business yourself, or would it be cheaper to recreate it? And that's what you can answer with P/B.

With a business like Microsoft, most/all their value is in how many people already use their products, are trained in their products, their brand value, intellectual property, etc. So I could physically recreate Microsoft, but it wouldn't necessarily be a business at all. It would probably make more sense as a REIT.
petulant
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Re: Dividend irrelevance for individual securities

Post by petulant »

OverseasBH wrote: Tue Dec 06, 2022 12:24 pm Wow, so many answers and so much theory. I will try to wend my way through all of it and answer what people have posted.

I do completely understand that there is no magic and how any advantage would be arbitraged away. It is just that I am trying to understand that this outside of general bromides and certainties by using a simple example. In the simplest of investment analysis, while a buyer and seller have to arrive at a price, I am starting from the idea that the price to book (the net equity of the firm) ratio is not going to adjust much based on paying a cash dividend to the shareholders. If that starting premise is true (and why would it not be), then I would think my example holds.

So can someone please explain why, in the example I provided, why in this short time period of the dividend declaration and payment, would the P/B change?
Go back and read my prior post for a simple example. A serious fundamental investor will not assign the same P/B to cash likely to become a dividend as he or she would for a profitable franchise.
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OverseasBH
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Re: Dividend irrelevance for individual securities

Post by OverseasBH »

alex_686 wrote: Wed Dec 07, 2022 2:04 pm
OverseasBH wrote: Wed Dec 07, 2022 1:17 pm Perhaps the difference in what we mean shows up with your Wikipedia reference. I understand that for a single asset, its book value is its purchase price less depreciation. But that is not what the "book" in the P/B ratio is discussing, is it?
Yes, this is exactly how you calculate book value. Now, I will grant that this is a tricky subject because 2 different disciplines using the same word for slightly different things.

First, where are you getting the "net value" of the company?

If you are getting it from the annual statement then that is coming from the accountants. The company buys equipment and you put that purchase price on the book as a asset, less depreciation. Nice solid hard numbers. Accountants are not allowed to fiddle with the books and increase the value of something or forget to depreciate something.

If you are not getting the book value from the annual statements then things get tricker. I assume it is from some investment website where they are using the term fast and loose. In which case they probably mean some version of Market Capitalization. Or you may be running across some fundamental stock analysis.

As a test just look at a couple of stock. You have intangible heavy Microsoft with a B/P of 11, John Deere with has lots of plant and equipment with a B/P of 6, and asset heavy Bank of America at 1.4. You can figure this out yourself. Maybe, sort of.

Here is my one cavate. I am used to looking at adjusted financial numbers. There is a fairly standard set of procedures to strip away the noise of annual statements and just present the meat of the situation. For example, you always strip out cash when doing a economic analysis of the actual company. I mean, it is basically a asset sitting on the books that is doing nothing. This methodology is deeply embedded in my brain. I don't know how many times I had to review the methodology for my tests.
I took out another book from the garage "The Analysis and Use of Financial Statements (White, Sondhi, Fried), which defines book value / share:
This ratio represents the equity of the firm (common equity less preferred shares at liquidation value) on a per-share basis.
so it seems that the B is P/B is the net equity of the firm, inclusive of all assets and liabilities.
alex_686
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

OverseasBH wrote: Thu Dec 08, 2022 5:26 am I took out another book from the garage "The Analysis and Use of Financial Statements (White, Sondhi, Fried), which defines book value / share:
This ratio represents the equity of the firm (common equity less preferred shares at liquidation value) on a per-share basis.
so it seems that the B is P/B is the net equity of the firm, inclusive of all assets and liabilities.
Right. But we are talking about Accounting Equity, not the value of the company.

In accounting Equity is more or less a plug number. That is, you can not directly measure it but rather it is the left over amount that is calculated, or "plugged" into the books to get things to balance. But out any balance sheet and you will find that:

Assets - Liabilities = Equity

Where assets and liabilities are defined by accounting measure, not market measures.

See the next post on why this matters.

So back to you - what do you think Assets and Net Equity actually mean?
Last edited by alex_686 on Thu Dec 08, 2022 1:15 pm, edited 1 time in total.
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alex_686
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

Logan Roy wrote: Wed Dec 07, 2022 6:11 pm A friend's gym business buys equipment from a firm. Relatively simple business. You could have an office, a factory, some skilled labour. So I looked at their P/B in order to work out: should you acquire this business yourself, or would it be cheaper to recreate it? And that's what you can answer with P/B.
Would the equipment show up on the balance sheet? Maybe yes, maybe no.

A classic example were airlines back in the 80s. About 1/2 of them would buy their aircraft. The planes would show up on their balance statement as a asset and their financing would should up as a liability. The other half would lease their aircraft. Since the aircraft were leased, and not purchased, they were treated 100% as a expenses. No planes in the book in this case. So the book value would be reported at lower level than the airline financing them.

Now, from a economic perspective there is no real difference between buying a airplane with credit or leasing a airplane. Cashflows and cost of financing are about the same. However the choice does have a pretty big impact on how the Income Statement and Balance Sheet looks like. If you wanted to compare airline A with airline B to see which one was actually doing better you had to make a fair number of adjustments.
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Logan Roy
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Re: Dividend irrelevance for individual securities

Post by Logan Roy »

alex_686 wrote: Thu Dec 08, 2022 1:14 pm
Logan Roy wrote: Wed Dec 07, 2022 6:11 pm A friend's gym business buys equipment from a firm. Relatively simple business. You could have an office, a factory, some skilled labour. So I looked at their P/B in order to work out: should you acquire this business yourself, or would it be cheaper to recreate it? And that's what you can answer with P/B.
Would the equipment show up on the balance sheet? Maybe yes, maybe no.

A classic example were airlines back in the 80s. About 1/2 of them would buy their aircraft. The planes would show up on their balance statement as a asset and their financing would should up as a liability. The other half would lease their aircraft. Since the aircraft were leased, and not purchased, they were treated 100% as a expenses. No planes in the book in this case. So the book value would be reported at lower level than the airline financing them.

Now, from a economic perspective there is no real difference between buying a airplane with credit or leasing a airplane. Cashflows and cost of financing are about the same. However the choice does have a pretty big impact on how the Income Statement and Balance Sheet looks like. If you wanted to compare airline A with airline B to see which one was actually doing better you had to make a fair number of adjustments.
Good point. And perhaps demonstrates that if these metrics have much use today, it's probably only as ways to estimate broad market sentiment, perhaps only at extremes.

To an extent luckily, when looking at a small private business, you usually have to work it out yourself. So I suppose the question you're trying to answer (how much would it cost to recreate this business?) finds its way into the estimate by how you calculate it.
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Re: Dividend irrelevance for individual securities

Post by OverseasBH »

alex_686 wrote: Thu Dec 08, 2022 1:06 pm
OverseasBH wrote: Thu Dec 08, 2022 5:26 am I took out another book from the garage "The Analysis and Use of Financial Statements (White, Sondhi, Fried), which defines book value / share:
This ratio represents the equity of the firm (common equity less preferred shares at liquidation value) on a per-share basis.
so it seems that the B is P/B is the net equity of the firm, inclusive of all assets and liabilities.
Right. But we are talking about Accounting Equity, not the value of the company.

In accounting Equity is more or less a plug number. That is, you can not directly measure it but rather it is the left over amount that is calculated, or "plugged" into the books to get things to balance. But out any balance sheet and you will find that:

Assets - Liabilities = Equity

Where assets and liabilities are defined by accounting measure, not market measures.

See the next post on why this matters.

So back to you - what do you think Assets and Net Equity actually mean?
Yes, OK. The only reason this got sidetracked was you were asserting cash was not included in the P/B ratio i was using, which we hopefully can now agree is not true, as it must be.

As to the proper measure for security evaluation, I am not saying P/B is the best but for my simple example, it served the purpose, as it is readily available and book is less subject to manipulation and uncertainty than, for example, earnings in the P/E ratio.

I need to get back to all the other responses now to see if anyone actually worked the numbers on my example.
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Re: Dividend irrelevance for individual securities

Post by burritoLover »

OverseasBH wrote: Fri Dec 09, 2022 5:35 am I need to get back to all the other responses now to see if anyone actually worked the numbers on my example.
I think the thing you are missing is that the market arbitrages away the benefit of the dividend which means the price will drop by the dividend amount per share excluding all other pricing action. It doesn't have to square with the new book value.
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Re: Dividend irrelevance for individual securities

Post by exodusNH »

burritoLover wrote: Fri Dec 09, 2022 5:59 am
OverseasBH wrote: Fri Dec 09, 2022 5:35 am I need to get back to all the other responses now to see if anyone actually worked the numbers on my example.
I think the thing you are missing is that the market arbitrages away the benefit of the dividend which means the price will drop by the dividend amount per share excluding all other pricing action. It doesn't have to square with the new book value.
It's actually not "the market" that arbitrages the value.

FINRA mandates that the price be adjusted downward and all open orders be adjusted as well. E.g. stock is $10.50. Expected dividend: $0.50. You put in a limit buy for $10. When the stock is adjusted down, your order will not fire. Your $10 order is dropped to $9.50.

This is why the discussion is so tiring: https://www.finra.org/rules-guidance/ru ... rules/5330
A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01), as follows...
Dividends are misunderstood. They are literally moving money from bank A that you have a claim in to Bank B that you also have a claim on.

It doesn't help that the size of the dividend is usually within the normal market movements. The price movement from the dividend just looks like more of that noise.

Of course when a dividend is bigger than normal, everyone freaks out and posts viewtopic.php?t=129142&sid=38642bef3f59 ... d67588cd9e.

As if somehow a $20 dividend drops the value but a $0.25 one doesn't.
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Re: Dividend irrelevance for individual securities

Post by Nowizard »

Our view differs from those who speak negatively about dividend investing. Dividends are nothing more to us than another factor involved with a particular stock or fund such as Alpha, Beta, PE, etc. Dividends may not be a specific reason to select a stock or fund for many but neither are they a reason to eliminate them. Some may have excellent reasons for selecting them, as well. There are numerous things such as annuities, for example, that are generally questioned that have a place for some based on their circumstances. The same applies to dividends.

Tim
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Re: Dividend irrelevance for individual securities

Post by burritoLover »

exodusNH wrote: Fri Dec 09, 2022 7:54 am
burritoLover wrote: Fri Dec 09, 2022 5:59 am
OverseasBH wrote: Fri Dec 09, 2022 5:35 am I need to get back to all the other responses now to see if anyone actually worked the numbers on my example.
I think the thing you are missing is that the market arbitrages away the benefit of the dividend which means the price will drop by the dividend amount per share excluding all other pricing action. It doesn't have to square with the new book value.
It's actually not "the market" that arbitrages the value.

FINRA mandates that the price be adjusted downward and all open orders be adjusted as well. E.g. stock is $10.50. Expected dividend: $0.50. You put in a limit buy for $10. When the stock is adjusted down, your order will not fire. Your $10 order is dropped to $9.50.

This is why the discussion is so tiring: https://www.finra.org/rules-guidance/ru ... rules/5330
Sorry, that is not what that means. The rule you posted there is so investors don't get screwed when they have an open order before the ex-div date because the price will drop due to market action - it is not the cause of a drop in price (which would make no sense whatsoever - buyers and sellers determine how a stock is priced).
Last edited by burritoLover on Fri Dec 09, 2022 8:27 am, edited 1 time in total.
exodusNH
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Re: Dividend irrelevance for individual securities

Post by exodusNH »

Nowizard wrote: Fri Dec 09, 2022 8:13 am Our view differs from those who speak negatively about dividend investing. Dividends are nothing more to us than another factor involved with a particular stock or fund such as Alpha, Beta, PE, etc. Dividends may not be a specific reason to select a stock or fund for many but neither are they a reason to eliminate them. Some may have excellent reasons for selecting them, as well. There are numerous things such as annuities, for example, that are generally questioned that have a place for some based on their circumstances. The same applies to dividends.

Tim
Dividends are neither bad nor good. How people view them is another story. Rational Reminder has discussed research that shows people treat them as a different source of return -- more like interest on savings rather than the movement of money from one pocket to another.

Specifically seeking out dividend stocks or funds reduces diversity and increases risk in a way that's not compensated.

As for annuities, SPIA and MYGA are generally well regarded around here. Other annuities are almost always a suboptimal choice.
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Re: Dividend irrelevance for individual securities

Post by dbr »

Nowizard wrote: Fri Dec 09, 2022 8:13 am Our view differs from those who speak negatively about dividend investing. Dividends are nothing more to us than another factor involved with a particular stock or fund such as Alpha, Beta, PE, etc. Dividends may not be a specific reason to select a stock or fund for many but neither are they a reason to eliminate them. Some may have excellent reasons for selecting them, as well. There are numerous things such as annuities, for example, that are generally questioned that have a place for some based on their circumstances. The same applies to dividends.

Tim
This is the essence of the discussion. People do not speak negatively about dividend investing. People do speak negatively about having wrong ideas about dividend investing. One would think, for example, that mistaking dividends for free money would be a rare fallacy. And yet that comes up all the time.

When the conversation is shifted from what amounts to getting free money to a discussion of how to pick stocks or stock funds then it is necessary to be open minded and examine facts and examine personal preferences. At this point it is true that the existence of dividends hardly is a reason to categorically reject the investment. There is still an open door to whether or not the preference to get dividends makes sense. It might be that dividends as a selection criterion makes sense or that it does not stand up to examination. That is decided on the merits. Taking dividends as a mechanism to withdraw money from a portfolio can be a practice that makes sense or it may be a purpose that is better or as well served by various other mechanism. That also is decided on the merits. In many cases the proposed merits of withdrawal by dividend don't stand up to examination, and in other cases they do. The tax consequences of dividends are what they are. This also can be decided on the merits.

What people should legitimately address is whether or not any preferences in particular are valid, make sense, and are helpful or that they are not.

To me the abiding mystery is how commonly one has not started with the helpful and comprehensive concept of return and then gone down into how dividends work in that context. Doing that saves a lot of misconception. It may be that this originates in simple experience with interest bearing cash accounts where the interest is the return and the difference is not recognized as one moves to equity investing. But lots of "dividend investors" are people who do understand how things work and have reasonable reasons for investment choices made.
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Re: Dividend irrelevance for individual securities

Post by Riprap »

exodusNH wrote: Fri Dec 09, 2022 7:54 am Dividends are misunderstood. They are literally moving money from bank A that you have a claim in to Bank B that you also have a claim on.
When the cash is in bank A, the shareholder has no control over it. When the cash is in bank B, the shareholder has total control.

Big difference!
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Re: Dividend irrelevance for individual securities

Post by Nowizard »

Interesting responses that add and make sense. The comment about starting with return is one that is also frequently discussed, fairly commonly from the perspective of "past results do not reflect future results." Does this comment hold in all circumstances, or are there reasons to include past performance, particularly for diversified and long established funds in selection of investments? More directly related to this thread is that total return is influenced by dividends as well if using total return as a factor in choices.

Tim
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Re: Dividend irrelevance for individual securities

Post by dbr »

Nowizard wrote: Fri Dec 09, 2022 9:28 am Interesting responses that add and make sense. The comment about starting with return is one that is also frequently discussed, fairly commonly from the perspective of "past results do not reflect future results." Does this comment hold in all circumstances, or are there reasons to include past performance, particularly for diversified and long established funds in selection of investments? More directly related to this thread is that total return is influenced by dividends as well if using total return as a factor in choices.

Tim
Return is a concept used to tally and understand what an investment has done, is doing, and might be estimated to do in the future. It is just a concept used to take all the behavior of investments into account. Using the concept says nothing about how to estimate future results; it just says that if you do that then do it by talking about return. Total return is not just influenced by dividends. By the definition dividends are part of the return and are included in the calculation along with changes in share value. In some cases, such as a savings account, the interest paid is the return. The point is to get past that simple idea and also take account of the value of the holding as increased or decreased by changes in prices, by reinvestment and in the presence of contributions and withdrawals.

A perfect example of the kind of thing you see when you look at return, contributions, and withdrawals in general is any of the planning models for investing and retirement.

Finally, applying the concept of return to talk about investments does not preclude also looking at what the dividends are, have been, or might be. It also does not preclude asking if dividend properties are a useful way to select investments. What the use of a return concept does do is allow a person to understand the results of selecting investments on dividend properties, if that is what one is interested in.

I actually don't like positing the opposite of dividend investing as being total return investing because using the idea of return is done in order to understand what investments are doing. This is then applied in any way a person wants to make use of it. Probably the actual opposite of dividend investing would be total market index fund investing in which one does not choose investments for the dividends paid but rather just chooses to hold shares of everything. What the return is would be the way to decide what one has accomplished by the choice.

An entirely different topic that comes up is stock picking. That topic is different because the conversation features all the ways in which dividends indicate something about how the company is managed and what the success of the company might be. But in that case also, attending to the return is a good way to measure the outcome.
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

Nowizard wrote: Fri Dec 09, 2022 8:13 am Our view differs from those who speak negatively about dividend investing. Dividends are nothing more to us than another factor involved with a particular stock or fund such as Alpha, Beta, PE, etc. Dividends may not be a specific reason to select a stock or fund for many but neither are they a reason to eliminate them. Some may have excellent reasons for selecting them, as well. There are numerous things such as annuities, for example, that are generally questioned that have a place for some based on their circumstances. The same applies to dividends.
On this, plus your comment about past predicting the future.

Dividends are not a factor. Or at least not a very good factor. A good factor has casual explanative powers. i.e., this factor has acted this way in the past under circumstances X doing Y. Also, stocks with the same factor should act the same way.

Dividends as a factor fail both. There is no good reason why dividend stocks should act a better way. To be more precise, it is not a parsimonious answer. i.e., there is always a better answer in the sense that there is a answer out there which is both simpler and has more statical power. Next, dividend stocks do not have a consistent character. Dividend stock X should act more like Dividend Stock Y then the total stock market. Expect they don't. Once again there is always a more parsimonious answer out there.
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Re: Dividend irrelevance for individual securities

Post by dbr »

alex_686 wrote: Fri Dec 09, 2022 9:45 am
Nowizard wrote: Fri Dec 09, 2022 8:13 am Our view differs from those who speak negatively about dividend investing. Dividends are nothing more to us than another factor involved with a particular stock or fund such as Alpha, Beta, PE, etc. Dividends may not be a specific reason to select a stock or fund for many but neither are they a reason to eliminate them. Some may have excellent reasons for selecting them, as well. There are numerous things such as annuities, for example, that are generally questioned that have a place for some based on their circumstances. The same applies to dividends.
On this, plus your comment about past predicting the future.

Dividends are not a factor. Or at least not a very good factor. A good factor has casual explanative powers. i.e., this factor has acted this way in the past under circumstances X doing Y. Also, stocks with the same factor should act the same way.

Dividends as a factor fail both. There is no good reason why dividend stocks should act a better way. To be more precise, it is not a parsimonious answer. i.e., there is always a better answer in the sense that there is a answer out there which is both simpler and has more statical power. Next, dividend stocks do not have a consistent character. Dividend stock X should act more like Dividend Stock Y then the total stock market. Expect they don't. Once again there is always a more parsimonious answer out there.
It might be worth discussing what the language "involved with" is supposed to mean. I think it is supposed to mean explaining return. One can also ask if by return we mean the expected return or that also means return as a statistical variable so that we can also try to explain risk.

I would argue that selecting on dividends is meaningfully explanatory regarding what the future dividends might be.
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Re: Dividend irrelevance for individual securities

Post by alex_686 »

dbr wrote: Fri Dec 09, 2022 10:03 am It might be worth discussing what the language "involved with" is supposed to mean. I think it is supposed to mean explaining return. One can also ask if by return we mean the expected return or that also means return as a statistical variable so that we can also try to explain risk.

I would argue that selecting on dividends is meaningfully explanatory regarding what the future dividends might be.
I would then ask why knowing future dividends is important and what can you do with that knowledge beyond tax preperation.

And this may be a nit, but not "expected returns" because expected returns is a forward looking estimate. Rather I am talking about statistical power, that is decomposing prior period returns and determining what drives risk and returns.

Can we explain Total Return? Growth? Volatility? Chance of Bankruptcy? Over or under-performance in a bull or bear market? How other dividend stocks differ? How non-dividend stocks differ? The answer is no.

The power of the dividend factor is slightly higher than the name factor. i.e., Does the company's name start with A-O or P-Z but not much.

Now Dividend stocks tend to be strong in the Value and/or Quality factor. Which takes us back to parsimonious factors. Value and Quality gives you a higher signal. There are lots of Value and Quality companies that don't issue dividends.

The example I tend to give is trying to determine a person's sex by the length of their hair. It kind of works, women tend to have longer hair then men. But there are better methods out there.
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Re: Dividend irrelevance for individual securities

Post by dbr »

alex_686 wrote: Fri Dec 09, 2022 11:57 am
dbr wrote: Fri Dec 09, 2022 10:03 am It might be worth discussing what the language "involved with" is supposed to mean. I think it is supposed to mean explaining return. One can also ask if by return we mean the expected return or that also means return as a statistical variable so that we can also try to explain risk.

I would argue that selecting on dividends is meaningfully explanatory regarding what the future dividends might be.
I would then ask why knowing future dividends is important and what can you do with that knowledge beyond tax preperation.

That would be one point of my comment. The answer to what people, not me nor you presumably, would do with it is that they would predict how much income they are going to have that they can spend because in this conversation it is a practice for some to set one's portfolio withdrawals at what the dividend payments are.

Expected return is not a forward looking statistic in and of itself. Expected is just double talk for the average* of the return data in the same way as risk is double talk for the standard deviation of a set of return data. It can be made into a forward looking statistic if we take it to be an estimator of the mean of a hypothetical future distribution of returns, if one is thinking of the analysis that way.

*There is always a discussion if we mean by the average the arithmetic mean of a set of returns or the CAGR thought of as a type of average, which it is. Presumably when one computes a mean of past returns to use as an estimator for the mean of that hypothetical distribution it would be the arithmetic mean because that is what makes sense to use as an estimator.
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Re: Dividend irrelevance for individual securities

Post by Ed 2 »

dbr wrote: Mon Dec 05, 2022 9:13 am
exodusNH wrote: Mon Dec 05, 2022 9:09 am
dbr wrote: Mon Dec 05, 2022 7:31 am
exodusNH wrote: Mon Dec 05, 2022 7:12 am
Ed 2 wrote: Mon Dec 05, 2022 4:59 am

So is your paycheck
The difference, of course, is that a paycheck, assuming you aren't the sole business owner, actually increases your wealth.

A dividend merely changes the composition of it. A dividend is no different than taking $10 from your savings account, paying the government $1.50 and depositing the net $8.50 in your checking account.
It would seem that the concept that a dividend is not a paycheck might lie at the heart of all the discussion about this.

As far as the performance of individual companies, if I were to invest in one the last thing I would want would be that the company forces me to take back part of the proceeds rather than investing in growing the enterprise. I would not have invested there if I did not think they could make better use of my money than I can. And, if for some reason I want to reduce how much of my assets are involved there, I would just sell some shares. But, I admit I don't invest in individual stocks and probably don't know much about it. It could be that dividend paying companies are bid up to higher prices than one's that don't pay dividends. It is true that failing companies that cut the dividend crash on the market.
I was trying to avoid going down the well-worn rabbit hole discussion.
Guilty as charged. I'll shut up now. What we really need is a bot that cancels any posting that talks about dividends.
Why not? Give me your dividends if you don’t need them .
I just started ;)
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Re: Dividend irrelevance for individual securities

Post by dkturner »

alex_686 wrote: Fri Dec 09, 2022 9:45 am
Nowizard wrote: Fri Dec 09, 2022 8:13 am Our view differs from those who speak negatively about dividend investing. Dividends are nothing more to us than another factor involved with a particular stock or fund such as Alpha, Beta, PE, etc. Dividends may not be a specific reason to select a stock or fund for many but neither are they a reason to eliminate them. Some may have excellent reasons for selecting them, as well. There are numerous things such as annuities, for example, that are generally questioned that have a place for some based on their circumstances. The same applies to dividends.
On this, plus your comment about past predicting the future.

Dividends are not a factor. Or at least not a very good factor. A good factor has casual explanative powers. i.e., this factor has acted this way in the past under circumstances X doing Y. Also, stocks with the same factor should act the same way.

Dividends as a factor fail both. There is no good reason why dividend stocks should act a better way. To be more precise, it is not a parsimonious answer. i.e., there is always a better answer in the sense that there is a answer out there which is both simpler and has more statical power. Next, dividend stocks do not have a consistent character. Dividend stock X should act more like Dividend Stock Y then the total stock market. Expect they don't. Once again there is always a more parsimonious answer out there.
If you visit Kenneth French’s website, at Dartmouth College, you can look at the history of dividend payments and total return going back to 1928. When I hear the frequently repeated mantra that “dividends don’t matter” I smile and recall the results of French’s research, and am reminded of the old adage that some phenomena work in practice - but not in theory.😄

French has determined that from 1928 through 2021 the lowest paying 30% of dividend stocks had total annualized returns of 9.6% while the highest paying 30% of dividend stocks had total returns of 11%. If you break this 94 year period into two equal sub periods the results are the same for each period, namely that higher dividend paying stocks have produced higher total returns. This may simply be the “value premium” in disguise. I prefer to call the value premium the higher dividend premium in disguise.

An interesting side note. Non-dividend paying stocks have had total returns that were 1.4 percentage point per year lower than dividend paying stocks for the full 94 year period. However when you look at the two sub periods, non-dividend paying stocks returned 3.4 percentage points per year less than dividend paying stocks for 1928-1974, but 7/10 of 1 percentage point per year MORE than dividend paying stocks for 1975-2021.
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Re: Dividend irrelevance for individual securities

Post by burritoLover »

dkturner wrote: Sat Dec 10, 2022 9:55 am
alex_686 wrote: Fri Dec 09, 2022 9:45 am
Nowizard wrote: Fri Dec 09, 2022 8:13 am Our view differs from those who speak negatively about dividend investing. Dividends are nothing more to us than another factor involved with a particular stock or fund such as Alpha, Beta, PE, etc. Dividends may not be a specific reason to select a stock or fund for many but neither are they a reason to eliminate them. Some may have excellent reasons for selecting them, as well. There are numerous things such as annuities, for example, that are generally questioned that have a place for some based on their circumstances. The same applies to dividends.
On this, plus your comment about past predicting the future.

Dividends are not a factor. Or at least not a very good factor. A good factor has casual explanative powers. i.e., this factor has acted this way in the past under circumstances X doing Y. Also, stocks with the same factor should act the same way.

Dividends as a factor fail both. There is no good reason why dividend stocks should act a better way. To be more precise, it is not a parsimonious answer. i.e., there is always a better answer in the sense that there is a answer out there which is both simpler and has more statical power. Next, dividend stocks do not have a consistent character. Dividend stock X should act more like Dividend Stock Y then the total stock market. Expect they don't. Once again there is always a more parsimonious answer out there.
If you visit Kenneth French’s website, at Dartmouth College, you can look at the history of dividend payments and total return going back to 1928. When I hear the frequently repeated mantra that “dividends don’t matter” I smile and recall the results of French’s research, and am reminded of the old adage that some phenomena work in practice - but not in theory.😄

French has determined that from 1928 through 2021 the lowest paying 30% of dividend stocks had total annualized returns of 9.6% while the highest paying 30% of dividend stocks had total returns of 11%. If you break this 94 year period into two equal sub periods the results are the same for each period, namely that higher dividend paying stocks have produced higher total returns. This may simply be the “value premium” in disguise. I prefer to call the value premium the higher dividend premium in disguise.

An interesting side note. Non-dividend paying stocks have had total returns that were 1.4 percentage point per year lower than dividend paying stocks for the full 94 year period. However when you look at the two sub periods, non-dividend paying stocks returned 3.4 percentage points per year less than dividend paying stocks for 1928-1974, but 7/10 of 1 percentage point per year MORE than dividend paying stocks for 1975-2021.
Ben Felix ran a 5-factor regression on the same high dividend data. So, from a factor perspective, the fact that the stock was a dividend payer had no relevance to explaining their performance.
Ben Felix RR episode 201 wrote:So, it's the same thing with dividends, you can go onto Ken French's website, download the series for the high dividend to price index and run five factor regression with, again, data available for free on Ken French's website. So, I did that for International Developed from 1990 through 2021, and for US, both high dividend indexes from July 1963 through December 2021, and using five factor regression I found alphas statistically indistinguishable from zero. So, in other words, market beta, company size, relative price, profitability and investment explained 100% of the returns of a portfolio formed on dividends, which is what you'd expect.
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Re: Dividend irrelevance for individual securities

Post by dkturner »

burritoLover wrote: Sat Dec 10, 2022 10:15 am
dkturner wrote: Sat Dec 10, 2022 9:55 am
This may simply be the “value premium” in disguise.
Ben Felix RR episode 201 wrote:So, it's the same thing with dividends, you can go onto Ken French's website, download the series for the high dividend to price index and run five factor regression with, again, data available for free on Ken French's website. So, I did that for International Developed from 1990 through 2021, and for US, both high dividend indexes from July 1963 through December 2021, and using five factor regression I found alphas statistically indistinguishable from zero. So, in other words, market beta, company size, relative price, profitability and investment explained 100% of the returns of a portfolio formed on dividends, which is what you'd expect.
True, but you may have missed the sentence where I said: “This may simply be the ‘value premium’ in disguise.”

So you’re saying that a retail investor can buy a fund like the Vanguard High Dividend Fund, or ETF, and get a portfolio optimized for market beta, company size, relative price, profitability and investment all in one place? How would this compare to traditional “value” funds, which could be (and are) created using all kinds of screens?
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Re: Dividend irrelevance for individual securities

Post by burritoLover »

dkturner wrote: Sat Dec 10, 2022 1:31 pm
burritoLover wrote: Sat Dec 10, 2022 10:15 am
dkturner wrote: Sat Dec 10, 2022 9:55 am
This may simply be the “value premium” in disguise.
Ben Felix RR episode 201 wrote:So, it's the same thing with dividends, you can go onto Ken French's website, download the series for the high dividend to price index and run five factor regression with, again, data available for free on Ken French's website. So, I did that for International Developed from 1990 through 2021, and for US, both high dividend indexes from July 1963 through December 2021, and using five factor regression I found alphas statistically indistinguishable from zero. So, in other words, market beta, company size, relative price, profitability and investment explained 100% of the returns of a portfolio formed on dividends, which is what you'd expect.
True, but you may have missed the sentence where I said: “This may simply be the ‘value premium’ in disguise.”

So you’re saying that a retail investor can buy a fund like the Vanguard High Dividend Fund, or ETF, and get a portfolio optimized for market beta, company size, relative price, profitability and investment all in one place? How would this compare to traditional “value” funds, which could be (and are) created using all kinds of screens?
No, I didn't miss that but what I also read was your statement: "I prefer to call the value premium the higher dividend premium in disguise". What that 5-factor regression means is that differences in returns for the high dividend set can be explained by the five factors alone and not any additional factor that could be attributed to these companies being dividend payers. Which means you can better target factor exposures (such as value) by not arbitrarily excluding non-dividend payers.
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Re: Dividend irrelevance for individual securities

Post by dkturner »

burritoLover wrote: Sun Dec 11, 2022 6:32 am
dkturner wrote: Sat Dec 10, 2022 1:31 pm
burritoLover wrote: Sat Dec 10, 2022 10:15 am
dkturner wrote: Sat Dec 10, 2022 9:55 am
This may simply be the “value premium” in disguise.
Ben Felix RR episode 201 wrote:So, it's the same thing with dividends, you can go onto Ken French's website, download the series for the high dividend to price index and run five factor regression with, again, data available for free on Ken French's website. So, I did that for International Developed from 1990 through 2021, and for US, both high dividend indexes from July 1963 through December 2021, and using five factor regression I found alphas statistically indistinguishable from zero. So, in other words, market beta, company size, relative price, profitability and investment explained 100% of the returns of a portfolio formed on dividends, which is what you'd expect.

True, but you may have missed the sentence where I said: “This may simply be the ‘value premium’ in disguise.”

So you’re saying that a retail investor can buy a fund like the Vanguard High Dividend Fund, or ETF, and get a portfolio optimized for market beta, company size, relative price, profitability and investment all in one place? How would this compare to traditional “value” funds, which could be (and are) created using all kinds of screens?
No, I didn't miss that but what I also read was your statement: "I prefer to call the value premium the higher dividend premium in disguise". What that 5-factor regression means is that differences in returns for the high dividend set can be explained by the five factors alone and not any additional factor that could be attributed to these companies being dividend payers. Which means you can better target factor exposures (such as value) by not arbitrarily excluding non-dividend payers.
Thanks, got it.

The reason I asked is I’m looking to add some “value” equity exposure to my IRA portfolio. I have been comparing the Vanguard Equity Income Fund (presumably an all dividend portfolio) and the Vanguard Value Index Fund (includes non-dividend equities).
Portfolio Visualizer does a 30 year comparison of these two funds. Their data shows that the Equity Income Fund has had a higher total return, lower standard deviation, higher Sharpe and Sortino ratios and a lower market correlation for the last 30 year period. I have always favored Wellington Management Company funds (in my tax deferred portfolio) and am leaning towards using the Equity Income Fund. Most of my equity exposure is in my taxable account, where I use only broad market index funds.
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burritoLover
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Re: Dividend irrelevance for individual securities

Post by burritoLover »

dkturner wrote: Sun Dec 11, 2022 8:21 am
burritoLover wrote: Sun Dec 11, 2022 6:32 am
dkturner wrote: Sat Dec 10, 2022 1:31 pm
burritoLover wrote: Sat Dec 10, 2022 10:15 am
dkturner wrote: Sat Dec 10, 2022 9:55 am
This may simply be the “value premium” in disguise.


True, but you may have missed the sentence where I said: “This may simply be the ‘value premium’ in disguise.”

So you’re saying that a retail investor can buy a fund like the Vanguard High Dividend Fund, or ETF, and get a portfolio optimized for market beta, company size, relative price, profitability and investment all in one place? How would this compare to traditional “value” funds, which could be (and are) created using all kinds of screens?
No, I didn't miss that but what I also read was your statement: "I prefer to call the value premium the higher dividend premium in disguise". What that 5-factor regression means is that differences in returns for the high dividend set can be explained by the five factors alone and not any additional factor that could be attributed to these companies being dividend payers. Which means you can better target factor exposures (such as value) by not arbitrarily excluding non-dividend payers.
Thanks, got it.

The reason I asked is I’m looking to add some “value” equity exposure to my IRA portfolio. I have been comparing the Vanguard Equity Income Fund (presumably an all dividend portfolio) and the Vanguard Value Index Fund (includes non-dividend equities).
Portfolio Visualizer does a 30 year comparison of these two funds. Their data shows that the Equity Income Fund has had a higher total return, lower standard deviation, higher Sharpe and Sortino ratios and a lower market correlation for the last 30 year period. I have always favored Wellington Management Company funds (in my tax deferred portfolio) and am leaning towards using the Equity Income Fund. Most of my equity exposure is in my taxable account, where I use only broad market index funds.
Vanguard index value funds tend to be more meat and potatoes value funds that focus solely on price to book. The Equity Income fund in question is an actively managed fund that has other screens for consistent dividend payers and such. Personally, I would look at DFA or Avantis for value funds where target multiple factors by different means (via momentum in rebalancing for example).
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Re: Dividend irrelevance for individual securities

Post by abuss368 »

Ed 2 wrote: Mon Dec 05, 2022 4:59 am
Artsypenguin wrote: Sun Dec 04, 2022 7:01 am Dividends are also tax negative.
So is your paycheck
Hi Ed 2 -

Excellent reference and point? I have been working on building a growing passive income stream with dividends by using total market index funds. In fact, each year end, I look at what the funds total dividends for the year first and then the ending value. It works.

I recall many interviews where Jack Bogle often referred to this as “income risk” to a retiree. He said you have to pay your bills and live. Mr. Bogle would tell a story about walking to your mailbox, opening it, and reaching in for your dividend checks. Honest down to earth common sense.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Riprap
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Re: Dividend irrelevance for individual securities

Post by Riprap »

WSJ had an article in last Wednesday's edition about Southwest Airlines resuming their dividend. They will payout $428 million per year.

For the irrelevance proponents, why do you think Southwest doesn't get it?

Airlines are notorious for going in and out of bankruptcy. Creditors are fist in line for any cash in bankruptcy, leaving shareholders with nothing. In my view, a periodic dividend is necessary to make sure shareholders are rewarded.

What am I missing?
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Re: Dividend irrelevance for individual securities

Post by vineviz »

Riprap wrote: Sun Dec 11, 2022 9:18 am WSJ had an article in last Wednesday's edition about Southwest Airlines resuming their dividend. They will payout $428 million per year.

For the irrelevance proponents, why do you think Southwest doesn't get it?

Dividend irrelevance does not, by definition, imply that "dividends are bad".

If a company has no productive use for excess cash, even the strongest "irrelevance proponent" will want to see that cash returned to shareholders.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Dividend irrelevance for individual securities

Post by abuss368 »

For anyone that does not like or want dividends, please send ‘em this way.

I will gladly pay the tax and enjoy the passive income!😂🤣

Best wishes.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Dividend irrelevance for individual securities

Post by Riprap »

vineviz wrote: Sun Dec 11, 2022 11:59 am If a company has no productive use for excess cash, even the strongest "irrelevance proponent" will want to see that cash returned to shareholders.
So...dividends are relevant. :beer
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Re: Dividend irrelevance for individual securities

Post by vineviz »

Riprap wrote: Sun Dec 11, 2022 12:40 pm
vineviz wrote: Sun Dec 11, 2022 11:59 am If a company has no productive use for excess cash, even the strongest "irrelevance proponent" will want to see that cash returned to shareholders.
So...dividends are relevant. :beer
No
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Dividend irrelevance for individual securities

Post by Ed 2 »

abuss368 wrote: Sun Dec 11, 2022 8:46 am
Ed 2 wrote: Mon Dec 05, 2022 4:59 am
Artsypenguin wrote: Sun Dec 04, 2022 7:01 am Dividends are also tax negative.
So is your paycheck
Hi Ed 2 -

Excellent reference and point? I have been working on building a growing passive income stream with dividends by using total market index funds. In fact, each year end, I look at what the funds total dividends for the year first and then the ending value. It works.

I recall many interviews where Jack Bogle often referred to this as “income risk” to a retiree. He said you have to pay your bills and live. Mr. Bogle would tell a story about walking to your mailbox, opening it, and reaching in for your dividend checks. Honest down to earth common sense.

Best.
Tony
+1

My goal- to pay more taxes when I won my game meaning I will have so much so I don’t need to withdraw anything and use only dividend distributions with lower taxable rates . Those who don’t understand this statement I am not going to explain;)
I used to argue with my CPA many years ago when she was asking me why I contribute into my Roth IRA and not going to open regular IRA instead. I told he many times that by the time I am 50 I will have my taxable portfolio the size that will pay me in dividends that I don’t need to work and I told her by the time I decide to retire I will pay so much in taxes so having nice Roth IRA portion will be useful to me , she was laughing with disbelief. Who is laughing now?
I just don’t understand those who fixated on paying less in tax and not thinking instead to have enough and not fretting of paying taxes.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
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Re: Dividend irrelevance for individual securities

Post by abuss368 »

Riprap wrote: Sun Dec 11, 2022 12:40 pm
vineviz wrote: Sun Dec 11, 2022 11:59 am If a company has no productive use for excess cash, even the strongest "irrelevance proponent" will want to see that cash returned to shareholders.
So...dividends are relevant. :beer
I would respond with: it depends on an investor’s individual needs. No two investors are alike.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Dividend irrelevance for individual securities

Post by abuss368 »

Ed 2 wrote: Sun Dec 11, 2022 2:26 pm
abuss368 wrote: Sun Dec 11, 2022 8:46 am
Ed 2 wrote: Mon Dec 05, 2022 4:59 am
Artsypenguin wrote: Sun Dec 04, 2022 7:01 am Dividends are also tax negative.
So is your paycheck
Hi Ed 2 -

Excellent reference and point? I have been working on building a growing passive income stream with dividends by using total market index funds. In fact, each year end, I look at what the funds total dividends for the year first and then the ending value. It works.

I recall many interviews where Jack Bogle often referred to this as “income risk” to a retiree. He said you have to pay your bills and live. Mr. Bogle would tell a story about walking to your mailbox, opening it, and reaching in for your dividend checks. Honest down to earth common sense.

Best.
Tony
+1

My goal- to pay more taxes when I won my game meaning I will have so much so I don’t need to withdraw anything and use only dividend distributions with lower taxable rates . Those who don’t understand this statement I am not going to explain;)
I used to argue with my CPA many years ago when she was asking me why I contribute into my Roth IRA and not going to open regular IRA instead. I told he many times that by the time I am 50 I will have my taxable portfolio the size that will pay me in dividends that I don’t need to work and I told her by the time I decide to retire I will pay so much in taxes so having nice Roth IRA portion will be useful to me , she was laughing with disbelief. Who is laughing now?
I just don’t understand those who fixated on paying less in tax and not thinking instead to have enough and not fretting of paying taxes.
Well said Ed! Many years ago we made the decision, after a lot of review and consideration of our financial circumstances, to convert the Traditional IRAs to Roth IRAs. In hindsight, this was a smart decision.

This will avoid RMDs and also taxable income, which will lower the Medicare premiums.

Roth IRAs provide so much benefits.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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