What's the deal with dividend funds?

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HanSolo
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Re: What's the deal with dividend funds?

Post by HanSolo »

burritoLover wrote: Tue Jun 21, 2022 10:07 am Except your example leaves out the fact that a company flush with cash is a lower credit risk and therefore the bond interest would be lower for that company than the company that paid dividends. Therefore, you can't say that the bond holders of the non-dividend paying company would be better off over the life of the company. In fact, a company flush with cash that it had no use for wouldn't need to issue bonds at all. Another false equivalency.
In fact, I don't know what the net effect of those considerations is on bondholders (or other creditors... I left that out). I'm only saying that at the time of bankruptcy, bondholders (and other creditors) are senior to common shareholders in the capital structure, making it far less likely that common shareholders will receive the cash from the company treasury than if it had already been paid out to them via dividends.

Try to figure out why bondholders (and/or other creditors) are being paid cash that's there only in scenario (a) and not (b). If you think equity investors, as a group, did equally as well in scenarios (a) and (b), then that's the equivalent of saying that scenario (a) generated "free money" for bondholders (and/or other creditors).

But, be advised... someone warned us not to believe in free money.
Da5id wrote: Tue Jun 21, 2022 10:16 am Also unclear how it would go into bankruptcy with apparently the companies entire lifetime accrued earnings sitting in a bank account just waiting to be paid to bond holders. Scenario realism at its best? Generally companies that don't pay out earnings (via dividends or buybacks) don't behave that way, but rather (more or less successfully) use the money to grow their business or acquire things.
There's nothing wrong with a company keeping a lot of cash in its treasury.

If you want, you can run scenario (c), where the cash is squandered on unwise investments. Scenario realism, if you will.
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Da5id
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Re: What's the deal with dividend funds?

Post by Da5id »

HanSolo wrote: Tue Jun 21, 2022 10:31 am
Da5id wrote: Tue Jun 21, 2022 10:16 am Also unclear how it would go into bankruptcy with apparently the companies entire lifetime accrued earnings sitting in a bank account just waiting to be paid to bond holders. Scenario realism at its best? Generally companies that don't pay out earnings (via dividends or buybacks) don't behave that way, but rather (more or less successfully) use the money to grow their business or acquire things.
There's nothing wrong with a company keeping a lot of cash in its treasury.

If you want, you can run scenario (c), where the cash is squandered on unwise investments. Scenario realism, if you will.
It is impossible to run such a scenario, as the made up company with made up behaviors has no data to do it. And you can surely make up hypotheticals to prove anything you desire. Why do that though? "If you follow my contrived thought experiment it will (implicitly) suggest xyz about the real world" seems weak to me, though obviously you seem to feel it is rhetorically compelling.
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HanSolo
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Re: What's the deal with dividend funds?

Post by HanSolo »

Da5id wrote: Tue Jun 21, 2022 10:37 am
HanSolo wrote: Tue Jun 21, 2022 10:31 am
Da5id wrote: Tue Jun 21, 2022 10:16 am Also unclear how it would go into bankruptcy with apparently the companies entire lifetime accrued earnings sitting in a bank account just waiting to be paid to bond holders. Scenario realism at its best? Generally companies that don't pay out earnings (via dividends or buybacks) don't behave that way, but rather (more or less successfully) use the money to grow their business or acquire things.
There's nothing wrong with a company keeping a lot of cash in its treasury.

If you want, you can run scenario (c), where the cash is squandered on unwise investments. Scenario realism, if you will.
It is impossible to run such a scenario, as the made up company with made up behaviors has no data to do it. And you can surely make up hypotheticals to prove anything you desire. Why do that though? "If you follow my contrived thought experiment it will (implicitly) suggest xyz about the real world" seems weak to me, though obviously you seem to feel it is rhetorically compelling.
It's not that difficult to construct a scenario with hypothetical data. This one doesn't even need a supercomputer.

If you want to make the assertion that equity investors could come out exactly the same (down to the penny) in scenarios (a) and (b), it would be interesting to know how you think that could even be possible.

In any case, I stand by my assertion that if bondholders (and/or other creditors) are receiving cash in the non-dividend-payer case that wouldn't be in the treasury had it been paid out in dividends, then there must be some difference to equity investors; otherwise, that would be implying that the bondholders (and/or other creditors) are getting free money.
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burritoLover
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Re: What's the deal with dividend funds?

Post by burritoLover »

HanSolo wrote: Tue Jun 21, 2022 10:31 am
burritoLover wrote: Tue Jun 21, 2022 10:07 am Except your example leaves out the fact that a company flush with cash is a lower credit risk and therefore the bond interest would be lower for that company than the company that paid dividends. Therefore, you can't say that the bond holders of the non-dividend paying company would be better off over the life of the company. In fact, a company flush with cash that it had no use for wouldn't need to issue bonds at all. Another false equivalency.
In fact, I don't know what the net effect of those considerations is on bondholders (or other creditors... I left that out). I'm only saying that at the time of bankruptcy, bondholders (and other creditors) are senior to common shareholders in the capital structure, making it far less likely that common shareholders will receive the cash from the company treasury than if it had already been paid out to them via dividends.

Try to figure out why bondholders (and/or other creditors) are being paid cash that's there only in scenario (a) and not (b). If you think equity investors, as a group, did equally as well in scenarios (a) and (b), then that's the equivalent of saying that scenario (a) generated "free money" for bondholders (and/or other creditors).

But, be advised... someone warned us not to believe in free money.
I still don't get what your point is. You've been shown how these two scenarios are not remotely equivalent yet seem to want to draw some conclusion from it nonetheless. Why don't you spell out exactly what you are saying about dividends? Are you saying they are "free money"?
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Re: What's the deal with dividend funds?

Post by Da5id »

HanSolo wrote: Tue Jun 21, 2022 10:43 am
Da5id wrote: Tue Jun 21, 2022 10:37 am
HanSolo wrote: Tue Jun 21, 2022 10:31 am
Da5id wrote: Tue Jun 21, 2022 10:16 am Also unclear how it would go into bankruptcy with apparently the companies entire lifetime accrued earnings sitting in a bank account just waiting to be paid to bond holders. Scenario realism at its best? Generally companies that don't pay out earnings (via dividends or buybacks) don't behave that way, but rather (more or less successfully) use the money to grow their business or acquire things.
There's nothing wrong with a company keeping a lot of cash in its treasury.

If you want, you can run scenario (c), where the cash is squandered on unwise investments. Scenario realism, if you will.
It is impossible to run such a scenario, as the made up company with made up behaviors has no data to do it. And you can surely make up hypotheticals to prove anything you desire. Why do that though? "If you follow my contrived thought experiment it will (implicitly) suggest xyz about the real world" seems weak to me, though obviously you seem to feel it is rhetorically compelling.
It's not that difficult to construct a scenario with hypothetical data. This one doesn't even need a supercomputer.

If you want to make the assertion that equity investors could come out exactly the same (down to the penny) in scenarios (a) and (b), it would be interesting to know how you think that could even be possible (without free money, that is).
What, precisely, will you prove by making up your own data to run through a scenario to prove a conclusion that you've already made? I can make up data that shows, literally, anything. So can you. I don't believe there is anything is achieved by that, you apparently do.
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HanSolo
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Re: What's the deal with dividend funds?

Post by HanSolo »

burritoLover wrote: Tue Jun 21, 2022 10:48 am I still don't get what your point is. You've been shown how these two scenarios are not remotely equivalent yet seem to want to draw some conclusion from it nonetheless. Why don't you spell out exactly what you are saying about dividends? Are you saying they are "free money"?
I'm saying that it's false to claim that dividends give no benefit to equity investors. My assertion is that if you run the numbers over the entire public life of a company (from IPO to bankruptcy), what you'll find is that the dividend payments caused an increased return to equity investors, not as free money, but at the expense of not being available for other purposes (one example being paying bondholders or other creditors during bankruptcy).

I agree that dividends are not free money. But it's equally true that, had the cash been kept in the treasury (as some companies do), the payment of that to bondholders (and/or other creditors) isn't free money either. There is no free money in any scenario whatsoever. The point is that the scenarios are not equivalent; in one scenario, someone comes out better, and in another scenario, someone else comes out better. Claiming that everyone always comes out equally well no matter how the company pays out its cash is false.
Da5id wrote: Tue Jun 21, 2022 10:49 am I can make up data that shows, literally, anything.
OK. It would be interesting to see the made-up data for two scenarios that exemplify my (a) and (b) where equity investors come out exactly the same in both scenarios. I think that's impossible. But that's what the "dividends make no difference to equity investors (other than taxes)" crowd seems to be claiming.
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Re: What's the deal with dividend funds?

Post by Statistical »

BGeste wrote: Tue Jun 21, 2022 10:23 am No one knows what the future will bring; however, if you believe things revert to the mean and P/E's are an indication, considering the last decade, value / dividend funds are more likely to outperform in the future.
Yeah really no evidence of that. VEIPX vs VFINX since 1998 has underperformed and that includes such events as the 2008 financial crash and 2000 dotcom boom & bust. Those are two of the longest directly comparable index funds.

https://www.portfoliovisualizer.com/fun ... bols=VFINX

The modern broader market comparison would be VTI vs VYM. VTI outperforms.
https://www.portfoliovisualizer.com/fun ... ymbols=VTI

There is no hard definition of value and individual funds selection for value will be different and even change over time. If value consistently outperforms you should be able to point to some long running value funds that outperform the broader market over 20+ years. VEIPX as an example didn't and it is the longest running value index funds that still exists that I am aware of.

Now since 2012 SCHD has outperformed VTI but I would point out 10 years isn't very long and the other five largest dividend focused ETFs underperformed VTI so any (temporary?) outperformance would seem to be based on stock selection not an inherent advantage to high dividend stocks universally.
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Re: What's the deal with dividend funds?

Post by burritoLover »

HanSolo wrote: Tue Jun 21, 2022 11:03 am
burritoLover wrote: Tue Jun 21, 2022 10:48 am I still don't get what your point is. You've been shown how these two scenarios are not remotely equivalent yet seem to want to draw some conclusion from it nonetheless. Why don't you spell out exactly what you are saying about dividends? Are you saying they are "free money"?
I'm saying that it's false to claim that dividends give no benefit to equity investors. My assertion is that if you run the numbers over the entire public life of a company (from IPO to bankruptcy), what you'll find is that the dividend payments caused an increased return to equity investors, not as free money, but at the expense of not being available for other purposes (one example being paying bondholders or other creditors during bankruptcy).

I agree that dividends are not free money. But it's equally true that, had the cash been kept in the treasury (as some companies do), the payment of that to bondholders (and/or other creditors) isn't free money either. There is no free money in any scenario whatsoever. The point is that the scenarios are not equivalent; in one scenario, someone comes out better, and in another scenario, someone else comes out better. Claiming that everyone always comes out equally well no matter how the company pays out its cash is false.
No, they are simply not comparable scenarios. It is a whole lot of nothing burger.
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Re: What's the deal with dividend funds?

Post by BGeste »

Statistical wrote: Tue Jun 21, 2022 11:07 am
BGeste wrote: Tue Jun 21, 2022 10:23 am No one knows what the future will bring; however, if you believe things revert to the mean and P/E's are an indication, considering the last decade, value / dividend funds are more likely to outperform in the future.
Yeah really no evidence of that. VEIPX vs VFINX since 1998 has underperformed and that includes such events as the 2008 financial crash and 2000 dotcom boom & bust. Those are two of the longest directly comparable index funds.

https://www.portfoliovisualizer.com/fun ... bols=VFINX

The modern broader market comparison would be VTI vs VYM. VTI outperforms.
https://www.portfoliovisualizer.com/fun ... ymbols=VTI

There is no hard definition of value and individual funds selection for value will be different and even change over time. If value consistently outperforms you should be able to point to some long running value funds that outperform the broader market.

Now since 2012 SCHD has outperformed VTI but I would point out 10 years isn't very long and the other five largest dividend focused ETFs underperformed VTI so any (temporary?) outperformance would seem to be based on stock selection not an inherent advantage to high dividend stocks universally.
The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt

Your measure of how funds have performed over the last 10 years is choosing a period where growth has outperformed value. History shows us that this is likely to change.
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Re: What's the deal with dividend funds?

Post by Da5id »

HanSolo wrote: Tue Jun 21, 2022 11:03 am OK. It would be interesting to see the made-up data for two scenarios that exemplify my (a) and (b) where equity investors come out exactly the same in both scenarios. I think that's impossible. But that's what the "dividends make no difference to equity investors (other than taxes)" crowd seems to be claiming.
I think the claim is more that in the "total return=dividends+capital appreciation" formulation dividends aren't special. Dividends are surely part of total return, so they "make a difference". I think the dispute (and the genesis of the thread) is more whether you should deviate from the total market to seek a higher dividend payout than the market offers. Or perhaps the dispute is if you choose to so deviate what benefits (other than comfort about not having to sell shares) accrue.

Whether a company should currently be returning capital to its investors (via dividends or buybacks) or should be reinvesting it (or building up cash for future needs) is a decision that management and the board should always be evaluating. Scenarios where "a company can give money to its investors or basically take it out back and burn it", which is your scenario c, aren't illuminating. Of course management can make bad decisions. They can also pay dividends just to meet market expectation when the business can't afford to do so, and when reinvestment would be a better decision. And the company may go under as a result.
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Re: What's the deal with dividend funds?

Post by tibbitts »

BGeste wrote: Tue Jun 21, 2022 11:24 am The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt

Your measure of how funds have performed over the last 10 years is choosing a period where growth has outperformed value. History shows us that this is likely to change.
It's difficult to believe that a clear majority of all the Bogleheads who are much smarter than I am have looked at the same evidence you cite and yet still favors broad market index funds (with maybe a small dose of SCV or REITs added in a few cases.) Of course maybe they're just telling the rest of us that so they'll make more money with their closet value/dividend strategy.
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Re: What's the deal with dividend funds?

Post by dbr »

Da5id wrote: Tue Jun 21, 2022 11:29 am
I think the claim is more that in the "total return=dividends+capital appreciation" formulation dividends aren't special. Dividends are surely part of total return, so they "make a difference". I think the dispute (and the genesis of the thread) is more whether you should deviate from the total market to seek a higher dividend payout than the market offers. Or perhaps the dispute is if you choose to so deviate what benefits (other than comfort about not having to sell shares) accrue.
Yes, over the years the discussion has mostly been questions from people or proposals from people that one might or should concentrate their stock holdings in stocks selected in some way for dividend paying. That might be by selecting a high dividend yield fund, or a dividend appreciation fund, or some kind of fund that has dividend in the name. It can also be questions or proposals that one hold a selection of individual stocks chosen for something having to do with dividends.

The reasons why people wonder or choose such holdings are myriad. Some of them are just plain wrong, some of them are misunderstandings or unsupported assumptions, some of the rationale is valid whether for psychological, practical, or finance analytical reasons that are real. Getting it all sorted out is problematic.

This topic is also one of those that for some reasons comes up over and over, generating the same discussion over and over. Apparently it is the nature of an online forum that there are always people who will just ask or propose something and not go to the trouble to read the discussion that is already there. The people who wish to reply are always welcome to do so.
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Re: What's the deal with dividend funds?

Post by BGeste »

tibbitts wrote: Tue Jun 21, 2022 11:35 am
BGeste wrote: Tue Jun 21, 2022 11:24 am The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt

Your measure of how funds have performed over the last 10 years is choosing a period where growth has outperformed value. History shows us that this is likely to change.
It's difficult to believe that a clear majority of all the Bogleheads who are much smarter than I am have looked at the same evidence you cite and yet still favors broad market index funds (with maybe a small dose of SCV or REITs added in a few cases.) Of course maybe they're just telling the rest of us that so they'll make more money with their closet value/dividend strategy.
I retired at 51, four years ago, with a significant portfolio. I live very comfortably on dividends and interest only.

My dividend income has increased more than CPI every year including 2020. I reinvest the dividends I don't spend. As a result, I never worry about market fluctuations.

My portfolio consists of broad based index funds with a meaningful tilt towards dividend paying funds and ETFs. A value tilt.

The evidence regarding value outperforming growth and US market indexes over the past 50 years is irrefutable. Look for yourself at Portfolio Visualizer.

My strategy works for me. It is based on solid fact and evidence and most importantly on actual experience. Others can choose what works for them.
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HanSolo
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Re: What's the deal with dividend funds?

Post by HanSolo »

burritoLover wrote: Tue Jun 21, 2022 11:24 am No, they are simply not comparable scenarios. It is a whole lot of nothing burger.
More like a "nothing burrito". It's wrong to invalidate my argument without reason. Perhaps the issue is that you don't understand the example. That's fine with me.

Bottom line: if a company has cash that it can either pay out as a dividend or retain in its treasury, then at bankruptcy time, the benefit of that cash goes to the bondholders/creditors if they retained it; and the benefit of that cash goes to the shareholders if they instead paid it out as a dividend. The result for equity investors is different in the two cases, for that reason.

If you want to claim (as you keep claiming) that equity holders come out the same whether the dividend was paid or not, then you have to account for why, in the non-dividend case, the bondholders/creditors get the benefit of that cash while the shareholders came out the same. Yours is a "free money" argument for bondholders/creditors, and I disagree with it.
Da5id wrote: Tue Jun 21, 2022 11:29 am I think the claim is more that in the "total return=dividends+capital appreciation" formulation dividends aren't special. Dividends are surely part of total return, so they "make a difference". I think the dispute (and the genesis of the thread) is more whether you should deviate from the total market to seek a higher dividend payout than the market offers. Or perhaps the dispute is if you choose to so deviate what benefits (other than comfort about not having to sell shares) accrue.
Thanks fine if you're talking about general investment strategy. I have no problem with that. I'm just pointing out that the assertion that dividends make no difference to equity investors (the claim that keeps getting made, over and over again) is false... as I demonstrate above (see "Bottom line").
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Re: What's the deal with dividend funds?

Post by Boglegrappler »

The reality is that if you own an S&P 500 index fund, somewhere around 80% of the companies pay a dividend, which is then paid out to you by the index fund. This is a bit different than saying companies representing 80% of your value are paying dividends, because that isn't the case. As has been discussed, many of most valuable companies in the index are non dividend payers (but they typically are high growers). But even those who eschew dividends are likely to be holding plenty of companies that pay them.

The trap you will fall into if you go to a "dividend" fund is that it is sought by investors looking for above-market average yields, which is likely to lead to stocks with less than average growth prospects. If you look for really high yields, you'll find companies with more risky businesses and capital structures (high debt levels).
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Re: What's the deal with dividend funds?

Post by Riprap »

dbr wrote: Tue Jun 21, 2022 11:45 amThis topic is also one of those that for some reasons comes up over and over, generating the same discussion over and over.
You know what they say about insantiy... :wink:
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Re: What's the deal with dividend funds?

Post by dbr »

There is a reason Fama and French and lots of other researchers made a project of identifying the properties of investments that predict returns. Of all the possibilities investigated certain one's have surfaced and dividend paying in some form has not surfaced as such a good predictor as other things. Part of that story is that there seems to be a lot of correlation between some proposed dividend factor and the value factor, so the dividend factor, such as it is, turns out not to be interesting. In the case a person's objective is to concentrate stock holdings in subsets that have more return, there is a ton of research on that, but it does not seem most people who like dividends have much interest in going there.

As always, if a person likes dividends that is certainly an available choice.
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Re: What's the deal with dividend funds?

Post by TN_Boy »

BGeste wrote: Tue Jun 21, 2022 11:48 am
tibbitts wrote: Tue Jun 21, 2022 11:35 am
BGeste wrote: Tue Jun 21, 2022 11:24 am The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt

Your measure of how funds have performed over the last 10 years is choosing a period where growth has outperformed value. History shows us that this is likely to change.
It's difficult to believe that a clear majority of all the Bogleheads who are much smarter than I am have looked at the same evidence you cite and yet still favors broad market index funds (with maybe a small dose of SCV or REITs added in a few cases.) Of course maybe they're just telling the rest of us that so they'll make more money with their closet value/dividend strategy.
I retired at 51, four years ago, with a significant portfolio. I live very comfortably on dividends and interest only.

My dividend income has increased more than CPI every year including 2020. I reinvest the dividends I don't spend. As a result, I never worry about market fluctuations.

My portfolio consists of broad based index funds with a meaningful tilt towards dividend paying funds and ETFs. A value tilt.

The evidence regarding value outperforming growth and US market indexes over the past 50 years is irrefutable. Look for yourself at Portfolio Visualizer.

My strategy works for me. It is based on solid fact and evidence and most importantly on actual experience. Others can choose what works for them.
Your response is a great example of how people talk past each other on this topic. This is the key point:
I retired at 51, with a significant portfolio. I live very comfortably on dividends and interest only.
Emphasis mine.

And a number of folks have made similar remarks in these threads, which is basically "I have a lot of money and I just live off the dividends and interest." Yeah, I believe that.

And the response back, which seems not to matter, is that "if you have a whole lot of money, you can live off interest + dividends + equity sales" too.

With "a significant portfolio" and a low enough withdrawal rate, nobody has to worry about market fluctuations. You just don't. Of course your strategy works. If you have enough money, almost anything works.

But your strategy working is unrelated to the fact you are living off dividends and interest; it is not a supporting argument for dividend investing. It is a supporting argument for a low withdrawal rate.

That's all people are saying. I like dividends just fine myself.

If my portfolio was big enough, I'd mostly live off dividends and interest, though I might do some tax management in taxable accounts.
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Re: What's the deal with dividend funds?

Post by burritoLover »

HanSolo wrote: Tue Jun 21, 2022 12:15 pm
burritoLover wrote: Tue Jun 21, 2022 11:24 am No, they are simply not comparable scenarios. It is a whole lot of nothing burger.
More like a "nothing burrito". It's wrong to invalidate my argument without reason. Perhaps the issue is that you don't understand the example. That's fine with me.

Bottom line: if a company has cash that it can either pay out as a dividend or retain in its treasury, then at bankruptcy time, the benefit of that cash goes to the bondholders/creditors if they retained it; and the benefit of that cash goes to the shareholders if they instead paid it out as a dividend. The result for equity investors is different in the two cases, for that reason.
You have one investor taking the dividend as cash while the other does nothing - that isn't a comparable scenario. If you want the non-dividend payer to do nothing, then the dividend payer investor must re-invest the dividend for that to be the equivalent. If the dividend investor is taking dividends as cash, then the non-dividend investor must sell the same amount. Both investors end up with the same net worth at the end. Do you not understand that you can't compare those investors otherwise? The result of the equity investor is EXACTLY THE SAME.

And your bond example is forced - since this is an all else equal example, both companies should have the same level of debt - but they don't. The company with cash could issue fewer bonds (or no bonds). Well, unless you force it to keep the cash and do nothing with while retaining the same level of debt - which, of course, means the companies are no longer comparable and neither are the bond investors. Not to mention the non-dividend payer has lower credit risk and can get a lower interest rate on the bond market. But keep forcing a square peg in a round hole and come to any conclusion you want.
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Re: What's the deal with dividend funds?

Post by dbr »

TN_Boy wrote: Tue Jun 21, 2022 12:43 pm
BGeste wrote: Tue Jun 21, 2022 11:48 am
tibbitts wrote: Tue Jun 21, 2022 11:35 am
BGeste wrote: Tue Jun 21, 2022 11:24 am The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt

Your measure of how funds have performed over the last 10 years is choosing a period where growth has outperformed value. History shows us that this is likely to change.
It's difficult to believe that a clear majority of all the Bogleheads who are much smarter than I am have looked at the same evidence you cite and yet still favors broad market index funds (with maybe a small dose of SCV or REITs added in a few cases.) Of course maybe they're just telling the rest of us that so they'll make more money with their closet value/dividend strategy.
I retired at 51, four years ago, with a significant portfolio. I live very comfortably on dividends and interest only.

My dividend income has increased more than CPI every year including 2020. I reinvest the dividends I don't spend. As a result, I never worry about market fluctuations.

My portfolio consists of broad based index funds with a meaningful tilt towards dividend paying funds and ETFs. A value tilt.

The evidence regarding value outperforming growth and US market indexes over the past 50 years is irrefutable. Look for yourself at Portfolio Visualizer.

My strategy works for me. It is based on solid fact and evidence and most importantly on actual experience. Others can choose what works for them.
Your response is a great example of how people talk past each other on this topic. This is the key point:
I retired at 51, with a significant portfolio. I live very comfortably on dividends and interest only.
Emphasis mine.

And a number of folks have made similar remarks in these threads, which is basically "I have a lot of money and I just live off the dividends and interest." Yeah, I believe that.

And the response back, which seems not to matter, is that "if you have a whole lot of money, you can live off interest + dividends + equity sales" too.

With "a significant portfolio" and a low enough withdrawal rate, nobody has to worry about market fluctuations. You just don't. Of course your strategy works. If you have enough money, almost anything works.

But your strategy working is unrelated to the fact you are living off dividends and interest; it is not a supporting argument for dividend investing. It is a supporting argument for a low withdrawal rate.

That's all people are saying. I like dividends just fine myself.

If my portfolio was big enough, I'd mostly live off dividends and interest, though I might do some tax management in taxable accounts.
One of the issues at discussion in all these dividend threads is the question of how and why certain things work or don't work. One imagines that people would be interested in that question, but it is not always so.
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Re: What's the deal with dividend funds?

Post by BGeste »

TN_Boy wrote: Tue Jun 21, 2022 12:43 pm
BGeste wrote: Tue Jun 21, 2022 11:48 am
tibbitts wrote: Tue Jun 21, 2022 11:35 am
BGeste wrote: Tue Jun 21, 2022 11:24 am The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt

Your measure of how funds have performed over the last 10 years is choosing a period where growth has outperformed value. History shows us that this is likely to change.
It's difficult to believe that a clear majority of all the Bogleheads who are much smarter than I am have looked at the same evidence you cite and yet still favors broad market index funds (with maybe a small dose of SCV or REITs added in a few cases.) Of course maybe they're just telling the rest of us that so they'll make more money with their closet value/dividend strategy.
I retired at 51, four years ago, with a significant portfolio. I live very comfortably on dividends and interest only.

My dividend income has increased more than CPI every year including 2020. I reinvest the dividends I don't spend. As a result, I never worry about market fluctuations.

My portfolio consists of broad based index funds with a meaningful tilt towards dividend paying funds and ETFs. A value tilt.

The evidence regarding value outperforming growth and US market indexes over the past 50 years is irrefutable. Look for yourself at Portfolio Visualizer.

My strategy works for me. It is based on solid fact and evidence and most importantly on actual experience. Others can choose what works for them.
Your response is a great example of how people talk past each other on this topic. This is the key point:
I retired at 51, with a significant portfolio. I live very comfortably on dividends and interest only.
Emphasis mine.

And a number of folks have made similar remarks in these threads, which is basically "I have a lot of money and I just live off the dividends and interest." Yeah, I believe that.

And the response back, which seems not to matter, is that "if you have a whole lot of money, you can live off interest + dividends + equity sales" too.

With "a significant portfolio" and a low enough withdrawal rate, nobody has to worry about market fluctuations. You just don't. Of course your strategy works. If you have enough money, almost anything works.

But your strategy working is unrelated to the fact you are living off dividends and interest; it is not a supporting argument for dividend investing. It is a supporting argument for a low withdrawal rate.

That's all people are saying. I like dividends just fine myself.

If my portfolio was big enough, I'd mostly live off dividends and interest, though I might do some tax management in taxable accounts.
I do agree my large portfolio gives me an advantage regarding my strategy of living on dividends and interest only. I live on my taxable accounts but most of my dividends are qualified and lots of my bond interest is from tax free muni funds. I will worry about retirement accounts after 59.5.

However, I am also advocating the value tilt that comes with many dividend paying funds. As I indicated my portfolio consists of broad based index with a meaningful tilt towards dividend / value funds and ETFs.

The evidence that Large Value has outperformed Large Growth and Large US indexes over the past 50 years is irrefutable. Look at Portfolio Visualizer. Also read Jeremy Siegel's Stocks for the Long Run regarding the value premium.

Value and dividend funds are more attractively priced right now and have certainly performed better during this downturn. No one knows what the future will bring, but the value / dividend tilt strategy can work very well for many investors.
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Re: What's the deal with dividend funds?

Post by Northern Flicker »

BGeste wrote: The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt.
Not necessarily. There are different strategies for selecting stocks for dividend funds or indices. SCHD has a moderate value and quality tilt. VIG has a quality tilt but no value tilt.
Last edited by Northern Flicker on Tue Jun 21, 2022 2:06 pm, edited 2 times in total.
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Re: What's the deal with dividend funds?

Post by TN_Boy »

BGeste wrote: Tue Jun 21, 2022 1:28 pm
TN_Boy wrote: Tue Jun 21, 2022 12:43 pm
BGeste wrote: Tue Jun 21, 2022 11:48 am
tibbitts wrote: Tue Jun 21, 2022 11:35 am
BGeste wrote: Tue Jun 21, 2022 11:24 am The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt

Your measure of how funds have performed over the last 10 years is choosing a period where growth has outperformed value. History shows us that this is likely to change.
It's difficult to believe that a clear majority of all the Bogleheads who are much smarter than I am have looked at the same evidence you cite and yet still favors broad market index funds (with maybe a small dose of SCV or REITs added in a few cases.) Of course maybe they're just telling the rest of us that so they'll make more money with their closet value/dividend strategy.
I retired at 51, four years ago, with a significant portfolio. I live very comfortably on dividends and interest only.

My dividend income has increased more than CPI every year including 2020. I reinvest the dividends I don't spend. As a result, I never worry about market fluctuations.

My portfolio consists of broad based index funds with a meaningful tilt towards dividend paying funds and ETFs. A value tilt.

The evidence regarding value outperforming growth and US market indexes over the past 50 years is irrefutable. Look for yourself at Portfolio Visualizer.

My strategy works for me. It is based on solid fact and evidence and most importantly on actual experience. Others can choose what works for them.
Your response is a great example of how people talk past each other on this topic. This is the key point:
I retired at 51, with a significant portfolio. I live very comfortably on dividends and interest only.
Emphasis mine.

And a number of folks have made similar remarks in these threads, which is basically "I have a lot of money and I just live off the dividends and interest." Yeah, I believe that.

And the response back, which seems not to matter, is that "if you have a whole lot of money, you can live off interest + dividends + equity sales" too.

With "a significant portfolio" and a low enough withdrawal rate, nobody has to worry about market fluctuations. You just don't. Of course your strategy works. If you have enough money, almost anything works.

But your strategy working is unrelated to the fact you are living off dividends and interest; it is not a supporting argument for dividend investing. It is a supporting argument for a low withdrawal rate.

That's all people are saying. I like dividends just fine myself.

If my portfolio was big enough, I'd mostly live off dividends and interest, though I might do some tax management in taxable accounts.
I do agree my large portfolio gives me an advantage regarding my strategy of living on dividends and interest only. I live on my taxable accounts but most of my dividends are qualified and lots of my bond interest is from tax free muni funds. I will worry about retirement accounts after 59.5.

However, I am also advocating the value tilt that comes with many dividend paying funds. As I indicated my portfolio consists of broad based index with a meaningful tilt towards dividend / value funds and ETFs.

The evidence that Large Value has outperformed Large Growth and Large US indexes over the past 50 years is irrefutable. Look at Portfolio Visualizer. Also read Jeremy Siegel's Stocks for the Long Run regarding the value premium.

Value and dividend funds are more attractively priced right now and have certainly performed better during this downturn. No one knows what the future will bring, but the value / dividend tilt strategy can work very well for many investors.
I can't go back and dig through all the research right now (I'll try and get to that later), but my strong recollection is that the "value factor" has sometimes outperformed, sometimes not. Smallcap value, for example, has underperformed for years, though it has partially risen from its slumber in recent months versus total stock market.

You could convince me that the value factor is a good thing, certainly not a bad thing, but you couldn't convince me it is always a good thing - it will underperform at times. Certainly a retirement with the core of the equity in a properly diversified set of large value stocks should work fine. I'd still tend to prefer a total market index, but a good large value portfolio .. sure.

I think a large value focus will not make a significant impact -- either way -- on the success of your retirement. You may disagree with this statement.
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Re: What's the deal with dividend funds?

Post by HanSolo »

burritoLover wrote: Tue Jun 21, 2022 1:23 pm You have one investor taking the dividend as cash while the other does nothing - that isn't a comparable scenario.
You completely misunderstood the example. I was not comparing what happens to one investor vs. another.

I wasn't comparing two companies either.

To make things simple, it's only one company. The company is deciding whether to pay out cash as a dividend, or retain the cash in the company treasury. What I'm comparing is the effect of making either decision -- that gives rise to two scenarios: (a) the cash is retained in the company treasury; or alternatively, (b) the cash is paid out as a dividend.

Get out a piece of paper. Draw symbols representing the company, the shareholders, and the bondholders/creditors. Draw a circle around the company, label it "C" (for "company"). Draw a circle around the shareholders, label it "S" (for "shareholders"). Draw a circle around the bondholders and all other creditors, label it "B" (for "bondholders/creditors").

So the question is, what is the effect of "C" (the company) on "S" (the shareholders, in the aggregate) and on "B" (the bondholders/creditors, in the aggregate)... and will the effects differ depending on the above-mentioned decision.

You keep claiming that the payment of a dividend has no effect on shareholders, in terms of the investments results delivered to them by virtue of their investment in the company. I'm saying that this claim is false.

The reason it's false is that, at the time of bankruptcy, group "B" comes out better in case (a) than in case (b), because in case (a), they get the cash that was retained, and in case (b), they don't. The advantage they get in case (a) has to be at someone's expense, and it's at the expense of group "S". And it's symmetrical -- group "S" comes out better in case (b) than in case (a), because in case (b), they received the dividend payment. It's simply a decision of the company, to retain the cash or pay it out as dividends, which has the effect at bankruptcy time of giving the advantage to either group "B" or group "S".

If we were to assume that your claim is true (that regardless of the dividend payment, the shareholders come out the same either way, in terms of their investment results), then that would be saying that group "S" comes out the same in case (a) as they do in case (b). But there's that inconvenient fact, that group "B" did better in case (a). If group "S" comes out the same in either case (as you claim), but group "B" comes out better in case (a) than in case (b), then we have a "free money" situation in case (a), that is, for the bondholders/creditors group ("B"). It appears to be free money because an upside is realized in case (a) (for group "B") with no downside for anyone. And, since we know that there's no such thing as free money, we must conclude that the premise (the claim that you made) was false.

Conclusion: It's not the case that whether dividends are paid or not has no effect on shareholder investment results.

I hope that clears that up. If there's some logical flaw in this, I'm open to hearing about it. But I don't think there is one.
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Tue Jun 21, 2022 12:15 pm
burritoLover wrote: Tue Jun 21, 2022 11:24 am No, they are simply not comparable scenarios. It is a whole lot of nothing burger.
More like a "nothing burrito". It's wrong to invalidate my argument without reason. Perhaps the issue is that you don't understand the example. That's fine with me.

Bottom line: if a company has cash that it can either pay out as a dividend or retain in its treasury, then at bankruptcy time, the benefit of that cash goes to the bondholders/creditors if they retained it; and the benefit of that cash goes to the shareholders if they instead paid it out as a dividend. The result for equity investors is different in the two cases, for that reason.

If you want to claim (as you keep claiming) that equity holders come out the same whether the dividend was paid or not, then you have to account for why, in the non-dividend case, the bondholders/creditors get the benefit of that cash while the shareholders came out the same. Yours is a "free money" argument for bondholders/creditors, and I disagree with it.
Da5id wrote: Tue Jun 21, 2022 11:29 am I think the claim is more that in the "total return=dividends+capital appreciation" formulation dividends aren't special. Dividends are surely part of total return, so they "make a difference". I think the dispute (and the genesis of the thread) is more whether you should deviate from the total market to seek a higher dividend payout than the market offers. Or perhaps the dispute is if you choose to so deviate what benefits (other than comfort about not having to sell shares) accrue.
Thanks fine if you're talking about general investment strategy. I have no problem with that. I'm just pointing out that the assertion that dividends make no difference to equity investors (the claim that keeps getting made, over and over again) is false... as I demonstrate above (see "Bottom line").
I'm replying to HanSolo, but my response is directed at all...

This example is only as relevant as your underlying assumptions about market efficiency. Dividends absolutely can "benefit" equity holders in a variety of examples, but that doesn't mean that, at current prices, dividend-paying stocks will outperform the total market by any metric. An efficient market will correctly value how much this "dividend benefit" is worth, making it irrelevant to anything actionable.

In other words, HanSolo might be right about the theory that dividends can benefit investors. But Da5id/burritoLover can still be right that this is irrelevant to any of us because the market already knows this.
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Re: What's the deal with dividend funds?

Post by HanSolo »

CuriousTacos wrote: Tue Jun 21, 2022 2:15 pm This example is only as relevant as your underlying assumptions about market efficiency. Dividends absolutely can "benefit" equity holders in a variety of examples, but that doesn't mean that, at current prices, dividend-paying stocks will outperform the total market by any metric.
There was nothing in my analysis that was relevant to predicting or estimating outperformance. I was simply showing how an oft-repeated claim was actually a false statement.

Even if it has no effect on market performance overall, false statements are still worth correcting, for the benefit of all forum members.
Last edited by HanSolo on Tue Jun 21, 2022 2:25 pm, edited 1 time in total.
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

BGeste wrote: Tue Jun 21, 2022 11:24 am The evidence that large value significantly outperformed large growth and the US market index over the last 50 years is clear. Go to Portfolio Visualizer and see for yourself. It is also clear that value funds and stocks pay more in dividends than growth and broad indexes. Dividend funds provide a value tilt

Your measure of how funds have performed over the last 10 years is choosing a period where growth has outperformed value. History shows us that this is likely to change.
Then why do you prefer dividend stocks/funds over value funds? I think the value factor is reasonably well supported (but should be described with modest expectations). Dividend funds have -at best- a weak loading on the value factor, and there isn't much good evidence that dividend yield adds much to the value factor.

In my opinion, the debate about value is completely separate from the debate about dividends since their overlap is less than many imply.
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Tue Jun 21, 2022 2:21 pm
CuriousTacos wrote: Tue Jun 21, 2022 2:15 pm This example is only as relevant as your underlying assumptions about market efficiency. Dividends absolutely can "benefit" equity holders in a variety of examples, but that doesn't mean that, at current prices, dividend-paying stocks will outperform the total market by any metric.
There was nothing in my analysis that was relevant to predicting or estimating outperformance. I was simply showing how an oft-repeated claim was actually a false statement.

Even if it has no effect on anyone's investment results, false statements are still worth correcting, for the benefit of all forum members.
Then this is a semantic miscommunication. Dividends are "relevant" to market participants' pricing of securities. Dividends are "irrelevant" to the expected risk and return if the market is efficient.

To argue anything actionable requires demonstrating whether the market is efficient w.r.t. pricing dividend stocks compared to all other stocks. This hypothetical between company A an B does not even attempt to address whether the market is efficient.
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Re: What's the deal with dividend funds?

Post by HanSolo »

CuriousTacos wrote: Tue Jun 21, 2022 2:25 pm Then this is a semantic miscommunication. Dividends are "relevant" to market participants' pricing of securities. Dividends are "irrelevant" to the expected risk and return if the market is efficient.
That's a big "if". Enron suddenly went to zero. If that happened to Berkshire, and I owned one share of BRK-A, then my entire investment is lost, because they never paid me any dividends. If they had paid me dividends (or, better yet, managed to pay a large special dividend before the collapse), then it would make a material difference in my investment results.

I'm not saying that this will predict anything about market performance. I'm only correcting the false notion that "the payment of dividends or not has no effect on equity investor results".

I didn't even get into the issues about there being times when it's strategically better for a company to retain earnings, and times when it's better to pay them out. Buffett said he prefers that the companies he owns pay out a dividend if they don't have any great investments to make with that money. Who am I to argue with Warren? If he likes receiving dividends, why shouldn't I?
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Re: What's the deal with dividend funds?

Post by Da5id »

HanSolo wrote: Tue Jun 21, 2022 2:41 pm
CuriousTacos wrote: Tue Jun 21, 2022 2:25 pm Then this is a semantic miscommunication. Dividends are "relevant" to market participants' pricing of securities. Dividends are "irrelevant" to the expected risk and return if the market is efficient.
That's a big "if". Enron suddenly went to zero. If that happened to Berkshire, and I owned one share of BRK-A, then my entire investment is lost, because they never paid me any dividends. If they had paid me dividends (or, better yet, managed to pay a large special dividend before the collapse), then it would make a material difference in my investment results.
You never seem to compare apples to apples. If you had sold BRK-A shares in the amount of the dividend you desired at the times you desired dividends, seems like your results would be as you like. Money taken off the table in advance of the company collapsing. And with custom dividend amounts that precisely suited your needs. If you didn't want dividends from your BRK, presumably you'd have reinvested them anyway. If you wanted to move money from BRK (say by reinvesting your dividends elsewhere) you could likewise have done that by selling bits of BRK and investing the money elsewhere. Huh.
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Re: What's the deal with dividend funds?

Post by Corvidae »

HanSolo wrote: Tue Jun 21, 2022 2:10 pm
Conclusion: It's not the case that whether dividends are paid or not has no effect on shareholder investment results.

I hope that clears that up. If there's some logical flaw in this, I'm open to hearing about it. But I don't think there is one.
As already mentioned, a stock buyback is another way to return value to shareholders. The company also could be purchased by another company (for stock and/or cash). Dividends are just one avenue to return value, and I don't think anyone is saying they are not a viable avenue. Assuming a terminal value of zero in your model is not very useful and obviously will not be supported empirically by the market portfolio or any other common benchmark. What you have shown is a tautology--nothing gained==nothing gained. Some may view that as a logical flaw, others not, but I don't think there is any actionable takeaway either way.
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Re: What's the deal with dividend funds?

Post by HanSolo »

Da5id wrote: Tue Jun 21, 2022 2:46 pm You never seem to compare apples to apples. If you had sold BRK-A shares in the amount of the dividend you desired at the times you desired dividends, seems like your results would be as you like. Money taken off the table in advance of the company collapsing. And with custom dividend amounts that precisely suited your needs. If you didn't want dividends from your BRK, presumably you'd have reinvested them anyway. If you wanted to move money from BRK (say by reinvesting your dividends elsewhere) you could likewise have done that by selling bits of BRK and investing the money elsewhere. Huh.
I'll assume you mean BRK-B, since I might not have that many shares of BRK-A to sell (maybe only one).

What you're saying may be true for an individual investor. What I'm talking about is the effect of a company on the equity investing community as a whole. I could sell my entire holding of Berkshire before the collapse and totally avoid any losses, but then someone else will eat the loss. What I'm saying is that if Berkshire had paid a dividend before that happening, then the net result to equity investors as a whole would be better (perhaps far better) than if they never paid any (which they aren't).

That's all I'm saying. You're correct that one investor can play their hand well and get an advantage over another. But equity investors as a group can come out ahead or behind depending on whether dividends are paid.
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Re: What's the deal with dividend funds?

Post by HanSolo »

Corvidae wrote: Tue Jun 21, 2022 2:50 pm As already mentioned, a stock buyback is another way to return value to shareholders. The company also could be purchased by another company (for stock and/or cash). Dividends are just one avenue to return value, and I don't think anyone is saying they are not a viable avenue.
That wasn't the assertion that I was examining.
Assuming a terminal value of zero in your model is not very useful
I'm not sure. What percentage of stocks eventually go to zero?

I'll assume you never owned individual airline stocks.
Last edited by HanSolo on Tue Jun 21, 2022 2:55 pm, edited 1 time in total.
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Re: What's the deal with dividend funds?

Post by burritoLover »

HanSolo wrote: Tue Jun 21, 2022 2:10 pm
burritoLover wrote: Tue Jun 21, 2022 1:23 pm You have one investor taking the dividend as cash while the other does nothing - that isn't a comparable scenario.
You completely misunderstood the example. I was not comparing what happens to one investor vs. another.

I wasn't comparing two companies either.

To make things simple, it's only one company. The company is deciding whether to pay out cash as a dividend, or retain the cash in the company treasury. What I'm comparing is the effect of making either decision -- that gives rise to two scenarios: (a) the cash is retained in the company treasury; or alternatively, (b) the cash is paid out as a dividend.

Get out a piece of paper. Draw symbols representing the company, the shareholders, and the bondholders/creditors. Draw a circle around the company, label it "C" (for "company"). Draw a circle around the shareholders, label it "S" (for "shareholders"). Draw a circle around the bondholders and all other creditors, label it "B" (for "bondholders/creditors").

So the question is, what is the effect of "C" (the company) on "S" (the shareholders, in the aggregate) and on "B" (the bondholders/creditors, in the aggregate)... and will the effects differ depending on the above-mentioned decision.

You keep claiming that the payment of a dividend has no effect on shareholders, in terms of the investments results delivered to them by virtue of their investment in the company. I'm saying that this claim is false.

The reason it's false is that, at the time of bankruptcy, group "B" comes out better in case (a) than in case (b), because in case (a), they get the cash that was retained, and in case (b), they don't. The advantage they get in case (a) has to be at someone's expense, and it's at the expense of group "S". And it's symmetrical -- group "S" comes out better in case (b) than in case (a), because in case (b), they received the dividend payment. It's simply a decision of the company, to retain the cash or pay it out as dividends, which has the effect at bankruptcy time of giving the advantage to either group "B" or group "S".

If we were to assume that your claim is true (that regardless of the dividend payment, the shareholders come out the same either way, in terms of their investment results), then that would be saying that group "S" comes out the same in case (a) as they do in case (b). But there's that inconvenient fact, that group "B" did better in case (a). If group "S" comes out the same in either case (as you claim), but group "B" comes out better in case (a) than in case (b), then we have a "free money" situation in case (a), that is, for the bondholders/creditors group ("B"). It appears to be free money because an upside is realized in case (a) (for group "B") with no downside for anyone. And, since we know that there's no such thing as free money, we must conclude that the premise (the claim that you made) was false.

Conclusion: It's not the case that whether dividends are paid or not has no effect on shareholder investment results.

I hope that clears that up. If there's some logical flaw in this, I'm open to hearing about it. But I don't think there is one.
Ok, let's just assume the two decisions are comparable. The company's decision to retain the cash makes it less risky so when the risk shows up (bankruptcy), the less risky investment puts those bondholders in a better position. What you are trying to say is that the bond investors with different levels of risk should have the same benefit when the risk shows up. That does not compute. It isn't a free money paradox. Equity investors don't have any claim to assets from a bankruptcy so the equity investor in both scenarios has the exact same risk level.
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Re: What's the deal with dividend funds?

Post by alex_686 »

BGeste wrote: Tue Jun 21, 2022 10:23 am No one knows what the future will bring; however, if you believe things revert to the mean and P/E's are an indication, considering the last decade, value / dividend funds are more likely to outperform in the future.
Why would one believe that things would revert to the mean? There is no theory to suggest that it might quite the contrary. And historically it never has expressed a reversion to mean.
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Tue Jun 21, 2022 2:41 pm I'm not saying that this will predict anything about market performance. I'm only correcting the false notion that "the payment of dividends or not has no effect on equity investor results".
Then I think you misunderstand what people mean by "the payment of dividends or not has no effect on equity investor results". It is reasonable to think the following phrases mean the same thing:

"the payment of dividends or not has no effect on equity investor results"
"the payment of dividends or not has no effect on expected market performance"

For anything actionable, I think they sound similar enough that you should probably be very careful to clarify before assuming otherwise.
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Re: What's the deal with dividend funds?

Post by Corvidae »

HanSolo wrote: Tue Jun 21, 2022 2:55 pm
Corvidae wrote: Tue Jun 21, 2022 2:50 pm As already mentioned, a stock buyback is another way to return value to shareholders. The company also could be purchased by another company (for stock and/or cash). Dividends are just one avenue to return value, and I don't think anyone is saying they are not a viable avenue.
That wasn't the assertion that I was examining.
Assuming a terminal value of zero in your model is not very useful
I'm not sure. What percentage of stocks eventually go to zero?

I'll assume you never owned individual airline stocks.
My full comment stated that your statement is a tautology. I included alternative ways to return value because you are saying, if we ignore these other ways (set them to zero), and set dividends to zero, and set terminal value to zero--that is, if we return nothing--then shareholders get nothing. This is true but not really saying anything. You also excluded "the market portfolio or any other common benchmark" from my comment. A model only concerned with stocks that have a terminal value of zero is not of general interest. Models are to be tested empirically. If you already set everything to zero, there is nothing to test.
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Re: What's the deal with dividend funds?

Post by HanSolo »

burritoLover wrote: Tue Jun 21, 2022 2:55 pm Ok, let's just assume the two decisions are comparable. The company's decision to retain the cash makes it less risky so when the risk shows up (bankruptcy), the less risky investment puts those bondholders in a better position. What you are trying to say is that the bond investors with different levels of risk should have the same benefit when the risk shows up. That does not compute. It isn't a free money paradox. Equity investors don't have any claim to assets from a bankruptcy so the equity investor in both scenarios has the exact same risk level.
A company with a market cap of a billion dollars has a million shares outstanding at $1000/share. They have a million in cash that they don't know what to do with.

Case (a). They retain it in the corporate treasury. The company has a sudden financial disaster and their stock goes to zero. Shareholders wind up with zero. Bondholders/creditors wind up with a million dollars to divide up among themselves.

Case (b). They pay it out as a dividend at $1/share. Then the stock goes to zero. The shareholders already have the million dollars ($1 for each share they owned). The bondholders/creditors don't have access to that money.

I agree that there is no free money. The money was earned by the company's operations. In case (a), the bondholders/creditors wound up with the money. In case (b), the shareholders got it.

Again, no free money. But you can see that the payment of the dividend provided a benefit to the shareholders in case (b).

That's why it's false to say that dividends never make a difference in equity investor results.
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Re: What's the deal with dividend funds?

Post by HanSolo »

Corvidae wrote: Tue Jun 21, 2022 3:02 pm My full comment stated that your statement is a tautology. I included alternative ways to return value because you are saying, if we ignore these other ways (set them to zero), and set dividends to zero, and set terminal value to zero--that is, if we return nothing--then shareholders get nothing. This is true but not really saying anything. You also excluded "the market portfolio or any other common benchmark" from my comment. A model only concerned with stocks that have a terminal value of zero is not of general interest. Models are to be tested empirically. If you already set everything to zero, there is nothing to test.
My analysis involved the effect of dividends on the equity investment community over the entire life of a company. That's why the endpoint is zero.

If you want to examine other scenarios, that's fine with me.

In that case, we may find that sometimes dividends affect equity investor returns and sometimes they don't. I'm just saying that it's not true that they don't at all. I don't see why saying that is controversial.
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Re: What's the deal with dividend funds?

Post by Da5id »

HanSolo wrote: Tue Jun 21, 2022 2:54 pm
Da5id wrote: Tue Jun 21, 2022 2:46 pm You never seem to compare apples to apples. If you had sold BRK-A shares in the amount of the dividend you desired at the times you desired dividends, seems like your results would be as you like. Money taken off the table in advance of the company collapsing. And with custom dividend amounts that precisely suited your needs. If you didn't want dividends from your BRK, presumably you'd have reinvested them anyway. If you wanted to move money from BRK (say by reinvesting your dividends elsewhere) you could likewise have done that by selling bits of BRK and investing the money elsewhere. Huh.
I'll assume you mean BRK-B, since I might not have that many shares of BRK-A to sell (maybe only one).

What you're saying may be true for an individual investor. What I'm talking about is the effect of a company on the equity investing community as a whole. I could sell my entire holding of Berkshire before the collapse and totally avoid any losses, but then someone else will eat the loss. What I'm saying is that if Berkshire had paid a dividend before that happening, then the net result to equity investors as a whole would be better (perhaps far better) than if they never paid any (which they aren't).
You have shifted your argument. To quote your original, bold added by me
HanSolo wrote: If that happened to Berkshire, and I owned one share of BRK-A, then my entire investment is lost, because they never paid me any dividends. If they had paid me dividends (or, better yet, managed to pay a large special dividend before the collapse), then it would make a material difference in my investment results.
I thought this was quite clearly a point from the perspective of your investment results. Which was what I was responding to. I actually don't care about the market as a whole, just results from the perspective on an investor. And if an investor wants to reduce the amount of money invested in a company, they can choose to not reinvest dividends or to "create a dividend" by periodically selling shares. Both address your issue about taking money off the table before a company collapses.

I'd also note that buybacks are an alternative way to return capital, and in the US they outstrip dividends by about 2:1 in terms of dollars.
Last edited by Da5id on Tue Jun 21, 2022 3:10 pm, edited 1 time in total.
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Re: What's the deal with dividend funds?

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CuriousTacos wrote: Tue Jun 21, 2022 3:02 pm
HanSolo wrote: Tue Jun 21, 2022 2:41 pm I'm not saying that this will predict anything about market performance. I'm only correcting the false notion that "the payment of dividends or not has no effect on equity investor results".
Then I think you misunderstand what people mean by "the payment of dividends or not has no effect on equity investor results". It is reasonable to think the following phrases mean the same thing:

"the payment of dividends or not has no effect on equity investor results"
"the payment of dividends or not has no effect on expected market performance"

For anything actionable, I think they sound similar enough that you should probably be very careful to clarify before assuming otherwise.
The word "expected" involves predictions. I wasn't saying anything about predictions. I was just talking about the mechanics of what actually happens, regardless of what anyone predicts. Predictions is a different topic that I'm not prepared to address.
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Re: What's the deal with dividend funds?

Post by HanSolo »

Da5id wrote: Tue Jun 21, 2022 3:08 pm You have shifted your argument. To quote your original, bold added by me
I shifted my argument from BRK-A to BRK-B because my example was owning one share of BRK-A, and you suggested that I "sell shares of BRK-A", which doesn't work for me if I own only one (remember that one share is about a quarter million dollars). And I don't know whether I'm allowed to own fractional shares of BRK-A.

I talked about "my investment results" in the case of BRK-A as an "existence proof", that the dividend can have a material effect on individual investor results in some case (which disproves the "never" assertion I was examining).
I thought this was quite clearly a point from the perspective of your investment results.
As I stated repeatedly, I was looking at it from the point of view of the investment results realized by the equity investment community as a whole, as a result of a company's actions.

I agree that an individual can work the results in his favor (e.g., by selling shares before a company goes bankrupt). That just leaves someone else holding the bag. I'm not saying there's anything wrong with that, I'm only saying that there's nothing false about conducting the analysis from the point of view of equity investors as a group. If you're not interested in that, that's fine.
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Re: What's the deal with dividend funds?

Post by alex_686 »

billaster wrote: Mon Jun 20, 2022 7:21 pm A lot of people cite the Modigliani-Miller Theorem without ever having read the two papers it is based on. They might be surprised to learn that it is only a simplified model of corporate finance and a model based on a lot of assumptions of perfection. Ignoring those assumptions might lead to wrong conclusions.
How so? Because I really don't think this is a fair statement.

Perfectly spherical inelastic cows in a vacuum do not exist yet physics college books routinely make the assumption that they do. Yet no one denies that Newtonian laws of motion are fundamental. Yet introduce the concept of friction or elasticity does not make the core concepts fall apart.

Yes, introducing inefficiencies does make the conversation more nuanced and complex.

For M&M here are 2 examples. M&M does not consider the impact of the tax shield when corporations issue debt. Nor does it consider the cost to issue new capital and I will note that issuing new equity is expensive and is doubly so during time of stress when you really need that capital. Do either of these complexities invalidate M&M? No, quite the opposite. You start with M&M and add these complexities to your model.
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Re: What's the deal with dividend funds?

Post by Da5id »

HanSolo wrote: Tue Jun 21, 2022 3:15 pm
Da5id wrote: Tue Jun 21, 2022 3:08 pm You have shifted your argument. To quote your original, bold added by me
I shifted my argument from BRK-A to BRK-B because my example was owning one share of BRK-A, and you suggested that I "sell shares of BRK-A", which doesn't work for me if I own only one (remember that one share is about a quarter million dollars). And I don't know whether I'm allowed to own fractional shares of BRK-A.
I thought this was quite clearly a point from the perspective of your investment results.
As I stated repeatedly, I was looking at it from the point of view of the investment results realized by the equity investment community as a whole, as a result of a company's actions.

I agree that an individual can work the results in his favor (e.g., by selling shares before a company goes bankrupt). That just leaves someone else holding the bag. I'm not saying there's anything wrong with that, I'm only saying that there's nothing false about conducting the analysis from the point of view of equity investors as a group. If you're not interested in that, that's fine.
The BRK.A thing is very unusual. I agree it makes selling some shares periodically difficult, though that doesn't apply to most stock holdings.

And you don't seem to feel that periodically selling a small amount of your holdings is comparable to getting a dividend. You instead feel like it is a clever way to work things in your favor. I disagree.

I'm unclear why the analysis from perspective of the market rather than the individual investor is useful in a personal finance discussion. But if you want to advocate for the interests of the market in abstract go to it.
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Re: What's the deal with dividend funds?

Post by HanSolo »

Da5id wrote: Tue Jun 21, 2022 3:23 pm The BRK.A thing is very unusual. I agree it makes selling some shares periodically difficult, though that doesn't apply to most stock holdings.
I edited my post above to add that this was an "existence proof", that the specific assertion I was examining can be disproven in certain cases.
And you don't seem to feel that periodically selling a small amount of your holdings is comparable to getting a dividend. You instead feel like it is a clever way to work things in your favor. I disagree.
It's better to quote where I said something than to vaguely claim I said something I didn't.
I'm unclear why the analysis from perspective of the market rather than the individual investor is useful in a personal finance discussion. But if you want to advocate for the interests of the market in abstract go to it.
I'm assuming that what happens to the individual is a subset of what happens to the whole, on average.
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Re: What's the deal with dividend funds?

Post by incognito_man »

I'm with Han Solo on this one. Everything they have been saying makes sense to me and I agree with it. I think it's a useful differentiator between dividend payers and non payers.

But that difference will only matter if the investor is taking the dividends out in cash and not re-investing (which is still obviously a useful distinction since many of those people exist).
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Re: What's the deal with dividend funds?

Post by CuriousTacos »

HanSolo wrote: Tue Jun 21, 2022 3:09 pm
CuriousTacos wrote: Tue Jun 21, 2022 3:02 pm
HanSolo wrote: Tue Jun 21, 2022 2:41 pm I'm not saying that this will predict anything about market performance. I'm only correcting the false notion that "the payment of dividends or not has no effect on equity investor results".
Then I think you misunderstand what people mean by "the payment of dividends or not has no effect on equity investor results". It is reasonable to think the following phrases mean the same thing:

"the payment of dividends or not has no effect on equity investor results"
"the payment of dividends or not has no effect on expected market performance"

For anything actionable, I think they sound similar enough that you should probably be very careful to clarify before assuming otherwise.
The word "expected" involves predictions. I wasn't saying anything about predictions. I was just talking about the mechanics of what actually happens, regardless of what anyone predicts. Predictions is a different topic that I'm not prepared to address.
But I think the original phrase you are attempting to correct does involve predictions, so you are talking past those people to assume otherwise. When I say "the payment of dividends or not has no effect on equity investor results", I mean that the market is efficient, so I have no expected future benefit by investing in dividend-paying companies. I may add on a footnote about "after adjusting for risk and/or established factors", but I'm talking about future expectations.

If you aren't prepared to address whether certain dividend characteristics (high yield, stable, growing, etc) make a difference for future expected performance, then this line of debate is not actionable or relevant in my opinion.
Last edited by CuriousTacos on Tue Jun 21, 2022 3:52 pm, edited 2 times in total.
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Re: What's the deal with dividend funds?

Post by burritoLover »

HanSolo wrote: Tue Jun 21, 2022 3:04 pm
burritoLover wrote: Tue Jun 21, 2022 2:55 pm Ok, let's just assume the two decisions are comparable. The company's decision to retain the cash makes it less risky so when the risk shows up (bankruptcy), the less risky investment puts those bondholders in a better position. What you are trying to say is that the bond investors with different levels of risk should have the same benefit when the risk shows up. That does not compute. It isn't a free money paradox. Equity investors don't have any claim to assets from a bankruptcy so the equity investor in both scenarios has the exact same risk level.
A company with a market cap of a billion dollars has a million shares outstanding at $1000/share. They have a million in cash that they don't know what to do with.

Case (a). They retain it in the corporate treasury. The company has a sudden financial disaster and their stock goes to zero. Shareholders wind up with zero. Bondholders/creditors wind up with a million dollars to divide up among themselves.

Case (b). They pay it out as a dividend at $1/share. Then the stock goes to zero. The shareholders already have the million dollars ($1 for each share they owned). The bondholders/creditors don't have access to that money.

I agree that there is no free money. The money was earned by the company's operations. In case (a), the bondholders/creditors wound up with the money. In case (b), the shareholders got it.

Again, no free money. But you can see that the payment of the dividend provided a benefit to the shareholders in case (b).

That's why it's false to say that dividends never make a difference in equity investor results.
The investors are acting differently in each case. For some reason, in case B the equity investors spend the dividend but in case A, those investors don't sell any shares. So the consumption activity of the investors changes between these supposedly equivalent examples.

Really, if you have to force a situation with some ridiculous bankruptcy single stock example where each set of investors acts differently in order to try to prove that dividends might not be irrelevant in some narrow situation (which I still don't agree with), that is pretty unconvincing.
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Re: What's the deal with dividend funds?

Post by Da5id »

burritoLover wrote: Tue Jun 21, 2022 3:40 pm The investors are acting differently in each case. For some reason, in case B the equity investors spend the dividend but in case A, those investors don't sell any shares. So the consumption activity of the investors changes between these supposedly equivalent examples.
The lack of apples to apples in terms of investor behavior really makes these examples bizarre. Either the investor wants the $1 now, in which case they will keep the dividend or they will sell $1 worth of stock, or they don't want the $1 now, in which case they will reinvest the dividend or keep their stock holding intact.
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Re: What's the deal with dividend funds?

Post by HanSolo »

burritoLover wrote: Tue Jun 21, 2022 3:40 pm The investors are acting differently in each case.
I wasn't examining the investor actions, only what happens to their results due to actions of the company.
Really, if you have to force a situation with some ridiculous bankruptcy single stock example
I'm not sure that's ridiculous. There's some not-insignificant percentage of companies that go to zero. And there's some not-insignificant percentage of investors who buy individual stocks.
where each set of investors acts differently
I didn't specify that in my scenario. If you think I did, you might try quoting where I said it.
CuriousTacos wrote: Tue Jun 21, 2022 3:38 pm But I think the original phrase you are attempting to correct does involve predictions,
There are some people who make considerable effort to address the mechanics of how dividends work and their effects, while saying nothing about predictions. I was trying to respond in that context.
If you aren't prepared to address whether companies with certain dividend characteristics (high yield, stable, growing, etc), then this line of debate is not actionable or relevant in my opinion.
OK. Then the assertion I was examining wasn't actionable or relevant either.
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