Market Down, Dividends UP YTD

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TropikThunder
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Re: Market Down, Dividends UP YTD

Post by TropikThunder »

Charles Joseph wrote: Thu Jun 30, 2022 12:04 pm Dividends are up in dollar terms and yield terms quarter over quarter in 2022.
Wait, you’re basing your argument on your 2nd quarter dividends (paid in June) being up compared to your 1st quarter dividends (paid in March)? Pretty much every mutual fund or stock portfolio will have higher 2nd quarter distributions for the mere fact that some stocks/funds pay dividends quarterly, some pay them semi-annually, some pay them annually.

Heck, even poor old VTSAX increased its dividend quarter-on-quarter from March (1.24%, $0.3422/share) to June (1.59%, $0.3621/share). That’s a 6% increase in dollar terms and a 28% increase in yield terms despite a 14% decrease in NAV.
TropikThunder
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Re: Market Down, Dividends UP YTD

Post by TropikThunder »

Da5id wrote: Thu Jun 30, 2022 12:18 pm That wasn't even really my point TBH. My point has nothing to do with dividends per se. It is more that attempting to draw any real conclusions about what constitutes a good portfolio based on YTD results is IMO a sign of thinking about investing wrong.
Also, most funds have higher 2nd quarter distributions than 1st quarter because not all of the underlying stocks pay dividends quarterly. So I don’t know how much meaning OP’s scenario has in the first place.
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Re: Market Down, Dividends UP YTD

Post by manuvns »

something strange is happening to the markets it drops like 1-3% on few days and quickly recovers any ideas why is this happening ? Is this algo or options traders ?
Thanks!
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Ocean77
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
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Charles Joseph
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Re: Market Down, Dividends UP YTD

Post by Charles Joseph »

Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Thank you for elucidating the obvious common sense to which the dividend bashers are absolutely blind.

Much appreciated.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
TropikThunder
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Re: Market Down, Dividends UP YTD

Post by TropikThunder »

Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Why would they still pay that dividend amount when their market cap has dropped by 50%?
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Re: Market Down, Dividends UP YTD

Post by Hyperchicken »

Charles Joseph wrote: Thu Jun 30, 2022 12:43 pm
Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Thank you for elucidating the obvious common sense to which the dividend bashers are absolutely blind.

Much appreciated.
Except the math in this example is broken.
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Ocean77
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

TropikThunder wrote: Thu Jun 30, 2022 12:46 pm
Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Why would they still pay that dividend amount when their market cap has dropped by 50%?
You may read the OP. This is not a theoretical speculation, but fact. The market cap of many companies dropped this year (though thankfully not by 50% yet). But most companies still pay the same, or sometimes even a higher dividend.
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TropikThunder
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Re: Market Down, Dividends UP YTD

Post by TropikThunder »

Hyperchicken wrote: Thu Jun 30, 2022 12:46 pm
Charles Joseph wrote: Thu Jun 30, 2022 12:43 pm
Thank you for elucidating the obvious common sense to which the dividend bashers are absolutely blind.

Much appreciated.
Except the math in this example is broken.
Right? The stock that paid a dividend would have to appreciate faster than the stock that didn’t to overcome the decline in share price, and there’s no evidence that happens.
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Re: Market Down, Dividends UP YTD

Post by Da5id »

TropikThunder wrote: Thu Jun 30, 2022 12:46 pm
Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Why would they still pay that dividend amount when their market cap has dropped by 50%?
Unclear why this hypothetical would be compelling? You can also have a hypothetical where continuing to maintain payment of the dividend in bad economic conditions leads the company to go bankrupt, proving something or another.

Does someone have a good study showing that dividend focused (as opposed to broad market) investing is consistently safer during downturns? Or that if such is the case that there is no associated cost in terms of return? Seems more interesting than anecdotes.

The following graph also suggests that your dividends aren't exactly safe during bad times, they can fall and take a while to recover.

Image
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Re: Market Down, Dividends UP YTD

Post by dbr »

TropikThunder wrote: Thu Jun 30, 2022 12:46 pm
Why would they still pay that dividend amount when their market cap has dropped by 50%?
In general because stock prices do not dictate what the company sales, earnings, and ability to pay dividends is. The former is highly volatile and the latter is not nearly so volatile. The market cap is not assets from which the company pays the dividend. A dividend is not set by some interest rate applied to the stock price.
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burritoLover
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Re: Market Down, Dividends UP YTD

Post by burritoLover »

Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Nope - if the company pays a $50 dividend after the crash, the market cap is then $450. So you have $50 cash from the dividend and $450 worth of stock or if no dividend is paid, the market cap remains at $500, you sold $50 of the company, you have $50 cash plus $450 in stock. Exactly the same.
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Re: Market Down, Dividends UP YTD

Post by aaaaaa111111 »

Ocean77 wrote: Thu Jun 30, 2022 12:48 pm You may read the OP. This is not a theoretical speculation, but fact. The market cap of many companies dropped this year (though thankfully not by 50% yet). But most companies still pay the same, or sometimes even a higher dividend.
I do have to say this was true for me, at least. My dividends for Q2 were actually slightly up on Q1, despite the market dropping 17% since then. And my dividends since 2019 have stayed within a pretty tight range despite how much the market ran up between then and the end of 2021.

So the dividend seems to have little correlation to market conditions, at least for the index funds I have.
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Re: Market Down, Dividends UP YTD

Post by Apathizer »

Da5id wrote: Thu Jun 30, 2022 12:18 pm
Apathizer wrote: Thu Jun 30, 2022 12:16 pm
Da5id wrote: Thu Jun 30, 2022 12:12 pm
Charles Joseph wrote: Thu Jun 30, 2022 12:04 pm
TropikThunder wrote: Thu Jun 30, 2022 11:29 am

By increase or decrease, are you referring to yield as a percentage, or as a dollar/share figure? Because those can give you hugely different results in a downturn.

- Stock is $100/share and pays a dividend of $1/share. That’s a 1.00% yield.

- Stocks crash and the share price drops to $50/share. If they still pay a dividend of $1/share, then the yield has now doubled to 2.00%.

- Stocks crash and the share price drops to $50/share. If they still pay a 1.00% yield, then the dividend is now $0.50/share.

So are your dividends up in dollar terms or in yield terms?
Dividends are up in dollar terms and yield terms quarter over quarter in 2022.
What conclusions if any do you think are reasonable to draw from YTD numbers? If YTD numbers were against your ideas of what constitutes a good investment, would you find it compelling in any way?
Exactly. Higher dividends just means a steeper share-price decline.
That wasn't even really my point TBH. My point has nothing to do with dividends per se. It is more that attempting to draw any real conclusions about what constitutes a good portfolio based on YTD results is IMO a sign of thinking about investing wrong.
I agree.
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Ocean77
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

burritoLover wrote: Thu Jun 30, 2022 12:57 pm
Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Nope - if the company pays a $50 dividend after the crash, the market cap is then $450. So you have $50 cash from the dividend and $450 worth of stock or if no dividend is paid, the market cap remains at $500, you sold $50 of the company, you have $50 cash plus $450 in stock. Exactly the same.
Yes, but in this example, you now own only 90% of the company, and will therefore participate less in the market recovery or future growth.

A crash is often caused by a compression in the PE ratio. The current bear market is a good example. Earnings forecasts have barely changed, but the PE ratio came down quite a bit. In case of our $1000 company example, let's say it earns $50 a year. So it had a PE of 20 at the start of the year. If the market crashed by 50%, the PE would now be 10 ($500 market cap, still earning $50). Company pays the 50$ dividend, book value drops by that $50, stock price by the same. So we're at $450 as you explained. And then down the road, the market recovers, and the PE goes back up to 20. What will the company now trade for? The market is not going to discount it by $100. It will be $1000, minus the drop in book value of $50. So $950 as I had explained before. If the company did not pay a dividend, then it will trade for the whole $1000. But you only own 90% of it, so $900.
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Statistical
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Re: Market Down, Dividends UP YTD

Post by Statistical »

manuvns wrote: Thu Jun 30, 2022 12:30 pm something strange is happening to the markets it drops like 1-3% on few days and quickly recovers any ideas why is this happening ? Is this algo or options traders ?
Random walk is random. The market is going to be aimless and drifting until it gets some solid good or bad news and then it will react more decisively.
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Re: Market Down, Dividends UP YTD

Post by gougou »

restingonmylaurels wrote: Thu Jun 30, 2022 11:40 am
gougou wrote: Wed Jun 29, 2022 8:47 pm
JoMoney wrote: Wed Jun 29, 2022 7:32 pm It's a transfer of cash from the books of the corporation you own, to your personal account,
This is true.
JoMoney wrote: Wed Jun 29, 2022 7:32 pm which means the company is worth that much less
This is so often repeated here but it is false. And there are countless real world examples to disprove this. Put it simply, in 99.9% of the times a stock is not worth exactly its book value.
On first impression, does not this latter statement contradict the mantra that you should be indifferent as to whether you fund your expenses from dividends or the sale of shares? I am thinking out loud here, so please chime in.

If I am the only shareholder of the Acme Company, which has a market value of $2,000 and a book value of $1,000. The company pays me a dividend of $100. The book value of Acme Company decreased by $100 to $900.

What is now the market value of my investment in Acme Company: $1,900, $1,800 or unknown?
A fully declared, fully expected dividend will drop the share price by about the dividend amount. For your example, it depends on whether market expected the dividend, and whether market believed Acme company could have made good use of that $100 dividend. In most cases, an unexpected dividend boosts the share price.

Here's an example to disprove the statement that paying from company's book to shareholder means nothing:
Take a company that trades below its net cash value (there are many of them all the time). Say its stock is $100 and it has $120 of cash per share. If the company declares a $110 dividend, does the stock go to -$10? Obviously not. Of course the market doesn't expect the stock to pay a $110 dividend, but that doesn't mean it's meaningless to pay from the company's book to shareholders.

If you hold dividend paying stocks or dividend-oriented ETFs, you are owning different kinds of companies. Take an extreme example, you could go 100% Tesla and do a 4% withdrawal by selling shares, it may very well be a safe withdrawal since Tesla grows a lot. Or you could go 100% ExxonMobil and only withdraw the dividends every year which also gives you about 4%. Which one is safer is up to you to decide.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Charles Joseph
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Re: Market Down, Dividends UP YTD

Post by Charles Joseph »

TropikThunder wrote: Thu Jun 30, 2022 12:23 pm Wait, you’re basing your argument on your 2nd quarter dividends (paid in June) being up compared to your 1st quarter dividends (paid in March)? Pretty much every mutual fund or stock portfolio will have higher 2nd quarter distributions for the mere fact that some stocks/funds pay dividends quarterly, some pay them semi-annually, some pay them annually.
Nope.

Your claim is all but irrelevant. The overwhelming majority of the companies in the two income-focused funds I own pay dividends quarterly.

What is a fact is that many companies have increased their dividend, despite market declines.
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Ocean77
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
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Da5id
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Re: Market Down, Dividends UP YTD

Post by Da5id »

Ocean77 wrote: Thu Jun 30, 2022 1:29 pm Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
I don't think anyone is actually arguing against this. Sure it is possible. What is generally the issue is whether one can know in advance that a dividend focused investing strategy will provide superior features (return, safety, whatever).
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Re: Market Down, Dividends UP YTD

Post by bondsr4me »

Charles Joseph wrote: Wed Jun 29, 2022 6:51 pm I track my dividends, and as the total market has been significantly down, my value-oriented, dividend-tilted portfolio has seen its dividends rise YTD. This has helped me stay the course and pay some bills along the way. It will do that more so in retirement in a few years.

Has anyone else experienced this? What does this say about tilting toward value stocks and dividends in retirement? As Jeremy Siegel has written, do "the tried and true (strong, mature dividend-paying companies) triumph over the bold and new?"
+1….I’ll take the dividends and keep the shares; “book” value and “market” value are not the same; I’ve personally had companies pay dividends and the “market” value/sh ends up higher even tho’ the share price gets reduced by the dividend amount when the stock opens up….sometimes share price finishes higher; other times it finishes lower…
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Re: Market Down, Dividends UP YTD

Post by gougou »

Ocean77 wrote: Thu Jun 30, 2022 1:29 pm Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
If company B buys back a lot of stocks, you could still own a bigger share of the company.

If company B doesn't pay dividends and doesn't buy back stocks, then it's most likely a growth company. Then it becomes whether it's safer to hold something like SCHD and live off the dividends, or hold ARKK and sell 3% a year to make your own dividends.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Market Down, Dividends UP YTD

Post by CuriousTacos »

Ocean77 wrote: Thu Jun 30, 2022 1:29 pm Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
I appreciate that you re-stated your ideas in this way. We can all agree that it is possible to come out ahead with option A, and it is possible to come out ahead with option B. Whichever option has the greater risk adjusted total return (i.e. total return "adjusted" for volatility) will be the better choice. Even if that has more volatility/risk than you want, you can offset that risk by reducing your equity allocation.

In your previous post about selling shares vs receiving a dividend during a downturn, you constructed that example with a hypothetical dividend fund that had a greater total return than the comparison fund (and roughly the same volatility), so the winner was pre-determined by the superior total return you assigned to the dividend fund, not by the presence of a dividend itself. You really can't separate dividends from total return when evaluating performance.

However, we don't know that dividend stocks/funds will in the future have greater risk adjusted returns than the total market, or value funds, or whatever the preferred comparison fund is. But we generally do know that diversification is statistically likely to improve risk adjusted returns. Unless you simply have a strong preference for dividends (in which case there's no reason to try to convince others that they perform better), I would personally recommend focusing less on dividends, and more on the value factor and maximizing diversification.
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Ocean77
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

Da5id wrote: Thu Jun 30, 2022 1:38 pm
Ocean77 wrote: Thu Jun 30, 2022 1:29 pm Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
I don't think anyone is actually arguing against this. Sure it is possible. What is generally the issue is whether one can know in advance that a dividend focused investing strategy will provide superior features (return, safety, whatever).
I agree. I would say there are at least some situations where the dividend focus can be beneficial, such as the one the OP described, and I illustrated in my earlier example. And of course there are other times when growth stocks shine and nobody cares about dividends, such as in the last decade. And like you said, we never know in advance which scenario comes next and what will work well. So I would not claim that a dividend focus is somehow an overall superior strategy. It is not. But there are times when it is beneficial, such as this year.
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Re: Market Down, Dividends UP YTD

Post by Logan Roy »

Ocean77 wrote: Thu Jun 30, 2022 1:29 pm Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
The effects of taxation and reinvesting at market value (rather than at book value) for dividend reinvestment can become quite a hurdle over time. Example of Berkshire Hathaway with a simulated dividend, vs without:

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Statistical
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Re: Market Down, Dividends UP YTD

Post by Statistical »

bondsr4me wrote: Thu Jun 30, 2022 1:40 pm I’ve personally had companies pay dividends and the “market” value/sh ends up higher even tho’ the share price gets reduced by the dividend amount when the stock opens up….sometimes share price finishes higher; other times it finishes lower…
The same thing that happens to companies that didn't post a dividend. Almost like shares trade higher and lower based on a variety of reasons. There is nothing magical about dividends. They don't produce wealth from nothing.

Thinking the dividend produces additional gains is thinking an accounting mechanism creates real value. It would be comparable to taking $100 out of your checking account using an ATM so you can make a $100 deposit to your checking account and then thinking you are getting ahead. I mean look at all that cash being deposited daily.
Last edited by Statistical on Thu Jun 30, 2022 2:38 pm, edited 1 time in total.
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Charles Joseph
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Re: Market Down, Dividends UP YTD

Post by Charles Joseph »

Ocean77 wrote: Thu Jun 30, 2022 2:23 pm
Da5id wrote: Thu Jun 30, 2022 1:38 pm
Ocean77 wrote: Thu Jun 30, 2022 1:29 pm Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
I don't think anyone is actually arguing against this. Sure it is possible. What is generally the issue is whether one can know in advance that a dividend focused investing strategy will provide superior features (return, safety, whatever).
I agree. I would say there are at least some situations where the dividend focus can be beneficial, such as the one the OP described, and I illustrated in my earlier example. And of course there are other times when growth stocks shine and nobody cares about dividends, such as in the last decade. And like you said, we never know in advance which scenario comes next and what will work well. So I would not claim that a dividend focus is somehow an overall superior strategy. It is not. But there are times when it is beneficial, such as this year.
I'm just thinking out of the box for a minute. What if the optimal or superior outcome isn't the goal? What if an investor was only worried about sufficient cash flow, even in the face of a potential, say, 60% market crash that took more than a decade to recover? Doesn't that make a dividend tilt a reasonable choice? Dividends saved investors who hung on to stocks during the Great Depression.

I don't care if I come out optimized in the end. I'm a small investor and when I retire in 2025 I just want to pay the bills and have enough discretionary money to enjoy life a bit. And I want to avoid financial ruin.

If I were to retire today, I could likely just turn dividend reinvestment off and never look at the market price again. Not a bad feeling.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Market Down, Dividends UP YTD

Post by Da5id »

Ocean77 wrote: Thu Jun 30, 2022 2:23 pm
Da5id wrote: Thu Jun 30, 2022 1:38 pm
Ocean77 wrote: Thu Jun 30, 2022 1:29 pm Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
I don't think anyone is actually arguing against this. Sure it is possible. What is generally the issue is whether one can know in advance that a dividend focused investing strategy will provide superior features (return, safety, whatever).
I agree. I would say there are at least some situations where the dividend focus can be beneficial, such as the one the OP described, and I illustrated in my earlier example. And of course there are other times when growth stocks shine and nobody cares about dividends, such as in the last decade. And like you said, we never know in advance which scenario comes next and what will work well. So I would not claim that a dividend focus is somehow an overall superior strategy. It is not. But there are times when it is beneficial, such as this year.
And my question to OP goes to you too. If you read the OP, it is about his results YTD and what conclusions you can draw from that. My opinion is that this type of short term backwards looking analysis is a poor way to think about investing (separate than whether dividends are useful). What do you think?
Statistical
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Re: Market Down, Dividends UP YTD

Post by Statistical »

Charles Joseph wrote: Thu Jun 30, 2022 2:36 pm
Ocean77 wrote: Thu Jun 30, 2022 2:23 pm
Da5id wrote: Thu Jun 30, 2022 1:38 pm
Ocean77 wrote: Thu Jun 30, 2022 1:29 pm Let's see if we can simplify it:

Option A: Company pays dividend
Option B: You sell some shares to make your own dividend

In case of option A, you end up owning a bigger share of the company (compared to option B), but that company now has a lower book value.
In case of option B, you end up owning a smaller share of the company, but that company now has a higher book value.

At the moment you receive the dividend or sells the shares, your total account balance will be the same in both options. But what will happen over time? In which case will you come out ahead in the long run? While there are no guarantees and things will vary across companies, I content it is at least possible that you come out ahead with option A.
I don't think anyone is actually arguing against this. Sure it is possible. What is generally the issue is whether one can know in advance that a dividend focused investing strategy will provide superior features (return, safety, whatever).
I agree. I would say there are at least some situations where the dividend focus can be beneficial, such as the one the OP described, and I illustrated in my earlier example. And of course there are other times when growth stocks shine and nobody cares about dividends, such as in the last decade. And like you said, we never know in advance which scenario comes next and what will work well. So I would not claim that a dividend focus is somehow an overall superior strategy. It is not. But there are times when it is beneficial, such as this year.
I'm just thinking out of the box for a minute. What if the optimal or superior outcome isn't the goal? What if an investor was only worried about sufficient cash flow, even in the face of a potential, say, 60% market crash that took more than a decade to recover? Doesn't that make a dividend tilt a reasonable choice? Dividends saved investors who hung on to stocks during the Great Depression.

I don't care if I come out optimized in the end. I'm a small investor and when I retire in 2025 I just want to pay the bills and have enough discretionary money to enjoy life a bit. And I want to avoid financial ruin.

If I were to retire today, I could likely just turn dividend reinvestment off and never look at the market price again. Not a bad feeling.
It really didn't. In fact depending on the high dividend fund they may have suffered worse drawdowns than the broad market. Case in point VYM vs VTI. VYM had had both a worse annual return AND a worse drawdown.

Now if your portfolio is so large you can live off dividends alone even without a dividend tilt (<2% SWR) then sure it would be great. It would also be great if you just sold stock as needed to cover the 2% SWR because a 2% SWR has never even come close to failing.
Last edited by Statistical on Thu Jun 30, 2022 3:24 pm, edited 1 time in total.
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Re: Market Down, Dividends UP YTD

Post by burritoLover »

Ocean77 wrote: Thu Jun 30, 2022 1:12 pm
burritoLover wrote: Thu Jun 30, 2022 12:57 pm
Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Nope - if the company pays a $50 dividend after the crash, the market cap is then $450. So you have $50 cash from the dividend and $450 worth of stock or if no dividend is paid, the market cap remains at $500, you sold $50 of the company, you have $50 cash plus $450 in stock. Exactly the same.
Yes, but in this example, you now own only 90% of the company, and will therefore participate less in the market recovery or future growth.

A crash is often caused by a compression in the PE ratio. The current bear market is a good example. Earnings forecasts have barely changed, but the PE ratio came down quite a bit. In case of our $1000 company example, let's say it earns $50 a year. So it had a PE of 20 at the start of the year. If the market crashed by 50%, the PE would now be 10 ($500 market cap, still earning $50). Company pays the 50$ dividend, book value drops by that $50, stock price by the same. So we're at $450 as you explained. And then down the road, the market recovers, and the PE goes back up to 20. What will the company now trade for? The market is not going to discount it by $100. It will be $1000, minus the drop in book value of $50. So $950 as I had explained before. If the company did not pay a dividend, then it will trade for the whole $1000. But you only own 90% of it, so $900.
Nope again.

You give an example of market forces causing the stock price to reduce by 50% for both scenarios. Recovering from that specific drop would require a 100% increase in share price. But on the recovery side, for some reason, the company that paid the dividend recovers by 111% while the non-dividend payer only recovers by 100%. What will actually happen is the dividend payer is worth $450, will increase by 100% to $900 after recovery. The non-dividend payer will increase 100% to $1000 of which the stock seller owns $900, or the same as the dividend getter.
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Re: Market Down, Dividends UP YTD

Post by CuriousTacos »

Charles Joseph wrote: Thu Jun 30, 2022 2:36 pm I'm just thinking out of the box for a minute. What if the optimal or superior outcome isn't the goal? What if an investor was only worried about sufficient cash flow, even in the face of a potential, say, 60% market crash that took more than a decade to recover? Doesn't that make a dividend tilt a reasonable choice? Dividends saved investors who hung on to stocks during the Great Depression.

I don't care if I come out optimized in the end. I'm a small investor and when I retire in 2025 I just want to pay the bills and have enough discretionary money to enjoy life a bit. And I want to avoid financial ruin.

If I were to retire today, I could likely just turn dividend reinvestment off and never look at the market price again. Not a bad feeling.
I'm honestly trying to get at the root of what you think about dividends. Whether there's anything to debate/discuss with you hinges on that, so do you think:
- simply that some investors prefer receiving some of their total return as dividends, even if the total returns are identical
- in a market crash, receiving dividends is inherently safer than selling shares
- companies that pay dividends are likely to have better total returns (less negative) in a downturn, and that makes them preferable for some people even if they lag more than that in bull markets
- something else?
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Re: Market Down, Dividends UP YTD

Post by dbr »

Charles Joseph wrote: Thu Jun 30, 2022 2:36 pm

If I were to retire today, I could likely just turn dividend reinvestment off and never look at the market price again. Not a bad feeling.
You almost certainly could, but the result would be only if the withdrawals in the form of dividends are small enough. You could get the same result from withdrawals of that size taken by any other method. How does a person know that -- one knows that by actually looking at what happens to portfolios offering some given returns and having some given withdrawals taken.

It might matter to most retirees to take whatever withdrawals they need or want within acceptable limits rather than be forced to live on whatever income the dividends dictate to you. My fifteen years experience in retirement tells me that what a person wants and needs at any point of time and what the dividends are does not correspond very well.

Even so, it is your choice if that is what you want to do and you have a clear understanding of the consequences, good or bad.
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Re: Market Down, Dividends UP YTD

Post by Apathizer »

CuriousTacos wrote: Thu Jun 30, 2022 3:11 pm
Charles Joseph wrote: Thu Jun 30, 2022 2:36 pm I'm just thinking out of the box for a minute. What if the optimal or superior outcome isn't the goal? What if an investor was only worried about sufficient cash flow, even in the face of a potential, say, 60% market crash that took more than a decade to recover? Doesn't that make a dividend tilt a reasonable choice? Dividends saved investors who hung on to stocks during the Great Depression.

I don't care if I come out optimized in the end. I'm a small investor and when I retire in 2025 I just want to pay the bills and have enough discretionary money to enjoy life a bit. And I want to avoid financial ruin.

If I were to retire today, I could likely just turn dividend reinvestment off and never look at the market price again. Not a bad feeling.
I'm honestly trying to get at the root of what you think about dividends. Whether there's anything to debate/discuss with you hinges on that, so do you think:
- simply that some investors prefer receiving some of their total return as dividends, even if the total returns are identical
- in a market crash, receiving dividends is inherently safer than selling shares
- companies that pay dividends are likely to have better total returns (less negative) in a downturn, and that makes them preferable for some people even if they lag more than that in bull markets
- something else?
Ultimately it seems to be about feelings. Nothing more than feelings. Or as Stephen Colbert would say, truthiness.

High dividend yield makes some investors feel like they're getting additional return when they aren't. Dividends make them feel better. I guess a case can be made that's worthwhile, but as someone that understands dividends are irrelevant to total return, that just doesn't work for me.
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Re: Market Down, Dividends UP YTD

Post by CuriousTacos »

Apathizer wrote: Thu Jun 30, 2022 3:19 pm Ultimately it seems to be about feelings. Nothing more than feelings. Or as Stephen Colbert would say, truthiness.

High dividend yield makes some investors feel like they're getting additional return when they aren't. Dividends make them feel better. I guess a case can be made that's worthwhile, but as someone that understands dividends are irrelevant to total return, that just doesn't work for me.
I'll let Charles Joseph speak for themselves. It could be that they like dividends just because they like them, and that's fine as long as they have a diversified portfolio that appropriately accounts for the risks of dividend funds.

I also wouldn't phrase it that dividends are necessarily "irrelevant to total return", but rather that total return/risk is all that (objectively) matters, that dividends don't inherently imply or guarantee anything about total return/risk (because the market is very efficient at valuing companies appropriately), and that historically, the total return/risk of dividend funds has not been appreciably different from the total market (or at least funds with similar factor exposure).
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Re: Market Down, Dividends UP YTD

Post by Apathizer »

CuriousTacos wrote: Thu Jun 30, 2022 4:03 pm
Apathizer wrote: Thu Jun 30, 2022 3:19 pm Ultimately it seems to be about feelings. Nothing more than feelings. Or as Stephen Colbert would say, truthiness.

High dividend yield makes some investors feel like they're getting additional return when they aren't. Dividends make them feel better. I guess a case can be made that's worthwhile, but as someone that understands dividends are irrelevant to total return, that just doesn't work for me.
I'll let Charles Joseph speak for themselves. It could be that they like dividends just because they like them, and that's fine as long as they have a diversified portfolio that appropriately accounts for the risks of dividend funds.

I also wouldn't phrase it that dividends are necessarily "irrelevant to total return", but rather that total return/risk is all that (objectively) matters, that dividends don't inherently imply or guarantee anything about total return/risk (because the market is very efficient at valuing companies appropriately), and that historically, the total return/risk of dividend funds has not been appreciably different from the total market (or at least funds with similar factor exposure).
Yes, that's a better, more articulate, less condescending characterization. :)
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

burritoLover wrote: Thu Jun 30, 2022 3:10 pm
Ocean77 wrote: Thu Jun 30, 2022 1:12 pm
burritoLover wrote: Thu Jun 30, 2022 12:57 pm
Ocean77 wrote: Thu Jun 30, 2022 12:37 pm
burritoLover wrote: Wed Jun 29, 2022 7:15 pm Dividends don’t help you pay bills anymore than selling shares helps you pay bills.
They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Nope - if the company pays a $50 dividend after the crash, the market cap is then $450. So you have $50 cash from the dividend and $450 worth of stock or if no dividend is paid, the market cap remains at $500, you sold $50 of the company, you have $50 cash plus $450 in stock. Exactly the same.
Yes, but in this example, you now own only 90% of the company, and will therefore participate less in the market recovery or future growth.

A crash is often caused by a compression in the PE ratio. The current bear market is a good example. Earnings forecasts have barely changed, but the PE ratio came down quite a bit. In case of our $1000 company example, let's say it earns $50 a year. So it had a PE of 20 at the start of the year. If the market crashed by 50%, the PE would now be 10 ($500 market cap, still earning $50). Company pays the 50$ dividend, book value drops by that $50, stock price by the same. So we're at $450 as you explained. And then down the road, the market recovers, and the PE goes back up to 20. What will the company now trade for? The market is not going to discount it by $100. It will be $1000, minus the drop in book value of $50. So $950 as I had explained before. If the company did not pay a dividend, then it will trade for the whole $1000. But you only own 90% of it, so $900.
Nope again.

You give an example of market forces causing the stock price to reduce by 50% for both scenarios. Recovering from that specific drop would require a 100% increase in share price. But on the recovery side, for some reason, the company that paid the dividend recovers by 111% while the non-dividend payer only recovers by 100%. What will actually happen is the dividend payer is worth $450, will increase by 100% to $900 after recovery. The non-dividend payer will increase 100% to $1000 of which the stock seller owns $900, or the same as the dividend getter.
The stock market does not work this way. Stock prices are ultimately determined by company earnings. Stocks don't go up or down by fixed percentages, following the index advance or decline.
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Re: Market Down, Dividends UP YTD

Post by Hyperchicken »

CuriousTacos wrote: Thu Jun 30, 2022 4:03 pm [...]

I also wouldn't phrase it that dividends are necessarily "irrelevant to total return", but rather that total return/risk is all that (objectively) matters, that dividends don't inherently imply or guarantee anything about total return/risk (because the market is very efficient at valuing companies appropriately), and that historically, the total return/risk of dividend funds has not been appreciably different from the total market (or at least funds with similar factor exposure).
That seems like the definition of "irrelevant". ;)
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Re: Market Down, Dividends UP YTD

Post by Charles Joseph »

dbr wrote: Thu Jun 30, 2022 3:12 pm
Charles Joseph wrote: Thu Jun 30, 2022 2:36 pm

If I were to retire today, I could likely just turn dividend reinvestment off and never look at the market price again. Not a bad feeling.
You almost certainly could, but the result would be only if the withdrawals in the form of dividends are small enough. You could get the same result from withdrawals of that size taken by any other method. How does a person know that -- one knows that by actually looking at what happens to portfolios offering some given returns and having some given withdrawals taken.

It might matter to most retirees to take whatever withdrawals they need or want within acceptable limits rather than be forced to live on whatever income the dividends dictate to you. My fifteen years experience in retirement tells me that what a person wants and needs at any point of time and what the dividends are does not correspond very well.

Even so, it is your choice if that is what you want to do and you have a clear understanding of the consequences, good or bad.
Point very well taken.
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Re: Market Down, Dividends UP YTD

Post by LTCM »

Dividend/value stocks have a shorter duration so should be suited to retirement.
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

Da5id wrote: Thu Jun 30, 2022 2:39 pm And my question to OP goes to you too. If you read the OP, it is about his results YTD and what conclusions you can draw from that. My opinion is that this type of short term backwards looking analysis is a poor way to think about investing (separate than whether dividends are useful). What do you think?
While the YTD results of dividend stocks were nice, the OP's approach of "tilting toward value stocks and dividends" has done just fine in the long run as well, and I don't see anything wrong with it. The OP expanded on this nicely just above your post:
Charles Joseph wrote: Thu Jun 30, 2022 2:36 pm I'm just thinking out of the box for a minute. What if the optimal or superior outcome isn't the goal? What if an investor was only worried about sufficient cash flow, even in the face of a potential, say, 60% market crash that took more than a decade to recover? Doesn't that make a dividend tilt a reasonable choice? Dividends saved investors who hung on to stocks during the Great Depression.

I don't care if I come out optimized in the end. I'm a small investor and when I retire in 2025 I just want to pay the bills and have enough discretionary money to enjoy life a bit. And I want to avoid financial ruin.

If I were to retire today, I could likely just turn dividend reinvestment off and never look at the market price again. Not a bad feeling.
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Re: Market Down, Dividends UP YTD

Post by CuriousTacos »

Hyperchicken wrote: Thu Jun 30, 2022 4:15 pm
CuriousTacos wrote: Thu Jun 30, 2022 4:03 pm [...]

I also wouldn't phrase it that dividends are necessarily "irrelevant to total return", but rather that total return/risk is all that (objectively) matters, that dividends don't inherently imply or guarantee anything about total return/risk (because the market is very efficient at valuing companies appropriately), and that historically, the total return/risk of dividend funds has not been appreciably different from the total market (or at least funds with similar factor exposure).
That seems like the definition of "irrelevant". ;)
I see why it might seem that way, but I think my re-phrasing is focused more on market efficiency than an absolute statement about dividends themselves. The market might think that dividends are relevant, but if the market values them appropriately on the whole, then there's no reason for the investor to think that a dividend fund will provide better/different returns from a similar fund that isn't focused on dividends.
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Re: Market Down, Dividends UP YTD

Post by burritoLover »

Ocean77 wrote: Thu Jun 30, 2022 4:13 pm
burritoLover wrote: Thu Jun 30, 2022 3:10 pm
Ocean77 wrote: Thu Jun 30, 2022 1:12 pm
burritoLover wrote: Thu Jun 30, 2022 12:57 pm
Ocean77 wrote: Thu Jun 30, 2022 12:37 pm

They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Nope - if the company pays a $50 dividend after the crash, the market cap is then $450. So you have $50 cash from the dividend and $450 worth of stock or if no dividend is paid, the market cap remains at $500, you sold $50 of the company, you have $50 cash plus $450 in stock. Exactly the same.
Yes, but in this example, you now own only 90% of the company, and will therefore participate less in the market recovery or future growth.

A crash is often caused by a compression in the PE ratio. The current bear market is a good example. Earnings forecasts have barely changed, but the PE ratio came down quite a bit. In case of our $1000 company example, let's say it earns $50 a year. So it had a PE of 20 at the start of the year. If the market crashed by 50%, the PE would now be 10 ($500 market cap, still earning $50). Company pays the 50$ dividend, book value drops by that $50, stock price by the same. So we're at $450 as you explained. And then down the road, the market recovers, and the PE goes back up to 20. What will the company now trade for? The market is not going to discount it by $100. It will be $1000, minus the drop in book value of $50. So $950 as I had explained before. If the company did not pay a dividend, then it will trade for the whole $1000. But you only own 90% of it, so $900.
Nope again.

You give an example of market forces causing the stock price to reduce by 50% for both scenarios. Recovering from that specific drop would require a 100% increase in share price. But on the recovery side, for some reason, the company that paid the dividend recovers by 111% while the non-dividend payer only recovers by 100%. What will actually happen is the dividend payer is worth $450, will increase by 100% to $900 after recovery. The non-dividend payer will increase 100% to $1000 of which the stock seller owns $900, or the same as the dividend getter.
The stock market does not work this way. Stock prices are ultimately determined by company earnings. Stocks don't go up or down by fixed percentages, following the index advance or decline.
So it declines by a percentage but then you want to force the price back to it’s original price after the dividend payer has the price decline whereas the non-dividend payer does not. Sorry, The market doesn’t work that way.
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Re: Market Down, Dividends UP YTD

Post by CuriousTacos »

LTCM wrote: Thu Jun 30, 2022 4:20 pm Dividend/value stocks have a shorter duration so should be suited to retirement.
For bonds, differences in duration show up very significantly in volatility and assurance of a particular return over a particular time frame. While an argument can be made that companies with sizable shareholder yield and/or company profits mean they have a shorter duration by some theoretical definition, the differences have not historically shown up in any significant difference in volatility or assurance of a particular return over a particular time frame.
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

burritoLover wrote: Thu Jun 30, 2022 4:32 pm
Ocean77 wrote: Thu Jun 30, 2022 4:13 pm
burritoLover wrote: Thu Jun 30, 2022 3:10 pm
Ocean77 wrote: Thu Jun 30, 2022 1:12 pm
burritoLover wrote: Thu Jun 30, 2022 12:57 pm
Nope - if the company pays a $50 dividend after the crash, the market cap is then $450. So you have $50 cash from the dividend and $450 worth of stock or if no dividend is paid, the market cap remains at $500, you sold $50 of the company, you have $50 cash plus $450 in stock. Exactly the same.
Yes, but in this example, you now own only 90% of the company, and will therefore participate less in the market recovery or future growth.

A crash is often caused by a compression in the PE ratio. The current bear market is a good example. Earnings forecasts have barely changed, but the PE ratio came down quite a bit. In case of our $1000 company example, let's say it earns $50 a year. So it had a PE of 20 at the start of the year. If the market crashed by 50%, the PE would now be 10 ($500 market cap, still earning $50). Company pays the 50$ dividend, book value drops by that $50, stock price by the same. So we're at $450 as you explained. And then down the road, the market recovers, and the PE goes back up to 20. What will the company now trade for? The market is not going to discount it by $100. It will be $1000, minus the drop in book value of $50. So $950 as I had explained before. If the company did not pay a dividend, then it will trade for the whole $1000. But you only own 90% of it, so $900.
Nope again.

You give an example of market forces causing the stock price to reduce by 50% for both scenarios. Recovering from that specific drop would require a 100% increase in share price. But on the recovery side, for some reason, the company that paid the dividend recovers by 111% while the non-dividend payer only recovers by 100%. What will actually happen is the dividend payer is worth $450, will increase by 100% to $900 after recovery. The non-dividend payer will increase 100% to $1000 of which the stock seller owns $900, or the same as the dividend getter.
The stock market does not work this way. Stock prices are ultimately determined by company earnings. Stocks don't go up or down by fixed percentages, following the index advance or decline.
So it declines by a percentage but then you want to force the price back to it’s original price after the dividend payer has the price decline whereas the non-dividend payer does not. Sorry, The market doesn’t work that way.
You can see the error in your math easily if you consider two companies that are identical in every way. One pays a $50 dividend, the other does not. It so happens that the dividend was paid during a market crash, and the market subsequently recovered. (It does not matter by what percentages the market dropped and recovered). What you content is that the dividend paying company would trade at more than $50 discount to the non-dividend paying company. What I am saying is that the difference in stock price between the two would be about $50.
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CuriousTacos
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Re: Market Down, Dividends UP YTD

Post by CuriousTacos »

Ocean77 wrote: Thu Jun 30, 2022 4:13 pm
burritoLover wrote: Thu Jun 30, 2022 3:10 pm
Ocean77 wrote: Thu Jun 30, 2022 1:12 pm
burritoLover wrote: Thu Jun 30, 2022 12:57 pm
Ocean77 wrote: Thu Jun 30, 2022 12:37 pm

They do in a market crash.

Let's say a company has a market cap of $1000, and you own all the shares. Company can pay a $50 dividend, then market cap falls to $950. Or company pays no dividend, but you sell $50 worth of shares (so 5% of the company) to your neighbor. Either way, you now have $50 in cash, and $950 worth of stock.

Now there is a 50% crash, and the market cap of your company falls to $500. Company can still pay you a $50 dividend, or you sell $50 worth of shares (so 10% of the company) to your neighbor. Then market recovers from the crash. Now you have $50 of cash, plus $950 of stock if the company paid a dividend, or only $900 worth of stock if you sold shares during the crash.

So in the latter example, the dividend indeed helped you pay your bills.
Nope - if the company pays a $50 dividend after the crash, the market cap is then $450. So you have $50 cash from the dividend and $450 worth of stock or if no dividend is paid, the market cap remains at $500, you sold $50 of the company, you have $50 cash plus $450 in stock. Exactly the same.
Yes, but in this example, you now own only 90% of the company, and will therefore participate less in the market recovery or future growth.

A crash is often caused by a compression in the PE ratio. The current bear market is a good example. Earnings forecasts have barely changed, but the PE ratio came down quite a bit. In case of our $1000 company example, let's say it earns $50 a year. So it had a PE of 20 at the start of the year. If the market crashed by 50%, the PE would now be 10 ($500 market cap, still earning $50). Company pays the 50$ dividend, book value drops by that $50, stock price by the same. So we're at $450 as you explained. And then down the road, the market recovers, and the PE goes back up to 20. What will the company now trade for? The market is not going to discount it by $100. It will be $1000, minus the drop in book value of $50. So $950 as I had explained before. If the company did not pay a dividend, then it will trade for the whole $1000. But you only own 90% of it, so $900.
Nope again.

You give an example of market forces causing the stock price to reduce by 50% for both scenarios. Recovering from that specific drop would require a 100% increase in share price. But on the recovery side, for some reason, the company that paid the dividend recovers by 111% while the non-dividend payer only recovers by 100%. What will actually happen is the dividend payer is worth $450, will increase by 100% to $900 after recovery. The non-dividend payer will increase 100% to $1000 of which the stock seller owns $900, or the same as the dividend getter.
The stock market does not work this way. Stock prices are ultimately determined by company earnings. Stocks don't go up or down by fixed percentages, following the index advance or decline.
Can you at least acknowledge that your original example showed a hypothetical dividend company that had a greater total return than a hypothetical non-dividend company over the hypothetical time period?
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Beensabu
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Re: Market Down, Dividends UP YTD

Post by Beensabu »

You know... if you look at a backtest of VEIPX (Vanguard Equity-Income Inv) vs VTSMX (Vanguard Total Stock Mkt Idx Inv) from a withdrawal perspective, the only time it really made a difference was if you had a start date near the top of the 2000 tech bubble. And it looks like that's just due to value holding up better than growth for that particular period. And then VEIPX came out of GFC with stronger performance than indexed large value for the first few years... That's interesting, actually. I wonder what that was about.
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CuriousTacos
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Re: Market Down, Dividends UP YTD

Post by CuriousTacos »

Ocean77 wrote: Thu Jun 30, 2022 4:37 pm You can see the error in your math easily if you consider two companies that are identical in every way.
I don't think this is an appropriate constraint. The market is pretty good at convincing companies to pay dividends (or repurchase shares) when that is the best use of cash, or to invest in projects when that is the best use of cash. I don't think you can know better than the market in advance.

You can make better comparisons between a company that issues a dividend with another company that buys back shares, in which case the results are identical (assuming the buybacks happen at the same times as the dividends would)
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Ocean77
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

CuriousTacos wrote: Thu Jun 30, 2022 4:42 pm
Ocean77 wrote: Thu Jun 30, 2022 4:13 pm
burritoLover wrote: Thu Jun 30, 2022 3:10 pm
Ocean77 wrote: Thu Jun 30, 2022 1:12 pm
burritoLover wrote: Thu Jun 30, 2022 12:57 pm
Nope - if the company pays a $50 dividend after the crash, the market cap is then $450. So you have $50 cash from the dividend and $450 worth of stock or if no dividend is paid, the market cap remains at $500, you sold $50 of the company, you have $50 cash plus $450 in stock. Exactly the same.
Yes, but in this example, you now own only 90% of the company, and will therefore participate less in the market recovery or future growth.

A crash is often caused by a compression in the PE ratio. The current bear market is a good example. Earnings forecasts have barely changed, but the PE ratio came down quite a bit. In case of our $1000 company example, let's say it earns $50 a year. So it had a PE of 20 at the start of the year. If the market crashed by 50%, the PE would now be 10 ($500 market cap, still earning $50). Company pays the 50$ dividend, book value drops by that $50, stock price by the same. So we're at $450 as you explained. And then down the road, the market recovers, and the PE goes back up to 20. What will the company now trade for? The market is not going to discount it by $100. It will be $1000, minus the drop in book value of $50. So $950 as I had explained before. If the company did not pay a dividend, then it will trade for the whole $1000. But you only own 90% of it, so $900.
Nope again.

You give an example of market forces causing the stock price to reduce by 50% for both scenarios. Recovering from that specific drop would require a 100% increase in share price. But on the recovery side, for some reason, the company that paid the dividend recovers by 111% while the non-dividend payer only recovers by 100%. What will actually happen is the dividend payer is worth $450, will increase by 100% to $900 after recovery. The non-dividend payer will increase 100% to $1000 of which the stock seller owns $900, or the same as the dividend getter.
The stock market does not work this way. Stock prices are ultimately determined by company earnings. Stocks don't go up or down by fixed percentages, following the index advance or decline.
Can you at least acknowledge that your original example showed a hypothetical dividend company that had a greater total return than a hypothetical non-dividend company over the hypothetical time period?
I was actually thinking of two companies with the exact same total return. We would need this for the example to be valid, right?
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Ocean77
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Re: Market Down, Dividends UP YTD

Post by Ocean77 »

CuriousTacos wrote: Thu Jun 30, 2022 4:46 pm
Ocean77 wrote: Thu Jun 30, 2022 4:37 pm You can see the error in your math easily if you consider two companies that are identical in every way.
I don't think this is an appropriate constraint. The market is pretty good at convincing companies to pay dividends (or repurchase shares) when that is the best use of cash, or to invest in projects when that is the best use of cash. I don't think you can know better than the market in advance.

You can make better comparisons between a company that issues a dividend with another company that buys back shares, in which case the results are identical (assuming the buybacks happen at the same times as the dividends would)
Yes, good point. If the non-dividend paying company does not pay the dividend because it found a better way to invest that cash more profitably, then my example will not work. In that regard, it is a contrived example.
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Re: Market Down, Dividends UP YTD

Post by Hyperchicken »

Ocean77 wrote: Thu Jun 30, 2022 4:13 pm The stock market does not work this way. Stock prices are ultimately determined by company earnings. Stocks don't go up or down by fixed percentages, following the index advance or decline.
Your reasoning here is circular.

You start by postulating that a dividend-paying company has higher total return than a non-dividend-paying one. Then you turn around and use the outcome as a proof of the initial assumption.

It's like saying - "cats are better than dogs - therefore, cats are better than dogs".
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