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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Investing for Dividends? Date: 9/3/2011 2:20 PM
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Investing in stocks for the dividends they might pay isn’t a game I play. But it is a popular form of gambling, and that got me to wondering how it compared to its counterpart, buying bonds for the coupons they might pay. In both cases, there’s a potential income component and a potential capital gains (or losses) component. So I ran the numbers on my all-bond portfolio just to see what its profile might be and how that might compare to what the stocks are doing these days as their prices continue to decline.

These are the raw numbers where “CY” equals “Current Yield” in its customary meaning, and “P/L” is the annual gain (or loss) from the difference between the purchase-price and the exit-price (aka, par) expressed as a percentage of the entry-price. In other words, exactly the same formula was used to calculate P/L as is universally used to calculate CY. So your choice is to accept both, or to accept neither. The first pair is ranked in descending order by CY; the second, by P/L.

CY P/L CY P/L
27.2% 0.7% 4.6% 24.7%
16.4% 16.4% 13.3% 20.3%
15.8% 3.4% 13.7% 16.9%
15.3% 5.3% 16.4% 16.4%
13.8% 6.5% 10.9% 12.7%
13.7% 16.9% 1.3% 11.4%
13.4% 0.8% 10.7% 11.1%
13.3% 20.3% 6.7% 10.4%
13.2% 3.8% 12.1% 10.3%
13.0% 4.6% 12.5% 8.6%
12.7% 4.8% 5.8% 7.8%
12.7% 1.5% 3.4% 7.8%
12.5% 8.6% 13.8% 6.5%
12.3% 2.0% 7.3% 6.5%
12.3% 2.8% 3.6% 6.5%
12.2% 3.1% 7.7% 6.2%
12.1% 10.3% 7.3% 6.2%
12.1% 6.1% 12.1% 6.1%
11.9% 1.6% 8.2% 5.5%
11.7% 2.5% 15.3% 5.3%
11.6% 3.9% 11.0% 5.2%
11.5% -0.5% 9.7% 5.0%
11.5% -1.3% 6.9% 5.0%
11.3% 1.9% 7.7% 4.9%
11.2% 3.0% 12.7% 4.8%
11.0% 1.0% 5.1% 4.7%
11.0% 5.2% 10.0% 4.7%
11.0% 2.4% 13.0% 4.6%
10.9% -1.8% 9.9% 4.1%
10.9% 12.7% 9.7% 3.9%
10.9% 2.8% 11.6% 3.9%
10.9% 1.2% 13.2% 3.8%
10.8% 2.5% 7.3% 3.5%
10.7% 1.8% 9.5% 3.5%
10.7% 11.1% 8.9% 3.5%
10.7% 1.9% 9.0% 3.4%
10.6% 1.6% 15.8% 3.4%
10.5% 1.0% 4.4% 3.3%
10.4% 1.3% 8.4% 3.3%
10.4% 1.0% 12.2% 3.1%
10.3% 1.0% 11.2% 3.0%
10.2% 0.8% 6.2% 2.8%
10.1% 0.9% 12.3% 2.8%
10.0% 4.7% 6.8% 2.8%
9.9% 1.1% 5.5% 2.8%
9.9% 1.5% 9.0% 2.8%
9.9% 4.1% 10.9% 2.8%
9.7% -0.3% 6.7% 2.6%
9.7% 5.0% 9.5% 2.5%
9.7% 3.9% 10.8% 2.5%
9.6% -1.5% 11.7% 2.5%
9.5% 2.5% 7.5% 2.5%
9.5% 3.5% 5.4% 2.5%
9.5% 2.2% 11.0% 2.4%
9.4% 1.3% 9.2% 2.4%
9.3% 2.2% 5.7% 2.4%
9.2% 0.6% 9.2% 2.4%
9.2% 2.4% 6.3% 2.2%
9.2% 2.4% 9.5% 2.2%
9.2% -0.7% 9.3% 2.2%
9.2% 0.9% 7.0% 2.2%
9.1% 1.0% 8.2% 2.0%
9.1% 0.2% 12.3% 2.0%
9.1% 1.7% 7.0% 1.9%
9.1% -0.2% 11.3% 1.9%
9.0% 3.4% 10.7% 1.9%
9.0% 1.7% 7.4% 1.8%
9.0% 0.8% 10.7% 1.8%
9.0% 1.4% 9.1% 1.7%
9.0% 2.8% 9.0% 1.7%
9.0% -0.4% 11.9% 1.6%
9.0% 0.5% 10.6% 1.6%
8.9% 3.5% 6.5% 1.6%
8.8% -1.9% 8.0% 1.6%
8.8% -1.9% 6.2% 1.5%
8.7% -0.2% 12.7% 1.5%
8.7% 1.4% 9.9% 1.5%
8.6% 0.9% 5.5% 1.4%
8.6% 1.3% 8.7% 1.4%
8.6% 0.1% 7.8% 1.4%
8.6% -0.4% 9.0% 1.4%
8.6% 0.7% 8.6% 1.3%
8.5% -0.2% 8.3% 1.3%
8.5% -0.9% 10.4% 1.3%
8.5% 0.7% 5.7% 1.3%
8.4% 1.1% 7.1% 1.3%
8.4% 1.3% 9.4% 1.3%
8.4% -0.2% 8.4% 1.3%
8.4% 0.5% 6.1% 1.2%
8.4% 3.3% 10.9% 1.2%
8.3% -0.2% 8.0% 1.2%
8.3% 1.3% 6.2% 1.2%
8.3% 0.3% 6.1% 1.1%
8.3% -0.2% 6.8% 1.1%
8.2% 0.0% 8.4% 1.1%
8.2% 5.5% 9.9% 1.1%
8.2% 2.0% 11.0% 1.0%
8.2% 0.1% 10.5% 1.0%
8.1% 0.9% 9.1% 1.0%
8.1% 0.0% 7.1% 1.0%
8.1% -0.7% 10.3% 1.0%
8.0% -0.6% 10.4% 1.0%
8.0% 1.6% 7.6% 1.0%
8.0% 0.0% 8.1% 0.9%
8.0% 0.7% 7.8% 0.9%
8.0% 1.2% 7.8% 0.9%
8.0% 0.3% 10.1% 0.9%
8.0% 0.4% 9.2% 0.9%
7.9% -0.2% 8.6% 0.9%
7.9% -0.1% 10.2% 0.8%
7.9% -0.1% 9.0% 0.8%
7.9% 0.0% 13.4% 0.8%
7.9% 0.0% 7.4% 0.8%
7.8% 0.2% 6.9% 0.8%
7.8% -0.9% 8.5% 0.7%
7.8% 0.5% 5.7% 0.7%
7.8% 0.9% 7.0% 0.7%
7.8% 1.4% 7.5% 0.7%
7.8% -0.2% 8.6% 0.7%
7.8% 0.9% 8.0% 0.7%
7.8% 0.1% 7.4% 0.7%
7.7% 6.2% 27.2% 0.7%
7.7% -0.5% 6.9% 0.6%
7.7% 0.2% 9.2% 0.6%
7.7% 4.9% 5.4% 0.6%
7.7% -0.1% 4.9% 0.5%
7.7% -0.3% 7.8% 0.5%
7.6% 0.4% 9.0% 0.5%
7.6% 1.0% 6.1% 0.5%
7.6% -0.5% 6.8% 0.5%
7.6% -0.8% 7.2% 0.5%
7.6% 0.1% 8.4% 0.5%
7.5% 2.5% 6.4% 0.4%
7.5% -0.1% 8.0% 0.4%
7.5% 0.7% 7.6% 0.4%
7.5% 0.3% 7.0% 0.4%
7.5% 0.2% 7.4% 0.4%
7.4% 1.8% 6.6% 0.3%
7.4% 0.8% 8.0% 0.3%
7.4% 0.7% 6.1% 0.3%
7.4% 0.4% 7.4% 0.3%
7.4% -0.2% 7.2% 0.3%
7.4% -0.3% 8.3% 0.3%
7.4% 0.3% 5.5% 0.3%
7.4% -0.3% 4.7% 0.3%
7.4% -0.1% 7.1% 0.3%
7.3% -0.2% 7.5% 0.3%
7.3% 3.5% 6.5% 0.3%
7.3% 6.5% 6.4% 0.3%
7.3% 6.2% 4.7% 0.2%
7.2% 0.2% 9.1% 0.2%
7.2% -0.5% 7.7% 0.2%
7.2% 0.3% 7.5% 0.2%
7.2% 0.5% 7.2% 0.2%
7.2% -0.1% 7.8% 0.2%
7.1% 1.3% 6.4% 0.1%
7.1% -0.1% 8.6% 0.1%
7.1% -0.1% 7.8% 0.1%
7.1% 0.3% 8.2% 0.1%
7.1% -0.1% 5.9% 0.1%
7.1% -0.1% 7.6% 0.1%
7.1% 1.0% 6.8% 0.0%
7.0% -0.9% 7.9% 0.0%
7.0% -0.1% 6.7% 0.0%
7.0% 0.7% 8.0% 0.0%
7.0% 0.4% 6.4% 0.0%
7.0% -0.2% 8.2% 0.0%
7.0% -0.2% 6.0% 0.0%
7.0% 1.9% 6.5% 0.0%
7.0% 2.2% 6.7% 0.0%
6.9% 5.0% 7.9% 0.0%
6.9% 0.8% 8.1% 0.0%
6.9% -0.5% 7.5% -0.1%
6.9% 0.6% 7.0% -0.1%
6.8% 0.0% 7.1% -0.1%
6.8% 1.1% 7.1% -0.1%
6.8% 2.8% 6.5% -0.1%
6.8% 0.5% 7.1% -0.1%
6.7% 2.6% 7.9% -0.1%
6.7% 10.4% 7.4% -0.1%
6.7% 0.0% 7.2% -0.1%
6.7% 0.0% 7.7% -0.1%
6.6% -0.7% 7.9% -0.1%
6.6% 0.3% 7.1% -0.1%
6.5% 0.0% 7.8% -0.2%
6.5% 1.6% 7.0% -0.2%
6.5% -0.1% 9.1% -0.2%
6.5% 0.3% 7.0% -0.2%
6.4% 0.4% 8.3% -0.2%
6.4% 0.0% 7.4% -0.2%
6.4% 0.1% 8.4% -0.2%
6.4% 0.3% 8.7% -0.2%
6.3% 2.2% 6.1% -0.2%
6.2% 1.2% 7.9% -0.2%
6.2% 2.8% 7.3% -0.2%
6.2% 1.5% 8.3% -0.2%
6.1% 1.1% 8.5% -0.2%
6.1% -0.2% 5.9% -0.3%
6.1% 0.3% 7.4% -0.3%
6.1% 1.2% 9.7% -0.3%
6.1% 0.5% 7.7% -0.3%
6.0% 0.0% 7.4% -0.3%
6.0% -1.0% 5.9% -0.4%
5.9% 0.1% 8.6% -0.4%
5.9% -0.4% 9.0% -0.4%
5.9% -0.3% 6.9% -0.5%
5.8% 7.8% 7.6% -0.5%
5.7% 0.7% 7.7% -0.5%
5.7% 2.4% 7.2% -0.5%
5.7% 1.3% 11.5% -0.5%
5.5% 0.3% 8.0% -0.6%
5.5% 2.8% 9.2% -0.7%
5.5% 1.4% 6.6% -0.7%
5.4% 2.5% 8.1% -0.7%
5.4% 0.6% 7.6% -0.8%
5.1% 4.7% 8.5% -0.9%
4.9% 0.5% 7.0% -0.9%
4.7% 0.3% 7.8% -0.9%
4.7% 0.2% 6.0% -1.0%
4.6% 24.7% 11.5% -1.3%
4.4% 3.3% 9.6% -1.5%
3.6% 6.5% 10.9% -1.8%
3.4% 7.8% 8.8% -1.9%
1.3% 11.4% 8.8% -1.9%

The obvious downside to buying bonds for their current-yield is that very little money --with rare exceptions-- is going to be made from capital-gains. In fact, some capital losses --albeit modest ones-- will be suffered unless one never buys at premium to par (which can be a good strategy but, also, a very limiting one, for excluding a lot of profitable opportunities ). Whereas with a dividend-stock strategy, the expectation is that, though the gains from dividends will, on average, be modest, the capital-gains will be substantial. (Dividends become “Icing on the cake”, so to speak.)

The obvious upside to favoring bonds over div-stocks is that bonds are puts and resistant –though not impervious— to price declines. Thus, in either case, money can be made from either factor: current income or cap-gains. Where the two strategies differ is in the certainty of each source of revenue. Bond coupons, typically, never increase, nor decrease. But stock dividends do vary. Bond price vary hugely, just as do stock prices. But, typically, and probably more often than dividend -stocks have been able to be exited at an increase over one’s entry-price in the last decade (and the several going forward), bonds mature. So the cap-gains/losses of bonds are easier to stabilize, not that a comparable stability can’t be achieved with stocks as well, just as bond returns can be enhanced to a level comparable to the average total-returns available from stocks. It just depends on how one wants to frame the goal and how much extra machinery one wants to employ.

Why can these two strategies be compared? Because "Risk is risk, no matter where it is found". There's nothing inherently superior in a div-stock strategy over a couponed-bond strategy, and any differences in returns obtained are solely due to risks accepted. If you want more total-return, then you have to accept more total-risk, and either gambling game offers a wide range of both, and either can be done "conservatively", or "aggressively", or something in-between.

Charlie
-----------
PS Zeros were excluded from this exercise, not because their returns are less, but because they merit their own discussion.
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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33264 of 35387
Subject: Re: Investing for Dividends? Date: 9/3/2011 4:08 PM
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Contrary to conventional practice, I do not distinguish “investing” from “gambling”.

As Justin Mamis says, “To identify yourself as a ‘stock-investor’, or a ‘bond-investor’, is merely to identify what kind of gambling you do. In both cases, you are making bets about an unknowable future.” (paraphrased from his book, The Nature of Risk. What matters isn’t the words used to describe the activity, but the methods used to control risk and the results obtained. If you’re doing the financial equivalent of waltzing into the stock-casino (or the bond-casino) and betting in a size that is inappropriately large for your account, you can call yourself an ‘investor’ if you want to, but you really are nothing more than the worst form of gambler possible.

OTOH, if you have identified a game that, on average, offers a positive-expectancy, and if you know your edge and exploit it to its fullest advantage, you still might lose in both the short run and the long run, for exactly any or all of the reasons Taleb lays out in his books and papers on why market returns aren’t amenable to the maths that are typically applied to measuring ”risk”. So the best that can be hoped for, and the best that can be done, is to pursue what seems to be prudent risks, all the while protecting capital. In other words, you gamble smart, so that you don’t get yourself thrown out of the casino before you have a chance to learn how to survive in a game than can never, with certainty, be won in every spin of the wheel, nor in every lifetime.

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Author: voiceinthedin Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33269 of 35387
Subject: Re: Investing for Dividends? Date: 9/4/2011 12:11 PM
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Charlie,

just adding stock to the pot.....

the smartest stock investors do a few things well.

one margin of safety....

two a dividend yield over 5%....

three little debt on the companies they buy.....

four major blue caps with all of the above.....

!!!!!!!!!!!!!!

one the stock market for several reasons may get down later this year or early next year to 7000 or so on the Dow.....

two this would mean yields would be optimal...

three stock picking demands in this case low beta stocks with little debt at the right time.....studies show this approach with low beta stocks actually over the long haul out perform everything.....and much more safely.....


finally Mungofitch has a make believe port with blue chips and large dividends from 2009 when GE was something like $10.00....the average yield on the port was just over 4% at first.......the nominal dividend is up some 32% in less than two years.......while the cap gains is up some 100%.......

Dave

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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33270 of 35387
Subject: Re: Investing for Dividends? Date: 9/4/2011 1:33 PM
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Dave,

I've done a similar comparison in this forum as his of the returns from stocks vs bonds from that same March 2009 bottom, and bonds were competitive with stocks on an absolute basis. On a risk-adjusted basis, bonds beat the crap out of stocks, of course. So, not withstanding the immense respect I have for Jim and his work, back-tested results can't be spent at the grocery store. Sometime, when you're truly bored, Google "investor under-performance."

How is that the Standard & Poor’s 500 index can turn in a return of 11.80% for the period 1987-2006 and yet individual stock mutual fund investors earned a dismal 4.30%? This is not an anomaly. Historical data indicates that individual investors consistently and significantly underperform the returns of the overall market.

Assume the study on which that result was based was methodological sound. Then apply the same ratio of under-performance to a benchmark such as Lehman's Aggregate Bond Index. (or whatever it has been re-named to). Stocks or bonds or whatever, it doesn't matter what the retrospective studies suggest was available to investors. The vast majority, like 95% of them, are unable to achieve even a reasonable fraction of it. Always, my point in this forum has been this:

"Very decent bonds can be made from bonds. Much better money can be made from other things. So, pick your game, and stop indulging in woulda/coulda/shoulda."

Charlie

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Author: LONGREITS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33271 of 35387
Subject: Re: Investing for Dividends? Date: 9/4/2011 1:38 PM
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"How is that the Standard & Poor’s 500 index can turn in a return of 11.80% for the period 1987-2006 and yet individual stock mutual fund investors earned a dismal 4.30%? This is not an anomaly. Historical data indicates that individual investors consistently and significantly underperform the returns of the overall market."

This is called the Dalbar study.

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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33272 of 35387
Subject: Re: Investing for Dividends? Date: 9/4/2011 2:01 PM
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DALBAR’s update of its Quantitative Analysis of Investor Behavior (QAIB) study found that while the S&P 500 has returned 8.35% over a 20 year period ending in 2008, the average equity investor earned just 1.87%, which was less than the inflation rate of 2.89%. Bond investors fared no better. They earned returns of just 0.77% compared to 7.43% for the index. The DALBAR update isn’t surprising. The QAIB has consistently shown a large gap between the returns investors actually earn and the return they could have easily earned with a buy-and-hold strategy. Other studies have confirmed DALBAR’s findings. http://www.canadiancapitalist.com/investors-behaving-badly/

Dave,

The work done on the MI board is impressive for its rigor and thoroughness, and it's work that any investor could emulate. But they don't, nor do they attempt to create other methods for themselves. They just "follow the crowd", because their performance relative to their peers is what matters emotionally to them, not spendable, benchmark performance.

Nearly all macro-economic data suggest that the US economy is following the path of Japan and can expect another decade or two of muddling along, with stock prices flat to down and bond prices flat to modestly up, or very few good opportunities to put money to work in either asset-class. So, pick your game.

Charlie

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33275 of 35387
Subject: Re: Investing for Dividends? Date: 9/4/2011 7:28 PM
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The work done on the MI board is impressive for its rigor and thoroughness, and it's work that any investor could emulate. But they don't, ... They just "follow the crowd", because their performance relative to their peers is what matters emotionally to them,

Dummy me, I saved these quotes but neglected to save the URLs, so I have no idea where I got them:

".. feature of many winning investment strategies: the arbitrage involved is behavioral, not financial. Good returns derived from uncomfortable strategies do not get arbitraged away, because very few people will actually do it."

"Most investors do poorly, but it’s not because good investment methodologies are secret. It’s because they do not have the will to stay with a winning strategy during a period when it is under duress."

"The arbitrage is less with the strategy than with human nature. Most investors can’t capture the excess returns because they aren’t willing to deal with the difficult inflection points."

"More Money Has Been Lost Avoiding Risk Than at the Point of a Gun
... Until you realize taking a beating is a normal part of long-term investing, you’ll hurt the overall performance of your portfolio.
Staying with your strategy during a pullback is difficult, and it never gets any easier."

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