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No. of Recommendations: 12
Can Dividends Be Cut?
A prolonged economic downturn might lead to dividend cuts, however most companies are very hesitant to cut or get rid of their dividend payouts. They know if they do so it will have a very negative effect on their share price. In my limited experience watching companies that do, it is only done in very rough seas as a precaution deemed necessary to preserve the company itself. So it does not happen that often, and when it does most are very quick to reinstate the dividend as soon as possible.

I think people look at a paltry 1.6% or whatever it is that the average S&P stock pays out at the moment and compares that to current rates available in CD's or something similar and says well I can do better than that in a 5-yr CD. And they probably can do better in the short term, but in so doing they underestimate the long-term effect of a growing dividend. Unlike the interest rate paid on CD's, or bonds, a dividend in a company that consistently raises it's yield each year is growing in a special way that no CD can compare to over the long haul.

So, to anyone who's looking at dividends and discounting the paultry payout I'd like to suggest they consider the long-term effect if that dividend is raised each year for 20 years.

The Dividend Secret
If you bought that same stock 20 years ago and it has split several times 2 for 1 then to calculate your rate of return in terms of what you paid for your original investment you would have to double that 1.6% a few times. And when you start doubling - even a small number can become a very large number after a few times.

For me, this is where we find the true magic of dividends. It is not inconceivable that you get to a point where you are getting a 10%, 15%, or even 20% return or more. And you get that return as long as the company continues to pay the dividend; even then there is a great liklighood that the return will continue to grow. You may never have to sell the stock to have the original value of your investment returned to you and more.

Inflation
Of course, over longer periods inflation eats up a small percentage of your return. I may be getting 6.5% on my (Fe94) investment in Johnson&Johnson, for example, but dollars in 2002/2003 and in future years won't likely garner the purchasing power that Fe 94 dollars did. However, the effect isn't that significant, increases in the payout amounting to about 12% each year in recent years, have been more than enough to counter for inflation rates averaging little more than 2%.

It is conceivable that inflation rise up again and become more of a factor going forward, however, generally such an economic environment arises because companies are finding it easier to raise prices and make those increases stick. In such an environment they are going to be more likely able to raise their dividend.

So generally, and historically dividend increases have exceeded inflation rates. This has been my observation, but no one need take my word for it. This is something which is verifiable. You can check it out to your own satisfaction.

Keeping A Buffer
As long as you have enough dividend income to pay for your living expenses and have established a healthy buffer between what you take in and what you pay out you should be fine. Even on a low-cost budget a person can run into occasional emergencies so it's a good idea to keep a buffer between your costs and what you take in.

The size of the buffer with which you are comfortable is an individual thing. It depends a lot on your risk-tolerance level. Some may need a larger buffer than others to feel secure enough.

I don't hesitate to let my buffer grow. At the moment I figure I spend only a small fraction of what I could probably spend without completely depleting my portfolio until I'm too old to be very concerned about it.

Your buffer is what gives you a sense of security. If I was barely squeaking by using dividends to pay for living costs that would be cutting things a little too fine for my liking. In such a case I'd be inclined to continue working to establish enough income to enhance the size of the buffer.

But at some point a person has to accept the fact that he/she is not going to live forever.

You may have only another 25-30 years left on this planet in which you are healthy enough to enjoy life.

If you have a sizeable portfolio you might want to ask yourself at what point your time becomes a more valuable commodity than the act of adding even more money?

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No. of Recommendations: 6
jammerh: "The Dividend Secret
If you bought that same stock 20 years ago and it has split several times 2 for 1 then to calculate your rate of return in terms of what you paid for your original investment you would have to double that 1.6% a few times. And when you start doubling - even a small number can become a very large number after a few times."


Why would you want to calculate your rate of return in this manner? To me, it seems to be intended to be ego-bolstering and deceptive.

It ignores current market values and opportunity cost.

For example, assume 10k invested 9 years ago in a stock that has split 2 for 1 three times during that holding period; as a result there are 8x as many shares as were originally purchased. Further, assume that current market value of stock is 20k; it doubled in 9 years. If the stock is paying 2% annual dividend, then it returning $400/year.

Recasting that as $400 year/$10k initially invested and recalculating as a 4% annual return makes the reutn sound better but it ignores the opportunity cost - the ability to sell the stock for 20k and redeploy it into something acutally returning 4% of 20k.

Obviously, if taxes need to be paid on gains, the calculation becomes more involved, but if the stock is held in a tax-benefitted plan, then that is a non-issue. Refusing to sell a stock that is paying a 2% dividend because it is 4% on the amount initially invested to buy an equivalent stock paying 4% currently is pennywise and pound foolish.

In addition to tax issue, which I already addressed, there is also the reinvestment risk, but unless the portfolio is intended to be in a single stock, it is an issue that is not any different than that facing a person with new/additional dollars to invest, so it should largely be anon-issue, too.

IOW, except for tax consequences (which we assumed away with holdings in tax-benefitted account), the decision to hold is the same as the decision to invest today at the current market value (and to receive/settle for the dividend return based on that value). Calculating dividend returnbased on original investment value under these circumstances only serves to cloud judgement with irrelevant data, IMO.

I will acknowledge that the issue is more complex if the holdings are not sheltered in a tax-favored account, especially because of asumptions about future tax rates and step-up in basis for estate tax.

Regards, JAFO



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Jafo, "Why would you want to calculate your return in this way?"

Only in an effort to demonstrate an aspect to dividend growth which can be obscured by the splitting process. I don't see it as an "ego" thing. I see it in the spirit of sharing and learning.

"It ignores current market values and opportunity cost"

It ignores a lot of things, but I think it is an important point in the context of understanding how growth in the dividend can be obscured by the splitting process - that's why I raised it.

"Recasting that as $400 year/$10k initially invested and recalculating as a 4% annual return makes the reutn sound better but it ignores the opportunity cost - the ability to sell the stock for 20k and redeploy it into something acutally returning 4% of 20k."

In my post I'd hoped to emphasize the power of dividend growth, which I believe is underappreciated. Market Timing vs a Buy & Hold strategy may be a related issue, however, it is not one I'd hoped to deal with in this particular post.

As for taxes you are taxed only on the capital gains when you sell. If you don't sell you don't pay capital gains. Apart from this you pay taxes on the dividends, but if this is your only source of income you might not have to pay much in taxes until your income is above a certain level. If your living costs are minimal you may not have to pay any taxes. Even if you do pay some taxes on your dividend income it doesn't destroy the validity of the approach. (if you missed it this has been discussed in a previous thread)

"Refusing to sell a stock that is paying a 2% dividend because it is 4% on the amount initially invested to buy an equivalent stock paying 4% currently is pennywise and pound foolish."

Again, I'm not interested in a momentum, or a market-timing approach. If you employ such an approach and you like it that's fine. If you don't like or appreciate the value of dividend income then we can agree to disagree. I don't expect everyone to have the same focus, interest, or emphasis that I do.

Generally, I don't buy and sell. I believe in a Buy & Hold approach. So, a dividend growth approach dovetails nicely with it. I'm not here to criticize your approach or to argue with you. I'm only here to describe the value of a dividend growth perspective as I see it.





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jammerh:

Jafo: <<<"Why would you want to calculate your return in this way?">>>

"Only in an effort to demonstrate an aspect to dividend growth which can be obscured by the splitting process. I don't see it as an "ego" thing. I see it in the spirit of sharing and learning."

I agree that the split may obscure some information, but I still wonder what value having that information adds to the decision making process.

<<<"It ignores current market values and opportunity cost">>>

"It ignores a lot of things, but I think it is an important point in the context of understanding how growth in the dividend can be obscured by the splitting process - that's why I raised it."

How does having this unobscured information affect or influence your decision making? And how does it make the decision making better?

<<<"Recasting that as $400 year/$10k initially invested and recalculating as a 4% annual return makes the reutn sound better but it ignores the opportunity cost - the ability to sell the stock for 20k and redeploy it into something acutally returning 4% of 20k.">>>

"In my post I'd hoped to emphasize the power of dividend growth, which I believe is underappreciated. Market Timing vs a Buy & Hold strategy may be a related issue, however, it is not one I'd hoped to deal with in this particular post."

But there is a real difference between mopmentum investing, generally being buy and hold with annual re-balance, and buy and hold and never selling under any circumstances.

"As for taxes you are taxed only on the capital gains when you sell."

Only if the stocks are not in a tax benefitted account. If they are in a tax benefitted account, you probably never pay capital gains and you pay eitehr ordinary income tax when withdrawn or no tax at all when withdrawn.

"If you don't sell you don't pay capital gains."

Same. See above.

"Apart from this you pay taxes on the dividends, but if this is your only source of income you might not have to pay much in taxes until your income is above a certain level."

Same. Dividens paid on stock held inside tax-benefitted account does not trigger current taxes.

"If your living costs are minimal you may not have to pay any taxes. Even if you do pay some taxes on your dividend income it doesn't destroy the validity of the approach. (if you missed it this has been discussed in a previous thread)"

I did not miss this and I understand the issue, the progressive income tax within the USA and the value of persoanl exemption(s) and the standard deduction (or itemizing, as the case may be).

<<<"Refusing to sell a stock that is paying a 2% dividend because it is 4% on the amount initially invested to buy an equivalent stock paying 4% currently is pennywise and pound foolish.">>>

"Again, I'm not interested in a momentum, or a market-timing approach."

Who even susggested that? Not I. Unless you are claiming that there are no circunstances under which you sell any stock that you purchased, you must have some kind of exit strategy. What if dividends are cut three years in a row? Or suspended altogether? Are you really claiming that you never sell?

"If you employ such an approach and you like it that's fine."

I do not.

"If you don't like or appreciate the value of dividend income then we can agree to disagree. I don't expect everyone to have the same focus, interest, or emphasis that I do."

And I can see potential value in a dividend income approach. I just do not see the value in ignoring current values and running all calculations based on initial value at time of investment. "House money" thinking is a fallacy that clouds thinking in several contexts.

"Generally, I don't buy and sell. I believe in a Buy & Hold approach. So, a dividend growth approach dovetails nicely with it. I'm not here to criticize your approach or to argue with you. I'm only here to describe the value of a dividend growth perspective as I see it."

Well, I have been more or less quiet through much of this discussion, through several threads, and have not even questioned the potential value of a dividend growth approach --- I have only questioned the value of one particular set of calculations.

If you genreally do not buy and sell, then there likely are circumstances in which you do sell. What I am also asking is what do you do if a you discover a better opportunity to invest and the only way to raise funds is to cull the current portfolio and sell something to raise the dollars?

Regards, JAFO

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<<In my post I'd hoped to emphasize the power of dividend growth, which I believe is underappreciated. Market Timing vs a Buy & Hold strategy may be a related issue, however, it is not one I'd hoped to deal with in this particular post.
>>


I think youmake a worthwhile point, and I like to consider the returns I get from dividends based on the original purchase price of stock.

For some reason, my favorite is Washington Mutual stock I bought twenty odd years ago. It wasn't paying any dividends when I bought it, but is paying me around a 35% return per year these days based on the price I paid for my original stock purchase.



Seattle Pioneer
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<my favorite is Washington Mutual stock I bought twenty odd years ago. It wasn't paying any dividends when I bought it, but is paying me around a 35% return per year these days based on the price I paid for my original stock purchase.>


I think there is some importance in all of the POVs described here. The original point of understanding dividend growth is a good one. However, I can see how too much of a focus on the current yield to original purchase price can distort the picture.

You say that WM is providing you a 35% dividend yield. The current dividend of 1.12 divided by todays close of 35.18 produces a current yield of 3.18%. What Jaffo says (if I understand his point correctly) is that focusing on the 35% may keep you from pursuing other income producing stocks that may have both a higher current yield and better growth prospects. IE: MO has a current yield of around 6.2%, a full 3% higher than WM. There are a number of REITs out there that have 7%+ yields, a long history of dividend growth and an element of principle growth. This whole issue can get very complicated depending on how you arrange your allocations. IOW, if one already has a REIT allocation or other significant real estate holdings, they may not want to move out of WM.

One measurement that I apply to all of my holdings is the calculation of annualized return. That factors in growth in price and dividend yield as well as a time factor. I think this calculation gives a much better total picture of your investment, especially after you have held it for a number of years. If you have held your shares for almost 20 years it may be very useful (although possibly difficult) to attempt such a calculation.

Of course even this calculation can cause you to freeze on the trigger if you happen to mistake your good fortune for skill. An excellent example is a block of my LU shares. At the end of 1997 I had an annualized return on them of 18%; at the end of 1998 it was 227%; at the end of 1999 it had fallen to a mere 139%; at the end of 2000 it stood at minus 5.5%. When I finally threw in the towel in 2001 it was at an annualized return of -12%. It is down some 80+% since my sale, so I am spared from having to make a further calculation.

The correct thing to do was very obvious in hindsight. The immense success I had, along with the rather large potential tax bill froze me. I figured I would just continue to ride my biggest winner. There was also the old fear/greed monster at work here. If there was a rebound after each pullback, I would have been upset at myself for selling too soon. BTW, there is the very real need for each of us to remind ourselves that we are not as smart as we think we are. I have long since stopped worrying about that potential tax bill. I do think a similar mindset can develop if you focus too much on the 35% dividend yield and not enough on the future growth prospects of WM (or any other holding).

The last 6 years have been quite a learning experience for anyone in the markets. In a strange way, I am even somewhat grateful for what the last three down years have taught me. It has reinforced many lessons that should always be on your radar screen. Among them are to stay diversifed (to limit the damage that any single holding can do to you) and to never mistake a bull market for genuis.<grin>


BRG



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<<
You say that WM is providing you a 35% dividend yield. The current dividend of 1.12 divided by todays close of 35.18 produces a current yield of 3.18%. What Jaffo says (if I understand his point correctly) is that focusing on the 35% may keep you from pursuing other income producing stocks that may have both a higher current yield and better growth prospects. IE: MO has a current yield of around 6.2%, a full 3% higher than WM. There are a number of REITs out there that have 7%+ yields, a long history of dividend growth and an element of principle growth. This whole issue can get very complicated depending on how you arrange your allocations. IOW, if one already has a REIT allocation or other significant real estate holdings, they may not want to move out of WM.

One measurement that I apply to all of my holdings is the calculation of annualized return. That factors in growth in price and dividend yield as well as a time factor. I think this calculation gives a much better total picture of your investment, especially after you have held it for a number of years. If you have held your shares for almost 20 years it may be very useful (although possibly difficult) to attempt such a calculation.
>>


Well, frankly I don't look at the underlying stock all that much. I've been sending in DRIP payments monthly for ten years or so.


Heck, I didn't realize the dividend payout was as high as 3+ percent. Since that's the case, my annual dividend return on the initial price I paid for the stock must be closer to 70% than 35%.


The joke on this one is that when I bought the initial shares, my broker made an error and placed two orders, each for the amount of stock I wanted to buy. Unfortunately, I made him correct his error.



Seattle Pioneer

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<<Of course even this calculation can cause you to freeze on the trigger if you happen to mistake your good fortune for skill. An excellent example is a block of my LU shares. At the end of 1997 I had an annualized return on them of 18%; at the end of 1998 it was 227%; at the end of 1999 it had fallen to a mere 139%; at the end of 2000 it stood at minus 5.5%. When I finally threw in the towel in 2001 it was at an annualized return of -12%. It is down some 80+% since my sale, so I am spared from having to make a further calculation.

The correct thing to do was very obvious in hindsight. The immense success I had, along with the rather large potential tax bill froze me. I figured I would just continue to ride my biggest winner. There was also the old fear/greed monster at work here. If there was a rebound after each pullback, I would have been upset at myself for selling too soon. BTW, there is the very real need for each of us to remind ourselves that we are not as smart as we think we are. I have long since stopped worrying about that potential tax bill. I do think a similar mindset can develop if you focus too much on the 35% dividend yield and not enough on the future growth prospects of WM (or any other holding).
>>


Oh, I agree. My Corning (GLW) stock was down 99% from it's all time high not too long ago.

For me, stock picking comes down to buying what appear to be good companies for the long term, and often buying them monthly with DRIPS.

So I don't claim any great ability as a stock picker. Buy 'n hold has been my favored strategy, which has worked well on the whole.

Hot shots are welcome to their own strategies, and good luck to you, too!



Seattle Pioneer
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JAFO,"I agree that the split may obscure some information, but I still wonder what value having that information adds to the decision making process."

I'm sorry JAFO, but I can't see what it is you don't understand here. If you're interested in current values and "opportunity costs" that sounds to me as if you are talking about a market-timing approach which involves buying and selling. That is not what I'm trying to describe.

Historically, much of investing returns have come in the form of dividends. As a long-term buy and hold investor I am not concerned about selling. That minimises a lot of the decision-making.

Certainly I understand the difference between Buy & Hold and "Buy & Hold with an annual re-balancing". To my way of thinking Buy & Hold means just that. Otherwise they might call it "Buy, Hold Then Sell".

"Only if the stocks are not in a tax benefitted account. If they are in a tax benefitted account, you probably never pay capital gains and you pay eitehr ordinary income tax when withdrawn or no tax at all when withdrawn."

Well, yes, tax benefited accounts are another consideration if you have income high enough to make them worthwhile.

"If you genreally do not buy and sell, then there likely are circumstances in which you do sell. What I am also asking is what do you do if a you discover a better opportunity to invest and the only way to raise funds is to cull the current portfolio and sell something to raise the dollars?"

Yes, there are circumstances in which I would sell but they are very rare. For example, I would sell if I needed the money.

However, generally I do not "...flit from flower to flower..." as Peter Lynch put it because that way you risk "...selling your flowers to water your weeds."

Most of us trade too much. We jump from one hot idea to another hoping to get in on the latest trends before everyone else does. Often we buy stocks that go down and we sell stocks that go up. In this respect we can be and often are our own worst enemies.

Warren Buffett says,

"The best time to sell is never.

This is good advice if you've done your homework and chosen good companies for the long haul.


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Warren Buffett says, "The best time to sell is never."

Who am I to argue with an investing legend, but is this really true? Is he saying that you never sell even a dog of a stock? Or, stating the obvious, that you ought not pick dogs to begin with?
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CatherineCoy asks,

Warren Buffett says, "The best time to sell is never."

Who am I to argue with an investing legend, but is this really true? Is he saying that you never sell even a dog of a stock? Or, stating the obvious, that you ought not pick dogs to begin with?


Warren Buffett regularly ejects "the dogs" from his portfolio (US Airways comes to mind), but he holds on to his winners (I think he's held Washington Post stock for about 30 years.)

intercst
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Catherine, good question. I take it that there is a little bit of both implications in his meaning with a little more emphasis on the latter.

You ought to do your homework so thoroughly that the chances of mishap are minimal. Of course, no one can account for the unexpected.

Disasters do happen, and some of us may feel that Buffett's stockpicking abilities give him the wherewithall to say such things but that they don't apply to the individual investor.

It is a hard question to answer though without getting quite far off topic for this thread. Maybe I'll try to address this in a later post on the merits of Buy And Hold investing.



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If you bought that same stock 20 years ago and it has split several times 2 for 1 then to calculate your rate of return in terms of what you paid for your original investment you would have to double that 1.6% a few times. And when you start doubling - even a small number can become a very large number after a few times.

I saw a point that some people were trying to make, but let me try my words:
If you have a stock with 1.6% dividends, and it keeps that rate through a couple splits, then you *are* earning 3.2%, then 6.4%, on your *original* investment. BUT, what makes compounding work is the continuous growth of earnings on top of earnings. So, when the dividend arrives and it's 6.4% of your original investment, it gets reinvested and buys more stock at the latest price, where the yield is still 1.6%. So, it's not the same as having a continuously doubling growth at each stock split.

Then again, if you have a stock that's growing and splitting AND paying dividends, it sounds like a pretty good one!
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Warren Buffett says,

"The best time to sell is never.


I don't remember this quote. Do you have a reference for this quote?

I do know he said something similar:
“My favorite time frame for holding a stock is forever.”
“Striking Out on Wall Street,” US News and World Report, June 20, 1994, p. 58

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Point #1: I think it's foolish to calculate the dividend yield as a percentage of your initial investment.

It is misleading. It will make you feel great about your investment even if it may lagging most other investment opportunities. You can be patting yourself on the back for getting a 35% dividend yield compared to a 5% current dividend yield on another stock, when the other stock might be a much greater opportunity. It would also have the strange result of making your old investment look much more attractive than any recent purchases of the same stock.

So forget about the dividend yield on your initial investment. Consider the return on the amount of your *current* investment, which is the current value of the investment (i.e. it *is* the opportunity cost you should be considering).

Point #2: I can create an increasing "dividend" out of other investment opportunities.

For example, let's say that I would be happy with a 3% "dividend yield", provided that I felt pretty certain that the dividend would increase consistently in the future. I could do this risk-free with Treasury bonds. I would take 3% of the interest as a distribution and the excess income would be re-invested. My interest income will increase next year as a result of this additional investment. My 3% dividend yield would be for a greater dollar amount, hence a growing "dividend." So it is very important to compare the potential additional growth in dividends of a stock compared to this risk-free benchmark. It is foolish to be proud of your investment acumen for picking a stock with consistently increasing dividends if the growth rate of those dividends is close to what you would have gotten with risk-free bonds.

A similar effect can be created using stocks that don't pay dividends, although it is a little trickier. You would simply sell a percentage of your shares that is less than the annual growth rate in the share price. It is a little trickier to manage because you would obviously want to sell when the stock is overvalued or even appropriately valued. You would need to make sure that you have enough cash on hand to allow you to wait for this condition to occur. The advantage of this method is that you will most likely save taxes because of the favorable capital gains tax rates.
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Mark, nice to hear from you again.

"You can be patting yourself on the back for getting a 35% dividend yield compared to a 5% current dividend yield on another stock, when the other stock might be a much greater opportunity."

Just how big a (growing) dividend would you have to get before you'd pat yourself on the back?

With regards to greater opportunity elsewhere, Lynch said that if you "...you spend your time flitting from flower to flower, you'll eventually end up selling your flowers to water your weeds."

In my opinion, "greater opportunity" elsewhere is a time-worn excuse money managers and brokers use to encourage individual investors to trade too much, and thereby churn themselves out of any gains they might have made.

Such people like to have you focus on the capital gains because that's where they make their money off you - by convincing you that you need their expert managerial skills.

"Point #2: I can create an increasing "dividend" out of other investment opportunities."

You may be able to create a 3% return elsewhere, but where are you going to find the 35% return on your original investment that you referred to above?

"So it is very important to compare the potential additional growth in dividends of a stock compared to this risk-free benchmark. It is foolish to be proud of your investment acumen for picking a stock with consistently increasing dividends if the growth rate of those dividends is close to what you would have gotten with risk-free bonds."

This indicates to me that you completely miss the point on how dividends can grow.

"A similar effect can be created using stocks that don't pay dividends, although it is a little trickier. You would simply sell a percentage of your shares that is less than the annual growth rate in the share price. It is a little trickier to manage because you would obviously want to sell when the stock is overvalued or even appropriately valued. You would need to make sure that you have enough cash on hand to allow you to wait for this condition to occur. The advantage of this method is that you will most likely save taxes because of the favorable capital gains tax rates."

I agree with you on this point. As I've indicated earlier, although I may not have emphasised the point well enough, companies such as Berkshire Hathaway, or Dell Computer etc... may make good "dividend" investments if you choose to look at it this way.


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"Point #2: I can create an increasing "dividend" out of other investment opportunities."

You may be able to create a 3% return elsewhere, but where are you going to find the 35% return on your original investment that you referred to above?


What do you mean? You would still be getting a 35% dividend yield on your *original* investment.
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"So it is very important to compare the potential additional growth in dividends of a stock compared to this risk-free benchmark. It is foolish to be proud of your investment acumen for picking a stock with consistently increasing dividends if the growth rate of those dividends is close to what you would have gotten with risk-free bonds."

This indicates to me that you completely miss the point on how dividends can grow.


No, *you* are missing the point. The "dividend" from the risk-free bonds would also grow as you re-invested the excess interest income. This is no different from a company reinvesting excess earnings (i.e. earnings not paid out as dividends).
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Mark, in your original message you said,

"You can be patting yourself on the back for getting a 35% dividend yield..." which led me to believe you understood how you could be getting a 35% return on the cost of your original investment.

I'll try to explain what I mean by this a little more literally to see if we can agree on a starting point for discussion. If not we can just agree to disagree on this. It isn't my intention to persuade anyone who prefers another approach. It isn't my contention that a dividend/growth focus is for everyone.

What I mean by a 35% return is that the current yield expressed as a percentage of the cost of your original investment may have to be adjusted to account for splits in the stock price, and increases in the dividend over the years.

Over longer periods of time this can mean that the real return you are receiving on the cost of your original investment is much higher.

If the stock currently pays 2% but you bought it 20 years ago and the stock split 2-for-1, 4 or 5 times since, and the dividend payout has been raised each year, you may very well be receiving a rather nice return. I'll let you do the calculations because I'm not interested in quibbling over a percentage or two.

Actually, I'm not here to quibble at all. I've described the approach to the best of my ability and understanding.

If anyone agrees there could be some merit in the approach they're welcome to persue some of the reading I've suggested earlier. If not I don't see any point in us arguing past each other for any great length of time. If you prefer another approach that's fine. I'm not trying to convince you that this approach is better for you.

However, this is a valid approach, and it is one that is verified by many sources - some of which I've cited above.

If you have something to add, or some positive criticism I'd appreciate hearing it, but I'm not interested in engaging in a prolonged debate with professional money-managers who have a vested interest in telling people that they really can't invest on their own.

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What I mean by a 35% return is that the current yield expressed as a percentage of the cost of your original investment may have to be adjusted to account for splits in the stock price, and increases in the dividend over the years.

I understood from the beginning what you mean, and I *still* think it is foolish to think this way.

Let's say you bought Coca Cola stock years ago and are earning a 35% dividend yield based on your calculation, and let's say that *I* just bought Coca Cola stock today at a 1.8% yield.

It would be quite foolish to think that *your* investment will perform any better than mine from here on out. The fact is that the so-called 35% dividend yield is irrelevant and *misleading*.
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"...I *still* think it is foolish to think this way..."

Mark, you're welcome to take it whatever way you choose. Some people are going to appreciate nice dividend returns, some aren't. It comes as no big surprise to me that not everybody is impressed.

It comes as no big surpirse to me that you feel you can get better gains elsewhere. Maybe you can.

"It would be quite foolish to think that *your* investment will perform any better than mine from here on out. The fact is that the so-called 35% dividend yield is irrelevant and *misleading*."

Of course, two people with stock in the same company can expect identical returns. Focusing on a dividend/growth approach shouldn't be viewed as a way to search for the highest-possible capital gains.

The idea, for me, is not that a fat dividend return can be taken as an indicator of better performance "from here on out", but rather that a fat return might be enough reward in and of itself.

So, if you don't feel a 35% return on your investment is adequate how much would make you happy? ...and how long would you have to receive such a return before you'd be satisfied?

A dividend/growth approach is more suitable for individual investors with long-term investment horizons who are happy with modest, relatively consistent gaines that can grow steadily higher over time. It may not be quite as glamourous as chasing the latest new, new thing, but such returns might be preferable to anyone tired of chasing rainbows.



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Mark, you're welcome to take it whatever way you choose. Some people are going to appreciate nice dividend returns, some aren't. It comes as no big surprise to me that not everybody is impressed.

It comes as no big surpirse to me that you feel you can get better gains elsewhere. Maybe you can.


I have nothing whatsoever against dividend returns. In fact, UST (dividend yield of about 5.7%) makes up about 20% of my portfolio. But of course I don't mind that my capital gains on UST since October have given me roughly 20% in additional return.

So, if you don't feel a 35% return on your investment is adequate how much would make you happy? ...and how long would you have to receive such a return before you'd be satisfied?

You obviously still have no idea what I'm talking about, so I will not bother pursuing this further.
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I agree. I don't understand what you're talking about, and there is probably no point in our continuing to talk past each other.
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Author: jammerh Date: 12/26/02 12:05 PM Number: 87627
The Dividend Secret
If you bought that same stock 20 years ago and it has split several times 2 for 1 then to calculate your rate of return in terms of what you paid for your original investment you would have to double that 1.6% a few times. And when you start doubling - even a small number can become a very large number after a few times.


I derive a large portion of my retirement income from dividends, and I search out those companies who regularly increase their dividend. In fact, I've been preaching dividends to all who would listen since 1998 right here on this board. Until recently, not many would listen. Amazing how things change.

Anyway, I've been reading your posts on the subject and it occurs to me, by your comments like the one above, that you think that splitting a stock has some effect on the dividend rate. So, just to be sure, I thought I would point out that when a stock splits, its dividend is cut by the same percentage. So, if a stock splits 2 for 1, the dividend is cut in half. Thus, splitting has no effect whatsoever on the growth of the dividend.

Russ
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Anyway, I've been reading your posts on the subject and it occurs to me, by your comments like the one above, that you think that splitting a stock has some effect on the dividend rate. So, just to be sure, I thought I would point out that when a stock splits, its dividend is cut by the same percentage. So, if a stock splits 2 for 1, the dividend is cut in half. Thus, splitting has no effect whatsoever on the growth of the dividend.

Russ


Your thinking there is of course correct.

However, companies quite often take the opportunity to strut their stuff when they announce a split. Strong companies arew known to jack up the dividend by a greater-than-normal amount in concert with the split, as a celebration of sorts.


Euro
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Author: eurotrash01 Date: 1/2/03 6:57 PM Number: 88590
...companies quite often take the opportunity to strut their stuff when they announce a split. Strong companies arew known to jack up the dividend by a greater-than-normal amount in concert with the split, as a celebration of sorts.

Now, I'm not saying you're wrong, but I have not seen this effect you mention.

My largest dividend payers are JPM, MO, XOM, GM, EK, SBC, AVB, EOP, EQR, HCP, PLD, SPG, BAC, BMY, CVX, USB, and VZ.

To my knowledge, in the last 15 years, none of these has ever increased their dividend in conjunction with a split. They have all steadily increased their dividends, but it has not been connected with the splits.

Russ
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"Anyway, I've been reading your posts on the subject and it occurs to me, by your comments like the one above, that you think that splitting a stock has some effect on the dividend rate. So, just to be sure, I thought I would point out that when a stock splits, its dividend is cut by the same percentage. So, if a stock splits 2 for 1, the dividend is cut in half. Thus, splitting has no effect whatsoever on the growth of the dividend."

Russ, you're right that some novice investors seem to believe that the splitting process has some magical powers. I assure I do not. I've been an investor for more than 25 years. That's long enough to have been through more than a few splits and to get some idea of how they affect share prices and dividend yields.

What I'm trying to point out here is the idea that many novice, and even some not-so-novice investors seem to underestimate the true value of dividends. I suspect that part of the reason why dividends are given so little attention is that many investors really don't understand them.

While a dividend of 1.5% might seem low, if the stock has split 4 times (each time 2 for 1)that dividend, expressed as a percentage of the cost of your original investment has to be doubled 4 times.

Split # 1 = 3%,
Split # 2 = 6%
Split # 3 = 12%
Split # 4 = 24% and so on...

This is how we say it is quite conceivable that someone be making a 35% return or even more.

Actually the dividend expressed as a percentage is not cut in half in a 2 for 1 split, but the value of the share price is cut in half which amounts to pretty much the same thing. I know what you mean. I've expressed it this way myself in the past, but have been corrected on it. It is more accurate to say that the dividend remains the same. (If you were getting 1.5% before the 2 for 1 split, you're still getting 1.5% after the 2 for 1 split, but since each of your (higher number of) shares is cut in half, the payout is likely to remain the same.

So I agree with you that the splitting process per se does not affect the dividend yield strictly speaking. But I think it can, and does work to obscrue the real return on the original investment.

On top of this, good dividend-paying stocks consistently raise the amount of the dividend paid each year.



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Ress, what I take Euro to mean is that companies often announce a split in the same year as a dividend increase.

Actually, in my experience "strong companies" often consistently raise their dividends. By this I mean every year. In such a situation it would be hard for them to not raise the dividend "in conjunction" with a split.
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Author: jammerh Date: 1/3/03 1:17 PM Number: 88663
On top of this, good dividend-paying stocks consistently raise the amount of the dividend paid each year.

To me this is the real power of the dividend. Once you get yourself into the position of being able to live from the dividends alone, then, with careful attention, you can be fairly sure to get inflation beating increases in your income stream every year.

However, I would caution anyone using this approach to watch those stocks carefully, and reevaluate and rebalance your portfolio yearly.

Reevaluating based on dividend yield and company soundness will get rid of companies whose dividend yield has decreased, and rebalancing is the only discipline that will assure that you buy low and sell high.

And, beware of any company whose dividend percentage is substantially above other similar companies. That company could be cut its dividend any time.

AT&T, Ford, and TXU (so-called 'widow & orphan stocks') come to mind as companies that a lot of people ignored for years as their dividend income (along with the share prices) steadily decreased. Now, many of those people have waited too long to make changes, and they're stuck with insufficient income to live on, and are forced to assume more risk to try to increase their income.

Yearly rebalancing and getting rid of any company that ever cuts a dividend is critical to success when living from dividends. When done properly, it can be very low stress and successful way to live in retirement.

Russ
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"To me this is the real power of the dividend. Once you get yourself into the position of being able to live from the dividends alone, then, with careful attention, you can be fairly sure to get inflation beating increases in your income stream every year."

Well said. This is one of the main points I was hoping to make. I'm glad we agree on that much. But we disagree in terms of our approaches to the need for "re-evaluation".

"However, I would caution anyone using this approach to watch those stocks carefully, and reevaluate and rebalance your portfolio yearly."

Many advisers advocate this method. I'm not an adviser, or a professional money-manager. My approach is to buy good quality in the first place and stick with it. Buying stock is like buying a piece of a business. You wouldn't buy a business and then sell it a year later if it happened to be running into some adversity.

Every company is going to run into some adversity from time to time. In the process of re-evaluating, many investors sell their flowers to water their weeds. How many times have you bought a stock only to watch it run into problems and go down? How many times have you sold a "dog" only to watch it recover, and eventually go higher?

"AT&T, Ford, and TXU (so-called 'widow & orphan stocks') come to mind as companies that a lot of people ignored for years as their dividend income (along with the share prices) steadily decreased. Now, many of those people have waited too long to make changes, and they're stuck with insufficient income to live on, and are forced to assume more risk to try to increase their income."

Yes, these are a few good examples of companies which had been good dividend-payers and whose dividend payout has decreased. And there are examples of companies who were once growing nicely which are now defunct. There is always some risk in the stockmarket. This is what you try to avoid by doing your homework thoroughly in the first place.

But you're not going to get it right every time. I expect to have some companies who for unexpected reasons run into adversity from wich they are not ever able to recover. Hopefully, this will be a smaller portion of my portfolio, and the winners that I'm able to let run freely because of this approach, will more than compensate.

I believe the continual process of buying and selling involved with re-evaluation is a sure-fire way to lose money in the stock market.

By selling a stock which has cut it's dividend you're probably selling at one of the worst possible times in terms of that company's share price. In most cases such a company recovers and reinstates the dividend. Only in rare instances do such companies completely go out of business.

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Author: jammerh Date: 1/4/03 12:34 PM Number: 88750
My approach is to buy good quality in the first place and stick with it. Buying stock is like buying a piece of a business. You wouldn't buy a business and then sell it a year later if it happened to be running into some adversity.

I guess you may not realize that given enough time, every single company, without exception, will eventually decline, and disappear.

Russ
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Author: rkmackdonald Date: 1/4/03 9:16PM Number 88794
"I guess you may not realize that given enough time, every single company, without exception, will eventually decline, and disappear."

Not necessarily. There are some companies that have been around for hundreds of years. In any event I don't expect to be around that long myself.

As Warren Buffett says, You wouldn't buy an entire company and then dump it a year later because it ran into some adversity. You should buy companies with good management, and then let them do their jobs.

"Flitting from flower to flower, you'll eventually end up selling your flowers to water your weeds." - Peter Lynch.

We are our own worst enemies when it comes to re-evaluation. We trade too much and we tend to make the wrong decisions. We sell companies which then go up, and we buy companies which go down. In the process we churn ourselves out of any gains by wracking up commissions which continually shave us.

In this context, anyone interested in the topic may enjoy reading,

Stocks For The Long Run, by Jerermy Siegel,

The Dividend Rich INvestor by the editors of S&P's Outlook,

Beyond Greed & Fear, by Hersh Shefrin

America's Finest Companies by Stanton

I may try to compose a more comprehensive suggested reading list later when I get a chance.



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Author: jammerh Date: 1/4/03 10:19 PM Number: 88799

We are our own worst enemies when it comes to re-evaluation. We trade too much and we tend to make the wrong decisions. We sell companies which then go up, and we buy companies which go down. In the process we churn ourselves out of any gains by wracking up commissions which continually shave us.

Not necessarily. Proper rebalancing is a very precise and disciplined procedure.

Here's what I do:

I hold 20 high quality, high dividend paying stocks with equal dollar amounts in each.

During the year some go up and some go down. The portfolio dividend yield always increases if you buy high quality.

At the end of each year, I rebalance so that I have equal dollars in each of these 20 stocks. This results in selling shares from the ones that have gone up and buying shares of the ones that have gone down. Rebalancing is the only procedure that assures you will always buy low and sell high!!

In addition, this rebalancing procedure always increases the dividend yield for the portfolio. This is because you are shifting money from the lower yield stocks (the ones that have gone up) to the higher yield stocks (the ones that have gone down).

Of course trading costs should also be carefully considered. Trading costs for doing my rebalancing at E-Trade are $14.99 per trade, so, assuming that I make a trade in all 20 stocks, which is not necessarily true, (if a stock is close, I leave it alone), it amounts to $300. So, for a typical retirement portfolio of $300,000 the annual trading costs amount to 0.1% of assets. This is a very low expense!!

Obviously, the smaller the portfolio, the higher the percentage for rebalancing, so it might not make sense to rebalance very small portfolios.

In addition, I review all my stocks to make sure I am not holding one that has reduced its dividend significantly. If I find one like this, I replace it with a better yielding one of equal or better quality. My goal is to maintain a specific portfolio dividend yield (currently around 5%). However, if you always buy high quality companies that yield at reasonable levels, you rarely get a dividend cut. (I did have one last year, however. Ford drastically cut its dividend, so I replaced it with BMY).

Russ
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rkmacdonald: I hold 20 high quality, high dividend paying stocks with equal dollar amounts in each.

Would you mind sharing the names of those stocks?

--fleg, always looking for ideas
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Author: fleg9bo Date: 1/5/03 2:39 AM Number: 88807

Would you mind sharing the names of those stocks?

Here they are:

DD EK GE GM JPM MO SBC BAC BMY CVX USB VZ XOM AVB EOP EQR HCP PLD SPG ICF

Notes:
1)ICF is actually an ETF, but I treat it as just another stock in my portfolio.

2) XOM is not yielding quite as high as I want, but I expect that to change. Even if it doesn't, XOM has a long history of increasing dividends.

3) The REITs in my list, not only yield well, they are essentially uncorrelated with the S&P 500, which smooths the returns of my portfolio (and the associated stress levels).

4) DD and GE are also yielding less than I would like, and I am considering replacing them if I can find something better (utilities maybe). I'm in no hurry on this.

Russ
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