I only saw your comment now, and didn't realize that we'd had any problems with the comments system. We did make a recent change a few days ago: we finally managed to show large numbers of comments beneath the article without crashing Internet Explorer. Perhaps the problem with your comment was related to that change.
If you see any problems in future, please send me a direct message and let me know.
The good news is that all comments now display beneath the article, without having to click to a new page to see comments.
You're right - the table only shows price appreciation, and excludes the dividends paid. Thanks for pointing that out.
Tracking the ETFs is useful even for people who prefer to buy individual stocks because they allow you to see how asset classes and strategies perform. In this case, as you point out, it's interesting to see how these Dividend ETFs have performed, as a fairly accurate proxy for the investment strategies they represent.
I know that most of the dividend investors in this discussion invest in stocks and not ETFs, but it's interesting to note that the Buy Backs ETF has outperformed the Dividend Achievers and Rising Dividends ETFs over the last year: seekingalpha.com/data/...
(1) I'm not sure I can get my head round the numbers. Surely the total return is the dividend payment plus stock appreciation. If you assume the P/E stays constant, then the total percentage return is the dividend yield plus the growth in E. In which case, the decline in dividend from 5.2% to 3.2% is not offset by the faster growth in E of 1.8% minus 1.3%. Am I missing something here?
(2) Did you find the original article? If so, how about posting a link to it and writing an article or instablog post about it?
Welcome to SA, and thank you for a terrific first comment.
I think your comment illustrates the behavioral aspects of dividends: in this case, buying and holding forever allows you to insulate yourself from the psychological roller coaster of fear and greed that causes many investors to buy high and sell low.
However, there are two risks that you'll want to look out for:
1. Selling non-dividend paying stocks regularly (the opposite of a DRIP) might be more cost efficient than being paid dividends and then reinvesting some of them, even taking account of tax and transaction fees.
2. Buy-and-hold-forever has its own risks. You can buy stocks when the companies look secure, but over longer periods of time their competitive advantage can disappear and industries can change dramatically. Broad index funds are much safer in that respect.
A quick FYI for the participants in, and readers of, this discussion: We've just launched a dividend ETF data dashboard that allows you to quickly see how dividend paying stocks are doing as an asset class, and compare them to straight market cap ETFs or ETFs that weight companies by earnings. Although David van Knapp, mbkelly75 and many other dividend investors like to pick individual stocks, the data here might be useful for you in any case:
On the discussion itself: this is of huge importance to many people, including retirees who have been hit hard by the stock market's performance over the last few years and many who have been forced to delay their retirement. I'd always hoped that Seeking Alpha could be a place where multiple viewpoints were represented in an atmosphere of mutual respect, and readers could make up their own minds - in contrast to traditional media sites, where there was usually a "house position" on important issues. So the continuation of this discussion, I hope, will be helpful for those whose retirements, savings and peace of mind are seriously impacted by investment strategies based on dividends.
On your substantive comment: It might surprise you to hear that I actually agree with you, David van Knapp and mbkelly75 that company managements don't always act in the interests of shareholders, and therefore there might be behavioral benefits in companies paying dividends. Buffett himself (in his latest letter) describes how CEOs sometimes pursue value-destroying acquisitions to increase their prestige and the size of their companies.
Payment of dividends, therefore, may have valuable behavioral results: (1) Commitment to paying dividends regularly may make managements more conscious in all their activities that their ultimate obligation is to deliver value to shareholders. (2) Restricting capital available for re-investment might force managements to evaluate the rate of return on projects more carefully. (3) Paying dividends is inconsistent with egregious options grants (an acute problem in the late '90s), because the option holders don't hold stock (and thus don't receive dividends), and paying out capital in the form of dividends, by reducing the company's long term growth and/or cash per share, reduces the value of the options.
However, the optimal scenario for investors is to own stocks where the management behaves like owners. (This is Warren Buffett's investment philosophy.) Then capital allocation is optimal, and any behavioral benefits of dividend payments are unnecessary.
Briar, I agree. What's particularly interesting about the case of the utilities is that most utilities do pay dividends, because they are slow growth businesses where added investment has questionable marginal returns. And even there, Buffett says that he's proud that his utilities haven't paid dividends.
Moreover, Buffett should like dividends in principle more than most investors, because he's such a good capital allocator. But for most dividend investors, it's hard to imagine that their ability to allocate capital (ie. reinvest the money) is better than the managers of the businesses whose stocks they own. So insisting that managers pay out profits in dividends instead of making what they regard as optimal capital allocation decisions makes little sense.
I thought this quote from Warren Buffett about Berkshire Hathaway's utilities businesses (from the latest report -- www.berkshirehathaway....), would interest the participants in this discussion:
"Moreover, we continue to pour huge sums of money into our operations so as to not only prepare for the future but also make these operations more environmentally friendly. Since we purchased MidAmerican ten years ago, it has never paid a dividend. We have instead used earnings to improve and expand our properties in each of the territories we serve. As one dramatic example, in the last three years our Iowa and Western utilities have earned $2.5 billion, while in this same period spending $3 billion on wind generation facilities."
This is particularly interesting because most utilities do pay dividends.
Your comment is similar to the point Low Sweat Investing made about not drawing down capital when stock prices have fallen. You wrote: "What if the market crashed and the prices of the 4 stocks you owned dropped by 30-40%. It would not matter, because as the owner of these 4 companies, you would still collect the same amount of dividend."
You're falling into the trap of viewing the stock price and the dividend as unrelated. The companies could have used the cash they paid out in dividends to repurchase stock at 30-40% less than the prior year's prices. That would boost the value of the stock you own. So the opportunity cost of companies paying dividends instead of buying back their own stock can be particularly large in down markets when stocks are undervalued.
Having said that, I think you've put your finger on an important psychological factor. Many investors buy high and sell low; they're euphoric when stock prices rise (buy!), and they panic when stocks prices fall (sell!). If banking dividends allows you to avoid that by ignoring the stock price due to the "income" from the dividend, you'll end up doing better.
But there's another way to insulate yourself against that: focus on asset allocation and rebalancing (seekingalpha.com/artic...).
mbkelly75, this is a critical point to clarify, so it's worth the discussion. When you buy any financial instrument, including a stock, bond or CD, you expect a positive return on your capital. If you're buying a bond, you demand interest payments. If you're buying a stock, you become a part-owner in the business. You'll pay less for a business with no growth than for a business with rising profits. But you'll still expect a share of the profits.
Those profits belong to you (proportionate to how much of the company you own) regardless of whether the company pays them out as a dividend, whether it repurchases its own stock (in which case your stock should be more valuable), whether it buys the stocks of other companies (think Berkshire Hathaway), or whether it re-invests the profits to grow its business. In every case, you benefit from the company's profits, and in every case you can describe your share of the profits as income or capital appreciation - it's semantics. But viewing dividends as income and buy backs as capital appreciation is not semantics - it's an illusion, because your total return is identical (assuming that the tax treatment is equal - which it isn't).
But David, paying a regular dividend is exactly equivalent to dollar cost averaging! The company is forced to forgo the possibility of profitable investments in its own business or buy back its own stock so that it can make regular payments to its shareholders. That's just like dollar cost averaging: allocate your capital according to a simple mechanical rule, irrespective of the alternative opportunities.
I know that you've stated that dividends aren't right for all companies. But why is paying a dividend right for any company, if it involves tying the company's hands behind its back and forcing itself to disregard opportunities to maximize the return on its capital?
BTW, I just want to echo what other people have said here: it's terrific to have such a vigorous debate about such an important topic with such smart and courteous people. Thank you!
Briar wrote something in one of his comments above that suddenly clarified for me something you hear frequently from retirees.
He wrote: "You’ve heard: I’m retired now, living off of income. Well, no; when you were working you were living off of income; now that you are tired you are living off of capital and your challenge is to withdraw capital in the most tax-advantaged way. "
There's a deep psychological truth here. Most retirees are (understandably) scared to be living off capital, because at some point the capital will run out. ***Investing in dividend paying stocks and bonds allows retirees to maintain the psychological illusion that they still have "income", and that as long as they live "within their income" they can continue that way forever.***
That's wrong, of course, because the stocks of companies that pay out earnings as dividends must (by definition) have lower price appreciation than if they re-invested in growth or bought back stock. The "income" comes at a price, by reducing the capital appreciation. (And since the company forgoes profitable investment opportunities and dividend payments are tax inefficient, the *total* return will be lower than if the company stopped paying dividends.) Similarly, if you strip out the interest payments from bonds, the principle doesn't keep up with inflation, so living off the "income" from bonds doesn't leave the capital in place, because in inflation adjusted terms the capital shrinks unless you re-invest the interest income.
Once retirees understand that they are indeed living off capital, the question then becomes: How do I maximize the (risk adjusted) value of my capital -- after tax, after fees -- and withdraw capital efficiently? And many of the arguments for dividend paying stocks then collapse, unless you view them as quasi-bonds (lower total return, but lower volatility).
Hester - your point about it being easy to manipulate dividends is often overlooked. As I wrote in my original article:
"There's no direct relationship between dividends and real profits. Dishonest companies can raise lots of money (Enron, Woldcom) and pay dividends from the cash on their balance sheets."
Why I Love Dividends [View article]
I only saw your comment now, and didn't realize that we'd had any problems with the comments system. We did make a recent change a few days ago: we finally managed to show large numbers of comments beneath the article without crashing Internet Explorer. Perhaps the problem with your comment was related to that change.
If you see any problems in future, please send me a direct message and let me know.
The good news is that all comments now display beneath the article, without having to click to a new page to see comments.
- David
Why I Love Dividends [View article]
Tracking the ETFs is useful even for people who prefer to buy individual stocks because they allow you to see how asset classes and strategies perform. In this case, as you point out, it's interesting to see how these Dividend ETFs have performed, as a fairly accurate proxy for the investment strategies they represent.
Why I Love Dividends [View article]
Why I Love Dividends [View article]
(1) I'm not sure I can get my head round the numbers. Surely the total return is the dividend payment plus stock appreciation. If you assume the P/E stays constant, then the total percentage return is the dividend yield plus the growth in E. In which case, the decline in dividend from 5.2% to 3.2% is not offset by the faster growth in E of 1.8% minus 1.3%. Am I missing something here?
(2) Did you find the original article? If so, how about posting a link to it and writing an article or instablog post about it?
Why I Love Dividends [View article]
Why I Love Dividends [View article]
Welcome to SA, and thank you for a terrific first comment.
I think your comment illustrates the behavioral aspects of dividends: in this case, buying and holding forever allows you to insulate yourself from the psychological roller coaster of fear and greed that causes many investors to buy high and sell low.
However, there are two risks that you'll want to look out for:
1. Selling non-dividend paying stocks regularly (the opposite of a DRIP) might be more cost efficient than being paid dividends and then reinvesting some of them, even taking account of tax and transaction fees.
2. Buy-and-hold-forever has its own risks. You can buy stocks when the companies look secure, but over longer periods of time their competitive advantage can disappear and industries can change dramatically. Broad index funds are much safer in that respect.
Why I Love Dividends [View article]
seekingalpha.com/data/...
Why I Love Dividends [View article]
On the discussion itself: this is of huge importance to many people, including retirees who have been hit hard by the stock market's performance over the last few years and many who have been forced to delay their retirement. I'd always hoped that Seeking Alpha could be a place where multiple viewpoints were represented in an atmosphere of mutual respect, and readers could make up their own minds - in contrast to traditional media sites, where there was usually a "house position" on important issues. So the continuation of this discussion, I hope, will be helpful for those whose retirements, savings and peace of mind are seriously impacted by investment strategies based on dividends.
On your substantive comment: It might surprise you to hear that I actually agree with you, David van Knapp and mbkelly75 that company managements don't always act in the interests of shareholders, and therefore there might be behavioral benefits in companies paying dividends. Buffett himself (in his latest letter) describes how CEOs sometimes pursue value-destroying acquisitions to increase their prestige and the size of their companies.
Payment of dividends, therefore, may have valuable behavioral results:
(1) Commitment to paying dividends regularly may make managements more conscious in all their activities that their ultimate obligation is to deliver value to shareholders.
(2) Restricting capital available for re-investment might force managements to evaluate the rate of return on projects more carefully.
(3) Paying dividends is inconsistent with egregious options grants (an acute problem in the late '90s), because the option holders don't hold stock (and thus don't receive dividends), and paying out capital in the form of dividends, by reducing the company's long term growth and/or cash per share, reduces the value of the options.
However, the optimal scenario for investors is to own stocks where the management behaves like owners. (This is Warren Buffett's investment philosophy.) Then capital allocation is optimal, and any behavioral benefits of dividend payments are unnecessary.
Why I Love Dividends [View article]
Moreover, Buffett should like dividends in principle more than most investors, because he's such a good capital allocator. But for most dividend investors, it's hard to imagine that their ability to allocate capital (ie. reinvest the money) is better than the managers of the businesses whose stocks they own. So insisting that managers pay out profits in dividends instead of making what they regard as optimal capital allocation decisions makes little sense.
Why I Love Dividends [View article]
"Moreover, we continue to pour huge sums of money into our operations so as to not only prepare for the future but also make these operations more environmentally friendly. Since we purchased MidAmerican ten years ago, it has never paid a dividend. We have instead used earnings to improve and expand our properties in each of the territories we serve. As one dramatic example, in the last three years our Iowa and Western utilities have earned $2.5 billion, while in this same period spending $3 billion on wind generation facilities."
This is particularly interesting because most utilities do pay dividends.
Why I Love Dividends [View article]
Your comment is similar to the point Low Sweat Investing made about not drawing down capital when stock prices have fallen. You wrote: "What if the market crashed and the prices of the 4 stocks you owned dropped by 30-40%. It would not matter, because as the owner of these 4 companies, you would still collect the same amount of dividend."
You're falling into the trap of viewing the stock price and the dividend as unrelated. The companies could have used the cash they paid out in dividends to repurchase stock at 30-40% less than the prior year's prices. That would boost the value of the stock you own. So the opportunity cost of companies paying dividends instead of buying back their own stock can be particularly large in down markets when stocks are undervalued.
Having said that, I think you've put your finger on an important psychological factor. Many investors buy high and sell low; they're euphoric when stock prices rise (buy!), and they panic when stocks prices fall (sell!). If banking dividends allows you to avoid that by ignoring the stock price due to the "income" from the dividend, you'll end up doing better.
But there's another way to insulate yourself against that: focus on asset allocation and rebalancing (seekingalpha.com/artic...).
Why I Love Dividends [View article]
Those profits belong to you (proportionate to how much of the company you own) regardless of whether the company pays them out as a dividend, whether it repurchases its own stock (in which case your stock should be more valuable), whether it buys the stocks of other companies (think Berkshire Hathaway), or whether it re-invests the profits to grow its business. In every case, you benefit from the company's profits, and in every case you can describe your share of the profits as income or capital appreciation - it's semantics. But viewing dividends as income and buy backs as capital appreciation is not semantics - it's an illusion, because your total return is identical (assuming that the tax treatment is equal - which it isn't).
Why I Love Dividends [View article]
I know that you've stated that dividends aren't right for all companies. But why is paying a dividend right for any company, if it involves tying the company's hands behind its back and forcing itself to disregard opportunities to maximize the return on its capital?
BTW, I just want to echo what other people have said here: it's terrific to have such a vigorous debate about such an important topic with such smart and courteous people. Thank you!
Why I Love Dividends [View article]
He wrote: "You’ve heard: I’m retired now, living off of income. Well, no; when you were working you were living off of income; now that you are tired you are living off of capital and your challenge is to withdraw capital in the most tax-advantaged way. "
There's a deep psychological truth here. Most retirees are (understandably) scared to be living off capital, because at some point the capital will run out. ***Investing in dividend paying stocks and bonds allows retirees to maintain the psychological illusion that they still have "income", and that as long as they live "within their income" they can continue that way forever.***
That's wrong, of course, because the stocks of companies that pay out earnings as dividends must (by definition) have lower price appreciation than if they re-invested in growth or bought back stock. The "income" comes at a price, by reducing the capital appreciation. (And since the company forgoes profitable investment opportunities and dividend payments are tax inefficient, the *total* return will be lower than if the company stopped paying dividends.) Similarly, if you strip out the interest payments from bonds, the principle doesn't keep up with inflation, so living off the "income" from bonds doesn't leave the capital in place, because in inflation adjusted terms the capital shrinks unless you re-invest the interest income.
Once retirees understand that they are indeed living off capital, the question then becomes: How do I maximize the (risk adjusted) value of my capital -- after tax, after fees -- and withdraw capital efficiently? And many of the arguments for dividend paying stocks then collapse, unless you view them as quasi-bonds (lower total return, but lower volatility).
Why I Love Dividends [View article]
"There's no direct relationship between dividends and real profits. Dishonest companies can raise lots of money (Enron, Woldcom) and pay dividends from the cash on their balance sheets."