# How to pass the time



## jrsaballa (Nov 22, 2015)

So I just invested in dividends and now it needs 12 months before I get some of my return

What can/should I do to pass the time?


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## Rusty O'Toole (Feb 1, 2012)

I hear knitting is an inexpensive hobby. If money is really low you might consider going to work.


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## indexxx (Oct 31, 2011)

Watch ice melt, paint dry, grass grow, etc. What are you really asking?


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## james4beach (Nov 15, 2012)

A great way to pass the time is to do some more reading:

The income illusion
Debunking Dividend Myths: Part 1
Debunking Dividend Myths: Part 2

These topics require some very deep thought, but if you read and think about this you will come to new and important realizations:



> Why do shareholders believe so strongly that a $1 dividend is preferable to a $1 capital gain? Meir Statman looked at this question in a 1984 article called Explaining Investor Preference for Cash Dividends, coauthored by Hersh Sheffrin. He also reviews the idea in his new book, What Investors Really Want, pointing out that receiving $1,000 in dividends is no different from selling $1,000 worth of stock to create a “homemade dividend.”
> 
> Even when this idea is explained to people, most refuse to accept it. Statman suggests that it comes down to a cognitive bias called mental accounting. Investors categorize $1,000 in dividends as income that they will happily spend, but the idea of selling $1,000 worth of stock is “dipping into capital,” which causes them great anxiety. This idea is deeply ingrained in many investors, but it is an illusion, because a company that pays a dividend to shareholders is depleting its own capital.


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## james4beach (Nov 15, 2012)

More good reading along that same series

Debunking Dividend Myths: Part 4
Debunking Dividend Myths: Part 5
Debunking Dividend Myths: Part 6


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## My Own Advisor (Sep 24, 2012)

An excellent series..with a few quibbles. 1. Selling incurs transaction costs. 2. You have to know when to sell.


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## jargey3000 (Jan 25, 2011)

...stay tuned in to this forum ..... great time-waster !!!...:biggrin:


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## My Own Advisor (Sep 24, 2012)

jargey3000 said:


> ...stay tuned in to this forum ..... great time-waster !!!...:biggrin:


+1 but fun.


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## RBull (Jan 20, 2013)

^I agree its an excellent series. I think that was at least my 4th reading of it!

MOA, can you explain what you mean with your 2 points above?


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## humble_pie (Jun 7, 2009)

re receive a dividend or sell a smidgin for capital gain ... most folks who cherish & depend on their regular dividends wouldn't be able to sell smidgins on a regular & disciplined basis. They'd get all hung up on their omg-the-market-is-down-but-i-need-$3k-this-month-what'll-i-do issues.

this topic has been debated before. More successfully in other threads. One excellent point raised by the pro-dividend crowd is that the issuance of regular dividend payouts provides insight into the financial bowels of a company's health. I agree. I'm left wondering if investors who chop off smidgens would bother to look into the health of the parent tree.




Rusty O'Toole said:


> I hear knitting is an inexpensive hobby. If money is really low you might consider going to work.


quick update on knitting, did u know it's now an expensive artisanal pursuit. Ace knit designer elizabeth mcCarten from kingston says she recently priced the imported wool for a sweater she's designing. The wool alone costs CAD $135.00.

add labour costs & the retail price for a handknit mcCarten garment might run $400-$800.

a simple baby dress or jacket goes for $250.

a machine-knit hockey tuque, $11.95. The same in handknit fair isle & shetland wool could set you back $99.
.


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## Rusty O'Toole (Feb 1, 2012)

OK forget knitting. How about video games? I don't play myself but hear they are a great time waster.


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## james4beach (Nov 15, 2012)

humble_pie said:


> a machine-knit hockey tuque, $11.95. The same in handknit fair isle & shetland wool could set you back $99.


That's a sharp looking toque though.

Would you believe that these crazy Americans don't use the word tuque? They have no idea what it means! On a snowy day in the mountains I asked someone, so tell me what is that thing you're wearing right now? He answered "beanie or hat".

Insanity.


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## steve41 (Apr 18, 2009)

Rusty O'Toole said:


> OK forget knitting. How about video games? I don't play myself but hear they are a great time waster.


 Video games are a great time waster. The problem is, as you age, your reflexes slow down. First Person Shooter games become especially challenging.


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## Rusty O'Toole (Feb 1, 2012)

"quick update on knitting, did u know it's now an expensive artisanal pursuit. Ace knit designer elizabeth mcCarten from kingston says she recently priced the imported wool for a sweater she's designing. The wool alone costs CAD $135.00.

add labour costs & the retail price for a handknit mcCarten garment might run $400-$800.

a simple baby dress or jacket goes for $250.

a machine-knit hockey tuque, $11.95. The same in handknit fair isle & shetland wool could set you back $99."

I may be missing the point but wouldn't doing your own knitting allow you to have an expensive looking custom made garment of the best material, for the cost of the wool? And wouldn't this be cheaper than buying said custom made garment? Not fair to compare a cheap mass produced item to one of better material, design and construction.
.
In your example, the equivalent of a $400 - $800 sweater for $135 in materials?


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## Jungle (Feb 17, 2010)

Video games are the ultimate time waster. 
Just get addicted to Grand Theft Auto, Counter Strike or Call of Duty (on line play)


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## peterk (May 16, 2010)

james4beach said:


> Debunking Dividend Myths: Part 1





humble_pie said:


> re receive a dividend or sell a smidgin for capital gain ... most folks who cherish & depend on their regular dividends wouldn't be able to sell smidgins on a regular & disciplined basis. *They'd get all hung up on their omg-the-market-is-down-but-i-need-$3k-this-month-what'll-i-do issues.
> *
> this topic has been debated before. More successfully in other threads. *One excellent point raised by the pro-dividend crowd is that the issuance of regular dividend payouts provides insight into the financial bowels of a company's health.* I agree. I'm left wondering if investors who chop off smidgens would bother to look into the health of the parent tree.


Great article James, and I generally agree 100%. Though, I would find it hard to fault retirees for desiring dividends. Dividend payments are pretty inarguably the "easiest" method of extracting a regular stream of income for hands-off investors who have better things to do like knitting or fishing, and have no desire to be actively involved in learning/keeping on top of their investments. If one is at that point, perhaps trading off some potential total return for a no-fuss income stream is a good bargain. It is certainly a better situation that being invested in a high MER mutual fund named "Balanced Income" from your friendly local bank branch advisors...Like so many retirees surely are...

What concerns me is the number of non-retirees and downright young people who are involving themselves with seeking yield, income, dividend growth, etc. There are quite a number of 30, sometimes 20 somethings, even here in CMF, that are actively seeking dividend income. Often this is in the pursuit of extremely early retirement (ala Mr. Money Mustache)and "replacing employment income with dividend income", is the goal. These folks I think would be very wise to read the entire article you linked to. 

Of course, HPs points are salient as well, and I think are the only justifiable arguments for seeking dividends (unlike all the other unjustifiable ones that are debunked in the article). However, the corollary to the "financial bowels" case I think needs mentioning as well. Namely, that there may be some companies who's managers and investors have become so addicted to dividends, that they pay out too much and harm the company's long term growth prospects or solvency.

We are seeing this play out with oil companies at the present time. All the little guys have cut their dividends longs ago due to necessity, but the integrated majors are holding out still, determined that continuing to pay a dividend makes them look strong and robust. In reality oil majors should be slashing and eliminating their dividends, not because they need the cash to remain solvent, but because they should be saving as much cash as possible to throw into buying out their junior competitors at bargain prices. Their dividend policies are causing harm to the long term growth of the corporations, IMO.

How often a company with not-enough dividend mismanages excess cash?, vs. how often a company with too much dividend is reluctant to reduce it, to their detriment?... That is the question.


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## donald (Apr 18, 2011)

A like div's for this exact reason
Aging demo and a big need for income
The trend of investments leans to the boomers
why bet against it
This isn't so much 'fad'(cashing divi's)as it is real need

No logical 65 yr old man with a Million in a account is going to forgo big cap/multi-nationals 105+ institutions in lue for the alternative to trade in and out of F,A.N,G stocks
Makes huge common sense going forward.


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## peterk (May 16, 2010)

donald said:


> Aging demo and a big need for income
> The trend of investments leans to the boomers
> why bet against it
> This isn't so much 'fad'(cashing divi's)as it is real need


What happens when interest rates rise and 5-year GICs are paying 4-5%+ again? Mass exodus of divi boomers, I would presume...

I think it is a fad.


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## james4beach (Nov 15, 2012)

peterk said:


> What concerns me is the number of non-retirees and downright young people who are involving themselves with seeking yield, income, dividend growth, etc. There are quite a number of 30, sometimes 20 somethings, even here in CMF, that are actively seeking dividend income. Often this is in the pursuit of extremely early retirement (ala Mr. Money Mustache)and "replacing employment income with dividend income", is the goal. These folks I think would be very wise to read the entire article you linked to.


And yes I agree that dividends are by far the easiest "automatic" extraction of cash from investments. No question about that. Even something like XTR could be ok, if one understands the risks.

There's just so much misinformation and misunderstanding about what the dividends are. As you put it above: why are young people so interested in dividends too? Another thing you will see is that people get excited about high dividend stocks and then want to DRIP the shares. That is nonsensical for someone who is trying to live off a cashflow stream.

But these are signs that some people, not all, misunderstood the fundamentals of dividends. Some people still think it is free money and think that by DRIPing, they are compounding the "high return".


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## james4beach (Nov 15, 2012)

I want to clarify something, I am not recommending XTR. It holds a lot of junk bonds. But I can imagine buying it once the junk bond crash plays out fully.


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## peterk (May 16, 2010)

james4beach said:


> Another thing you will see is that people get excited about high dividend stocks and then want to DRIP the shares. That is nonsensical for someone who is trying to live off a cashflow stream.
> 
> But these are signs that some people, not all, misunderstood the fundamentals of dividends. Some people still think it is free money and think that by DRIPing, they are compounding the "high return".


Ha. That one gets me. The whole idea that anything to do with stock returns (dividends, capital gains, reinvesting, etc.) has anything to do with the properties of "compound interest" is a pervasive one. It is simply growth or no growth and how much. There can be no assumption that more growth happens on top of existing growth. There is no magic of compound interest in the stock market.

Many also seem to confuse DRIPing with DCAing, another popular investing maneuver. The two are not the same thing at all, despite what some people seem to argue.


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## donald (Apr 18, 2011)

I am not sure Peter
I guess in less bank advisors start pushing non divi etfs to clients?
It's the etfs that prop the bloat(or overvalued on the big individual names)
the need for income etf's in the market place being sold


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## My Own Advisor (Sep 24, 2012)

RBull said:


> ^I agree its an excellent series. I think that was at least my 4th reading of it!
> 
> MOA, can you explain what you mean with your 2 points above?


Hey RBull,

I guess by point #1, I was thinking selling ETF units, will incur a transaction cost, although it's a very small quibble. At some point, unless they want to leave a legacy, most dividend investors who are largely living off dividends will eventually sell their shares as well.

I guess by point #2, I was thinking the indexer in addition to selling off ETF units for income, i.e., the income illusion, will largely wish to sell equities or bonds when they are priced high, ideally. This means unless they deploy some sort of significant "cash wedge", i.e., about 3-5 years in cash, they will need to carefully figure out when to sell equities as to keep more of their capital intact; total return is more maintenance because you probably want to replenish the cash wedge when assets are priced high/i.e., sell high.

You're not looking to sell bonds at high prices per se, maybe not even a higher price at all...because you're buying bonds largely to protect against equity risk. If you're looking for appreciation, bonds are not the place, equities are. Just my take of course. 

The biggest reason I've read against living off dividends is a) it's unrealistic for people to save and invest this much and b) it's more risky. There is nothing to say you can't "live off dividends or distributions" via ETFs so there goes the b) argument. 

Anyhow, all debated before and will be debated again.

Maybe this is how to pass the time


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## Eclectic12 (Oct 20, 2010)

peterk said:


> ... Of course, HPs points are salient as well, and I think are the only justifiable arguments for seeking dividends (unlike all the other unjustifiable ones that are debunked in the article).


I bought my first dividend paying stock because #1, I thought it was going to grow over time (it did) and because #2, all stocks in that business of that size on the exchange paid dividends.

It's great that misunderstandings are being cleared up, misplaced priorities etc. but I'm not sure why the fact that at times, there is no viable alternative to dividends is glossed over.


Cheers


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## peterk (May 16, 2010)

My Own Advisor said:


> Hey RBull,
> 
> 
> I guess by point #2, I was thinking the indexer in addition to selling off ETF units for income, i.e., the income illusion, will largely wish to sell equities or bonds when they are priced high, ideally. This means unless they deploy some sort of significant "cash wedge", i.e., about 3-5 years in cash, they will need to carefully figure out when to sell equities as to keep more of their capital intact; total return is more maintenance because you probably want to replenish the cash wedge when assets are priced high/i.e., sell high.


Ah, my other main beef with dividend investors. Every single person squirms and balks at the thought of selling stocks during a market downturn for income. But dividend investors are all too happy to continue withdrawing their stable or growing dividends angst free during good times and bad. This is nonsense. Drawing on your dividend income during market downturns is JUST as bad as selling stock during a downturn. All efforts should be made to conserve cash, spend other sources of cash/fixed income, and reinvest dividends as much as possible during a downturn.

Spending dividends is taking money out of the market. Taking a 4% dividend for income is exactly as bad for your portfolio as selling 4% at a capital loss for income. Why is the former prescribed as "one of the key benefits of living off dividends, not worrying about market fluctuations" and the latter admonished as "one of the worst things you could ever do to your portfolio"?


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## humble_pie (Jun 7, 2009)

Rusty O'Toole said:


> ... wouldn't doing your own knitting allow you to have an expensive looking custom made garment of the best material, for the cost of the wool? And wouldn't this be cheaper than buying said custom made garment?



yes one can knit one's own garments just as one can manage one's own portfolio. Either way, the results can be sumptuous (although that's a quaint thing to say on a down day like today.)

re dividends, i'm a capital gains seeker, i only riffed on dividends because they are comfort food for so many people. This is not a phenomenon of recent years. Investors have sought dividend bread & butter for generations.

james4 & other math wizards can prove beyond perfection that a dollar in capital gain is the same as a dollar dividend, once it lands in the cash account. From a tax perspective it's even true that, for some investors, a dollar gained in the hand is worth two dollars of dividends in the bush.

but there will always, always be folks who like comfort food.

re knitting, a skilled knitter can turn $100 of wool into a $500 sweater. But very few persons have the skills to knit garments like these, which is why they're priced well north of $1,200 if a hopeful buyer can even find one for sale.










.


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## Jungle (Feb 17, 2010)

Comepare taking the distribution from xiu vs selling the same amount of hxt... Ahhh you have the same total return. You can still underperform the benchmark even though you're not selling part of your stocks. If this is the case, you could just buy etfs and make your own dividend each year. Questrade charges $5 trade which might still be cheaper than the amount you lost from underperforming. But you got cash dividends


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## donald (Apr 18, 2011)

Yeah but than said investors needs to be 'active'
that is scary **** Peter lol
at least with divis you can consol yourself reading buffett and munger quotes in downturns lol


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## Jungle (Feb 17, 2010)

What we are seeing right now is a huge shift in commodities and this has been putting a lot of companies dividends at risk, as a retire this would not be comforting,


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## humble_pie (Jun 7, 2009)

Q: What are we going to do when the dividends are cut?
A: Start selling the capital.

Q: What are we going to do when the capital is too low to sell?
A: Start selling options.

Q: What are we going to do when low volatility means no option premiums?
A: Start selling the children.


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## MDavey (Jan 15, 2016)

Haha! My girlfriend actually crochets and I attempted one night... new respect for that... I'll stick to music and the trades!


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## humble_pie (Jun 7, 2009)

a great way to kill an afternoon: getting married in a blizzard

.


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## donald (Apr 18, 2011)

Him:you owe me sweetie it's bloody cold out here
Her:easy there i am in full control now bucko
lol
how much does those photos costs


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## humble_pie (Jun 7, 2009)

idk apparently he's a policeman
he looks pretty rugged to me


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## donald (Apr 18, 2011)

She is a pretty young women.


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## humble_pie (Jun 7, 2009)

they're not thinking about dividends


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## donald (Apr 18, 2011)

Good point haha


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## indexxx (Oct 31, 2011)

Jungle said:


> Video games are the ultimate time waster.
> Just get addicted to Grand Theft Auto, Counter Strike or Call of Duty (on line play)


That's why I have never tried them!


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## el oro (Jun 16, 2009)

peterk said:


> Drawing on your dividend income during market downturns is JUST as bad as selling stock during a downturn.
> 
> Taking a 4% dividend for income is exactly as bad for your portfolio as selling 4% at a capital loss for income. Why is the former prescribed as "one of the key benefits of living off dividends, not worrying about market fluctuations" and the latter admonished as "one of the worst things you could ever do to your portfolio"?


In a market downturn, you will need to sell more shares to get the equivalent dividend income, assuming a sustainable dividend, and will be worse off after the eventual recovery.


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## james4beach (Nov 15, 2012)

el oro said:


> In a market downturn, you will need to sell more shares to get the equivalent dividend income, assuming a sustainable dividend, *and will be worse off after the eventual recovery*.


That's wrong. You are ignoring the equivalent value that the dividend removes from the company, which causes equivalent damage to your equity holding. This is the fundamental mistake you and everyone else makes: forgetting that the dividend removes value from the company.

peterk is correct. Yes, I realize nobody gets this. I'm convinced that dividends are massively misunderstood by everyone. I'll illustrate this effect of why the dividends and selling-share method are identical, even if you sell during a depressed market.

~ Illustration ~

For illustration, let's say we have 1000 shares of a stock that trades at $50. We want to extract $2,000 cashflow. A market crash declines all shares by 50%, and then shares rebound by doubling in price.

*******************************************
Dividends, $2/share dividend = $2,000 dividend
*******************************************

You start with 1000 shares at $50. The market crashes and now you have 1000 shares at $25. Now it's dividend time. You get the $2,000 cash and the share price _automatically_ declines to $23 reflecting the value removed from the company. (Yes this absolutely happens, once you remove daily noise... it's a stock market law).

Notice the total value you have at this moment. $2,000 cash + (1000 shares x $23) = $25,000 total value

The market rebounds, the shares double in price and now the shares are 2 x $23 = $46. Your ending stock value is $46,000

*******************************************
Selling shares method to achieve $2,000 cash
*******************************************

You start with 1000 shares at $50. The market crashes and now you have 1000 shares at $25. To raise $2,000 cash you sell 80 shares at $25. Now you're down to 920 shares.

Notice the total value you have at this moment. $2,000 cash + (920 shares x $25) = $25,000 total value ... the same as in the dividend case

The market rebounds, the shares double in price and now the shares are 2 x $25 = $50. Your ending stock value is 920 shares x $50 = $46,000

~ Do you see? ~

The dividend makes absolutely no difference. It is a total illusion. It does not make any difference that you sell during a depressed time at the market. *The dividend causes equivalent damage to selling shares when depressed, because it knocks value off the share price while it's depressed and thus the shares can never recover to their full previous value.*

Selling shares is identical to the dividend method. Both remove value from a company's shares.


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## james4beach (Nov 15, 2012)

peterk said:


> Ah, my other main beef with dividend investors. Every single person squirms and balks at the thought of selling stocks during a market downturn for income. But dividend investors are all too happy to continue withdrawing their stable or growing dividends angst free during good times and bad. This is nonsense. Drawing on your dividend income during market downturns is JUST as bad as selling stock during a downturn.


Right, as I proved in my last post.

I would argue that the selling-shares method (which Buffett also endorses by the way) is superior to dividends in this respect. It gives you the power to "suspend" your own dividend. During rough years of the stock market, you can simply sell fewer shares and reduce your cash extraction. You cannot do this with dividends since dividends happen automatically, and force you to remove value from the company.

Similarly if you want more cashflow, you can just boost your sell-off method during good years and extract more at high values. Great flexibility.

The overall point I'm trying to make is that dividends don't matter and just using XIU, XIC or ZCN as your primary retirement holding is probably the best plan. The mix of dividends and selling off shares gives you all the cashflow you need. "Dividend paying stocks" or ETFs do not offer you any advantage at all: not safety, not crash protection, not cashflow reliability, not capital preservation.


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## donald (Apr 18, 2011)

I dunno
dividend centered etf's seem to hold up a lot better than non div companies in downdrafts(don't you notice that?)
There range is a lot tight(you might not get the big gains when the course changes but it operates this way on both sides)

Maybe there is no advantage but.......people pay up because of this imo
Humans are wired to have as much comfort as they can get in life
a company that has paid a dividend for 100 yrs---that is up there with a nice wood burning fire roaring on a cold winters days with a nice cup of coffee in your hand looking out your window as the blizzard rages and taking on the beautiful winter scene that looks like a pictures lol
You rub your hands together and go ahha,she is cold but 'were' okay here
Have you ever took a look at Ishares or blackrock or whoever
You could spend a life time looking at all their different div funds(head will spin-they are mostly all the same ironically)
THey wouldn't pump these out if there wasn't a need
advisors are the world must be demanding for them.


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## My Own Advisor (Sep 24, 2012)

James4, would you buy an apartment building without any tenants to rent it to? I wouldn't. Dividends are like tenants in an apartment building and because they are part of total return, so they do matter. I would agree with you there is nothing magical about them, it's just a different way companies return profits to shareholders; for some companies a regular way I might add.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... I'll illustrate this effect of why the dividends and selling-share method are identical, even if you sell during a depressed market.
> 
> ~ Illustration ~
> 
> ...


Trouble is ... the dividend shares did not stop at a double and there is no comparable stock to confirm that the same time one was at $46 the other was at $50.

Or to throw a wrinkle observed in the 2008/2009 drop ... how do we confirm that the non-dividend stock did more than a double where the dividends paid increased?


It sounds great in theory but then again, there are lots of theories like the efficient market theory where market behaviour observed does not line up 100% of the time, as claimed.


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I would argue that the selling-shares method (which Buffett also endorses by the way) is superior to dividends in this respect.
> It gives you the power to "suspend" your own dividend. During rough years of the stock market, *you can simply sell fewer shares* and reduce your cash extraction.


Assuming one has other means of providing the income to live ... sure. I'm not sure everyone fits this or wants to spend the time required.



james4beach said:


> You cannot do this with dividends since dividends happen automatically, and force you to remove value from the company.


Odd ... when an earlier post said the following, it did not seem so cut and dried that there was only one choice.


> Drawing on your dividend income during market downturns is JUST as bad as selling stock during a downturn. All efforts should be made to conserve cash, spend other sources of cash/fixed income, and *reinvest dividends* as much as possible during a downturn.





james4beach said:


> The overall point I'm trying to make is that dividends don't matter and just using XIU, XIC or ZCN as your primary retirement holding is probably the best plan ...
> "Dividend paying stocks" or ETFs do not offer you any advantage at all: not safety, not crash protection, not cashflow reliability, not capital preservation.


Odd ... I'd have said that dividend payors having a total return of 2.5x that of XIU and XIC *was* an advantage. 

It would be interesting if there were comparables non-dividend paying stocks to see of they would have been even better but sadly, none are available to check.

Or have you decided total return does not matter?
That's what you seemed to saying where you said the dividends from XIU/XIC did not bother you.


Cheers


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## hboy43 (May 10, 2009)

james4beach said:


> "Dividend paying stocks" or ETFs do not offer you any advantage at all: not safety, not crash protection, not cashflow reliability, not capital preservation.


I think your comment is in the context of a static long position. I see advantages outside of that context. Consider that I sold my held for many years HSE between idk $25, $28, somewhere in there, in the pre dividend cut era. The dividend was cut and I bought back in ~15 and now hold more than the initial position. Now some of this is of course the continuing slide in oil price, but I would think a good half of the difference is my taking advantage of other people's dividend irrationality as per the topic at hand.

I continue to look forward to say POT cutting in the future. I don't currently hold, but it fits my style of buying something of intrinsic human utility as opposed to many potential investments that fail this test.

hboy43


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## el oro (Jun 16, 2009)

james4beach said:


> That's wrong. You are ignoring the equivalent value that the dividend removes from the company, which causes equivalent damage to your equity holding. This is the fundamental mistake you and everyone else makes: forgetting that the dividend removes value from the company.
> 
> peterk is correct. Yes, I realize nobody gets this. I'm convinced that dividends are massively misunderstood by everyone. I'll illustrate this effect of why the dividends and selling-share method are identical, even if you sell during a depressed market.
> 
> ...


In order for your argument to be correct, management of the non-dividend company will need to deploy the retained earnings at the depressed market rate during the downturn. 

In your examples, assume each company starts at an EPS of $2. After the market rebounds, P/E of company 1 is 23. Before deploying retained earnings, P/E of company 2 is 25. In order to catch up to company 1, company 2 needs to buy back shares at the depressed price or invest to increase earnings proportionally during the downturn.

In reality, few companies do this. Anything short of this, including hoarding cash, paying down average interest rate debt or bad investments, and company 2 is behind after the rebound.


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## james4beach (Nov 15, 2012)

It has nothing to do with that. The dividend immediately removes value from the share price, directly. It's money that literally flies out the door, it's cash payments. Equity goes down.


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## el oro (Jun 16, 2009)

I never disputed that.. I showed P/E of company 1 at 23, corresponding to your end share price of $46. The variability comes from the other company. The non-dividend payer.


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## james4beach (Nov 15, 2012)

donald said:


> dividend centered etf's seem to hold up a lot better than non div companies in downdrafts(don't you notice that?)


I don't think that's true. Jan 2008 - Jan 2009, as total returns XIU fell -32%, XDV fell -31%, CDZ fell -30%. They all fell the same amount in market turmoil.

Dividend stocks and ETFs don't do anything special that the regular indices can't do.



> You could spend a life time looking at all their different div funds... THey wouldn't pump these out if there wasn't a need


They pump them out because people are desperate in a ZIRP (zero interest rate policy) environment. It's not a good sign when something is this popular. There's been a mania, a hyper-popularity of dividend stocks & funds post 2009. You should _worry_ about the fact that there are so many ETFs being pumped out.



> I would agree with you there is nothing magical about them, it's just a different way companies return profits to shareholders


I have nothing against dividends. They are a legitimate way to return part of the company's value. I like the dividends of XIC and ZCN

My argument in the end is that total returns matter. The XIC total return comes from dividends plus share price appreciation. Both are good.

I don't have a fundamental problem with dividends. I'm trying to burst the misconceptions ... which are plentiful.


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## james4beach (Nov 15, 2012)

el oro said:


> I never disputed that.. I showed P/E of company 1 at 23, corresponding to your end share price of $46. The variability comes from the other company. The non-dividend payer.


I didn't grasp your counter argument. Even if we have a simple holding company, holding static assets in the form of a pile of cash with no new earnings, my comparison applies.

I don't see how P/E factors into any of this. The math I showed has nothing to do with the earnings (E) of the company. Perhaps I'm missing something.

_BTW, see, we are passing the time by critiquing dividend misconceptions!_


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## donald (Apr 18, 2011)

James,you say dividend orientated etf's don't do anything 'special vs a total bottom line 100% total return method
My ape brain wring of 'reward' dis agrees 
When comparing index vs debate- a dividend focused investors already knows or should know 'half' the total return is given in the form of cashola 
My beer after a long week on a friday night always goes so much better when i spot my cash component any given week or 2 rising(don't to fuc^ all-just collect)
and no need to read lonewolf's star charts when to exist 'here' and 'there' or 'add' to a index lol
Who want to read the star gazer once a mth?i don't lol


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## peterk (May 16, 2010)

el oro said:


> In order for your argument to be correct, management of the non-dividend company will need to deploy the retained earnings at the depressed market rate during the downturn.


I don't think so. Why would the non dividend payer have to deploy its cash in investments while the dividend payer just pays out the money? That's not a fair comparison. The equal comparison is that company 2 retains it's earnings as cash and makes no investment at all, just like company 1.


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## humble_pie (Jun 7, 2009)

.

*some people are dividend huggers*
.










.


*other people can let them go*
.










.


*whichever you are, Keep a grip on the portf*
.


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## yyz (Aug 11, 2013)

james4beach said:


> *******************************************
> Dividends, $2/share dividend = $2,000 dividend
> *******************************************
> 
> ...



Use your example above and when the market crashes 2 years in the future and the companies are bankrupt and the shares go to $0
In the dividend example I may have extracted dividend payments of $2000 and lost my $50000 initial investment and my total loss would be $48000 
In your non dividend scenario I lost $50000

There are many different scenarios that can play out and you are right when a stock goes ex dividend the share price will usually (not always) fall .It can be more it can be less.It would be unusual for the share price to fall by the exact dividend amount.When I have the cash in hand I can decide what to do with it.I am not subject to what can happen to companies stock or future. And I don't have to pay trading fees although small cost money.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I don't think that's true. Jan 2008 - Jan 2009, as total returns XIU fell -32%, XDV fell -31%, CDZ fell -30%. They all fell the same amount in market turmoil ...
> They pump them out because people are desperate in a ZIRP (zero interest rate policy) environment. It's not a good sign when something is this popular ...


So what's your theory on why the G&M columnist in the late 70's or early 80's wrote that market was paying a premium for dividend paying "widows and orphans" stock?




james4beach said:


> There's been a mania, a hyper-popularity of dividend stocks & funds post 2009. You should _worry_ about the fact that there are so many ETFs being pumped out.


If everything works out equal (i.e. the total return is same for a dividend payer and non-dividend payer) - why isn't the demand that preceeded the explosion in equity investing coupled with the "mania, a hyper-popularity of dividend stocks" not driving up the total return?

If all equity is over-priced where dividend payers are off the charts in popularity ... shouldn't dividend stock total returns at the moment but *better* than non-dividend payers? 




james4beach said:


> My argument in the end is that total returns matter.


You have an odd way of showing it ... it seems more like "total return matters" when the chosen benchmarks illustrate the point but investors holding dividend paying stock with better total return than either benchmark is of no import.


Cheers


*PS*

Talking about a misunderstood or controversial item (based on what's in this thread) seems to be a great way to pass the time. :biggrin:


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## atrp2biz (Sep 22, 2010)

Boring buy-and-holder investor here. I don't spend time figuring out when to sell, so I play hockey and edit my videos to pass my time.


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## peterk (May 16, 2010)

Aren't those beautiful, delicate hand knit mittens being wrecked by hugging that coarse, sappy, mossy tree bark?? Not that I know anything about knitting....but I didn't think wool and tree bark mixed very well together!


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## Mechanic (Oct 29, 2013)

My wife knits a lot. Our kids and grandkids are constantly getting new knitted hats, scarves, mittens, sweaters etc. Me, I golf, read, surf(net), diy, garden, tinker, trade and whatever else I come up with.


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## humble_pie (Jun 7, 2009)

atrp2biz said:


> I don't spend time figuring out when to sell, so I play hockey and edit my videos to pass my time.



yay.

speaking of videos, here's the latest from cmf forum's top gun two-wheeled daredevil:
.


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## Mechanic (Oct 29, 2013)

humble_pie said:


> yay.
> 
> speaking of videos, here's the latest from cmf forum's top gun two-wheeled daredevil:
> .


I might have to get another bike after watching that.


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## cainvest (May 1, 2013)

humble_pie said:


> yay.
> 
> speaking of videos, here's the latest from cmf forum's top gun two-wheeled daredevil:
> .


Ahh great .... now I'm suffering from PMS. 



(P.S. PMS = Parked Motorcycle Syndrome)


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## RBull (Jan 20, 2013)

My Own Advisor said:


> Hey RBull,
> 
> I guess by point #1, I was thinking selling ETF units, will incur a transaction cost, although it's a very small quibble. At some point, unless they want to leave a legacy, most dividend investors who are largely living off dividends will eventually sell their shares as well.
> 
> ...


Thanks for the detailed reply. 

I agree with the points and different perspectives you've outlined, and especially the last 2. 

I don't find the decision part of rebalancing difficult. What gets sold is what is higher as a percentage of your predetermined asset mix based on some set parameters you decide. You use this to buy what asset class your need to stay in balance, while considering your income draw and the cash wedge portion. I'm finding this straightforward so far, with only a few trades a year, and I could even have a simpler portfolio. Since retiring I have a net buyer of equity and haven't sold any. In any case I don't see the cost or the work in maintaining this as a reason not to consider this approach. 

A dividend only investor with many stocks could likely have more work and trades if they do eventually sell over time and want to maintain any kind of balance or limits between stocks in their portfolio.


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## el oro (Jun 16, 2009)

james4beach said:


> I didn't grasp your counter argument. Even if we have a simple holding company, holding static assets in the form of a pile of cash with no new earnings, my comparison applies.
> 
> I don't see how P/E factors into any of this. The math I showed has nothing to do with the earnings (E) of the company. Perhaps I'm missing something.
> 
> _BTW, see, we are passing the time by critiquing dividend misconceptions!_


Yes, you're right if we're talking about a holding company but things change when you add earnings to the picture.



peterk said:


> I don't think so. Why would the non dividend payer have to deploy its cash in investments while the dividend payer just pays out the money? That's not a fair comparison. The equal comparison is that company 2 retains it's earnings as cash and makes no investment at all, just like company 1.


Adjusting the j4b example to reflect companies with earnings ($2 EPS) but otherwise the same logic, the ending point becomes:

Company 1 - $2000 cashed out, 1000 shares, $50/share ($25/share in the downturn, spit out 100% of $2/sh earnings as dividends over four quarters, still $25/share, market rebounds at $25/sh x 2 = $50/share)
Company 2 - $2000 cashed out, 920 shares, $54/share ($25/share in the downturn, retain $2/share as cash pushes price up to $27/sh, market rebounds at $27/sh x 2 = $54/share)

Company 1 - $2000 + 1000 sh x $50/sh = $52,000
Company 2 - $2000 + 920 sh x $54/sh = $51,680

Company 2 ends up behind. Imo, this even overestimates the company 2 end point value because it assumes the $2/sh held as cash doubles to $4/sh.

Now, company 2 could have performed as well as company 1 if it had bought back shares at the lows or made equivalent investments in equally distressed assets:
Say the companies had 2000 shares outstanding. If company 2 immediately spent the $2/sh of retained earnings buying back shares at $25/sh, shares outstanding goes down to 1840 (=2000-2*2000/25). The company used to earn $2/sh but with fewer outstanding shares now earns ~$2.17/sh (= $2/sh x 2000sh / 1840sh). The company 2 value becomes - $2000 + 920sh x $54.34/sh = $52,000 or the same as company 1.

A simpler way to think about it - with company 1, you end up with 1000 shares of a company generating $2/share. With company 2 you end up with 920 shares of a company generating $2/share plus cash in the coffers generating $0. Relative performance depends on how effective company 2 uses that cash.


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## steve41 (Apr 18, 2009)

This is how you guys 'pass the time?'


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## james4beach (Nov 15, 2012)

yyz said:


> Use your example above and when the market crashes 2 years in the future and the companies are bankrupt and the shares go to $0
> In the dividend example I may have extracted dividend payments of $2000 and lost my $50000 initial investment and my total loss would be $48000
> In your non dividend scenario I lost $50000


I don't see a difference. You would have sold the shares on schedule from the non-dividend case, so you'd still have the $2,000. Total loss in both cases is $48,000. To make it more obvious, just imagine you sell shares whenever the equivalent stock would have paid dividends.

By the way, I see why andrewf gave up on debating this dividend stuff


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## yyz (Aug 11, 2013)

You're right about that in a worst case $0 scenario.
But the other case would be selling when a share price is below cost. Not only do I have selling cost but lose money on each share sold.In a take the dividend scenario I can maintain my shares and wait for the price to return.The key is to pick a solid company but there are NO guarantees in the market.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> yay.
> speaking of videos, here's the latest from cmf forum's top gun two-wheeled daredevil ...


 ... which is yet another pass time. 


Cheers


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## peterk (May 16, 2010)

james4beach said:


> By the way, I see why andrewf gave up on debating this dividend stuff


The thing is, even though I know that the desire for dividends as part of my portfolio as a young person is complete BS, I still think about dividends an inordinate amount. I have no idea why, I can't help it. When I bought some CPG last week I though "muahahaha this is yielding 9%! And if in a couple years oil is back up and the original dividend restored my _yield on cost_ will be 21%!!!"

I know it is wrong and stupid, but I always have to constantly be beating this dividend talk out of my head for my own good. If I stop, my thought inevitably drift back towards yield, income, yield on cost, and how much do I need to invest at what % yield to live off dividends.

It is a curse. Damn you dividends, damn you all to hell!


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## humble_pie (Jun 7, 2009)

.

*gawd they are so serious around here*
.


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## donald (Apr 18, 2011)

If Kevin Oleary says dividends are good then thats good by me
By the way James doesn't have to be either or
A guy can hold a few favorite dividend stock & a index
The tandem approach is prob the best actually(i should do that actually haha-light bulb moment)


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