# The great dividend stock investing vs. passive index investing debate:



## doitnow! (May 28, 2011)

*The dividend stock investing vs. passive index investing debate:*

I am new to investing and lost about 10% on my broad based index funds (which I have heard and understand is part of the game).

I am hearing about many different investment styles in this blog but it's possible to divide the majority into 2 groups: 

The first, are broad based couch potato type, buy and hold, strictly index investors. There seems to be a consensus among this group that losses have lately been in the 10% range regardless of the impact it's had on their sleep. 

In contrast I've been hearing from a the second group of investors that their portfolios have lost but a tiny percentage in comparison and that they are collecting dividends which further help to mitigate their losses. These folks focus on picking a few blue chip dividend stocks which they keep them for the long haul till their portfolios are of a sufficient amount to enable them to retire on the income exclusively from their dividends. Furthermore a large proportion of dividend investors make the claim that they are have higher rates of return than index investors. 

The latter approach seems to offer some distinct advantages. If this is true, then why aren't more etf investors not converting the majority of their portfolio to holdings in a few well diversified blue chip dividend stocks?

Your opinion?


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## Argonaut (Dec 7, 2010)

You have to find what's best for you. Everyone is completely different.

Personally, I think passive investing is very, very poor based on the consensus couch potato examples. For someone who doesn't want to pick stocks, a much better portfolio would be a split between fixed income, cash, and gold, with no stocks whatsoever. The worst trend in couch potato portfolios is splitting between Canadian, US, and International ETFs. Stocks are stocks, and in a global market they all move with each other. 

Those who are comfortable with investing in equities should pick their own stocks, and dividend investing is a good choice. Picking up solid companies that grow their dividends every year, or have a high sustainable yield is a great way to maintain income for your whole life. Otherwise you can be an active trader, and contrary to what some people say, you CAN time the market.

Personally, I am a hybrid investor. I'm letting my dividend stocks sit in my TFSA, and will contribute $5000 more to them every year. I'm also a rabid gold bug, which is a whole other story. And lately have been trading options to take advantage of the extreme volatility in the general market. Never let a good crisis go to waste. No need to panic sell my stocks either, shorting the general market through puts more than makes up for their losses.


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## Sampson (Apr 3, 2009)

doitnow! said:


> then why aren't more etf investors not converting the majority of their portfolio to holdings in a few well diversified blue chip dividend stocks?


ETF investors also collect dividends.

Current yield on XIU is about 2.5-3%, where as yield on XDV is maybe 3.5-4.5%.

That's a differential of 1-2%.

So when Couch potatoes report 10% losses over the last week, how much have dividend investor lost?

maybe 10% less the 1% differential in yield?


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## humble_pie (Jun 7, 2009)

they don't - that is, many investors don't change from holding etfs including dividend-paying etfs to holding dividend-paying stocks outright - for the same reason that doitnow doesn't.

because cherry-picking individual stocks still appears to be too risky or too much trouble.

i doubt very much that the differences in recent portfolio drop are as great as now! says. I haven't noticed too many holders of individual stocks recently reporting paper losses of only 1-2%. The truth must be certainly greater than that.

an always-intriguing aspect of stock market life is that there are always so many facets to a topic. There are never any universal answers.

for example, the argument against dividend-paying stocks is an argument in favour of stronger, emerging growth stocks with hi-energy prospects. This argument recites that older, mature companies tend to pay out their excess cash as dividends because their growth profiles are slowing or in fact have slowed.

not that any of this really matters today, as seen from inside the slaughterhouse.

btw did all notice argo's great quote. "Never let a good crisis go to waste," he says. Argo, did you make this up yourself ? it's a winner. Would make sensass book title.

i also agee w argo that the conventional couch potato etf division between canadian, US & international stocks is worse than useless. Surely it must be an archaic survivor from 40 years ago.


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## Four Pillars (Apr 5, 2009)

@DoItNow - You need to come up with a new handle - You've been posting this same question over and over again, seemingly without learning anything from the responses or doing anything about your problem.

Why don't you set up some kind of watchlist so you can monitor how the broad-based index ETFs do compared to some individual dividend stocks? See for yourself if dividend stocks are less volatile.


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## Mike59 (May 22, 2010)

The problem with this debate is that there is no correct, absolute answer. 

Indexers and Dividend-pickers can skew the data by saying "from x period to x period, my approach did better", but one can quickly find another time period that reveals the contrary.

Having invested on both sides of the debate, I'd say it depends on the time period in which you are in. My hypothesis is that bear and flat markets likely favor dividend investing, and bull markets favor index investing. Unfortunately it's always hard to tell if we're in a bull or bear market and hindsight is 20/20. 

My solution is to mix them up. I have 1/2 my equities in value picks, I try to buy when p/e is low and when valuation looks attractive by checking balance sheets, and plan to hold long term. The other 1/2 is indexed, and I market-time in and out to capture gains and minimize loss, based on a moving average protocol. I've become conservative though , and tend to hold more cash/gold than most. 

By checking your own portfolio's performance at various intervals, only you can tell if you were better off indexing


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## gimme_divies (Feb 12, 2011)

My dividend portfolio is exclusively blue-chip dividend payers and it has dropped close to 10% from it's peak of a few months ago. The only advantage is that despite this large paper loss, I also have a few thousand cash gain over that period that helps greatly.

My belief is that this portfolio is great because it requires little maintenance once set up, but is designed to deliver solid results from dividend growth over the long-term.


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## CanadianCapitalist (Mar 31, 2009)

Argonaut said:


> The worst trend in couch potato portfolios is splitting between Canadian, US, and International ETFs. Stocks are stocks, and in a global market they all move with each other.


In a crisis, yes, correlations between all risky assets goes to one. That's not a new phenomenon. It's been true in the past, it will most likely be true in the future.

Take a slightly longer term view and you'll see quite a bit of variation in returns between international stocks. 

Returns from 2001-10 (all in C$ terms annualized):
TSX: 6.57%
Wiltshire 5000: -1.46%
MSCI EAFE: -0.24%
MSCI Emerging Markets: 11.55%

That doesn't look like global markets all moving together to me. If you mean correlations, the last I checked correlations are positive but not perfect. So, you get diversification benefits by investing in overseas markets.


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## Topo (Aug 31, 2019)

In the past ten years, looks like XIC beat both XDV and CDZ, the latter holding dividend aristocrats. Total return chart for comparisons:


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## Eder (Feb 16, 2011)

My dividend portfolio crushed XIC 2010 to present. Don't make me post statistics.


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## Topo (Aug 31, 2019)

Eder said:


> My dividend portfolio crushed XIC 2010 to present. Don't make me post statistics.


Please do so. I'm eager to see them. If you would be willing to name names, even better!


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## james4beach (Nov 15, 2012)

Topo said:


> In the past ten years, looks like XIC beat both XDV and CDZ, the latter holding dividend aristocrats.


Dividend stocks have been underperforming lately if we're talking total return, and the same is true in the US. But I would think that the argument for dividend stocks would be that the cash dividends are quite stable over the long term.

I'm not a dividend investor myself, but I would think that "success" in dividend investing means that (1) your equity value is holding steady over the long term and not trending towards zero and (2) the cash dividends are steady.

As far as I know, the popular Canadian dividend ETFs are still succeeding at that.


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## Topo (Aug 31, 2019)

james4beach said:


> Dividend stocks have been underperforming lately if we're talking total return, and the same is true in the US. But I would think that the argument for dividend stocks would be that the cash dividends are quite stable over the long term.
> 
> I'm not a dividend investor myself, but I would think that "success" in dividend investing means that (1) your equity value is holding steady over the long term and not trending towards zero and (2) the cash dividends are steady.
> 
> As far as I know, the popular Canadian dividend ETFs are still succeeding at that.


Those are good points in favor of dividend investing, but as a group, dividend investors are not beating the index by leaps and bounds.


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## agent99 (Sep 11, 2013)

Topo said:


> Those are good points in favor of dividend investing, but as a group, dividend investors are not beating the index by leaps and bounds.


Don't know one way or the other myself. Index performance is of course readily available. Interested in where you obtained data on dividend investors as a group. Many of whom could be private individual investors using individual stocks, not funds.


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## Pluto (Sep 12, 2013)

1) Topo if you want to beat the index one of many things you have to do is concentrate. Concentrate in stocks that have eps growth higher than the eps growth of the index. If you don't do that, you won't beat it. 
2) From the list of stocks that grow faster than the index evaluate which ones are quality survivors. It is important to read and study the thinking of successful investors to hone your own judgement of whats a quality survivor. I've always believed that if I want to be successful at something I should incorporate as much as possible what the successful people do in to my own strategy. 

ETF's are useful for people who do not want to do the thinking and studying. If I was new at investing and had some cash one approach I might take is take about 90% of my money and buy an index etf. Then select one or two stocks I think are quality and use the remaining 10 % to buy them and see how it goes. If I found out stock picking was for me, I would gradually transition out of the etf into individual issues. Personally, I'm confidenct in stock picking as I started by putting all my available $ into one stock at a time. These days most people would be horrified but it was a good learning experience. 

There are posters here who are not asking how to beat the index because they already know how. Eder, agent99, LTR are some that seem to be quite happy with their stocks and performance. LTR has posted his portfolio. Check his out, it is a work of art. You can tell he made a study of investing and is quite confident in his approach.


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## james4beach (Nov 15, 2012)

In the US as well, dividend investing appears to have underperformed.

VYM has 10 year return of 11.40%, whereas SPY is 13.70%
DVY has 15 year return of 5.30%, whereas SPY is 8.77%

The irony is that dividend investing was supposed to make your capital last longer. But when your total return underperforms by 3% annualized over 15 years, you are not helping your capital last.

I realize the claim is that stock picking can do better than the dividend ETFs, and maybe it can. But now you're asking people to become experts on both stock picking (already very hard) and dividend stock screening (another specialized skill).

It can be done, but it's quite an advanced skill set.


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## Pluto (Sep 12, 2013)

Well I'm not asking anyone to to be an expert in stock picking, not sure where you got thaat from. I don't really see why it is so difficult either. We've covered this alot in this forum. I'm not specifically talking about "dividend investing". 
Topo made some comment about beating the index so I relayed the obvious: if you wnt to beat the index you have to conentrate in stocks whose EPS growth is greater than the EPS growth of the index. I didn't make any requirement for it to pay dividends. 

According to yahoo charts my one US holding, which does not pay a dividend, is up 55% in the last 12 months while the s&P is up about 6% in the same period. it wasn't difficult to find the stock and decide to buy. Was its Growth rate higher than the s&P? check. Was the quality high enough to hold it? check. What the difficulty? It wasn't difficult to put a significant chunk in one stock either. One, among many things, I do with a candidate stock is check its long term performance against the index using chart a comparison to index feature. If it don't go up greater than the index, don't buy. 

All my canadian based stocks also outperform the index. This has been checked using G&M's handy dandy portfolio feature in which one can test performance with dividneds reinvested, or not. If the story changes for the worse, and it appears to be chronic, in terms of eps growth, I dump the stock. Get rid of the losers, keep the winners. 
it really doesn't take much time. 3/4 of my picks come from the Investment Reporter, a proven service. 

What can take time is for an investor to gain the experience, confidence and develop decisiveness. It was a bit difficult for me, years ago, to dump the losers. That's a major filter. dump the losers and replace with proven long term growers greater than the index. Once I got the dump the losers habit, I ended up with a really great bundle of stocks. 

But don't think I'm asking anyone to do this. Develop your own judgement.


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## Topo (Aug 31, 2019)

agent99 said:


> Don't know one way or the other myself. Index performance is of course readily available. Interested in where you obtained data on dividend investors as a group. Many of whom could be private individual investors using individual stocks, not funds.


Dividend ETFs would generally be representative of dividend stock holdings in aggregate. CDZ is more quality bent, XDV more dividend yield. There will be a lot of overlap between Canadian holdings of dividend investors and the holdings of those ETFs.


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## Topo (Aug 31, 2019)

Pluto said:


> Topo if you want to beat the index one of many things you have to do is concentrate. Concentrate in stocks that have eps growth higher than the eps growth of the index. If you don't do that, you won't beat it.


Concentration per se will not beat the index. It will cause a divergence that could end up beating the index or trailing it, at least for some time. With regards to growth, it depends how much you are paying for it. If you pay a lot for growth, you will underperform.


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## Topo (Aug 31, 2019)

Pluto said:


> ETF's are useful for people who do not want to do the thinking and studying.


That is one way to look at it. But most studies show that investors, including pros, have difficulty beating the market in the long term. Short term results are usually the result of luck.


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## Pluto (Sep 12, 2013)

Topo said:


> Concentration per se will not beat the index. It will cause a divergence that could end up beating the index or trailing it, at least for some time. With regards to growth, it depends how much you are paying for it. If you pay a lot for growth, you will underperform.


Of course concentration perse wont beat it. that why I mentioned other factors as well. of course one should not over pay for growth.


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## Pluto (Sep 12, 2013)

Topo said:


> That is one way to look at it. But most studies show that investors, including pros, have difficulty beating the market in the long term. Short term results are usually the result of luck.


I don't pay attention to what the studies say about most investors and most managers except to note that I shouldn invest like most do if I want to outperform. Most are average, so I should be average to, buy xyz etf's - its marketing. I care about how the money managers who beat the market by a long shot over the long term did it. Focus on the positive, not the negative. 

But I'm not telling you you should't be like most. If being an index investor is what resonates with you, by all means do it. 

We covered the luck issue here at some length years ago. I think people create their own luck, good or bad. Its obvious to me that What Templeton, Buffett and other acomplished isn't luck.


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## MrBlackhill (Jun 10, 2020)

And I guess there's multiple strategies to beat the market. Takashi Kotegawa turned $13 000 into $150 million in 8 years.

But one sure thing. Beating the market needs a lot of work, research, learning, reading, trying and failing.


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## james4beach (Nov 15, 2012)

Topo said:


> That is one way to look at it. But most studies show that investors, including pros, have difficulty beating the market in the long term. Short term results are usually the result of luck.


A good illustration of this is Buffett.

He believes (probably correctly) that he has skills in stock picking and capital management. So while he's alive, he actively manages money.

But he has instructed his estate to invest in 90% stock index + 10% t-bills after his death. Notice that he has not delegated the work to another portfolio manager or stock picker. If there's anyone on this planet who has access to good stock pickers and portfolio managers, it's got to be Buffett.

Apparently, Buffett does not believe he can find a person who is likely to do better than the index. He spent a lot of time thinking about this decision. Think about it ... he is betting $72 BILLION that a human manager can't do better than the index.

[ it should be noted that he may in fact believe in the skills of the Berkshire stock picker(s) who he hired, but since his wealth is concentrated in BRK, for his decision about the estate he must ignore the great stock picking happening at Berkshire ]

If great stock picking was as easy as what's suggested upthread, then Buffett would simply choose one of those stock picking pros, would he not?


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## Topo (Aug 31, 2019)

james4beach said:


> Notice that he has not delegated the work to another portfolio manager or stock picker.


Exactly, including his own successors at BRK.


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## Topo (Aug 31, 2019)

MrBlackhill said:


> Takashi Kotegawa turned $13 000 into $150 million in 8 years.


He certainly didn't do that by picking stocks.


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## james4beach (Nov 15, 2012)

For every stock picking success story you hear (and there certainly are some), you also have to look at the stories of the stock picking failures. There are many failures.

And that's the problem. Due to survivorship bias, and the fact that people with terrible results don't go around seeking attention for their disastrous results, you will mostly hear about the good outcomes from stock picking.

IMO the financial media (Wall Street) encourages all of this, because the story that you can "stock-pick your way to riches" encourages more people to trade, gamble, and participate. All of this is good for Wall Street. They *want *investors to have the idea that they could pick stocks and get rich.



MrBlackhill said:


> Takashi Kotegawa turned $13 000 into $150 million in 8 years.


This is what Wall Street _wants_ us to focus on. They don't want us to be aware of all the people who've had horrible results, who've ruined their retirements, or lost all the family's money and gone through divorces, etc.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> A good illustration of this is Buffett.
> 
> If great stock picking was as easy as what's suggested upthread, then Buffett would simply choose one of those stock picking pros, would he not?


Stock-picking is definitely not easy. If success was easy, we'd be all successful. And if we'd be all successful, then no one would be. If we were all wealthy, then no one would be. Yes, the rule of the average means most of us are average (more precisely, most of us are "median"). But it also means some of us are better and some of us are worst. Why so many people fail and quit? Because they think it's easy, because they think they don't need to work that hard, because they are impatient, because they don't read & learn, because they fail once and quit right away.

Buffett is not the only great investor out there. There are many others with different styles and opinions. World Top Investors • Low Down on the Greatest Stock Market Investors And we don't have to become as rich as those investors to be successful.



Topo said:


> He certainly didn't do that by picking stocks.


True, he did day trading. Yet, there are also many success stories of other styles like long term investing based on fundamental analysis.



james4beach said:


> For every stock picking success story you hear (and there certainly are some), you also have to look at the stories of the stock picking failures. There are many failures.
> 
> And that's the problem. Due to survivorship bias, and the fact that people with terrible results don't go around seeking attention for their disastrous results, you will mostly hear about the good outcomes from stock picking.
> 
> ...


That's a very pessimistic point of view. Let's take another subject instead of investing. Let's say you have an idea and you want to start a business or a self-employed job. How many entrepreneur fail? Does that mean you won't try? Or let's say when you were young you wanted to become a physician. How many fail? Does that mean you should not try and work hard on your studies?

With the mindset of an average person, you stay an average person. With the mindset of a successful person, you become a successful person.

Let's take the example of starting a new website on your own. You'll work 60 hours a week trying to figure out so many things from designing the website, to creating content, to figuring out how to get more traffic, to making sure your website brings value and interest to people. Yet, for maybe half a year or even more, you'll get about no visits and no revenue. Most would then quit. Who would work 60 hours a week during half a year without any revenue for all that work? But then maybe after one year, your website starts getting a few visits and then it continue growing the second year and you start getting some revenue and you start dreaming. And then you plateau. And maybe at some point you conclude that you failed. So, instead of quitting, you start another website with all the knowledge you acquired from your previous experience. Yes, there are many challenges ahead as an entrepreneur.

But does that mean we should all be optimist and keep trying until we succeed? Thomas Edison (the inventor of the light bulb) said "I have not failed. I've just found 10,000 ways that won't work." That's true and I definitely recommend that mindset, but one must also know himself - his strengths and weaknesses, his interests and passions. For instance, I won't ever become a singer no matter how hard I try. Or maybe I would, after 15 years of hard work I could sing in a low-key bar while others become internationally famous within 5 years.

Also, in a certain point of view, you are already above average in something. In another point of view, you are below average in something. So what does "being average" truly means? It depends of the sample. You said that Wall Street wants you to believe you are better than average, well I will also tell you that our whole society wants you to believe you are just an average person and so you shouldn't try to change your faith. In fact, it plays on both sides. Sometimes trying to make you believe you are better than average, other times trying to make you believe you are average. Society is brainwashing us that success is having a great 40h/week career, buying a house, buying a nice car and having 2 kids. Society keeps us thinking inside the box.

But if you have interest, if it's part of your strengths, if you believe in yourself, then you should at least try and try more than one time. And most importantly, learn from your failures because as Albert Einstein said, "Insanity is doing the same thing over and over again and expecting different results." That's what happens when somebody fails and doesn't learn from its failures. As Nelson Mandela once said "I never lose. I either win or learn." (And I could cite many other Mandela quotes Here are 10 of Nelson Mandela’s most inspirational quotes) (Another great thing to know is this Taoist parable of the farmer and the horse)

If you don't want to take the risk of working hard for the opportunities of stock-picking because you prefer working hard on other personal projects, then yes, you should go for index investing and that's a personal decision. But if you are thriving at stock-picking and you can search for stocks during a whole night just because you are passionate about it, if you can spend whole weekends reading books about investing, then you should give it a try instead of index investing.

You've quoted Buffett as one of the greatest investor in history. I've quoted 3 of the most important names in recent human history. It's all about deciding who you believe and from whom you get your inspiration.

Also, do you know the Golem effect - Wikipedia and the Self-fulfilling prophecy - Wikipedia ?


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## agent99 (Sep 11, 2013)

Topo said:


> Dividend ETFs would generally be representative of dividend stock holdings in aggregate. CDZ is more quality bent, XDV more dividend yield. There will be a lot of overlap between Canadian holdings of dividend investors and the holdings of those ETFs.


I wouldn't think dividend ETFs would be representative of dividend investments in aggregate. Only relatively small investors would be in ETFs. Then there are mutual funds, pension funds, private wealth etc etc. The index covers all bases. Dividend ETFs, just a fraction. You can't compare the two. And why bother anyway


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## Pluto (Sep 12, 2013)

james4beach said:


> For every stock picking success story you hear (and there certainly are some), you also have to look at the stories of the stock picking failures. There are many failures.
> 
> And that's the problem.


I don't really see that as "the problem". Its a clear indication of what not to do. Why is being able to know what not to do a problem?


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## Pluto (Sep 12, 2013)

MrBlackhill said:


> Stock-picking is definitely not easy. If success was easy, we'd be all successful.


You have the right mind set. Thanks for being positive and realistic.


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## Pluto (Sep 12, 2013)

And speaking of Buffett, apparently over 50% of BRK is now in Apple. Talk about concentration.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> Apparently, Buffett does not believe he can find a person who is likely to do better than the index. He spent a lot of time thinking about this decision. Think about it ... he is betting $72 BILLION that a human manager can't do better than the index.





Pluto said:


> And speaking of Buffett, apparently over 50% of BRK is now in Apple. Talk about concentration.


True! Buffett's BRK has more than 85% of its holdings in only 3 sectors. It also has more that 75% of its holdings in only 6 stocks. And that's all US stocks. And yes, he kept a position of about 30-50% in a single stock : AAPL. After all, Apple maintained 40% CAGR during the last 17 years. Now, let's talk about diversification and indexing...


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## james4beach (Nov 15, 2012)

Perhaps there is a notion that optimism leads to good stock picking results? We have plenty of statistics on fund managers and we know that as a group, they don't do very well.

I think you have to be careful with the optimism stuff because this is one of those scenarios where you can easily get fooled by randomness. Against the backdrop of random stock returns, sprinkle in overconfidence and optimism, and you can walk away with entirely the wrong idea.

I've been stock picking some growth stocks for fun, and now have 4 years of index-beating performance. Does that mean I'm a good stock picker? Does that mean that I can expect to keep outperforming going forward? Maybe. I recognize that there is a lot of randomness in the outcomes. Maybe I'm just getting lucky with the outcomes so far.

In this game, it's virtually impossible to differentiate between luck and skill. I think the more disciplined and methodical one is, the more likely it's "skill" but there is still no way to know. I could beat the index for 10 years and still just be lucky.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> In this game, it's virtually impossible to differentiate between luck and skill. I think the more disciplined and methodical one is, the more likely it's "skill" but there is still no way to know. I could beat the index for 10 years and still just be lucky.



Huh, 10 years continually beating the index would result in someone being quite a bit ahead I would think. You could probably lose to the index for many years and still be ahead. But that just isn't enough for the index supporters. 

I always wonder what would be enough? If I beat the index for 100 years, would you still stick to the tired mantra of, _"Sure you can beat the index for 100 years, but that's just lucky"_. It's never enough.

What I find is that beating the index is best done incrementally. So if you beat the index a little at a time, after many years it adds up and you are quite a bit ahead and you can afford the odd down year. 

Please tell us how long we have to beat the index until approval is given?

ltr


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## fireseeker (Jul 24, 2017)

Here's one way to think about beating the index:
The index is the de facto median. Investors in any given year have a 50/50 chance of beating it or failing it.
The odds of beating the index every year for 10 years via lucky choices are about 1 in 1,000. To beat the index every year for 20 years is about 1 in a million.

Now, how many investors are there?
Millions.

So, the math suggests someone out there has beaten the index every year for 20 years for no other reason besides luck.

That's why James is right when he says it's hard to differentiate between skill and luck.

Is Buffett skilled or lucky?
I'd bet on skilled, but I need to acknowledge that he may just be Mr. One in a Million.


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## Eder (Feb 16, 2011)

Its just plain silly to think you beat the index every year...why would this matter...what is important is to exploit small edges to stimulate index beating returns over the long run. Why is that concept so difficult to understand? 

I have doubled the total return of XIC over the last 10 years...I have no idea if I beat it every year. I think I will stick to what works but will stop posting anything ever again about beating XIU or any other trigger topics that make heads explode.


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## james4beach (Nov 15, 2012)

Guys, I'm so glad we're back to arguing over stock picking. This actually shows that COVID fears are waning.

Happy Friday to all, I'm hitting the hiking trails!


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## agent99 (Sep 11, 2013)

fireseeker said:


> The odds of beating the index every year for 10 years via lucky choices are about 1 in 1,000. To beat the index every year for 20 years is about 1 in a million.


Where did you get those statistics? A link would help? And which index is "the Index" ?


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## agent99 (Sep 11, 2013)

Deleted


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## Topo (Aug 31, 2019)

agent99 said:


> Where did you get those statistics? A link would help? And which index is "the Index" ?


I think fireseeker is saying that half will beat the index every year and half will not, which is a good assumption albeit generous (I think less than 35% beat the index after fees). So to beat the index 10 years in a row, the probability math works out to be 1 over 2 to the power of 10, which is 1 in 1024 rounded to 1 in a thousand.


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## Topo (Aug 31, 2019)

Here is one reference:









Active fund managers trail the S&P 500 for the ninth year in a row in triumph for indexing


Investing in low-cost, passive funds remains the soundest long-term investment.




www.cnbc.com




.




> This is not a one-year phenomenon. S&P has been doing this study for 16 years, and the long-term results only strengthen the claims for index investing. Indeed, while a fund manager may outperform for a year or two, the outperformance does not persist. After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.


I believe Standard and Poor's have been doing studies comparing active to passive called SPIVA Scorecard. The results are consistently in favor of passive.


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## fireseeker (Jul 24, 2017)

agent99 said:


> Where did you get those statistics? A link would help? And which index is "the Index" ?


They're not statistics, it's math. And it doesn't matter which index -- it's all the same.
As I said in the post, it's 50/50 whether an investor beats the index in any given year. And 50/50 is a coin flip.
The odds of flipping the same side 10 consecutive times is 1 in 1,024.

If you have 1,000 money managers, it's reasonable to assume that one of them will beat the index every year for 10 consecutive years -- simply by chance!


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## agent99 (Sep 11, 2013)

Well, investing is hardly a coin flip. Some will beat the index most of the time. Some will lose most of the time. That 50/50 only applies when all investors are lumped together as a group. Personally, I just can't imagine just matching an index.


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## fireseeker (Jul 24, 2017)

agent99 said:


> Well, investing is hardly a coin flip. Some will beat the index most of the time.


The lucky coin-flippers.



agent99 said:


> Some will lose most of the time.


The unlucky coin-flippers.



agent99 said:


> Personally, I just can't imagine just matching an index.


Maybe you're a lucky coin-flipper?


Yes, I'm being flippant. But this is an important point. Even if you have outperformed, it is impossible for you -- or anyone else -- to know with certainty whether it's skill or luck.

Your strategy could be shrewd, or it could simply be one that by good fortune led you to winners.
Winning makes people feel shrewd.

Believe me, if you flip a coin heads 10 times in a row you will think that something special is happening. But it's just randomness. Ask Nassim Nicholas Taleb.


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## james4beach (Nov 15, 2012)

Taleb's book is required reading.



agent99 said:


> That 50/50 only applies when all investors are lumped together as a group. Personally, I just can't imagine just matching an index.


So as I understand it, the stock picking argument goes something like this: only half of stock pickers overall beat the average (index). However, I'm confident that due to my intelligence & intuition, I can do better than average. Not only that, but I think I can generally beat the average over time, in most years.



fireseeker said:


> If you have 1,000 money managers, it's reasonable to assume that one of them will beat the index every year for 10 consecutive years -- simply by chance!


Fund managers and even mutual funds actually exploit this statistical quirk. It's one of the oldest tricks in active management. The way it works is that the mutual fund company has a huge number of mutual funds (let's call each of these a stock picker). Over the years, they continuously shut down mutual funds with really bad track records. They also keep adding new mutual funds, feeding this pool of stock pickers.

As a consequence of statistics, even if these mutual fund managers were totally unskilled, *there will always be 1 or 2 mutual funds with amazing track records*. This isn't fake. Those historical track records are real, and the fund manager (stock picker) really achieved that result.

The fund company then plays up and sells those "star" mutual funds. They get published in the newspaper. The results are shown to everyone as proof of the fund company's amazing talent. The fund manager themselves _probably actually believe_ that they have amazing skills. They get big bonuses, and praise from the industry; surely that means they are great at what they do?

Unfortunately those managers may have no skills at all. There is no way to know. You would get the same result even if they were dumb as bricks and randomly selecting stocks.


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## MrBlackhill (Jun 10, 2020)

agent99 said:


> Where did you get those statistics? A link would help? And which index is "the Index" ?


He based that probability on an assumption of 50/50 chance to beat the market at a given year. Then winning 10 times in a row (10 years) is the same as flipping a coin on heads 10 times in a row, which is 1 on 1000. For 20 times in a row, it's 1 on 1 000 000.

But that's oversimplification in my opinion. First, I don't believe the chance to beat the market is 50/50, but let's keep that assumption. Now, say on year 1 the market returned 9% and your portfolio returned 13%. You've beat the market. On year 2, the market returned 11% and your portfolio returned 8%. You haven't beat the market. But, over those 2 years, the market had a total return of 21% and your portfolio had a total return 22%. Therefore, you're still beating the market and you could continue beating the market only 50/50 and still be beating the market overall.


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## like_to_retire (Oct 9, 2016)

fireseeker said:


> Believe me, if you flip a coin heads 10 times in a row you will think that something special is happening. But it's just randomness.


A bit of a strawman argument I would say. I have no doubt you are quite correct about the odds of flipping a coin, but that has little to do with the stock market. There is a degree of luck involved with the stock market, but it doesn't equate to a coin flip.

ltr


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## Jimmy (May 19, 2017)

There are active factors that have beat the index over long periods on avg. This was noted in the book 'The 4 pillars of Investing" . Over ~ 70 yrs real returns for US large caps were on avg 3.5%. Yet large value stocks were 5%, small cap & REITS 5% etc.


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## canew90 (Jul 13, 2016)

I won't try to convert anyone, but dividend growth or Income growth investing is not about meeting or beating the market. It's about maximizing and growing the income from your portfolio. The goal is to generate an ever-growing income regardless of what the market is doing or what are the current economic or political issues. By following the strategy one can ignore ignore the market, the market value of ones portfolio and price fluctuation. Price is only a factor in deciding when to buy more shares.


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## like_to_retire (Oct 9, 2016)

Jimmy said:


> There are active factors that have beat the index over long periods on avg. This was noted in the book 'The 4 pillars of Investing" .


And beating the Canadian index is especially easy since it's so tilted to just a few sectors. It's really not a great index to hang your hat on.

Certainly the BTSX strategy has been quite successful., and there are lots of others.

_" With data going back to the late 1980’s, the strategy now has a 30-year track record. Over that time, the method has returned an average of 12.33% annually. The benchmark index has returned an average of 9.40% (dividends included)". 








_

ltr


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## agent99 (Sep 11, 2013)

Some seem to relate investing to a game of chance, like coin flipping. But that is not what it is. Think about a player in sports. Say Roger Federer. Look at his record against the average pro player (the index) His record beats the average by a large margin. Why? Because tennis, like investing, is not a game of chance. It requires skills. And some have more than others. 

If you know you don't have sufficient skill, by all means buy index funds. As I get older, I may do a little of that, because those who will eventually take over our portfolios won't have the time or skill or interest to manage them. Exposure to equities will be cut considerably. That part has been started without my help .


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## Pluto (Sep 12, 2013)

MrBlackhill said:


> True! Buffett's BRK has more than 85% of its holdings in only 3 sectors. It also has more that 75% of its holdings in only 6 stocks. And that's all US stocks. And yes, he kept a position of about 30-50% in a single stock : AAPL. After all, Apple maintained 40% CAGR during the last 17 years. Now, let's talk about diversification and indexing...


I'm not to keen on diversification for my self, although I'm quite happy if others diversify. My problem with diversification is, the more one diverisifies, the more ones portfolio becomes like "the market". and why would I want that? Quite frankly I perfer concentration. I have an advantage over fund managers in that I have a comparativly small amount of $ to invest. That means I don't have to diversify thereby becoming more like the market. I can incorporate some smaller faster growing issues into my collection of stocks that most fund managers would not be interested in as they are too small to move the needle. 

But I'm not saying that other people should concentrate. They should do what resonates with them.


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## MrBlackhill (Jun 10, 2020)

agent99 said:


> Some seem to relate investing to a game of chance, like coin flipping. But that is not what it is. Think about a player in sports. Say Roger Federer. Look at his record against the average pro player (the index) His record beats the average by a large margin. Why? Because tennis, like investing, is not a game of chance. It requires skills. And some have more than others.
> 
> If you know you don't have sufficient skill, by all means buy index funds. As I get older, I may do a little of that, because those who will eventually take over our portfolios won't have the time or skill or interest to manage them. Exposure to equities will be cut considerably. That part has been started without my help .


Exactly!

I will even put a bit more controversy to this discussion. If someone compares investing to a game of luck, then let's compare it to... poker players. As an analogy only, they have to make about the same decisions as an investor : Check ~ Hold, Raise ~ Buy, Fold ~ Sell at loss. So, poker is a simplification since it's only about cards probabilities and no other factor. Therefore, probabilities means... luck? Well, how can some poker players make so much money in tournaments, then? That's because - as for investing - they have a strategy, they control their emotions, they are patient, they analyse the odds and they get to make better decisions than others. Pure luck is when your decisions have absolutely no effect on the outcome.


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## Pluto (Sep 12, 2013)

fireseeker said:


> Yes, I'm being flippant. But this is an important point. Even if you have outperformed, it is impossible for you -- or anyone else -- to know with certainty whether it's skill or luck.


I'm pretty sure that's just your belief. I doubt you could prove your belief. 

1. Study of stocks has convinced me that if EPS goes up, the stock price will go up as well. Stock prices are not simply random. And EPS isn't random either although earnings predictibility varies depending on the industry. 
2. So I determine the growth rate of the index. Then pick from stocks that historically have beaten the index in terms of EPS growth. Another factor is ROE. I want stocks where the ROE is greater than average. Why would I want stocks where the mangement can't produce a decent ROE? There are other factors as well but those two alone greatly improve performace. Another is earnings predictibility: I weed out companies with severe boom and bust cycles. 

None of this is coin flipping. It's common sense criteria to pick from a pool of higher than average quality stocks. A bundle of higher than average stocks will perform better than the average. Any given issue might underperform expectations due to unforeseeable circumstances. Simmilarily, any give issue might exceed expectations. I suppose such might be construed as randomness, but its really superficial, and not the essence of the matter.


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## Pluto (Sep 12, 2013)




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## Pluto (Sep 12, 2013)

In post 56 the blue line is BRK compared to S&P which is the squished almost horizontal line near the bottom. 
Why should I believe that BRK performance is luck?


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## agent99 (Sep 11, 2013)

Quod Erat Demonstrandum


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## james4beach (Nov 15, 2012)

Pluto said:


> In post 56 the blue line is BRK compared to S&P which is the squished almost horizontal line near the bottom.
> Why should I believe that BRK performance is luck?


There's no question that Buffett is good at capital allocation. By the way, BRK isn't just stock picks. He fully owns many companies, including insurance giants. He controls and influences companies. He has a lot of bonds. In any case, yes, he's good at actively managing his money. Possibly the best in the world.

But that isn't the issue. The question is, are YOU good enough at active management to beat most other market participants? Or am I good enough at it?

There are a lot of highly skilled participants out there, people who dedicate their entire lives to this work. They work in teams. They have better access to information, they have Bloomberg terminals, they have research departments.

Confidence and optimism aren't enough to make it happen. You have to beat most of these people at the game.

On top of that, you have to beat them on their home turf. People on Wall Street and Bay Street have certain advantages due to their connections and networks. This is not a fair and level playing field.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Confidence and optimism aren't enough to make it happen. You have to beat most of these people at the game.


Nope, I just have to beat the index. 

It ain't that hard as you yourself have seen with your various "x-pack" experiments. Seriously, why are you arguing against beating the index. You're a poster boy for beating the index.

If you don't want to do any work, get the index. It's great, you'll get a market return. No one will argue with that. But with extra work you can beat the index. Why do indexers argue so fervently about that simple fact? 

The indexes are full of crap that drag it down. Come up with a system that exploits the weakness' in the index. Many on this forum do this. That James4Beach guy seems to do it all the time.

ltr


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## fireseeker (Jul 24, 2017)

fireseeker said:


> Yes, I'm being flippant. But this is an important point. Even if you have outperformed, it is impossible for you -- or anyone else -- to know with certainty whether it's skill or luck.





Pluto said:


> I'm pretty sure that's just your belief. I doubt you could prove your belief.


What are you asking me to prove? 
All I said was people can't know for certain whether their good fortune is a result of skill or, well, good fortune.
I can't prove what you know, or what you don't know.
But you can.
What's the proof that your outperformance is the result of skill?
Unfortunantely, a simple accumulation of good results isn't proof. And I don't know how else one can measure investing skill.
But I am open to be shown otherwise.




Pluto said:


> Why should I believe that BRK performance is luck?


You don't have to. As it happens, I think it's skill, too, for all the reasons James articulated.
But I can't prove it's skill. And neither can Buffett.


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## Eder (Feb 16, 2011)

You can prove you are a winning investor...its called sample size. 
How do I know I'm a winning poker player?...15% ROE over 23 years says I am. Sample size. Math doesn't lie.


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## MrBlackhill (Jun 10, 2020)

Why are we debating luck vs skill as if it was black or white? It's a bit of both. Some people had lucky shots, sure. But the law of large numbers will get everybody to the same level of luck and only the skilled will outperform. Therefore, skill is the most important part when trying to beat the market over multiple decades. In order to beat the market, you needs skills, strategies, self-control, knowledge and intuition. Luck is only a bonus which happens to everybody and it also comes with bad luck.

Big teams of professionals have all their own investment styles. But many out there are not trying to become great investors, they are trying to figure out the best trading algorithm to break the code of market trading. They are working on machine learning strategies. You don't need to be at that level to simply beat the market.

Some people have the skills and knowledge to beat the market.

Take for example this game which appear to be pure luck : There are 1000 boxes which you can open one by one. Each box contains a number ranging from 1 to 1,000,000,000,000,000,000,000,000,000 taken from a uniform distribution. You must find the box with the biggest number, BUT each time you open a new box, the number inside that box becomes your final number. Therefore, you must decide when to stop. What's your chance of winning? 1 out of 1000 (0.1%)? With some specific strategy, your probability of winning is actually 37%. Who here can figure this out? Who here already knows that? Same for investing, some people have studied the best winning strategies and got the skills the execute them.


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## james4beach (Nov 15, 2012)

like_to_retire said:


> It ain't that hard as you yourself have seen with your various "x-pack" experiments. Seriously, why are you arguing against beating the index. You're a poster boy for beating the index.


It's true that my 5-pack has outperformed the TSX since I started using it. But I still don't think that proves anything; it could be luck. The 5 pack only has 5 individual stocks, which naturally will be more volatile than the broad index. More volatile means sometimes it returns more, sometimes less.

Perhaps out of dumb luck, I've been in a stretch of a few years where it's returning more than the index. That could simply be the volatility that comes from only choosing 5 stocks. Yes it might be skill, I might have a great method... but it could also be luck.


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## james4beach (Nov 15, 2012)

Also, if the goal is to have a method to beat the TSX, then why not just buy ZLB and be done with it? BMO's ZLB has beaten the TSX Composite over 8 years. It has sensible holdings and sector weights. It's not a bad fund by any measure.










Is that enough to conclude that the BMO fund manager is able to beat the index and will continue outperforming?

My own answer would still be 'maybe'. No question it's done great over 8 years, and I wouldn't blame anyone for replacing XIC with ZLB. But the outperformance could still stop, just like my 5-pack outperformance could stop.


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## MrBlackhill (Jun 10, 2020)

I think many people forget about the time frame with may include some huge profit at some point. When we look at historical return over 30 years, we may want to take into account the different cycles of the market, sure, which averages down the CAGR. But meanwhile some people didn't have to get through all these cycles, they got rich enough during a bull market to sell their growth stocks and retire on dividend stocks. That's a matter of risk management.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Also, if the goal is to have a method to beat the TSX, then why not just buy ZLB and be done with it? BMO's ZLB has beaten the TSX Composite over 8 years. It has sensible holdings and sector weights. It's not a bad fund by any measure.


ZLB is fine, except there's an expense ratio, tax distributions of all flavors, phantom re-invested capital gains, etc. Also they have huge amounts of money to deal with that slows their ability to be nimble and a bunch of rules they have to stick to.

I can do better without all the fuss. One T5 slip and I can also change on a dime.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> I can do better without all the fuss. One T5 slip and I can also change on a dime.


So you can do better than not only XIC, but also do better than ZLB which has nearly double the XIC performance?

I'm curious, how confident are you that you can beat XIC going forward? Where 100% means that you are absolutely certain it will happen.

I am about 50% confident that my 5 pack can outperform XIC going forward.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I am about 50% confident that my 5 pack can outperform XIC going forward.


I would only be 50% confident in the 5 pack too since you don't not have enough stocks to avoid a catastrophe if one goes bad. One stock represents 20%. You need to double or triple the number of constituents. But I've told you that before - just my opinion..

Myself, I guess I'm pretty confident over time I'll continue to pull away from the XIC total return. You only need a small difference every year and it just adds up, which allows a year or two here and there that you don't beat it. I have missed once in the last 9 years where XIC beat me by 1.6%. And actually this year is a draw so far - a perfect storm where the few sectors I don't represent happen to be the ones that are doing well. Tech! - who knew?

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> And actually this year is a draw so far - a perfect storm where the few sectors I don't represent happen to be the ones that are doing well. Tech! - who knew?


What if tech really is the future, though? What if we have a stretch of something like 10 years where tech and energy/commodities lead the market performance and grow to become the industrial giants which dominate the economy.

Would you not underperform in those conditions?


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## like_to_retire (Oct 9, 2016)

Yes, probably. I have 8 equal sectors, but not Tech or Material, so that's my downfall I guess. 

I'm still confident though.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Yes, probably. I have 8 equal sectors, but not Tech or Material, so that's my downfall I guess.
> 
> I'm still confident though.


What's interesting to me is that we are all making similar trades. Eder, you, me, other X-packs, and even ZLB.

All are excluding commodities, and tech isn't even on the radar (so we've all excluded tech). This has given good performance in recent years.

The worry I have about this is that we may all just be benefitting from a certain "theme" in markets that is lasting for a number of years. If the theme changes, and other sectors take off to become new leaders, it's a different story.


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## fireseeker (Jul 24, 2017)

like_to_retire said:


> I would only be 50% confident in the 5 pack


I am also 50% confident in James's ability to outperform going forward.
As I am in LTR, Eder, Mr. B, Pluto and Warren Buffett.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> What if tech really is the future, though? What if we have a stretch of something like 10 years where tech and energy/commodities lead the market performance and grow to become the industrial giants which dominate the economy.
> 
> Would you not underperform in those conditions?


Tech is the future. The strength of the tech sector is that it's everywhere. Therefore, in order for other sectors to growth faster, they need better... tech! The other way around is not as true. Everything is about tech and it's only the beginning, there's no doubt. Recall how people used to live back in 1850? This is the biggest boom in human history. Humans didn't evolve fast. Tech did, though.


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## Pluto (Sep 12, 2013)

james4beach said:


> But that isn't the issue. The question is, are YOU good enough at active management to beat most other market participants? Or am I good enough at it?


Yes.


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## Pluto (Sep 12, 2013)

fireseeker said:


> What are you asking me to prove?
> All I said was people can't know for certain whether their good fortune is a result of skill or, well, good fortune.
> I can't prove what you know, or what you don't know.
> But you can.
> ...


1. What am I asking you to prove? Prove that I can't know if it is skill or luck. I know it is skill. You can't prove that I don't know it. 
2. Well you have defined what proof isn't: proof of outperformance isn't actual outperformance, according to you. That's like saying Tiger Woods was just lucky, and his dominance at golf doesn't prove he was better than anyone else. After all, everything is just luck, you say. Since you don't define what constitutes proof, its obvious that nothing would satisfy you. You have to define the goal posts, otherwise it is futile. Its like you devised a soccer game with no goals - so nobody can score. Then you say see, I knew no one would win soccer games, I knew it would be 50/50. 
Your preconcieved conclusion is contained in the premise of your argument and the way you frame the circumstances. Since you assume everything is just luck, you can't come to anyother conclusion. It all just boils down to your belief.


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## Topo (Aug 31, 2019)

Pluto said:


> Yes.


Almost everybody thinks they are.


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## Pluto (Sep 12, 2013)

Topo said:


> Almost everybody thinks they are.


The reality is that study, practice, and experience will help improve skills. Improved skills contribute to improved performance. Want to improve at golf or someother sport? Practice. Get lessons. In lessons they will likely show you video of how the best swing and encourage you to emulate that. Same thing in stocks. How do the best do it? What of what they do can one incorporate into ones own strategy? 

The flawed random walk theory has unfortunately added fuel to cynicism. I'm not really keen on promoting cynicism in this forum hence my firm opposition to it. 

People who are convinced it is luck won't improve because they already believe it can't happen. So they won't put in the effort. That's their choice. For them some etf is likely the best choice.


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## Money172375 (Jun 29, 2018)

canew90 said:


> I won't try to convert anyone, but dividend growth or Income growth investing is not about meeting or beating the market. It's about maximizing and growing the income from your portfolio. The goal is to generate an ever-growing income regardless of what the market is doing or what are the current economic or political issues. By following the strategy one can ignore ignore the market, the market value of ones portfolio and price fluctuation. Price is only a factor in deciding when to buy more shares.


Tell me more.


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## james4beach (Nov 15, 2012)

Money172375 said:


> Tell me more.


I have actually warmed up to the 'dividend investing' idea over the years. I think the value in it has nothing to do with the performance (total return) but rather about _perception_... it's a behavioural benefit.

@canew90 wrote: "By following the strategy one can ignore the market, the market value of ones portfolio and price fluctuation"

Yes... By focusing on the regular cash flow it generates, they care less about the share price and I think that leads to *better tolerance* of wild swings in equity. When equities do crash (like March) the investor keeps their focus on the dividend. When the dividends continue coming through, the investor is satisfied and comfortable.

That's a pretty good thing. I think it means that dividend investors might have an easier time holding through market turmoil, whereas other equity investors would be more tempted to sell / get out. For example it's pretty hard for most people to be 100% equities and see those big swings. But I suspect dividend investors have an easier time tolerating 100% equity.

Dividend investing could help a person stick with a long term strategy, though I would argue that couch potato investing does the same.

I don't think the dividend investor will outperform but I think they may do a better job at sticking with the strategy and holding through turmoil. That's a positive thing.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I have actually warmed up to the 'dividend investing' idea over the years. I think the value in it has nothing to do with the performance (total return) but rather about _perception_... it's a behavioural benefit.


And I completely agree with your assessment for those in the accumulation stage of life. But the real benefit comes to those in retirement when they rely on that portfolio for their income to live rather than a paycheck. When the market goes down, and it can go down for years, the investors that rely on a growth portfolio must sell more shares into the market to receive their same income. This causes a rapid decline in shares, and if it goes on long enough they will deplete their portfolio. This isn't a problem for the dividend investor.

ltr


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## Pluto (Sep 12, 2013)

james4beach said:


> All are excluding commodities, and tech isn't even on the radar (so we've all excluded tech). This has given good performance in recent years.
> 
> The worry I have about this is that we may all just be benefitting from a certain "theme" in markets that is lasting for a number of years. If the theme changes, and other sectors take off to become new leaders, it's a different story.


Well I have some tech. 
About your worry of changing theme: you cross that bridge when you come to it. If you worry about what you can't control it will freeze you.


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## james4beach (Nov 15, 2012)

like_to_retire said:


> And I completely agree with your assessment for those in the accumulation stage of life. But the real benefit comes to those in retirement when they rely on that portfolio for their income to live rather than a paycheck. When the market goes down, and it can go down for years, the investors that rely on a growth portfolio must sell more shares into the market to receive their same income. This causes a rapid decline in shares, and if it goes on long enough they will deplete their portfolio. *This isn't a problem for the dividend investor.*


Nope. It's _even worse_ for dividend investors, because they are depleting their capital and don't even realize it.

The dividend investor might prefer the comfort of seeing those dividends, and this is a nice experience during a down market. But the overall benefit is only in the mind.

The dividend investor is depleting their portfolio with each dividend payment. Each dividend is a withdrawal. Selling shares during market declines is no different than taking the dividends.

Selling shares actually has a benefit: you have the _choice_ to not sell if you don't need the money. On the other hand, dividends automatically erode the capital, each and every time, and you can't stop them unless you explicitly buy shares to put the $ back into equity form.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Selling shares actually has a benefit: you have the _choice_ to not sell if you don't need the money.


We'll just have to disagree I guess.

Whether you sell shares or take dividends, most people _do not have a choice_ when it's their monthly income they require to live in retirement, so selling shares as you state is not a benefit over dividends. 

When you sell shares, you have a lower number to generate your income. Eventually you'll run out, especially if the stock is down for a number of years as it was in 2000.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Whether you sell shares or take dividends, most people _do not have a choice_ when it's their monthly income they require to live in retirement, so selling shares as you state is not a benefit over dividends.


I can see advantages of both methods. I am not opposed to dividend investing.

It's true that some people have very steady expense needs. But others have flexibility and might even get more from dividends than they need. I think it a dividend investor is getting excess cash that they don't need, it's very important to by more shares (keep the $ invested).

I'm semi-retired and get a decent amount of dividends from my 5 pack. Currently, because I have income, I don't need to withdraw from my investments. Therefore I need to invest the dividend cash back into my 5 pack.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> The dividend investor is depleting their portfolio with each dividend payment. Each dividend is a withdrawal. Selling shares during market declines is no different than taking the dividends.



Even now if I look at this pandemic after some recovery I still see energy stocks down -50% and financial stocks down -20%, etc., etc., but I haven't had a single dividend drop in my 24 stocks. 

If I was someone that relied on dividends for my monthly income needs there wouldn't be any change. But if I relied on the vagaries of the market share price and had to sell shares for my income, then I would be taking a huge hit - _not as a result of actual changes in the health of a company, rather by what the rather fickle market decided the share price should be_. I would be at their mercy.

The company is in charge of the dividend that is distributed to maintain their health, while the share price is decided by a bunch of crazy people. I would much rather take a dividend decided by an accountant than to sell shares where the price depends on the feelings of the masses. 

As I have said many times to you James, if we just analyze growth versus dividends for income by using the _math_ then you're correct - there's no difference. But that's not reality. What I state above is the reality.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> The company is in charge of the dividend that is distributed to maintain their health, while the share price is decided by a bunch of crazy people. I would much rather take a dividend decided by an accountant than to sell shares where the price depends on the feelings of the masses.


I realize you will not agree with any of the following, but

The critical point is still the point at which money leaves the company, and gets into your hand. That occurs on the ex dividend date and the impact on your holdings is still determined by market value, all those crazy people. You are not free from the craziness.

Example: I recently got a $0.575 per share CNR dividend on June 8 (ex date). But it matters which date this happens on. On June 8, this knocked the CNR share price down by 0.4% based on consecutive closing prices. Every dividend knocks down the share price.

As you can see, 0.575 paid out when CNR trades around $122 hurts, to the tune of about 0.4%. But if crazy people made the share price crash to $70 (silly irrational behaviour), the dividend would hurt to the tune of 0.8%

^ Those are real hurts. Your overall equity holding gets knocked down by the dividend.

You are not immunized from the share price. It's the same as selling shares. Every dividend knocks the share price down. It's just really hard to see it because it's muddied by daily volatility.

But every dividend hurts and the amount of the hurt very much depends on the share price of the day, just as it would if you were selling shares.


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## james4beach (Nov 15, 2012)

Let's take a more extreme example. BCE pays a massive dividend of $0.8325. At the current share price of $56 this knocks the share price down by about 1.5% when it's paid out.

(On the June 12 ex dividend date, the TSX was +1.3% whereas BCE closed -0.9% so you can see how, roughly, this erosion of share price happens)

Question: if the crazy masses crashed the BCE price to $25, what impact would the dividend have on the equity price on the ex dividend day?

My answer: assuming a flat broad market that day, the impact would be 0.8325/25 = 3.3% loss on your shares. That's a really serious hit to your capital.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I realize you will not agree with any of the following, but


hehe, with respect, you're correct, I don't agree with you, but you always make me think.

ltr


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## cainvest (May 1, 2013)

james4beach said:


> As you can see, 0.575 paid out when CNR trades around $122 hurts, to the tune of about 0.4%. But if crazy people made the share price crash to $70 (silly irrational behaviour), the dividend would hurt to the tune of 0.8%
> 
> ^ Those are real hurts. Your overall equity holding gets knocked down by the dividend.


Maybe a silly question but why would it hurt CNR more at $70 vs $122?
Of course this assumes the price drop was from "silly irrational behaviour" and not real problems.


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## james4beach (Nov 15, 2012)

cainvest said:


> Maybe a silly question but why would it hurt CNR more at $70 vs $122?
> Of course this assumes the price drop was from "silly irrational behaviour" and not real problems.


When I say "hurt", I mean it will reduce the equity value (or dollar amount of your capital) shown in your account holdings. Because the dividend cash is not free money, whatever you are paid in dividends comes out of the share price.

If the dividend is the same, but share price is lower, then you are paying out a larger amount of the company value. The stock exchange automatically adjusts down the share price the moment the dividend is paid out.

That's why it hurts more... larger % drop at time of dividend payment.

If you look at my BCE example above you can see an example of how the share price responds to the dividend payment. On average, after you correct for the stock market's direction of the day,

The dividend amount = share price drop


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## like_to_retire (Oct 9, 2016)

james4beach said:


> That's why it hurts more... larger % drop at time of dividend payment.


Sure, if the dividend is real dollars and the share price is a fictitious price determined by the nutty market, then it's a larger % drop, but the actual drop determined by real accountants at the company is a totally different story. You have to let the math of this go as it doesn't follow the rules you live by.

ltr


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## Eder (Feb 16, 2011)

Its amazing that BCE share price doesn't drop every 2nd Friday when they pay their employees. Or goes up at the end of each month when clients pay their bills.


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## cainvest (May 1, 2013)

like_to_retire said:


> but the actual drop determined by real accountants at the company is a totally different story.


This is my thought ... there is no additional "hurt" due to the share price drop.

Either a company decides to give out a piece of their profits (monthly, quarterly, etc) or they use the money in hopes of growing it to make more money or a combination of both.


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## agent99 (Sep 11, 2013)

For those who think companies should retain their earnings and grow the company. Why invest in those type of companies? Wouldn't it be better to enjoy some of the profits on an ongoing basis just like the insiders do? 

You might ask the boards and executives of those companies why they award themselves bonuses and huge other benefits. Why don't they leave those in the company and allow the company to grow faster? No dividends to share wealth - no bonuses or other benefits to board & management?


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## cainvest (May 1, 2013)

agent99 said:


> For those who think companies should retain their earnings and grow the company. Why invest in those type of companies?


I don't think there is anything wrong with investing in growth companies. If they use the money wisely they can make you money as well. For larger established companies in mature markets it can be hard to grow so I completely understand those wanting to kick out a dividend.


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## Pluto (Sep 12, 2013)

james4beach said:


> On the other hand, dividends automatically erode the capital, each and every time,


The cash dividend is capital. Consequently it is not an erosion of capital.


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## fireseeker (Jul 24, 2017)

Pluto said:


> The cash dividend is capital. Consequently it is not an erosion of capital.


It is indeed an erosion of invested capital.


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## like_to_retire (Oct 9, 2016)

I would be more concerned about the erosion of capital that can occur selling shares as I've pointed out in previous posts when the source of someone's income is much more volatile than a dividend. 

This is called _Sequence of Returns Risk_ and can be a big problem, especially early in retirement. It's a risk that can be greatly reduced by using dividends as much as possible for retirement income.

ltr


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## MrBlackhill (Jun 10, 2020)

But isn't the principle of dividend to distribute money to investors because the company wouldn't know where to invest that money that would provide a better ROI because they reached their maximum growth? So I don't understand how can this truly lead to an erosion of capital, it's more like investing back into investors. And that dividend keeps investors happy otherwise they would cash out and the stock price would crash.


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## cainvest (May 1, 2013)

MrBlackhill said:


> But isn't the principle of dividend to distribute money to investors because the company wouldn't know where to invest that money that would provide a better ROI because they reached their maximum growth?


That's pretty much the main reason.


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## milhouse (Nov 16, 2016)

One hopes that mature companies that are able to pay a dividend from their profits have a fairly reliable earnings streams. And hopefully, they can keep payout ratio's under 100%. Beyond that, companies will hopefully manage their cashflow to support ongoing dividends by pulling on different levers if needed (ex. Adjusting capital spend, reducing opex, etc) without long term harm.


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## Topo (Aug 31, 2019)

Dividends come out of the share price. There is no difference between taking a quarterly dividend and liquidating enough shares to create your own dividend. The advantage of the latter is that it does not force a taxable event on all shareholders.


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## like_to_retire (Oct 9, 2016)

Topo said:


> Dividends come out of the share price. There is no difference between taking a quarterly dividend and liquidating enough shares to create your own dividend. The advantage of the latter is that it does not force a taxable event on all shareholders.



Mathematically true, unless the volatility is higher in one case or the other. 

In that situation, then the case with the lowest volatility is a better risk. And we know this to be true for the dividend versus a share price.

ltr


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## Topo (Aug 31, 2019)

like_to_retire said:


> In that situation, then the case with the lowest volatility is a better risk. And we know this to be true for the dividend versus a share price.


Volatility and dividends are independent of each other.


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## Pluto (Sep 12, 2013)

fireseeker said:


> It is indeed an erosion of invested capital.


When investors are in the in the acquisition stage they reinvest the dividends. I just reinvested some dividends the other day. When they retire, presumably they spend the dividends. Some people have stock that pays no dividend, but evnetually it will be sold and use for some other purpose. I don't see what the big deal is. Its not the big dramatic flaw it is made out to be. One of my stocks pays no dividends which is appropriate as they can use the money for growth. Evenutally I will sell it and spend the money, or reinvest it elsewhere. But I don't want to have all of my stocks like that. You may, if you wish. Find an etf that only invests in stocks that pay no dividends, if there is one.


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## Pluto (Sep 12, 2013)

Topo said:


> I believe Standard and Poor's have been doing studies comparing active to passive called SPIVA Scorecard. The results are consistently in favor of passive.


The index isn't really passive: they drop stocks out - poor performers - from time to time and replace it with something else that is growing. that's what I do with my collection of stocks. Does that mean I'm a passive investor?


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## AltaRed (Jun 8, 2009)

Topo said:


> Volatility and dividends are independent of each other.


Indeed they are. It never fails to amuse me how entrenched dividend investors can be. Technically speaking, getting dividends is better ONLY if: 1) the investor can re-invest it at a higher ROE than the company issuing the dividends or to spend it as cash, in which case there is no return, or 2) the investor who needs cash immediately cannot time the sale of an equity (or bond) at an over-valued price. In the latter case, that is what cash reserves and/or fixed income is for. The dividend investor may, or may not, be better off than capital gains crystallization depending on tax bracket and considering the FV of deferred taxes. For most of us, the tax situation is probably noise in the overall scheme of things relative to picking the right stock.

The best investment decisions are made on performance metrics, whether or not they pay dividends. Dividends, or not, are the result of picking stocks, not the driver of picking stocks, even if all things being equal, I personally prefer dividend stocks too. I have a preference for investment income in my retirement years but I still like portfolio performance better. In over 14 years of retirement, I've never had an aversion to selling all or part of a holding to fund my cash flow needs. It is all just money ultimately.

As most everyone knows, I stock pick Canada and broad index everything ex-Canada. There is room for both.


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## Topo (Aug 31, 2019)

Pluto said:


> The index isn't really passive: they drop stocks out - poor performers - from time to time and replace it with something else that is growing. that's what I do with my collection of stocks. Does that mean I'm a passive investor?


The index (S&P 500 for example) is a rule-based index that holds all major stocks in a weighting proportional to their float. If that is what you do, then yes you are a passive investor (i.e. your portfolio will closely track the market). If you deviate substantially in terms of constituents or holdings, then you are an active investor. Selling poor performers may be good practice but will not per se qualify qualify you as a passive investor.


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## hboy54 (Sep 16, 2016)

Topo said:


> Dividends come out of the share price. There is no difference between taking a quarterly dividend and liquidating enough shares to create your own dividend. The advantage of the latter is that it does not force a taxable event on all shareholders.


Say a share sells in a range of $9 to $10 on a particular day and your holdings could pay $90 in dividends, but don't. Instead of the dividend, one investor sells 10 shares at $9 = $90, another sells 9 shares at $10 = $90. But there is this common perception that a sale of shares is equivalent to a dividend. So the $90 dividend is equivalent to selling 10 shares. It is also equivalent to selling 9 shares. So logically 9 shares = 10 shares. Except that 9 does not equal 10 therefor the assertion is false, that is a dividend is not equivalent to selling shares.

Now instead of considering a single trading day with a SP range of $9 to $10, consider instead a quarter with a range say $4.50 to $45 corresponding to 20 shares and 2 shares respectively. To generate your quarterly dividend, you will be just as happy to give up 20 shares as 2?

My conclusion is that the assertion in question is true in a theoretical or calculus sense where the dividend is paid or the shares sold in an instant of time that approaches 0 seconds long, and the price per share approaches a single value, but in the physical world, the shares are sold over some 90 days at a better or worse impact on your holdings dependent upon your timing.

Some people will be happy believing the the theoretical truth and consider the two options equivalent and not give the matter another thought. Others will be happy to manage their affairs quarterly to sell as few shares as possible to generate their income, or perhaps to occasionally decline selling any and make other arrangements to cover their living arrangements.


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## james4beach (Nov 15, 2012)

The stock exchange immediately and automatically reduces the price at the time of the ex dividend. This is not a theoretical thing.

Of course the timing of when exactly the "withdrawal" occurs matters. If you decide to sell shares instead, you also do that at a specific point in time. The difference in outcomes has to do with what the price happens to be at this withdrawal point.

Whether it's dividends or selling shares makes no difference. Withdraw when the shares trade higher and you're better off. Withdraw when the shares trade lower and you're worse off.

During bear markets, it's better to withdraw your cash needs from fixed income for this reason. It's just not a good time to withdraw from equities, and dividends don't solve that problem.


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## hboy54 (Sep 16, 2016)

I agree with James and he argues back LOL. Why do I bother, people are going to believe what they believe.


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## james4beach (Nov 15, 2012)

hboy54 said:


> I agree with James and he argues back LOL. Why do I bother, people are going to believe what they believe.


Maybe I didn't understand the point you were making, sorry. You're saying that selling shares means that various prices are in effect, and the range of prices impacts the outcome? I agree.


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## Eder (Feb 16, 2011)

All this talk is ignoring the elephant in the room, the dividend tax credit that make dividends especially juicy for those with no other income than OAS & CPP. Of course any of this planning will vaporize soon as Trudeau completes running us into a bottomless debt and will tax everything into the ground.


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## AltaRed (Jun 8, 2009)

Eder said:


> All this talk is ignoring the elephant in the room, the dividend tax credit that make dividends especially juicy for those with no other income than OAS & CPP. Of course any of this planning will vaporize soon as Trudeau completes running us into a bottomless debt and will tax everything into the ground.


Indeed tax effects matter more the lower one's income, since the effective tax rate of eligible dividends (remember it is the grossed up amount too, not the actual dividends received) is lower than cap gains tax....and that varies by province. The threshold in ON is right around $93k taxable income. That all said, deferring taxes to a later date rather than paying them annually has value too.

For many of us, it is probably a wash, or close enough to a wash so as not to fret over small differences.


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## agent99 (Sep 11, 2013)

I can't believe you guys keep on discussing this old subject. It has been discussed to death over and over and over for years. What is the point? It is summer - get out and enjoy it!

But if you have nothing better to do, carry on!


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> It never fails to amuse me how entrenched dividend investors can be.


Personally, I have no dog in this race, as I am still in accumulation mode after 14 years of retirement since my pension income more than covers my needs. I only comment because I tire of this mantra that selling shares in retirement is no different than relying on dividends. I feel new forum readers should have alternative points of view.

The supporters of selling shares detail the math while completely ignoring that dividend income in aggregate is generally much more stable than stock prices and if you examine _Sequence of Returns Risk_ then you see that dividends are preferable to liquidating stock in a down market. I just don't see how that can be argued with, and when people try, it doesn't ring true.

I do remember when I started to shift my thinking on this subject. It was after reading a comment some three years ago by James Hymas where he commented on his website about a paper on this very subject. People should actually read this and James's comments.

He said: _"Prices are more volatile than dividends; it is therefore desirable, in a consumption situation such as retirement, to arrange one’s portfolio so that income is spent while the capital is untouched – this forms a part of ‘Sequence of Returns Risk’."_

I remember clearly reading that statement and thinking it made so much sense and I would have to look into it. So, I read a bunch of articles and did some spreadsheets and came away thinking that he was correct, as he often is!

I find it interesting that even stalwart supporters of "there's no difference between dividends and selling shares" such as james4beach will concede the issue, but then tack on a silly appendum as evidenced in this thread:
_During bear markets, it's better to withdraw your cash needs from fixed income for this reason. It's just not a good time to withdraw from equities, and dividends don't solve that problem_.

Seriously? you concede the point and then say that dividends don't solve the problem?

Anyway, I just like to throw out my counter arguments to the newbies who come to this site. Accept it or not.

ltr


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## hboy54 (Sep 16, 2016)

I agree with both sides of this debate per my piece above because people are really talking about two different things, but the two camps are too busy shouting each other down to notice.


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## Topo (Aug 31, 2019)

hboy54 said:


> Say a share sells in a range of $9 to $10 on a particular day and your holdings could pay $90 in dividends, but don't. Instead of the dividend, one investor sells 10 shares at $9 = $90, another sells 9 shares at $10 = $90. But there is this common perception that a sale of shares is equivalent to a dividend. So the $90 dividend is equivalent to selling 10 shares. It is also equivalent to selling 9 shares. So logically 9 shares = 10 shares. Except that 9 does not equal 10 therefor the assertion is false, that is a dividend is not equivalent to selling shares.


To make matters comparable, the shares should be sold at the close of the day prior to the stock going ex-dividend.


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## Topo (Aug 31, 2019)

There is no reason to be fixated on the number of shares. Stocks undergo splits and reverse splits all the time; the number of shares is totally arbitrary. What matters is the dollar value of the account. Is it better to own 10,000 shares of a stock priced at a penny or one share of CP?


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## AltaRed (Jun 8, 2009)

like_to_retire said:


> Personally, I have no dog in this race, as I am still in accumulation mode after 14 years of retirement since my pension income more than covers my needs. I only comment because I tire of this mantra that selling shares in retirement is no different than relying on dividends. I feel new forum readers should have alternative points of view.
> 
> The supporters of selling shares detail the math while completely ignoring that dividend income in aggregate is generally much more stable than stock prices and if you examine _Sequence of Returns Risk_ then you see that dividends are preferable to liquidating stock in a down market. I just don't see how that can be argued with, and when people try, it doesn't ring true.
> 
> ...


My underlines in quoting you above...... The problem, LTR, is the dividend only (or investment income only) crowd do not appear interested in recognizing the vast majority of investors MUST tap into invested capital to meet withdrawal criteria, e.g. per RRIF, or VPW, just to get enough cash flow to survive. Stats Can data proves the point. They have to deal with real life starting on the day they retire. Those investors focused on income portfolios will likely (not necessarily) compromise Total Return that they actually badly need over 30 years of retirement. Trade offs will obviously be made but how about broad market passive indexing for resource strapped seniors to simply 'get market net of MER'?

The five (?) percenters like yourself and James Hymas are in a different investor class altogether. It is easy for James to talk when he is likely still making good money as an investment manager. Why not have a conversation that is relevant to the 95 percenters, or in the case of CMF, maybe the 80 percenters that cannot even relate to living off investment income and pensions?. The fact you can live off your pensions alone is even more extraordinary and out of touch with the common man. I don't know anyone other than maybe a senior civil servant with a gold plated DB pension (like an Ontario teacher) able to do that. Heck, they likely don't need an investment portfolio at all.

I agree sequence of returns risk is very real of course, but how many years in a row have equity markets been down over the last 20 years? Last 30 years? Norm's asset mixer will provide some Canadianized data on just that subject. It is pretty rare to have 2 years in a row on a global equity portfolio, e.g. VEQT style.

I know I will sound preachy and fair enough, accuse me of that, but I think we senior members of CMF have a bit of an obligation to look at the more realistic and common scenarios for the majority who participate in this forum. Hence I will argue the Total Portfolio approach to counter your counter even if I love dividends myself. See how that works?


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## MrBlackhill (Jun 10, 2020)

like_to_retire said:


> The supporters of selling shares detail the math while completely ignoring that dividend income in aggregate is generally much more stable than stock prices and if you examine _Sequence of Returns Risk_ then you see that dividends are preferable to liquidating stock in a down market. I just don't see how that can be argued with, and when people try, it doesn't ring true.


_Sequence of Returns Risk_ : Yup. For your information, here's how you can visualise this.

John V1 and John V2 both want to invest their 1M$ in the market. They invest it on the exact same day on a stock at the exact same price. They withdraw 8000$ every 20 trading days at the exact same moment. That's about once every month. They do that for the exact same amount of time : 5040 trading days. That's about 20 years. At the end, the price of their stock is the exact same, therefore the exact same total return on the stock price. Both stock also have the exact same volatility.

Yet, John V2 depleted his money on the 4200th day, which is about a bit more than 16 years. Meanwhile, John V1 still have money left after the 5040 days (about 20 years).

In fact, after 5040 trading days, John V1 is left with 200 000$ worth of stocks while John V2 would be in the negative ground at -430 000$ if he could continue the withdrawals at stock price. That's more than 600 000$ difference.

Why? Because of the sequence of returns :









Another example that stays in the positive ground but still has 400 000$ difference at the end :


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## Topo (Aug 31, 2019)

Dividends do not make a difference in SORR. To avoid that risk, a retiree has to either lower their withdrawal from the equity side (both dividends and capital) or take distributions from other asset classes such as bonds. If the investor takes out the dividends (instead of reinvesting them), the problem will be compounded, because he is gradually taking larger distributions from a dwindling equity side of the portfolio. 

The retiree needs to have enough bonds, pension, etc, so that he can reinvest the dividends at lower equity prices and give it time to grow.


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## Pluto (Sep 12, 2013)

Topo said:


> The index (S&P 500 for example) is a rule-based index that holds all major stocks in a weighting proportional to their float. If that is what you do, then yes you are a passive investor (i.e. your portfolio will closely track the market). If you deviate substantially in terms of constituents or holdings, then you are an active investor. Selling poor performers may be good practice but will not per se qualify qualify you as a passive investor.


I thyink you misunderstood what I meant to say. I didn't say it clearly: the indexes are actively managed, therefore not passive and emulating them isn't passive. It is choosing to act in a specific way, and that's not passive. 

ETF investing isn't passive either. One has to choose what etfs one will buy, then act on it.


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## Pluto (Sep 12, 2013)

james4beach said:


> The stock exchange immediately and automatically reduces the price at the time of the ex dividend. This is not a theoretical thing.


Do you have a reference for this? How do they do it? 
The stock market is an auction sale: bid and ask prices. How does the stock exchange require investors to ask less on the ex dividend date?


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## Pluto (Sep 12, 2013)

Eder said:


> All this talk is ignoring the elephant in the room, the dividend tax credit that make dividends especially juicy for those with no other income than OAS & CPP. Of course any of this planning will vaporize soon as Trudeau completes running us into a bottomless debt and will tax everything into the ground.


Correct. I know a fellow who has cpp, oas and dividend income. He pays not tax on the dividends at his income level. I think one has to make over 55000, or there abouts, before paying tax on canadian dividends.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> the vast majority of investors MUST tap into invested capital to meet withdrawal criteria,


Sure, but the more dividends they use rather than selling shares will lower their risk. I realize most have to tap into capital, but if they show a preference toward dividends I think it can help. That's all I'm saying.



AltaRed said:


> how many years in a row have equity markets been down over the last 20 years?


Not many, but it doesn't take many at the start of retirement to make a huge difference. I've played with spreadsheets on it and it's quite significant.

ltr


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## Pluto (Sep 12, 2013)

like_to_retire said:


> Personally, I have no dog in this race, as I am still in accumulation mode after 14 years of retirement since my pension income more than covers my needs. I only comment because I tire of this mantra that selling shares in retirement is no different than relying on dividends. I feel new forum readers should have alternative points of view.
> 
> The supporters of selling shares detail the math while completely ignoring that dividend income in aggregate is generally much more stable than stock prices and if you examine _Sequence of Returns Risk_ then you see that dividends are preferable to liquidating stock in a down market. I just don't see how that can be argued with, and when people try, it doesn't ring true.
> 
> ...


And keep up the good work.
People come here looking for some kind of direction so it is best if there is debate so they can see all sides of an issue.


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## Topo (Aug 31, 2019)

Pluto said:


> I thyink you misunderstood what I meant to say. I didn't say it clearly: the indexes are actively managed, therefore not passive and emulating them isn't passive. It is choosing to act in a specific way, and that's not passive.
> 
> ETF investing isn't passive either. One has to choose what etfs one will buy, then act on it.


If you'd like to use a very strict definition of passive, then one could say that the index (such as S&P 500) is more passive, or less active, however you would like to put it.


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## james4beach (Nov 15, 2012)

Pluto said:


> Do you have a reference for this? How do they do it?
> The stock market is an auction sale: bid and ask prices. How does the stock exchange require investors to ask less on the ex dividend date?


Yes I have references:









Facts About Dividends


Dividends are one way in which companies share the wealth generated from the business. Discover the issues that complicate these payouts for investors.




www.investopedia.com












Dividend Myths Foolishly Debunked, Part 1 | The Motley Fool


Read up for the ins and outs of dividends.




www.fool.com









5330. Adjustment of Orders | FINRA.org


(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that...




www.finra.org





FINRA rule 5330 describes the procedure for adjusting existing client orders. So if the customer places a limit order before the ex date, their order is automatically adjusted by the dividend amount.

That occurs in the US. In Canada, though, I don't think existing orders are adjusted.

If you have any doubts about this, you just have to watch a stock on the ex dividend date. It's pretty easy to see it for yourself, just look for a day that doesn't have a broad market movement, since daily volatility obscures this effect (and is a big reason why people don't think it occurs).


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## Topo (Aug 31, 2019)

james4beach said:


> Yes I have references. And yes, the stock exchange requires investors to change their orders (and does it for them)
> 
> 
> 
> ...


That is very interesting. I didn't know this and thought investors would have to account for dividends themselves when placing "good to" orders.

Another way to look at it is through the arbitrage opportunity. If the price is not reduced, then one could buy stock at the close of the day before it goes ex-dividend and then sell it the next morning for the same price and pocket the dividend for free. Who wouldn't?


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## james4beach (Nov 15, 2012)

Topo said:


> That is very interesting. I didn't know this and thought investors would have to account for dividends themselves when placing "good to" orders.
> 
> Another way to look at it is through the arbitrage opportunity. If the price is not reduced, then one could buy stock at the close of the day before it goes ex-dividend and then sell it the next morning for the same price and pocket the dividend for free. Who wouldn't?


I think on TSX, the individual investor still has to account for the dividend themselves. But it seems that the US markets automatically adjust this.

The existence of the arb opportunity you describe also explains why the price must drop by the dividend amount. If it didn't happen, the dividend would be free money.

IMO the confusion around this simply comes from the daily volatility added on top of the guaranteed ex dividend price drop. If you correct for that volatility, for example by averaging across many instances (an equal number of up and down days) or removing the broad market volatility, you can easily see the price dropping on the ex dividend date. It's also easier to see in down markets. Whether you see it or not, it's always happening.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> IMO the confusion around this simply comes from the daily volatility added on top of the guaranteed ex dividend price drop. If you correct for that volatility, for example by averaging across many instances (an equal number of up and down days) or removing the broad market volatility, you can easily see the price dropping on the ex dividend date. It's also easier to see in down markets. Whether you see it or not, it's always happening.


The price adjustment is real, but then you must not forget that the market reaction will balance back up the price. Therefore, at the end, you haven't really "lost" anything. In fact, dividends will definitely keep the stock more stable as opposed to selling shares of a growth stock where you rely only on the market sentiment for that growth stock. And also you deplete your stocks reserve during a crash, as opposed to dividends.

Let me explain what I'm trying to say. You said that we don't see it that much because of the volatility. Well, we can see it, right here : PURPOSE HIGH INTEREST SAVINGS E (PSA.TO) Stock Historical Prices & Data - Yahoo Finance

But yet, to the investor point of view, he has not lost any shares and his shares are still worth the exact same amount.

Suppose there's a stock out there giving a high yield of 12%, at the rate of 1% per month. The current stock price is 100$ and the dividend is 1$ every month for a total of 12$ per year. After the first month, the price drops to 99$. Then to 98$. Then to 97$. Then after 50 months the stock price is at 50$. But wait a minute, with a dividend of 12$/year and a stock price of 50$, that's 24% yield! To you, it's still only 12%, but do you think other investors will look away? So other investors starts buying and the stock price goes up... and stabilises back to 100$.

Therefore, that price drop due to dividend has absolutely no effect for the dividend investor. But for people selling their shares, they are the ones giving away their shares at the current market condition.

We can take a real example where the drop is not due to paying the dividend. Take RIOCAN REAL EST UN (REI-UN.TO) Stock Price, Quote, History & News - Yahoo Finance We can average out that they have paid about 0.10$/ dividend per month for the past 15 years. The stock price has mostly been ranging in the 24$, which is yield on cost of 5%. When the price dropped to 12$ in 2008, do you think it would really have stayed at that level for a long time, at the current yield on cost of 10%? Definitely not (as long a there is no dividend cut and as long as the company is healthy). Investors kept having their fixed amount of dividend paid and 2 years later their stock value was back up to its usual level. Meanwhile, investors relying on selling shares had to sell their shares at loss for an extended period of time.


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## 5Lgreenback (Mar 21, 2015)

Interesting thread. I'm thinking James is right on what should happen theoretically with the dividend stocks, but MrBlackhills explanation above seems to be what actually happens when you factor in the market forces.


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## AltaRed (Jun 8, 2009)

Limit orders in Canada are not adjusted automatically to account for ex-dividend


MrBlackhill said:


> The price adjustment is real, but then you must not forget that the market reaction will balance back up the price.


Well yes, it had better do so in most cases if the company is making money! The valuation of the company has indeed dropped in the very near term by the amount of the dividend/distribution. Stock prices simply represent what the market thinks the company is worth at any given moment. The value of the company itself dropped by the amount of the dividend once it went ex-dividend, but the very next week, 30 days, one year, etc. the company is worth more as it continues to generate cash flow and profits. The price better recover!

If you are going to argue your point, at least argue it on both incoming and outgoing cash flows. In your RioCan example, the company technically would have a valuation considerably more if it had never paid out a distribution. The tax structure aside for the moment, had RioCan been able to re-invest ALL of its cash flow tax exempt into new properties, it would be a considerably larger company. The REIT structure does not do that efficiently, so a REIT pays out its taxable cash flow. IOW, RioCan's stock price would have been even higher in 2011 had it re-invested all its cash flow, increasing its size and its cash flow thereafter, and therefore its valuation.

That is exactly what happens to companies who pay out very little, or nothing, in dividends/distributions..... provided of course, they re-invested their capital effectively.

You have no way of arguing for, or against, whether the share price by 2011 would have been equal to the 2007 price PLUS all the distributions it paid out in the meantime. We simply cannot know without 2 exact companies side by side, one paying out distributions, and the other not. We simply have to accept the market values both methodologies efficiently. We can argue incessantly and indefinitely but will never know


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## Topo (Aug 31, 2019)

Those who own a CCPC can and often pay themselves a dividend. The dividend is backed by earnings from an active business / profession (for example a law practice) or a passive portfolio. Does paying out a dividend make them richer? I don't think so. Tax consequences aside, money moves from a corporate account to a personal account, at times in the same bank. A prospective buyer of the business would pay that much less for it when the dividend is taken out.


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## 5Lgreenback (Mar 21, 2015)

AltaRed- Isn't that only true assuming that the company has room to grow effectively and is not fully matured yet? And of course as you mentioned assuming the capital is invested effectively, which is always a risk.

edit- I suppose even if the company just sat on the capital instead of dividend payouts or reinvesting, it would still increase the capital reserves and therefore the companies value.


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## MrBlackhill (Jun 10, 2020)

Yes, but I guess they pay a dividend because they assume that - in their current context - reinvesting that money would have not generated a better growth, so it was better to give dividends. Each company paying dividends is because they cannot keep growing indefinitely (or their growing pace is slowing). They can keep generating earnings indefinitely, though.

Otherwise, companies paying dividends should instead reinvest that money and try to take over the world? All companies cannot be AAPL and AMZN. (Yet, even AAPL is giving dividends, why? They could reinvest that money instead, no?)

I'm investing in growth when I don't need a stable income from my investments and in dividends when I need a stable income from my investments.


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## AltaRed (Jun 8, 2009)

The key criteria is being able to re-invest capital effectively at a reasonable ROE/ROC, so of course, not every company can do so (and doesn't do so). That does not change the mathematics of capital flows and valuations though. Capital is capital.

That all said, many investors value (need) regular returns on their investment in the form of dividends rather than just (or instead of) capital growth, so they will sometimes bid up share prices on stocks that have reliable dividends. Companies may also be more prudent/disciplined in their investments if they have a boat anchor around their neck in the form of needing to generate cash flow for quarterly investor cash fixes. It's been demonstrated companies paying dividends may well provide a better Total Return over long periods of time because of that discipline. The counter argument is companies not paying dividends are in major growth mode and many actually fail due to risky investment decisions, thereby dragging down the average return of growth companies. Except growth stocks have done better this past decade. I'd say all this is mostly an academic debate not worth of investor attention. Ultimately we pick stocks based on our own emotional needs taking volatility, risk (or certainty) and total return into account. There is no right answer for everyone.


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## like_to_retire (Oct 9, 2016)

MrBlackhill said:


> So other investors starts buying and the stock price goes up... and stabilises back to 100$.


There are some investors who use yield as their trigger to buy and sell many blue chip stocks. They'll become familiar with a stocks range such as Fortis where it might be between 3.5% and 4.5% yield as the trigger. Inside that range they hold.

Then when they see the share price drop (because of crazy market conditions that have nothing to do with the health of the company) and this drop raises the yield above 4.5%, then they will buy. And likewise when the share price gets high (because of the market) and this rise changes the yield below 3.5%, they might sell. 

But as you say, when that yield gets too high, the investors will pour in and bid the price back up.

ltr


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## AltaRed (Jun 8, 2009)

As in the spreadsheet Mike Higgs (aka Yielder) used to provide (and update regularly) years ago on Financial Wisdom Forum. I used to have a copy but believe I purged it cleaning up my Documents folder years ago.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> The price adjustment is real, but then you must not forget that the market reaction will balance back up the price. Therefore, at the end, you haven't really "lost" anything.


If one believes this is true, then simply buy before the ex dividend. Watch the price drop on the ex, but then (you claim) it gets boosted back up to where it was before, meaning the dividend is *free* money.

The trading strategy should therefore be clear. You simply need to get your hands on as much leverage as possible. Before every ex dividend, you buy millions of $ of the stock. Pocket the dividend, and then the price magically recovers, and you sell. The huge borrowing is only for a day or two, so it basically costs you nothing to borrow.

Do you believe that would work?


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## agent99 (Sep 11, 2013)

How does the historical performance of the top 6 dividend payers on the TSX 60 compare with the top 6 stocks that pay no dividend? Based on for example, total return over 10 years?
(I would have chosen 10, but doubt there are 10 non-dividend payers on the TSX60)


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> If one believes this is true, then simply buy before the ex dividend. Watch the price drop on the ex, but then (you claim) it gets boosted back up to where it was before, meaning the dividend is *free* money.
> 
> The trading strategy should therefore be clear. You simply need to get your hands on as much leverage as possible. Before every ex dividend, you buy millions of $ of the stock. Pocket the dividend, and then the price magically recovers, and you sell. The huge borrowing is only for a day or two, so it basically costs you nothing to borrow.
> 
> Do you believe that would work?


The market is intelligent. This would not work because if everybody did that, then we would see an increase in share price before the ex-div due to people buying, then the small decrease due to paying the dividend and then another decrease due to people selling their shares because they wanted the supposedly free dividend.

It's either way:

1) Say people doesn't buy before ex-div. Price is stable at 100$, then after paying the dividend it gets to 99$, then investors buy that deal and it gets back to 100$.

2) Say people buy before ex-div for the supposedly "free div". Price is stable at 100$. Before ex-div, price increases to 101$ from people wanting to buy for the "free div", then after paying the dividend, it gets to 100$. Then people sell at 100$ since they now got their "free div". People bought at 101$, got 1$ div, then sold at 100$. Final balance 0$ to them.


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## Eder (Feb 16, 2011)

Not many 10 year old companies don't pay dividends...they go tits up or initiate a dividend. That is what companies private & public do.


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## agent99 (Sep 11, 2013)

Eder said:


> Not many 10 year old companies don't pay dividends...they go tits up or initiate a dividend. That is what companies private & public do.


Really? I haven't checked TSX lately, but a few years ago, there were about 68 stocks on S&P500 that pay no dividends. And many of those have been around for a lot more than 10yrs and are household names. Google, Amazon, Facebook, etc

In Canada, far fewer non-dividend payers for those that eschew dividend stocks.


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## AltaRed (Jun 8, 2009)

agent99 said:


> How does the historical performance of the top 6 dividend payers on the TSX 60 compare with the top 6 stocks that pay no dividend? Based on for example, total return over 10 years?
> (I would have chosen 10, but doubt there are 10 non-dividend payers on the TSX60)


Don't think that is actually relevant. The TSX60 is mainly mature companies without much major growth ahead of them, SHOP and such excepted of course. It is ultimately a matter of degree. CN Rail and ATD.B are low dividend payers because they can re-invest capital with a decent ROE/ROC. I like and would own both even if they had 0% yield. Stocks may well have succumbed to paying at least a tiny dividend because it broadens the universe for many indices/ETFs that require dividend payers to be included in the index/ETF.

Dividends are a result of good stock picking, not THE driver of stock picking. Folks who filter by decreasing yield are most likely missing the boat. Sort by ROE/ROC instead.


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## agent99 (Sep 11, 2013)

Just trying to show how pointless this thread is. If you invest in Canada, you will be investing in dividend payers regardless. If you dont want the dividends, drip or accumulate them and buy more stock. If you need the income, use it. If that is not sufficient, sell some stock. And as has been pointed out, good dividend stocks tend to maintain value, so less susceptible to volatility in overall markets.

How are y'all spending this warm summer?


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