# Investing for Income only



## Johnny Cash (Apr 21, 2012)

I keep reading that most of the people invest in dividend paying stocks for income. Does somebody invest in bonds, preferred shares, HISA, European dividend paying stocks, along with Canadian Dividend paying stocks for income only. Of course, some capital gain would be nice but the main purpose is income after retirement. If you do, how much (%) do you invest in each income vehicle and why? I also noticed that a few people invest in financial and utilities preferred shares and other in European telecommunication stocks (Vodafone, Telefonica). Are there other choices and what strategy do you use? Thanks. Johnny


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## andrewf (Mar 1, 2010)

The whole idea of an income portfolio is slightly bonkers. You should just create a balanced diversified portfolio of equities and fixed income, and use the distributions along with the sales of units to generate regular cashflow. I think the 'yield hungry' people are fetishizing dividends/distributions, and it is to their detriment.


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## My Own Advisor (Sep 24, 2012)

Even though I love dividends, the only thing that matters is total return, or should I say real return (after inflation). 

My portfolio is a blend, some dividend paying stocks but also dirt cheap ETFs that provide mostly capital appreciation.


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## Soils4Peace (Mar 14, 2010)

I would not focus on income at all. I would hold a set of ETFs suitable to my risk tolerance. I would meet shortfalls by selling some ETFs once per year, then putting the cash into e-series funds. So at any time, I would be holding mainly ETF, but spending the dividends, interest and proceeds from sale of the e-series funds. Then you have some capital gains as part of your income.


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## Hobotrader (Feb 10, 2013)

Income? Central bank interest rates are 0-1% for most of the developed world (this will affect their bond rates) and S&P dividend average is around 2% lol...Governments don't want you to save / invest! They want you to spend!...or Speculate...


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## Johnny Cash (Apr 21, 2012)

Is there somebody on this forum that solely relies on dividend income or supplements with preferred shares, HISA, European dividend paying stocks? If S&P dividend average is 2%, how can somebody gain 4-5% average annually? If not, what is your long term average (5-10 years)?


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## Squash500 (May 16, 2009)

Johnny Cash said:


> Is there somebody on this forum that solely relies on dividend income or supplements with preferred shares, HISA, European dividend paying stocks? If S&P dividend average is 2%, how can somebody gain 4-5% average annually? If not, what is your long term average (5-10 years)?


I personally depend mostly on my non-registered account portfolio to produce a monthly income with which to live on. I use ETFS such as XTR, XRE, CPD, XDV, XFN, and CDZ to achieve my monthly income goals.


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## Hobotrader (Feb 10, 2013)

Johnny Cash said:


> Is there somebody on this forum that solely relies on dividend income or supplements with preferred shares, HISA, European dividend paying stocks? If S&P dividend average is 2%, how can somebody gain 4-5% average annually? If not, what is your long term average (5-10 years)?



Keep in mind that's an S&P average. There are shares within there that pay decent dividends. If you like cigarettes, NYSE:MO (Altria) was paying 5% awhile back, though recent money printing caused a surge in stock prices so those dividends are likely not 5% anymore. TSX: PPL.TO was paying me 7% dividends back when I bought it in 2011 (I took proceeds and profits and gambled it away however). I've also seen 30% dividends for CANFOR Pulp though they only did it for 2 years because of a bumper harvest. There's opportunities all around, but don't get stuck in a company whose dividends are high because their stock price had been flattened LOL. Dividend rates are its payouts relative to share value. If a stock price goes up and its dividend payout amount is the same, obviously it goes down if you were to buy after the share price increase. Dividend yields go up when stock prices get flattened. It's the same as the bond yield curve. Interest rates are very low because Central Banks are buying bonds in order to inject money into the economy. That extra money is then used to buy stocks and commodities (stuff we use/eat) pushing up prices (and this is what people will call inflation). You can also think about it as property value and rentals, if the price of a house goes up way too fast vs. the rent then your rent yield becomes **** and you can't cashflow positively. Sounds all too familiar to me lol.


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## gibor365 (Apr 1, 2011)

Hobotrader said:


> Keep in mind that's an S&P average. There are shares within there that pay decent dividends. If you like cigarettes, NYSE:MO (Altria) was paying 5% awhile back, though recent money printing caused a surge in stock prices so those dividends are likely not 5% anymore. .


You are not exactly right , MO increases dividends every year and now has yield 5%, the same T (AT&T). For sake of curuousity I took a look at dividend chapions list (stocks in creasing dividends annually for 25+ years) and except 2 mentioned , thaere are quite a few others: BWL.A, MCY 6%, ORI 6%, PBI 10%.
Withing Contenders (stocks in creasing dividends annually for 10+ years), ARLP 7%, BPL 7, JCS 5.7, LMT 5, JUVF 5, KMP 5.8, NNN 5, NS 8.5, OHI 7, PBCT, O, UBA


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## Johnny Cash (Apr 21, 2012)

Squash500 said:


> I personally depend mostly on my non-registered account portfolio to produce a monthly income with which to live on. I use ETFS such as XTR, XRE, CPD, XDV, XFN, and CDZ to achieve my monthly income goals.


Squash500, what is your average yield using these ETFs?


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## gibor365 (Apr 1, 2011)

Who want high-yield ETF , go for SDIV Global X SuperDividend ETF  
"_The underlying index tracks the performance of 100 equally weighted companies that rank among the highest dividend yielding equity securities in the world, as defined by Structured Solutions AG. It generally will use a replication strategy. _ 
yield = 7.8%


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## Squash500 (May 16, 2009)

Johnny Cash said:


> Squash500, what is your average yield using these ETFs?


 JC I just started using this strategy a couple of months ago. Based on the monthly income of the ETF distributions multiplied by 12 divided by the amount of capital invested into these ETFS shares in my non-registered account....my average yield works out to approx 4.68%. The yield might be a little bit higher than that as I have approx 45k invested in the CPD.

However I'm exposed to a lot of danger as if the price of ETFS such as XDV, CDZ, XRE, XFN starts tanking then I could actually be danger of losing money on this ETF portfolio. On the plus side....since I'm in such a low tax bracket then according to my accountant a lot of the distribution income that I'm earning in my non-registered account on these ETFS will be in the form of eligible dividends which will be eligible for the canadian dividend tax credit etc. Meaning I won't pay much tax on this income from such ETFS as the CPD, XDV....ETC, ETC.


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## james4beach (Nov 15, 2012)

I think the yield-chasing behaviour is pretty dangerous. Reason it's dangerous is that a lot of "strong dividend" stocks are only getting bid up because of the hype for dividends. I suspect this is a powerful force on the stock movement.

When the hype for dividends fades, the selling on those specific stocks could be greater than average. Hype can fade in many ways: higher interest rates, more corporate risk, trouble making payouts, change in tax laws.

I am a fan of stocks that pay some dividends (and even XIU pays a good dividend), but once you cross a certain threshold you get into that territory of stocks that are loved only due to their dividends. Financials and utilities are likely in that category. Those could be really dangerous, at current price levels, if the hype for dividends fades away.

My suspicion is that in the long period, encompassing the time after dividends are no longer hyped, I suspect that XIU would perform just as well as the dividend stocks + total return of all their dividends.


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## andrewf (Mar 1, 2010)

Since distributions are so great, why not go 100% in AGNC? Currently yielding 15%... what could go wrong?


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## HaroldCrump (Jun 10, 2009)

For someone considering purchasing a stock for dividends only, take a look at any of the recent dividend cuts for high yield stocks, and see the haircut the stock took as a result of that.
A 1/3rd cut led to a greater than 1/3rd fall in the stock prices, a 50% cut slashed stock price by more than 50%.
Such stocks are being priced exclusively for their dividend cash flow, therefore, a cut in dividends leads to an equal cut in the stock price, and plus some more in anticipation of further cuts.
A small set of examples - PSN, CF, and the infamous YLO


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## Squash500 (May 16, 2009)

james4beach said:


> I think the yield-chasing behaviour is pretty dangerous. Reason it's dangerous is that a lot of "strong dividend" stocks are only getting bid up because of the hype for dividends. I suspect this is a powerful force on the stock movement.
> 
> When the hype for dividends fades, the selling on those specific stocks could be greater than average. Hype can fade in many ways: higher interest rates, more corporate risk, trouble making payouts, change in tax laws.
> 
> I am a fan of stocks that pay some dividends (and even XIU pays a good dividend), but once you cross a certain threshold you get into that territory of stocks that are loved only due to their dividends. Financials and utilities are likely in that category. Those could be really dangerous, at current price levels, if the hype for dividends fades away.


James I'm probably wrong as usual---LOL. However in this low interest rate environment....I might as well gamble a bit with these ETFS that I mentioned upthread. 1 yr gics at TDW are only paying 1.55%. The 10 year gov't of Canada bond benchmark is only yielding 1.85%. Best 5 yr GIC at TDW is only yielding 2.45%.

IMHO...these rates are totally pathetic--LOL. Therefore I've decided to watch the market every day and sell my ETFS if the prices start tanking etc. Just to repeat myself....IMHO the XIU is not the best ETF to be invested in right now due to its high Gold, silver and resource component. Also I'm not interested in being in the US market at the present moment as the Canadian dollar is continuously falling against the US dollar. As usual....just my opinion.


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## HaroldCrump (Jun 10, 2009)

Squash500 said:


> Also I'm not interested in being in the US market at the present moment as the Canadian dollar is continuously falling against the US dollar.


Well, if that's the case, why don't you buy some USDs now and invest in the US market (in whatever form).
If you believe the CAD will keep falling vis-a-vis the USD, buy USD now and invest.
As the CAD falls, the value of your USD investments will rise automatically.


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## blin10 (Jun 27, 2011)

right, but if you have solid companies such as bell,ry,td,fts,trp,etc,etc, it's nice to getting paid to wait...



HaroldCrump said:


> For someone considering purchasing a stock for dividends only, take a look at any of the recent dividend cuts for high yield stocks, and see the haircut the stock took as a result of that.
> A 1/3rd cut led to a greater than 1/3rd fall in the stock prices, a 50% cut slashed stock price by more than 50%.
> Such stocks are being priced exclusively for their dividend cash flow, therefore, a cut in dividends leads to an equal cut in the stock price, and plus some more in anticipation of further cuts.
> A small set of examples - PSN, CF, and the infamous YLO


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## james4beach (Nov 15, 2012)

Squash500 said:


> James I'm probably wrong as usual---LOL. However in this low interest rate environment....I might as well gamble a bit with these ETFS that I mentioned upthread. 1 yr gics at TDW are only paying 1.55%. The 10 year gov't of Canada bond benchmark is only yielding 1.85%. Best 5 yr GIC at TDW is only yielding 2.45%.
> 
> IMHO...these rates are totally pathetic--LOL. Therefore I've decided to watch the market every day and sell my ETFS if the prices start tanking etc. Just to repeat myself....IMHO the XIU is not the best ETF to be invested in right now due to its high Gold, silver and resource component. Also I'm not interested in being in the US market at the present moment as the Canadian dollar is continuously falling against the US dollar. As usual....just my opinion.


That's a perfectly reasonable strategy to follow. I agree that low interest rates will put upwards pressure on dividend stocks. But as you said, you're gambling a bit... as is everyone else! Lots of speculative pressure on dividend stocks.

Also avoiding XIU due to its commodity exposure is a rational position to take. You're not crazy or anything, it's just that XIU has had very good long term performance.


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## james4beach (Nov 15, 2012)

HaroldCrump said:


> For someone considering purchasing a stock for dividends only, take a look at any of the recent dividend cuts for high yield stocks, and see the haircut the stock took as a result of that.


Also, JE. It certainly wasn't "news" that the dividend was unsustainable, but look what happened when they actually cut the dividend. Shows you how widely held these stocks are purely on their high payouts.

That spells bubble trouble, lol


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## gibor365 (Apr 1, 2011)

james4beach said:


> but once you cross a certain threshold you get into that territory of stocks that are loved only due to their dividends. Financials and utilities are likely in that category. Those could be really dangerous, at current price levels, if the hype for dividends fades away.
> 
> .


What do you mean by "financials"? Canadian banks (practically) all have P/E ratio in 8-11 range, payouts +/- 50%, so what is the danger? ...and do ytou recall when last time CAD banks cut dividends? I think for them much easier to increase some fees for a bit, than cut dividend and see stock is tanking...
Regarding Utilities , maybe some, but I hardly beleive that FTS gonna cut dividends... btw US Utilities in much better shape than CAD


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## Sampson (Apr 3, 2009)

It keeps coming back to the distinction between nominal and real return.

Anyone who considers 1.5% interest in cash accounts and longs for 5-6% interest needs to compare the REAL returns. Doesn't matter if cash is yielding 6% if inflation is at 7%.

The 'getting paid' to wait mentality also severely overlooks equity risk. Getting paid 3-5% to wait through 2009 didn't help equity investors who potentially lost 40% of their portfolio value. Sure, some waiting had their equities recover in value, but many people sold (hence the drop) and in many instances, the portfolio value never returned - look at GE, US banks etc.

Get past the psychological barriers and focus on real returns, that's the ONLY thing that matters.


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## james4beach (Nov 15, 2012)

gibor: I'm not saying the banks will cut dividends, but I listed a bunch of other reasons. Including changes to tax law. There's many reason that investors may cool to the idea of yield chasing.

I don't think it would hit the banks extremely hard, but I bet it would put some selling pressure on them if people started dumping dividend stocks.


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## blin10 (Jun 27, 2011)

better then getting 0$... stocks that didn't pay dividend tanked as well



Sampson said:


> It keeps coming back to the distinction between nominal and real return.
> 
> Anyone who considers 1.5% interest in cash accounts and longs for 5-6% interest needs to compare the REAL returns. Doesn't matter if cash is yielding 6% if inflation is at 7%.
> 
> ...


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## gibor365 (Apr 1, 2011)

james4beach said:


> gibor: I'm not saying the banks will cut dividends, but I listed a bunch of other reasons. Including changes to tax law. There's many reason that investors may cool to the idea of yield chasing.
> 
> I don't think it would hit the banks extremely hard, but I bet it would put some selling pressure on them if people started dumping dividend stocks.


and what people will do?! buy GIC with 1.45% interest? (everyone telling that bonds are bad now)... or buy BB that doen't pay a dividend and can gtank with grater probability than banks?
As far as banks don't cut dividends, I'm fine with it... some drop in price will allow me to drip more shares with same dividend pay... so more dividends next quorter.. as I'm planning to retire and live from dividends, again for me the major points: not to cut and better to increase dividends....


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## Johnny Cash (Apr 21, 2012)

I thought that making 4-5% return (dividend+capital gain) should not be difficult. Most of the forum members know that there are very good dividend paying companies in Canada (banks, utilities, telcos) and in the US (MCD, HD, PG, JNJ + pharmaceuticals). I believe that by investing in these companies and being patient, we should be able get 4-5% return.


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## doctrine (Sep 30, 2011)

Dividends are important, but so is valuation, and that combined with diversification will help protect you. A 4% yield is not unusual. In fact for the banks, it has been pretty typical anytime in the last 30 years to purchase at around that level. 



> Getting paid 3-5% to wait through 2009 didn't help equity investors who potentially lost 40% of their portfolio value.


They only lost if they sold. The markets almost fully recovered within a year of the low. Stocks are nominally priced, and economies are bigger and there is more money out there now than in 2007 - a big reason why stock markets are approaching 2007 highs. All the more reason to be invested with whatever %/$ you are comfortable with.


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## Sampson (Apr 3, 2009)

I guess I have only one question for the dividend folks.

Do you think dividends alone are MORE important than total return?


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## andrewf (Mar 1, 2010)

Yes, yes they do. I don't get it.


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## Echo (Apr 1, 2011)

No, we just believe the total return from dividend paying stocks will be superior to the total return from non-dividend paying stocks - 

http://mhinvest.com/files/pdf/AI_Dividends_Matter.pdf

http://mhinvest.com/files/pdf/NF_highgrowingdivstockstrat.pdf


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## Nemo2 (Mar 1, 2012)

Echo said:


> No, we just believe the total return from dividend paying stocks will be superior to the total return from non-dividend paying stocks - http://mhinvest.com/files/pdf/AI_Dividends_Matter.pdf


+1


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## andrewf (Mar 1, 2010)

Why? Total return is total return.


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## Echo (Apr 1, 2011)

andrewf said:


> Why? Total return is total return.


Well if you could buy a broad index that excluded poor performing industries like airlines, for example, would you? I don't want to own even a fraction of Groupon.

Doesn't all the crap inside the broad index pull down total returns?


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## andrewf (Mar 1, 2010)

You might avoid buying Groupon but you also avoid buying Apple.

Stock pickers (including dividend focused ones like Kevin O'Leary) don't produce market-beating results in general.


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## Sampson (Apr 3, 2009)

While I hold a lot of dividend paying stocks, I don't invest in them for their dividends per se - much like Buffet isn't a dividend investor despite holding many classic dividend stocks.

I try to invest in value, based on fundamental metrics - this often explains much of dividend stocks outperformance anyway.

Fama, Eugene F.; French, Kenneth R. (1993). "Common Risk Factors in the Returns on Stocks and Bonds". Journal of Financial Economics 33 (1): 3–56

But believing that companies that pay dividends protect one from risk or that they will necessarily be better than a company not paying dividends is a bit of a slippery slope.


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## Four Pillars (Apr 5, 2009)

Echo said:


> Well if you could buy a broad index that excluded poor performing industries like airlines, for example, would you? I don't want to own even a fraction of Groupon.
> 
> Doesn't all the crap inside the broad index pull down total returns?


I don't play favourites - I love all my stocks equally.


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## Sampson (Apr 3, 2009)

Four Pillars said:


> I don't play favourites - I love all my stocks equally.


So Canadian of you.

I love my stocks that do well, and dislike the ones that underperform - well, more precisely, I dislike myself for picking those stocks.


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## Echo (Apr 1, 2011)

@Sampson - I try to invest for value as well and it just so happens that most of the stocks I uncover tend to pay dividends and grow them over time. Funny how that works.


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## james4beach (Nov 15, 2012)

To be honest, I would have been more keen on dividend stocks (to outperform long term), until this whole ZIRP-fuelled dividends hype started up.

This idea that dividend payers will outperform has become very mainstream lately. It's a very popular theme both in Canada and abroad. I've seen marketing brochures from many wealth management companies that are all pushing dividend portfolios... my gut says, it's just too hyped right now. I suspect that the prices on dividend companies have already been bid up to the point that by joining now, you're late to the game and will probably get returns worse than other broad averages.

But that's just a gut feeling. I don't like buying into an overly hot sector.


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## Echo (Apr 1, 2011)

@james4beach - That's fine, I've heard all the hype about dividend stocks being in a bubble. I bought most of my dividend stocks in 2009 when they were out of favour. Now they're very much in favour and so I'll wait to buy more.

If you're telling a new investor to avoid dumping a pile of money into dividend stocks right at this moment because they're over valued, I can understand that. But it's silly to tell someone who's invested in dividend paying stocks for years that, due to some temporary euphoria from yield chasers, their strategy no longer makes sense. 

Jumping in and out of strategies every few years can only lead to trouble.

PS - The most active stock on the TSX is still Blackberry. The 'average' retail investor is likely more interested in tech and gold than they are in banks and utilities.


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## Sampson (Apr 3, 2009)

Echo said:


> it just so happens that most of the stocks I uncover tend to pay dividends and grow them over time. Funny how that works.


That's why I have a pile as well.

But as j4b is alluding to, with all the interest in dividend paying stocks and people asking questions about "high-yielding" and "bond-replacing" etc, it is easy to confuse/distort the message of whether the stock itself is a good investment.

I'll come back to the point that total return is more important than 'dividend-alone'. If the total return is high in part due to a dividend, great, but that's only a single component.


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## james4beach (Nov 15, 2012)

And when these dividend stocks are held within a fund or ETF things get even more distorted, because you can't figure out exactly where the cashflow is coming from.

Take for example a bunch of the iShares and BMO dividend ETFs (including ZUT, ZDV, XEI) whose distributions are in the neighbourhood of 20% return of capital (ROC). That's a lot of ROC!

Some forms of ROC actually eat into your investment capital by liquidating shares, and this will impede total returns going forward. Do the above ETFs have that kind of ROC? I can't tell... we've discussed this at length previously and it's pretty damn hard to tell until somebody finds an expert accountant who can decipher the ROC from the annual financial statements.

But given the large ROC portion in many of the ETFs today, I suspect many of the high yields we see today are an illusion and I suspect the large ROC will impede total returns going forward.


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## Toronto.gal (Jan 8, 2010)

Echo said:


> 1. I bought most of my dividend stocks in 2009 when they were out of favour.
> 2. Jumping in and out of strategies every few years can only lead to trouble.
> 3. The 'average' retail investor is likely more interested in tech and gold than they are in banks and utilities.


*1.* Same here, though I did so between late 2009 & 2010, by which time they were not so much out of favour, but still reasonable.
*2.* I agree, and for that reason, I have separate strategies given market conditions, but I follow each with discipline most of the time.
*3.* It goes back to priority & type of strategy; such stocks mentioned above would fall more under the category of buy low/sell high [repeat various times]. 

I'm definitely not obsessed with dividends & own non-dividend paying stocks as well, but I certainly think they are important for several reasons, such as the fact that they reduce risk & original investment/increases # of shares if divs. are reinvested, which in turn increases div. payments, etc.

Even when few companies have stopped and/or reduced their dividend, hence collapsing share prices, it has had its benefits, as it became more affordable to accumulate shares of certain [big] companies [like another 03/09 type of opportunity]. 

It all comes down to priorities/needs & time horizon of the investor.


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## Echo (Apr 1, 2011)

@j4b - Yeah, that's a problem. Also, a dividend ETF like CDZ imposes rules and criteria like 'must have raised dividends for 5 consecutive years'. That removes all the big banks, who held off on dividend hikes for a few years.


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## gibor365 (Apr 1, 2011)

Sampson said:


> I'll come back to the point that total return is more important than 'dividend-alone'. If the total return is high in part due to a dividend, great, but that's only a single component.


but you never know what will be your total return , but when you hold solid blue-chip paying that not cutting (better increasing) dividends for many years, "you get paid while waiting". As I said before if company increases dividends every year and dividend is sustainable, stock appreciation not really matters if I want to live on dividends income , even better if stock price drops, I can DRIP more shares at cheaper price, and next time dividend will be higher....
Sampson, i don't understand , do you advocate index investing or timing market?


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## BlackThursday (Apr 25, 2011)

Echo said:


> @j4b - Yeah, that's a problem. Also, a dividend ETF like CDZ imposes rules and criteria like 'must have raised dividends for 5 consecutive years'. That removes all the big banks, who held off on dividend hikes for a few years.


No it doesn't. Both TD and BNS are included. So is Laurentian if you consider that big. 
The problem, IMHO, is weak yield, ROC, and a mixed bag of companies; e.g. how did ATP become a "dividend aristocrat"?


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## andrewf (Mar 1, 2010)

gibor, you don't really know your dividend return either. Could be higher, could be lower.


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## Echo (Apr 1, 2011)

@BlackThursday - Fair point. I just meant it was 'light' in financials.


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## gibor365 (Apr 1, 2011)

andrewf said:


> gibor, you don't really know your dividend return either. Could be higher, could be lower.


It can be lowe only if company cuts dividends and yes it can happen, but if you hold dividend champions/contenders with reasonable payout , P/E and so on, dividend income stream is more predictable.... I'd say that there is much more chances that non-dividend stock or ETF selected would tank, than that stocks like MCD, JNJ, PG and so on will cut dividends. Just look what happened in 2008-09, all indexes tanked 40-50%, but mentioned stock continued to increase dividends annually....
imho, for retired preson that have RIF, there are 2 ways to use it:
- take minimum or above payment from dividend income (considering that minimum is about 5% - dividend portfolio would cover those payments)
- have indexed ETF , non-div stocks and take 4-5% from principal that will involve selling (and paying trading fees) in many cases booking your losses that cannot be recovered.

I like 1st option more  It doesn't mean I don't hold non-dividend assets (I hold XIU, VTI, PRF), some commodities (PALL, PPLT, DBA).... but with a time when I will be closing to retirement , I gonna sell those assets and buy more dividend stocks...


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## andrewf (Mar 1, 2010)

They amount to the same thing. Worrying about booking losses is just psychological.

To wit, what would you do with dividends you didn't need as income? Reinvest? So if you don't reinvest, how is that different than selling to generate the same cash? Especially in a tax sheltered account?

Commissions are irrelevant. Most people spend more on laundry soap in a year.


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## gibor365 (Apr 1, 2011)

andrewf said:


> They amount to the same thing. Worrying about booking losses is just psychological.
> 
> To wit, what would you do with dividends you didn't need as income? Reinvest? So if you don't reinvest, how is that different than selling to generate the same cash? Especially in a tax sheltered account?
> 
> Commissions are irrelevant. Most people spend more on laundry soap in a year.


andrew, I DRIPing all shares I can, thus increasing # of shares, when I switch to RRIF ,I'll stop driping and start receiving income....
Also, don't underestimate psychological issues! 
As an example, I'd feel more comforatable holding AAPL over BB when they correcting. I know that on AAPL I get at least some dividends...


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## doctrine (Sep 30, 2011)

> But that's just a gut feeling. I don't like buying into an overly hot sector.


Agree, but by what criteria are dividend paying stocks overvalued? Similar to 1999, when tech stocks were trading with P/Es of 50, 100, even 500+? In my opinion, a solid blue-chip dividend paying stock at a P/E of 15 or less is reasonably valued. If that same company doubled in value overnight with no increase in earnings to a P/E of 30+, I'd probably sell it, because by that same metric it appears overvalued. 

I'm with Echo on this one. I invest on value, and most value is in companies that happen to pay dividends. But value matters! You shouldn't buy a company at a P/E of 30 just because it has a 4% yield - it might be an unsustainable dividend!


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## james4beach (Nov 15, 2012)

My thesis is that "dividend stocks" (mostly banks) have inflated value, because bank stocks have inflated value. The low interest rate environment and central bank stimulus has exaggerated the valuation of many bank assets, and thus the earnings are over-stated when marking to market. As the derivatives market bounced back with a vengeance (also due to government & central bank intervention), banks also show plenty of derivatives related income activity... and I think that's inflated earnings too.

So when you look at P/E, my assertion is that E is artificially inflated right now. So I don't really care that bank P/E's are "low" ... that's just me. Everyone else in Canada buys banks and loves them.

Globally, not just in USA, many of the bad assets have been shifted to the public balance sheet. Of course this has the effect of higher earnings for banks, as they don't have to keep showing the losses. This won't go on forever.


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## doctrine (Sep 30, 2011)

There are other companies besides banks in Canada that have good (P/E 15) or great (P/E 10) value. Although, there are less pickings than even last year as a lot of the real good dividend ones have been bid up (like Autocanada, which had a 8% yield a year ago!). But they still exist.


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## Echo (Apr 1, 2011)

@j4b - I agree to some extent. I'm not sure what's caused the recent insurance rally, but the low rate environment probably doesn't bode well for short-to-medium term earnings.

Most of the bank stocks appear to be reasonably priced according to some broad value screens - http://www.ndir.com/SI/strategy/tse60.vr.shtml


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> My thesis is that "dividend stocks" (mostly banks) have inflated value, because bank stocks have inflated value.
> 
> The low interest rate environment and central bank stimulus has exaggerated the valuation of many bank assets, and thus the earnings are over-stated when marking to market....


The asset transfer to the public balance sheet certainly helped the banks but what does that have to do with a pipeline or construction or fertilizer or regulated electricity generating company?

Your aversion to bank stock might be justified but there's more than banks or financial companies out there. The factors cited don't affect all dividend stock companies the same (or potentially at all). What makes you sure that everything is over-priced where no bargains or reasonable prices exist?

For example - is a low interest environment and investors switching from growth to dividends going to make up for the US housing market crashing for a lumber company that sells the bulk of it's lumber to the US? I would doubt it.



Cheers


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> The asset transfer to the public balance sheet certainly helped the banks but what does that have to do with a pipeline or construction or fertilizer or regulated electricity generating company?
> 
> Your aversion to bank stock might be justified but there's more than banks or financial companies out there. The factors cited don't affect all dividend stock companies the same (or potentially at all). What makes you sure that everything is over-priced where no bargains or reasonable prices exist?


Yes good point...there's much more than just financial companies out there. My points were just relevant for the financials.


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## Sampson (Apr 3, 2009)

gibor said:


> do you advocate index investing or timing market?


I'm not making mention of either.

The OP is asking if people invest for the income/dividend the investment alone.

The best way to do this and not face all sorts of risk is via an annuity or other guaranteed payout vehicle. If one believes that a sustainable and growing payout is more important than the total return, then they should look towards those types of products, not stocks.


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## Sampson (Apr 3, 2009)

gibor said:


> As an example, I'd feel more comforatable holding AAPL over BB when they correcting. I know that on AAPL I get at least some dividends...


But are you also saying the AAPL was a bad hold before it started paying dividends? Most of your posts suggest that you think getting 'paid to wait' outweighs the risk of investing when you don't get paid. All those poor AAPL investors who bought before the dividend started.


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## Cal (Jun 17, 2009)

I don't buy any bonds directly, preferred shares or GIC's. I just focus on accumulating the dividend paying equities.


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## Eclectic12 (Oct 20, 2010)

gibor said:


> Also, don't underestimate psychological issues!
> As an example, I'd feel more comforatable holding AAPL over BB when they correcting. I know that on AAPL I get at least some dividends...


Really?

I suspect the buy price plays a big role. If I bought at $620 and have stuck with it to around $429, I'm not sure that about $11 or so in dividends gives me a lot of comfort.




james4beach said:


> Yes good point...there's much more than just financial companies out there. My points were just relevant for the financials.


The big ones - yes. Some apply to all (ex. investors jumping from growth to dividends) while others only have a partial impact.


Cheers


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## doctrine (Sep 30, 2011)

Yes, but if the price of AAPL returns to $620, you have your original capital plus $11 in dividends (plus whatever other dividends you get between now and then). Once they start getting the dividend increases going, the stock will be all right. If you bought BB/RIM at $100, if the stock ever got back to that price in 5 years, you'd have your capital back and $0 in dividends to show for it.


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## Eclectic12 (Oct 20, 2010)

doctrine said:


> Yes, but if the price of AAPL returns to $620, you have your original capital plus $11 in dividends (plus whatever other dividends you get between now and then).
> 
> If you bought BB/RIM at $100, if the stock ever got back to that price in 5 years, you'd have your capital back and $0 in dividends to show for it.


Some thoughts ... 

The first is that if you bought BB/RIM at $100 you've been holding it for quite a while.

The second is to wonder what you've missed out on by having that much capital tied up on the hope that what has caused such a wide swing in value is fixable.

The third is with such a wide swing in share price, how does one confirm that it's not something like Nortel's dividends? Some were confident in Nortel's dividends pretty much to the end.


Cheers


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## doctrine (Sep 30, 2011)

I don't have any BB/RIM. Nor AAPL. My thoughts are though, the drop in AAPL from $700 to $450 is big, but I believe 50% drops are recoverable and not that unusual even in large caps. 90% drops, though, are far more often non-recoverable. I could see myself investing in AAPL, but not BB. Still, AAPL probably won't raise it's dividend until August so there's lots of time for the stock to go lower. $3XX would be incredibly tempting though, given how much cash they have and even if they were to maintain/have slightly lower profits in the future. At $350, they hit a 3% yield.


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## gibor365 (Apr 1, 2011)

I just think that if BB (RIM) would pay dividends they wouldn't drop so hard


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## jcgd (Oct 30, 2011)

Buffett pointed out how dividends are not always the best deal in his most recent letter. He used two simplistic examples to outline how it can sometimes be more lucrative for the company to retain the earning and the investor sell shares for income (like he has done with Berkshire) instead of the company paying out dividends and the investor keeping all the shares. Just some food for though if anyone cares to read the letter, it only takes a few minutes.

http://www.berkshirehathaway.com/letters/2012ltr.pdf
Page 19 for the dividend bit.


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## andrewf (Mar 1, 2010)

More and more companies are returning cash to shareholders through share buybacks rather than dividends for tax efficiency reasons. All the more reason why dividend fetishism is misguided. Dividends are fine and dandy, but what matters is after tax total return. Dividends don't matter if the company is in a death spiral...


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## james4beach (Nov 15, 2012)

jcgd said:


> Buffett pointed out how dividends are not always the best deal in his most recent letter. He used two simplistic examples to outline how it can sometimes be more lucrative for the company to retain the earning and the investor sell shares for income (like he has done with Berkshire) instead of the company paying out dividends and the investor keeping all the shares. Just some food for though if anyone cares to read the letter, it only takes a few minutes.
> 
> http://www.berkshirehathaway.com/letters/2012ltr.pdf
> Page 19 for the dividend bit.



Yes, Buffett's letter is no doubt in response to the current dividends hype. That section is worth reading!

In fact after thinking about this over the last while, I came to the conclusion that one of the best investments you could hope for (whether you're young or retired) is simply to hold XIU & XBB, or equivalent, and quarterly liquidate some shares to generate whatever cashflow you want. This is more or less what Buffett is endorsing too.

There are a couple factors he doesn't mention though (and these are still the reasons I want some dividends from stocks). One is that dividends provide a bit of safety, in that even if management screws up everything, at least you've received some amount of the earnings paid out over the years. That is, even if a huge fraud is discovered one morning and the shares crash, you've already been receiving dividends for the years you've held the stock -- at least you've gotten something, instead of a vague future possibility of selling shares at good value.

As someone who is generally very skeptical of corporations, my view is something like this: "Sure you executives are doing a great job, keep it up, but I still want you to hand over 1/4 of those profits to me in cash juuuuust in case you turn out to be full of s***". I do NOT reinvest or DRIP dividends. That cash is mine to keep safe.

The other factor is simply that dividends are a convenient mechanism for automatically getting the cash, instead of having to sell shares, bothering triggering capital gains, etc


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## doctrine (Sep 30, 2011)

Berkshire Hathaway doesn't pay dividends. But what does Warren Buffet think about investing in companies that pay dividends? 

From his latest letter:



> _Most companies pay consistent dividends, generally trying to increase them annually and cutting them very
> reluctantly. Our “Big Four” portfolio companies follow this sensible and understandable approach and, in certain
> cases, also repurchase shares quite aggressively.
> *We applaud their actions and hope they continue on their present paths. We like increased dividends, and
> we love repurchases at appropriate prices.*_


I like increased dividends as well. I think of my holdings as a holding company as well - I'm not paying my dividends out to myself, I'm holding them and reinvesting as I see fit.


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## jcgd (Oct 30, 2011)

I do think however, that Buffet makes it clear that he does not always consider dividends to be the best option. Sure his big four meet the criteria he outlines for buybacks and dividends, but if he was investing in Berkshire, for example, I believe he would prefer the company not pay the dividends. Wells Fargo, IBM, Coca Cola and American Express would not likely put the dividends to better use than they would if paid out to their investors. In the case of Buffett's Big Four the dividends make sense. I don't think it's fair to paint Buffett's comment "We applaud their actions and hope they continue on their presnt paths. We like increased dividends, and we love repurchases at appropriate prices." onto all stocks. That clearly isn't what he believes.

Quoted from the latest letter:


> We’ll start by assuming that you and I are the equal owners of a business with $2 million of net worth. The
> business earns 12% on tangible net worth – $240,000 – and can reasonably expect to earn the same 12% on
> reinvested earnings. Furthermore, there are outsiders who always wish to buy into our business at 125% of net
> worth. Therefore, the value of what we each own is now $1.25 million.
> ...


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## doctrine (Sep 30, 2011)

His example is entirely theoretical; what company stays at exactly the same book value for 10 years? And his margin of error in his example is 4% over 10 years - 0.39% per annum. There are some ETFs that have larger tracking errors following an index. Companies that don't pay dividends are proven over time to have poorer returns. This is as clear as a link as is investing by value. The fact that all of his major investments pay dividends to him, that he uses to invest as he sees fit, is enough proof for me. Follow the money. He's a wise investor, and wants cash returns. He didn't buy $8B in Heinz prefs at 9% because he doesn't like cash.


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## Eclectic12 (Oct 20, 2010)

doctrine said:


> I don't have any BB/RIM. Nor AAPL. My thoughts are though, the drop in AAPL from $700 to $450 is big, but I believe 50% drops are recoverable and not that unusual even in large caps. 90% drops, though, are far more often non-recoverable. I could see myself investing in AAPL, but not BB.
> 
> Still, AAPL probably won't raise it's dividend until August so there's lots of time for the stock to go lower. $3XX would be incredibly tempting though, given how much cash they have and even if they were to maintain/have slightly lower profits in the future. At $350, they hit a 3% yield.


Fair enough.

Though I'm sure some of those who held on to BB/RIM thought that the 50% drop was recoverable, especially with them sitting on so much cash. Nortel on the other hand, didn't have such a stockpile.


Cheers


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## Toronto.gal (Jan 8, 2010)

Eclectic12 said:


> Really?
> 
> I suspect the buy price plays a big role............


The 'psychological' point/comparison that Gibor talked about between AAPL & BB, I believe had more to do with holding a 'comfort'/solid stock rather than a contrarian one that has been compared to Nortel, so not so much a share price issue nor dividend debate per se in said example, as I'm sure that he [and many others] would not have bought BB, even if it were paying a 10% dividend. :biggrin: 

The psychological factor is powerful indeed, and as we say, the investor is his own worst enemy. Warren Buffett's famous quote of ‘Be fearful when others are greedy, and greedy when others are fearful’ didn't work so well for everyone in 2009, did it?

The dividend vs no dividend debate is old! Obsessing with dividends alone is a mistake, especially when there are so many solid undervalued stocks that should offer plenty of capital appreciation in time.

Not having dividend paying stocks, is also a mistake IMO. The getting paid while you wait, does make sense as dividends alone [assuming no increases/reductions], @ realistic yields of 3%-5% for example, would pay around 15%-25% of one's original investments in 5 years; a bit of a buffer in a worst case scenario [assuming one kept the cash]. 

All I know, is that I need/want both in my portfolio at present time, and that obsessing/following a single strategy is a mistake.

Below article shows the impressive dividend increases by CDN banks since 2002.
http://www.theglobeandmail.com/glob...-some-dividend-detective-work/article4266483/


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## gibor365 (Apr 1, 2011)

_as I'm sure that he [and many others] would not have bought BB, even if it were paying a 10% dividend. 
_
T.gal, who knows?! Maybe yes, maybe no. For example , my wife (who is very knowledgable IT Solution arcitect , is very bullish on field-programmable gate array (FPGA) manufactures... and in her LIRA this months some money would be unlocked, so she wants me to buy Xilinx (XLNX)... and one of the reason why I probably agree with her, that XLNX 10 years in a row increasing dividends by doublr-digiet %, have very low payout ratio etc... I doubt that I'd be comfortable buying such kind of stock without dividends...


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## HaroldCrump (Jun 10, 2009)

I am not a big fan (or a fan at all) of share buy-backs for buy-and-hold investors in the stock.
In fact, all else being equal, IMHO returning cash to investors via dividends is better than share buy-backs.

Yes, I understand the tax implications (dividends vs. capital gains) but let's leave the tax tail aside for a minute.

The effect on stock prices as a result of buy-backs is usually temporary and transient.
It gets lost in all the market noise.
After a few weeks or months, no one even remembers - there is always something else (European debt, fiscal cliff, sequestration, Iran's nuclear test, you name it).

Unless you were anyway planning to sell your shares, and are able to sell into the temporary rally in the hours or days following the announcement, you will benefit.

In order to consistently boost share price via buy-backs, a company will have to commit a pretty large sum and aggressively keep buying on down days.


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## andrewf (Mar 1, 2010)

Nonsense. Share buy backs increase EPS, ceteris paribus. People can't help but remember higher EPS. Now, it's true that companies often buy back shares at the wrong time (peaks) and avoid it at bad times (blood in the streets). But to say the effect is merely transient doesn't pass muster.


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## Homerhomer (Oct 18, 2010)

andrewf said:


> Nonsense. Share buy backs increase EPS, ceteris paribus. People can't help but remember higher EPS. Now, it's true that companies often buy back shares at the wrong time (peaks) and avoid it at bad times (blood in the streets). But to say the effect is merely transient doesn't pass muster.


No, it's not nonsense.
Yes they do increase eps, but in big picture the difference is negligible, and often the amount of shares bought back is quickly offset by new shares issued for employee compensation, and in some cases drip.


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## andrewf (Mar 1, 2010)

Share buybacks to prevent dilutation from stock based compensation is a separate issue from net stock buy backs (ie, such that the # shares decreases over time).

Whether companies pay dividends or buy back their shares to return capital to shareholders, both are buying back copious amounts of shares for executive compensation. That is a problem with executive compensation, not share buybacks.

In other words, the net share buybacks are what matters. Share buybacks that compensate for issuance is just spending, not a net cash flow to financing.


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## Toronto.gal (Jan 8, 2010)

I'm not comparing at all, but was just reminded of how FB's IPO never fell below $38 on the 1st day of trading, thanks to manipulation by its U/Ws.

With all the volatility that is going on currently, repurchases have had a de minimis result indeed. 

*''Even when there is no intent to hoodwink the market, companies that announce buyback programs often do not commit to the exact number of shares that will be repurchased or even to buying back any shares at all. Instead, companies simply say that their buyback programs will proceed as conditions warrant. Investors would have a hard time detecting companies whose managers are being disingenuous.'
*
http://www.nytimes.com/2007/12/16/business/yourmoney/16stra.html?_r=0

This is the study mentioned above:
http://gates.comm.virginia.edu/uvafinanceseminar/2006-Ikenberry paper.pdf

*How Share Repurchases Manipulate Fundamental Ratios*
http://seekingalpha.com/article/1206621-how-share-repurchases-manipulate-fundamental-ratios

*Gibor:* no, you wouldn't have; I know you!


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## andrewf (Mar 1, 2010)

Boy do I dislike seeking alpha. Most of the people who write for that site have no idea what they are talking about. Case in point: how share buybacks 'distort' financial ratios. On the contrary, all the changes mentioned are accurate, meaningful and fair changes to financial ratios/metrics as a result of buybacks. Sure, a fall in P/E driven by a rise in EPS, which in turn was driven by a reduction in # of shares rather than total company profitablility does not mean the company as a whole is growing profits--but who cares? You should only care how it affects your stake in the company. Should we be happy that a company is growing profits by 20% per year, but issues 30% more shares (diluting existing shareholders and reducing EPS)? Or should we be happier as shareholders with a company that has flat total profit, but reduces its shares by 20%, boosting EPS by 25%? I have shares, so EPS matters to me. I don't own the whole company...


Now there are legitimate concerns/downsides to share buybacks. This piece doesn't mention a single one of them.


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## Toronto.gal (Jan 8, 2010)

Why comment on that single article then?


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## andrewf (Mar 1, 2010)

The NYT piece does not really criticize share buybacks. It criticizes the announcement of 'fake' share buyback schemes where the company hints that it will buy back shares but does not follow through.

I don't think I want to dive into an academic study. Can you post a synopsis?


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## gibor365 (Apr 1, 2011)

andrewf said:


> Boy do I dislike seeking alpha. Most of the people who write for that site have no idea what they are talking about. .


andrewf, just was wondering who are those few that in your opinion have such idea?


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## jcgd (Oct 30, 2011)

I'm with Andrew. It all depends on the scenario. Take Wells Fargo for example. The share repurchases over the last five years or so were only able to prevent dilution due to stock based compensation. Direct tv though, had reduced shares outstanding by 60%. Direct tv is hardly growing yet is able to create shareholder value by buying back stock at depressed values. IBM favors a strategy of dividends and buy backs. They also increase eps by increasing their margins.


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## andrewf (Mar 1, 2010)

gibor: I don't read SA much. When I do, I am sometimes shocked by how horribly wrong some people are about what they are writing. One person whose blog I read (and who gets picked up on SA) is Bill Luby.

It's important to remember that SA contributers get paid per view. So they write about topics they don't necessarily understand, but expect to get a lot of views. And a lot of the content is just garbage.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> Share buy backs increase EPS, ceteris paribus. People can't help but remember higher EPS. Now, it's true that companies often buy back shares at the wrong time


EPS changes within the next 3 months.
And then it changes again.
Sure, there are companies that have more stable EPS's such as the mega caps like MSFT and BRK but for many companies, EPS is a constantly moving target.

Market does not remember last quarter's EPS, let alone 3 quarters ago.

In the meantime, all the market volatility and noise drowns out the buy backs.

I am not saying that buy backs do not benefit some investors some of the time.
But for long term buy and holders of the stock, I am not sure.

Unless the company is willing to commit large sums of money and a consistent, aggressive buy back program, I am not sure there is any sustained benefit to share-holders.

Most companies do not grow in a linear path, with consistently increasing EPS and cash flow.
If they did, and if the market were perfect and rational, then sure buy backs increase shareholder value.


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## andrewf (Mar 1, 2010)

So, if you go from 4 people sharing a pie, to 3 people (the 3 bought out the 4th), do the 3 not have 33% more pie than they would have had they not bought out the 4th person?

Ceteris paribus, if the company has the same total profitability and fewer shares, EPS is necessarily higher after buybacks than it would have been absent them. Unless something about buybacks lowers total profitability...? Long term shareholders are precisely the people who benefit. Short term swing traders may or may not benefit from buybacks, but growing EPS supports the share price long term... An Apple share buyback may not help in the short term, but in the long term, there will be fewer shareholders to split the juicy cash flows amongst.

Frankly, there are many businesses out there that have excess cash flows and use them to go on empire building sprees or investing in new businesses outside their core competency or acquiring other firms at a significant premium. All this in a quest to grow the top and bottom lines on an absolute basis. Many firms would be better off growing EPS by reducing the # of shares. Organic growth is great, but for businesses that have more cash flow than they need to sustain investment for organic growth could benefit from growing EPS through share buybacks.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> So, if you go from 4 people sharing a pie, to 3 people (the 3 bought out the 4th), do the 3 not have 33% more pie than they would have had they not bought out the 4th person?
> Ceteris paribus, if the company has the same total profitability and fewer shares


Yabbut, that is the part I am questioning - _the pie is not ceteris paribus_.
The size and shape of the pie is ever changing, sometimes dramatically, from quarter to quarter.

Look at some of the typical stocks even on the TSX - the energy or materials related stocks, even the financials.
Aside from the EPS, there are a whole range of external factors, such as market noise, politics, etc. that affect the prospects of the company - real or perceived.

All I am saying is that companies and markets do not progress along a linear path in their growth.

If a company can find no other profitable investment avenues other than distributing cash back to share-holders, and the only choices are increased dividends or buy backs, a dividend increase puts an immediate, guaranteed returns into the pockets of the share-holders, vs. a buy back which may or may not boost share price, esp. over long periods of time.


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## Toronto.gal (Jan 8, 2010)

Many things work brilliantly in theory, so no need to be Einstein to realize that. BUT facts & reality gives us mixed results. 

I don't think it's too difficult to find a number of real examples of when the impact of buy-backs on share value have been less than shining.


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## andrewf (Mar 1, 2010)

Do you have one (an example)? 

Receiving a 2% dividend only guarantees that you can only lose 98% of your remaining investment. If you reinvest it in the same company, it is much the same as a share buyback.



> Yabbut, that is the part I am questioning - the pie is not ceteris paribus.
> The size and shape of the pie is ever changing, sometimes dramatically, from quarter to quarter.


We're comparing two options:

-return cash via buyback
-return cash via dividend

Are you arguing that which of these is chosen impacts future operating results (the pie)? I'm saying that if you order the pie, and while you're waiting, you decide to either buy out someone or just receive your share, which you choose does not impact the size of the pie when it arrives. Now, you may not have 100% certainty of the pie in advance, but you have certainty you will get the share you paid for. This is what ceteris paribus means... Not that nothing changes within each scenario, just that all the changes in each scenario are mirrored _except those specified_.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Do you have one (an example)?
> 
> Receiving a 2% dividend only guarantees that you can only lose 98% of your remaining investment. If you reinvest it in the same company, it is much the same as a share buyback.


Not really. If company buys back shares - it doesn't affect my dividend income, if I DRIP shares , I get compounded dividend income


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## andrewf (Mar 1, 2010)

You get the tax implication, sure, but if you're dripping you're not getting cash flow.


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## gibor365 (Apr 1, 2011)

andrewf said:


> You get the tax implication, sure, but if you're dripping you're not getting cash flow.


Yeah, I just accumulate shares ...


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## Toronto.gal (Jan 8, 2010)

andrewf said:


> but if you're dripping you're not getting cash flow.


With a traditional DRIP, you can receive a % of the dividend payments in cash as well.

As for the example you asked [if you were talking to me], the one that I used to own & came immediately to mind was CSCO. I can think of others, but you can search yourself.

Anyway, no need to argue as there are pros & cons.


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## andrewf (Mar 1, 2010)

I disagree with the assertion that significant net share buybacks usually or often don't do anything, or only in the short term. It doesn't make any intuitive sense for that to be true, and I don't think the evidence supports it.

With CSCO, sure, the P/E contracted. That would have happened with share buybacks or dividends. You can make the argument, rightly, that companies should probably not be buying back shares when they have a high P/E, unless they are very sure of their earnings growth. 

(btw, this is one of the legitimate critiques about share buybacks--companies often do it when their price is high, not opportunistically when the market is down or the firm is out of favour).


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## Chigu (Aug 6, 2009)

Why can't you have the best of both worlds? 

Take a look at company's such as the big banks, great capital appreciation and a 4% yield on top. 

Take a look at RY: 
March 5, 2012 = 54.48
March 5, 2013 = 63.85
+2.34 dividends.

Total return of 21.49% for the year, and it would be more if you had enough invested to reinvest those dividends!! I read Warren Buffet's letter to shareholders, and although I would like to believe that a company will be better able to compound free cash at a better rate instead of paying out dividends, this is not always the case. Most companies are not in the 'investment' business and if they have excess cash, they will just put it in overnight deposits or short term t-bills. I look for good companies that are undervalued and pay a dividend.

Hence picking up MFC.TO under $13, yielding 4% at that time. I was stupid last year, and went yield chasing and picked up a couple of big losers (EGL.UN, and PLT.UN), I am still holding them as I now think that the dividends are sustainable (and also a constant reminder to not be stupid). So I am banking on additional appreciation from here, and due to the high yield I should be able to recover most of my money back in a few years (if not turn a profit). I think the risk of bankruptcy for these stocks are still low, as long as they meet guidance. 

I learned my lessen, and have changed my strategy to the one above (value + dividends).


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## andrewf (Mar 1, 2010)

Nothing wrong with dividends, per se. But for a business in a mature industry without much room to grow, they can still deliver solid EPS growth by buying back shares. EPS growth also supports dividend growth, given many companies have a target payout ratio.


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