# Total return of a dividend stock



## james4beach (Nov 15, 2012)

After a conversation in another thread, it seems that a few of us disagree on how total return is calculated for a dividend paying stock.

Here's a simple scenario: assume a universe where this stock trades precisely according to book value with no volatility. I know many things are added on top in reality, but I want to get clear on what the underlying value is doing.

Company XYZ starts the year at $10 a share. First, its book value remains constant and share price remains $10. Then it pays out a single dividend in June of $1 a share and the price drops to $9. In July through year end, the book value finally rises due to profitable operations. We are told that for the whole year, its *total return is 10%*.

Question: What is the share price at the end of the year?

(This is similar to real investing where we forecast the year's total return, but the order of earnings & dividends are unpredictable).


----------



## james4beach (Nov 15, 2012)

Here’s my answer to this. According to these sources, total return (the 10% number) assumes reinvestment of all dividends:
https://www.investopedia.com/terms/t/totalreturn.asp
http://allfinancialmatters.com/2007/01/22/how-total-returns-are-calculated/
https://www.theglobeandmail.com/glo...total-return-is-so-important/article19576412/

From the Globe & Mail,


> by definition the total return assumes that all dividends, interest and other income are reinvested in the security at the prevailing market price on the payment date


Say I start the year with 100 XYZ shares at $10.00 a share with $1000 equity. When the dividend is paid out, the ex-dividend price drops to $9.00 and I get a $100 dividend. I now reinvest this dividend, buying 11.111 shares. I end up with 111.111 shares. I think the share price ends the year at $9.90, because then my equity is (111.111 x $9.90) = $1100, showing a 10% total return from the starting equity value.

I think the shares end the year at $9.90


----------



## Jimmy (May 19, 2017)

That is right. Getting the shares at a discount reinvesting the div is a good deal.


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> I think the shares end the year at $9.90


BCE opened 2006 at *$27.87*.

Since 2006, BCE paid *$24.14* in dividends.

Please explain how is it possible that BCE closed last week at $55.87.

According to your theory, it should be trading around $3.73.


----------



## GoldStone (Mar 6, 2011)

Company A always trades at book value. Book value at the start of the year is $10.

Each year, the company generates $1 in free cash flow (FCF) and pays out the entire FCF as $1 dividend.

There are no other changes on the balance sheet throughout the year.

The book value at the end of the year *must *be $10. By definition. If it's not $10, it means something else has changed on the balance sheet.

====

I am a retiree and I choose to consume $1 dividend paid by Company A. I don't care what G&M's definition of total return is. *My own* total return for the year is:

(dividends + capital gains) / starting price

dividends = $1
capital gain = $0

Total return: $1 / $10 = 10%

You are trying to make it more complicated that necessary to obfuscate your claim that every dividend payment permanently erodes shareholder equity. My BCE example above clearly demonstrates that your claim is nonsense.


----------



## Eder (Feb 16, 2011)

Not to mention that $1 of dividend is worth more than 1$ of unrealized capital gains...


----------



## GoldStone (Mar 6, 2011)

James, I will try another angle.

Companies A and B are identical:

- both have book value of $10
- both trade at book value
- both generate $1/year in free cash flow (FCF)

There are no other differences.

Company A pays out its FCF as $1 dividend. It ends the year at $10 where it started.
Company B keeps $1 FCF on the balance sheet as retained earnings. It ends the year at $11.

Both stocks have the same return:

A: $1 dividends + $0 capital gains
B: $0 dividends + $1 capital gains

If dividends and capital gains are taxed the same, and the stocks always trade at book value, there is no difference between A and B. I can spend $1 in dividends or $1 in capital gains (after I sell $1 worth of stock B). In both cases, I end up owning $10 worth of stock.

We don't live in that ideal world. Stock prices fluctuate wildly. Sometimes they trade at a premium; sometimes, at a deep discount. Dividends decouple a retiree from the market fluctuations. Selling shares leaves a retiree exposed to the vagaries of the stock market.

There are also tax difference as Eder mentioned. In Ontario, you can receive $56K in dividends tax free, if you don't have any other taxable income.


----------



## OptsyEagle (Nov 29, 2009)

Not really sure what is being explained here, except perhaps that there is a difference between simple interest (taking the dividend) and compound interest (reinvesting the dividend).

James for a fund, the idea that the value of it drops by exactly the same as the dividend is absolutely correct, but for a stock it is not always the case. Yes, many brokers (although I am not sure all do) will adjust outstanding bids down by the amount of the dividend, you should have noticed by now that as soon as it starts trading the market will most times adjust if back up. The reason for this is the investors opinion of how much value was lost in the company by paying out that dividend. *In most cases, very little value was lost. * In most cases, it was unnecessary working capital that the company paid out. They did not sell their only widget making machine to pay out the dividend, but an amount of cash that was deemed "excess" which really had very little value within the company. Because investors are buying future profits, when they buy a companies stock and because paying that dividend had little effect on future profits, the share price tends to rebound very quickly after it goes ex-dividend, in most cases. Investors are rarely paying for book value when they buy stock. Of course there are exception and of course there are unsophisticated investors but for the most part, my statement is correct.

In summation, for MOST companies that pay a $1 dividend, there is a reduction in the companies value after the dividend is paid, it is just that the reduction is usually a considerable amount below the $1 that was paid. That is usually why the company pays it in the first place.


----------



## GoldStone (Mar 6, 2011)

James, looking at my post #7, I think we have narrowed our differences. I propose that we agree on this summary:

In an ideal world, where stocks always trade at their intrinsic value (however you define it), there is no difference between receiving $1 dividend and selling $1 worth of shares, all else is being equal.

In the real world, stock prices fluctuate wildly around intrinsic value. Dividends offer a more predictable, reliable source of income than selling shares.

Agree?

I didn't mention the tax issues. In Canada, in a taxable account, $1 of dividend is usually worth more to a retiree than $1 of unrealized capital gains. Tax issues are complicated (e.g. OAS clawback), so I intentionally excluded the tax treatment from the summary.


----------



## Eder (Feb 16, 2011)

I think using a poker analogy would explain my view on dividends verses capital gains. 

I hold 4 clubs after the flop on a raised pot..flop comes A J 5 with 2 clubs. Pot size is $100 . I bet $80, guy to my left goes all in with $290 . It will cost me another $210 to call pot is $$470, I have 9 outs twice to beat his big ace I win about 36% of the time so I call as I'm priced in.

I either make a large capital gain or lose a large capital gain....depends what happens on 4th & 5th.

The chips behind my cards are the same as dividends...I already control the ownership of them.

That's why I say a $1 of dividend is better than $1 of capital gains, I already own the dividend. The capital gain can be as variable as owning pot equity in hold em. In the long run I win..short term my capital gains can under go incredible coolers.


----------



## GoldStone (Mar 6, 2011)

Eder, your analogy doesn't help. Not everyone is a poker junkie.


----------



## humble_pie (Jun 7, 2009)

GoldStone said:


> In an ideal world, where stocks always trade at their intrinsic value (however you define it), there is no difference between receiving $1 dividend and selling $1 worth of shares, all else is being equal.
> 
> In the real world, stock prices fluctuate wildly around intrinsic value.




this is true. If a regular dividend payout does permanently lower the value of a company by the exact dollar amount of each dividend, one has to ask how come other large payables & large receivables in a corporate treasury don't get the same treatment?

eg how come the market is not evaluating publicly traded companies strictly on their cash flow?

it's true that companies facing extraordinarily large costs - ie having to finance a buyout - or exceptionally large revenues - ie a windfall profit - will usually see their share prices adjust down or up. But these adjustments will be erratic, subject to countless other market factors.

i for one think it could actually be harmful to some seniors to insist that they *must* accept the selling of shares to finance their retirement years, on the grounds that some cold one-off black-&-white arithmetic is forcing this artificial logic upon them.


.


----------



## Nerd Investor (Nov 3, 2015)

Two components to total returns: dividends + increase (decrease) in share price.
In theory, and in the long term, total return is all that should matter irrespective of whether a dividend makes up either component. 

In the shorter term:
1) The ability to pay and continue to pay dividends is based on company fundamentals
2) The change in share price is based on human emotion and behaviour

#1 is infinitely more predictable.


----------



## AltaRed (Jun 8, 2009)

Jimmy said:


> That is right. Getting the shares at a discount reinvesting the div is a good deal.


Stocks can trade at premiums to intrinsic value, or enterprise value, or whatever you want to make value judgment values on. Re-investment of dividends into premium priced shares is not a good re-investment. A reason I never use dividend re-investment. I will make the decision (rightly or wrongly) of when I think a stock is fairly priced. Generally, I just accumulate all my dividends as cash and make an overall investment decision, perhaps on a different stock entirely.

What matters is Total Return = share price appreciation + dividend yield, and in the long haul, Total Return will exceed dividend yield if a company is getting ROE/ROCE in excess of its cost of capital and the market acknowledges the increased enterprise value.

A retiree should always consider Total Return of their individual investments even if they disproportionately depend on the dividend income stream for their cash flow. Yield on its own is useless if it is decreasing enterprise value. This is why there are general market rules of thumb that yields (over long periods) exceeding 5-6% are red flags. Many companies have a hard time in the long run beating ROE/ROCE in the mid-single digits, so they would/should cut their dividend to bring yield back into line sufficiently to support future share price growth. We've seen many, especially commodity examples, of this in the past 4 years. No corporate CFO wants (or should want) to see their stock yield get past mid-single digits for any significant length of time (general market corrections aside).


----------



## GoldStone (Mar 6, 2011)

humble_pie said:


> this is true. If a regular dividend payout does permanently lower the value of a company by the exact dollar amount of each dividend, one has to ask how come other large payables & large receivables in a corporate treasury don't get the same treatment?
> 
> eg how come the market is not evaluating publicly traded companies strictly on their cash flow?
> 
> ...


I understand what you are saying and I agree. But my point (which you quoted) was different and simpler than that.

In an ideal world, a business that is worth $10 always trades at $10.

In the real world, in calm markets, it usually trades in a range around $10. Say, $9 to $11. This happens because:
(a) markets are reasonably efficient
but
(b) stock valuation is not an exact science. There is a range of fair values.

So far so good.

The problem is, the markets are not always calm. A business that is worth $10 can easily trade as low as $5 in a market panic. As a retiree, that's a bad place to be in if you MUST sell shares to generate cash flows.

In an ideal world, there is no difference between receiving $1 dividend and selling $1 worth of shares. In the real world, there is a huge difference.


----------



## cainvest (May 1, 2013)

GoldStone said:


> The problem is, the markets are not always calm. A business that is worth $10 can easily trade as low as $5 in a market panic. As a retiree, that's a bad place to be in if you MUST sell shares to generate cash flows.
> 
> In an ideal world, there is no difference between receiving $1 dividend and selling $1 worth of shares. In the real world, there is a huge difference.


Even assuming the stock price fluctuates both positive and negative by the same amount from the fair value one would have to sell shares evenly between the two times to come out even ... good luck with that! Also with prolonged downwards trends (e.g. full year of stock/sector out of favor) dividends seem to provide a level of protection from that.


----------



## Jimmy (May 19, 2017)

AltaRed said:


> Stocks can trade at premiums to intrinsic value, or enterprise value, or whatever you want to make value judgment values on. Re-investment of dividends into premium priced shares is not a good re-investment. A reason I never use dividend re-investment. I will make the decision (rightly or wrongly) of when I think a stock is fairly priced. Generally, I just accumulate all my dividends as cash and make an overall investment decision, perhaps on a different stock entirely.
> 
> What matters is Total Return = share price appreciation + dividend yield, and in the long haul, Total Return will exceed dividend yield if a company is getting ROE/ROCE in excess of its cost of capital and the market acknowledges the increased enterprise value.
> 
> A retiree should always consider Total Return of their individual investments even if they disproportionately depend on the dividend income stream for their cash flow. Yield on its own is useless if it is decreasing enterprise value. This is why there are general market rules of thumb that yields (over long periods) exceeding 5-6% are red flags. Many companies have a hard time in the long run beating ROE/ROCE in the mid-single digits, so they would/should cut their dividend to bring yield back into line sufficiently to support future share price growth. We've seen many, especially commodity examples, of this in the past 4 years. No corporate CFO wants (or should want) to see their stock yield get past mid-single digits for any significant length of time (general market corrections aside).


I was just saying that generally. I do both. I reinvest div DRIPs because it is cheaper vs paying a lot of tx costs for small holdings. And if you are getting the stock after a div of say 3-4% , so at a 3-4% discount year in and out that is still a good deal. 

I do what you do in my TFSA though as I am adding to that usually monthly . Will wait if everything is overvalued for the monthly contribution, then add in all the div cash too


----------



## james4beach (Nov 15, 2012)

A real stock that trades has all kinds of market effects operating on it. I'm just asking about the simplified case I opened the thread with -- surely we can figure out what price that stock will become?

This isn't a question about free cash flow and operating earnings, talk about complications. Total return is a mechanical calculation that is routinely done. I'm trying to see if we all understand how total return is calculated. Morningstar doesn't go and look into free cashflow.

This isn't a theoretical question. We can find an actual stock, look at its daily pricing data and calculate the total return. But it will be much simpler if we can figure out how to do it for hypothetical stock XYZ in my opening post.

GoldStone says my example stock closes at $10.00 whereas I think it closes at $9.90


----------



## james4beach (Nov 15, 2012)

GoldStone said:


> I don't care what G&M's definition of total return is. *My own* total return for the year is:
> 
> (dividends + capital gains) / starting price


I think your calculation for total return is incorrect. It isn't just G&M's definition, it's found in many places.


----------



## AltaRed (Jun 8, 2009)

james4beach said:


> I think your calculation for total return is incorrect. It isn't just G&M's definition, it's found in many places.


Actually for the year a stock is purchased, GoldStone is correct. But that number is only of interest to a trader, not an investor, i.e. multi-year holder of an asset.


----------



## james4beach (Nov 15, 2012)

AltaRed said:


> Actually for the year a stock is purchased, GoldStone is correct. But that number is only of interest to a trader, not an investor, i.e. multi-year holder of an asset.


So in the span of a single year, you don't think it matters what the price of reinvestment is? Again let's keep it simple -- the example I gave, for a single year. Would this end at $10.00 or $9.90 ?


----------



## AltaRed (Jun 8, 2009)

james4beach said:


> So in the span of a single year, you don't think it matters what the price of reinvestment is? Again let's keep it simple -- the example I gave, for a single year. Would this end at $10.00 or $9.90 ?


The price of re-investment could have been bought at a premium or discount to enterprise value and then the exercise is academic.


----------



## OnlyMyOpinion (Sep 1, 2013)

http://financeformulas.net/Total-Stock-Return.html
For a period:
((end price - start price) + dividends)/start price

(($10-$10) + $1)/$10= 10%

So $10 is the answer. Not $9.90:
(($9.90-$10) + $1)/$10 as this equals 9%


----------



## humble_pie (Jun 7, 2009)

james4beach said:


> Company XYZ starts the year at $10 a share. First, its book value remains constant and share price remains $10. Then it pays out a single dividend in June of $1 a share and the price drops to $9. In July through year end, the book value finally rises due to profitable operations. We are told that for the whole year, its *total return is 10%*.
> 
> Question: What is the share price at the end of the year?



$10.00


----------



## OptsyEagle (Nov 29, 2009)

james4beach said:


> Company XYZ starts the year at $10 a share. First, its book value remains constant and share price remains $10. Then it pays out a single dividend in June of $1 a share and the price drops to $9. In July through year end, the book value finally rises due to profitable operations. We are told that for the whole year, its *total return is 10%*.
> 
> Question: What is the share price at the end of the year?


Whatever someone else is willing to pay for it. 

Total return is simply adding up all the money you received from an investment divided by the money you invested. If you are reinvesting along the way, then of course reinvestment price makes a difference as did the initial price you paid.

I don't think anyone is disputing that total return is the goal. The only dispute I will make is that a $1 dividend makes no difference to total return because it somehow gets subtracted from the value of the remaining investment, once it is paid. Sometimes it does and many times it does not. A $1 dividend from two different investments will have two different reductions of value that are retained in the investments that paid it. Some will be reduced by $1 and others will be reduced by practically nothing, with most stock investments falling somewhere in between, depending on the company and how much it needed that $1.


----------



## james4beach (Nov 15, 2012)

So people here are saying the shares end at $10.

Then why am I able to turn $1000 of equity into $1111, when the total return is 10% ?

Can I please do the same magic trick with the stock market as a whole? That is, the total return of the stock market in a year is 10%, but you are all telling me I could get 11%. In fact, with another pattern of price movements, it seems you are telling me that I could even get 15% or 20% growth of my equity investment... even though the total return is 10%.

Don't you see the problem with this? It's inconsistent.


----------



## humble_pie (Jun 7, 2009)

james4beach said:


> Don't you see the problem with this? It's inconsistent.



market, thy name is Inconsistent

PS perhaps the problem has to do with the way you keep injecting book value into the calculation, when classic return has only to do with start price beginning of year, end price end of year, dividend(s) paid out during the year, no?


----------



## AltaRed (Jun 8, 2009)

humble_pie said:


> PS perhaps the problem has to do with the way you keep injecting book value into the calculation, when classic return has only to do with start price beginning of year, end price end of year, dividend(s) paid out during the year, no?


+1 Book value is not necessarily enterprise value. Rarely is a stock ever market priced at book.


----------



## peterk (May 16, 2010)

Hmm.

Why would a dividend reinvestment operation be the standard way to calculate the Total Return on "the" investment? If I make "the" investment _it_ happens on a certain date, dividends are paid, and it's worth some price in the future. The dividend is paid, in cash, and stays cash unless something is done about it. Any other operation or finiking about of accounting or reinvesting is a completely _different investment _ than "the" investment made at the beginning.

Edit: But I see what you mean... What is the proper accounting standard? Isn't this already settled officially with the big money guys?


----------



## GoldStone (Mar 6, 2011)

James, 

Total return formula from G&M and other sources is the formula for Total compounded return. Compounding implies reinvestment. This formula is typically used for comparing two investments over multi-year periods where two investments have different yields. To compare apples to apples, you must reinvest.

For one year periods, we typically use simple return formula:

(dividends + capital gains or losses) / starting price

You were able to turn $1000 into $1111 because:

1. The dividend yield in your example is detached from reality (10%). 3-5% is far more typical, paid out in 4 quarterly instalments. The impact of each payment on the company value is negligible. 

2. You assumed that you would able to reinvest the dividend immediately on the ex-dividend date at a full theoretical discount ($9). This is not possible in the real world. There is a several weeks delay between the ex-date and the payment date. By the time you receive the payment, the stock trades at a different price. The small blip caused by the dividend payment is long gone.

3. Finally, you compounded the return within the year. The effect of intra-year compounding is usually very small. It's not small in your example because of #1 and #2 above.

As reminder, the entire debate started in another thread. You claimed that every dividend payment permanently erodes shareholder equity. I gave you several theoretical explanations why this is not the case. OptsyEagle gave you a similar explanation in this thread.

I also gave you an empirical example that clearly debunks your claim:

BCE opened 2006 at *$27.87*.
Since 2006, BCE paid *$24.14* in dividends.
BCE closed today at *$55.80*.

According to your theory, BCE should be trading around $3.73.

This example is a startling violation of your claim. Take a pause and think how this "magic" is possible. I put magic in quotes because it's not rocket science. It's Business 101.


----------



## like_to_retire (Oct 9, 2016)

peterk said:


> ........Why would a dividend reinvestment operation be the standard way to calculate the Total Return on "the" investment? If I make "the" investment _it_ happens on a certain date, dividends are paid, and it's worth some price in the future. The dividend is paid, in cash, and stays cash unless something is done about it. Any other operation or finiking about of accounting or reinvesting is a completely _different investment _ than "the" investment made at the beginning.
> 
> Edit: But I see what you mean... What is the proper accounting standard? Isn't this already settled officially with the big money guys?


I use both SPIV and TRIV values in my spreadsheets to compare my portfolio against the index. 
My portfolio uses simple capital appreciation plus dividends for Total Return, but the TMX Total Return TRIV value uses re-invested dividends on the ex date. 

******************************************************************
TMX definition of Total Return TRIV:

Total Return Index Value (TRIV)
This is a measure of the index with dividends reinvested on their ex-dividend day.
Similar to the stock price index value (SPIV), except that the TRIV is based on the aggregate, float quoted market value of the index constituents (SPIV) plus their paid dividends/distributions. 
TRIV is calculated only at the end of the trading session for all S&P/TSX indices. 
******************************************************************

ltr


----------



## GoldStone (Mar 6, 2011)

The debate started in another thread. We were talking about retirement spending. More specifically, we were comparing two scenarios:

A. Spend dividends
B. Sell shares and spend the proceeds

There is no reinvestment in this context. The cash flows are spent in both cases.

So how we ended up discussing compounding?

James introduced reinvestments in the dividend case. Next, he compared total compounded return of the dividend case to the total simple return of the capital gains case. They ended up being NOT equal, because of the artificially high intra-year compounding in the dividend example. To make the two returns equal, he reduced the final price of the dividend payer to $9.90. He flogged this result as proof that dividends reduce shareholder equity.

He started with a faulty premise: dividends permanently erode shareholder equity. He tortured the numbers to "prove" it. The entire exercise is smoke and mirrors.

Please don't perpetuate the confusion by discussing SPIVs, TRIVs etc.


----------



## OptsyEagle (Nov 29, 2009)

GoldStone said:


> The debate started in another thread. We were talking about retirement spending. More specifically, we were comparing two scenarios:
> 
> A. Spend dividends
> B. Sell shares and spend the proceeds
> ...


That is what I thought the discussion was about as well.

I guess I better bow out because I certainly don't feel like going back and re-reading the last 4 pages of posts to see where I went off the rails.


----------



## AltaRed (Jun 8, 2009)

In fairness, the discussion did evolve to that of reported total returns, e.g. CAGR, in the G&M, TMX, etc. so... re-investment of dividends is a fundamental component of that. But I agree that was not the original discussion and personally I don't care about it because I look at it from a cash flow spending perspective as a retiree. Who cares if a particular stock's reported CAGR is, for example, 8%, but for me it is slightly less than 8% because I spend dividends or crystallize cap gains. I just want to know my investment's return is above middle single digit, and exceeds dividend yield to continue to grow shareholder value.


----------



## GoldStone (Mar 6, 2011)

James, I will make one more attempt to explain why dividends don't reduce company value. Maybe a simple analogy will help.

===

Jane and John have the same net worth at the start of the year: $100K.
Both earn $50K/year after tax.
Both spend $40K/year. 
Both are left with $10K on Dec 31.

John saves $10K. His net worth grows to $110K.

Jane gifts $10K to her family. Her net worth remains at $100K. I really hope you will agree with that!! If not, please delete my CMF account. 

=== 

If you are not sure how this is relevant:

"Jane" is company A. It pays out its free cash flow as dividends.
"John" is company B. It retains 100% of FCF.


----------



## james4beach (Nov 15, 2012)

I see we're not going to agree that the share price drops on dividend payment (even though I showed real world data on BCE price dropping on the ex-dividend date). This isn't theoretical, here is the actual historical price: http://canadianmoneyforum.com/showt...n-Affect-You?p=1864865&viewfull=1#post1864865

But let me try leaving that aside, since we clearly will not agree on this. I am trying to understand your perspective on total returns for dividend stocks.

If we have a $10 stock that pays quarterly dividends of 0.125 (total 0.50 for the year) and ends the year at $10, I think you're telling me that the total return is 5.0%. What I'm still having trouble understanding is why this stock (said to be 5.0% total return) is able to generate higher returns on my equity investment.

Say the $10 stock drops to $5, and stays down at $5 while it pays those quarterly dividends. I am not talking about dividend payment/ex drop here, I just mean that for whatever reason (2008) the stock falls 50%. I choose to reinvest dividends, so I can make $1000 initial equity grow to $1104. That means my equity investment grows by 10.4% for the year.

So am I understanding correctly that I can grow my equity investment by 10.4% on this stock, and we call this a 5.0% total return? I'm willing to accept that this is the terminology used, but I still have trouble with this.


----------



## james4beach (Nov 15, 2012)

AltaRed said:


> Who cares if a particular stock's reported CAGR is, for example, 8%, but for me it is slightly less than 8% because


Here's where I think the relevance is. We make a lot of assumptions in our planning based on estimates for future returns. For example we look at stocks as a category and say that we think an all-stock portfolio has perhaps 7% CAGR.

But whether total returns include reinvestment of all dividends (as sources I've found say) or don't (as GoldStone and others say) has an impact on portfolio fluctuations, and therefore things like maximum drawdown and sequence of returns. Whether or not dividends are reinvested in what we call 7% CAGR is important for portfolio analysis, I think.


----------



## canew90 (Jul 13, 2016)

John Bogle says Total Return is made up of:
Dividend Yield + Earnings Growth + Change in p/e (speculative growth)

Connolly Report says future return is equal to:
The current yield + dividend growth + or - any change in valuation

As we don't worry about selling to fund our retirement expenses, we ignore Change In Valuation. It's our Income and the Growth of our Income that's important, not the market value of our holdings.


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> I see we're not going to agree that the share price drops on dividend payment


Shareholder equity (accounting metric) does drop. The drop is not permanent, if the company continues to retain earnings. Share price may or may not drop. Sometimes it drops, sometimes it doesn't. Even when it drops, the impact is usually indiscernible after a few days of trading.



james4beach said:


> But let me try leaving that aside, since we clearly will not agree on this. I am trying to understand your perspective on total returns for dividend stocks.
> 
> If we have a $10 stock that pays quarterly dividends of 0.125 (total 0.50 for the year) and ends the year at $10, I think you're telling me that the total return is 5.0%. What I'm still having trouble understanding is why this stock (said to be 5.0% total return) is able to generate higher returns on my equity investment.
> 
> ...


If a $10 stock drops to $5 and stays there, 0.50 dividend will be cut. 10% dividend is not sustainable. Exceptions are rare. One is BMO after the GFC, if I remember correctly. I think it traded at 9%(?) yield for quite a while. Eventually it rebounded. That was a rare exception were fat dividend was not cut.


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> Here's where I think the relevance is. We make a lot of assumptions in our planning based on estimates for future returns. For example we look at stocks as a category and say that we think an all-stock portfolio has perhaps 7% CAGR.
> 
> But whether total returns include reinvestment of all dividends (as sources I've found say) or don't (as GoldStone and others say) has an impact on portfolio fluctuations, and therefore things like maximum drawdown and sequence of returns. Whether or not dividends are reinvested in what we call 7% CAGR is important for portfolio analysis, I think.


*You are taking my words out of context and twisting them.* Okay?

I told you that you should have not used intra-year compounded return in your example. That's because:

- your assumed yield was too high
- your assumed price drop was therefore too high
- the opportunity to reinvest 10% dividend at 10% discount does not exist in the real world

Add all of the above, and the impact of the intra-year compounding ends up too high. That's exactly what happened in your example.

I then told you that G&M et al definition of total return does not apply to your example. Their definition is correct in general, but it was irrelevant in your example.

I didn't say *anything* about long-term portfolio planning, what kind of returns to use, etc. It's a whole different subject.

*Again, please do not twist my words.*


----------



## AltaRed (Jun 8, 2009)

canew90 said:


> John Bogle says Total Return is made up of:
> Dividend Yield + Earnings Growth + Change in p/e (speculative growth)
> 
> Connolly Report says future return is equal to:
> The current yield + dividend growth + or - any change in valuation


Both are correct because it results in share price growth.


----------



## james4beach (Nov 15, 2012)

GoldStone said:


> If a $10 stock drops to $5 and stays there, 0.50 dividend will be cut. 10% dividend is not sustainable. Exceptions are rare. One is BMO after the GFC, if I remember correctly. I think it traded at 9%(?) yield for quite a while. Eventually it rebounded. That was a rare exception were fat dividend was not cut.


Well that's beside the point though. Use a smaller dividend with my example if you want, or a shallower price drop. The core of my question is, when total return is said to be TR%, am I correct in understanding that if I invest $X in equity, I am able to achieve (through dividend reinvestment) greater than TR% growth of my equity in a single year?

You seem to be getting caught up on the magnitude of the numbers. Reduce the magnitude as you want, and you see the same effects.

e.g. stock starts at $10, then falls to $6. Pays quarterly dividends of 0.075 each while down at $6. The amounts are sustainable. Later bounces back to $10. You are calling this a 3.0% total return -- but by reinvesting, I can make my original $1000 grow more than 3.0%.

What I'm asking is if I have understood your terminology correctly, that a stock with 3.0% "total return" can actually grow my initial equity investment by more than 3.0% in this way.


----------



## Jimmy (May 19, 2017)

james4beach said:


> Well that's beside the point though. Use a smaller dividend with my example if you want, or a shallower price drop. The core of my question is, when total return is said to be TR%, am I correct in understanding that if I invest $X in equity, I am able to achieve (through dividend reinvestment) greater than TR% growth of my equity in a single year?
> 
> You seem to be getting caught up on the magnitude of the numbers. Reduce the magnitude as you want, and you see the same effects.
> 
> ...


Yes that is right. You can make more than 3% if you reinvest the dividends paid at mid year in your example because the reinvestment also earns a return. The same effect as compounded interest semi annually pays more vs annually. 

I think that is where this is getting confused because the other ex assume div paid just at YE.


----------



## james4beach (Nov 15, 2012)

Jimmy said:


> Yes you can make more than 3% if you reinvest the dividends in your example because you looked at a period of 2 years. If you just look at a period of 1 year where div are paid at YE the return is the same. Ie stock starts at $10 rises to $11 div paid $1 return 10%. Or if div not paid return is still 10%.


Jimmy to clarify, I meant this is one year in my example. The stock falls in price before the 4 quarterly payments, and I can reinvest each of those at a depressed price. By the end of the first year, I have grown my initial investment by more than the "total return" figure.

Again I am just trying to make sure I have fully understood what people here are arguing.


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> Well that's beside the point though. Use a smaller dividend with my example if you want, or a shallower price drop. The core of my question is, when total return is said to be TR%, am I correct in understanding that if I invest $X in equity, I am able to achieve (through dividend reinvestment) greater than TR% growth of my equity in a single year?
> 
> You seem to be getting caught up on the magnitude of the numbers. Reduce the magnitude as you want, and you see the same effects.
> 
> ...


*Again, you are taking my words out of context and twisting them.*

Here's the original post #5 in its entirety:



GoldStone said:


> Company A always trades at book value. Book value at the start of the year is $10.
> 
> Each year, the company generates $1 in free cash flow (FCF) and pays out the entire FCF as $1 dividend.
> 
> ...


See the part in red? I clearly spelled out the definition. I talked about withdrawal scenario where dividends are consumed, not reinvested. Okay?

I am done with this thread and the other thread as well. Bye.


----------



## Jimmy (May 19, 2017)

james4beach said:


> Jimmy to clarify, I meant this is one year in my example. The stock falls in price before the 4 quarterly payments, and I can reinvest each of those at a depressed price. By the end of the first year, I have grown my initial investment by more than the "total return" figure.
> 
> Again I am just trying to make sure I have fully understood what people here are arguing.


Yes. Thought your ex was over 2 yrs but went back and reviewed and was reediting my post when you replied. That is right. You can make more than 3% if you reinvest the dividends paid at mid year in your example because the reinvestment also earns a return. The same effect as compounded interest semi annually pays more vs annually. 

I think that is where this is getting confused because the other examples assume div paid just at YE.


----------



## hboy54 (Sep 16, 2016)

I am kind of lost here. There seems to be 3or 4 ideas swirling around.

I agree with James that if in his most recent example of 4 quarterly 0.125 dividends, additional shares are purchased at $5, then the SP recovers to $10 at year end, there will be 11.04 shares worth $11.04 , and a 10.4% return (assuming the math was done right, I did not check). This is a calculation as per CAGR and presumably what is reported typically.

However, notwithstanding the above, if someone wants to put the cash dividend in their pocket and on January 1 finds 50 cents in the pocket and wants to call this a 5% return investment, well I won't spend any time arguing with them.

Hboy54


----------



## OnlyMyOpinion (Sep 1, 2013)

james4beach said:


> ... e.g. stock starts at $10, then falls to $6. Pays quarterly dividends of 0.075 each while down at $6. The amounts are sustainable. Later bounces back to $10. You are calling this a 3.0% total return -- but by reinvesting, I can make my original $1000 grow more than 3.0%. What I'm asking is if I have understood your terminology correctly, that a stock with 3.0% "total return" can actually grow my initial equity investment by more than 3.0% in this way.


If you bought 100sh at $10/sh for $1000 and were paid $30 in dividends, and shares ended the year at $10 (you had 100sh worth $1000 and $30 cash= $1030) - you made a 3% total return comprised of $30 dividends.
If you bought 100sh at $10/sh for $1000 and were paid $30 in dividends and bought 5 shares with that $30 when the shares had dipped to $6 and shares ended the year at $10 (you had 105sh worth $1050) - you made a 5% total return comprised of $30 of dividends and $20 of CG's (from the 5sh you bought at $6).
But I think we are starting to digress. Am I missing something? :fatigue:


----------



## humble_pie (Jun 7, 2009)

james4beach said:


> stock starts at $10, then falls to $6. Pays quarterly dividends of 0.075 each while down at $6. The amounts are sustainable. Later bounces back to $10. You are calling this a 3.0% total return -- but by reinvesting, I can make my original $1000 grow more than 3.0%.



me i get an annual return of 4.85% for this example. The extra above 3% is because the notional capital gain portion of the total return was due to the lucky happenstance of having been able to buy additional shares with the dividend dollars at deeply discounted $6. Following which the stock in this unlikely example then miraculously soared back to $10.

however the equity - the original $10 per share - didn't get stretched. It was augmented by adding the $.30 dividend per share to the original cost base.

the way i see it, it doesn't matter whether dividend cash was used to purchase the additional shares or whether the funds came from salary or from piggybank or from raiding teen-age daughter's babysitting earnings. In every case, the original equity is being topped up with new money.


.


----------



## cainvest (May 1, 2013)

james4beach said:


> If we have a $10 stock that pays quarterly dividends of 0.125 (total 0.50 for the year) and ends the year at $10, I think you're telling me that the total return is 5.0%. What I'm still having trouble understanding is why this stock (said to be 5.0% total return) is able to generate higher returns on my equity investment.


I don't understand your confusion with the 5% return above, it appear obvious even to me.



james4beach said:


> Say the $10 stock drops to $5, and stays down at $5 while it pays those quarterly dividends. I am not talking about dividend payment/ex drop here, I just mean that for whatever reason (2008) the stock falls 50%. I choose to reinvest dividends, so I can make $1000 initial equity grow to $1104. That means my equity investment grows by 10.4% for the year.
> 
> So am I understanding correctly that I can grow my equity investment by 10.4% on this stock, and we call this a 5.0% total return? I'm willing to accept that this is the terminology used, but I still have trouble with this.


So the above has added confusion because you invested more than once into the company, no longer "a simple example".

Say I invest in a company at the start of the year that has no dividends at $10 and at years end it is $11 what is my total return?


----------



## james4beach (Nov 15, 2012)

cainvest said:


> So the above has added confusion because you invested more than once into the company, no longer "a simple example".


I think I see what you mean now. I now agree that reinvesting dividends is not applicable to total return, it's a different problem.

So I'm turning around on this matter. One should not assume that dividends are reinvested, this becomes (as you say) investing more than once in the company.

I also checked Morningstar's annual returns stated for some stocks, and confirmed that they are not reinvesting each dividend. It seems that those sources I found earlier gave me the wrong idea about how to reason total return for dividend stocks.



> Say I invest in a company at the start of the year that has no dividends at $10 and at years end it is $11 what is my total return?


That's +10% return for the year


----------



## cainvest (May 1, 2013)

james4beach said:


> I think I see what you mean now. I now agree that reinvesting dividends is not applicable to total return, it's a different problem.
> 
> So I'm turning around on this matter. One should not assume that dividends are reinvested, this becomes (as you say) investing more than once in the company.
> 
> I also checked Morningstar's annual returns stated for some stocks, and confirmed that they are not reinvesting each dividend. It seems that those sources I found earlier gave me the wrong idea about how to reason total return for dividend stocks.


Yup, while reinvesting dividends is likely a good idea for accumulation, especially with DRIP, it messes up the simple total return calculation for a single trade. 

The analogy I was going to draw with the $10 no dividend company was to swing trade a portion of the stock between $12 (sell) and $8 (buy) four times within the same year, like reinvesting a common dividend payout. No "new money" went into the investment but my return would be higher than a simple total return of holding it for one year.


----------



## canew90 (Jul 13, 2016)

AltaRed said:


> Both are correct because it results in share price growth.


Should probably add the word "evenutally" as market price is not as predictable.


----------



## james4beach (Nov 15, 2012)

Thanks to all for helping me understand this more clearly.

Some of my confusion may also have come from the difference with ETFs and mutual funds. For mutual funds, the norm is to reinvest all distributions when calculating CAGR. I think this is actually in mutual fund regulations, so something like XIU must assume reinvestment of distributions.

Interestingly though, it's not calculated the same way for individual stocks. Consider XIU which pays out exactly the dividend stream as distributions, practically in 1:1 fashion (there is no other ROC etc). If the quoted CAGR on XIU assumes reinvestment of all distributions, then it seems to me that a performance calculation on a basket of the TSX 60 individual stocks will give a different answer than the performance calculation on XIU.

Do you see what I mean? There is a difference in the total return calculation between individual stocks and ETFs.

This difference gives an advantage to ETFs and mutual funds *during rising markets*, when stating performance. For example you might say to someone that the 60 stocks of the TSX 60, if held in a portfolio, returned 7.0% in the last year. However XIU returned 7.2% (the advantage being due to reinvestment of distributions). This is how Morningstar and other sources will report the performance.

Perhaps this is one of the slight marketing gimmicks the mutual fund industry uses. Over the years they will publish higher performance readings than individually held stocks can achieve, just based on difference in total return calculation.

There's another interesting implication of this. As mentioned above, this means ETF performance gets an advantage during rising markets. However during falling markets, individual stocks (*especially dividend stocks*) get an advantage, because unlike the the mutual funds, they are not reinvesting at lower and lower prices. Maybe this fuels the perception that dividend stocks fare better in bear markets: on paper they DO! But it's not an apples-to-apples comparison but rather a subtle difference in calculation method.


 In a rising market, ETFs show higher published performance than the exact same underlying individual stocks. This is just a _perceived benefit_ due to the assumption of reinvesting divs.
 In a falling market, individual stocks (esp those with dividends) show higher published performance than the exact same index ETF. But this is just a _perceived benefit_ due to not reinvesting divs.

Running some calculations, I think this difference can be significant. I'll have to keep this in mind any time I'm comparing a portfolio of individual stocks to an index ETF. It's a pity that the measurement standards are different.


----------



## kelaa (Apr 5, 2016)

I'm not quite sure why you think this is a big issue, James. The companies themselves report returns which assume reinvestment of all dividends. You can for instance go to the Fortis website, and they will calculate your return between any two dates for you assuming reinvestment. Correction: it seems this feature is no longer available or I remembered wrong.

If someone asked you how much you have made on those 100 shares of ACME you bought two years ago, I think it's fine to say 100 shares x ( different in share price + dividends). Let's say the result is 20% change, then the CAGR is 9.5%. If you want to recalculate based on when you reinvested the shares or rolled the dividends into a GIC or loaned it to your uncle Bob, you can, but does that really add to the discussion?


----------



## Nerd Investor (Nov 3, 2015)

It's kind of like a time weighted vs money weighted (or personal) rate of return issue. 

You need a simplified, uniform way to measure to measure the same time-weighted rate of return for all stocks. Anyone who holds a stock for an entire year should have the same time weighted rate of return. 
If and when dividends are actually re-invested is what would dictate your personal rate of return (which could be better or worse than the time weighted rate of return). 

I started out as DRIPer but now take all dividends as cash as I want the ability to determine for myself how best to deploy that cash.


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... Some of my confusion may also have come from the difference with ETFs and mutual funds. For mutual funds, the norm is to reinvest all distributions when calculating CAGR. I think this is actually in mutual fund regulations, so something like XIU must assume reinvestment of distributions.
> 
> Interestingly though, it's not calculated the same way for individual stocks ...


Typically ... no. 

But as was pointed out in the past in dividend paying versus non-dividend paying stock threads, there are other sources. Specifically, Yahoo Finance Historical date provides an "Adjusted Close" value that takes splits and dividends into account. It is not one stop shopping as for ETFs, the thread discussion revealed that the phantom distributions were missing, requiring two sources to get an apples to apples comparison.




james4beach said:


> ... Consider XIU which pays out exactly the dividend stream as distributions, practically in 1:1 fashion (there is no other ROC etc) ...


The RoC component is small so the "practically" is fine IMO.
Not sure why you insist on repeating the claim of "no other" when I recall pointing out in past threads that there is an RoC component (for 2016 to 1999 or 17 years - RoC exists in 16 years).

*Edit:*
Want to take a bet on whether the 2017 breakdown lists an RoC component?


Not sure if the RoC was intended as an example of "other" or only RoC was intended to be the only non-eligible dividend income to be considered but depending on year, there is also "other", "capital gains", "foreign income" as well as "foreign income tax paid".


It may be considered picky but it does seem misleading to talk about "no RoC" when almost every year of existence RoC has been paid (2016 being one of the highest RoC amounts on record for XIU).




james4beach said:


> ... Do you see what I mean?
> 
> There is a difference in the total return calculation between individual stocks and ETFs ...Running some calculations, I think this difference can be significant. I'll have to keep this in mind any time I'm comparing a portfolio of individual stocks to an index ETF. It's a pity that the measurement standards are different.


Yes ... but is this any different than lots of areas of investing which should push to investor to do their due diligence?


Cheers


----------



## james4beach (Nov 15, 2012)

Hi Eclectic12, thanks for this correction about XIU. For some reason I was under the impression that it had nil ROC, but you're right, there always seems to be some ROC present.

You're right, these are just the small differences in calculations and assumptions that show up everywhere in investing. With ETFs there are the phantom reinvested distributions. With individual stocks we have the question of what is done with dividends. Different blogs or articles may use different variations ... I suppose I will have to live with the lack of precision and lack of certainty.


----------



## Eclectic12 (Oct 20, 2010)

No worries ... as I say, you main point is correct - for the last several years, the bulk of the income is eligible dividends. I wanted to avoid rookies from being mislead into not doing the right things because 100% eligible dividends means nothing else to worry about.

Historical Sidenote: Interestingly, the first seven years or so of XIU have zero eligible dividends.


Getting back to the differences in performance with ETFs, stocks as well as rising/falling markets ... I think there is another layer as well. 

I suspect re-investing dividends onself is going to be different than DRIPs. The first difference is that depending on how long it takes to build up the $$, identify a suitable purchase then have the time to do it - there likely at best case is a period of low growth in say a HISA MF and worst case, nothing at all. The DRIP seems to be re-invested the same day as the payment (or at least is for my broker). The DRIP may also benefit from a discount price, driving down the cost to have a higher capital gain.


Complicated stuff as you have noted.


Cheers


----------



## OnlyMyOpinion (Sep 1, 2013)

Eclectic12 said:


> Getting back to the differences in performance with ETFs, stocks as well as rising/falling markets ... I think there is another layer as well.
> I suspect re-investing dividends onself is going to be different than DRIPs. The first difference is that depending on how long it takes to build up the $$, identify a suitable purchase then have the time to do it - there likely at best case is a period of low growth in say a HISA MF and worst case, nothing at all. The DRIP seems to be re-invested the same day as the payment (or at least is for my broker). The DRIP may also benefit from a discount price, driving down the cost to have a higher capital gain.


IMO that is the strongest argument for DRIPs - the dividend is reinvested on timely basis, earning its own dividends the very next quarter, with no action required on my part (I tend to get busy and/or procrastinate), and no commission. If I bought the stock initially with a dividend tilt, as a long term hold then I don't mind buying additional shares. IME, if all activity has occurred in the same acc, the BV being carried in the acc equals the ACB so accounting is not problematic in a non-registered acc. 
The dollar cost averaging is real but very small in the scheme of things. As far as I know, synthetic DRIP's (at TDDI) don't benefit from the purchase discount that some companies offer. You'd have to have to be enrolled in the company dividend reinvestment plan with their agent to get that.


----------



## like_to_retire (Oct 9, 2016)

OnlyMyOpinion said:


> If I bought the stock initially with a dividend tilt, as a long term hold then I don't mind buying additional shares. IME, if all activity has occurred in the same acc, the BV being carried in the acc equals the ACB so accounting is not problematic in a non-registered acc.


In a non-registered account, for tax drag reasons, I've always felt during accumulation that a tilt toward (growth or low dividend stocks) was a better idea. The higher the dividend, the more tax you pay each year during accumulation. With growth stocks, you get to internally re-invest your gains with taxes deferred. This has to be an advantage over time.

Once retired and an income steam is required, then I feel dividend stocks are the way to go to avoid sequence of return risk.

ltr


----------



## agent99 (Sep 11, 2013)

like_to_retire said:


> In a non-registered account, for tax drag reasons, I've always felt during accumulation that a tilt toward (growth or low dividend stocks) was a better idea. The higher the dividend, the more tax you pay each year during accumulation. With growth stocks, you get to internally re-invest your gains with taxes deferred. This has to be an advantage over time.


That is no doubt true. But we shouldn't let taxation determine our investment strategy. I am sure there are many dividend paying stocks that beat the pants of growth stocks despite the taxes that had to be paid on dividends.


----------



## james4beach (Nov 15, 2012)

like_to_retire said:


> Once retired and an income steam is required, then I feel dividend stocks are the way to go to avoid sequence of return risk.


To make sure I understand what you're saying, when you say you can avoid sequence of return risk here, I think you're referring to just taking the dividends and NOT selling any shares -- is that right?

I want to check because the share prices of dividend stocks fell just as badly as the broad market. It's true that Canadian dividends remained stable through the last bear market so an investor purely living off dividends would not have been negatively impacted.

Beware, though, that dividends don't always remain stable through bear markets. During some past rough markets, dividends declined between 20% and 40%.


----------



## cainvest (May 1, 2013)

james4beach said:


> Beware, though, that dividends don't always remain stable through bear markets. During some past rough markets, dividends declined between 20% and 40%.


Is that for CDN or US markets?


----------



## AltaRed (Jun 8, 2009)

Both I would surmise. US financials specifically in 2008/2009 and Cdn commodity stocks specifically in 2015/2016, as the more recent sector specific examples. Certain not the case for the broad market overall.


----------



## humble_pie (Jun 7, 2009)

james4beach said:


> Beware, though, that dividends don't always remain stable through bear markets. During some past rough markets, dividends declined between 20% and 40%.



can't recall any of those periods. Not talking about on-again-off-again dividends intermittently paid out by cyclical or 3rd rank corporations & below. Talking only about the blue chippers. Doubt that they dividends declined 20-40% in dollar amounts durng any cycle over the past 80 years.

.


----------



## cainvest (May 1, 2013)

humble_pie said:


> Talking only about the blue chippers. Doubt that they dividends declined 20-40% in dollar amounts durng any cycle over the past 80 years.


And those would be the "go to" companies for dividend payouts to minimize sequence of return problems.


----------



## OnlyMyOpinion (Sep 1, 2013)

like_to_retire said:


> In a non-registered account, for tax drag reasons, I've always felt during accumulation that a tilt toward (growth or low dividend stocks) was a better idea. The higher the dividend, the more tax you pay each year during accumulation. With growth stocks, you get to internally re-invest your gains with taxes deferred. This has to be an advantage over time.
> Once retired and an income steam is required, then I feel dividend stocks are the way to go to avoid sequence of return risk.
> ltr


Yes, but then you are faced with when and how to crystalize gains within your growth portfolio and when to rotate to dividend income stocks, etc., all subject to the vagrancies of the market. 
In practice, I would say we had about 5-10yrs ahead of retirement when income was at a maximum that allowed us to gradually build up our dividend portfolio to enter retirement with (RRSP's, TSFA's then non-registered accs). So yes, we were 'doubled up' on income for a few years ahead of retirement. In hindsight, I suppose we could have tried to tilt to CG's and lowered taxes, assuming the markets co-operated. 

It seems to have worked out. So far, no "damn it I wish we'd done it this way" moments. 
And hey, think how much worse shape our gov'ts would be in without all those taxes I paid them.


----------



## Eder (Feb 16, 2011)

I'm trying to find if Royal Bank ever cut its dividend in the last 100 years...any hints for data like this? Their website only goes to 2000.


----------



## cainvest (May 1, 2013)

Eder said:


> I'm trying to find if Royal Bank ever cut its dividend in the last 100 years...any hints for data like this? Their website only goes to 2000.


Maybe email them?
I can get data back to 1992 on some of the large cap stocks, including RY, but that's about it.


----------



## agent99 (Sep 11, 2013)

cainvest said:


> Maybe email them?
> I can get data back to 1992 on some of the large cap stocks, including RY, but that's about it.


I looked at some of mine and found the same thing. Maybe James can tell us where he got his 20-40% numbers 

What I did do, is look at the dividend income we have drawn since 2003. It has steadily increased. 

Regarding RY, it paid $0.135 in 2000, 0.50 in 2008-2010 and 0.91 in 2018. Never a drop, but no increases during 2008 recession period.

It would be nice to be able to back-check historical dividends and make comparisons. This site may provide some of the answers to James' original question.

http://siblisresearch.com/data/tsx-composite-return-dividend/


----------



## Jimmy (May 19, 2017)

Many of the US banks cut their dividends during the recession. JP Morgan, Wells Fargo, BoA, Citigroup etc


----------



## OnlyMyOpinion (Sep 1, 2013)

I recall Bell stopping their dividend for 2 qtrs in 2008 when the Teacher's group was machinating to buy them and go private.
I've had TA, BR, BEI, MTL cut dividends in the past. If you are diversified, esp. across sectors, it won't be the end of the world. 
I held on to TA way too long. Now if a company cuts I sell, regardless of the fact that they may still be viable.


----------



## agent99 (Sep 11, 2013)

OnlyMyOpinion said:


> I recall Bell stopping their dividend for 2 qtrs in 2008 when the Teacher's group was machinating to buy them and go private.
> I've had TA, BR, BEI, MTL cut dividends in the past. If you are diversified, esp. across sectors, it won't be the end of the world.
> I held on to TA way too long. Now if a company cuts I sell, regardless of the fact that they may still be viable.


No question some companies cut their dividends at times. And so they should. But overall, I have only ever seen a gradual increase in portfolio dividend income. Not sure why James would post those -20 to -40 numbers.


----------



## james4beach (Nov 15, 2012)

agent99 said:


> No question some companies cut their dividends at times. And so they should. But overall, I have only ever seen a gradual increase in portfolio dividend income. Not sure why James would post those -20 to -40 numbers.


I did a historical study of S&P 500 dividends and that's what I found:
http://canadianmoneyforum.com/showthread.php/128553-Historical-dividends-during-turbulent-markets

I don't know about Canada though. Maybe it's a totally different picture.



AltaRed said:


> Both I would surmise. US financials specifically in 2008/2009 and Cdn commodity stocks specifically in 2015/2016, as the more recent sector specific examples. Certain not the case for the broad market overall.


The US dividends contracted briefly during 2008-2009, across whole S&P 500. However they bounced back quickly. In earlier time periods the drop lasted much longer.

Those graphs in the other thread are dividend amounts versus inflation-adjusted constant $. Dividends seem quite solid and *have been steadily rising since the 1990s*, but in some earlier decades it's a different picture.


----------



## cainvest (May 1, 2013)

james4beach said:


> I did a historical study of S&P 500 dividends and that's what I found:
> http://canadianmoneyforum.com/showthread.php/128553-Historical-dividends-during-turbulent-markets
> 
> I don't know about Canada though. Maybe it's a totally different picture.


The picture does look much better, dividend wise, for Canada in recent history (1992 on). There are many large and stable companies outputting double what the S&P500 does in dividends.

For someone in retirement, a mix of good quality CDN divy producers and S&P500 (for total return) might be the way to go. The percentage of the two could change depending on your needs, protection or growth.


----------



## agent99 (Sep 11, 2013)

cainvest said:


> The picture does look much better, dividend wise, for Canada in recent history (1992 on). There are many large and stable companies outputting double what the S&P500 does in dividends.
> 
> For someone in retirement, a mix of good quality CDN divy producers and S&P500 (for total return) might be the way to go. The percentage of the two could change depending on your needs, protection or growth.


Not so sure the S&P500 would always improve total return. I learned hard way that even when S&P500 was doing well, currency changes wiped out the gains for Canadians. Then hedged funds became attractive, but with lower returns. This article compares TSX and S&P500 in C$ terms. As can be seen, a lot depends on market timing! http://topforeignstocks.com/2013/06/16/a-review-of-tsx-composite-vs-sp-500-returns/

We are 15 years into retirement and no longer have US exposure. I don't care too much about growth in portfolio value, so long as the stocks keep paying their dividends. And they have. Portfolio continues to grow at more than inflation rate despite no corporate pensions and withdrawals at SWR.

International stocks are something to consider. We have a smaller allocation to holdings of ADRs of truly international companies like Unilever, Shell & British Telecom in registered accounts. These pay very healthy dividends and being UK based, there is no withholding tax. I would like to add to these if I can find others (and the money to buy them!)


----------



## james4beach (Nov 15, 2012)

agent99 said:


> We are 15 years into retirement and no longer have US exposure. I don't care too much about growth in portfolio value, so long as the stocks keep paying their dividends. And they have. Portfolio continues to grow at more than inflation rate despite no corporate pensions and withdrawals at SWR.


In recent years the dividends have increased at a much faster pace than inflation. I'm curious, do you withdraw whatever dividends the portfolio pays? Or do you take out an amount close to inflation and reinvest the remaining dividends?


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> To make sure I understand what you're saying, when you say you can avoid sequence of return risk here, I think you're referring to just taking the dividends and NOT selling any shares -- is that right?


Yes, but that's often not possible, so I feel selling as few shares as possible will turn out for the better.

Some time ago I made an excel sheet with two tables to compare sequence of return risk. See the tables below and the explanation.

Table #1 shows a starting balance of $500,000 and after 15 years ends with a balance of $620,469. Note that Table #1 starts the first number of years in a down market and ends with an up market. 

Table #2 uses exactly the same percentage returns, except the returns are completely reversed, starting with an up market and ending with a down market.

If no shares are sold, then both tables end with the exact same balance after 15 years. Both sets of returns produce a cumulative return of 24.1% and an average return of 1.4%.

But see what happens if I withdraw $30,000 worth of shares every year from both situations. Table #1 runs out of money after 12 years and Table #2 is still doing fine.

To me, I feel dividends reduces this situation by not having to sell as many (or any) shares in a down market.

View attachment 18033


ltr


----------



## OnlyMyOpinion (Sep 1, 2013)

like_to_retire said:


> Yes, but that's often not possible, so I feel selling as few shares as possible will turn out for the better.
> Some time ago I made an excel sheet with two tables to compare sequence of return risk. See the tables below and the explanation.
> Table #1 shows a starting balance of $500,000 and after 15 years ends with a balance of $620,469. Note that Table #1 starts the first number of years in a down market and ends with an up market.
> Table #2 uses exactly the same percentage returns, except the returns are completely reversed, starting with an up market and ending with a down market.
> ...


That's a great comparison LTR. Thanks for sharing.

In my mind it reinforces the value of bridging those first retirement years and letting that $500k grow for as long as possible.


----------



## AltaRed (Jun 8, 2009)

That is a good academic analysis but is essentially the old SWR concept at 0% yield. I don't imagine anyone with some savvy would employ that concept specifically. They would have a combination of dividend income and capital gains that is available from the total market, and retirees should employ VPW. 

As we all know, VPW varies the output each year depending on the starting balance each year thereby significantly reducing 'sequence of returns' risk.... and thus de-emphasizing the cap gains vs dividend income debate. The point being... don't lose sight of the forest by over-attachment to dividend streams. My portfolio more closely represents total market with a dividend bias, with a portfolio yield of just under 3% overall.


----------



## cainvest (May 1, 2013)

agent99 said:


> Not so sure the S&P500 would always improve total return. I learned hard way that even when S&P500 was doing well, currency changes wiped out the gains for Canadians. Then hedged funds became attractive, but with lower returns. This article compares TSX and S&P500 in C$ terms. As can be seen, a lot depends on market timing! http://topforeignstocks.com/2013/06/16/a-review-of-tsx-composite-vs-sp-500-returns/


Exactly, depending on the time period and duration the S&P500 may or may not improve your total return. It does seem pretty clear though that having "high quality" CDN dividend payouts does reduce sequence of return risk. I just wish there was more CDN data going back pre-1992 to back test with.


----------



## cainvest (May 1, 2013)

AltaRed said:


> As we all know, VPW varies the output each year depending on the starting balance each year thereby significantly reducing 'sequence of returns' risk.... and thus de-emphasizing the cap gains vs dividend income debate. The point being... don't lose sight of the forest by over-attachment to dividend streams. My portfolio more closely represents total market with a dividend bias, with a portfolio yield of just under 3% overall.


On the flip side, doesn't having more dividend income bias (CDN anyways) reduce the variance of VPW required?


----------



## AltaRed (Jun 8, 2009)

cainvest said:


> On the flip side, doesn't having more dividend income bias (CDN anyways) reduce the variance of VPW required?


Of course, any kind of bias towards recurring income reduces the variance of VPW from year to year, but so what? Using VPW still reduces the overall need for income bias and thus potentially a more rational approach/balance to growth vs income. 

Too many individuals repetitively recite the 'live off dividends' mantra. That is perfectly fine for those with the capital base to do that (cheers to them), but that is a pretty small club within the national population. The vast majority of retirees have no hope of 'not' depleting capital as well, and thus total return PLUS use of VPW would be better than a fixed SWR with sequence of returns risk.


----------



## cainvest (May 1, 2013)

AltaRed said:


> Of course, any kind of bias towards recurring income reduces the variance of VPW from year to year, but so what? Using VPW still reduces the overall need for income bias and thus potentially a more rational approach/balance to growth vs income.
> 
> Too many individuals repetitively recite the 'live off dividends' mantra. That is perfectly fine for those with the capital base to do that (cheers to them), but that is a pretty small club within the national population. The vast majority of retirees have no hope of 'not' depleting capital as well, and thus total return PLUS use of VPW would be better than a fixed SWR with sequence of returns risk.


Totally agree, really depends on which side of the fence you're sitting on. If you need growth, having capital gains is a good idea plus you get the bonus diversification if indexed based. If you need to preserve your portfolio and it can generate enough income to live off of then a stronger dividend component is likely a very good idea.


----------



## RBull (Jan 20, 2013)

AltaRed said:


> That is a good academic analysis but is essentially the old SWR concept at 0% yield. I don't imagine anyone with some savvy would employ that concept specifically. They would have a combination of dividend income and capital gains that is available from the total market, and retirees should employ VPW.
> 
> As we all know, VPW varies the output each year depending on the starting balance each year thereby significantly reducing 'sequence of returns' risk.... and thus de-emphasizing the cap gains vs dividend income debate. The point being... don't lose sight of the forest by over-attachment to dividend streams. My portfolio more closely represents total market with a dividend bias, with a portfolio yield of just under 3% overall.


Good points I agree with. I do the same and also use VPW- dividend bias but overall total return focus around the same % as you. 



AltaRed said:


> Of course, any kind of bias towards recurring income reduces the variance of VPW from year to year, but so what? Using VPW still reduces the overall need for income bias and thus potentially a more rational approach/balance to growth vs income.
> 
> Too many individuals repetitively recite the 'live off dividends' mantra. That is perfectly fine for those with the capital base to do that (cheers to them), but that is a pretty small club within the national population. The vast majority of retirees have no hope of 'not' depleting capital as well, and thus total return PLUS use of VPW would be better than a fixed SWR with sequence of returns risk.


Totally agree. However it seems anectodotally those claiming to do so or wanting to do so simply choose a more frugal lifestyle than what they could have. 

Some of those who "could" live from dividends alone in the same financial situation don't want to, and perhaps fit into that camp myself. We have no desire or good reason to leave a large and growing pile behind particularly when there are no heirs to consider.


----------



## OnlyMyOpinion (Sep 1, 2013)

I didn't take it that LTR was recommending a fixed $30k withdrawl. I think using it makes it easier to illustrate sequence-of-returns-risk (SORR) in a very clear manner: You can be broke after 12 years versus still having nearly half your original money depending on the markets (returns) you encounter in your initial years.

I agree a VPW plan eliminates the risk of running out of money. It even starts you at nearly the same $30k/yr. But I'm not sure if it is obvious that you will be down to spending about half as much per year after 12 years if you encounter the same poor initial markets. 

Is it perhaps easier to be complacent (or unaware) of SORR if you are using VPW? Do people spend less than the 'suggested' annual VPW amount or do they assume they are bullet-proof?

I still think spending less of your portfolio in those early years is prudent. Whether you do that by limiting dividend, CG or capital withdrawls from that portfolio, or by spending tax-efficient dividends or other money from a 'bucket' outside of that portfolio will depend on individual circumstances.


----------



## AltaRed (Jun 8, 2009)

Yeah, I know LTR was just showing a theoretical example of SORR...but that would pretty much be what a % of SWR withdrawal scenario would also do.

VPW has been backtested a lot and you cannot go broke with it. But you can deplete capital in bad years that you may not want too, such that in later years, the withdrawal amounts may be a lot smaller than they otherwise would. It's designed so that you are out of capital by the age that you choose, e.g. 99 for example. 

I think prudent people, even on VPW, would intuitively reduce their withdrawal amount (below the percentage) in a bad year. It's just human nature to hunker down a bit rather than pull out the formula amount blindly. So, no, I don't think VPW promotes complacency or misrepresents the facts for most people. There will always be those who don't have the sense to adjust. We can't fix 'stupid'. 

Whether people typically draw down the exact percentage of VPW every year is probably unlikely, but is a personal thing. I don't do that because I don't need to with my current lifestyle. Then again, I might in a future year if I want that new $150k Porsche.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> In recent years the dividends have increased at a much faster pace than inflation. I'm curious, do you withdraw whatever dividends the portfolio pays? Or do you take out an amount close to inflation and reinvest the remaining dividends?


It's not that simple in retirement. We do withdraw all the dividends produced by our taxable accounts. But there are also dividends and interest produced by our RRIFS and TFSAs. We have to withdraw from RRIFS and some of that is re-invested in taxabe accounts or TFSAs. Info I posted was for overall portfolio.


----------



## james4beach (Nov 15, 2012)

AltaRed said:


> That is a good academic analysis but is essentially the old SWR concept at 0% yield. I don't imagine anyone with some savvy would employ that concept specifically. They would have a combination of dividend income and capital gains that is available from the total market, and retirees should employ VPW.
> 
> As we all know, VPW varies the output each year depending on the starting balance each year thereby significantly reducing 'sequence of returns' risk.... and thus de-emphasizing the cap gains vs dividend income debate. *The point being... don't lose sight of the forest by over-attachment to dividend streams*. My portfolio more closely represents total market with a dividend bias, with a portfolio yield of just under 3% overall.





AltaRed said:


> Too many individuals repetitively recite the 'live off dividends' mantra. That is perfectly fine for those with the capital base to do that (cheers to them), but that is a pretty small club within the national population. The vast majority of retirees have no hope of 'not' depleting capital as well, and thus total return PLUS use of VPW would be better than a fixed SWR with sequence of returns risk.


I agree 100% with AltaRed.


----------



## james4beach (Nov 15, 2012)

As I understand it, what makes the constant withdrawal (SWR) method most vulnerable to sequence of return is that it insists on always withdrawing the fixed amount + inflation, even from a declining portfolio.

Any flexibility for reducing withdrawals immediately helps alleviate the sequence of return risk, and helps protect capital. Dividend-based withdrawals help because dividends tend to decline in bad years or high inflation (divs in real dollars). They add the flexibility that reduces the stress on your capital under the worst conditions.

So the intrinsic flexibility of dividends helps avoid capital depletion, but this is not unique to dividends. You get the same effect with any withdrawal scheme that has flexibility in reducing withdrawals, like constant percent withdrawal, or VPW.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> As I understand it, what makes the constant withdrawal (SWR) method most vulnerable to sequence of return is that it insists on always withdrawing the fixed amount + inflation, even from a declining portfolio.


This has been discussed before, but SWR, is more a planning method to determining how much money you will need going into retirement. Once you reach retirement, you have what you have. Then you need a new plan that takes into account pension income and investment income. Then you need to adjust your living costs to match, not draw an unsustainable amount.


----------



## Pluto (Sep 12, 2013)

In case this helps, someone gave an example of BCE commencing in jan 2006. Start with 10,000 (327.58 shares). 

1. with dividends reinvested : 32,873.00 (11,1100 of that value comes from dividends).
2. Dividends not reinvested: value is 18,443.00 plus 7,930.00 in cash from dividends - total =26,373.00

My first conclusion is that dividends do not bleed equity (assuming divdend payouts are not exceeding profit.)
Second conclusion is reinvesting dividends compounds returns. 

With dividends reinvested, the compond annual retirun is about 10.43% over 12 years since 2006.

With dividends not reinvested compond annual return is about 8.42

This test case suggests that good old boring dividend payers is a viable strategy for those wanting to build a retirement nest egg. Reinvest dividends until you decide to retire, then stop reinvesting and spend the income.


----------



## OnlyMyOpinion (Sep 1, 2013)

⬆+1 and perhaps consider a maturing 5yr GIC ladder to take you 5yrs into retirement while that nest egg continues to grow.


----------



## cainvest (May 1, 2013)

Pluto said:


> With dividends reinvested, the compond annual retirun is about 10.43% over 12 years since 2006.


That's almost exactly the same return as the S&P500 did over the same period.


----------



## cainvest (May 1, 2013)

james4beach said:


> So the intrinsic flexibility of dividends helps avoid capital depletion, but this is not unique to dividends. You get the same effect with any withdrawal scheme that has flexibility in reducing withdrawals, like constant percent withdrawal, or VPW.


Except that the dividend method still lets you eat steak instead of just reducing withdrawals and eating kraft dinner during bad market conditions.


----------



## james4beach (Nov 15, 2012)

cainvest said:


> Except that the dividend method still lets you eat steak instead of just reducing withdrawals and eating kraft dinner during bad market conditions.


I've often said here (half-seriously) that if someone had $4 million, they could probably just put the whole thing in XIU and live comfortably off the dividends... very little risk, zero effort, zero middle men.

But for middle class amounts like 1M to invest, I don't see how the dividend method "lets you eat steak". Even with a high quality and high dividend yield like CDZ at 3.5%, we're talking about 35K gross income. Sure, it might be stable and partially insulated against market downturns, but you're getting much less income than using one of the methods that lets you deplete capital. You could be getting 40K or 45K income.

I agree that living off dividends is a fine method and even insulates you (partially) against bad market conditions, but I can't see how it's feasible unless you have a ton of capital.


----------



## Eder (Feb 16, 2011)

Don't forget that 35k of dividends usually becomes 37 k the following year then 40k then etc etc. if you invest in the better TSX businesses.


----------



## AltaRed (Jun 8, 2009)

That is precisely it... a ton of capital required to live off dividends and eat steak. A niche for a pretty small minority of retirees who somehow don't mind likely dying the richest bodies in the cemetery while potentially limiting their adventures during their especially early retirement years. I don't object to that kind of discussion, or to those that can practice it, but it is a niche discussion for a small portion of the population. It doesn't serve the masses (and the bulk of CMF membership) very well. Things like VPW and a diversified asset allocation have broader application for a much larger portion of the population.


----------



## AltaRed (Jun 8, 2009)

Eder said:


> Don't forget that 35k of dividends usually becomes 37 k the following year then 40k then etc etc. if you invest in the better TSX businesses.


That works if 35k is sufficient income to eat steak to begin with as a starting point. I can't imagine too many people getting by on CPP and OAS and $35k of dividends and having a 'generous' retirement. Don't forget that retirement spending goes down significantly some 10 years or so after retirement when travel, golf and a host of expensive hobbies no longer are fun things to do. It is only the last 2-5 years of one's life that spending tends to spike again due to health issues and changes in living quarters. Burning through cash at that point should be intentional.


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> But for middle class amounts like 1M to invest, I don't see how the dividend method "lets you eat steak". Even with a high quality and high dividend yield like CDZ at 3.5%, we're talking about 35K gross income. Sure, it might be stable and partially insulated against market downturns, but you're getting much less income than using one of the methods that lets you deplete capital. You could be getting 40K or 45K income.
> 
> I agree that living off dividends is a fine method and even insulates you (partially) against bad market conditions, but I can't see how it's feasible unless you have a ton of capital.


Did you forget about CPP and OAS?

So Dividends ($35000) + CPP ($13608) + OAS ($7039) = $55647. And don't forget what a spouse would bring to the table. Surely you could live off that without touching capital since it's all indexed to inflation (assuming the dividends keep up).

ltr


----------



## AltaRed (Jun 8, 2009)

like_to_retire said:


> Did you forget about CPP and OAS?
> 
> So Dividends ($35000) + CPP ($13608) + OAS ($7039) = $55647. And don't forget what a spouse would bring to the table. Surely you could live off that without touching capital since it's all indexed to inflation (assuming the dividends keep up).
> 
> ltr


FWIW, our spending is almost 3 times that level and we are by no means extravagant, albeit our travel budget is a large portion of our current spend. We keep our cars for many years, we don't spend a lot on clothes and we don't eat out more than 2-3 times a week. That travel budget will wind down when we no longer want to travel to distant places.


----------



## agent99 (Sep 11, 2013)

If a couple had $1million, I doubt it would all be in one ETF, but lets say it is and it does yield 3.5%. If the couple both receive most of CPP/OAS, they might have an additional $30k. (On top of that they might even have a company pension). Annual income of $65k+ and very low taxation. Some might not feel that was that bad? So why draw down the capital?

This is however, a very theoretical example. They would likely have unregisterd, RRSPs/RRIFs and TFSAs with a mix of investments. Maybe they could do better than 3.5%? ~4% from overall portfolio (~5% from unregistered accounts) can be achieved without too much risk. Now up to $70k pa incl pensions before tax?


----------



## james4beach (Nov 15, 2012)

Yes for some people, the 3.5% on 1M = 35K plus CPP/OAS could be enough... but definitely not enough for my parents.

Once you start getting into 4% to 5% yielding portfolios I start to worry you are reaching for yield and are going to compromise quality. I think the _safe_ bet for a dividend portfolio is along the lines of XIU or CDZ. A portfolio like ZDV has the yields you mention but this is getting questionable... it remains to be seen if they can pull off steady dividend levels & growth through bear markets.

I'm still more comfortable with a diversified investment portfolio, fixed income + stocks (with variable withdrawals), instead of taking 100% equity risk (with its price fluctuations), plus the danger that your hand-picked dividend portfolio ends up with turds like Citigroup and GE -- which were both dividend darlings not too long ago. It's easy with the benefit of hindsight to say which stocks are good quality. It's much harder to do in real life.


----------



## james4beach (Nov 15, 2012)

By the way, here is the history of ZDV's annual dividends (not showing capital gains or return of capital). I don't endorse ZDV but I'm showing this because it has a high yield and a reasonably diverse portfolio, so it's probably a pretty good attempt at a "high yield portfolio". The third column is the annual dividend resulting from 1M invested at the start of 2012.

2012 ; 0.525 ; $33,853
2013 ; 0.725 ; $46,781
2014 ; 0.703 ; $45,326
2015 ; 0.657 ; $42,388
2016 ; 0.688 ; $44,414
2017 ; 0.736 ; $47,491

That's showing 7.0% annual growth in dividends, but it's zero dividend growth for 2013-2017 despite the fact that they explicitly screen for dividend growth stocks, described in their methodology document here.


----------



## AltaRed (Jun 8, 2009)

Not to derail the direction of the conversation, but XDIV is the new XDV player in this field of high dividend yield stocks. https://www.blackrock.com/ca/individual/en/products/287823/ It is of course skewed to certain sectors and therefore susceptible to major downdrafts in certain types of market crises. There are subtle differences though that might make XDIV better. That said, I wouldn't hold it as my one and only Cdn equity allocation.


----------



## james4beach (Nov 15, 2012)

I wouldn't hold any of these either as primary Canadian exposure, but I'm talking about these dividend ETFs because I think when someone puts together a "dividend portfolio", they are ending up with something similar to one of these (at best). So I'm using the ETF as a proxy for what a Canadian dividend investor might see in their own portfolio.

Though, I realize many people around here say they can put together a better dividend portfolio than any of these dividend ETFs.


----------



## cainvest (May 1, 2013)

like_to_retire said:


> Did you forget about CPP and OAS?
> 
> So Dividends ($35000) + CPP ($13608) + OAS ($7039) = $55647. And don't forget what a spouse would bring to the table. Surely you could live off that without touching capital since it's all indexed to inflation (assuming the dividends keep up).
> 
> ltr


Exactly ... for a single person, with no debt, over $50k / year is pretty nice plus add on additional tax breaks one is likely to get and I think that's pretty good. How does that come against the median income for a single working person who is saving for retirement?

Also, let's not forget about the capital growth that is likely happening at the same time. In the early years, when it's most important, you're protected from sequence of return issues and you can always change over to a full depletion strategy whenever you feel like it.

Is this a sure fire plan for everyone, not a chance, everyone has different needs/wants .... but it could work very well for some.


----------



## cainvest (May 1, 2013)

AltaRed said:


> FWIW, our spending is almost 3 times that level and we are by no means extravagant, albeit our travel budget is a large portion of our current spend. We keep our cars for many years, we don't spend a lot on clothes and we don't eat out more than 2-3 times a week. That travel budget will wind down when we no longer want to travel to distant places.


Seriously ... your spending is over $150k annually ?


----------



## james4beach (Nov 15, 2012)

cainvest said:


> Exactly ... for a single person, with no debt, over $50k / year is pretty nice plus add on additional tax breaks one is likely to get and I think that's pretty good. How does that come against the median income for a single working person who is saving for retirement?
> 
> Also, let's not forget about the capital growth that is likely happening at the same time. In the early years, when it's most important, you're protected from sequence of return issues and you can always change over to a full depletion strategy whenever you feel like it.
> 
> Is this a sure fire plan for everyone, not a chance, everyone has different needs/wants .... but it could work very well for some.


You make a strong case for this method and I'm starting to warm up to the idea.

But also worth remembering that this retiree would have to be comfortable with 100% equity risk, which might mean they see their $1,000,000 portfolio shrink to $400,000 at some point. Along with the simultaneous reduction in dividends (albeit not as bad as the price change), this could cause some stress.


----------



## james4beach (Nov 15, 2012)

like_to_retire said:


> Did you forget about CPP and OAS?
> 
> So Dividends ($35000) + CPP ($13608) + OAS ($7039) = $55647. And don't forget what a spouse would bring to the table.


A follow-on question, just because my mind went there. I personally think this is a bad idea, but...

This retiree with the 1M of capital. What if he were to leverage up (using an IB margin loan or something) and put 1.25 M into CDZ or an equivalent portfolio? Now the annual dividends are 44 K. The interest cost is something like 4 K with its tax deduction advantage.

So now the same retiree with the 1M capital gets 44 K dividends - 4 K interest + 14 K CPP + 7 K OAS = *61 K*

(One consequence is that the retiree might have to tolerate 75% drawdown in his net worth from 1M down to 250K but presumably this increasingly hypothetical retiree already has a stomach of steel against such volatility. We're also assuming no margin calls due to elevated market volatility, and a broker who is just as comfortable with stock risk as the retiree.)


----------



## cainvest (May 1, 2013)

james4beach said:


> But also worth remembering that this retiree would have to be comfortable with 100% equity risk, which might mean they see their $1,000,000 portfolio shrink to $400,000 at some point.


Doesn't have to be 100% equity risk, depends on portfolio size and income required. Overall, yes ... they'd have to be ok with serious corrections, which if they were fine with 2000 and 2008 I'd guess they'd be ok.



james4beach said:


> Along with the simultaneous reduction in dividends (albeit not as bad as the price change), this could cause some stress.


While a simultaneous reduction in dividends is possible, it seems very unlikely. Worse case there would be a time delay, months to years of reduction. Best case, little or no change at all in dividend output. 

As an example, how much did the dividends for your "10 pack" of CDN divys drop between 1999 and 2018? Is there any "one" of them that reduced significantly? I know it's not a huge time horizon for comparison but that info is tough to get farther back.


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> A follow-on question, just because my mind went there. I personally think this is a bad idea, but...
> 
> This retiree with the 1M of capital. What if he were to leverage up (using an IB margin loan or something)..................................


I don't feel it's a good idea to borrow money and take on debt when you're retired. That's the time where you have cleared all your debts. You own your home and so you're able to live on less.

You've offered a scenario where a retiree has $1M in their portfolio and is able to conservatively produce an income of $35,000. I feel this amount combined with CPP and OAS and perhaps a small pension through work would be a very usual situation. 

In addition, perhaps the spouse worked part time or even full time and also receives a smaller CPP and OAS. These modest sources of income could easily produce $87,000 (Dividends ($35000) + CPP ($13608) + OAS ($7039) + Pension ($20,000) + Spouse CPP ($5000) + Spouse OAS ($7039).

With a paid off house, no debt, and an inflation protected income of over $85,000 that *requires no selling of shares*, no one needs to go into debt to make more income. 

Many CMF'ers have commented that this is all academic because this would never occur in a real situation, and everyone needs to sell shares to live in retirement. But to me, this scenario seems quite typical. It may not be enough if someone requires $150,000 a year spending money, but aren't we discussing the standard middle class here? Is my scenario out in left field for many in the middle class, and if so why?

ltr


----------



## Oldroe (Sep 18, 2009)

It's my deal to a T.


----------



## Eder (Feb 16, 2011)

ltr describes our retirement other than we have no pension income. The only thing I'd like to add is during retirement we have plenty of time to monitor our investments and can proactively sell shares if our cash cow companys situation changes, as well as adding new cows at great prices like Fortis, CU etc to juice future monthly paychecks.
The line up of dividend payers should never be static or we may end up with cows that turn into pigs like TransAlta or GE.


----------



## like_to_retire (Oct 9, 2016)

Eder said:


> ltr describes our retirement other than we have no pension income. The only thing I'd like to add is during retirement we have plenty of time to monitor our investments and can proactively sell shares if our cash cow companys situation changes, as well as adding new cows at great prices like Fortis, CU etc to juice future monthly paychecks.
> The line up of dividend payers should never be static or we may end up with cows that turn into pigs like TransAlta or GE.


Of course, that's just smart investing. 

I'm just trying to dispel this notion that has been expressed several times that living off dividends and not selling shares for income is some sort of rare impossible dream that is only an academic discussion.

ltr


----------



## Pluto (Sep 12, 2013)

james4beach said:


> A follow-on question, just because my mind went there. I personally think this is a bad idea, but...
> 
> This retiree with the 1M of capital. What if he were to leverage up (using an IB margin loan or something) and put 1.25 M into CDZ or an equivalent portfolio? Now the annual dividends are 44 K. The interest cost is something like 4 K with its tax deduction advantage.
> 
> ...


I'm not too keen on the margin idea in a normal market. In a maturing bear market it is safer. I used margin back in '09 to good effect. But was only on margin for about 9 months. The market moved up fast during that time, then I sold enough to clear off the debt. To me margin is only good at a time when the excess valuations are eleminated by a serious bear market. Margin is for a stellar, no brainer opportunity.


----------



## AltaRed (Jun 8, 2009)

I've not said living off dividends plus CPP plus OAS without touching capital is impossible (the inference above). It is just not very likely given the state of the Canadian population in terms of investment accounts....and given total cash flow needs in retirement. It would be a small segment of retirees who are in the position to do that, depending as already mentioned on what one's cash burn (including income taxes) is on an annual basis. We probably should also remember that most retirees, if they don't have a DB pension, would most likely have the bulk of their retirement assets in a RRSP/RRIF (including their dividend paying stocks) and all of that is fully taxed on withdrawal. 

The scenario of one having only $35k (or so) of eligible dividends + CPP + OAS... (with spousal supplement) every year and paying income tax out of that sum as well, is likely a really small group of retirees. While it can certainly work, it is not a very realistic scenario in real life.


----------



## AltaRed (Jun 8, 2009)

cainvest said:


> Seriously ... your spending is over $150k annually ?


I would suggest this is not particularly unusual in our circle of travelling friends. Along with income taxes, household upgrades/operations/maintenance, and a $50+k travel spend, it is pretty easy to get there. It won't last forever as travel becomes more difficult with increasing age.


----------



## OnlyMyOpinion (Sep 1, 2013)

We digress from the original thread, but interesting stuff.
I already have skin in the retirement income game, so I'll offer a few other things a person needs to consider as well:

1. RRSP's - are we discussing retirement income scenarios where there is no RRSP/RRIF savings? Because most (I hope) have them and they have prescribed minimum withdrawls that are intended to leave you with a zero balance at age 95.
To have $35k/yr income from a RRIF at age 72, you are only going to need ~$500k to $600k, not $1MM. (3% real return, ignoring SORR, taxes, etc.). A DIY VPW uses pretty much the same withdrawl factors.

2. Estate - is dying with all that capital in your account the best use of that money? Are there children or family that could use that money now while they & you are younger? And could you reduce CG impact with a yearly wind-down rather than have it end up as a lump sum in the estate? 

3. Aging - How complicated do you want your accounts & income streams to be as you age? I'm already simplifying my affairs ahead of either dying early or becoming senile and leaving the mess to DW.


----------



## cainvest (May 1, 2013)

OnlyMyOpinion said:


> We digress from the original thread, but interesting stuff.
> I already have skin in the retirement income game, so I'll offer a few other things a person needs to consider as well:
> 1. RRSP's - are we discussing retirement income scenarios where there is no RRSP/RRIF savings? Because most (I hope) have them and they have prescribed minimum withdrawls that are intended to leave you with a zero balance at age 95.
> To have $35k/yr income from a RRIF at age 72, you are only going to need ~$500k to $600k, not $1MM. (3% real return, ignoring SORR, taxes, etc.). A DIY VPW uses pretty much the same withdrawl factors.


I would gather most would have RRSP and TFSA. Maybe some would have a small amount in a taxed account, don't know.



OnlyMyOpinion said:


> 2. Estate - is dying with all that capital in your account the best use of that money? Are there children or family that could use that money now while they & you are younger? And could you reduce CG impact with a yearly wind-down rather than have it end up as a lump sum in the estate?


Who says you "have to" die with a large capital sum in your account? One can change from the dividend strategy to depletion at anytime, likely when SORR has less impact on your portfolio.



OnlyMyOpinion said:


> 3. Aging - How complicated do you want your accounts & income streams to be as you age? I'm already simplifying my affairs ahead of either dying early or becoming senile and leaving the mess to DW.


Personally, I'll have more than enough time to manage and would adjust my portfolio over time to meet my needs plus account for aging.

All good questions BTW, no one should enter into a strategy without thinking it through.


----------



## cainvest (May 1, 2013)

AltaRed said:


> I would suggest this is not particularly unusual in our circle of travelling friends. Along with income taxes, household upgrades/operations/maintenance, and a $50+k travel spend, it is pretty easy to get there. It won't last forever as travel becomes more difficult with increasing age.


While it may not be unusual for your circle I believe your retirement income level is far above what the average Canadian will have.


----------



## Oldroe (Sep 18, 2009)

We have all this stuff and we don't touch most. Likely about 5 years we will start spending some div.


----------



## AltaRed (Jun 8, 2009)

cainvest said:


> While it may not be unusual for your circle I believe your retirement income level is far above what the average Canadian will have.


I suspect most middle class Canadians could aspire to $100+k joint income level in retirement if they really wanted too. One pair of in-laws our age probably have at least that income level. He was a blue collar union guy with Telus and she was a RN for their entire careers. They have a fractional unit in one vacation spot and a snowbird home in Arizona. Another pair of our cohort our age is in a similar situation (both were in BC civil service jobs, he in the MSP Admin, she a teacher). Neither couple could be considered wealthy by any means given where they live and what they drive, but certainly financially comfortable to enjoy the fruit of their labour. Granted all these folks also have gold plated DB pensions and that will not apply to GenXers in the future.

Anyway, this is going off-topic to the real discussion about dividend stock returns.


----------



## agent99 (Sep 11, 2013)

cainvest said:


> Also, let's not forget about the capital growth that is likely happening at the same time.


Its worth noting that there is not always capital "growth". Sometimes it goes the other way without selling any equity!

There is always a problem using percentages . 3.5% yield on $1Million in CDV may be $35k today. A year from now, that could be 7% or 1.75% with dividend still at $35k. Living off dividends & interest does reduce stress when markets tank!

Regarding overall portfolio yield. We have aimed at about 60% FI in registered accounts and 40% in overall portfolio. But again I am using percentages. In fact our FI allocation has varied from about 37% to 55%, just because of change in market value of our portfolio. For example, in 2008 it was 55% and our portfolio yield was 6.7%! Actual dollars in FI didn't change (nor did income cash flow)

In recent years when equity portfolio was doing well, our overall portfolio yield was at it's lowest (3.95%). This was first time it had dropped below 4% in 15 years of tracking. On average, our yield (div/Int) over 15 years has been 4.88%. We have spent most of that as retirement income. We have never sold equity because we had insufficient income. Overall portfolio has grown by 72% or ~3.3% pa (a bit better than inflation). Those percentages could both go back to zero, if we have another 2008/9, but income would probably not be affected much.

Do we have too much risk? I don't think so. No overly diversified etfs, no low interest bonds ( almost no US exposure), no currency risk.


----------



## AltaRed (Jun 8, 2009)

Indeed. Yield rate is not all that meaningful depending on what equity markets are doing, e.g. mad rush up, or a slide down. I generally pay little attention to yield percentage or changes in yield percentage. It is the income that matters from year to year.


----------



## Oldroe (Sep 18, 2009)

The value of our investments means about as much as the value of our house . We can't eat "house" and we could spend it "investments " but we don't need to and likely never will.


----------



## like_to_retire (Oct 9, 2016)

AltaRed said:


> Indeed. Yield rate is not all that meaningful depending on what equity markets are doing, e.g. mad rush up, or a slide down. I generally pay little attention to yield percentage or changes in yield percentage. It is the income that matters from year to year.


I agree it's income that matters, and I suspect everyone is much like myself in that I get pretty use to spending about the same from year to year along with some inflation. I would sure notice if suddenly I had to take a 25% cut in my spending.

I'm all for not prematurely depleting a portfolio, but having my income change every year doesn't sound like it would work for me. Isn't this what could occur with this VPW budget?

ltr


----------



## AltaRed (Jun 8, 2009)

like_to_retire said:


> I'm all for not prematurely depleting a portfolio, but having my income change every year doesn't sound like it would work for me. Isn't this what could occur with this VPW budget?


If you indeed take out exactly what VPW says. You can always take less as I do. The point of VPW is to mitigate/prevent you from running out of money and for those that "have" to deplete at least some capital due to lack of portfolio size, it keeps them in the game. It also helps everyone else from being the wealthiest body in the cemetery.


----------



## GreatLaker (Mar 23, 2014)

like_to_retire said:


> I agree it's income that matters, and I suspect everyone is much like myself in that I get pretty use to spending about the same from year to year along with some inflation. I would sure notice if suddenly I had to take a 25% cut in my spending.
> 
> I'm all for not prematurely depleting a portfolio, but having my income change every year doesn't sound like it would work for me. Isn't this what could occur with this VPW budget?
> 
> ltr





AltaRed said:


> If you indeed take out exactly what VPW says. You can always take less as I do. The point of VPW is to mitigate/prevent you from running out of money and for those that "have" to deplete at least some capital due to lack of portfolio size, it keeps them in the game. It also helps everyone else from being the wealthiest body in the cemetery.


I plan to use VPW. This is my first full year of retirement, and with severance and a real estate sale I won't be tapping into my retirement portfolio until next year.

It seems to me that using VPW instead of a constant real $ withdrawal (aka SWR) or living off dividends trades one problem for another (albeit lesser) problem. Living only off dividends would need a large starting portfolio for a lot of people, and leaves a huge estate (which is fine if the retiree wishes to leave a large estate to family or other beneficiaries). SWR method (aka 4% rule) is designed to weather the worst historical returns (in a study period that includes the Great Depression, the stagflationary 70s and several other periods of low returns and/or inflation), resulting in a small likelihood of running out of money, and a very large probability of dying with a portfolio that is multiple times the size it was at retirement.

VPW is designed to completely deplete a portfolio by the selected age, which the author recommends setting a long life such as age 99. So someone that dies at an average age of around 85 will still leave some money unused. And someone that lives beyond the selected age will run out of money (unless of course they decide to play it safe and not spend all that VPW says they can spend). And also results in the annual portfolio withdrawal being variable (the magnitude of which depends on the asset allocation of the portfolio).

Also increasing guaranteed, lifetime, indexed income sources of such as annuities and/or deferring CPP/OAS helps in coping with variability of returns or adverse economic conditions later in life such as bear markets or high inflation. Unfortunately many people are repulsed by those techniques and prefer the "bird-in-the-hand" approach, especially with government supplied money. I can't think of one friend or family member that plans to defer CPP after they stop working.

Still, I think that VPW is a good solution for those that don't have a desire to leave a large estate, and that can weather variable spending. For me it will work, because in good years VPW will allow me to spend on home improvements, hobbies, travel, good Scotch whisky, and maybe a nice set of wheels. And in bad years my base non-discretionary spending will be covered by the lower amounts that VPW indicates in its backtesting. 

There are no perfect one size fits all solutions. Horses for courses.


----------



## Eder (Feb 16, 2011)

I pretty much intend to live off my dividends, interest and cpp thrown in there till I get about 70 or 72. That's when I'll start dipping into my nest egg...I'll be able to see the end zone and not be too worried about going broke. Of course the older you get the less stuff to spend dough on, but I was thinking of trying cocaine or maybe meth once I get old enough to not care.


----------



## cainvest (May 1, 2013)

like_to_retire said:


> I agree it's income that matters, and I suspect everyone is much like myself in that I get pretty use to spending about the same from year to year along with some inflation. I would sure notice if suddenly I had to take a 25% cut in my spending.
> 
> I'm all for not prematurely depleting a portfolio, but having my income change every year doesn't sound like it would work for me. Isn't this what could occur with this VPW budget?


Yes, VPW would cut your yearly income based on returns.
Example, with $1M starting, 21 yr depletion, 100% equity from 1996 - 2016 the largest changes are:
2001 - $108,450 then in 2002 - $89,745
2008 - $117,637 then in 2009 - $74,493

You can download the VPW spreadsheet yourself and put in more realistic numbers but that's the idea.


----------



## humble_pie (Jun 7, 2009)

james4beach said:


> A follow-on question, just because my mind went there. I personally think this is a bad idea, but...
> 
> This retiree with the 1M of capital. What if he were to leverage up (using an IB margin loan or something) and put 1.25 M into CDZ or an equivalent portfolio? Now the annual dividends are 44 K. The interest cost is something like 4 K with its tax deduction advantage.
> 
> ...




indeed it's a bad idea. It's the daftest idea ever.

jas4 what kind of retiree have you ever known who is suddenly going to sign up an IB account (most challenging online platform in canada bar none), borrow $250 grand, leverage his savings, turn his GI tract into a stomach of steel & weather margin calls from his broker with james bond cool cheek?

i bet you don't talk to your own parents like that ... each:


.


----------



## like_to_retire (Oct 9, 2016)

cainvest said:


> Yes, VPW would cut your yearly income based on returns.
> Example, with $1M starting, 21 yr depletion, 100% equity from 1996 - 2016 the largest changes are:
> 2001 - $108,450 then in 2002 - $89,745
> 2008 - $117,637 then in 2009 - $74,493


OMG, look at the drop in income from one year to the next. From 2008 to 2009, a drop in income of $43144 representing 36.6%. That's ridiculous. 

If there ever was an academic exercise that would never be used in reality, this is it.

I can't imagine if I had to drop my income 36%. 

What would I not spend money on to make that up? Food?

ltr


----------



## agent99 (Sep 11, 2013)

GreatLaker said:


> Still, I think that VPW is a good solution for those that don't have a desire to leave a large estate,


You have clearly studied all the often discussed options and have made a good summary.

Just one thing though. Living off portfolio income, or spending less than SWR or VPW suggest, does not mean that you will leave a large estate. There are health issues to consider. Perhaps major medical expenses. I have a friend who is having to spend $100k pa on his wife's cancer treatment. It is a last hope experimental drug and not covered by OHIP. Others can no longer look after themselves, so move to a retirement home. For a couple used to a reasonable standard of living, this can cost $5k/month. So $60 k pa after tax. 

I consider maintaining maximum retirement savings along with the equity in our home as a lifeline against such things. And if they don't occur, I am more than happy that our kids and grand kids will benefit. No need to overspend just because we can. We have never been big spenders, so no need to start now!


----------



## GreatLaker (Mar 23, 2014)

cainvest said:


> Yes, VPW would cut your yearly income based on returns.
> Example, with $1M starting, 21 yr depletion, 100% equity from 1996 - 2016 the largest changes are:
> 2001 - $108,450 then in 2002 - $89,745
> 2008 - $117,637 then in 2009 - $74,493
> ...





like_to_retire said:


> OMG, look at the drop in income from one year to the next. From 2008 to 2009, a drop in income of $43144 representing 36.6%. That's ridiculous.
> 
> If there ever was an academic exercise that would never be used in reality, this is it.
> 
> ...


Yabbut if someone was using 4% SWR, their initial annual withdrawal from a $1M portfolio would be $40k. Say the inflation adjustment was 2% annually then 12 years later (1996-2008) the inflation adjusted amount would be $51k. Contrast that with VPW method's withdrawal for 2008 being $117k, and dropping to $74k in 2009. But yes, if you do not have significant discretionary expenses then VPW won't work for you.

Canadian Couch Potato's model portfolios show that the lowest 12 month return (in 2008-09) for a 60/40 couch portfolio was -19.62%. Yet in the face of almost 20% portfolio drop in value, a SWR adherent would increase their withdrawal and budget by inflation. How much of an academic exercise that would never be used in reality is that?

And by only spending dividends you could never get close to the VPW suggested withdrawals.


----------



## cainvest (May 1, 2013)

Regardless of the depletion method used it seems an initial stream of dividend income can lessen SORR. How long you want to deploy it and what percentage of equity you put up for dividend income is completely up to you. It seems to me it can work with SWR, VPW, or full dividend investing with varying levels of protection on capital preservation.

If someone is entering retirement now (say with a typical CCP model portfolio) would you say their SORR is higher now than someone who retired in 2010?


----------



## james4beach (Nov 15, 2012)

cainvest said:


> Regardless of the depletion method used it seems an initial stream of dividend income can lessen SORR. How long you want to deploy it and what percentage of equity you put up for dividend income is completely up to you. It seems to me it can work with SWR, VPW, or full dividend investing with varying levels of protection on capital preservation.


That's a really good point!



like_to_retire said:


> OMG, look at the drop in income from one year to the next. From 2008 to 2009, a drop in income of $43144 representing 36.6%. That's ridiculous.
> 
> If there ever was an academic exercise that would never be used in reality, this is it.
> 
> I can't imagine if I had to drop my income 36%.


But the S&P 500 has had similar drops in dividend income. I shared the charts earlier but here's the underlying data, year & dividends in notional dollars:

1930 ; $43,499
1931 ; $35,196
1932 ; $21,892
1933 ; $18,306

Those year-over-year declines in dividends are: -19%, -38%, -16% (without deflation adjustment)

With deflation adjustment, it's approximately: -10%, -30%, -20%

Admittedly this has not happened too often in US history, but that reduction in dividends is very severe. Certainly as bad as VPW.


----------



## GreatLaker (Mar 23, 2014)

agent99 said:


> You have clearly studied all the often discussed options and have made a good summary.


Thanks



> There are health issues to consider. Perhaps major medical expenses.


Great point. It's something to which all of us should give due consideration. I find it hard to evaluate since it's such an outlier and the costs can vary widely



> I consider maintaining maximum retirement savings along with the equity in our home as a lifeline against such things.


Similar to me. I consider my home as a long-term store of value... just in case some unlikely or unforeseeable thing happens. Also aside from the part of my portfolio assigned for VPW spending I also have some "mad money" I can spend on anything, and another chunk of $ assigned to be left in my estate, but could be tapped for expensive medical expenses or long-term care.

Hard things to evaluate or assign a value to. An insurance agent gave me a detailed proposal for critical illness and long-term care insurance, augmented by heartfelt stories of Sally's Uncle Joe who was considering critical illness insurance but hesitated before signing the contract, and was unfortunately diagnosed with a critical illness before the insurance could take effect. The thing is... the insurance agent would have made an enormous commission from selling me the insurance. Subsequently I had a good conversation with a fee-only financial planner that recommended against critical illness and long-term care insurance because they are high cost and low probability. Better to deal with that possibility via the equity in your home and/or money that was intended to be left in your estate, and/or money that would otherwise have been spent on travel, hobbies etc. And the planner did not stand to make any money from selling me insurance or investments. Hmmm... who was more objective and considering my best interest without a conflict of interest?


----------



## OnlyMyOpinion (Sep 1, 2013)

We continue to digress from "total return of a dividend stock", whatever.
Just wanted to note that long term care (in Ontario) is $2600/mo/person for private. You basically have no other costs then except $25/mo for TV and $ for a phone.
Semi-private is $2200/mo. They can be similar to private except for sharing a washroom with the adjoining room. A few are still old ward style, 4/room w curtains, but very few of these. It really depends on age of the facitity. Semi-private can be means tested upon application, so if you have no income you can potentially stay at no cost.
Whether this seems expensive depends on what you are used to. Where it definately can be expensive is if a couple is separated and living at two places (LTCH and house, or retirement apt, etc.). Then you can be burning throuh $8000/mo fairly easily.

As to expensive insurance, living or medical costs outside of provincial coverage, I guess I wonder why I would pay them for very long. I have to go some day. Maybe that's my cue to leave.


----------



## james4beach (Nov 15, 2012)

While dividends are convenient, I'm still not convinced that they offer an advantage versus total return strategies, especially ones with variable/flexible withdrawals. In the fixed withdrawal SWR, SORR/portfolio depletion happens due to years like 1930-1945 and 1965-1980. But those are also years where dividends did poorly, not keeping up with inflation.

People in this thread are repeating that "living off dividends" protects you from SORR but I'm not sure that's the correct conclusion. It might be more correct to say that variable withdrawal strategies (including living off dividends) protect you from SORR.

Maybe one way to think of dividends are that *they are a form of variable withdrawal*, where instead of YOU deciding how to much to withdraw, the corporation decides what the safe amount of $ to extract is. They are motivated to set a sustainable dividend level so they don't ever have to cut it. This is pretty nice... you have many experts at the corporation doing this analysis, which is nice.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> While dividends are convenient, I'm still not convinced that they offer an advantage versus total return strategies, especially ones with variable/flexible withdrawals. In the fixed withdrawal SWR, SORR/portfolio depletion happens due to years like 1930-1945 and 1965-1980. But those are also years where dividends did poorly, not keeping up with inflation.


James - most of us are in Canada. But you keep harping on those old US numbers. If you could find equivalent Canadian numbers, that might be useful. 

I have recorded 15 years of data from my own portfolio through a bad recession and never in that time did dividends do poorly. I don't think before that either. SWR is not something that is imposed on you. It is just a rough guide as to how much you can safely withdraw. Don't get too bogged down on "rules". We dod what ever makes sense based on the situation at the time.


----------



## Eder (Feb 16, 2011)

OnlyMyOpinion said:


> I have to go some day. Maybe that's my cue to leave.



+1....see ya in the funny papers!


----------



## cainvest (May 1, 2013)

agent99 said:


> James - most of us are in Canada. But you keep harping on those old US numbers. If you could find equivalent Canadian numbers, that might be useful.


Exactly, nobody would use a broad US index fund for dividend generation.

Personally I would use this dividend method with a basket of blue chip TSX based stocks. If you run these numbers it definitely helps with SORR.


----------



## cainvest (May 1, 2013)

james4beach said:


> While dividends are convenient, I'm still not convinced that they offer an advantage versus total return strategies, especially ones with variable/flexible withdrawals.


Look at the dividend $ output in current history, say the past 26 years, on the CDN market vs the stock prices. Overall I'm seeing they fluctuate much less than the stock price levels, they are much slower moving. So for blue chip TSX stocks, which is generally more closely tied to the actual performance of the company, stock price or dividend output?


----------



## AltaRed (Jun 8, 2009)

cainvest said:


> Look at the dividend $ output in current history, say the past 26 years, on the CDN market vs the stock prices. Overall I'm seeing they fluctuate much less than the stock price levels, they are much slower moving. So for blue chip TSX stocks, which is generally more closely tied to the actual performance of the company, stock price or dividend output?


Neither... Total Return. A proper stock screen will present those stocks with the most return on investment, i.e. ROI, ROE, ROCE. By definition, one would then pick the best stocks on overall return performance, with dividend generation a secondary, but highly useful, influencing factor. Over a 30 year period, one will be further ahead in portfolio size. Which stock has provided a better 30 year investment return? CNR or the old Bell Aliant? 

Too often, we get blinders on chasing a successful investing strategy for a defined period of time, e.g. dividend stocks the past 10 years, where valuations have been driven partly by fixed income refugees.


----------



## cainvest (May 1, 2013)

AltaRed said:


> Neither... Total Return. A proper stock screen will present those stocks with the most return on investment, i.e. ROI, ROE, ROCE.


True, over the long term total return tells the story. However, on shorter timelines dividends can easily remain nearly constant even while the stock prices tank for a few while (i.e. 2008-2009).


----------



## Jimmy (May 19, 2017)

AltaRed said:


> Neither... Total Return. A proper stock screen will present those stocks with the most return on investment, i.e. ROI, ROE, ROCE. By definition, one would then pick the best stocks on overall return performance, with dividend generation a secondary, but highly useful, influencing factor. Over a 30 year period, one will be further ahead in portfolio size. Which stock has provided a better 30 year investment return? CNR or the old Bell Aliant?
> 
> Too often, we get blinders on chasing a successful investing strategy for a defined period of time, e.g. dividend stocks the past 10 years, where valuations have been driven partly by fixed income refugees.


FYI . I like the Wisdom Tree approach to returns in their quality dividend ETF screens . They look at ROA too which is a better return measure in some cases. Firms could take on extra debt to boost ROE so it is a useful check.


----------



## AltaRed (Jun 8, 2009)

Agreed. I included ROCE as a key measure but similar in some respects.

https://www.investopedia.com/ask/answers/011215/what-difference-between-roce-and-roa.asp


----------



## james4beach (Nov 15, 2012)

agent99 said:


> James - most of us are in Canada. But you keep harping on those old US numbers. If you could find equivalent Canadian numbers, that might be useful.
> 
> I have recorded 15 years of data from my own portfolio through a bad recession and never in that time did dividends do poorly.


I use the US numbers because a long history is available. The last 15 years is too short a period to have confidence that "living off dividends" works as you hope, and for the US history anyway, the last 15 years _has been particularly good for dividends_ and could give a false sense of security in dividend-based income. Why do you think dividend investing, blogs, and books on this have become so popular recently? It's because the strategy has worked great since the 90s.

Dividend investors shouldn't be doing all this on faith, just assuming that dividends remain consistent and don't contract significantly. If you're relying on Canadian stocks to provide steady-and-always-growing dividend income for the rest of your retirement, you should verify that this has worked historically for a much longer time period.

"Just use a portfolio of solid dividend paying stocks" sounds a bit fluffy to me -- I'm sorry. How do you verify it? How do you test it? How do you know it worked through high inflation periods (1960s-1970s)? How do you know this isn't just an exercise in hindsight stock picking?



cainvest said:


> Exactly, nobody would use a broad US index fund for dividend generation.
> 
> Personally I would use this dividend method with a basket of blue chip TSX based stocks. If you run these numbers it definitely helps with SORR.


OK, so where is the historical data for TSX based stocks that shows this is a feasible method? How much has the "TSX based stocks" dividend income contracted through past bear markets... and I mean further back than the 90s.

And if it's such an obvious method, why is there no established mutual fund for it? Are you telling me that there has been this incredibly effective, SORR-immune retirement method that assures comfortable retirement, has worked in Canada for many decades, but nobody made a fund (or even an index) for it?

My guess: even with those TSX blue chip stocks, the dividends probably decline at times, which is what alleviates the SORR. A fine strategy but you'll want to know how much those dividends declined, in real dollars, historically.


----------



## AltaRed (Jun 8, 2009)

J4B, you are flogging this one to death. You are indeed right that one likely needs to look at 50 years minimum for patterns though I wouldn't go further back than the end of WWII. Isolated economies and incomplete/untested central banks didn't know what they were doing back in the '30s, so we have to recognize Central banks globally, or at least OECD banks, coordinate policy in more recent decades to avoid catastrophic policy. Had the 2008 crisis occurred in the '30s, well, we would have had a lost decade just like the '30s, needing a world war to stimulate the economy.

Clearly investors here who have embraced the dividend model strategy over the past 20+ years have done well by it and nothing is going to change their minds...until or if the model doesn't work any more. We don't know that and we can't be paralyzed by the remote chance of a meteorite wiping us out either, so those focused on retiring in 10 or so years and counting on the dividend model working 10-20 more years in retirement probably have time on their side, perhaps forever. We can only 'protect' against certain events and being overly conservative doesn't win many olympic medals either. Each of us are obviously happy where we are... so nothing will change minds. Me either. I will continue with a market based approach with a strong twist of dividend bias and blissfully ride off into the sunset.


----------



## gardner (Feb 13, 2014)

cainvest said:


> which is generally more closely tied to the actual performance of the company, stock price or dividend output?


This is what drives me towards dividend payers -- a strong company with steady earnings can pay dividends even when the stock price is buffeted by the winds of fashion, fear and greed. One does not have to look far at all for pretty convincing evidence that stock price movements are often in part or even mostly irrational. The fear of irrational stock prices is, perhaps itself irrational on my part, but the knowledge that I am somewhat insulated from market stupidity is something I like, even if the overall returns are the same. 

While J4B has mounted a substantial and reasonably convincing argument that overall returns would not IMPROVE because of dividends, I still don't see that they necessarily make returns worse.


----------



## milhouse (Nov 16, 2016)

Here's a question then. With respect that even people going the dividend route will have their own ideas and risk tolerances for their dividend portfolio composition, do you think we can even come to an agreement on what kind of general composition would be reasonable for an analysis?


----------



## cainvest (May 1, 2013)

james4beach said:


> OK, so where is the historical data for TSX based stocks that shows this is a feasible method? How much has the "TSX based stocks" dividend income contracted through past bear markets... and I mean further back than the 90s.
> 
> And if it's such an obvious method, why is there no established mutual fund for it? Are you telling me that there has been this incredibly effective, SORR-immune retirement method that assures comfortable retirement, has worked in Canada for many decades, but nobody made a fund (or even an index) for it?


Data going back pre-1992 is difficult to find so I can't help you there. 

As for the rest, make your best guess, why would I know?



james4beach said:


> My guess: even with those TSX blue chip stocks, the dividends probably decline at times, which is what alleviates the SORR. A fine strategy but you'll want to know how much those dividends declined, in real dollars, historically.


You can guess or run the numbers yourself, then you'll know.


----------



## cainvest (May 1, 2013)

AltaRed said:


> I will continue with a market based approach with a strong twist of dividend bias and blissfully ride off into the sunset.


I think this is a good approach, likely one I will do myself.


----------



## james4beach (Nov 15, 2012)

gardner said:


> While J4B has mounted a substantial and reasonably convincing argument that overall returns would not IMPROVE because of dividends, I still don't see that they necessarily make returns worse.


I don't think dividends will make anything worse.

It just strikes me as an unfair comparison when people say that 4% constant withdrawals are unsustainable or risk depleting capital (based on 100+ years of data), but dividend approaches "should be fine" (based on 20 years of data). Hey if we're only looking at the last 20 years, then even 5% constant withdrawal looks sustainable and does not deplete capital with a mix of stocks and bonds.

I'm not retiring on a dividend portfolio myself, but I'd presume that anyone who aims to live off dividends will want to understand what kind of cashflow reduction % they may have to face. Yet we don't even know how to benchmark this... everyone makes their own decisions, but this would be too weak a retirement strategy for me.


----------



## Oldroe (Sep 18, 2009)

Inflation is real and you need new money every 10 years.


----------



## Eder (Feb 16, 2011)

Well I found some old BNS dividend data...from 1892 to 1931 they raised their divy...then it gradually fell by about 30% to 1945 when the stock split 10-1. From there it increases...never cut, to today level. Not bad.


----------



## cainvest (May 1, 2013)

Eder said:


> Well I found some old BNS dividend data...from 1892 to 1931 they raised their divy...then it gradually fell by about 30% to 1945 when the stock split 10-1. From there it increases...never cut, to today level. Not bad.


Wow, where did you find that?


----------



## Eder (Feb 16, 2011)

Dusted off this...all of us could do alot worse than let BNS common stock fund our retirement...

http://www.scotiabank.com/ca/en/0,,3098,00.html


----------



## cainvest (May 1, 2013)

Got any other hidden data gold mine links for CDN large cap stock dividends? 

edit: Looks like the TD website has data back to 1969.
At a quick glance looks like their dividend has never decreased.


----------



## james4beach (Nov 15, 2012)

I understand the banks have a good history, but how about the broader market? Here were some of the other Canadian blue chip firms in 2000, other than the banks. I pulled these out by looking at the largest holdings of XIU in 2000:

Alberta Energy Company Ltd
Bombardier
Canadian Pacific
Nortel
Alcan Aluminum
BCE

Bombardier was a huge part of the market for a long time and a must have blue-chip stock for any portfolio. I see from their dividend history that their div peaked at 0.045 and then plummeted to 0.023 over the next few years. That's a decline of over 50% in inflation adjusted dollars. OK so this one was a disaster. Does anyone have figures for any of the others?


----------



## agent99 (Sep 11, 2013)

Seems to me that using a foreign country's market and dividend data to plan a Canadian retirement income doesn't make any sense. Instead of S&P500, why not use some other country's data - such as FTSE100? Or some other country. No, that makes no sense either. Find relevant Canadian data and don't make irrelevant comparisons.

Several of us posted that BCE was our major holding. This site provides historical dividend data since 1949. I don't see any reduction of dividends. 

http://www.bce.ca/investors/dividendinfo/dividendhistory

This is BMO since 1995 http://dividendhistory.org/payout/tsx/BMO/ (Nice dividend growth)

CNR since 1995. http://dividendhistory.org/payout/tsx/CNR/ Great dividend growth with one slight blip in 2004. 

There are sites that claim to have more historical dividend data, but they are pay site.

Historical dividend information can likely be found for most major Canadian companies. Starting with XIU holdings, maybe James could work on this and report back


----------



## OnlyMyOpinion (Sep 1, 2013)

Here is TD's dividend history, 2007-2017 from their Q4-2017 slide deck. 









It doesn't look like any cuts in 20 yrs. 
But it may be reasonable to assume a lower trajectory for future growth?


----------



## bgc_fan (Apr 5, 2009)

james4beach said:


> And if it's such an obvious method, why is there no established mutual fund for it? Are you telling me that there has been this incredibly effective, SORR-immune retirement method that assures comfortable retirement, has worked in Canada for many decades, but nobody made a fund (or even an index) for it?
> 
> My guess: even with those TSX blue chip stocks, the dividends probably decline at times, which is what alleviates the SORR. A fine strategy but you'll want to know how much those dividends declined, in real dollars, historically.


I am not sure how much you looked, but just about all mutual fund families have dividend based mutual funds. TD has a Dividend growth fund, Dividend Income fund, as well as North American dividend fund. BMO offers similar mutual funds.


----------



## agent99 (Sep 11, 2013)

This site is useful when comparing dividend payers:

http://ca.dividendinvestor.com/?symbol=bce&submit=GO


----------



## james4beach (Nov 15, 2012)

bgc_fan said:


> I am not sure how much you looked, but just about all mutual fund families have dividend based mutual funds. TD has a Dividend growth fund, Dividend Income fund, as well as North American dividend fund. BMO offers similar mutual funds.


Mutual funds could be a good source for this kind of research. What you need is the full distribution history... I'm not sure how to find that.

By the way, the major dividend funds I am aware of (including TD's created in 1987) are incredibly heavy in financials. TD Dividend Growth is 52% in banks. Perhaps that says that a Canadian dividend investor has no choice but to load up on banks. If there was a better way, I would suppose that TD's world class managers could have figured it out some time in the last 31 years.



agent99 said:


> Historical dividend information can likely be found for most major Canadian companies. Starting with XIU holdings, maybe James could work on this and report back


It probably makes more sense for a dividend investor to look into that and do the work, since presumably they would want confidence in their own retirement plan.

I'm presenting a critique of dividend-based investing. To me it looks like a dividend investor is making compromises, and stretching, all over the place:

* less cashflow than they can achieve with total return methods
* concentration purely in stocks, and especially in Canadian stocks (one asset class & country)
* sector allocations skewed to banks
* no historical benchmark
* data available for about 20 or 30 years, *which happens to coincide with a great bull market*
* virtually no Canadian data for other economic conditions like prolonged bear markets

One big banking sector crisis in Canada is all it would take to wipe out Canadian dividend investors. You know, the kind of that happened in the US, UK, Spain, Ireland, Iceland, France, and previously Japan.


----------



## bgc_fan (Apr 5, 2009)

james4beach said:


> Mutual funds could be a good source for this kind of research. What you need is the full distribution history... I'm not sure how to find that.
> 
> By the way, the major dividend funds I am aware of (including TD's created in 1987) are incredibly heavy in financials. TD Dividend Growth is 52% in banks. Perhaps that says that a Canadian dividend investor has no choice but to load up on banks. If there was a better way, I would suppose that TD's world class managers could have figured it out some time in the last 31 years.


They essentially cherry pick so you end up with financials. Given that mutual funds usually reinvest distributions, you could just compare the returns of the funds to whatever benchmark you want to use.


----------



## cainvest (May 1, 2013)

OnlyMyOpinion said:


> Here is TD's dividend history, 2007-2017 from their Q4-2017 slide deck.
> 
> View attachment 18073
> 
> ...


Actually no cuts in 48 years -> DividendLookup TDBank


----------



## james4beach (Nov 15, 2012)

cainvest said:


> Actually no cuts in 48 years -> DividendLookup TDBank


That's impressive. Certainly better than Citigroup which raised its dividend for 33 years
http://www.valuewalk.com/2016/12/dividend-investment-risk/



> Many financial institutions in the US had problems that led to dividend cuts in the early 1990s and in 2007 – 2009. You might be surprised to hear that Citicorp (C) was a member of the dividend champions index all the way until 1991. The company had raised distributions for 33 consecutive years in a row. Unfortunately, the company cut dividends in 1991, ending the streak.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> I'm presenting a critique of dividend-based investing. To me it looks like a dividend investor is making compromises, and stretching, all over the place:


You have not provided any evidence of your claims based on the Canadian markets. Not worth pursuing any further. I will let this rest.


----------



## cainvest (May 1, 2013)

Fortis no dividend cuts from 1972 on -> https://www.fortisinc.com/investor-relations/share-information


----------



## james4beach (Nov 15, 2012)

agent99 said:


> You have not provided any evidence of your claims based on the Canadian markets. Not worth pursuing any further. I will let this rest.


The burden is not on me to provide evidence... the bold claim is being made by dividend investors.

Here's the claim that I think is being made: "one can create a portfolio of Canadian dividend stocks that provides: steady and growing dividend income, no substantial drops in (inflation adjusted) dividends over many decades, and is unlike its US counterpart that did have substantial drops. We don't have data on such an existing example portfolio and its dividend history, but we are confident we can pick stocks and create/manage a portfolio like this."

You don't have to prove the claim but is this ^ about right? It's plausible, and I already agreed that CDZ or XIU might be examples of such portfolios.


----------



## cainvest (May 1, 2013)

james4beach said:


> Here's the claim that I think is being made: "one can create a portfolio of Canadian dividend stocks that provides: steady and growing dividend income, no substantial drops in (inflation adjusted) dividends over many decades, and is unlike its US counterpart that did have substantial drops. We don't have data on such an existing example portfolio and its dividend history, but we are confident we can pick stocks and create/manage a portfolio like this."


That's quite the claim, where did you get that from?


----------



## james4beach (Nov 15, 2012)

cainvest said:


> That's quite the claim, where did you get that from?


Perhaps I understood it wrong, but I thought this was the assertion being made.


----------



## Eder (Feb 16, 2011)

james4beach said:


> One big banking sector crisis in Canada is all it would take to wipe out Canadian dividend investors. You know, the kind of that happened in the US, UK, Spain, Ireland, Iceland, France, and previously Japan.


If my Canadian Bank holding went to zero (even though I actively vet my holdings for weakness and would have sold) my portfolio would take a 20% hit. Most likely the banks in a crisis would drop 50% like in 2009...good spot for a dividend investor to load up (I bought BMO in the $20's & RY in the $30's during that time).
So rather than being wiped out a banking crisis like 2009 it would be like Christmas for an astute investor.

Maybe you noticed on this forum not many of us are loading on banks, we are rooting around businesses like Fortis, Enbridge, Emera. I wonder why?


----------



## Pluto (Sep 12, 2013)

TD came up as another example so I ran it. Start Jan 1981, 10,000.00 @ 33.5, 298.5 shares, dividends reinvested. 

Current value 1.77 million. (447,000 in dividends received and reinvested.) current number of shares is 23,500 shares. 

Current annual dividend payout: 2.4 (x's 23500 shares = 56000.00 per year.)

Woulda, coulda, shoulda.

To give inflation perspective, 10,000 in '81 is about 28,000 presently. the current annual div payout is higher than the original investment.

TD shares would have to fall to 0.02 cents per share to break even in the event of a "financial crisis".


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> One big banking sector crisis in Canada is all it would take to wipe out Canadian dividend investors. You know, the kind of that happened in the US, UK, Spain, Ireland, Iceland, France, and previously Japan.


I suppose a big banking sector crisis in Canada would hurt those that play dividends with ETF's, but for those that hand pick it's probably not so.

I have 12.5% allocated to banks along with 12.5% assigned to each of the other sectors. Not too hard to do.

ltr


----------



## cainvest (May 1, 2013)

james4beach said:


> Perhaps I understood it wrong, but I thought this was the assertion being made.


I think maybe if you tweaked it a bit it would be a better fit ...

- One can create a basket of Canadian dividend stocks that could provide steady and growing dividend income with historically no substantial drops in dividends over many decades
- There is existing data on dividend history but some data doesn't go very far back, more history research would be good on some companies.
- One could pick stocks and create/manage a portfolio like this.

I believe there is a recent thread that shows a number of CMFers in fact hold at least some of these potential stocks in good percentages. Also, it's up to you to set the allocation amount (100%, 50%, 10%) of these stocks in your portfolio depending on your own risk assessment and beliefs.


----------



## gardner (Feb 13, 2014)

james4beach said:


> bold claim is being made by dividend investors


I think you are vastly inflating the strength of the claim or assumption that is being made here. For my part, I am not assuming there will be "no drops", only that the risk of volatility in dividend income is substantially less that the risk of volatility in share prices. Share prices are often totally irrational. Dividend payouts seldom are. QED.


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> I use the US numbers because a long history is available. The last 15 years is too short a period to have confidence that "living off dividends" works as you hope, and for the US history anyway, the last 15 years _has been particularly good for dividends_ and could give a false sense of security in dividend-based income. Why do you think dividend investing, blogs, and books on this have become so popular recently? It's because the strategy has worked great since the 90s ...


*sigh* ... I suspect your US numbers have similar challenges to the Canadian numbers. More on that below.

In the meantime, when you say "become so popular recently" - there is more at play than low interest rates encouraging people to look at dividend investing. 

If as you seem to be implying, dividend invest is so recent - why can I recall articles, books etc. on this subject from the '70's? Why was Money Saver magazine publishing "beat the Toronto Index with ten dividends paying stocks" in the same time frame and from what I recall, earlier as there were references in the current articles for past articles to allow one to track the positions/responses over decades?




james4beach said:


> ... Dividend investors shouldn't be doing all this on faith, just assuming that dividends remain consistent and don't contract significantly. If you're relying on Canadian stocks to provide steady-and-always-growing dividend income for the rest of your retirement, you should verify that this has worked historically for a much longer time period ...


Hard to do as a retail investor as well as having so many changes as well as variables at play.
It doesn't seem to have meant much in the past but FWIW, I'm at about 38 years with few dividends cut or dropped, for those I own.




james4beach said:


> ... How do you verify it? How do you test it? How do you know it worked through high inflation periods (1960s-1970s)? How do you know this isn't just an exercise in hindsight stock picking? ... OK, so where is the historical data for TSX based stocks that shows this is a feasible method?


I suspect one would have to be paid and in the industry to get the numbers to prove it. I will have to find the link again but an academic study that was evaluating dividends as a way predict shares prices had to cobble together current info from multiple sources, annual reports and *still* had gaps to be able to look at 125 years or so.

Then there's all the changes that have happened over time that would need to be sorted out. Post #158 talks about BNS cutting their dividends by 30% over what looks like the WW2 period. Is it fair to note this drop without sorting out that prior to 1917, when according to the academic study there was no taxes on corporations? Corporations had more taxes added in the Great Depression and WW2 vastly expanded the number of tax payers from WW1's 2% of the population to 17% so it wouldn't surprise me if corporate taxes also increased. 

As you like using indexes for comparison purposes, there are the index changes. For the TSX composite there's one set/method of for 2002 to today for the TSX composite, a different set for 1977 to 2002 and whatever else for earlier. If you prefer the S&P TSX 60 then the date ranges change.




james4beach said:


> ... if it's such an obvious method, why is there no established mutual fund for it? Are you telling me that there has been this incredibly effective, SORR-immune retirement method that assures comfortable retirement, has worked in Canada for many decades, but nobody made a fund (or even an index) for it?


Using the same criteria - if selling shares works so much better, where are the established MFs, ETFs, articles, blogs or whatever else "proves by existence the method" for the alternative?
Or maybe it is complicated without an easy way for retail investors to know for sure.

Waiting for proof isn't everything as doing so for Nortel would have cost me a $3 to $11 and $8 gain.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

AltaRed said:


> cainvest said:
> 
> 
> > Look at the dividend $ output in current history, say the past 26 years, on the CDN market vs the stock prices. Overall I'm seeing they fluctuate much less than the stock price levels, they are much slower moving. So for blue chip TSX stocks, which is generally more closely tied to the actual performance of the company,stock price or dividend output?
> ...


Maybe it is because I am still accumulating ... but it seems to me another areas that blinders go on is trying to get proof for one method or another.

It seems to be me focusing on buying good investments, especially if they are temporarily cheap is more important than dividend or no dividend. Where one has already figured out a large Canadian bank is a good long term investment, worrying about dividends seems moot.

Throw in that high percentages of the North American indexes pay a dividend and it seems more productive to buy good investments then look at income sources closer to retirement.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> I understand the banks have a good history, but how about the broader market?
> 
> Here were some of the other Canadian blue chip firms in 2000, other than the banks. I pulled these out by looking at the largest holdings of XIU in 2000:
> 
> ...


I guess you really like complicated situations to end up with a "fair comparison".

Up until May 2000, the dividend payer was the combination of BCE *and* Nortel, with Bell spinning out Nortel shares to it's shareowners in May 2000. To have a proper comparison, it seems to me the analysis would have to dig into BCE as well as Nortel annual reports in details to figure out the combo of the market decline plus the spinoff.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

Eder said:


> james4beach said:
> 
> 
> > ... One big banking sector crisis in Canada is all it would take to wipe out Canadian dividend investors ...
> ...


I suspect it is his preference to use indexes as his comparison that leads him to conclude everyone is loading up on high percentages for banks.


Cheers


----------



## AltaRed (Jun 8, 2009)

Eclectic12 said:


> Maybe it is because I am still accumulating ... but it seems to me another areas that blinders go on is trying to get proof for one method or another.
> 
> It seems to be me focusing on buying good investments, especially if they are temporarily cheap is more important than dividend or no dividend. Where one has already figured out a large Canadian bank is a good long term investment, worrying about dividends seems moot.
> 
> Throw in that high percentages of the North American indexes pay a dividend and it seems more productive to buy good investments then look at income sources closer to retirement.


I agree that buying a good investment when cheap provides a good tailwind, no matter what the dividend yield is. Buy good companies...period. I've had good luck with both low and high yield stocks. I have also been burned a few times by yield traps. 

I am 12 years into withdrawal and do not get hung up on one particular strategy. If I am lucky I have 15-25 more years left before I start to drool.


----------



## OnlyMyOpinion (Sep 1, 2013)

Eclectic12 said:


> I guess you really like complicated situations to end up with a "fair comparison".
> Up until May 2000, the dividend payer was the combination of BCE *and* Nortel, with Bell spinning out Nortel shares to it's shareowners in May 2000. To have a proper comparison, it seems to me the analysis would have to dig into BCE as well as Nortel annual reports in details to figure out the combo of the market decline plus the spinoff.
> Cheers


Similarly, someone would have to track Alberta Energy Company Ltd through its merger with PanCanadian and name change to Encana, and then its later split into Encana and Cenovus.
Have fun with that.


----------



## cainvest (May 1, 2013)

gardner said:


> For my part, I am not assuming there will be "no drops", only that the risk of volatility in dividend income is substantially less that the risk of volatility in share prices. Share prices are often totally irrational. Dividend payouts seldom are. QED.


And that was my reason for looking at dividend payouts to provide a way to reduce SORR at the beginning of retirement.


----------



## james4beach (Nov 15, 2012)

I did assume that many dividend investors tend to load up on banks, mainly based on the allocations I see in popular dividend funds like TD Dividend Growth ($7 B aum), RBC Cdn Dividend ($18 B aum). But perhaps as you say, this is not representative of how stock pickers create their portfolios.

I agree that a sector-diversified individual dividend stock portfolio is a fine way to invest. Many good points raised in the above answers -- thanks.

As for the corporate actions and complications, that's where historical index data is very useful. It rolls all of those effects into the index total returns. I don't keep talking about the index because I think it's the best way to invest, but it does provide a historical record and benchmark.


----------



## james4beach (Nov 15, 2012)

Just curious if you folks would put ENB in a dividend portfolio. It obviously pays out a huge dividend yield. They've paid dividends for 64 years, with annual 11.7% growth rate in dividends for 20 years:
https://www.enbridge.com/investment...nd-tax-info/dividends-securities-and-tax-info


----------



## AltaRed (Jun 8, 2009)

I suspect it has been in pretty much everyone's dividend portfolio for years, if not decades. Doesn't mean that some of us are not getting a little uncomfortable with ENB's financial ratios, especially its payout ratio and things like Debt/EBITDA. 

The saving grace is much of its cash flow is regulated. The downside is Line 3 replacement is a bit of a wild card. Will it happen? Will it happen on schedule and on budget? Will it be subject to a Standing Rock debacle stateside? And finally, are some of its other growth prospects really sound and economic? When will it really focus on paying down debt?


----------



## cainvest (May 1, 2013)

I gather the Line 3 delays down south and their balance sheet are the reason the stock has been falling for a while now. I'm keeping an eye on them though.


----------



## james4beach (Nov 15, 2012)

I was concerned with their free cashflow estimates as well, but they have a history of managing it well.

At this point my own five pack (RY, ENB, CNR, BCE, FTS) has a pretty high 4.3% dividend yield. It is not meant to be a high dividend portfolio, but it happens to have one right now.


----------



## cainvest (May 1, 2013)

james4beach said:


> At this point my own five pack (RY, ENB, CNR, BCE, FTS) has a pretty high 4.3% dividend yield. It is not meant to be a high dividend portfolio, but it happens to have one right now.


Looks like a solid lineup there ... and you say you're not a dividend player. :rolleyes2:


----------



## james4beach (Nov 15, 2012)

cainvest said:


> Looks like a solid lineup there ... and you say you're not a dividend player. :rolleyes2:


My methodology is to select the largest weights out of XIU in selected sectors. Because virtually everything in XIU pays a dividend, and the biggest companies tend to have significant dividends, I end up with a portfolio of dividend payers.

I do this because it gives similar behaviour to XIU itself but (since 2000 anyway) with higher total returns, possibly due to omitting resource stocks/miners. I also prefer equal sector weighting and holding individual stocks right now, due to US tax complications if I hold a Canadian ETF.

If I didn't have the tax complication, I'd either hold XIU, CDZ or maybe ZLB.


----------



## cainvest (May 1, 2013)

james4beach said:


> My methodology is to select the largest weights out of XIU in selected sectors. Because virtually everything in XIU pays a dividend, and the biggest companies tend to have significant dividends, I end up with a portfolio of dividend payers with equal sector weighting.
> 
> I do this because it gives similar behaviour to XIU itself but (since 2000 anyway) with slightly higher performance, possibly due to omitting commodities.


I know ... just teasing ya! 
On a side note, think you'll ever expand that to a 10 pack?


----------



## agent99 (Sep 11, 2013)

ENB has a lot of aging pipelines. Leaks and subsequent costs likely. Very Risky. I would recommend you sell it and get something safer. Like a GOC bond?


----------



## james4beach (Nov 15, 2012)

cainvest said:


> I know ... just teasing ya!
> On a side note, think you'll ever expand that to a 10 pack?


I started back testing with the 10 pack approach. It does become a little less volatile, since the single-stock exposure reduces, but overall performance looked the same. Intuitively, the 10 pack seems like a better idea than 5 pack.

If I were to put a huge amount of money in it, I'd definitely use the 10 pack approach to reduce single stock exposure. In my case this is only part of my Canadian exposure anyway, so I have other stock positions. My overall portfolio is pretty well diversified since I hold other things beside the 5 pack.


----------



## peterk (May 16, 2010)

james4beach said:


> At this point my own five pack (RY, ENB, CNR, BCE, FTS) has a pretty high 4.3% dividend yield. *It is not meant to be a high dividend portfolio, but it happens to have one right now.*


Is it just me who thinks James should not be allowed to invoke the self deceptive dividend double talk he so admonishes everyone else for using? :biggrin: That language is reserved for the true dividend believers James... Soon you'll be telling us you don't care about market gyrations either!

Say it like you preach it: "The total return on my 5 pack has gone down a lot lately." :wink:


----------



## Eder (Feb 16, 2011)

Don't forget all 5 of those recently jacked their dividends...but the market didn't jack their share price. I like the divy's.


----------



## james4beach (Nov 15, 2012)

peterk said:


> Say it like you preach it: "The total return on my 5 pack has gone down a lot lately." :wink:


I own them for their total returns... and yes, the total return has been poor in 2018.

Luckily my low-dividend portfolio is outperforming  It's a small portfolio compared to the 5 pack. What remains to be seen is whether that low div portfolio can continue performing well over the long term. Last year it beat the TSX by 10%


----------



## james4beach (Nov 15, 2012)

Notice that BCE went ex dividend today, which also was a flat day on the stock market. Both XIU and XIC had about zero change, so it's a day that lacks big price swings.

At the close of June 12, BCE was $62.52. Today, BCE went ex with a $0.7925 dividend. In an ideal world, with stock market volatility (and bull bias removed) we'd expect the share price to be 62.52 - 0.7925 = $61.73

In fact BCE closed today at $59.88, considerably worse. This massive 4.2% price drop versus yesterday is partially due to the dividend and partially because it was a bad day for BCE stock.

I think both daily stock market volatility, and the general bullish bias, really masks the fact that dividends directly deplete capital. When you look at markets during flat or negative periods, you can see the impact of the dividend much more clearly. Dividends knocking down the share price are not theoretical. A rising market just obfuscates what's going on.

Each dividend knocks the share price down, then hands you cash. I still do not understand why people get so excited about that process, which has net zero effect. You are neither better off or worse off, except perhaps for tax effects.


----------



## AltaRed (Jun 8, 2009)

I wouldn't say


> This massive 4.2% price drop versus yesterday is partially due to the dividend and partially because it was a bad day for BCE stock


 too loudly. All 3 telecoms got hammered and it is mostly BCE and T matching, or besting, Rogers attempt to 'give away' data for free. The data plan war is on and market speculation is that will lead to decreased revenue from overage fees. I hold all 3 and thus had a down day overall.


----------



## james4beach (Nov 15, 2012)

Ah, I didn't realize there was an 'event' today. That's too bad, would have been nice to have a flat day in the market + boring day in the stock to show the dividend effect.

I retract my statement that today was a good illustration, then. Too many other things happening.


----------



## Karlhungus (Oct 4, 2013)

Just look at the daily chart for stocks that pay a dividend. For example, RIO Can pays 12 cents per unit per month. On the day the dividend is payed, the stock automatically drops 12cents at opening bell.


----------



## dotnet_nerd (Jul 1, 2009)

I don't want to rekindle a dividend vs no-dividend flamewar. 

But one view I have is, it's better to return profits to shareholders. Otherwise you're assuming management will reinvest that money wisely. Boards are run by people and people are imperfect.

What about the "burn a hole in your pocket" syndrome? What if the board, flush with cash, decides to upgrade the furniture and fixtures in the all corporate offices? Or buy a new jet? Or up the bonuses? How does that benefit me as a stockholder? I'd rather take the dividend.


----------



## AltaRed (Jun 8, 2009)

Presumably you own stocks of companies that provide you with high single or low double digit ROE/ROCE. If so, they are obviously re-investing capital effectively. You should want more of that and would trust they re-invest rather than throw dividends at shareholders. Or do you want it both ways?

P.S. Not wanting to open the debate either but there is no simple answer. And yes, I know managements could suddenly do stupid things and ROE would thus decline going forward. Or the business environment could go south. On the other hand, the retail investor can do stupid (worse) things too re-investing those dividends. There is no singular answer.


----------



## kcowan (Jul 1, 2010)

I only hold one stock that does not return to shareholders in either dividends or stock buybacks. For me it is a 14x in a non-reg account so I am looking for opportunities to let some of it go when I have offsetting losses. Or when I am not subject to involuntary takeouts.

The good news is that all the action is just fine but getting closer to paying the piper.


----------



## SixesAndSevens (Dec 4, 2009)

james4beach said:


> Each dividend knocks the share price down, then hands you cash. I still do not understand why people get so excited about that process, which has net zero effect


by your logic, BCE share price today should be $0, because it has been paying dividends for decades.
the big 5 banks share price should be even lower (-ve) because have been paying consistently rising dividends for over 100 years
that logic is nonsense....


----------



## james4beach (Nov 15, 2012)

SixesAndSevens said:


> by your logic, BCE share price today should be $0, because it has been paying dividends for decades.


The only reason the share price isn't zero is because the company achieves a return on equity, and there is enough share price gains to offset the price decline due to dividends. If you find a company that pays out too much in dividends, beyond the profits they can generate, then you do find the share price continues to decline over time.

If those BCE shares didn't pay dividends, the share price would be spectacularly higher than it is today. The reason they have been able to pay out such high dividends without the share price collapsing is that they've had very successful business results for a long time. If BCE paid no dividends, the share price would have reflected all of that, with tremendous capital gains.

It should make no difference to an investor whether they receive dividends or higher share price.

Dividends are not free money (though lots of investors seem to think they are)


----------



## humble_pie (Jun 7, 2009)

lol there's one scenario that's even better than banks & BCE dropping into negative because depleted/exhausted by dividend payout ...

that's if they were giant ponzi schemes

fast as they could pay out a dividend, new dollars from shareowners would pour into their treasuries to replenish their cash position

wait the big banks _are_ giant ponzi schemes. Almost as fast as they pay out rising canadian dividends & thus keep on looking good to canadian investors, those sneaky banks are scuttling off to the US of A behind our backs. There they quietly raise new money in USD by selling new preferred share issues.


----------



## SixesAndSevens (Dec 4, 2009)

james4beach said:


> The only reason the share price isn't zero is because the company achieves a return on equity


okay, so you admit that there are factors in a company's success beyond whether it pays a dividend or not....



> If those BCE shares didn't pay dividends, the share price would be spectacularly higher than it is today.


umm...no, not quite...you can't say that.

chances are equally good that management would sooner or later have spent that cash in an unproductive and unprofitable way...such as acquiring another company at high multiple price or doing some vanity project like buying sports teams, launching a space program, etc etc...
managements do lots of stupid things when they have too much cash on the books....not every management is like warren buffett and munger….

the list of companies that don't pay dividends and end up doing stupid things with the cash on hand is long...
Aol Time Warner merger, Microsoft under Ballmer (before cloud computing saved Nadella's backside), and so on....

paying out regular dividends automatically creates transparency, financial discipline, stability in the stock.
increasing dividends regularly shows that the business is growing and keeping up with inflation....

there aren't many (or maybe none) 50 year old or 100 year old companies that are still around that don't pay a dividend.
the 5 banks, the 2 telcos, the 2 railways, the 2 insurers, the 2 pipelines...they all pay growing dividends and have been great investments for decades....

otoh, maybe blue apron and snapchat will still be around 50 years from now...i dunno….we can talk then....


----------



## SixesAndSevens (Dec 4, 2009)

humble_pie said:


> wait the big banks _are_ giant ponzi schemes.


modern fractional reserve banking is a ponzi scheme...that's well understood by those in the know...fact is the whole financial system is a ponzi scheme...at least since 1971...


----------



## james4beach (Nov 15, 2012)

SixesAndSevens said:


> the list of companies that don't pay dividends and end up doing stupid things with the cash on hand is long...
> Aol Time Warner merger, Microsoft under Ballmer (before cloud computing saved Nadella's backside), and so on....
> 
> paying out regular dividends automatically creates transparency, financial discipline, stability in the stock.
> increasing dividends regularly shows that the business is growing and keeping up with inflation....


Paying out dividends absolutely does not create stability in the stock. You can see this in the stock charts; dividend payers declined just as sharply as the broad market in previous bear markets (just look at XDV charts). I don't know where people get this idea that dividend stocks are more stable.

There are plenty of garbage stocks and mismanaged disasters which paid very strong dividends. While I agree that the ability to pay out dividends adds some credibility to a company, there are plenty of giant disasters which still paid dividends:

* Northern Telecom / Nortel back in 1990s
* Bombardier
* Citigroup, and many other big financials before 2007
* Encana
* TransAlta
* GE ... which was a Dividend Aristocrat, one of the best dividend track records on earth

I think it's a mistake to focus too much on the dividend. It really doesn't matter that much. Ben Felix at PWL Capital explains: Dividends Do Not Matter.


----------



## doctrine (Sep 30, 2011)

Saying that BCE's stock would be fantastically higher if they did not pay dividends is quite ridiculous. Many factors go into valuing a stock, including management's use of capital. BCE's book value might be higher, but the price to book ratio of the stock price is entirely different. And retaining that capital could absolutely result in a serious reduction of return on equity. 

BCE is here today because they employ a high return on capital in a specific market in which they excel. If you give BCE an extra $5 billion a year in cash to invest, where are they going to invest? Even more cell towers? More television shows? Epic price war with Rogers and Telus? It is a virtual certainty that every additional dollar that BCE invests from here on out is going to be lower than their current highly prized assets which they very skilfully operate. Far better for a company in their position to return 70-80% of the net profits to shareholders rather than needlessly invest it in lower returns. 

Paying out dividends of capital that is not necessary for sustaining and incremental growth of the business gives BCE it's stock price as investors trust the approach of the company; it is not nearly so much based on the underlying book value of the company. A P/B going from 2.5 to 0.5 can and will happen to a company poorly employing capital and immediately result in massive, real, and permanent destruction of wealth.


----------



## SixesAndSevens (Dec 4, 2009)

james4beach said:


> There are plenty of garbage stocks and mismanaged disasters which paid very strong dividends


okay, so we agree then that a garbage company is garbage regardless of whether it pays dividend or not, yeah?

your "strategy" (ahem !) of "low dividend portfolio" is just as nonsensical as a "high yield dividend portfolio".
if you are picking garbage stocks with low dividend, you will lose 98% of your capital instead of say 90% of capital with a high yield dividend stock.

seeking out no dividend or low dividend stocks is just gimmicky...



> I think it's a mistake to focus too much on the dividend. It really doesn't matter that much


my experience is different...dividends do matter...

it has allowed many working stiffs like me to retire before we drop dead at 75.....

my dividends are more safer than my job ever was....

it allows me a steady, relatively predictable income stream, without having to liquidate part of my capital every month...
without dividends, i would need to keep selling off my portfolio piece by piece every month.
when stock markets are down, i'd need to sell more shares...
sooner or later, my portfolio will dwindle down to a level when there are no shares left and no dividend left.

i do make mistakes every now and then, just like everyone does....

but overall, i have a diversified portfolio of dividend stocks, diversified across sectors and global regions that pay steady, gradually rising dividends to me dutifully every month....



> Ben Felix at PWL Capital explains


this Ben Felix is still working at his job, yeah, while I am not....

i will take my own personal experience retiring on dividends (and a small company pension) over these investment management gurus spewing quant gobbledygook any day,...


----------



## Pluto (Sep 12, 2013)

PWL capital's performance isn't all that outstanding. 
20 yr 40/60 = 5.48%
20 year 100% equity = 7.16%.

I don't see any claims that the holdings in the PWL funds do not pay dividends. I guess their funds themselves don't pay dividends. Anyway, it seems that Ben's agenda may have something to do with selling their funds.


----------



## SixesAndSevens (Dec 4, 2009)

Pluto said:


> I don't see any claims that the holdings in the PWL funds do not pay dividends. I guess their funds themselves don't pay dividends. Anyway, it seems that Ben's agenda may have something to do with selling their funds.


the dividends in the fund line Ben Felix's pockets...


----------



## AltaRed (Jun 8, 2009)

These hard line positions of dividend stocks vs non-dividend stocks have been waged again and again. It is an exercise in futility. 

The only thing that really matters with any security is its Total Return over a period of time. Without good fundamentals such as high single/low double digit ROE/ROCE, etc., a stock cannot have good long term performance. If one wants a dividend yield tilt, vs a capital appreciation tilt, that is a personal choice. I prefer my stocks to have robust ROE ratios, a dividend yield and hopefully dividend growth, but I have no obsession with dividend yield on its own. Some of the very best stocks have dividend yields <2% and I want those in my portfolio's mix.


----------



## james4beach (Nov 15, 2012)

SixesAndSevens said:


> it allows me a steady, relatively predictable income stream, without having to liquidate part of my capital every month...
> without dividends, i would need to keep selling off my portfolio piece by piece every month.


You _are_ liquidating a part of your capital every month. Unless you reinvest the dividends, you are removing $ from the equity and walking away with it. There's nothing wrong with this but it is an extraction from equity. You are effectively selling off some of your portfolio each month.

I have a portfolio of some dividend paying large caps. Each quarter they generate significant dividends. This actually gets a bit annoying because they are forcing liquidation (withdrawal from capital) whether I want to or not.


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> You _are_ liquidating a part of your capital every month. Unless you reinvest the dividends, you are removing $ from the equity and walking away with it. There's nothing wrong with this but it is an extraction from equity. You are effectively selling off some of your portfolio each month.
> .


There's a difference. 

The market determines the share price, but the company determines the dividend. 

The share price can fluctuate quite a bit and that price determines the amount amount of shares you need to sell to maintain the fixed cash you need each month. 

But a dividend is fixed and not subject to the vagaries of the market. The share price can get quite low, yet the company will continue to hand over that fixed dividend each month. 

Yes, I know they could drop it, but companies are loath to do that and so the risk to the dividend is much less than the risk to the share price.

No one will ever convince me they're the same.

Dividends for income are much more stable.

ltr


----------



## SixesAndSevens (Dec 4, 2009)

james4beach said:


> You _are_ liquidating a part of your capital every month. Unless you reinvest the dividends, you are removing $ from the equity and walking away with it. There's nothing wrong with this but it is an extraction from equity. You are effectively selling off some of your portfolio each month.


okay, so by that logic, after many years (decades) of dividend focused investing, my portfolio should be $0, eh?
except...it is not....

those dividends are my primary source of income and the regular increases enable me to keep up with inflation much better than my pension, CPP, and GIC does.

this has allowed me to survive through at least 2 large bear markets relatively unscathed...
i didn't lose anything during the 2001 blow up precisely because I had almost none of those high flying (*non dividend*, btw) stocks.
same with the massive bear market of 2007 - 2008....

i didn't fare so well during the oil market crash of 2014, though
had a few blow ups where i lost capital.
that taught me some valuable lessons which i am now incorporated into my approach.

i have recovered all of the losses from 2014 and my dividend stream today is higher than it was back then....

this whole argument that companies choosing to pay dividends as a matter of policy are forgoing share buybacks, or r&d or m&a is all theoretical, paper arguments...
good companies manage to do all of the above...and yet, keep paying increasing dividends....

i don't benchmark against S&P 500....even though it is known that dividend achievers index has been beating out the S&P 500 by over 3% annualized for decades...
dividend focused investing has allowed me to be financially independent without having to liquidate my portfolio capital....


----------



## AltaRed (Jun 8, 2009)

You actually mean "invested capital", not "portfolio capital". Investment income is part of your "portfolio capital". Important to keep objectivity lest one's biases get in the way of good decision making.


----------



## SixesAndSevens (Dec 4, 2009)

AltaRed said:


> You actually mean "invested capital", not "portfolio capital". Investment income is part of your "portfolio capital"


yes you are right...i meant investment capital.


----------

