# Investing for dividends



## Rickson9 (Apr 9, 2009)

If my wife and I won't use the dividend income (ie we have enough cash from other sources), what are the other reasons to invest in a stock for their dividend?

As it stands now, the dividends are a side-effect of our investing (ie if they pay a dividend there's nothing we can do about it, but we don't go out of our way to examine the company based on its dividend yield).

PS: Just noticed that World Wrestling Entertainment pays a hefty dividend yield. I didn't notice that before.


----------



## refutor (Apr 5, 2009)

*Wwe*



Rickson9 said:


> PS: Just noticed that World Wrestling Entertainment pays a hefty dividend yield. I didn't notice that before.


Any thoughts on WWE as an investment? the arenas always seem full...what do their numbers look like?


----------



## Sampson (Apr 3, 2009)

@ Rickson - hoard it, and deploy when opportunity arises.

@refutor - growth rates are good, have been slowing in the face of UFC's popularity - but they've locked up a great toy contract with Mattel - and they next avenue of expansion is into the Far East - where growth rates are excellent.

Their dividend is a little high and quite possibly not sustainable - keep in mind a very large chunk of the company rests in the family's hands - so they'll very likely cut our dividend before their own.


----------



## OntFA (May 19, 2009)

What about the notion that dividends and shares bought with reinvested dividends account for 60+ % of the total return of the various stock indexes?


----------



## Cal (Jun 17, 2009)

Reasons people might buy dividend stocks:
Cash flow
Buy and Hold type investor could DRIP and accumulate more units
If they set up a SPP they could avoid transaction fees
It could simply be a good stock to buy, and/or at a fair price

Reasons against:
Buy and Hold strategy vs a more active trader
SPP doesn't allow you to buy at a certain price, simply on a certain preset date
Dividend Chasing

Just a quick opinion...


----------



## Rickson9 (Apr 9, 2009)

OntFA said:


> What about the notion that dividends and shares bought with reinvested dividends account for 60+ % of the total return of the various stock indexes?


If I understand this correctly, if an index increases 8%, the dividends account for 4.8% of the return and the appreciation accounts for 3.2%?


----------



## Rickson9 (Apr 9, 2009)

Cal said:


> Reasons people might buy dividend stocks:
> Cash flow
> Buy and Hold type investor could DRIP and accumulate more units
> If they set up a SPP they could avoid transaction fees
> ...


Good summary. Thanks Cal.


----------



## Rickson9 (Apr 9, 2009)

refutor said:


> Any thoughts on WWE as an investment? the arenas always seem full...what do their numbers look like?


I prefer companies to have 10 years of history as public company so they don't qualify (for me). In addition, their insider ownership is lower than 20-25% which I also look for. Another investor who doesn't have these hangups would be better able to answer your question.


----------



## OntFA (May 19, 2009)

Rickson9 said:


> If I understand this correctly, if an index increases 8%, the dividends account for 4.8% of the return and the appreciation accounts for 3.2%?


Yes. And the 4.8% isn't pure dividend yield. It's a combination of yield + appreciation of the reinvested dividends. There have been a number of studies on this. I can find one and link it if you'd like.


----------



## Rickson9 (Apr 9, 2009)

OntFA said:


> Yes. And the 4.8% isn't pure dividend yield. It's a combination of yield + appreciation of the reinvested dividends. There have been a number of studies on this. I can find one and link it if you'd like.


That's fine. That's information that's cool to know!


----------



## leslie (May 25, 2009)

That quote "Dividends account for ...% of returns" comes from Siegel. It is pure garbage. See what it really measures. If you demand a projected 10% return for the risk of owning common stocks, and today's dividends pay about 3%, you are implicitly expecting dividends to account for only 30% of total returns, and are expecting capital appreciation of 7%. 

The counter-argument for the various reasons to like dividends.
Basic understanding of them that most all advisors ignore.


----------



## bean438 (Jul 18, 2009)

Dividend stocks are perceived as "safer" so people flock to them in bad markets so they may not drop as much then non dividend payers or even not at all. (FTS and ENB held up quite nicely)

Dividend payers tend to to trade within a range. Price will drop and people will buy for the dividend bringing price back up. 

It is also nice to see cash building in your account. My annual dividends are just about equal to my annual RSP contribution. Kinda like a double contribution each year. (My dividends actually were MORE than my contribution until this year. Thanks PFE and GE...Immelt you are a snake)

It is also hard to fake a dividend. Gotta have cash to pay it. 

Lots of reasons to love dividends.


----------



## Jon202 (Apr 14, 2009)

It's not so much just the dividend, but rising annual dividends.

Check out this pdf of US companies with 25 years+ of annual increases.


----------



## Rickson9 (Apr 9, 2009)

leslie said:


> If you demand a projected 10% return for the risk of owning common stocks, and today's dividends pay about 3%, you are implicitly expecting dividends to account for only 30% of total returns, and are expecting capital appreciation of 7%.


That was pretty much how I thought of it before OntFA's post.


----------



## Rickson9 (Apr 9, 2009)

bean438 said:


> Dividend stocks are perceived as "safer" so people flock to them in bad markets so they may not drop as much then non dividend payers or even not at all. (FTS and ENB held up quite nicely)


For me, "safer" isn't a benefit, but I understand what you mean and for others it is more important.



bean438 said:


> Dividend payers tend to to trade within a range. Price will drop and people will buy for the dividend bringing price back up.


Good point. So you're saying that there is a natural "floor" for the stock price. 



bean438 said:


> It is also nice to see cash building in your account. My annual dividends are just about equal to my annual RSP contribution.


Having cash build up in my account isn't a benefit for me. Again, I can see how this may be important for others. As it stands now, my wife and I have too much cash building up in our accounts. At the moment rational deployment of capital > saving capital.



bean438 said:


> It is also hard to fake a dividend. Gotta have cash to pay it.


Good point. However, having said that, a company could also borrow heavily or dilute their stock to keep their dividends going.


----------



## leslie (May 25, 2009)

"*That was pretty much how I thought of it before OntFA's post*." Since OntFA's post was wrong about that, as well as about the 60% of total return, you have been led down the path.


----------



## bean438 (Jul 18, 2009)

Rickson how can "safety" not be a benefit? 

I found it comforting that FTS and ENB didnt really drop at all over the past year or so. Stability plus rising dividends.


----------



## Rickson9 (Apr 9, 2009)

bean438 said:


> Rickson how can "safety" not be a benefit?


Investing in dividend paying stocks for "safety" is not a benefit for me because I already feel safe with my stock investments. Safety may be a bigger benefit for others.



Rickson9 said:


> For me, "safer" isn't a benefit, but I understand what you mean and for others it is more important.


----------



## bean438 (Jul 18, 2009)

Well I do not invest in dividend growers because they are perceived as safe. 

I buy them for their growing income. The longer I own them the "safer" they become. 

As the income grows so does the stock price, almost at the same rate as the dividend growth.


----------



## OntFA (May 19, 2009)

leslie said:


> "*That was pretty much how I thought of it before OntFA's post*." Since OntFA's post was wrong about that, as well as about the 60% of total return, you have been led down the path.


That's a rather hostile response, don't you think?

Back on topic: The precise number is a moving target. But if I'm wrong about the basic idea that dividends are a big component of total returns, then you're smarter than Standard and Poors. Look, it's just a calculation. It's not a wild theory. And sure you could spin the stats but I've seen this calculation from various sources on both the TSX and the S&P and the numbers are slightly different but the overall conclusion is the same.



Standard & Poors in [url=http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500dividend/2 said:


> Historical Total Return
> From January 1926 through March 2009 the annualized total return for the S&P 500 was 9.51% per year vs. 9.69% for December 2008. The dividend component consists of 44.00% of the return vs. 43.27% for December 2008. The annualized return consists of both capital appreciation and dividends reinvested.


Leslie, you quote a number of 97% (i.e. that some claim dividends account for 97% of returns), I have never seen that in anything I've read on the topic. The highest I've seen is about 67% and I've seen numbers somewhat lower. And, as mentioned, the figure will fluctuate. But your argument that this ignored capital gains is valid, but it doesn't form part of the index data as a separate component. In other words, the price index and dividends are listed as separate items and the dividends are not included in the price index.

Realized capital gains only happen when selling. While indexes are reconstituted, there is not "cost base" or capital gain calculated at the index level that I've ever seen. So the "capital gains" appear to be embedded into the price level of the index. Are you saying that this is not the case? If so, that is news to me.

Alliance Berstein published an article a few years back that not only looked at the general significance of dividends but also the pure capital appreciation of dividend payers vs non dividend payers and other related issues. It's not that dividends are superiod to capital gains, in theory, but that dividends signal greater financial strength and, because of that, share prices tend to respond better.


----------



## bean438 (Jul 18, 2009)

Ontfa don't take Leslie too seriously. He/she has responded to some of my posts and also came across as rude and ignorant. 

Hard to put across emotions and atitude in print so I could be wrong. Who knows and it really doesn't matter. 

Back to the dividends. The way it was explained to me was that as the dividend rises so will the share price. 

If coke raises dividends for 53 years and the stock price remained the same then the yield would be extremely high and people would be lined up around the block to buy the stick putting upward pressure on the stock


----------



## OntFA (May 19, 2009)

bean438 said:


> Ontfa don't take Leslie too seriously. He/she has responded to some of my posts and also came across as rude and ignorant.


Thanks bean. Leslie ain't bad so I'm certainly not going to stop responding. Besides, I'm not so arrogant that I think I can't learn anything from her or other posters here even though I'm in the biz.



bean438 said:


> Back to the dividends. The way it was explained to me was that as the dividend rises so will the share price.
> 
> If coke raises dividends for 53 years and the stock price remained the same then the yield would be extremely high and people would be lined up around the block to buy the stick putting upward pressure on the stock


I think part of leslie's argument is that there is nothing special about dividends. It's just one source of return and whether you get a 3% dividend or you sell 3% of your shares to raise the same amount of cash, it's still the same dollars. But there is a psychological barrier to selling shares to generate cash flow. Now, that's a valid theoretical argument but the reality is that there is no guarantee that earnings retained by corporations (i.e. not paid out as dividends) will be invested more profitably than shareholders can on their own.

And dividends do signal a certain amount of financial strength. You don't rely only on that but it's one indication of management's confidence. At the same time, really high dividends relative to earnings indicates that dividends are likely to get cut. But the basic point remains valid, in my view, which is that if you take your dividends and reinvest them, compound mathematics can work wonders for your wealth accumulation. That's the basic argument, nothing more.


----------



## bean438 (Jul 18, 2009)

I guess we all have our quirks. 

I am a firm believer in dividends. There are many roads to Babylon but I prefer to buy stocks (trees) for their dividends (fruit). 

At the end of the day cash is king and cash is what we need to pay the bills. 

I like to spend dividends and never sell my stock for cashflow. 

This is why I don't like mutual funds. You sell more units in bad times for cash flow. 

I found it comforting that as the markets dove the past year or so my annual dividend income actually went up even as I suffered 2 dividend cuts. (Thanks diversifacation). 

Had I bee retired I would be receiving my income as usual but with a pay raise. 

Stocks that don't pay dividends must be sold at a higher price than you paid. Hopefully there are greater fools than me?

There are many ways to invest. None of them are infallible, and even the masters like WEB get it wrong. 

To me dividend growth investing makes sense. I am comfortable with it, I have been sucsessful at it terms of never "losing" money (in terms of income NOT price). 

I would not discount dividends at all. 

The main thing is pick a style and stick with it. 

I am also always open to learning new things. 

I may simplify my TFSA next year and simply DCA td' e series index funds. 

There are pros and cons to all investing styles. Data can be cherry picked and both sides can provide strong arguements both for and against their own styles and all others. 

Can't we all just get along?


----------



## leslie (May 25, 2009)

Please do no 'speak for me' with comments like "*I think part of leslie's argument is that....*" Especially when you prove to have not bothered reading my supporting argument. I mean what I say, I say what I mean and I never use passive-aggression.


----------



## Jon202 (Apr 14, 2009)

somehow this comes to mind...


----------



## OntFA (May 19, 2009)

leslie said:


> ...I never use passive-aggression.


No, just aggression apparently. A saucer of milk?


----------



## OntFA (May 19, 2009)

jon202 said:


> somehow this comes to mind...


:lol:


----------



## Rickson9 (Apr 9, 2009)

bean438 said:


> Well I do not invest in dividend growers because they are perceived as safe.
> 
> I buy them for their growing income. The longer I own them the "safer" they become.
> 
> As the income grows so does the stock price, almost at the same rate as the dividend growth.


I understand. Thanks for the clarification.

I don't invest for dividends but now understand more clearly why some would. Cheers!


----------



## bean438 (Jul 18, 2009)

Jon awsome post. Now that I know what Leslie looks like, I can cut her/him?? Some slack for being inconsiderate and rude. 

Retarded people sometimes come across as rude.


----------



## AdamW (Apr 22, 2009)

*Dividends + Dividend Growth = Expected Return*

There are also a few studies that show that your expected return from a stock is equal to the current dividend plus the dividend growth rate.

Some of the larger cap Canadian dividend growers have performed almost lock step with their 10 year dividend growth rates. 

The wonderful thing about investing is that everyone can have their own spin on it, at the end of the day we all need to do what makes us feel most comfortable and what we believe will provide us with an optimal return. As long as you have the conviction to stand behind your chosen investment strategy you're that much ahead of the rest of the pack who chases the most recent fad


----------



## leslie (May 25, 2009)

*"Your expected return from a stock is equal to the current dividend plus the dividend growth rate"* would result in calculated 0% returns from all the companies who pay no dividends. So it cannot be correct. 

Growth in dividends comes from three sources:
1) a greater payout ratio of earnings, leaving less $$ reinvested and lower future growth,
2) payment in excess of earnings (return of capital) leading to the shrinking of the business. or making it more risky with additional debt,
3) greater earnings which usually requires investment from last year's reinvested earnings (i.e. not payed out as dividends).

You cannot look at every aspect of investing through the lens of 'dividends'. Growth essentially comes from increased operations, using capital from some source. To be of benefit to shareholders, (i.e. not offset by value reduction) an increase of dividends must come from an increase in earnings. 

Subject to fluctuating market sentiment, stock prices will follow the increase in earnings. When dividend policy is changed, there is a price reaction as the ownership changes between people wanting dividends and people not. This is only a superficial market reaction. Soon it adjusts to the expectations of earnings growth. Bean438's claim the "*as the dividend rises so will the share price*" is putting the cart before the horse. 

Your expected return is the sum of the dividend plus the capital gain. The quote (above) from S&P: 
_"From January 1926 through March 2009 the annualized total return for the S&P 500 was 9.51% per year... The dividend component consists of *44.00%* of the return..." _ reflects only that back in 1926 stock prices were one-times book value and companies paid out 80% of earnings. The quote does NOT support OntFA's claim *"dividends account for 60+ % of the total return"*. Note present tense. 

The '% of total' calculation used by S&P for yearly numbers is not perfectly accurate but a pragmatic 'good-enough' given their constraints. http://www2.standardandpoors.com/spf/xls/index/MONTHLY.xls. I don't know how they calculate a multi-yr average, but I am pretty sure is is NOT the calculation used in the 60% number or the 97% number. The individual does not have their constraints and should measure his dividends to include only dividends received, and capital gains as only the capital gains. It makes no sense to be reclassifying the capital gains from StockB back to the 'dividend' income from StockA, just because it was purchased by reinvesting StockA's distribution.

Their correct calculation is NOT the calculation used for OntFA's claim that *"reinvested dividends account for 60+ % of the total return"*, or the 97% number. Where those numbers come from, and the proof they are garbage is discussed here.


----------



## OntFA (May 19, 2009)

leslie said:


> [S&P's] correct calculation is NOT the calculation used for OntFA's claim that "reinvested dividends account for 60+ % of the total return", or the 97% number. Where those numbers come from, and the proof they are garbage is discussed here.


Interesting that you call my number garbage but I've never provided you with any calculation that you claim I used. But leap away. Second, I never claimed anything close to 97% and did not say that I agreed with it. It's a claim you have a hate-on for and you keep mentioning it when rebutting me.

Third, what S&P does is exactly right but it is not different than what I would do. S&P takes the total return performance (price + dividend + reinvested dividends) and substracts from it the price return performance (price). And I'm not married to the 60% figure either because, as I said a few times, the figure will fluctuate. But if you want to take me on, go for it and enjoy your one person battle.


----------



## OntFA (May 19, 2009)

leslie said:


> ...OntFA's claim that *"reinvested dividends account for 60+ % of the total return"*...


Apparently, besides being pig-headed, you can't read either. I NEVER said that reinvested dividends account for 60%. What I said was that dividends + the value of reinvested dividends (and the additional dividends that yields) has accounted for that much in the past.


----------



## Rickson9 (Apr 9, 2009)

Rickson9 said:


> If I understand this correctly, if an index increases 8%, the dividends account for 4.8% of the return and the appreciation accounts for 3.2%?





OntFA said:


> Yes. And the 4.8% isn't pure dividend yield. It's a combination of yield + appreciation of the reinvested dividends. There have been a number of studies on this. I can find one and link it if you'd like.


Would this mean that a DRIP would be more efficient because the dividend reinvestment is done automatically or would a DIY investor fare better because they can reinvest the dividends when there is a better opportunity (ie when prices crash)?


----------



## Sampson (Apr 3, 2009)

Rickson9 said:


> Would this mean that a DRIP would be more efficient because the dividend reinvestment is done automatically or would a DIY investor fare better because they can reinvest the dividends when there is a better opportunity (ie when prices crash)?


I think you're basically bringing up the dollar-cost-averaging vs. market timing debate.

I've seen/read academic research supporting both methods, and each working under different market conditions (retreating vs. advancing markets).

I think if you can time well, then banking the cash and redeploying when value arises is better. If you're like most people who don't spend sufficient time evaluating the value of the Co.'s they are buying, then DCA is probably better.

We all know which category you fall in Rickson


----------



## Rickson9 (Apr 9, 2009)

http://members.shaw.ca/retailinvestor/truths.html

The dividend section should be read by anybody considering investing in dividend stocks (link was originally posted by Leslie, but don't let that hold you back ). Although I don't specifically invest in stocks that pay dividends, my mentality seems to be more aligned with the information found in the aforementioned link.


----------



## Cal (Jun 17, 2009)

If the dividend stock had both a DRIP and a SPP, technically you could both dollar cost average with the DRIP, and use additional funds and invest when you want with the SPP (to a certain extent, as you can't time it so well that they cash your cheque at the most optimal time).


----------



## Oldroe (Sep 18, 2009)

I read most of the link, most is true some borderline then I came to the example were you sell your share after holding for 10 years and buy back the same day proving that you are really only getting 4%.

Must be Gov. study, only Gov. would spent money that stupid. It was 12.0 and you sold and bought to get 4.

Oldroe


----------

